Annual Report by a Foreign Non-Canadian Issuer — Form 20-F — Sect. 13 / 15(d) – SEA’34 Filing Table of Contents
Document/ExhibitDescriptionPagesSize 1: 20-F Annual Report by a Foreign Non-Canadian Issuer HTML 1.75M
2: EX-8.1 Opinion of Counsel re: Tax Matters -- exhibit81 HTML 49K
5: EX-13.1 Annual or Quarterly Report to Security Holders -- HTML 35K
exhibit131
6: EX-13.2 Annual or Quarterly Report to Security Holders -- HTML 35K
exhibit132
3: EX-12.1 Statement re: Computation of Ratios -- exhibit121 HTML 41K
4: EX-12.2 Statement re: Computation of Ratios -- exhibit122 HTML 41K
7: EX-15.1 Letter re: Unaudited Interim Financial Info -- HTML 33K
exhibit151
14: R1 Document and Entity Information HTML 58K
15: R2 Consolidated balance sheets HTML 156K
16: R3 Consolidated balance sheets (Parenthetical) HTML 47K
17: R4 Consolidated statement of income HTML 95K
18: R5 Consolidated statement of comprehensive income HTML 60K
19: R6 Consolidated statement of comprehensive income HTML 38K
(Parenthetical)
20: R7 Consolidated statement of shareholders' equity HTML 82K
21: R8 Consolidated statements of cash flows HTML 127K
22: R9 Description of business and environment HTML 37K
23: R10 Basis of presentation and significant accounting HTML 285K
policies
24: R11 Business combinations HTML 196K
25: R12 Property and equipment HTML 54K
26: R13 Goodwill HTML 46K
27: R14 Intangible assets HTML 67K
28: R15 Impairment loss HTML 37K
29: R16 Short-term borrowings HTML 47K
30: R17 Consideration payables for acquisitions HTML 196K
31: R18 Derivatives and hedging activities HTML 152K
32: R19 Other gain HTML 52K
33: R20 Accrued liabilities HTML 42K
34: R21 Related party transactions HTML 60K
35: R22 Shareholders' equity HTML 46K
36: R23 Income taxes HTML 125K
37: R24 Commitments and contingencies HTML 56K
38: R25 Segment information HTML 75K
39: R26 Share-based compensation HTML 189K
40: R27 Earnings per share HTML 104K
41: R28 Employee Benefit Plans HTML 94K
42: R29 Subsequent events HTML 38K
43: R30 Basis of presentation and significant accounting HTML 221K
policies (Policies)
44: R31 Basis of presentation and significant accounting HTML 227K
policies (Tables)
45: R32 Business combinations (Tables) HTML 145K
46: R33 Property and equipment (Tables) HTML 53K
47: R34 Goodwill (Tables) HTML 46K
48: R35 Intangible assets (Tables) HTML 69K
49: R36 Consideration payables for acquisitions (Tables) HTML 69K
50: R37 Derivatives and hedging activities (Tables) HTML 153K
51: R38 Other gain (Tables) HTML 50K
52: R39 Accrued liabilities (Tables) HTML 42K
53: R40 Related party transactions (Tables) HTML 56K
54: R41 Shareholders' equity (Tables) HTML 43K
55: R42 Income taxes (Tables) HTML 124K
56: R43 Commitments and contingencies (Tables) HTML 48K
57: R44 Segment information (Tables) HTML 103K
58: R45 Share-based compensation (Tables) HTML 200K
59: R46 Earnings per share (Tables) HTML 101K
60: R47 Employee Benefit Plans (Tables) HTML 92K
61: R48 Description of business and environment (Details) HTML 34K
62: R49 Basis of presentation and significant accounting HTML 139K
policies - Subsidiaries (Details)
63: R50 Basis of presentation and significant accounting HTML 55K
policies - Foreign currency translation and
Restricted cash (Details)
64: R51 Basis of presentation and significant accounting HTML 46K
policies - Accounts receivable (Details)
65: R52 Basis of presentation and significant accounting HTML 49K
policies - Property and equipment useful lives
(Details)
66: R53 Basis of presentation and significant accounting HTML 42K
policies - Intangible assets useful lives
(Details)
67: R54 Basis of presentation and significant accounting HTML 46K
policies - Long lived assets, Revenue and
Advertising (Details)
68: R55 Basis of presentation and significant accounting HTML 35K
policies - Social contributions (Details)
69: R56 Basis of presentation and significant accounting HTML 40K
policies - Derivative financial instruments
(Details)
70: R57 Basis of presentation and significant accounting HTML 55K
policies - Concentration of credit risk (Details)
71: R58 Basis of presentation and significant accounting HTML 65K
policies - Fair value measurement (Details)
72: R59 Basis of presentation and significant accounting HTML 58K
policies - Fair value Level 3 reconciliation
(Details)
73: R60 Basis of presentation and significant accounting HTML 35K
policies - Recent accounting pronouncements
(Details)
74: R61 Business combinations (Details) HTML 52K
75: R62 Business combinations - Acquisition of Unafortis HTML 95K
AG (Details)
76: R63 Business combinations - Acquisition of DerivIT HTML 99K
Solutions Pte Ltd (Details)
77: R64 Business combinations - Acquisition of Science, HTML 76K
Management and Engineering AG (Sme) (Details)
78: R65 Business combinations - Acquisition of IntroPro HTML 106K
(Details)
79: R66 Business combinations - Acquisition of Pelagicore HTML 91K
(Details)
80: R67 Business combinations - Acquisition of Insys HTML 106K
Group,Inc. (Insys) (Details)
81: R68 Property and equipment (Details) HTML 65K
82: R69 Goodwill (Details) HTML 55K
83: R70 Intangible assets (Details) HTML 84K
84: R71 Impairment loss (Details) HTML 37K
85: R72 Short-term borrowings (Details) HTML 126K
86: R73 Consideration payables for acquisitions (Details) HTML 72K
87: R74 Derivatives and hedging activities - Narrative HTML 52K
(Details)
88: R75 Derivatives and hedging activities - HTML 81K
Reconciliation of Derivative Instruments (Details)
89: R76 Derivatives and hedging activities - Accumulated HTML 54K
OCI (Details)
90: R77 Derivatives and hedging activities - Derivatives HTML 44K
Designated as Hedging Instruments (Details)
91: R78 Derivatives and hedging activities - Derivatives HTML 46K
Not Designated as Hedging Instruments (Details)
92: R79 Other gain (Details) HTML 49K
93: R80 Accrued liabilities (Details) HTML 43K
94: R81 Related party transactions (Details) HTML 69K
95: R82 Shareholders' equity (Details) HTML 59K
96: R83 Income taxes - Income tax expense (Details) HTML 42K
97: R84 Income taxes - Reconciliation of income tax HTML 55K
(Details)
98: R85 Income taxes - Deferred tax assets and liabilities HTML 93K
(Details)
99: R86 Income taxes - Income before income tax by HTML 40K
geographic locations (Details)
100: R87 Income taxes - Uncertain tax positions (Details) HTML 45K
101: R88 Income taxes - The Tax Cuts and Jobs Act (Details) HTML 34K
102: R89 Commitments and contingencies - Rent expense under HTML 35K
operating leases (Details)
103: R90 Commitments and contingencies (Details) HTML 49K
104: R91 Segment information - Revenues (Details) HTML 51K
105: R92 Segment information - Long lived assets (Details) HTML 52K
106: R93 Segment information - Client information(Details) HTML 46K
107: R94 Share-based compensation - Plan (Details) HTML 60K
108: R95 Share-based compensation - Top Management Bonus HTML 74K
(Details)
109: R96 Share-based compensation - CEO Remuneration HTML 74K
(Details)
110: R97 Share-based compensation - SOP III Awards Granted HTML 112K
(Details)
111: R98 Share-based compensation - SOP III Awards HTML 53K
Reconciliation (Details)
112: R99 Share-based compensation - SOP III Awards HTML 71K
Nonvested (Details)
113: R100 Share-based compensation - SOP III Awards Other HTML 70K
Information (Details)
114: R101 Earnings per share (Details) HTML 80K
115: R102 Employee Benefit Plans (Details) HTML 40K
116: R103 Employee Benefit Plans - Inputs in Benefit HTML 58K
Obligations (Details)
117: R104 Employee Benefit Plans - Change in Projected HTML 54K
Benefit Obligations (Details)
118: R105 Employee Benefit Plans - Plan Investment (Details) HTML 51K
119: R106 Employee Benefit Plans - Funded Status of the Plan HTML 64K
(Details)
120: R107 Subsequent events (Details) HTML 68K
122: XML IDEA XML File -- Filing Summary XML 228K
121: EXCEL IDEA Workbook of Financial Reports XLSX 151K
8: EX-101.INS XBRL Instance -- lxft-20180331 XML 4.62M
10: EX-101.CAL XBRL Calculations -- lxft-20180331_cal XML 361K
11: EX-101.DEF XBRL Definitions -- lxft-20180331_def XML 1.36M
12: EX-101.LAB XBRL Labels -- lxft-20180331_lab XML 2.66M
13: EX-101.PRE XBRL Presentations -- lxft-20180331_pre XML 1.86M
9: EX-101.SCH XBRL Schema -- lxft-20180331 XSD 294K
123: ZIP XBRL Zipped Folder -- 0001538375-18-000009-xbrl Zip 418K
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
o
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report
For the transition period from to
Commission File Number
LUXOFT
HOLDING, INC
(Exact Name of Registrant as specified in its charter)
British Virgin Islands
(Jurisdiction of incorporation or organization)
Gubelstrasse 24
6300 Zug, Switzerland
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class
Name of
each exchange on which registered
Class A Ordinary Shares with no par value
New York Stock Exchange
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
Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of March 31, 2018: 22,884,525
Class A ordinary shares with no par value and 11,117,582 ordinary shares with no par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act
Yes o No x
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 o No x
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 x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website,
if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No o
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 "large accelerated filer""accelerated filer", "smaller reporting company"and "emerging growth company" in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filerx
Accelerated filer o
Non-accelerated filer o
Emerging growth company o
If
an emerging growth company, 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. o
Indicate by check mark basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP x
International
Financial Reporting Standards as issued
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 o Item 18 o
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):
As used herein, and unless the context suggests otherwise, the terms "Luxoft,""Company,""Group,""we,""us" or "our" refer to Luxoft Holding, Inc and its direct and consolidated subsidiaries unless otherwise stated or indicated by context. We define Central and Eastern Europe ("CEE") to include Albania, Belarus, Bosnia-Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Macedonia, Moldova, Montenegro, Kosovo, Poland, Romania, Russia, Serbia, Slovakia, Slovenia and Ukraine.
Throughout this annual report, we refer to various trademarks, service marks and trade names that we use in our business. "Luxoft" is
our registered trademark. We also have several other registered trademarks, service marks and pending applications relating to our products and services. Other trademarks and service marks appearing in this annual report are the property of their respective holders.
Special Note Regarding Forward-Looking Statements
In addition to historical facts, this annual report on Form 20-F contains forward-looking statements within the meaning of Section 27A of the U.S. Securities Act of 1933, as amended (the "Securities Act"), Section 21E of the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act") and the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. We make forward-looking statements in this annual report that are subject to risks and uncertainties. These forward-looking statements include information about possible or
assumed future results of our business and financial condition, as well as the results of operations, liquidity, plans and objectives. In some cases, you can identify forward-looking statements by terminology such as "believe,""could,""seek,""may,""estimate,""continue,""anticipate,""intend,""should,""plan,""will,""would,""expect,""predict,""project,""potential" or the negative of these terms or other similar expressions that convey uncertainty of future events. These statements may be found in the sections of this annual report on Form 20-F (the "annual report") titled "ITEM 3. Key Information—Risk Factors,""ITEM 4. Information About Luxoft,""ITEM 5. Operating and Financial Review and Prospects,""ITEM 10. Additional Information—E. Taxation—United States Federal Income Taxation—Passive Foreign Investment Company
Considerations,""ITEM 11. Quantitative and Qualitative Disclosures About Market Risk" and elsewhere in this annual report, including the section of this annual report entitled "ITEM 4. Information about Luxoft—Business Overview—Overview" and "ITEM 4. Information about Luxoft—Business Overview—Industry Background," which contain information obtained from independent industry sources. These statements include, but are not limited to, statements regarding:
•
the persistence and intensification of competition in the information technology ("IT") industry;
•
the
future growth of spending in IT services outsourcing generally and in each of our lines of business, application outsourcing and custom application development and offshore research and development services;
•
the level of growth of demand for our services from our clients;
•
the level of increase in revenues from our new clients;
•
general
economic and business conditions in our locations, including geopolitical instability and social, economic or political uncertainties, such as in Russia and Ukraine, and any potential sanctions, restrictions or responses to such conditions imposed by some of the locations in which we operate;
•
seasonal trends and the budget and work cycles of our clients;
•
the levels of our concentration of revenues by line of business, by geography, by client and by type of contract
in the future;
•
the expected timing of the increase in our corporate tax rate;
•
our expectations with respect to the proportion of our fixed price contracts;
•
our expectation that we will be able to integrate
and manage the companies we acquire and that our acquisitions will yield the benefits we envision;
•
the demands we expect our rapid growth to place on our management and infrastructure;
•
the sufficiency of our current cash, cash flow from operations and lines of credit to meet our anticipated cash needs;
•
the
high proportion of our cost of services comprised of personnel salaries;
•
IBS Group Holding Limited and its subsidiaries consideration of further divesting all or a portion of its ownership interest in us; and
•
our continued financial relationship with IBS Group Holding Limited and its subsidiaries including expectations for the provision
and purchase of services and purchase and lease of equipment.
The preceding list is not intended to be an exhaustive list of all of our forward-looking statements. The forward-looking statements are based on our beliefs, assumptions and expectations of future performance, taking into account the information currently available to us. These statements are only predictions based upon our current expectations and projections about future events. There are important factors, some of which lie beyond our control or ability to predict, that could cause our actual results, level of activity, performance or achievements to differ materially from the results,
level of activity, performance or achievements expressed or implied by the forward-looking statements. In particular, you should consider the risks discussed in "ITEM 3. Key Information—D. Risk Factors" and elsewhere in this annual report.
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that future results, levels of activity, performance and events and circumstances reflected in the forward-looking statements will be achieved or will occur. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this annual report to conform these statements to actual results or to changes in our expectations.
Industry Data and Other Information
This
annual report includes data, forecasts and information obtained from industry publications and surveys and other information available to us. Forecasts and other metrics included in this annual report to describe our industry are inherently uncertain and speculative in nature and actual results for any period may materially differ. Estimates and forecasts involve uncertainties and risks and are subject to change based on various factors, including those discussed above and in "ITEM 3. Key Information—D. Risk Factors" of this annual report.
The Gartner Report(s) described herein, (the "Gartner Report(s)") represent(s) research opinion or viewpoints published, as part of a syndicated subscription service, by Gartner, Inc. ("Gartner"), and are not representations of fact. Each Gartner Report speaks as of its original publication date (and not as of the date of this Annual Report) and the opinions expressed
in the Gartner Report(s) are subject to change without notice.
Gartner does not endorse any vendor, product or service depicted in its research publications, and does not advise technology users to select only those vendors with the highest ratings or other designation. Gartner research publications consist of the opinions of Gartner's research organization and should not be construed as statements of fact. Gartner disclaims all warranties, expressed or implied, with respect to this research, including any warranties of merchantability or fitness for a particular purpose.
The following tables set forth our selected consolidated financial data. You should read the following selected consolidated financial data in conjunction with "ITEM 5. Operating and Financial Review and Prospects" and our consolidated financial statements and the related notes included elsewhere in this annual report. We have derived the consolidated statements
of income data for the years ended March 31, 2018, 2017, and 2016 and the consolidated balance sheet data as of March 31, 2018 and 2017 from our audited consolidated financial statements included in "ITEM 18. Financial Statements," which have been prepared in accordance with generally accepted accounting principles in the United States. We have derived the consolidated statements of income data for the years ended March 31, 2015 and 2014 and the consolidated balance sheet data as of March 31, 2016, 2015, and 2014
from our audited consolidated financial statements, which are not included in this annual report. Historical results are not indicative of the results to be expected in the future.
See
note 19 to our annual consolidated financial statements included elsewhere in this annual report for an explanation of the number of shares used in calculating basic and diluted earnings per share.
(2)
Working capital is defined as total current assets minus total current liabilities.
(3)
Includes short-term and long-term borrowings, loans from related parties and capital lease obligations.
B.
Capitalization
and Indebtedness
Not applicable.
C.
Reasons for Offer and Use of Proceeds
Not applicable.
D.
Risk Factors
An investment in our Class A ordinary shares involves a high degree of risk. You should consider carefully the risks
described below, together with financial and other information contained in this annual report and in our other filings with the United States Securities and Exchange Commission (the "SEC"). If any of the following risks actually occurs, our business, financial condition and results of operations could be materially adversely affected. In that event, the trading price of our Class A ordinary shares would likely decline and you might lose all or part of your investment. This report also contains forward-looking statements that involve risks and uncertainties. Our results could materially differ from those anticipated in these forward-looking statements, as a result of certain important factors including the risks described below and elsewhere in this report and our other SEC filings. See "Preliminary Notes—Special Note Regarding Forward-Looking Statements."
Risks
related to our business and our industry
We generate a significant portion of our sales of services, and anticipate deriving a large portion of our sales of products, from a limited number of clients, and any significant loss of business from these clients or failure by such clients to pay for our services would materially adversely affect our results of operations.
We are dependent on our key clients for a significant portion of our sales of services. Our largest clients, Deutsche Bank and UBS, together accounted for 52.3%, 43.3% and 34.7% of our sales of services in the fiscal years ended March 31, 2016,
2017 and 2018, respectively. In the aggregate, our ten largest clients accounted for 73.7%, 66.0% and 57.6% of our sales of services in the fiscal years ended March 31, 2016, 2017 and 2018, respectively.
Our ability to maintain close relationships with these and other major clients is essential to the growth and profitability of our business. We have entered into framework agreements with each of our key clients, including Deutsche Bank and UBS, which govern substantially
all of our arrangements for the provision of services to such clients. These agreements, however, do not grant us any exclusivity and do not contain any minimum service conditions. Further, although our framework agreements with Deutsche Bank and UBS entitle us to compensation for any services already rendered by us if prematurely terminated, they may be terminated by Deutsche Bank and UBS, respectively, generally upon prior written notice of between one and six months' without any penalty. In addition, Deutsche Bank may terminate any or all of the individual service contracts governed by the master framework agreement if the master framework agreement is terminated for cause or for any other reason. Accordingly, we cannot provide any assurance that we will succeed in maintaining or growing our business with sales of services from our largest clients.
Our reliance on any individual client may give that client a certain degree of pricing leverage against us as we negotiate contracts and terms of service. In addition, a number of other factors outside our control could cause the loss of or reduction in business or sales of services from any client. These factors may include, among others, a client's corporate restructuring or insolvency, pricing pressure or changes to its outsourcing strategy and budget. A client may decide to reduce spending on technology services or sourcing from us, or shift such spending to one of our competitors, due to a challenging economic environment, a change of strategy in outsourcing services or other internal or external factors relating to its business. Furthermore, we may become further dependent on our key customers
in case of global consolidation processes.
Due to the nature of our business, our operations are, to a large extent, based on the clients’ trust. The implementation of an IT system, which has critical importance for the client’s business, usually results in signing a long-term agreement with the system user. The quality of solutions and services provided to such clients determines their confidence in us. The implementation of contracts with key clients may heavily impact the level of sales revenues generated by us in the coming years. Loss of a major client or deterioration in the financial terms for provision of services to a major client would have a significant adverse impact on the operations, financial position, financial results and prospective development of our business.
Furthermore,
as we expand our services and product offerings to clients, we run the risk of approaching our clients' maximum budget allowance for spending on IT services and software products. If our clients are unable or unwilling to devote more of their IT or overall budget to paying for our services, we risk being unable to increase our sales of services from each of these clients.
The loss of any of our major clients, or a significant decrease in the volume of work they outsource to us or the price at which we sell our services to them, would materially adversely affect our sales of services and thus our results of operations.
We generate a significant portion of our sales of services, and anticipate deriving a material portion of our sales of products, from clients primarily located in the United States and Europe. Deterioration of economic conditions in the United States or Europe could
result in reduced sales of our services and thus adversely affect our results of operations.
We derive a significant portion of our sales of services from clients in the United States and Europe. If the U.S. or European economies weaken or slow, pricing for our services may be depressed and our clients may significantly reduce or postpone their technology spending which may in turn lower the demand for our services. Furthermore, clients in affected regions could terminate their contracts with us, generally by giving between 30 days' and six months' notice, or choose not to renew their contracts with us. Such actions by our clients would negatively affect our sales of services and profitability.
A significant
decline in the economies of the countries where our clients are exposed could have a material adverse effect on our business. If we are unable to anticipate changing economic and other conditions affecting the markets in which we operate, we may be unable to plan effectively for or respond to those changes, and our results of operations could be materially adversely affected. In the European Union, despite measures taken by several governments and monetary authorities to provide financial assistance to certain Eurozone countries and to avoid default on sovereign debt obligations, concerns persist regarding the debt burden of several countries. The large sovereign debts and/or fiscal deficits of a number of European countries and the United States have raised concerns regarding the financial condition of financial institutions, insurers and other corporations, located in these countries, that have direct or indirect exposure to these countries; and/or whose banks, counterparties,
custodians, clients, service providers, sources of funding and/or suppliers have direct or indirect exposure to these countries. A resurgence of the sovereign debt crisis in Europe or, on a lesser scale, a default, or a significant decline in the credit rating, of one or more sovereigns or financial institutions could cause severe stress in the financial system generally and could adversely affect the businesses and economic condition and prospects of our clients (some of the largest of which are European banks), counterparties, suppliers or creditors, directly or indirectly, in ways difficult to predict. The impact of these conditions could be detrimental to us and could materially adversely affect our business, operations and profitability.
Rapid growth may strain our limited resources, and a failure to manage this growth could have a material adverse effect on the quality of our services and client support.
We
intend to continue our expansion for the foreseeable future and pursue available opportunities. Our sales of services grew from $398.3 million in the fiscal year ended March 31, 2014 to $906.8 million for the fiscal year ended March 31, 2018. As of March 31, 2018 we had 12,898 personnel, as compared to 12,766 personnel as of March 31, 2017. Our rapid growth has placed, and we expect it to continue to place, significant
demands on our management and our administrative, operational and financial infrastructure. In addition, in fiscal year ended March 31, 2015, we implemented our Global Upgrade Program, which aimed at increasing the share of our operations in the EU, the UK, Asia Pacific and North America. The Global Upgrade Program has resulted in our expansion in Central and Eastern Europe and has facilitated our expansion into new markets. Continued expansion increases the challenges we face in offering our services in the following areas:
•
recruiting and retaining sufficiently skilled IT professionals, as well as marketing and management personnel;
•
training
and supervising our personnel to maintain our high standards of quality;
borrowing adequate short-term funds to finance rapid growth;
•
developing financial and management controls; and
•
preserving
our culture and values and our entrepreneurial environment.
If we are unable to manage our rapid growth effectively, or if we are unable to implement our Global Upgrade Program successfully or promptly, the quality of our services and client support could suffer, and productivity and results of operations could be materially adversely affected.
We derive a large portion of our sales of services, and expect that we will derive a large portion of our sales of products, from clients who operate in a limited number of industries. While this gives us deep expertise in those industries, it increases our exposure to adverse conditions in any of them.
We derive a large portion of our sales of services from clients who operate in a limited number of industries. In the fiscal year ended March
31, 2018, we derived 56.7%, 17.5% and 25.8% of our sales of services from clients operating in our financial services, automotive and transport, and digital enterprise lines of business, respectively. Our business and growth depend to a large extent on continued demand for our services from clients and potential clients in these industries. Demand for our services and products in general, as well as in any industry specifically, could be affected by multiple factors outside of our control, including a decrease in growth or growth prospects of the industry, a slowdown or reversal of the trend to outsource technological applications and software development services generally, or consolidation within the industry. Clients in these affected industries could terminate their contracts
with us, generally by giving between 30 days and six months' notice, or choose not to renew their contracts with us. In addition, serving a major client within a particular industry may restrict our ability to enter into engagements with competitors of that client, and certain of our client contracts prohibit certain of our employees from working on engagements with our clients' competitors. As businesses within these industries, in particular, the financial services industry, continue to limit the number of vendors from whom they buy products and services, we may face challenges in gaining new clients or keeping the existing clients. Any significant decrease in demand for our services by clients in these industries, or other industries from which we derive significant sales of services
in the future, may have a material adverse effect on our results of operations.
In particular, an economic slowdown or financial crisis could result in decreased IT spending by institutions in the financial services industry and/or project delays, making it more difficult for us to obtain new clients, sell our services and products or maintain the current level of demand from our existing clients in this industry. Because the financial services industry is our largest vertical, such a slowdown could materially affect our revenues and thus our results of operations.
We operate in a highly competitive environment and may not be able to compete successfully.
The IT industry in general, and the software development market in particular, is highly competitive, and we expect competition not only to persist but also to continue to intensify. We
believe that the principal competitive factors in our markets are the quality of the services offered, breadth and depth of service offerings, reputation and track record, industry expertise, effective personnel recruiting, training and retention, marketing and sales skills, scalability of infrastructure, and ability to address clients' timing requirements and price.
We face competition from offshore technology service providers in outsourcing destinations with low wage costs such as India, as well as competition from large global consulting and outsourcing firms and in-house IT departments of large corporations. There is no assurance that we will not face additional competition from new market entrants. We do not enter into exclusive services arrangements with any of our clients, and as a result, our sales of services could suffer to the extent that clients could obtain services from other competing application and software
engineering outsourcing services. Clients may prefer application and software engineering outsourcing service providers that have more locations or that are based in countries that are more cost-competitive or more politically and economically stable than the countries in which we operate.
Some of our current and potential competitors may benefit from substantially greater financial, marketing, or technical resources. Our current and potential competitors may also be able to respond more quickly to new technologies or processes and changes in client demands; may be able to devote greater resources toward the development, promotion and sale of their services than we can; and may also make strategic acquisitions or establish cooperative relationships among themselves or with third parties that increase their ability to address client needs. We cannot give any assurance that we will be able to retain our clients while competing
against such competitors. Increased competition, our inability to compete successfully, pricing pressures and resulting loss of clients could materially adversely affect our business.
Our computer and data networks may be vulnerable to security risks that could disrupt our services and cause us to incur losses or liabilities that could adversely affect our business.
As a multinational service provider with customers in a broad range of industries, we believe that an appropriate information technology infrastructure is important in order to support our daily operations and the growth of our business. In
the
current environment, there are numerous and evolving risks to cybersecurity and privacy, including criminal hackers, hacktivists, state-sponsored intrusions, industrial espionage, employee malfeasance and human or technological error. High-profile security breaches at other companies and in government agencies have increased in recent years, and security industry experts and government officials have warned about the risks of hackers and cyber-attacks targeting businesses such as ours. In a number of public networks, hackers have bypassed firewalls and misappropriated confidential information, including personally identifiable information, for various reasons, including political, economic and commercial gain.
Our computer networks may be vulnerable to unauthorized access, computer hackers, computer viruses, worms, malicious applications and other security problems caused by unauthorized access to, or improper use of, systems
by third parties or employees. A hacker who circumvents security measures could misappropriate our proprietary information or cause interruptions or malfunctions in our operations. We also have access to sensitive customer information in the ordinary course of business. It is possible that, despite existing safeguards, an employee could misappropriate our clients' proprietary information or data, exposing us to a risk of loss or litigation and possible liability. Such data networks are vulnerable to attacks, unauthorized access and disruptions.
We implement from time to time new technologies and solutions to assist in the prevention of potential and attempted cyber-attacks, as well protective measures and contingency plans in the event of an existing attack. Additionally, we analyze the risks we face on an ongoing basis and, accordingly, strengthen our information technology infrastructure, update our policies and conduct
training for our employees to enhance our ability to prevent and respond to such risks. However, we can provide no assurance that our current IT system or any updates or upgrades thereto, or the current or future IT systems of our business partners, are fully protected against third-party intrusions, viruses, hacker attacks or other similar threats. We expect to experience actual or attempted cyber-attacks of our IT networks. We cannot guarantee that any such incidents will not have such a material impact on our operations in the future. Actual or perceived concerns that our systems or the systems of our business partners may be vulnerable to such attacks or disruptions may deter our clients from using our solutions or services. As a result, we may be required to expend significant resources to protect against the threat of these security breaches or to alleviate problems caused by these breaches. There is also no assurance that we will be insulated from criminal or
civil enforcement actions or private claims relating to cyber-attacks or that we will withstand legal challenges in relation to our agreements with third parties. Legislative or regulatory action in these areas is evolving, and we may be unable to adapt our IT systems or to manage the IT systems of third parties to accommodate these changes. Finally, if a significant data breach occurred, our reputation could be materially and adversely affected, and confidence among our customers may be diminished.
These risks will increase as we continue to grow our cloud-based offerings and services, store and process increasingly large amounts of customer data and host or manage parts of our customers’ businesses, especially in industries involving particularly sensitive data such as the financial services industry. Losses or liabilities that are incurred as a result of any of the foregoing could adversely affect our business and reputation,
thus adversely affecting our results of operations and the value of an investment in our ordinary shares.
If we cause disruptions to our clients' businesses or provide inadequate service, our clients may have claims for substantial damages against us, which could cause us to lose clients, have a negative effect on our reputation and adversely affect our results of operations.
Many of our engagements involve projects that are critical to the operations of our clients' businesses and provide benefits to our clients that may be difficult to quantify. Our software development services involve a high degree of technological complexity, have unique specifications and could contain design defects or software errors that our quality assurance procedure may fail to detect and correct.
Errors or defects may result in the loss of current clients,
failure to attract new clients, diversion of development resources and an increase in support or service costs. Furthermore, any failure in a client's system or any breach of security could disrupt the client's business and could result in a claim for substantial damages against us, regardless of our responsibility for such failure, if such failure is caused by a breach of our contract obligations under any agreements with clients. In addition, any such failures or errors could seriously damage our reputation and materially affect our ability to attract new business.
Many of our contracts contain limitations on liability capped either at between six months and one year of payments under the contract
or at the full service contract price, and many of our contracts disclaim any warranties of merchantability and sell our services "as-is." However, not all client contracts contain liability caps, and these limitations on liability may not apply in all circumstances, may be unenforceable in some cases or may be insufficient to protect us from liability for damages, direct or consequential. Any substantial liability that we incur as a result of any of the above could have a material adverse effect on our business and results of operations.
Changes in the European regulatory environment regarding privacy and data protection regulations could expose
us to risks of noncompliance and costs associated with compliance.
On April 14, 2016 the European Parliament approved the General Data Protection Regulation (GDPR), which came into effect on May 25, 2018. The GDPR is directly applicable in every EU member state, without the necessity of national implementation laws. The new regulation replaces the Data Protection Directive 95/46/EC and is designed to harmonize data privacy laws across the European Union and to reshape the way organizations across the region
approach data privacy. The GDPR have a significant impact on how businesses can collect and process the personal data of individuals in the European Economic Area. The regulation contains many key changes, such as: stronger enforcement, increased accountability, new approach to consent and data transfer, new privacy rights, data breach regulation, data protection officer appointment, data processing agreements, and privacy impact assessment.
The Company has been undertaking measures to comply with the GDPR. The costs of compliance with, and other burdens imposed by, such laws, regulations and policies that are applicable to us may limit the use and adoption of our products and solutions, alter the way we conduct business and/or could otherwise have a material adverse impact on our results of
operations. We may be unsuccessful in establishing legitimate means of transferring data from the European Economic Area, we may experience hesitancy, reluctance, or refusal by European or multi-national customers to continue to use our services due to the potential risk exposure to such customers as a result of the implementation of GDPR, and we and our customers are at risk of enforcement actions taken by the European Union data protection authority until such point in time that we ensure that all data transfers to us from the European Economic Area are legitimized. We may find it necessary to establish systems to maintain EU-origin data in the European Economic Area, which may involve substantial expense and distraction from other aspects of our business. Further, the costs of compliance with, and other burdens imposed by, such laws, regulations and policies that are applicable to us, may limit the use and adoption of our products and solutions and could have a material
adverse impact on our results of operations.
Our insurance may be inadequate to protect us against our losses.
Although we believe our insurance coverage is customary for the jurisdictions in which we operate, insurance for our operations in Central and Eastern Europe ("CEE") does not cover all the risks that a company of a similar size and nature operating in a more economically developed country could insure. For example, we do not have coverage for business interruption or loss of key management personnel. In addition, we only have limited product liability insurance to the extent required by our client contracts. We do not maintain separate funds or otherwise set aside reserves to cover such losses or third-party claims. If any such uninsured event were to occur, we might incur
substantial costs and diversion of resources, which, in turn, could have a material adverse effect on our results of operations.
Our success depends on our ability to continue to attract new personnel, and retain and motivate our existing personnel.
Our ability to maintain and renew existing engagements and obtain new business is critical to our success and will largely depend on our ability to attract, train and retain skilled professionals, including experienced IT professionals and other professionals, which enables us to keep pace with growing demands for outsourcing, evolving industry standards and changing client preferences.
We rely heavily on maintaining a workforce of skilled professionals. Because our business model does not provide for the hiring and training of a large number of junior personnel, we must depend on lateral hires
to provide us with skilled professionals. Competition for skilled professionals in the markets in which we operate can be intense, and, accordingly, we may not be able to retain or hire all of the professionals necessary to meet our ongoing and future business needs. If our competitors are able to increase the educational level of their workforce, or if clients and prospective clients become more price-sensitive and choose lower-cost suppliers that have a cheaper labor force, we may lose our competitive advantage notwithstanding the relatively high educational level of our workforce.
Furthermore, the cost of work is increasing. Salaries account for a significant share of each project implementation costs. Our operations and development outlook depend to a large extent on the knowledge, experience and professional qualifications of the employees who implement the IT projects. Because we mainly rely on highly skilled professionals,
any increase in salaries may negatively affect the margins achieved on our projects, and consequently have an unfavorable impact on our financial results. The significant market demand for IT specialists and competitors’ activities may induce our qualified personnel to leave our organization and make it quite difficult to recruit new employees with suitable knowledge, experience and professional qualifications.
Attrition rates among our employees were 10.3%, 12.7% and 17.8% for the fiscal years ended March 31, 2016, 2017 and 2018, respectively. We define "attrition"
as the total number of personnel with more than six months of work experience in the Company, who have left the Company during the reporting period, divided by the total number of personnel at the end of the reporting period, net of employees who have left on the last day of the period. Although we believe that our competitors calculate attrition based on the same principles, their methodology may differ from ours. We may encounter higher attrition
rates in the future. A significant
increase in the attrition rate among professionals with specialized skills could decrease our operating efficiency and productivity and could lead to a decline in demand for our services. The competition for highly-skilled professionals may require us to increase salaries, and we may be unable to pass on all these increased costs to our clients. These factors may have a material adverse effect on our profitability and results of operations.
Wage inflation in countries where our delivery centers are located may adversely affect our financial condition and results of operations.
We operate delivery centers in Russia, Ukraine, Romania, Poland, Bulgaria, India, and Vietnam where wage costs have historically been significantly lower than wage costs in the United States and Western Europe for comparably skilled professionals. Wages are our most significant operating expense, and wage increases
in these countries may prevent us from sustaining this competitive advantage internationally and may negatively affect our profitability. Russia and Ukraine use inflation as measured by the consumer price index, as a proxy for wage inflation in official statistics. However, we believe that wage inflation rates for the IT industry can be significantly higher than overall wage inflation rates within each of 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.
Fluctuations in currency exchange rates and increased inflation could materially
adversely affect our financial condition and results of operations.
We conduct business in multiple countries, which exposes us to risks associated with fluctuations in currency exchange rates. In the fiscal year ended March 31, 2018, 54.9% of our sales were denominated in U.S. dollars, 26.5% were denominated in euros, 9.5% of our expenses were denominated in Polish zloty and 10.9% in Russian rubles. As a result, weakening of the euro against U.S. dollar, as well as strengthening of the Russian ruble and Polish zloty relative to the U.S. dollar, are significant short-term risks to our financial performance. The Russian ruble-to-U.S. dollar and euro-to-U.S.
dollar exchange rates have been volatile in the past few years largely as a result of instability of the global financial markets. Any further significant fluctuations in currency exchange rates may have a material impact on our business.
In addition, economies in CEE countries such as Russia and Ukraine 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 are denominated in Russian rubles, the relative movement of inflation can significantly affect our results of operations by increasing 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 and materially adversely affect our business. Inflationary pressures could also slow economic growth in the applicable countries and limit
our ability to access financial markets and take counter-inflationary measures, which may harm our financial condition and results of operations or materially adversely affect the market price of our securities.
The decision by the United Kingdom to exit from the European Union could materially adversely affect our business and results of operations.
In a referendum held on June 23, 2016, the people of the United Kingdom voted in favor of the United Kingdom withdrawing from the European Union ("Brexit") and on March 29, 2017, the United Kingdom formally notified the European Union of its intention to withdraw from the European Union. While the United Kingdom and the European Union are expected to reach an agreement by 2019, political changes in the UK following the “Brexit”
referendum, including recent attempts by certain members of the UK Parliament to expand their influence over the “Brexit” process in case the United Kingdom fails to come to an agreement with the European Union, along with other factors, leave it unclear when exactly the United Kingdom will exit and on what terms. The impact on us from Brexit will depend, in part, on the outcome of tariff, trade, regulatory and other negotiations. Because this is an unprecedented event, it is unclear what long-term economic, financial, trade and legal implications the withdrawal of the UK from the EU would have and how such withdrawal would affect the regulation applicable to our business globally and specifically in the region.
We have two UK subsidiaries and a holding company of the group, which is an UK tax resident, together employing approximately
325 people, and have operations across the European Union. As a result, we face risks associated with the political and economic uncertainty and consequences that have flowed, and may continue to flow, from Brexit.
The announcement of Brexit has caused significant volatility in global financial markets and currency exchange rate fluctuations that have resulted in the strengthening of the U.S. dollar against the British pound and the euro. The uncertainty in the financial markets created by Brexit may cause our clients to closely monitor their costs and reduce their spending budget on our services. In addition, the strengthening of the U.S. dollar relative to the British pound and the euro may adversely affect our results of operations in a number of ways, including:
Our sales are denominated in both the U.S. dollar and currencies other than U.S. dollars, including the euro and the British pound. The depreciation of the euro and the British pound relative to the U.S. dollar may impair the purchasing power of our European clients and could cause clients to cancel contracts or default on payment; and
•
We translate sales and other results denominated in foreign currency into
U.S. dollars in the preparation of our financial statements. During periods of a strengthening dollar, our reported sales and earnings could be reduced because the euro and British pound may translate into fewer U.S. dollars.
For more information, see "Risks related to our business and our industry—Fluctuations in currency exchange rates and increased inflation could materially adversely affect our financial condition and results of operations."
In addition, because a significant portion of the regulatory framework in the United Kingdom is derived from European Union directives and regulations, Brexit could materially change the regulatory regime applicable to our operations and our clients' operations as the United Kingdom determines which European Union directives and regulations to replace or replicate. In particular, the European Union has implemented
various regulations relating to the financial services industry that apply to all member states. Because we generate a significant portion of our sales from clients in the financial services industry, any decision by the United Kingdom to adopt different or conflicting laws could negatively affect our clients' businesses, which in turn could adversely impact our financial condition and results of operations.
Although the long-term effects of Brexit will depend on any agreements the United Kingdom makes to retain access to the European Union markets, the United Kingdom could lose access to the single European Union market, including the single market for financial services, and to the global trade deals negotiated by the European Union on behalf of its members, which may materially harm the UK financial services industry and increase trade barriers, both of which could adversely affect our results of operations. For a company
with UK subsidiaries and operations across Europe, such as us, Brexit could result in adverse changes in applicable tax benefits or liabilities in various jurisdictions within and outside EU, reconsideration of indirect tax rules without European Union VAT Directive, restrictions on the movement of capital or sales of services, and limitations on the mobility of our personnel. Any of these effects of Brexit, among others, could materially adversely affect our business, results of operations and financial condition.
Significant political or regulatory developments, such as those stemming from the recent change of the presidential administration in the United States and the rise of anti-establishment movements in Europe could have a materially adverse effect on us.
Recent events, including the
policies introduced by the current U.S. presidential administration, have resulted in substantial regulatory uncertainty regarding international trade and trade policy. For example, the current U.S. presidential administration has called for substantial changes to trade agreements, such as the North American Free Trade Agreement (“NAFTA”), has increased tariffs on certain goods imported into the United States and has raised the possibility of imposing significant, additional tariff increases. The announcement of unilateral tariffs on imported products by the United States has triggered retaliatory actions from certain foreign governments and may trigger retaliatory actions by other foreign governments, potentially resulting in a “trade war.” While we cannot predict the extent to which the United States or other countries will impose quotas, duties, tariffs, taxes or other similar restrictions upon the import or export of our products in the future, a “trade
war” of this nature or other governmental action related to tariffs or international trade agreements could have an adverse impact on demand for our services, sales and customers and affect the economies of the United States and various European countries, materially harming our business.
Additionally, the outcome of the “Brexit” referendum in the United Kingdom, the results of the referendum in Italy on constitutional reform, which led to a possible coalition of anti-establishment parties, the Syrian refugee crisis and the increasing appeal to voters of populist and anti-austerity movements in Germany, France, The Netherlands and other countries have created rising political uncertainty throughout Europe. An escalation of political risks could have unpredictable consequences for economy of European countries and in turn for our business, as customers may rein in
activity levels in light of decreased economic output and increased insecurity, which would materially adversely affect our operating results and financial condition. In sum, given our significant sales operations in the U.S. and Europe, changes in U.S. or European political, regulatory and economic conditions or in its policies governing international trade and foreign investment in the U.S. or Europe could materially and adversely affect our business.
Our competitive position and future prospects depend on the expertise of members of our senior management team, and our business may be severely disrupted if we lose their services.
Our business is dependent on retaining the services of certain key members of the management team who have extensive experience in the IT industry. If a key member of the management team is unable or unwilling to continue in his or her present position,
our business operations could be disrupted, and we may not be able to replace such a person easily, or at all. In addition, the number of qualified managerial personnel in the primary jurisdictions in which we operate is limited, and
competition for the services of such persons in our industry is intense. While we have entered into employment contracts with our senior managers and have provided incentives for them to remain with us, including monetary bonuses and share-based compensation, we cannot guarantee that we will retain their services. We currently do not
maintain insurance against any damage that may be incurred in case of the loss or dismissal of our key specialists or managers.
If any of our key personnel, including senior management and business development managers, joins a competitor or forms a competing company, we may lose clients, suppliers, knowhow and key technology professionals and staff members to them, and our sales of services may be materially adversely affected. Such movement by key personnel could also result in unauthorized disclosure or use of our technical knowledge, practices or procedures, which may materially adversely affect our competitive position and, consequently, our business.
Our ability to generate and retain business depends on our reputation in the marketplace.
Because many of our specific client engagements involve unique services, our corporate reputation
is a significant factor in our clients' evaluation of whether to engage our services and in our potential and existing employees' decision to join and remain at our Company. However, our corporate reputation is susceptible to damage by actions or statements made by current or former clients, competitors, vendors, employees, adversaries, government regulators and members of the investment community and the media, irrespective of the accuracy or the veracity of the information on which such actions or statements are based. There is a risk that negative information about us, 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 and could materially adversely affect our recruitment and
retention efforts. Damage to our reputation could also reduce the value and effectiveness of the Luxoft brand name and could reduce investor confidence in us. Our inability to generate or retain business as a result of damage to our reputation could materially adversely affect our business.
If we do not succeed in quickly assimilating new technologies and rapidly changing technologies, methodologies and evolving industry standards, our business may be materially adversely affected.
The IT industry is subject to rapid and significant changes in technology, methodologies and evolving industry standards. Our clients rely on us to continue to anticipate and provide them with the most innovative technologies on the market. Our future success will to a large extent depend on our ability to quickly acquire and assimilate cutting edge technologies, which we can then use to develop our clients'
systems. Development and introduction of new services and products involve a significant commitment of time and resources and are subject to a number of risks and challenges, including:
•
difficulty or cost in ensuring that some features of our software work effectively and securely over the Internet or with new or changed operating systems;
•
difficulty or cost in developing and updating our software and services quickly enough to meet our clients' needs and to keep pace with business, evolving industry standards, methodologies, regulatory
and other developments in the industries where our clients operate; and
•
difficulty or cost in maintaining a high level of quality as we implement new technologies and methodologies.
We may not be successful in anticipating or responding to these developments in a timely manner, or if we do respond, the services, technologies or methodologies we develop or implement may not be successful in the marketplace. Further, products, services, technologies or methodologies that are developed by our competitors may render our services and products non-competitive or obsolete. Our failure to enhance our existing services and to develop and introduce new services and products in line with the
developments in technology, methodologies and standards in the IT industry that will promptly address the needs of our clients could cause us to lose clients, and materially adversely affect our business.
Our profitability could suffer if we are not able to manage large and complex projects.
Our profitability and operating results are dependent on the scale of our projects and the prices we are able to charge for our services. The challenges of managing larger and more complex projects include:
•
maintaining high-quality control and process execution standards;
•
maintaining
planned resource utilization rates on a consistent basis;
•
maintaining productivity levels and implementing necessary process improvements;
•
controlling project costs;
•
maintaining close client contact and high levels of client satisfaction;
•
recruiting
and retaining sufficient numbers of skilled IT professionals; and
In addition, large and complex projects may involve multiple engagements or stages, and there is a risk that a client may choose not to retain us for additional stages or may cancel or delay additional planned engagements. Such cancellations or delays may make it difficult to plan our project resource requirements,
and may result in lower profitability levels than we anticipated upon commencing engagements.
Our profitability could suffer if we fail to maintain favorable pricing for our services.
The pricing of our services is 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;
•
our ability to charge premium prices when justified by market demand or the type of service;
•
our large clients' pricing leverage; and
•
general economic conditions.
If we
are unable to maintain favorable pricing for our services, our profitability could suffer.
If we are unable to collect our receivables from, or bill our unbilled services to, our clients, our results of operations and cash flows could be materially adversely affected.
Our business depends on our ability to obtain payment from our clients of the amounts they owe us for work performed. We usually bill and collect such amounts on relatively short cycles. We maintain allowances for doubtful accounts. Actual losses on client balances could differ from those that we currently anticipate and, as a result, we might need to adjust our allowances. There is no guarantee that we will accurately assess the creditworthiness of our clients. Weak macroeconomic conditions and related turmoil in the United States, European or the global financial system could also result in financial difficulties,
including limited access to the credit markets, insolvency, or bankruptcy for our clients, and, as a result, could cause clients to delay payments, request modifications to their payment arrangements that could increase our receivables balance, or default on their payment obligations. For more information, see “-We generate a significant portion of our sales of services, and anticipate deriving a material portion of our sales of products, from clients primarily located in the United States and Europe. Deterioration of economic conditions in the United States or Europe could result in reduced sales of our services and thus adversely affect our results of operations.” In addition, some of our clients may delay payments due to changes in internal payment procedures driven by rules and regulations to which they are subject. Timely collection of client balances also depends on our ability to complete our contractual commitments and bill and collect our contracted sales
of services. If we are unable to meet our contractual requirements and if we experience an increase in the time to bill and collect for our services, we might be unable to collect our client balances or experience delays in collection. If this occurs, our results of operations and cash flows could be materially adversely affected.
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 fixed price projects and costs incurred in the performance of each project;
•
inability
to maintain high employee utilization levels;
•
changes in pricing in response to client demand and competitive pressures;
•
changes in the allocation of onsite and offshore staffing;
•
the business decisions of our clients regarding the use of our services;
•
the
ability to further grow sales of services from existing clients;
•
the available leadership and senior technical resources compared to junior engineering resources staffed on each project;
•
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 contracts;
the
continuing financial stability of our clients; and
•
general economic conditions.
Based upon all of the factors described above, our operating results may from time to time fall below our estimates or the expectations of public market analysts and investors. If we fail to meet expectations regarding our financial and operating results for any given period announced by us or by analysts, the market price of our Class A ordinary shares could decrease substantially, and we could face costly lawsuits, including securities class action suits, thus adversely affecting our results of operations and business.
We have incurred, and may continue to
incur, significant share-based compensation expenses which could adversely impact our net income.
We have granted shares and share-based instruments under our stock option plan, as a result of which we have recorded $29.0 million, $29.0 million, $17.7 million, $5.8 million, and $1.4 million in share-based compensation expenses for the fiscal years ended March 31, 2018, 2017, 2016, 2015 and 2014,
respectively.
U.S. GAAP prescribes how we account for share-based compensation. U.S. GAAP requires us to recognize share-based compensation as a compensation expense in the statement of comprehensive income generally based on the fair value of equity awards on the date of the grant, with the compensation expense recognized over the period in which the recipient is required to provide service in exchange for the equity award. Such expenses could adversely impact our results of operations or the price of our Class A ordinary shares. If we do not grant equity awards, or if we reduce the number of equity awards we grant, we may not be able to attract and retain key personnel. If we adopt additional equity incentive plans in the future in order to attract and retain key personnel, the expenses associated with such additional equity awards could materially adversely affect our results of operations.
We
may be subject to third-party claims of intellectual property infringement that could be time-consuming and costly to defend.
Our success largely depends on our ability to use and develop our technology, tools, code, methodologies and services, which might also require us to utilize the intellectual property rights of third parties, including patents, copyrights, trade secrets and trademarks. All intellectual property rights created by our employees and contractors are transferred to us subject to local laws and regulations. Typically, we transfer to our clients all of the intellectual property rights to the software we develop for them within the scope of our custom software development and software engineering arrangement, without retaining any rights for ourselves. In developing software for our clients we use third-party environment software under separate license agreements, or, if requested by clients, we may incorporate
third-party software into our software development for them. In these cases, we acquire all necessary licenses for such software once we reach a preliminary agreement with our clients.
Claims that we have infringed the intellectual property rights of others may be asserted against us in the future. For example, we may be unaware of intellectual property registrations or applications relating to our services that may give rise to potential infringement claims against us. Our contracts may be deemed to result in the assignment to our clients of the rights to any developments or improvements in our proprietary delivery platform, software development tools, or residual know-how developed by us during the course of our engagements. Such an interpretation may give rise to a potential claim that our product improvements or residual know-how
were previously assigned to our client and can no longer be used by us on behalf of ourselves or other clients, or subject us to liability for infringement of our client's intellectual property rights. There may also be technologies licensed to and relied on by us that are subject to infringement or other corresponding allegations or claims by third parties, which may damage our ability to rely on such technologies.
Further, our current and former employees and/or independent contractors could challenge our exclusive rights in the software they have developed in the course of their employment or engagement. In Russia and certain other countries in which we operate, (a) where intellectual property was created by an employee of a company as part of their employment relationship, the respective employee retains authorship of such intellectual property, while the employer, unless otherwise provided in the employment agreement,
is deemed to own the exclusive rights to such intellectual property, and (b) where an engaged specialized contractor creates the intellectual property by contract with the client, the latter is by default the holder of exclusive rights to such intellectual property, unless the contract provides otherwise. However, in either case, the authors, regardless of whether they were employees of the company or of any of its contractors (as the case may be), may retain authorship and must be paid consideration for the intellectual property work performed. In the case of intellectual property work created by an
employee during his/her employment, the employer may be required to satisfy additional legal requirements in order to make further use or dispose of such intellectual property. Courts have been inconsistent in their approach to enforcing such applicable legal requirements. As a result, there can be no guarantee that we would be successful in defending against any claim by our current or former employees or contractors challenging our exclusive rights over the use and transfer of works that the respective employees and contractors created or requesting additional compensation for such works.
Parties making infringement claims may be able to obtain an injunction to prevent us from delivering our services or using technology containing the allegedly infringing intellectual property.
We may also be subject
to litigation involving claims of patent infringement or violation of other intellectual property rights of third parties. Furthermore, most of our client contracts require us to indemnify the client in these circumstances for any damages and expenses the client incurs in defending any such claims by third parties, and we may be required to indemnify the client even if the claim by the third party against our client is without merit or is dismissed.
If we fail to defend ourselves and our clients against such claims, our reputation as well as our financial condition may be adversely affected.
Our use of open source software may expose us to risks.
Following the software industry trend of making an increasing
use of open source software in its development work, we incorporate open source technology in our services, which may expose us to liability and have a material impact on our software development services and sales. The open source license may require that the software code in those components or the software into which they are integrated be freely accessible under open source terms. There is a possibility that third-party claims may require us to disclose our own source code to the public, to make the same freely accessible under open source terms. In addition, if the license terms for the open source code change, we may be forced to re-engineer our software or incur additional costs. Any such requirement to disclose our source code or other confidential information related to our work product or such additional costs could materially adversely affect our competitive position, results of business operations, financial condition and client relationships.
We
may not be successful in protecting our intellectual property rights, including our unpatented proprietary know-how and trade secrets, or in avoiding claims that we infringed on the intellectual property rights of others.
We rely on unpatented proprietary know-how and trade secrets and employ commercially reasonable methods, including confidentiality agreements with employees and consultants, to protect our know-how and trade secrets. However, these methods and our patents and trademarks may not afford complete protection and there can be no assurance that others will not independently develop the knowhow and trade secrets or develop better production methods than us. Further, we may not be able to deter current and former employees, contractors and other parties from breaching confidentiality agreements and misappropriating proprietary information and it is possible that third parties may copy or otherwise obtain and use our
information and proprietary technology without authorization or otherwise infringe on our intellectual property rights. Additionally, in the future we may develop and license trade secrets and similar proprietary rights to third parties. Third parties may take actions that could materially adversely affect our rights or the value of our intellectual property, similar proprietary rights or reputation. In the future, we may also rely on litigation to enforce our intellectual property rights and contractual rights and, if not successful, we may not be able to protect the value of our intellectual property. Furthermore, no assurance can be given that we will not be subject to claims asserting the infringement of the intellectual property rights of third parties seeking damages, the payment of royalties or licensing fees and/or injunctions against the sale of our products. Any litigation could be protracted and costly and could have a material adverse effect on our business
and results of operations regardless of its outcome.
We may be liable to our clients for damages caused by violations of intellectual property rights and the disclosure of other confidential information, system failures, errors or unsatisfactory performance of services, and our insurance policies may not be sufficient to cover these damages.
We often have access to sensitive or confidential client information, including personally identifiable information. The protection of our clients' intellectual property rights and other confidential information, including personally identifiable information of our clients, is particularly important for us since our operations are mainly based in CEE countries. CEE countries have not traditionally enforced intellectual property protection to the same extent as countries such as the United States. To protect proprietary information and other intellectual
property, we require our employees, independent contractors, vendors and clients to enter into written confidentiality agreements with us.
Despite measures we take to protect the intellectual property and other confidential information or personally identifiable information of our clients, unauthorized parties, including our employees and subcontractors, may attempt to misappropriate certain intellectual property rights that are proprietary to our clients or otherwise breach our clients' confidences. The agreements we enter into with employees, independent contractors, vendors and clients may not provide meaningful protection for trade secrets, knowhow
or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, knowhow or other proprietary information. Policing unauthorized use of proprietary technology is difficult and expensive. The steps we have taken may be inadequate to prevent the misappropriation of our and our clients' proprietary technology. Reverse engineering, unauthorized copying or other misappropriation of our and our clients' proprietary technologies, tools and applications could enable third parties to benefit from our or our clients' technologies, tools and applications without paying us for doing so. Unauthorized disclosure of sensitive or confidential client information, including personally identifiable information, or a violation of intellectual property rights, whether through employee misconduct, breach of our computer systems, systems failure or otherwise, may subject us to liabilities, damage our reputation and cause us to lose
clients.
Our client contracts generally provide for indemnity for intellectual property infringements of third-party rights that arise from our breach under such contracts. Although we attempt to limit our contractual liability for consequential damages in rendering our services, and provide limitation of liabilities for amount of such liabilities, typically to one year's payment under the relevant agreement, these limitations on liability may be inapplicable, unenforceable or insufficient to protect us from liability for damages. There may be instances when liabilities for damages are greater than the insurance coverage we hold and we will have to internalize those losses, damages and liabilities not covered by our insurance. Furthermore, if
any third party brings any claims against our clients, claiming that our work product or intellectual property transferred to our clients infringes upon such third party's IP rights, any such claims could result in claims by our clients against us, which could result in the loss of such client, could seriously damage our reputation, could result in other clients terminating their engagements with us and could make it more difficult to obtain new clients.
If we fail to integrate or manage acquired businesses efficiently, or if the acquired companies are difficult to integrate, divert management resources or do not perform to our expectations, we may not be able to realize the benefits envisioned for such acquisitions, and our overall profitability and growth plans could be materially adversely affected.
On occasion we have expanded our service capabilities and gained new clients through
selective acquisitions. During the fiscal year ended March 31, 2018, we completed two acquisitions, and we plan to continue making selective acquisitions in the future. Our ability to successfully integrate an acquired business and realize the benefits of an acquisition requires, among other things, successful integration of technologies, operations and personnel. Challenges we face in the acquisition and integration process include:
•
integrating operations, services, personnel and corporate, IT and administrative infrastructures in a timely and efficient manner;
•
diverting
significant management attention and financial resources from our other operations and disrupting our ongoing business;
•
unforeseen or undisclosed liabilities and integration costs;
•
incurring liabilities from the acquired businesses for infringement of intellectual property rights or other claims for which we may not be successful in seeking indemnification;
•
incurring
debt, amortization expenses related to intangible assets, large and immediate write-offs, or issuing ordinary shares as consideration for the acquired assets that would dilute our existing shareholders' ownership;
•
generating sufficient revenues and net income to offset acquisition costs;
•
potential loss of, or harm to, employee or client relationships;
•
properly
structuring our acquisition consideration and any related post-acquisition earn-outs and successfully monitoring any earn-out calculations and payments;
•
failing to realize the potential cost savings or other financial benefits and/or the strategic benefits of the acquisition;
•
retaining key senior management and key sales and marketing and research and development personnel, particularly those of the acquired operations; and
•
increased
complexity or risks from potentially doing business in unfamiliar markets and operating additional geographically dispersed sites.
In addition, the primary value of many potential acquisition targets in the IT services industry lies in their skilled IT professionals and established client relationships. Transitioning these types of assets to our business can be particularly difficult due to different corporate cultures and values, geographic distance and other intangible factors. For example, some newly acquired employees may decide not to work with us or to leave shortly after their move to our
company and some acquired clients may decide to discontinue their commercial relationships with us. These challenges could disrupt our ongoing business, distract our management and employees and increase our expenses, including causing us to incur one-time expenses and write-offs, and make it more difficult and complex for our management to effectively manage our operations. If we are not able to successfully integrate an acquired business and its operations and to realize the benefits envisioned for such acquisition, our overall growth and profitability plans may 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.
We have operations in a number of jurisdictions, including Russia, Ukraine, Romania, Bulgaria, the United States,
the United Kingdom, Germany, Poland, Mexico, South Africa, Australia, Canada, Singapore, India and Vietnam, and we serve clients across North America, Australia, Europe and Asia. 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.
Additional risks associated with international operations include difficulties in enforcing contractual rights, the burdens of complying with a wide variety of foreign laws and potentially adverse tax consequences, including permanent establishment and transfer pricing issues, tariffs, quotas and other barriers and potential difficulties in collecting accounts receivable. 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. Additionally, such companies may have longstanding 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. We cannot ensure that these and other factors will not impede the success of our international expansion plans or limit our ability to compete effectively in other countries.
Our business operations and financial condition could be adversely affected by negative publicity about offshore outsourcing or anti-outsourcing legislation in
the United States or other 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, including the United States. Current or prospective clients may elect to perform services that we offer themselves, 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. As a result, our ability to compete effectively with competitors that operate primarily out of facilities located in these countries could be harmed. In addition, anti-outsourcing legislation, if adopted, could materially adversely affect our business, financial condition and results of operations, and impair our ability to service our clients.
We
may need additional capital to support our growth, 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 and credit facilities 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 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 of the U.S. and other capital markets in which we may seek to raise funds;
•
our
future results of operations and financial condition; and
•
economic, political and other conditions in CEE and globally.
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 face risks associated
with having significant resource commitments to provide services prior to realizing sales for those services.
We have a long selling cycle for our IT services (generally up to 18 months for new clients), which requires significant investment of human resources and time by both our clients and us. Before committing to use our services, potential clients 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' decisions to choose alternatives to our services (such as other IT services providers or in-house resources) and the timing of our clients' budget cycles and approval processes. Our selling cycle for new clients can be especially unpredictable. In the past, we have received sales from new clients up to six months
later than expected. If our selling cycle unexpectedly lengthens for one or more large projects, it would negatively affect the timing of our sales and hinder our sales growth.
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 sales, or delays in recognizing sales after incurring costs related to our sales or services process, could materially adversely affect our business.
Our
effective tax rate could be materially adversely affected by a number of factors, including recent OECD initiatives.
We conduct business globally and file income tax returns in Switzerland, the United States, the United Kingdom, Russia, Romania, Poland, Ukraine, Germany and multiple other tax jurisdictions. Our effective tax rate could be materially adversely affected by a number of factors, including changes in the amount of income taxed by or allocated to the various jurisdictions in which we operate and which have different statutory tax rates; changing tax laws, regulations and interpretations of such tax laws in multiple jurisdictions; implementation, by various jurisdictions, of measures developed by the Organization for Economic Cooperation and Development (the "OECD") and aimed at preventing base erosion and profit shifting ("BEPS") and enhancing international exchange of financial and tax information;
and the resolution of issues arising from tax audits or examinations and any related interest or penalties; acquisition or setting up of new businesses in jurisdictions with higher statutory rates, undeveloped or evolving tax regimes.
We report our results of operations based on our determination of the amount of taxes owed in the various jurisdictions in which we operate. The determination of our provision for income taxes and other tax liabilities requires estimation, judgment and calculations where the ultimate tax determination may not be certain. Our determination of tax liability is always subject to review or examination by authorities in various jurisdictions
We have certain intercompany arrangements among our subsidiaries in relation to various aspects of our business that are subject
to transfer pricing regulations of the respective jurisdictions. U.S. transfer pricing regulations, OECD regulations, as well as regulations applicable in CEE and APAC countries in which we operate, require international transactions involving associated enterprises be on arm's-length terms. We consider the transactions among our subsidiaries to be on arm's-length terms; however, the determination of transfer prices for intercompany transactions and relevant tax liabilities in each particular jurisdiction requires estimates, judgment and complex calculations, and the ultimate tax determination may not be certain.
The OECD has been working on BEPS project, resulting in issuance in 2015 and further years guidelines and proposals that may change various aspects of the existing framework under which our tax obligations are determined in
many of the countries in which we do business. It is expected that OECD will continue issuing further comments and practical guidelines on BEPS in the future which can also impact our approaches to future tax computations.
Actions 8-10 of BEPS seek to update guidance on practical application of arm's-length principle, removing outdated emphasis on contractual allocation of risks, functions and assets, which has proven to be vulnerable to manipulation. Instead, OECD proposes using pricing methods that will allocate profits to jurisdictions with the most important economic activities, functions performed and risks undertaken and align transfer pricing outcome with value created in such locations. Many countries, where we operate, have implemented at least some of OECD guidelines by introducing new tax legislation of varying scope and wording. It is currently unknown what would be the effect of applying updated guidelines to our
intercompany arrangements, but we cannot exclude that it will lead to increase of our effective tax rate.
Action 13 of BEPS proposes an addition to transfer pricing documentation in the form of Country-by-Country Report ("CbCR"). The new guidance requires large multinational enterprises to provide tax authorities a global overview of enterprise operations and taxation in a format of unified report. Such reporting requirements are proposed to be applicable to multinational enterprises with annual consolidated Group revenue exceeding EUR 750 million (although some countries have established a different threshold for national purposes). The proposed
reporting rules have met worldwide recognition, and the majority of developed countries have adopted CbCR legislation. We were not in the scope of CbCR reporting for the fiscal year ended March 31, 2017. However, since in the fiscal year ended March 31, 2018 we have exceeded reporting threshold we will have to file CbCR reporting for the subsequent fiscal year ending March 31, 2019. Material penalties may be applied in case of failure to file the CbC report. Visibility of global operations and taxation may lead tax authorities in some countries to increased scrutiny of intercompany arrangements and challenging tax treatment of transactions, which was not questioned before. In addition, automatic exchange of information, which is implemented by tax authorities worldwide, may also result in additional tax claims to us.
We
are implementing reasonable and sufficient procedures, documents and policies required by the mentioned BEPS and global transfer pricing rules. However, if a tax authority in any jurisdiction proposes an adjustment to our tax reruns and/or imposes fines and/or penalties, including, as a result of a determination, that the transfer prices and terms we have applied are not appropriate, this could have a negative impact on our financial results.
Changes in the tax system in CEE and Asian countries or court practice, or unforeseen application of existing rules could adversely affect our financial condition and results of operations.
There have been significant changes to the taxation systems in CEE and Asian countries in recent years as the authorities have gradually replaced or updated legislation regulating the application of major taxes such as corporate income tax, VAT, corporate
property tax with new legislation. In addition, recently, the tax authorities of several countries (including Russia, Poland, Romania, Singapore, India and China) have joined the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information and the Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports. In June 2017, these countries also signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, implementing the BEPS measures, which following ratification process, will amend the existing bilateral tax treaties. Significant developments in transfer pricing rules, introduction of controlled foreign corporation legislation, anti-avoidance legislation (such as adopted by European Union) and other recent changes in tax laws bring additional uncertainty to the Group's tax affairs.
Tax authorities in
CEE and Asian countries have also been quite aggressive in their interpretation of certain tax laws and their many ambiguities, as well as in their enforcement and collection activities. Incorrect interpretation of contradictory laws and regulations, many of which are relatively new and have not been subject to extensive practical application, may lead to additional tax exposure. High-profile companies may be particularly vulnerable to judgmental application of unclear requirements. Our tax liability may become greater than the estimated amount we have expensed to date, particularly if the tax benefits we receive are revised or removed. Any additional tax liability, as well as any unforeseen changes in tax laws, could materially adversely affect our future results of operations, financial condition or cash flows.
We may encounter difficulties in obtaining withholding income tax benefits envisaged by the Cypriot double tax
treaties for dividends distributed from our subsidiaries.
Our subsidiary in Cyprus is a sub-holding company, which is a direct or indirect 100% parent of all other legal entities of the Group, except for Luxoft Holding, Inc. Upstream dividends, which could be paid to Cyprus by our major operational legal entities, may be subject to withholding income tax upon distribution.
Cyprus has a wide range of double tax treaties with various jurisdictions, which often provide either decreased tax rate or complete exemption from withholding taxes. For example, substantial part of undistributed profits is accumulated at our operational headquarters in Switzerland; under a tax treaty between Cyprus and Switzerland the withholding tax on dividends may be reduced to zero. We have obtained tax clearance to
apply zero withholding tax rate for dividends that may be paid from Switzerland to Cyprus. Most of the double tax treaties contain a limitation on benefits provisions and/or special provision regarding the beneficial owner of the dividends; also practical interpretation of beneficial double tax treaty provisions may vary from a county to country.
Although in the case of dividend payment we will seek to claim treaty protection, there is a risk that the applicability of the reduced rate or exemption may be challenged by tax authorities. As a result, there can be no assurance that we would be able to avail ourselves of the benefits under double tax treaty in practice, if the treaty clearance procedures are not performed at the date when the dividend payment is made.
Ongoing corporate tax reform in Switzerland may result in abolition of privileged tax regime and increase in our effective
tax rate.
Switzerland is undertaking a comprehensive corporate tax reform ("Tax Proposal 17") that will among other things result in the phasing out of the so-called holding, mixed company, domiciliary company and other special tax regimes with a timeline for adoption of anticipated changes within 2019 to 2021.
Our Swiss subsidiary, which also serves as group operational headquarters, has been enjoying mixed company regime in the canton of Zug since its incorporation in 2013. Under cantonal tax law a mixed company is partially exempted from cantonal taxation of profits earned outside of Switzerland. The
income tax saving from utilizing this regime was approximately $1.5 million for the year ended March 31, 2018 and approximately $1.9 million for the year ended March 31, 2017.
Switzerland's privileged taxation of holdings as well as mixed companies has been under increasing international pressure over the last decade, particularly from the European Union and the OECD. Despite the previous version of tax reform, called CTR III, was rejected by Swiss voters on February 12, 2017, abolition of preferential tax regimes is a commitment made by Switzerland to European Union and OECD. So it remains widely
undisputed that reform has to be implemented. Federal Council has submitted the renewed version of Tax Proposal 17 for parliamentary discussion. The bill includes abolition of privileged regimes and several compensating measures to retain Switzerland's attractiveness as a business location. Companies, which previously used privileged regimes, were provided with a transitional period (in the canton of Zug up until 2024) and, subject to certain limitations, were expected to maintain the effective tax rate at the pre-reform level during this period. Several cantons, including canton of Zug, also announced plans to decrease their statutory rate, if Tax Proposal 17 is enacted.
If no or reduced compensating measures are available in the final bill, our financial results may significantly suffer from increase in the effective tax rate. In addition, we may record an extraordinary one-time loss due to revaluation of deferred tax liabilities
in the period of enactment. Unless a referendum is held, the bill is expected to be adopted during the year ended March 31, 2019.
Our business may be materially adversely affected by tax reform in the United States.
The U.S. Tax Cuts and Jobs Act of 2017 (the "TCJA") was approved by the U.S. Congress on December 20, 2017 and signed into law by President Donald J. Trump on December 22, 2017. This legislation makes significant changes to the U.S. Internal Revenue Code of 1986, as amended (the "IRC"). Such changes include a reduction in the corporate tax rate from 35% to 21% and limitations on certain corporate deductions and credits, among other changes. In addition, the TCJA requires complex computations to be performed
that were not previously required in U.S. tax law, significant judgments to be made in interpretation of the provisions of the TCJA and significant estimates in calculations, and the preparation and analysis of information not previously relevant or regularly produced.
In addition, the final impacts of the TCJA could be materially different from our expectations. For example, adverse changes in the underlying profitability and financial outlook of our operations or changes in tax law could lead to changes in our valuation allowances against deferred tax assets on our consolidated balance sheets, which could materially affect our results of operations. The U.S. Treasury Department, the Internal Revenue Service (the IRS), and other standard-setting bodies could interpret or issue guidance on how provisions of the TCJA will be applied or otherwise administered that is different from our interpretation. Finally, foreign governments
may enact tax laws in response to the TCJA that could result in further changes to global taxation and materially affect our financial position and results of operations. The uncertainty surrounding the effect of the reforms on our financial results and business could also weaken confidence among investors in our financial condition. This could, in turn, have a materially adverse effect on the price of our ordinary shares.
We may incur additional liabilities if we fail to comply with UK Corporate Criminal Offense rules.
UK rules for Corporate Criminal Offense for failure to prevent facilitation of tax evasion (CCO) came into force in September 2017. The CCO is part of civil and criminal law measures aimed at both tax evaders and those that facilitate tax evasion. CCO focuses on the failure to prevent facilitation crimes by those who
act for or on behalf of an entity e.g. as its employees, agents, subsidiaries or others that provide services on the company’s behalf. A company will be criminally liable if it fails to take reasonable steps to prevent an associated person facilitating the commission of an UK tax evasion offense or an overseas tax evasion in the part related to UK.
We are implementing reasonable and sufficient procedures, documents and policies to comply with CCO rules. However, if the tax authorities find our procedures and actions not sufficient, we may be imposed with penalties and our business, financial condition and results of operations may be adversely affected.
Globally mobile employees may potentially create additional
tax liabilities for us in different jurisdictions.
The OECD’s BEPS project has sharpened the focus on the risks posed by global mobility in order to ensure profits are taxed in the territory where the value creating activity is performed. Location of employees and activities they perform is having greater and more substantial tax implications.
During performance of professional duties our employees may be required to travel to various locations. Depending on the length of the required travel and the nature of employees’ activities the tax implications of travel arrangements vary, with generally more extensive
tax consequences in cases of longer travel. Such tax consequences mainly include payroll tax liabilities related to employee compensation and, in cases envisaged by international tax legislation, taxation of profits generated by employees during their time of travel.
We elaborate internal procedures, policies and systems, including internal mobility program, for monitoring our tax liabilities arising in connection with the business travel. Nevertheless, considering that the tax authorities worldwide are paying closer attention to global mobility issues our operations might be adversely affected by additional tax charges related to the activity of mobile employees.
International hostilities, terrorist activities, other violence or war, natural disasters, pandemics and infrastructure disruptions could delay or reduce the number of new service orders we receive and impair our ability
to service our clients.
Hostilities and acts of terrorism, violence or war, natural disasters, global health risks or pandemics or the threat or perceived potential of these events could materially adversely affect our operations and our ability to provide services to our clients. We may be unable to protect our people, facilities and systems against any such occurrences. Such events may cause clients to delay their decisions on spending for IT services and give rise to sudden significant changes in regional and global economic conditions and cycles. These events also pose significant risks to our people and to physical facilities and operations around the world, whether the facilities are ours or those of our clients, which could materially adversely affect our financial results. By disrupting communications and travel, giving rise to travel restrictions, and increasing the difficulty of obtaining and retaining highly-skilled
and qualified IT professionals, these events could make it difficult or impossible for us to deliver services to some or all of our clients. Travel restrictions could cause us to incur additional unexpected labor costs and expenses or could restrain our ability to retain the skilled IT professionals we need for our operations. In addition, any extended disruptions of electricity, other public utilities or network services at our facilities, as well as system failures at, or security breaches in, our facilities or systems, could also adversely affect our ability to serve our clients.
Risks related to conducting business in CEE countries
Emerging markets, such as CEE countries, are subject to greater risks than more developed markets, and financial turmoil in any emerging market in which we operate could disrupt our business.
CEE countries
are generally considered to be emerging markets. Investors in emerging markets should be aware that these markets are subject to greater legal, economic and political risks than more developed markets. Emerging markets are subject to rapid change, and information relating to our operations in such markets set out in this annual report may become outdated relatively quickly. Moreover, financial or political turmoil in any emerging market country tends to adversely affect prices in the equity markets of all emerging market countries, as investors move their money to more stable, developed markets. The development of the IT services sector in the CEE region is closely related to the country’s overall economic prosperity. The main factors affecting our financial results obtained therein include GDP growth, value of customer orders for IT solutions, level of capital expenditures made by enterprises, clients' demand for complex IT solutions, inflation rate and the exchange
rate of currencies in the countries where we operate. As has happened in the past, financial problems or an increase in the perceived risks associated with investing in emerging economies could dampen foreign investment in the CEE region and adversely affect regional economies. In addition, during such volatile times, companies that operate in emerging markets could face severe liquidity constraints as foreign funding sources are withdrawn. Thus, even if the economy of the CEE region remains relatively stable, financial turmoil in any emerging market country could adversely affect our business that could result in a material decrease in the price of our Class A ordinary shares.
Sanctions imposed by the United States, the European Union and other countries as a result of the ongoing crisis in Ukraine may have a material adverse effect on our business.
In late 2013 and the first half
of 2014, deteriorating economic conditions and general social unrest in Ukraine resulted in a wide-scale crisis provoking armed confrontations in Eastern Ukraine that ultimately involved the Russian Federation.
The United States, the European Union and a number of other jurisdictions and authorities (including Australia, Albania, Canada, Iceland, Japan, Moldova, Montenegro, Norway, Switzerland, the United Kingdom and Ukraine) have imposed sanctions on a number of Russian officials and individuals, former Ukrainian officials, and several Russian companies and banks, with the consequence that entities and individuals in the United States and European Union
(including the United Kingdom) cannot do business with such persons or provide funds or economic resources to such persons. Certain assets in the relevant sanctioning jurisdictions are subject to seizure and the sanctioned individuals to visa bans. In addition, the United States and European Union have applied "sectoral" sanctions, whose principal consequence is that several leading Russian banks have been restricted from accessing international capital markets. These sanctions have adversely affected the Russian economy and Russia's financial markets, increased the cost of capital and capital outflows, and worsened the investment climate in Russia. The United States has periodically expanded the list of Russian companies and individuals placed under the sanctions regime and it is currently unclear whether new sanctions may be imposed.
Furthermore, on August 2, 2017 the
U.S. Congress enacted legislation, the Countering America’s Adversaries Through Sanctions Act (“CAATSA”), that updates existing sanctions against Russia and requires the imposition of “secondary sanctions” on non-U.S. companies and individuals who engage in certain sanctionable transactions even in the absence of a connection to the United States. CAATSA, among other things, (a) requires the U.S. President to impose certain secondary sanctions on non-U.S. persons that were discretionary under the existing U.S. sanctions legislation (including, but not limited to, secondary sanctions for investing in or supporting special Russian crude oil projects and the facilitation of transactions on behalf of Russian Specially Designated Nationals); (b) allows the U.S. President to impose secondary sanctions on non-U.S. persons (including those that invest in the construction or servicing of Russian energy export pipelines); and (c) requires the U.S. President, subject
to the ability to claim a national interest waiver, to impose asset-blocking and travel sanctions, including certain secondary sanctions, on any person who knowingly engages in significant activities that undermine the cybersecurity of any person or government, including a democratic institution, on behalf of the Russian government. Secondary sanctions can also be imposed on non-U.S. persons who knowingly facilitate significant transactions or significant financial transactions for or on behalf of a party subject to the U.S. sanctions against Russia. The U.S. government has not yet issued guidance on how it intends to enforce the new secondary sanctions against non-U.S. persons, so no assurance can be given that secondary sanctions would not be applied to any Group entity that engages in sanctionable transactions related to Russia. These sanctions may have a material adverse effect on the Russian financial markets and investment climate and the Russian economy generally,
which could in turn result in a material adverse impact on our business.
The sanctions imposed by the U.S. and the EU in connection with the Ukraine crisis so far have had an adverse effect on the Russian economy, prompting revisions to the credit ratings of the Russian Federation and a number of major Russian companies that are ultimately controlled by the Russian Federation, causing extensive capital outflows from Russia and impairing the ability of companies to access international capital markets. The governments of the U.S. and certain EU member states, as well as certain EU officials have indicated that they may consider additional sanctions should tensions in Ukraine continue. Further confrontation in Ukraine and any escalation of related tensions between Russia and the U.S. and/or the EU, the imposition of further sanctions, or continued uncertainty regarding the scope thereof, could have a prolonged adverse impact
on the Russian economy, particularly levels of disposable income, consumer spending and consumer confidence. In addition, Russia’s involvement in the armed conflict in Syria since September 2015 may put further pressure on the international relations between Russia and other countries. Russia’s involvement in the conflict in Syria could further lead to an escalation of geopolitical tensions, the possible introduction or expansion of international sanctions against Russia by other countries and an increased risk of terrorist attacks. These impacts could be more severe than those experienced to date. All of the above could have a material adverse impact on our business, financial condition, results of operations or prospects in Russia.
No individual or entity within the Group has been designated by either the United States or the European Union as a target of its respective sanctions imposed in connection with the situation in
Ukraine. However, no assurance can be given that none of those individuals or entities will be made subject to any such sanctions in the future. Notably, the United States has increasingly utilized the authority under an existing Executive Order for cyber-related sanctions to target Russian entities operating in the information technology sector. Additionally, no assurance can be given that broader sanctions against Russia or parts of Ukraine that affect us will not be imposed (and/or that there will not be certain related changes to the UK sanctions compliance regime as a result of Brexit). Although the majority of our Group entities are neither U.S. nor European Union Persons, certain of our subsidiaries are U.S. or European Union Persons and are therefore subject to U.S. and European Union sanctions restrictions, including prohibitions on dealing with any persons subject to
U.S. blocking sanctions or the European Union asset freeze. However, the majority of Group entities are neither U.S. nor EU Persons, and these entities are therefore restricted in dealings with sanctioned persons primarily to the extent those dealings involve U.S. nor EU Persons or U.S.-dollar denominated transactions, are conducted within the United States or in EU member states, or otherwise fall within EU jurisdiction.
We may engage in certain operations with Russian and Ukrainian persons and entities that are currently sanctioned. Such operations are rare and, according to our estimates, the overall volume of such operations with such persons and entities
is not material and such operations are limited to the territory of the Russian Federation and Ukraine.
The scope and consequences of U.S. and EU sanctions remain subject to interpretation by competent authorities and courts in the United States and the EU and no assurance can be given that a broader interpretation may not affect any of our entities. Non-compliance with applicable sanctions could result in, among other things, the inability of the relevant entities to contract with the U.S. and/or EU governments or their agencies, civil or criminal liability, including the imposition of significant fines, the disgorgement of profits, and/or the imposition of a court-appointed monitor, negative publicity and reputational damage, and designation under U.S. and/or EU sanctions. Designation under U.S. and/or EU sanctions could affect our
ability to transact with U.S. and/or EU Persons.
We have significant exposure to the Russian and Ukrainian economies and the attendant risks. The current difficult economic environment in Ukraine and Russia and any future downturns in the economies of these countries could diminish demand for our services, increase our costs, constrain our ability to retain existing customers and collect payments from them and prevent us from executing our strategies. If sanctions were generally brought against such industry or specifically against us, such sanctions would likely have a material adverse impact on our business, financial condition, results of operations or prospects.
Regional and international political and diplomatic conflicts involving Russia and Ukraine could create an uncertain operating environment that could adversely affect our business.
Ukraine
has enacted sanctions with respect to certain Russian entities and individuals. The sanctions impose various limitations on economic activities in Ukraine and restrict entry into Ukraine of certain individuals. The sanctions became effective on September 22, 2015 and were set to expire on September 22, 2016. The sanctions apply to 388 individuals and 105 companies, including two Russian IT companies. On October 17, 2016, the President of Ukraine enacted the decision of the Ukrainian National Security and Defense Council imposing new personal sanctions against 335 individuals and 167 entities, and extending the sanctions imposed in September 2015 for one more year. On March 15, 2017, the President of Ukraine enacted the decision of the Ukrainian National Security and Defense
Council to impose sanctions on five Ukrainian banks with the capital of Russian state-owned banks: Sberbank PJSC; VS Bank PJSC; Prominvestbank PJSC; VTB Bank PJSC; and BM Bank PJSC. The Sanctioned Banks are prohibited from transferring capital outside the territory of Ukraine in favor of any affiliated entities. The sanctions against these banks were extended by the Ukrainian National Security and Defense Council in March 2018.
On January 18, 2018, the Ukrainian parliament, the Verkhovna Rada, adopted the law "On the peculiarities of state policy on ensuring Ukraine's state sovereignty over temporarily occupied territories in Donetsk and Luhansk regions," in which Russia is recognized as an aggressor state carrying out temporary occupation of part of Ukrainian territory.
Russia has responded with countermeasures to international
and Ukrainian restrictions and sanctions, currently including limiting the import of certain goods from the United States, the European Union, Ukraine and other countries, imposing visa bans on certain persons, and imposing restrictions on the ability of Russian companies to comply with sanctions imposed by other countries.
In addition, Russia's involvement in the armed conflict in Syria, since September 2015, has occasionally put, and may continue to put, pressure on international relations between Russia and other countries. Russia's involvement in the conflict in Syria could further lead to an escalation of geopolitical tensions, the possible introduction or expansion of international sanctions against Russia by other countries and an increased risk of terrorist attacks.
The instability in Crimea and Eastern Ukraine specifically, and in the surrounding region more generally, economic
sanctions and related measures, and other geopolitical developments (including with respect to the current conflict and international interventions in Syria) could result in further instability and/or worsening of the overall political and economic situation in Ukraine, Russia, Europe and/or in the global capital markets generally, which could adversely impact us. Further conflict, sanctions, export controls and/or other measures, including sanctions on additional persons or businesses (including vendors, joint venture and business partners, affiliates and financial institutions) imposed by the United States, the European Union, Ukraine, Russia, and/or other countries, could materially adversely affect our business, financial condition, results of operations, cash flows and prospects.
We have delivery centers in Ukraine, employing 3,265 engineers located in Kiev, Dnipro and Odessa. We have delivery centers in Russia, employing
1,872 engineers located in various cities. At present we have not experienced any interruption in our office infrastructure, utility supply or Internet connectivity. All our offices remain open and fully functional to support our clients. Our contingency plans include relocating work or personnel to other locations and adding new locations as appropriate. We recently opened new delivery centers in Penang, Malaysia, and Bangalore, India. In 2014, we launched a
multi-year Global Upgrade Program to implement another level of globalization across our organization and to accelerate our expansion in the European Union, the UK, Asia Pacific and North America.
As part of this program, to better support our global client base, since launch, we relocated over 3,300 professionals to key geographies such as Mexico, Poland, Romania, the U.S. and the United Kingdom. While we have contingency plans in place to address volatility in Russia and Ukraine, if we are unable to conduct business with our existing or potential clients or partners, or continue our operations in an uninterrupted manner as a result of these geopolitical developments or the reaction to these developments by international authorities through expanded sanctions or otherwise, our business could be materially adversely affected.
Political and governmental instability in CEE countries could materially adversely affect our business and operations in these countries.
We have significant operations in Russia, Ukraine, Poland, Bulgaria and Romania. Since the early 1990s, Russia, Ukraine,
Romania and other CEE countries have sought to transform from one-party states with a centrally planned economy to democracies with a market economy to various degrees. Despite various reforms, the political systems of many CEE countries remain vulnerable and unstable. In addition, the political and economic situation in these countries is negatively affected by the global financial and economic crisis, the ongoing economic recession in some parts of the world and political conflicts.
Ukraine. Although the political situation in Ukraine is stabilizing, armed clashes are still ongoing in the eastern regions of Ukraine, though our operations are in the western part of the country. On September 5, 2014, representatives of Ukraine, the Russian Federation, the Donetsk People's Republic, and the Lugansk People's Republic agreed to the Minsk Protocol, an agreement
to halt the war in the Donbass region of Ukraine. In February 2015, the leaders of Ukraine, the Russian Federation, France and Germany reached a ceasefire deal on the Ukrainian conflict. The standing cease-fire has been continuously violated. Although the conflict has transitioned to a stalemate after it first erupted in early 2014, shelling and skirmishes occur regularly. A spike in violence and civilian casualties in the summer of 2016 has raised concerns of further escalation. Such escalation of the political instability or military action could have a material negative impact on our operations in Ukraine.
Since the start of this conflict, there have been multiple waves of partial mobilization to the Ukrainian army. The mobilization has not materially affected our delivery centers in Ukraine; however, any future impact is difficult to predict. In the event the conflict worsens and the Ukrainian government triggers the application
of martial law, it could have a material adverse effect on our operations in Ukraine.
Romania. The current political environment in Romania is dynamic and may become unstable. After the collapse of the Democrat-led government in early 2012, the Social Democrats held power in a coalition with the Liberals, until February 2014 when the Liberals terminated their alliance with the Social Democrats. While moving into opposition, the Liberals have since merged with the Democrats. This has fragmented the Romanian Parliament and may ultimately give rise to populist measures at the government level. Moreover, in late 2014, the Liberal-nominated candidate won the presidential election, while the incumbent Social Democrat Prime Minister was reconfirmed by Parliament. The Social Democrat Prime Minister subsequently resigned and his cabinet was dissolved in November 2015 following a corruption scandal, to be replaced
by a President-nominated independent Prime Minister and a new cabinet. Romania held parliamentary elections on December 11, 2016. The Social Democratic Party (PSD) and the Alliance of Liberals and Democrats ("ALDE") formed a government in January 2017 led by a Social Democrat Prime Minister, after winning 250 seats in the 465-seat parliament in the December 2016 election. In January 2017, the newly elected coalition government passed a decree that would have decriminalized some major corruption cases, which spurred the largest public protests since the Revolution of 1989. As a consequence, the controversial decree was withdrawn. This issue, together with rows within the PSD, led to the dismissal of Prime Minister Sorin Grindeanu with a no-confidence vote in parliament in June. On January 15, 2018, Mihai Tudose, the prime minister (in office since June 2017), was
forced from office by the ruling PSD due to disagreements with the party leadership. The governing coalition composed of the PSD and the ALDE appointed a cabinet on January 29, 2018, following the resignation of a short-lived cabinet that governed from June 2017 to January 2018.
Separately, on-going recent military conflict in Ukraine has resulted in a negative impact in the region, affecting Romania's political and economic outlook. Romania has a significant land border with Ukraine and, as a result, ongoing instability or military conflicts in Ukraine could have a significant and adverse effect on Romania's economic and financial stability either directly or indirectly as a result of sanctions or restrictions on gas exports from Russia. Any further escalation of the conflict would heighten the risk of significant unfavorable consequences, both indirectly—through effects on
Romania's EU trade partners—and directly, through financial flows. Amendments in the policies pursued by the Romanian government and the political and regional instability may have a material negative impact on our operations in Romania.
Poland. In Poland, since the last Parliamentary elections won by the conservative political party named Law and Justice (Prawo i Sprawiedliwosc) in 2015, there have been significant changes in policies to increase government influence over the country’s media, judiciary, civil service, and education system. New regulations have increased government options for telephone and internet surveillance
without a court order and introduced additional restrictions on the freedom of assembly.
The conflict between the government and the Polish Constitutional Tribunal has led to legal uncertainty in which the courts can follow either the government’s interpretation or that of the Constitutional Tribunal, which decreased legal certainty of the Polish legal system and resulted in damaging Poland’s reputation as an investment target among international investors. Increased government control over the Constitutional Tribunal has allowed the government to pursue the amendments to the Polish judicial system.
Russia. Although the current political situation in Russia has stabilized, future political instability could result in a worsening overall economic situation, including capital flight and a slowdown of investment and business activity. Any change in the Russian
government or the Russian government's program of reform in Russia or lack of consensus between the President, the Prime Minister, the Russian government, Russia's Parliament and influential economic groups could lead to further political instability and a deterioration in Russia's investment climate.
The emergence of new or increased tensions among CEE countries could further exacerbate tensions between CEE countries and the United States and the European Union, which may have a negative effect on their economy, our ability to obtain financing on commercially reasonable terms, and the level and volatility of the trading price of our Class A ordinary shares. Any of the foregoing circumstances could materially adversely affect our business and operations in CEE countries.
Deterioration in political and economic relations among CEE countries in which we operate and/or between CEE countries
and the United States and the European Union could materially adversely affect our business and operations in CEE.
Political and economic relations among Russia, Romania, Poland, Ukraine and the other countries in which we operate are complex, and recent conflicts have arisen among many of their governments. Likewise, many CEE countries continue to have a complicated relationship with the United States and the EU. Political, ethnic, religious, historical and other differences have, on occasion, given rise to tensions and, in certain cases, military conflicts between countries of CEE that can halt normal economic activity and disrupt the economies of neighboring regions. Moreover, various acts of terrorism have been recently committed in various parts of the world. The risks associated with such terrorism events could materially and adversely affect the investment environment and overall consumer and entrepreneurial confidence
in the countries where we operate, including the CEE countries.
The relationship between Russia and Ukraine has been historically strained due to, among other things, disagreements over the prices and methods of payment for gas delivered by Russia to, or for transportation through, Ukraine, issues relating to the temporary stationing of the Russian Black Sea Fleet in Ukraine, a Russian ban on imports of meat and milk products from Ukraine and anti-dumping investigations conducted by Russian authorities in relation to certain Ukrainian goods. In response to the ban on imports of meat and milk products from Ukraine, The Cabinet of the Ministers of Ukraine amended its decree No. 1147 of December 30, 2015 prohibiting the importation of goods produced in the Russian Federation into the Ukraine’s territory to extend the ban until December
31, 2018.
Political tensions have escalated following the political situation in Crimea and a number of associated events, including the adoption of a Ukrainian law canceling neutral status to military blocks, the signing of the Ukraine-European Union Association Agreement and a new wave of gas price negotiations. In recent years, economic confrontation between Russia and Ukraine has continued to grow. New bilateral sanctions and restrictions in the areas of transit, trading and agriculture were imposed. Any further adverse changes in relations between Ukraine and Russia may have negative effects on the Ukrainian and Russian economies as a whole, which could in turn have a material adverse effect on our business. Similarly, sanctions imposed by Ukraine against certain Russian entities could further strain the Russian economy. Although we primarily target markets outside of Russia, stress on the Russian economy from Ukrainian
sanctions could materially adversely affect our business. Conflicts among CEE countries and conflicts within CEE countries have, in some instances, also harmed their relationship with the United States and the European Union and, at times, have negatively impacted their financial markets. See "-Sanctions imposed by the United States, the European Union and other countries as a result of the ongoing crisis in Ukraine may have a material adverse effect on our business" above.
Similarly, economic deterioration in other CEE countries may strain political relationships with neighboring regions, lead to economic uncertainty and decrease confidence in the economies of the CEE countries, which could negatively affect our ability to conduct business in these countries. For example, since it joined the European Union in 2007, Romania has been subject to certain post-accession benchmarks mandated by the European Union under the
Cooperation and Verification Mechanism to help Romania address outstanding shortcomings in various social fields such as judicial reform and anti-
corruption. On January 27, 2016, the European Commission made recommendations for further steps in certain areas including judicial independence, judicial reform, integrity and anti-corruption initiatives. If Romania does not adequately progress towards these benchmarks, the European Commission is authorized to apply safeguard measures against Romania, including the suspension of Member States' obligation to recognize and enforce, under the conditions set forth
in the Community laws, the decisions of Romanian courts. The application of such sanctions may have a negative effect on the Romanian economy and investor confidence in the Romanian economic environment, which could lead to material adverse consequences on our operations in Romania. Furthermore, any future allegations or evidence of corruption or money laundering in Romania may have an adverse effect on the Romanian economy, and in turn could adversely affect our operations in Romania.
Similarly, in its report on Polish economy, the European Commission noted a number of challenges and areas for improvement. Although Poland is gradually improving in international ”doing business” rankings, the regulatory framework weighs on the business environment in some areas. Frequent changes in regulations often passed with limited public consultations coupled with regulatory and
policy uncertainty already dampened investment and may continue to impact business confidence. Among the most significant regulatory changes introduced by the new government was the pension reform, aimed to decrease the retirement age from 67 to 65 for men and 60 for women, which took effect in October 2017 despite the European Union concerns. The pension reform was followed by a number of social spending initiatives such as “Family 500’ program” which is estimated to costs approximately PLN 22.9 billion (about 5.3 billion EUR) or 1.3% of Poland’s GDP. Furthermore, since taking office, the Law and Justice government has faced criticism from the United States, the European Union, and various civil rights groups for working to diminish the powers of the Polish Constitutional Tribunal and altering its composition in ways that prevent its ability to serve as core element of check and balances system in Poland. In December 2017, the European Commission has triggered
Article 7 of the Treaty on European Union stating that that there is a clear risk of a serious breach of the rule of law by the Republic of Poland, primarily related to the lack of an independent and legitimate constitutional review and judicial independence in Poland. Under Article 7 proceedings the European Council may rule that Poland has committed a serious and persistent breach of common EU values and decide to suspend certain rights Poland has due to its membership in the EU and impose economic sanctions such as limiting Poland’s access to EU funds and subsidies. The application of such sanctions may have a negative effect on the Polish economy and investor confidence in the Polish economic environment, which could lead to material adverse consequences on our operations in Poland.
The legal and tax systems in CEE countries can create an uncertain environment for business activity, which could materially adversely affect
our business and operations in the CEE.
The legal and tax framework to support a market economy remains new and in flux in Russia, Ukraine, Romania, Poland, and other CEE countries and, as a result, these systems can be characterized by:
•
inconsistencies between and among laws and governmental, ministerial and local regulations, orders, decisions, resolutions and other acts;
•
extensive regulation of businesses in general and substantial protection afforded to domestic IT businesses;
•
gaps
in the regulatory structure resulting from the delay in adoption or absence of implementing regulations;
•
selective or inconsistent enforcement of laws or regulations, sometimes in ways that have been perceived as being motivated by political or financial considerations;
•
limited judicial and administrative guidance on interpreting legislation;
•
relatively
limited experience of judges and courts in interpreting recent commercial legislation;
•
a perceived lack of judicial and prosecutorial independence from political, social and commercial forces;
•
inadequate court system resources;
•
a high degree of discretion on the part of the judiciary and governmental
authorities; and
•
under-developed bankruptcy procedures that may be subject to abuse.
In relation to our business operations in the emerging markets in which we operate, legal ambiguities, inconsistencies and anomalies and, in certain cases, doubts around constitutional or legislative basis exist due to the relatively recent enactment of many laws, the lack of consensus about the scope, content and pace of political and economic reform and the rapid evolution of legal systems in ways that may not always coincide with market developments. Furthermore, legal and bureaucratic obstacles and corruption exist to varying degrees in each of the regions in which we operate, and these factors
are likely to hinder our further development. These characteristics give rise to investment risks that do not exist in countries with more developed legal systems. We also face risks with respect to property rights in CEE countries. The expropriation or nationalization of any of our entities, their assets or portions thereof, in these countries, potentially without adequate compensation, could materially adversely affect our business, financial condition and results of operations.
In addition, as is true of civil law systems generally, judicial precedents generally have no binding effect (with a few exceptions in Ukraine) on subsequent decisions. Not all legislation and court decisions in CEE countries are readily available to the public or organized in a manner that facilitates understanding. Enforcement of court orders can be challenging in practice.
All of these factors make judicial decisions difficult to predict and effective redress uncertain. Additionally, court claims and governmental prosecutions may be used in furtherance of what some perceive to be political or commercial aims.
Any of the factors mentioned above may result in ambiguities, inconsistencies and anomalies in the application and interpretation of laws and regulations in CEE countries, and may affect our ability to enforce our rights under our contracts or to defend ourselves against claims by others. These factors may also subject us to unpredictable requirements.
Loss of taxation benefits related to our employment-related taxes that are enjoyed in CEE countries could have a negative impact
on our operating results and profitability.
The Russian government provides qualified Russian IT companies with substantial tax benefits through a reduced social contribution charge rate program. This program resulted in savings for us of $9.5 million in the fiscal year ended March 31, 2017 and $11.8 million in the fiscal year ended March 31, 2018. However, the reduced tax rates for social contributions (14% in total) are a temporary measure. In 2016 application of reduced rates was prolonged until 2023, after which the Russian government may take the decision to gradually increase the tax rates. If the Russian government were to change its favorable
treatment of Russian IT companies by modifying or repealing its current favorable tax measures, or if we become ineligible for such favorable treatment, it would significantly impact our financial condition and results of operations.
In Poland the law provides for a personal income tax benefit in part of employment income provided by an application of a deemed cost deduction (but not greater than PLN 85,528 for each individual). Such benefit is available only for employees who, while performing their daily duties, are creating intellectual property, subject to certain local requirements. Furthermore, personal income tax regulations have been changed from January 1, 2018 and a deemed cost deduction is now available only for specific areas, determined by law. The new law was implemented without specific guidelines, leading to conflicting interpretations within IT sector. Some
industry participants decided to continue applying this tax deduction relying on inconsistency of new regulations. The Polish government is working on an amendment to a personal income tax by adding additional categories, also within the IT sector.
This deduction has resulted in the personal income tax savings of $4.1 million in the fiscal year ended March 31, 2017 and $4.6 million in the fiscal year ended March 31, 2018. If our employees would not be entitled to this benefit either through a change in the law or through a failure to comply with the rules, we may suffer additional payroll costs to compensate the lost benefit.
In
addition, new provisions in social security legislation of Poland were enacted recently. Under these provisions the taxation threshold for social security contributions will be abolished from January 2019. Currently certain social security contributions are paid by Polish employer and employees from gross employment income until it cumulatively reaches 133,290 PLN. Removal of this cap may cause additional payroll costs for us of approximately $2.2 million starting with the fiscal year ending March 31, 2019.
Also, a new obligatory pension plan is expected to be introduced in Poland. Under the proposed amendment, establishing employees’ capital pension schemes, all employers in Poland will be obliged to participate in additional pension plan. We expect to implement the plan starting January 2019, which will lead to additional payroll costs in the fiscal year ending March
31, 2019, estimated approximately as $1.2 million per year and approximately $0.3 million for the year ended March 31, 2019.
In Romania employment income of IT specialists is exempt from personal income tax, if the employer and employee meet certain criteria, such as company's nature of activity, employees' position and education and other. This deduction has resulted in the personal income tax savings of $5.4 million in the fiscal year ended March 31, 2017 and $5.7 million in the fiscal year ended March 31, 2018. If our employees would not be entitled for this benefit either through a change
in the law or through a failure to comply with the rules, we may suffer additional payroll costs to compensate the lost benefit.
Selective or arbitrary government action resulting from uncertain application of commercial laws and regulations in CEE countries could materially adversely affect our business and operations.
Many commercial laws and regulations in CEE countries 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 Russia, Ukraine and other CEE countries and have at times 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. In this environment, our competitors could receive preferential treatment from the government, potentially giving them a competitive advantage. Government officials may apply
contradictory
or ambiguous laws or regulations in ways that could materially adversely affect our business and operations in CEE countries. We cannot offer assurance that regulators, judicial authorities or third parties in Russia, Ukraine and other CEE countries will not challenge our compliance (including that of our subsidiaries) with applicable laws, decrees and regulations. In addition to the foregoing, selective or arbitrary government actions have included withdrawal of licenses, sudden and unexpected tax audits, criminal prosecutions and civil actions, all of which could materially adversely affect our business, financial condition and results of operations.
In addition, governments may revise existing contract rules and regulations or adopt new contract
rules and regulations at any time and for any reason. Any of these changes could impair our ability to obtain new contracts or renew or enforce contracts under which we currently provide services. Any new contracting methods could be costly or administratively difficult for us to implement, which could materially adversely affect our business and operations in CEE countries.
We may be exposed to additional taxation in Ukraine related to the activities of our non-Ukrainian subsidiaries or Ukrainian independent contractors.
The Ukrainian Tax Code contains the concept of a permanent establishment in Ukraine as a
basis for taxing foreign legal entities, which carry out regular entrepreneurial activities in Ukraine beyond those of preparatory and auxiliary character. Ukraine's double tax treaties with other countries contain a similar concept. Double tax treaties provide for a narrower definition of permanent establishment than the Ukrainian Tax Code and overrule Ukrainian tax law, which is expressly recognized by the Tax Code. However, not all countries where our subsidiaries operate have double tax treaties with Ukraine.
The practical application of the concept of a permanent establishment in Ukraine under Ukrainian law and double tax treaties is not well developed. For this reason, foreign companies having even limited operations in Ukraine, which would normally satisfy the conditions for not creating a permanent establishment, may be at risk
of being treated as having a permanent establishment in Ukraine and hence being liable to Ukrainian taxation. Accordingly, there is a risk that activities of our non-Ukrainian subsidiaries may be treated by the Ukrainian authorities as creating such a permanent establishment.
If activities of any of our non-Ukrainian subsidiaries were treated as creating a permanent establishment in Ukraine, such company would be subject to Ukrainian taxation on the part of its income that is attributable to that permanent establishment in a manner broadly similar to the taxation of any Ukrainian legal entity (with 18% applicable corporate income tax rate). There is, therefore, a risk that the tax authorities might seek to assess Ukrainian tax on the entire income
of such company related to Ukraine if it were treated as having a permanent establishment in Ukraine. Having a permanent establishment in Ukraine may also have other adverse tax implications, including jeopardizing the right to benefit from the reduced withholding tax rate under an applicable double tax treaty, and affecting the VAT obligations in Ukraine. There is also a risk that penalties could be imposed by the tax authorities for failure to register the permanent establishment with the Ukrainian tax authorities and improper fulfillment of tax obligations. Any such taxes or penalties could have a material adverse effect on our business, results of operations, financial condition and prospects.
We provide significant portion of our services to multinational clients using Ukrainian IT specialists. Substantial part of Ukrainian IT specialists who provide services to us are independent contractors who are properly registered
as private entrepreneurs with the tax authorities. They are third party suppliers operating as independent contractors, for whom we are not required to pay social duties and personal income tax applicable to employees. There is, nevertheless, a risk that Ukrainian tax authorities may take a different view. Since laws and regulations governing the status and classification of independent contractors are subject to change or interpretation by various authorities, it is possible that Ukrainian tax authorities could assert a position on the classification of our independent contractors contrary to ours and even combine their assessment of independent contractors statuses with permanent establishment status. As a result, they could claim we had to withhold personal income tax and to accrue single social contribution in relation to employees' remuneration. In addition, if a national authority or court enacts legislation or adopts regulations that change the manner in which
employees and independent contractors are classified, or makes any adverse determination with respect to some or all of our independent contractors, we could incur significant costs arising from fines or judgments as a result of tax withholding. We may also decide to hire these independent contractors as our employees, and, we may, as a result, incur significant personnel expenses. All of these factors could in turn result in material adverse effects on our financial condition.
In March 2017, Ukraine and the International Monetary Fund signed the Memorandum of Economic and Financial Policies. In accordance with the memorandum the tax reform will aim to increase the efficiency and equity of the tax system. Ukraine declared that it will refrain from any major tax cuts and will not introduce new tax exemptions and amnesty schemes. As a result some developments in the areas of tax administration, taxation of royalties, transfer
pricing rules came into force from January 1, 2018. It was also announced that the requirements to qualify for the simplified tax regime which is typically used by individual entrepreneurs for tax purposes was expected to be tightened to address existing gap in the tax system. To date, no such change to the simplified regime has been effected. If such developments occur, we may be required to hire these
independent contractors as our employees, and, we may, as a result, incur significant personnel expenses. All of these factors could in turn result in material adverse effects on our financial condition.
We
may be exposed to liability for actions taken by our subsidiaries.
In certain cases we may be jointly and severally liable for obligations of our subsidiaries. We may also incur secondary liability and, in certain cases, liability to creditors for obligations of our subsidiaries in certain instances involving bankruptcy or insolvency.
In particular, under Article 53 part 1 of the Russian Civil Code, a "controlling person" of a legal entity may be held directly liable for losses that the entity suffers because of his or her "fault", and any agreement that seeks to limit or waive such liability will
not be valid. Generally, a controlling person is anyone who holds the power to determine the entity's actions, including the right to direct the actions of officers or executives. When a controlling person causes losses, officers and executives may all be held jointly and severally liable (a parent entity may also be held jointly liable with a subsidiary for actions directed by the parent or made with its consent). Liability may also apply to shareholders or controlling persons when the company is a foreign legal entity but conducts its business primarily in Russia.
Further, an effective parent is secondarily liable for an effective subsidiary's debts if the effective subsidiary becomes insolvent or bankrupt as a result of the action or inaction of the effective parent. In these instances, the other shareholders of the effective subsidiary
may claim compensation for the effective subsidiary's losses from the effective parent that caused the effective subsidiary to take action or fail to take action, knowing that such action or failure to take action would result in losses. We could be found to be the effective parent of the subsidiaries, in which case we could become liable for their debts, which could have a material adverse effect on our business, financial condition and results of operations or prospects.
Our CEE subsidiaries can be forced into liquidation on the basis of formal non-compliance with certain legal requirements.
We operate in CEE countries primarily through locally organized subsidiaries.
Certain provisions of the laws of CEE countries may allow a court to order liquidation of a locally organized legal entity on the basis of its formal noncompliance with certain requirements during formation, reorganization or during its operations.
Russian corporate law, Ukrainian corporate law and Romanian corporate law require liquidation of a company if its net assets fall below a certain threshold and, in the case of Romania, it does not take remedial steps, in which case any interested person may request in court the dissolution of the applicable Romanian company. For example, under Russian corporate law, in case of negative net assets calculated on the basis of Russian accounting standards as of the end of the year following the second or any subsequent year of a company's existence, the company is required to reduce its share capital
or to liquidate the company. Many Russian companies have negative net assets due to a very low historical value of property, plant and equipment reflected on their Russian accounting standards balance sheets. However, their solvency, which is defined as their ability to pay debts as they come due, has not been otherwise adversely affected by such negative net assets. Also, the Russian Civil Code provides for liquidation of a legal entity by a court decision: if, among other things, a legal entity operates without proper authorization (license) or operations are illegal or the state registration was invalid, and these violations may not be cured.
There have also been cases in CEE countries in which courts have used formal deficiencies in the establishment process of a legal entity or noncompliance with provisions of law as a basis for liquidation
of a legal entity. Weaknesses in the legal systems of CEE countries create an uncertain legal environment, which makes the decisions of a court or a governmental authority difficult to predict. If involuntary liquidation of any of our subsidiaries were to occur, such liquidation could materially adversely affect our financial condition and results of operations.
On-going regulatory changes in Russia may have a material adverse effect on our operations there.
In June 2015, a set of amendments to the Russian Civil Code's general contract law provisions came into effect.
Several new concepts were introduced to the code, such as personal insolvency, alternative
and optional obligations, a fine for failure to perform under a court ruling ("astrent"), the so-called option agreement, inter-creditor and framework agreements, new types of legal entities, protections for shareholders in nonpublic companies, right to expel a shareholder, shareholder agreements, joint signatures, mandatory audits, new minimum of charter capital, etc.
Although recent and potential amendments could ultimately expand our possibilities for doing business and taking advantage of innovative legal structures, they may initially also pose difficulties to us in negotiating and entering into contracts insofar as the underlying legal concepts are not sufficiently developed in the Russian legal system. Additionally, we may face problems enforcing our rights where the application of these concepts by Russian authorities
has not been tested or where they carry less weight among counterparties to contracts.
In addition to the Civil Code reform, Russian legislation is being amended in various sectors. For example, new legislation was introduced regarding the regulation of software purchases, pursuant to which after January 1, 2016 Russian governmental bodies are required to renounce foreign software in favor of domestic software developed by entities owned by the state, by non-profits or by entities with 50% or more Russian ownership.
It is still possible to buy foreign software but only if necessary programs do not have domestic equivalents or the client can explain why the domestic software is not suitable. In particular, under new resolution issued by the Russian government in June 2018, Russian governmental bodies shall acquire certain types of domestic office and internal accounting software in a centralized manner through the Ministry of Communication of the Russian Federation.
Changes in personal data protection regulations have also occurred. For example, all data operators collecting personal data of Russian citizens through electronic communications, including the Internet, must ensure that its storage takes place in databases located in the territory of Russia. The new law applies not only to local data controllers but also to data controllers established outside Russia to the extent they gather personal data relating to Russian nationals through
websites aimed at the territory of Russia.
Starting from 2016 employee leasing is prohibited in Russia and only specially accredited employment agencies or affiliated entities can provide staff and only in the exceptional cases. In practice, this means that companies that previously used agency work will have to completely revise the conditions of work with out-staffing companies providing staff to them, and out-staffing companies will have to obtain the appropriate accreditation.
In the absence of sufficient official guidance and clear practical enforcement examples, we cannot predict how these new laws will be applied and enforced and their influence on our operations. Our failure to comply with the legal requirements may lead to the imposition of penalties and
may adversely affect our business, financial condition and results of operations.
Risks related to our Class A ordinary shares
The price of our Class A ordinary shares may be volatile, and you may lose all or part of your investment.
Following our initial public offering (the "IPO"), the price of our Class A ordinary shares has ranged from a high of $80.64 to a low of $18.55 through the date of this annual report. Some of the factors that have caused or may cause the market price of our Class A ordinary shares to fluctuate include:
•
fluctuations
in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;
•
changes in estimates of our future financial results or recommendations by securities analysts;
•
geopolitical instability in some locations where we operate, such as Ukraine and Russia;
•
failure
to develop or deliver our services as expected;
•
changes in market valuations of similar companies;
•
successes by our competitors;
•
changes in our capital structure, such as future issuances of securities or the incurrence of debt;
•
sales
of large blocks of our Class A ordinary shares;
•
announcements by us or our competitors of significant services, contracts (or terminations), acquisitions, strategic alliances or actions/news concerning our major clients;
•
regulatory developments in Russia, Ukraine, Poland, Romania or elsewhere;
•
litigation
involving our company, our general industry or both;
•
additions or departures of key personnel;
•
investors' general perception of us, including any perception of misuse of sensitive information;
•
changes in
general economic, industry and market conditions;
•
our ability to forecast revenue and control our costs; and
•
changes in regulatory and other dynamics.
In addition, if the market for shares in our industry, or the stock market in general, experience price and volume fluctuation or a loss of investor confidence, the trading price of our Class A ordinary shares could decline for reasons unrelated to our business, financial condition or results of operations.
If any of the foregoing occurs, it could cause our share price to fall and may expose us to lawsuits that, even if unsuccessful, could be costly to defend and a distraction to management.
The dual class structure of our ordinary shares has the effect of concentrating voting control with certain shareholders who held our shares prior to our IPO, including IBS Group Holding Limited, one of our directors and our chief executive officer, and limiting the ability of other shareholders to influence corporate matters.
Each of our Class B ordinary shares has ten votes per share and each of our Class A ordinary shares
has one vote per share. Shareholders who hold Class B ordinary shares together beneficially own shares representing approximately 83.2% of the voting power of our outstanding shares as of June 30, 2018.
IBS Group Holding Limited, our controlling shareholder ("IBS Group") beneficially owns through its two wholly-owned subsidiaries 100.0% of our outstanding Class B ordinary shares and controls 83.2% of our voting power as of June 30, 2018. As a result of this concentration of share ownership, IBS Group, through
its two wholly-owned subsidiaries, has and will have sufficient voting power to effectively control all matters submitted to our shareholders for approval. These matters include:
•
the composition of our board of directors;
•
approving or rejecting a legal merger, demerger or other business combination; and
•
amending
our Amended Memorandum and Articles of Association, which govern the rights attached to our ordinary shares.
This concentrated control will limit the ability of holders of Class A ordinary shares to influence corporate matters for the foreseeable future, and, as a result, the market price of our Class A ordinary shares could be adversely affected. Specifically, this concentration of ownership of our ordinary shares could delay or prevent proxy contests, mergers, tender offers, open-market purchase programs or other purchases of our ordinary shares that might otherwise give Class A shareholders the opportunity to realize a premium over the then-prevailing market price of our ordinary shares. The interests of our controlling shareholder and holders of our Class B ordinary shares generally may not always coincide with the
interests of our other shareholders.
Future transfers by holders of Class B ordinary shares will generally result in those shares converting to Class A ordinary shares, which 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 that a modification of our dual class share arrangement may have on our share price.
Our Class B ordinary shares - which currently grant their holders 83.2% of our voting power while they own 33.2% of our shares - convert into Class A ordinary shares on June 7, 2020, the seventh anniversary of the adoption of the Amended and Restated Memorandum and Articles
of Association. It is possible that this provision of our articles of association could be amended by our controlling shareholder in order to change the terms of when a conversion might otherwise occur. We cannot predict whether such an action would be upheld as valid if challenged, nor the likelihood that such an action might be challenged, nor can we predict the impact such an action might have on our share price or on investor perceptions of our company.
Future sales of our Class A ordinary shares by our principal shareholders, or the perception that such sales could occur, may cause the market price of our ordinary shares to decline.
Future sales of Class A ordinary shares by our principal shareholders,
including two wholly-owned subsidiaries of IBS Group, Dmitry Loshchinin, Morgan Stanley Investment Management, FMR LLC and M&G Investment Management Limited who beneficially owned in the aggregate 61.2% of our Class A ordinary shares as of June 30, 2018, may cause the market price of our Class A ordinary shares to decline. Further, shares issuable under our share incentive plans have been registered on a Form S-8 registration statement and may be freely sold in the public market upon issuance, except for shares held by affiliates who have certain restrictions on their ability to sell. Sales of substantial amounts of our ordinary shares in the public marketplace by us or our shareholders, including our
principal shareholders who have the right to cause us to register their shares for resale with the SEC, or the perception that such sales could occur, could adversely affect the market price of our ordinary shares and may make it more difficult for investors to sell ordinary shares at a time and price that such investors deem appropriate.
If securities or industry analysts cease to publish research or publish inaccurate or unfavorable research about our business, our Class A ordinary share price and trading volume could decline.
The trading market for our Class A ordinary shares is affected by any research and reports that securities or industry analysts publish about us and our business. If one or more of the analysts who currently cover us or our business publish inaccurate or unfavorable research about us or our business, and in particular, if they downgrade their evaluations
of our Class A ordinary shares, the price of those shares would likely decline. If one or more of these analysts cease coverage of the Company, we could lose visibility in the market for our Class A ordinary shares, which in turn could cause the price of those shares to decline.
As a foreign private issuer, we are not subject to U.S. proxy rules or Regulation FD and are exempt from filing certain Exchange Act reports.
As a foreign private issuer, we are exempt from certain rules and regulations under the Exchange Act related
to the furnishing and content of proxy statements, and our officers, directors, and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. We are also exempt from Regulation FD, which prohibits issuers from making selective disclosures of material non-public information. In addition, we are not required under the Exchange Act to file annual, quarterly and current reports and financial statements with the SEC as frequently or as promptly as domestic companies whose securities are registered under the Exchange Act.
However, we would lose our foreign private issuer status if a majority of our directors or executive officers are U.S. citizens or residents and we fail to meet certain additional requirements. Although we have elected to comply with certain U.S. regulatory provisions, our loss of foreign private issuer status would make such provisions
mandatory. The regulatory and compliance costs to us under U.S. securities laws as a U.S. domestic issuer may be significantly higher. If we are not a foreign private issuer, we will be required to file periodic reports and registration statements on U.S. domestic issuer forms with the SEC, which are more detailed and extensive than the forms available to a foreign private issuer. We may also be required to modify certain of our policies to comply with good governance practices associated with U.S. domestic issuers. Such conversion and modifications will involve additional costs. In addition, we may lose our ability to rely upon exemptions from certain corporate governance requirements on U.S. stock exchanges that are available to foreign private issuers.
As a foreign private issuer, whose shares are listed on the NYSE, we may in the future elect to follow certain home country corporate governance practices instead of certain
NYSE requirements.
We have elected to comply with the corporate governance rules of the NYSE applicable to controlled companies, with the exception of maintaining an internal audit function, even though, as a foreign private issuer, we are permitted to follow the corporate governance practices of our home country, the British Virgin Islands. Nevertheless, we may in the future follow home country corporate governance practices instead of some or all of the NYSE's requirements. A foreign private issuer that elects to follow a home country practice instead of NYSE requirements must disclose in its annual reports filed with the SEC any significant ways in which its corporate governance practices differ from those followed by domestic companies under NYSE listing standards.
Certain corporate governance requirements are not reflected in the BVI Business Companies Act, 2004 (as amended from
time to time; the "BVI Act") or other British Virgin Islands law, such as the requirement to obtain shareholder approval for certain dilutive issuances of shares, including the sale of our Class A ordinary shares in below-market private placement transactions if greater than 20% of our pre-transaction issued and outstanding shares are sold, or are subject to different approval requirements, such as in connection with the establishment or amendment of equity compensation plans. Moreover, the BVI Act does not require the implementation of a nominating committee or establishment of a formal director nomination process, the formation of an audit committee or if such a committee is formed that it have any specific composition, that a board of directors consists of a majority of independent directors or that independent directors be involved in the determination of executive compensation. See "ITEM 6. Directors, Senior Management and Employees—C. Board Practices—Corporate
governance practices." Accordingly, our shareholders may not be afforded the same rights as provided under the NYSE's corporate governance rules.
Our U.S. shareholders may suffer adverse tax consequences if we are classified as a passive foreign investment company or as a controlled foreign corporation.
Generally, if for any taxable year 75% or more of our gross income is passive income, or at least 50% of the average quarterly value of our assets (which may be measured in part by the market value of our Class A ordinary shares, which is subject to change) are held for the production of, or produce, passive income, we would be characterized as a passive foreign investment company (a "PFIC") for U.S. federal income tax purposes under the Internal Revenue Code of 1986, as amended (the Code). Based on
our financial statements, relevant market data, and the projected composition of our comprehensive income and valuation of our assets, including goodwill, we do not believe we were a PFIC for the fiscal year ended March 31, 2018, and we do not expect to become one in the foreseeable future, although there can be no assurance in this regard. If we become a PFIC, holders of our Class A ordinary shares in the United States may become subject to increased tax liabilities under U.S. federal income tax laws and regulations and may become subject to burdensome reporting requirements. The determination of whether or not we are a PFIC is made on an annual basis and will depend on the composition of our comprehensive income and assets from time to time. As a result, it is not possible to determine whether we will be characterized as a PFIC for the taxable year ending March 31, 2019,
or for any subsequent year, until we finalize our financial statements for that year. The calculation of the value of our assets will be based, in part, on the quarterly market value of our Class A ordinary shares, which is subject to change. See "ITEM 10. Additional Information-E. Taxation-United States federal income taxation."
Additionally, certain U.S. holders of our Class A ordinary shares may suffer adverse tax consequences if we or any of our non-U.S. subsidiaries
are characterized as a controlled foreign corporation (a "CFC") under Section 957(a) of the Code. Certain changes to the CFC constructive ownership rules under Section 958(b) of the Code introduced by the TCJA may cause one or more of our non-U.S. subsidiaries to be treated as CFCs, may also impact our CFC status, and may affect holders of our Class A ordinary shares that are United States shareholders. Generally, for U.S. shareholders that own 10% or more of the combined vote or combined value of our Class A ordinary shares, this may result in negative U.S. federal income tax consequences and these shareholders may be subject to certain reporting requirements with the U.S. Internal Revenue Service. Any such 10% U.S. shareholder should consult its own tax advisors regarding the U.S. tax consequences of acquiring, owning, or disposing our ordinary shares and the impact of
the TCJA, especially the changes to the rules relating to CFCs.
If we are unable to satisfy the requirements of Section 404 of the Sarbanes Oxley Act of 2002, or if our internal control over financial reporting is not effective, we may be unable to report our financial information on a timely basis, our costs may increase, the reliability of our financial statements may be questioned and our share price may suffer.
We are required to comply with the internal control evaluation and certification requirements of Section 404 ("Section 404") of the Sarbanes Oxley Act of 2002 (the "Sarbanes Oxley Act"). Section 404(a) of the Sarbanes Oxley Act requires annual management assessments of the effectiveness of our internal control over financial reporting. We are also required to obtain an annual auditor attestation on the effectiveness of our internal control over financial
reporting, as required under Section 404(b) of the Sarbanes Oxley Act.
To maintain the effectiveness of our disclosure controls and procedures and our internal control over financial reporting, we expect that we will need to continue enhancing existing, and implement new, financial reporting and management systems, procedures and controls to manage our business effectively and support our growth in the future. The process of evaluating our internal control over financial reporting requires an investment of substantial time and resources, including by our Chief Financial Officer and other members of our senior management. As a result, this process may divert internal resources and take a significant amount of time and effort to complete. Additionally, as part of our management's assessment of the effectiveness of our internal control over financial reporting, our management may conclude that our internal control over financial
reporting is not effective due to any identified material weakness or otherwise. If we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404(a) or 404(b) of the Sarbanes-Oxley Act in a timely manner or to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion or issues an adverse opinion in its attestation as to the effectiveness of our internal control over financial reporting required by Section 404(b), investors may lose confidence in the accuracy and completeness of our financial reports and the trading price of our ordinary shares could be negatively affected. We could also become subject to investigations by the NYSE, the SEC or other regulatory authorities, which could require additional financial and management resources.
In
addition, timely and accurate financial reporting requires us to retain a sufficient number of U.S. GAAP experienced accounting personnel. There is strong demand for U.S. GAAP experienced accounting personnel in the regions in which we operate, and as such, we may not be able to effectively compete for such personnel, which could make it more difficult for us to maintain the effectiveness of our internal control over financial reporting and obtain an annual auditor attestation concluding that our internal control over financial reporting is effective.
We have taken advantage of NYSE's "controlled company" exemption from certain corporate governance requirements, to a limited extent, and therefore, our shareholders will not have the same protections afforded to shareholders of companies that are subject to such requirements.
As a result of the number of shares beneficially
owned by IBS Group through its two wholly-owned subsidiaries, we are eligible to take advantage of the "controlled company" exemption under NYSE's corporate governance rules. A "controlled company" is a company of which more than 50% of the voting power is held by an individual or group of shareholders. Pursuant to the "controlled company" exemption, a company that qualifies as a "controlled company" is not required to comply with the requirements of having a majority independent board of directors or of having a nominating and corporate governance committee and a compensation committee, each composed entirely of independent directors. See "ITEM 6. Directors, Senior Management and Employees—C. Board Practices—Board Committees." We currently rely on this exemption to the extent necessary to permit Anatoly Karachinskiy, Glen Granovsky and Yulia
Yukhadi to serve on our compensation committee, even though they do not satisfy NYSE's definition of an "independent director" for purposes of such committee service. We also do not have a nominating and corporate governance committee. If available to us, we may elect to use the controlled company exemption more broadly in the future. If we do so, our shareholders will not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of the NYSE.
We are not subject to the supervision of the British Virgin Islands Financial Services Commission and so our shareholders are not protected
by any regulatory inspections in the British Virgin Islands.
We are not an entity subject to any regulatory supervision in the British Virgin Islands by the Financial Services Commission. As a result, shareholders are not protected by any regulatory supervision or inspections by any regulatory agency in the British Virgin Islands and we are not required to observe any restrictions in respect of its conduct save as disclosed in this annual report or our Amended Memorandum and Articles of Associationincorporated by reference herein.
As a public company, we may become subject to further compliance obligations, which may strain our resources and divert management's attention.
Changing laws, regulations
and standards in the United States, relating to corporate governance and public disclosure and other matters, may be implemented in the future, which may increase our legal and financial compliance costs, make some activities more time-consuming and divert management's time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and our business may be harmed. Being a publicly traded company in the United States and being subject to U.S. rules and regulations make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and
retain qualified members of our board of directors, particularly to serve on our audit committee, and qualified executive officers.
It may be difficult to enforce a U.S. or foreign judgment against us, our directors and officers named in this annual report outside the United States, or to assert U.S. securities laws claims outside of the United States.
Most of our assets are located outside of the United States. A majority of our directors and officers are nationals or residents of jurisdictions other than the United States and a substantial portion of their assets are located in Russia, Ukraine and other CEE countries. As a result, it may be difficult for a shareholder to effect service of process within the United States upon these persons, or to enforce against us or them, judgments obtained in U.S. courts, including judgments predicated upon the civil liability provisions of
the securities laws of the United States or any state therein. Additionally, it may be difficult to assert U.S. securities law claims in actions originally instituted outside of the United States. Foreign courts may refuse to hear a U.S. securities law claim because foreign courts may not be the most appropriate forums in which to bring such a claim. Even if a foreign court agrees to hear a claim, it may determine that the law of the jurisdiction in which the foreign court resides, and not U.S. law, is applicable to the claim. Further, if U.S. law is found to be applicable, the content of applicable U.S. law must be proved as a fact, which can be a time-consuming and costly process, and certain matters of procedure would still be governed by the law of the jurisdiction in which the foreign court resides.
Additionally, although arbitration awards are generally enforceable in Commonwealth of Independent State ("CIS") countries,
judgments obtained in the United States or in other foreign courts, including those with respect to U.S. federal securities law claims, may not be enforceable in many CIS countries including Russia. A foreign court judgment may be recognized and enforced in Ukraine only on the basis of an international treaty to which Ukraine is a party providing for enforcement of such judgments, and then only in accordance with the terms of such treaty. Ukraine is a party to more than 20 mutual legal assistance treaties in civil matters (mostly with CIS and former Socialist countries) and, by way of legal succession, a party to nine mutual legal assistance treaties of the former USSR. However, while Ukraine does have such treaties in place with several EU countries, it is not a party to mutual legal assistance treaties in civil matters with the United States, Canada, the U.K., Germany and France. As a result, there are no international treaties that could be relied upon to enforce
in Ukraine a civil judgment rendered in those countries. In the absence of an international treaty providing for enforcement of judgments, the courts of Ukraine may only recognize or enforce a foreign court judgment on the basis of the principle of reciprocity, which, unless proven otherwise, is deemed to exist in relations between Ukraine and the country where the judgment was rendered. At the same time, the principle of reciprocity is a relatively new and undeveloped concept in Ukrainian legislation, and there is no official interpretation or established court practice on the application of the principle of reciprocity. Therefore, it is possible that a U.S. or other foreign court judgment issued in a country, which has no mutual legal assistance treaty with Ukraine, could be refused recognition and/or enforcement in Ukraine, and the parties would have to re-litigate the dispute in Ukrainian courts. In addition, the lack of practice and varying approaches towards recognition
and enforcement in Ukraine of foreign court judgments potentially make such recognition and enforcement problematic, if possible at all.
In Romania, foreign civil and commercial judgments issued by courts of a non-EU member state may be recognized and enforced only if certain conditions are met, including reciprocity between Romania and the relevant foreign state in respect of the effects of the foreign court rulings. Under the existing Romanian legal framework, the existence of a bilateral instrument or agreement providing for the mutual recognition of the legal effects of civil judgments is seen as an important facilitator for the recognition and enforcement of such court judgments. No such agreement or instrument is currently in place between
Romania and the United States. In Poland, rulings of foreign state courts issued in civil matters, even from non-EU member states, are recognized by virtue of law unless there exist obstacles specified in the Polish Code of Civil Procedure, such as if the ruling was issued in a case which falls under the exclusive jurisdiction of Polish courts. As a result of the difficulty associated with enforcing a judgment against us, our investors may not be able to collect any damages awarded against us by either a U.S. or foreign court.
We do not intend to pay regular dividends for the foreseeable future.
Our investors should not rely on an investment in our Class A ordinary shares to provide dividend income. Although we have declared and paid dividends in prior years, we do not intend to declare or pay regular
dividends to holders of our Class A ordinary shares for the foreseeable future, and any future credit facility may contain terms prohibiting or limiting the amount of dividends that may be declared or paid on our Class A ordinary shares. While we currently intend to retain all available funds and any future earnings to fund the development and growth of our business, we may, by a resolution of the board of directors, authorize a special one-time dividend or other form of distribution to our shareholders at such time and in such amount as the board of directors determines to be appropriate and in the best interest of the Company. Any payment of dividends in the future would be at the discretion of our board and will depend on, among other things, our earnings, availability of distributable profits, liquidity and financial position, business opportunities, tax considerations, planned
acquisitions and other strategic plans of the Company, the restrictions in our debt agreements, and other considerations that our board deems relevant. As a result, if we do not pay dividends, capital appreciation, if any, of our Class A ordinary shares will be investors' sole source of gain for the foreseeable future. Accordingly, investors must rely on sales of their Class A ordinary shares after price appreciation, which may never occur, as the only way to realize any return on their investment. Investors seeking annual cash dividends should not purchase our Class A ordinary shares.
In addition, our ability to pay dividends is dependent upon the earnings of our subsidiaries and their distribution of funds to us, primarily in the form of dividends.
The ability of our subsidiaries to make distributions may be subject to statutory restrictions and retained earnings criteria, and is contingent upon the cash flow of those subsidiaries.
Provisions in our organizational documents may delay or prevent our acquisition by a third party.
Our Amended Memorandum and Articles of Association contain a number of provisions that may make it more difficult or expensive for a third party to acquire control of us without the approval of our board of directors. These provisions also may delay, prevent or deter a merger, acquisition, tender offer, proxy contest or other transaction
that might otherwise result in our shareholders receiving a premium over the market price for their ordinary shares. These provisions include, among others:
•
a dual class ordinary share structure for seven years following the completion of our initial public offering;
•
our board of directors' ability to issue, from time to time, one or more classes of preferred shares and, with respect to each such class, to fix the terms thereof by resolution;
•
restrictions
on the ability of shareholders to call meetings and bring proposals before meetings;
•
absence of the ability of shareholders to act by written consent;
•
the requirement of an affirmative vote of two-thirds or more of the shares entitled to vote to amend certain provisions of our Amended Memorandum and Articles of Association;
•
the
requirement of an affirmative vote of two-thirds or more of the shares entitled to vote on special matters such as mergers or acquisitions; and
•
the ability of directors in their absolute discretion to decline to register or delay the registration of any transfer of shares without assigning any reason.
These provisions of our Amended Memorandum and Articles of Association could discourage potential takeover attempts and reduce the price that investors might be willing to pay for our Class A ordinary shares in the future, which could reduce the market price of our Class A ordinary shares. For more
information, see "ITEM 10 Additional Information—B. Memorandum and Articles of Association."
Risks Related to Our Incorporation in the British Virgin Islands
As the rights of shareholders under British Virgin Islands law differ from those under U.S. law, you may have fewer protections as a shareholder.
Our corporate affairs are governed by our Amended Memorandum and Articles of Association, the BVI Act and the common law of the British Virgin Islands. The rights of shareholders to take legal action against our directors, actions by minority shareholders and the fiduciary responsibilities of our directors under British Virgin Islands law are to a large
extent governed by the BVI Act and the common law of the British Virgin Islands. The common law of the British Virgin Islands is derived in part from comparatively limited judicial precedent in the British Virgin Islands as well as from English common law,
which has persuasive, but not binding, authority on a court in the British Virgin Islands. The rights of shareholders and the fiduciary responsibilities of our directors under British Virgin Islands law are not as clearly established as they would be under statutes or judicial precedents in some jurisdictions in the United States. In particular, the British Virgin Islands has a less developed body of
securities laws than that of the United States, and some states (such as Delaware) have more fully developed and judicially interpreted bodies of corporate law. In addition, British Virgin Islands law does not make a distinction between public and private companies and some of the protections and safeguards (such as statutory pre-emption rights, save to the extent that they are expressly provided for in the Amended Memorandum and Articles of Association) that investors may expect to find in relation to a public company are not provided for under British Virgin Islands law.
As a result of all of the above, holders of our Class A ordinary shares may have more difficulty in protecting their interests in the face of actions taken by our management, directors or major shareholders than they would as shareholders of a U.S. company. For a discussion
of significant differences between the provisions of the BVI Act and the laws applicable to companies incorporated in the United States and their shareholders, see "ITEM 10. Additional Information—B. Memorandum and Articles of Association."
Shareholders in British Virgin Islands companies may not be able to initiate shareholder derivative actions, thereby limiting shareholders' ability to protect their interests.
While statutory provisions do exist in British Virgin Islands law for derivative actions to be brought in certain circumstances, shareholders in British Virgin Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States. The circumstances in which any such action may be brought, and the procedures and defenses that
may be available in respect to any such action, may result in the rights of shareholders of a British Virgin Islands company being more limited than those of shareholders of a company organized in the United States. Accordingly, shareholders may have fewer alternatives available to them if they believe that corporate wrongdoing has occurred. The British Virgin Islands courts are also unlikely to: (i) recognize or enforce against us judgments of courts in the United States based on certain civil liability provisions of U.S. securities law; or (ii) to impose liabilities against us, in original actions brought in the British Virgin Islands, based on certain civil liability provisions of U.S. securities laws that are penal in nature. There is no statutory recognition in the British Virgin Islands of judgments obtained in the United States, although the courts of the British Virgin Islands will in certain circumstances recognize and enforce the non-penal judgment of a foreign
court of competent jurisdiction without retrial on the merits.
The laws of the British Virgin Islands provide little protection for minority shareholders, so minority shareholders will have little or no recourse if those shareholders are dissatisfied with the conduct of our affairs.
Under the laws of the British Virgin Islands, there is little statutory protection of minority shareholders other than the provisions of the BVI Act dealing with shareholder remedies. The principal protection under statutory law is that shareholders may bring an action to enforce the BVI Act or the constituent documents of the corporation, the Amended Memorandum and Articles of Association. Shareholders are entitled to have the affairs of the
company conducted in accordance with the BVI Act and the Amended Memorandum and Articles of Association.
There are common-law rights for the protection of shareholders tsahat may be invoked, largely dependent on English company law, since the common law of the British Virgin Islands is limited. Under the general rule pursuant to English company law known as the rule in Foss v. Harbottle, a court will generally refuse to interfere with the management of a company at the insistence of a minority of its shareholders who express dissatisfaction with the conduct of the company's affairs by the majority or the board of directors. However, every shareholder is entitled to have the affairs of the
company conducted properly according to British Virgin Islands law and the company's constituent documents.
As such, if those who control the company have persistently disregarded the requirements of company law or the provisions of the company's Amended Memorandum and Articles of Association, then the courts may grant relief. Generally, the areas in which the courts will intervene are the following: (1) an act complained of which is outside the scope of the authorized business or is illegal or not capable of ratification by the majority; (2) acts that constitute a "fraud
on the minority" where the wrongdoers control the company; (3) acts that infringe or are about to infringe on the personal rights of the shareholders, such as the right to vote; and (4) where the company has not complied with provisions requiring the approval of a majority of shareholders, which are more limited than the rights afforded to minority shareholders under the laws of many states in the United States.
Luxoft Holding, Inc. was founded in March 2000 and incorporated as a company, limited by shares under the laws of the British Virgin Islands, on March 7, 2006. Over the past 18 years, the Company grew from an initial team of 20 employees to over 12,800 employees, across 42 cities and 21 countries, covering North America, Western and Eastern Europe, Latin America,
and Southeast Asia. In June 2013, the shares were listed on the New York Stock Exchange ("NYSE") under the symbol "LXFT."
During the fiscal years ended March 31, 2017 and 2018, we completed a number of acquisitions, as discussed in further detail in "ITEM 5. Operating and Financial Review and Prospects—A. Operating Results—Acquisitions." Additionally, in 2012, our subsidiary Luxoft International Company Limited, which had previously been a British Virgin Islands company, reincorporated in Cyprus. We have principal executive offices located at Gubelstrasse 24, 6300 Zug, Switzerland. Our registered office is located at Commerce House, Wickhams Cay 1, PO Box 3140, Road Town, Tortola, British Virgin Islands. Our telephone number is +41 417 262 060. We have appointed Luxoft USA, Inc. ("Luxoft USA"), 100
Wall Street, Suite 503, New York, NY10005, as our agent upon whom process may be served in any action brought against us under the securities laws of the United States.
For more information about us, our website is www.luxoft.com. The information contained therein or connected thereto shall not be deemed to be incorporated by reference in this annual report.
Principal
Capital Expenditures
During the fiscal years ended March 31, 2018, 2017 and 2016 we invested $55.2 million, $106.5 million and $32.7 million, respectively, of which $20.6 million, $19.6 million and $24.2 million, respectively, related to acquisitions of property and equipment and $34.2 million, $77.7 million and $3.5 million were spent
on acquisitions of Business. In order to support our overall business expansion, we intend to continue to invest in production equipment. Moreover, we may spend additional amounts of cash on acquisitions from time to time, if and when such opportunities arise. We anticipate that our next major capital expenditures in the fiscal years ending March 31, 2019 and March 31, 2020 will be related to the expansion of our business and possible merger and acquisition transactions in Europe, Asia-Pacific ("APAC") and the United States. We currently anticipate our capital expenditures in the years ending March 31, 2019 and March
31, 2020 will be financed from cash generated from operations, our current cash position and currently available credit facilities.
Luxoft is a global provider of innovative IT services and technology solutions that deliver measurable business outcomes
to multinational companies across a number of end markets. Our offerings encompass strategic consulting, custom software development services, and digital solution engineering. Luxoft delivers competitive advantage to customers by leveraging its deep multi-industry expertise in the financial services, automotive, communications, healthcare and life sciences, and other industries. Its managed delivery model is underpinned by a highly-educated workforce, allowing the company to continuously innovate upwards on the technology stack to meet evolving digital challenges.
Luxoft has more than 12,800 employees across 42 cities in 21 countries within five continents, with its operating headquarters office in Zug,
Switzerland.
Our software development services consist of core and mission critical custom software development and support, product engineering, and technology consulting. Our bespoke solutions include technology architecture selection and other consulting-based applications, our proprietary products and/or standard system software and platforms, as well as implementation and maintenance. These solutions directly impact our clients' business outcomes through efficient delivery of continuous innovation. Through our services and solutions, we help our clients strengthen their competitive position through increased efficiency, cost optimization and productivity gains, and drive change through disruptive digital technologies that enhance end-user experience and shorten time-to-market.
We have developed a reputation and track record of delivering consistent, high-quality service and
establishing long-term strategic relationships with many of our clients. We continue to increase our value proposition through advanced capabilities, an enhancement of our premium services, and a shift from traditional outsourcing to digital agendas. This includes expansion of our advisory, platform architecture selection and packaged software services, such as consulting and implementation of Murex, OpenLink, Avaloq, Qt Automotive, IBM BPM, Pivotal and PEGA, and enhanced proprietary platforms.
We utilize our deep industry and domain specific expertise to develop green field innovative software and to replace legacy IT ecosystems for our clients to improve their efficiency, competitiveness, core products, processes, and applications.
Our resources and management efforts are currently concentrated on three lines of business: Financial Services; Automotive and Transport; and Digital
Enterprise. We are well positioned in these industries given companies have significant and growing demand for IT services and consider innovative and disruptive technologies to be a top priority in achieving their business goals. We also perform a portion of our work for various enterprises within travel, aviation, retail, energy, technology, agriculture and other industries.
We serve large multinational corporations that rely on our IT solutions and software development capabilities for many of their mission-critical systems. For the fiscal year ended March 31, 2018, a significant portion of our sales was from Fortune Global 500 companies. During this period, 60.5% of sales were from clients located in Europe (including UK and Russia), 34.1%
from clients in North America and 5.4% from clients in other geographies. Additionally, five out of our top ten clients were with us for five or more years.
Our engagements with clients are based on the implementation of transformational and managed services offerings. For these offerings, we assume full control of the project team, including the project manager, lead analyst and lead architect, and manage all facets of project execution. In managed services engagements, we have a higher degree of control over the staffing mix and the deployment of resources across our global dedicated delivery platform. These engagements allow us to embed ourselves in our client's business and capture deeper client loyalty while also strengthening barriers to entry for competition.
Our long-standing relationships with large multinational clients can
lead to transformational engagements, where we replace a portion of the client's entire IT team and interface directly with the internal end user, instead of merely augmenting our client's IT department. We seek to continually improve our delivery by using optimized software development methodologies, such as Agile. Agile methodology entails the delivery of software at frequent iterations by cross-functional geographically distributed teams, often working remotely across various time zones. This methodology, along with our products and platforms, reduces time-to-market and lowers development costs for our clients.
We operate through an expansive and scalable
global dedicated delivery model, creating a key competitive advantage, whereby we can meet our clients' diverse needs and provide a compelling value proposition. We provide our services and deliver our solutions from 37 cities with delivery centers located primarily in CEE, including Bulgaria, Poland, Romania, Russia, Ukraine, where we have access to a significant pool of highly educated IT professionals who possess technical expertise and business domain knowledge. We also have delivery centers in Australia, Canada, Germany, Malaysia, India, Mexico, Singapore, South Africa, Sweden, the United Kingdom, the United States, and Vietnam. Our CEE delivery centers are strategically located near current and potential client sites in Eastern and Western Europe and in Asia Pacific. They are designed to offer worldwide offshore and nearshore seamless support and to meet our clients' security and infrastructure requirements.
We believe
that our global delivery model allows us to better serve our clients, providing us with agility, logistical and time zone convenience and the cost advantage of having fewer dedicated on-site personnel. We also believe the similarities in engineering culture between CEE, where the majority of our engineering talent is located, and our primary revenue-generating geographies—Europe and the United States—afford us a competitive advantage over non-CEE based competitors in pursuing engagements in those geographies. Our delivery model also serves as a powerful recruitment engine supporting the growth of our business by providing access to numerous emerging markets worldwide and allowing us to resolve bottlenecks in talent supply.
We believe that our strong brand, corporate culture and focus on efficient innovation aimed at promoting our clients' business goals and outcomes allow us to successfully recruit and retain highly qualified
IT engineers and developers ("IT professionals"). As of March 31, 2018, we had 12,898 personnel of whom 10,844 were IT professionals. We support our growth through our human resources infrastructure that allows us to scale the workforce globally as our business grows. During the fiscal year ended March 31, 2018, we hired, on average, more than 500 IT professionals per month.
The quality of our operational processes has been recognized by our Capability Maturity Model Integration, or CMMI, Level 5 certification, which is the highest level of the Software Engineering Institute's CMMI categorization for measuring maturity of software development
processes. We have also achieved TMMi Level 4 maturity level in quality management and testing.
As of March 31, 2018, we had over 280 active clients and over 54 high potential accounts ("HPA"). In aggregate, HPA accounts generated over $340 million in revenue during the year. We define HPAs as client accounts which, according to management's estimates, have potential to reach at least $5 million in recurring annual revenue within three years from inception and are capable of generating a three-year CAGR of at least 30%.
Industry background
IT services outsourcing and offshoring
For a multinational corporation to remain competitive and meet the increasingly diverse needs
of its client base, it must have high-quality underlying IT architecture that keeps pace with constant technological evolution. It must also have access to high-quality IT talent at a competitive cost, which leads firms to rely on capabilities of IT outsourcing firms in lieu of high-cost local IT engineering talent. Multinational corporations continue to seek IT services providers that have industry-specific knowledge, global delivery capabilities, and the ability to manage dynamic, short development cycles with agility. Furthermore, IT spending is becoming more aligned with companies' broader business strategies towards innovation and digital agendas.
The increased importance of IT-related decisions requires companies to look for providers with specific domain practice and vertical expertise, as opposed to generalists with commoditized skill sets. The offshore outsourcing business model has matured and evolved. The need
for traditional industry agnostic application development and maintenance ("ADM") services is losing momentum in lieu of the end-to-end services concept. The end-to-end services concept is based on delivery of a complete solution that addresses a defined type of problem(s) typically faced by customers in a given vertical. We provide a solution reflecting the combination of necessary components, such as proprietary IP, expert engineering and custom software development services, and selection and deployment of standard off-the shelf software. We actively enhance our premium services and end-to-end solutions to move outside of the traditional outsourcing space and add capabilities, such as consulting, in order to move up the value chain.
Trends of IT spend in our lines of business
Financial Services: The financial services industry is one of the most
IT-intensive industries. Most of the IT services providers are concentrating their efforts within the Run the Bank (RTB) segment, which is now challenged with budget and margin pressure, and thus these providers are facing a challenging growth environment. Historically, we have been present in the less crowded and more non-discretionary Change the Bank (CTB) space, providing a wide array of services designed to achieve growth.
In order to stay competitive in an evolving marketplace, financial institutions need to invest in their IT architecture and change many legacy business processes. This enables these institutions to modernize their mostly in-house developed, vertical-specific legacy systems, which often increases the demand for managed services in front-office IT, to introduce new technologies and processes.
We believe the following key trends drive financial institutions' IT spending: innovation in response to digital disruption, standardization and simplification of legacy systems, and ongoing regulatory and compliance challenges:
Innovation: The financial services industry is driven by an ongoing necessity to innovate, especially with the recent digital transformation in the industry. Digital transformation provides new sources of revenue and a competitive advantage. Data-driven investment decisions, AI-powered productivity tools, Straight Through Processing (STP), automation, and other digital initiatives all work to create a streamlined client experience. Technologies such as big data, private cloud, various FinTech tools and products, UI/UX, as well as less immediate technologies, such as blockchain, machine learning,
and grid computing, are becoming necessities in the modern financial services industry. These technologies require a drive towards off-the-shelf technology augmented by custom systems, creating a wealth of opportunity.
The massive proliferation of data acquisition enables advances in AI and a new paradigm in automation. Rules are not necessarily programmed into systems; Instead, systems are taught and identify patterns and make decisions with minimal human intervention. Machines can process data far quicker than humans, findings patterns and triggers. This enables companies to analyze more complex data and deliver faster, more accurate results, providing a better a chance of identifying profitable opportunities and avoiding unknown risks.
Simplification: Banks have hundreds of applications but need to reduce the number of applications by sun-setting some
legacy items. They have a dispersion of platforms with no centralized view by geography, product, or client. There is a mounting need to decrease infrastructure costs and increase computing capacity, which generates ample demand for cloud migration services to make the underlying data cheaper to maintain, and become available quickly.
Standardization: IT infrastructure and custom trading systems built in the capital markets over the last decades became quite massive in size and are difficult and expensive to maintain. The banks used to spend a lot of money on creative proprietary trading systems and efforts focused on unifying the data. At this juncture, IT operations of most banks, especially large global banks, represent a significant cost item and a burdensome legacy to carry. Thus, standard platforms, such as Murex, have started receiving an increased amount of attention. The areas of significant
demand growth for standard package implementations are Capital Markets as well as wealth and asset management divisions.
Regulatory and compliance: On-going regulatory reporting, governance and compliance (GRC) challenges fueling consistent demand for data-related technologies, including big data. The regulations in the fiscal year ending March 31st, 2018 that required financial institutions to make changes to their systems were E.U.'s Markets in Financial Instruments Directive (MIFID II), Brexit, Securities Financing Transactions Regulation (SFTR), final minimum total loss-absorbing capacity (TLAC) standard, General Data Protection Regulation (GDPR) and PSD.
Automotive and Transport: The rapid introduction of new electronic architecture and the separation of hardware and its functionality and software are driving
demand for embedded software development and independent software integration expertise inside and outside of the cockpit. The way the cars are being designed and produced as well as the length of software development cycles are radically changing. Inside of the cockpit infotainment and navigation, the Human Machine Interface (HMI) features / user experience, and autonomous driving are all undergoing continuous transformation. Outside of the cockpit the disruption spans across all levels of automating the driving task, from ADAS (Advanced Driver Assistance System) to HAD (Highly-Automated Driving) to fully autonomous. The capabilities of a car receiving over-the-air updates is increasing, allowing for a shorter time to market from design room to the end consumer. Regulation and competitive pressure from other industries place new demands on vehicle User Experiences and UTH control functions, as more and more autonomous driving features are added into the vehicles.
Sharing
economy, electrification of the vehicle and overall increased presence of software in the car opens the door for relevant technologies and allows various services related to fully digital lifestyle to come into the cars of today. Thus, cloud- and diagnostics-related services have become a new catalyst for growth and IT expenditures, in this sector. Furthermore, IT expenditures in the automotive and transport industry are also increasingly driven by improving safety and complying with regulatory requirements. Ensuring safety and limiting driver distraction while improving the in-car experience is remaining one of the key priorities of OEMs and their immediate suppliers.
Digital Enterprise: Consumers of today choose providers of goods and services based on convenience, speed of service, ease of use and quality of their experiences with desired goods and services. Digitalization is becoming an important
way to differentiate, become more efficient, acquire new customers, and improve our clients' output. Data is becoming a valuable source of intelligence, effective consumer targeting, and source for improvement of business outcomes. Our expertise in Internet of Things ("IoT"), Big Data, Data Analytics, Artificial Intelligence, Machine and Deep Learning ensures that we enable competitive differentiation for our clients across all verticals.
Automation and robotics are becoming important trends in retail, services, logistics, and even financial services. Below are examples of trends in various industry verticals where we are making a difference:
Media,
Telecommunications and Networks: The growth of tablets and smart phones, combined with the accelerating growth of video and multimedia traffic, will continue to increase the demands on network providers' networks and enterprises' systems. The growth in adoption of wireless communications (including 4G/LTE), virtualization technologies and cloud computing will require service providers and enterprises to further invest in their network infrastructure. Software Defined Networking ("SDN") and Network Function Visualization ("NFV") are technologies that carriers and network equipment manufacturers are pursuing and aggressively testing in their lab environments and selected networks. New eco-systems are being developed around NFV Conformance and Interoperability testing.
Wireless competition has intensified in the U.S. and underlying technologies are advancing to ensure better economics and agility.
The nature of competition and change continues to put pressure on our customers in the service provider, equipment manufacturer, and large enterprise spaces. Our core technical services remain in demand and we continue to build out additional capabilities in 4G/LTE, Over-the-top ("OTT") video enablement, big data management, and software systems that make our customers more efficient. New software technology persists as the dominant change agent in the advancement of communications services.
Customers are looking for providers with highly relevant expertise, including offshore and onshore data analytics and software development capabilities specifically tailored to communications services providers and their end customers. Service providers and media companies in this vertical are seeking out vendor partners with deep expertise in systems technology for network equipment manufacturers and new OTT media competences.
Healthcare
and Pharmaceuticals: Patients are increasingly empowered with access to personal health data and supporting technologies. Pharmaceutical companies are being driven towards outcomes based medicines and are required to embrace new technologies to streamline and accelerate their drug discovery and commercialization activities. Furthermore, the Healthcare and Life Sciences industries are converging, opening up a significant potential within each of these two fields especially in the R&D domain. For example, clinical, pharmacovigilance, and regulatory processes will be advanced and accelerated with techniques, such as machine learning and natural language processing. Competitive landscape in this vertical is comprised of traditional IT vendors without extensive industry experience, and sector-focused providers who do not have adequate capabilities with cutting edge technologies. Clients are looking for vendors who are capable of handling complex
domain-focused engagements, which are outside of the scope of commoditized IT services, and incorporating innovation and technologies of tomorrow.
Travel and Aviation: New technologies and a shift to mobile devices and social media have transformed the way the travel experience is offered and managed. Concepts like connected airplane made possible through IoT-based technologies and airplane infotainment on demand are becoming more and more popular with clients in this vertical. With software technologies transforming the travel industry, highly personalized customer service of the traditional travel agent has been nearly eliminated in favor of customer self-service. The players in the travel and aviation industry demand new solutions that return the business focus onto the customer while improving the way the travel experience is offered and managed. This change from a transactional model to a relationship
based consumer centric model opens up additional opportunities for travel technology companies, from new product development to the transformation of legacy systems. For aerospace companies, in addition to stringent industry regulations and security requirements, it is necessary to keep with the pace of technological innovation while managing overall profitability.
Thus, with increasing cost and competitive pressures, travel and aviation companies will continue to be attracted to high quality, low cost IT services and solutions providers. Therefore, we see prevailing demand from existing clients in the areas of big data processing, analysis and visualization. Clients are also interested in developing mobile applications for travel, such as travel assistants, disruption management, loyalty and in-flight entertainment. Additionally, there is interest in emerging technologies, such as Near Field Communication (NFC), and indoor
positioning based on low-power consuming technologies, such as Bluetooth.
Technology: Embedded Software has become a crucial component of ecosystems, helping to put products ahead of the competition. Original Equipment and Device Manufacturers (OEMs and ODMs) as well as leading semiconductor companies strive to create innovative software solutions that meet the latest market requirements. With the continued migration to new operating systems and open standards, escalating adoption of cloud technologies and increasing mobile, high performance cross-platform and smart electronics development and proliferation of new concepts, such as IoT, technology companies are required to keep up with the pace of rapid technological evolution. OEMs and ODMs focus on multiple industries, including automotive, wireless, consumer electronics, manufacturing, medical handheld devices, telecom, video, multimedia, security
and identification, and vendors, which can help them address product engineering tasks that cover the entire technology stack. For example, the rising demand for IoT and connected solutions creates a new challenge for automation intelligence in the space of smart sensors and cloud data processing. Disruptive technologies and new ways of customer interactions introducing new avenues for security threats are becoming more complex and impactful on business. That is why embedded software is increasing in its importance and the players in the technology industry must increasingly invest in controlling features like security in a "built-in" (i.e. embedded) manner, rather than a "bolt-on" (i.e. added later) manner, for their products to minimize security vulnerabilities and flaws.
Energy and Utilities: With an aging energy distribution infrastructure and increased regulatory pressures to implement smart grid and demand response services, IT needs of energy companies will continue to grow. Furthermore, the popularity and progress of green and renewable technologies combined with the ever-increasing need to cut costs is expected to drive demand for innovative, high quality and low cost IT services providers. Prevailing digitization trends are also affecting this sector generating demand for IoT-based technologies and big data / analytics, including telemetry. Technology plays a greater role in increasing effectiveness and enhancement of the oil and gas production process. The enterprises in this segment are looking for IT capabilities in automation of geological data collection, modeling of drilling
logs, extraction optimization, well completion analysis, as well as analysis of drilling data pools delivered by the connected censors participating in the entire drilling process.
Growth of CEE as a services delivery location
Availability of high-quality talent
CEE's large pool of highly educated and experienced IT professionals with strong technical skills makes the region an appealing outsourcing destination. Countries in CEE have historically demonstrated a strong focus on technical education, exemplified by the high proportion of students in this region with higher education degrees in the areas of applied mathematics, physics and engineering.
The availability of human resources throughout the region, in particular in Ukraine, Russia, Poland, Romania, and Bulgaria allows providers to be
as agile and scalable as necessary.
Ukraine. According to the July 2017 Gartner Report, Evaluate Offshore/Nearshore Countries for Outsourcing, Shared Services and Captives in EMEA, 2017," by Neil Barton, et.al., "Ukraine grew rapidly as a location of nearshore software development until 2014: The labor pool of programmers alone was estimated as 30,000 in 2015. Technical skills are excellent; English language skills are good; and labor rates remain very attractive, given current exchange rates". The report continues "most buyers of software development in Ukraine now do so through large system integrators headquartered in the West". Our engineering headcount as of March 31, 2018 in Ukraine amounted to 3,265 engineers.
Russia. The United Nations Educational, Scientific and
Cultural Organization ("UNESCO") estimates that 28% of all graduates in Russia receive degrees in the field of science and technology. Our engineering headcount as of March 31, 2018 in Russia amounted to 1,872 engineers. According to the July 17, 2017 Gartner report, "Evaluate Offshore/Nearshore Countries for Outsourcing, Shared Services and Captives in EMEA, 2017," by Neil Barton, et.al. (the "July 2017 Gartner Report"), "According to Russoft, Russia's software development and IT service export industry is worth $4 billion a year and grows at a 14% CAGR. Some 110,000 engineers currently work in the IT service industry, with around 60,000 STEM graduates entering the workforce each year. The Russian government continues to fund universities to perform at worldwide standards, and students continue to achieve excellent results in software development
competitions. Around 75% of IT workers speak English, while 3% speak German. Moscow has the largest cluster of delivery centers. Lower rates can be found at secondary cities such as St. Petersburg, Novosibirsk, Nizhny Novgorod, Kazan, Yekaterinburg, Tomsk, Taganrog, Rostov-on-Don and Voronezh."
Poland. During fiscal year 2018, our engineering headcount in Poland was 1,741, a 3.7% decrease year over year. According to the July 2017 Gartner Report, "Poland was one of the first countries in Eastern Europe to build a nearshore service capability, and it remains one of the most successful. Over 900 delivery centers operate from the country, with 140,000 people working for service providers, and a further 70,000 working in captive and shared-service centers operated by multinational corporations. About 60% of the labor pool is in Krakow, Warsaw and Wroclaw. Secondary cities such as the Gdansk Tri-City
and Katowice agglomerations are growing fast, and activity is now growing in Lodz, Poznan, Bydgoszcz, Rzeszow, Lublin and Szczecin. Gartner estimates that a software developer with two years of experience earns between $23,000 and $25,000. Labor inflation for IT workers is 3% to 5%, and labor attrition rates are between 12% and 18%."
Romania. The language capabilities of the local human capital position Romania as an attractive offshore destination for IT services outsourcing, although competition for skilled resources may be intense. Our engineering headcount as of March 31, 2018 in Romania amounted to 1,477. According to the July 2017 Gartner Report, "According to the Association of Business Service Leaders in Romania (ABSL), the country's IT service industry is worth over $2.5 billion and is expected to continue growing due to its labor costs
and technical and language skills. Romania has invested heavily in technology parks, with 2.25 million square meters of office space available in Bucharest and increasing options in cheaper secondary cities such as Cluj-Napoca, Iasi and Timisoara.
In addition to English language skills, Romania is an interesting option for customers needing other European languages; 27% of IT workers speak French, and in total, Romania offers 2.7 million French speakers. German, Italian and Spanish speakers are also widely available. Romania's political stability has improved as an established member of the EU, and service exports continue to grow at above 10% per year. Romania is now home to delivery centers for more than 50 well-known multinational brands.”
Bulgaria. Our engineering headcount in Bulgaria as of March 31, 2018 amounted to 170 engineers. According to the July 2017 Gartner Report, "Building on its legacy as a key hardware and software supplier to Russia, Bulgaria has become a major provider of technical skills within southeast Europe, with service exports now contributing over 3% of the country's economy. Despite relatively low numbers of staff, Bulgaria's service export industry is growing rapidly due its healthy economy, political stability and strong foreign language offerings. Supported by a business-friendly environment and a legislative base derived from its EU membership, Bulgaria is being used as an outsourcing destination by an increasing number of European and North American businesses."
We seek
out engineering excellence worldwide, especially in emerging markets, and move these resources to our larger locations, such as Poland, Romania or Bulgaria, utilizing benefits and established processes obtained during the initial relocation of our staff. Those benefits include monetary incentives from the governmental organizations of Eastern European countries. During the fiscal year ended March 31, 2018, we received 1.7 million PLN, or $0.5 million, in Poland and 0.1 million BGN, or $0.1 million, in Bulgaria. See more information on governmental programs and incentives in the "Government support for the IT industry in CEE" section.
The
Gartner Report(s) described herein, (the "Gartner Report(s)") represent(s) research opinion or viewpoints published, as part of a syndicated subscription service, by Gartner, Inc. ("Gartner"), and are not representations of fact. Each Gartner Report speaks as of its original publication date (and not as of the date of this Annual Report]) and the opinions expressed in the Gartner Report(s) are subject to change without notice.
Increasing popularity of near-shoring
As the model for offshoring has evolved, the industry has seen the emergence of near-shoring, which involves outsourcing to countries with lower labor costs that are in geographical and/or time zone proximity to client locations. Near-shoring improves communication between clients and delivery teams, increases efficiency, reduces complexity and risks and increases the ultimate value
delivered to clients. Given the physical proximity, cultural affinity, ease of travel, minimal time zone difference and high-quality talent offered by CEE, this region is becoming an increasingly popular destination for near-shoring and a diversification alternative for Western European companies, as well as European divisions of large global companies. Other popular near-shoring destinations for clients in North America include Mexico, and for clients in Asia Pacific include Malaysia, Singapore and Vietnam.
Government support for the IT industry in CEE
The CEE region's IT industry is supported by favorable governmental policies. Russia has announced a number of initiatives to promote IT growth as part of a broader focus on modernization and innovation. For example, the Russian government provides qualified Russian IT companies with substantial tax benefits through a reduced social
contribution charge rate program. This program resulted in savings for us of $9.5 million in the fiscal year ended March 31, 2017 and $11.8 million in the fiscal year ended March 31, 2018. In 2016 application of reduced rates was prolonged until 2023, after which the Russian government may take the decision to gradually increase the tax rates.
In 2012, the Romanian government started a state aid program for support of investments promoting regional development by using new technologies and creating working places. In the third quarter of 2013, our subsidiary Luxoft Professional Romania ("Luxoft Romania") applied to participate in this state aid program and received the requisite approvals
in February 2014. As a condition to being accepted into the state aid program and receiving a 40% reimbursement from the Romanian government of the total salary costs of new workers during a period of 24 months starting on their respective hiring dates, Luxoft Romania undertook to do the following: (i) make an investment in equipment, furniture, and licenses of RON 1.7 million, or approximately $0.4 million, during 2014 and 2015, as part of the investment plan submitted to the Romanian government, and to maintain the investment for a period of five years thereafter; (ii) hire 250 workers during 2014 and 2015 and maintain the new working places for a period of five years after the first payment of the state grant related to each new working place, as part of the hiring plan submitted to the Romanian Government; and (iii) pay to the state budget, in the course of five years from the completion date of the investment, social tax payments of RON 49.3 million, or approximately
$13.1 million at the exchange rate as of March 31, 2018, as stated in the business plan submitted by Luxoft Romania to the Romanian government.
In 2013, the government of Bulgaria implemented measures to support IT companies, including reimbursing employers in Bulgaria for the social security contributions they are required to make in relation to newly hired personnel. In 2014, we received a grant for the reimbursement of such social security contributions we must pay for new personnel we hire in Bulgaria. This incentive applies to remuneration to be paid by us to such employees during the first year of employment. During fiscal year ended March 31, 2018, we received a reimbursement under the grant in the amount of 0.1
million BGN or $0.1 million.
The Special Economic Zones ("SEZ") in Poland are areas in the country where investors may set-up a company and run their business under preferential conditions. These conditions include an exemption from the corporate income tax for companies in Poland. Our subsidiary in Poland conducts a part of its operational activities in the territory of Krakow SEZ. Our profit generated from operations in the SEZ is non-taxable within the amount of tax credit calculated based on eligible expenses. Since the amount
of
the relevant tax credit currently exceeds the amount of income tax payable with respect to profits earned in the SEZ, we pay no income tax in relation to this subsidiary's operations in the SEZ.
Additionally, during fiscal year 2016 we received an award from the Polish Agency of Foreign Investments. The award provides for a monetary subsidy of 8,688 PLN to our company for each individual hired in Poland over the next five years subject to certain conditions. During fiscal year ended March 31, 2018, we received a payment in the amount of 1.7 million PLN or $0.5 million. Also, in Poland the law provides for a personal income tax benefit in part of employment
income provided by an application of a deemed cost deduction (but not greater than PLN 85,528 for each individual). Such benefit is available only for employees who, while performing their daily duties, are creating intellectual property with certain conditions. This deduction has resulted in the personal income tax savings of $4.1 million in the fiscal year ended March 31, 2017 and $4.6 million in the fiscal year ended March 31, 2018.
Competitive strengths
We believe the following strengths differentiate us from our competitors:
Deep vertical expertise with focus on end-to-end service offerings and solutions.
We focus on three lines of business that are technology- and data-intensive, that, we believe, present a large and growing market opportunity. To enhance our expertise further, we recruit highly skilled IT professionals with significant understanding of industry-specific business operations and issues and substantial technology experience. We have also built substantive practice areas within our lines of business to address our clients' most pressing problems. We believe that our expertise and services offered within these verticals are superior to those of our competitors and serve as compelling differentiators for our customers.
Strong domain practices anchored within Digital Enterprise. Over the past several years, we have developed expertise in domain practices, including IoT, Big Data, Cloud, DevOps, and Digital Experience. The purpose of these domain practices is to operate
across all of our verticals and deliver higher customer value and synergies by reinforcing our Digital Enterprise's technical capabilities and niche-focused domain services within these lines of businesses. We believe these domain practices are critical to the ongoing success of our clients. Each practice has a dedicated pool of resources, including its own budget, time and IT professionals. We believe that our domain practice knowledge, applied within the industry vertical context of our clients' business needs, provides us with a strong competitive advantage.
Long-term relationships with multinational clients. Our largest clients consist primarily of Fortune Global 500 companies. As of March 31, 2018, five out of our top ten clients have been with us for five or more years and we have experienced very
low turnover in the past. Many of our large relationships began as standalone pilot projects, the success of which enabled us to win additional mission critical, multi-year development engagements. Because of our delivery of consistently high quality and innovative results, our relationship with many of these clients evolved into large scale collaborative relationships and managed delivery engagements whereby we entered into outcome-based arrangements. We generally enter into multi-year master services agreements that encompass multiple stages of clients' IT development cycle. We leverage these relationships to develop a sophisticated understanding and extensive knowledge of the clients' businesses, aiming to become vendor-partners for a wide variety of their CTB IT needs, and thus providing higher quality services, better business outcomes and stronger relationships.
Highly educated and experienced workforce. We
are committed to recruiting, developing and maintaining a work force of high quality IT professionals. We have invested significant resources to grow from 2,619 IT professionals as of March 31, 2009 to 10,844 technically sophisticated IT professionals as of March 31, 2018. Certain of our delivery locations, such as Bulgaria, Poland, Romania, Russia, Ukraine, and Vietnam, are strategically established in regions with large pools of highly skilled engineers and a strong focus on technical education. We have improved relationships with key academic institutions in strategically important and fast-growing locations of Luxoft, including Poland, Romania and Bulgaria. In addition to helping us to attract talent, this enables us to continue increasing employer brand awareness in these regions.
For more information on our recruitment and retention programs, see "Recruitment and Retention" below. We believe a continuous increase of our average annual revenues per billable engineer is a result of us consistently training and successfully retaining our staff that is delivering higher quality value-added services to our clients. During the fiscal year 2018, our revenue per delivery engineer increased to $82.2 thousand as compared to $78.3 thousand for the fiscal year 2017.
Global delivery platform. Our secure delivery centers across 35 cities allow us to provide managed delivery and value added services for software development and innovative IT solutions. We believe that having such an expansive and scalable
delivery platform is one of our key differentiating factors. On one hand, it offers worldwide offshore and near-shore seamless support to our clients. On the other hand, it serves as a powerful engine fueling the growth of our business and resolving bottlenecks in talent supply. As we execute engagements for many clients we have a certain degree of discretion with respect to workflow distribution between our delivery locations with differing macro attributes (i.e. wage inflation and interest and currency rates), for example, Krakow and Wroclaw in Poland, Bucharest in Romania and Kiev in Ukraine versus Omsk, Russia, Dnipro, Ukraine and Ho Chi Minh City, Vietnam. The latter group usually has lower wages, lower wage inflation, stable talent pool and lower attrition.
Managing work flows in that fashion enables us to increase the utilization of our IT professionals by effectively allocating work based on resource and talent requirements to balance cost and achieve scalability, and mitigates certain economic risks, such as wage inflation, that might affect any single geography. Our dedicated delivery centers are distributed across time zones among our delivery locations and consist of teams of IT professionals dedicated to a single client. This setup allows us to work seamlessly for clients in different time zones and maintain a cultural and geographic cohesiveness with our clients' on-site teams. We believe that serving our clients by means of this model, combined with the mission critical nature of engagements, reduces the risk that our clients will switch vendors and drives recurring revenue. We have been keeping, on average, approximately 84% of our
engineering workforce located in offshore and nearshore delivery centers as of March 31, 2018, which is intended to reduce our costs by limiting the use of expensive on-site personnel.
Strong and experienced management team. We benefit from the effective leadership of an international management team with diverse backgrounds and extensive experience in IT services. Each member of our senior management team has on average more than 16 years of industry experience as of March 31, 2018, and has extensive experience in working both inside and outside of CEE for large and multinational corporations. Our CEO has been with us since our inception in 2000, and many of our managers have been with us for seven or more years.
Strategies
Our
goal is to become the end-to-end solutions provider of choice for core systems and mission critical software that enhance business outcomes and help enterprises remain competitive. Typically, within our three lines of business, we target HPAs having potential to reach at least $5M in recurring annual revenue and three year forward CAGR of at least 30% within three years of inception.
HPAs are large multinational companies that require significant amounts of sophisticated IT services and solutions on an ongoing basis with an intention to become an embedded, strategic provider for their high-end technology needs. We intend to expand our offerings to current clients and to win business from new clients by pursuing the following:
Develop new capabilities and service offerings within our lines of business. We plan to expand our offerings to large multinational
clients with whom we already have a strong relationship, and to win new clients within our three lines of business. We intend to use our multi-site global dedicated delivery model, vertically aligned client-facing teams and innovative industry-specific products and platforms to increase our share of high value engagements and diversify across our existing clients' divisions and departments. For example, for our financial services line of business, we opened a delivery center in Gothenburg, Sweden in 2015 to be in close proximity and better serve our clients in the Nordic region of Europe. We opened delivery centers in Bangalore and Malaysia in order to expand our services within the growing APAC market. Additionally, we opened a new delivery center in Berlin in early 2018, the result of a strategic collaboration with a major German multinational automotive manufacturer. This has helped to attract new automotive talent for the software development of next-generation intelligent
user experience.
Further, in Automotive and Transport line of business, we seek to expand beyond software development services around cockpit, and increasingly target new sources of revenues. Today we see more and more demand for independent software integration outside of the cockpit—for the Under the Hood area of the car. This includes software for powertrain, chassis, and for the body of the car, which must run and communicate fast enough to meet timing, quality and safety requirements for the safe continuous operation of the vehicle.
We also seek to expand our service offerings in all of our lines of business by taking over our clients' captive IT operations, which also benefits clients by reducing the total cost of ownership. We plan to continue to invest proactively in and develop our innovative proprietary solutions around emerging technologies, supporting trends and critical
client needs in our industry verticals.
Leverage domain practice expertise to win new business. We intend to leverage the domain practice expertise we have developed and to continue to develop new technical expertise. We believe that our continued dedication to several key domain practices will result in substantial business outcomes for clients who use our services and solutions, and will translate into more business for us. In addition to being helpful to existing clients, we plan to use the products and platforms we have developed within our domain practices as pre-sale tools to demonstrate our capabilities to new clients in the existing verticals and to help us diversify to other industries, such as retail, manufacturing, healthcare, pharmaceuticals and others.
Provide managed delivery model. In an effort to better serve our clients'
needs, a meaningful portion of our engagements is executed as managed delivery. We believe managed delivery provides advantages for both our clients and our operations. For clients, managed delivery greatly enhances visibility, transparency and cost predictability of the outsourcing process, thereby reducing their risks. For us, managed delivery is a means of expanding our role in our clients' projects, thereby embedding us in our clients' core IT operations and ensuring stability of our ongoing relationships with these clients. Managed delivery, especially when used in conjunction with Agile methodologies, improves utilization of our IT professionals and resources, streamlines the engineering of complex distributed systems, and increases the visibility of our potential revenue stream and the scalability of our operations. It also allows us to gain real-time knowledge of our clients' business, thus further growing our expertise in given
business domain practices, ensuring our quality service and increasing client loyalty. Our aim is to increase our ownership of client projects to the point of providing transformational engagements and those within which we substantially or fully replace a portion of our clients' IT departments.
Continue to develop our proprietary platforms. We will continue to develop our existing proprietary platforms and demonstrators to showcase our expertise in a given domain, further enhance capabilities of existing solutions and create new products and platforms. For example, our technology demonstrator AllView utilizes an in-house reference design platform for creating an in-vehicle user experience ("UX"), linking instrument cluster, head unit and mobile devices. AllView shows automakers the possibilities in optimizing car
user experience and improving safety by reducing driver distraction, while encouraging third-party application development.
Attract and retain top quality talent. To support our growth and maintain our competitive position as a leading high-end IT service provider, we grow our highly skilled employee base by continuing to execute our sourcing and hiring practices and enhancing our brand as an employer of choice in the industry and numerous countries around the worlds in which we currently have presence. We plan to continue to enhance our human resources infrastructure as our business grows. We seek to maintain our comparatively low attrition rates through our internal training programs and employee initiatives, including rewards and incentives for high-performing employees. Since 2001, we have been building a successful track record of establishing delivery centers in CEE, Asia Pacific and Western Europe,
where we have access to highly educated IT professionals at attractive wages. Over the past fiscal year, we have opened delivery centers in Eindhoven, Berlin, Bangalore, and Tianjin. We plan to continue opening delivery centers in CEE, APAC, and other emerging and developed markets that strategically fit into our existing nearshore and offshore delivery network.
Selectively pursue strategic acquisitions and strategic partnerships. While we focus primarily on organic growth, we continue to consider complementary acquisitions that would expand our technological and/or domain knowledge and client relationships to be a critical part of our growth strategy. From a strategic perspective, our goal is to pursue acquisitions that will measurably contribute to our positioning as a preferred end-to-end solution provider of certain domain-focused quality IT services. We aim to acquire new capabilities in our core
verticals to enhance our value-added offering to our existing client base and help secure new HPAs to underpin the long-term growth outlook for the business.
On September 27, 2017, we acquired Unafortis AG (subsequently renamed to Excelian Luxoft Financial Services AG), a Swiss-based wealth management consultancy specializing in Avaloq implementations and business consulting anchored in IT services. Avaloq is a provider of fully integrated banking software for the back, middle, and front office. With a team of in-depth experts dedicated to Avaloq-related services, Excelian Luxoft Financial Services AG is one of its leading implementation partners. This acquisition deepened our expertise in standardized software and enables our Financial Services line of business to target a growing
global client base within the wealth management, private, and universal banking sectors.
On August 22, 2017, we acquired DerivIT, a Singapore-based financial services-focused technology consulting provider. DerivIT provides a unique blend of technology expertise, deep domain understanding and strong knowledge of leading platforms in credit and risk management and capital markets. This transaction cemented a strong foundation on which we have been building out delivery platform in APAC to service numerous high-potential clients in the region. In addition to helping us pursue new business opportunities in financial, automotive, telecom and other sectors in the region, this transaction also positioned us to better respond to interest on the part of a number of our existing global customers. Furthermore,we have recognized immediate cross-selling opportunities between derivIT and
Excelian, our Financial Services line of business, due to a highly synergistic customer base and deep expertise in financial software platforms. After the acquisition, our delivery footprint, catering to enterprises located in Singapore, Australia, Hong Kong and the Middle East, also includes India, Malaysia, and China.
Recent Initiatives
During fiscal 2018 we have committed and started executing on a series of steps that we believe lead to a strengthening of our business with respect to the following: reduction in customer concentration, reduction in vertical concentration, enhanced geographic presence in the U.S. and Asia Pacific, entrance into new verticals, expansion of the global sales force, growth of global delivery centers, and acquisition of attractive HPAs.
As a result of our efforts, top ten account concentration decreased by
8% year over year; we strengthened our value proposition for our clients; further expanded our global presence in the U.S. through organic hiring of sales customer facing personnel, continued to build-out our vertically aligned offerings, and created a deeper and more diverse customer portfolio.
As of March 31, 2018, our on-shore headcount was approximately 14% of total delivery personnel.
We continue to limit our exposure to any geography to no more than 30% of the engineering headcount in the mid-term and 25% in the long term. As of March 31, 2018, our presence in Ukraine was 30% compared to 31% in the prior year. As of March 31, 2018, our
presence in Russia was 17%, compared to 19% in the prior year. All other geographies have less than 25%
of the overall engineering personnel, in-line with our mid-term target. We plan to continue reducing staff concentration in Ukraine by accelerated hiring in other regions. In addition, we plan to further expand our global delivery model in APAC and North America.
Our capabilities
Luxoft brings a wide variety of modern and emerging technologies and expertise across industry verticals. It plays an important role in differentiation from our peers as it enriches our
capabilities and service offerings. Modern cutting edge technologies include Cloud, Internet of Things ("IoT"), Big Data / Data Analytics, Digital Experience, Mobile, and DevOps, which occupy an increasing part of corporate IT budgets today. Emerging technologies are focused on bleeding edge IT trends and include blockchain, robotics, machine learning, artificial intelligence and deep learning.
Luxoft focuses on the research and development of its respective subject matter and has a dedicated pool of IT professionals. The purpose is to contribute knowledge and expertise to generate better synergies between technical capabilities and niche-focused domain services within all of our lines of businesses.
For example, we bring our Big Data expertise into our current alliance with the technology organization at one of our European Union based banking clients. We are working together
on a multi-year strategic program of rebuilding core data warehouse platform used for regulatory reporting and business performance management. We believe the combination of our broad range of services and solutions, along with our deep industry and domain expertise, allows us to work concurrently on multiple mission-critical engagements for a single client, leaving us well positioned to increase our share of our clients' core technology budgets. We also believe that our services and solutions will allow us to diversify our current business and access new clients, resulting in lowered customer and vertical revenue concentration.
Agile
Our Agile practice helps clients to develop new applications using Agile methodology and to transition their existing enterprise development processes such as waterfall (end-to-end development with delivery upon the completion of defined tasks) into
Agile. The principal differentiator of Agile methodology is its ability to deliver code frequently and consistently, usually every two to four weeks. The Agile approach usually involves small cross- functional teams of engineers (Scrum teams) that work on the same project, often in a distributed environment. The main advantage of utilizing Agile methodology, and the reason we built a CoE within the Agile practice, is its flexibility and quick response to change, which is critical to our clients because of shrinking product lifecycles. Agile's client-driven iterative development lets the client steer projects, iteration by iteration, and determine execution priority. This approach helps foster stronger client relationships, identifies mistakes and allows us to implement last minute changes without losing critical time and generating additional expenses. It also enhances shared learning and communications processes and solidifies teamwork. Luxoft was accredited as a Member
Training Organization of International Consortium for Agile ("ICAgile") in January 2014. ICAgile develops education tracks and learning objectives for its members' training classes, and accredits course materials for covering particular set of topics. We have 3 accredited courses for Agile professionals: ICP Agile Fundamentals, ICP Business Value Analysis and ICP Agile Team Facilitation, participants of which are recognized as ICAgile Certified Professional after successful completion of learning objectives. Other options for continuous Agile at Luxoft include regular webinars and blog articles on Agile/Lean practices, coaching and facilitation techniques.
Big Data
Our big data practice delivers services and creates critical enterprise-wide solutions based on big data technologies and knowhow. Big data technologies are coming from the Internet world, where they are used by
large-scale websites, like Facebook or Google. Banks are now using these technologies to better manage and process increased data volumes prompted by numerous new rules and regulations. Excelian, in collaboration with our big data CoE, assists its clients in choosing the right technologies, architecting the systems and delivering them into production. We develop innovative approaches to comprehensive information storage, processing and analysis in order to deliver business and operational benefits to our clients. Within this domain practice we perform services focused on adapting an open-source software framework, Hadoop, which supports data-intensive distributed applications to the enterprise environment. This is the key differentiator of our big data offering. We believe that our approach is vital for many strategic enterprise initiatives in various
verticals, such as risk management and reporting in financial services, metering information processing in energy and data channel processing though SDN/OpenFlow architecture in telecom. Our architects, consultants and developers utilizing their significant engineering experience with large business-critical applications, combined with expertise in Hadoop-based systems development, engineered a solution accelerator and data transformation engines for low-risk adoption of Hadoop to specific corporate requirements and rules. We partner with one of the market leaders in big data platforms for enterprises, Cloudera, and implement its innovative technologies to maximize value of Hadoop adoption for enterprises.
Distributed Ledger Technologies (commonly known as blockchain) are recognized as a likely disrupter of business models across most industry eco-system. Over the last three years, Luxoft has invested resources into understanding and building our blockchain expertise.
Luxoft is a founding member of the Crypto Valley Association, established partners with Chain, R3 and Evernym, and one of six IT consulting and services companies with blockchain capabilities available to Amazon Web Services (AWS) users. We focus on enabling companies to adopt a blockchain strategy quickly and easily while engaging closely with stakeholders to ensure it delivers business value.
We have a long-term technology strategy which enables us to work with a customer to evaluate whether blockchain makes sense for the selected use-case.
We then help clients pick and choose a solution that will deliver the highest value, whether that be the best individual platform or a combination of ledger technologies.
DevOps
The need for a defined DevOps focused center of excellence ("CoE") has been gaining momentum. This has been driven by the need to reduce friction between development and operations groups within organizations that historically have been focusing on different and usually conflicting goals. Applying DevOps approaches and culture leads to numerous improvements including faster time to market, higher quality code delivery, increased infrastructure stability, enhanced scalability and automation of controls and development processes. All of these improvements lead to reduced costs and increased effectiveness of our clients' businesses. We currently have Continuous Delivery Transformation and Infrastructure
Automation offerings that are relevant for virtually all lines of business.
Digital Experience
Our user interface/user experience/HMI practice consists of concept development, prototyping and design development for car connectivity systems based on various user studies. Its main focus is to create products and solutions that can manage and then present information in the car without distracting the driver, while making the in-car experience seamless, effortless and interactive. Our engineers have years of experience in developing efficient, intelligent, reliable and user-friendly HMIs for the world's leading automakers. We believe that these car features can become a distinct part of the brand strategy and value, and thus represent a competitive advantage for the OEMs.
Internet of Things (IoT)
Luxoft
IoT helps our clients find the right end-to-end solutions that integrate hardware, applications and cloud services to maximize the impact to their operations. The Luxoft IoT team has helped clients in a variety of industries including manufacturing, retail, high tech, communications and aerospace. Since our purchase of Radius Inc. in October 2014, we have continued to build out this domain practice and to advance our IoT offerings across all lines of business. We are advancing our intellectual property ("IP") and solutions portfolio using both internal resources as well as our marketing platform.
Mobility
Our mobility practice offers our clients full product life cycle development of mobile applications. Our engineers have expertise in mainstream mobile platforms, including iOS, Android and others, as well as specific frameworks for cross-platform development. These frameworks
allow rapid building and deployment and cost effective maintenance of products for a range of consumer devices, while providing a unique user experience. Our services span through every functional area, from user interface design to development of server-side solutions to integration with enterprise back-end applications and payment systems. Our broad project portfolio includes a number of innovative applications—such as enterprise dashboards, media monitoring systems, animated user guides, electronic document management, booking and reservation and home automation solutions—for the travel, financial services, retail, energy, automotive and other industries.
Our services
Our software development service offerings consist of three primary categories:
We provide a comprehensive set of core and mission critical software development services, including application software development, software architecture design, performance engineering, optimization and testing, process consulting and software quality assurance, to enterprise clients in our financial services, automotive and transport, travel and aviation, and energy verticals. Our services span the entire development lifecycle, and combine sophisticated processes for solving complex problems with domain and business knowledge, project management tools and global delivery capabilities. In certain cases we also provide maintenance and support services for the software and applications that we have developed for our clients. In addition, we provide re-engineering and migration services for transferring
legacy applications to our clients' new operating systems and enhancing their functionality.
Product engineering and testing
We provide a wide range of product engineering services for the full product lifecycle, including functional specification and mock-ups, product design, engineering, automated testing, maintenance, support and performance engineering, to our clients in the technology, telecom, automotive and transport and energy verticals. We provide product engineering services by assembling specialized teams of IT professionals who use Agile development methodologies to deliver our work product incrementally.
Technology consulting
Our technology consulting services are designed to address clients' needs in each of our three lines of business, while leveraging our in-depth expertise in
technology and our best practices to optimize our clients' software processes and data security procedures. Our technology consulting services generate a small portion of our sales and include IT strategy consulting, software engineering process consulting and data security consulting. We use our best practices, methodologies and frameworks to assist clients in establishing and improving their software development processes, including metrics analysis, quality control and appraisal procedures.
These elements are of extreme importance to our customers at a time of disruptive change in their respective sectors.
Our solutions
Our solutions, consisting of products and platforms, are a small, but growing portion of our business model. We intend to increase future sales using our organically built and acquired products as standalone software
and as a part of our software development services offering. Our platforms are also a part of our proprietary solutions portfolio that we utilize within the scope of our software development services to clients. From time to time we make available parts of our platforms under non-commercial open-source licenses to allow potential users to quickly evaluate the characteristics of the technology, but these components are not sufficient for a commercial use.
Our products and platforms include the following:
Our platforms
Populus. Populus Suite is a complete tool chain for HMI design, HMI development and the deployment of automotive user interfaces for distributed embedded systems. It minimizes the time and cost of producing full-featured automotive HMIs. Populus has been designed for the automotive industry to deliver
high- performance car user interfaces with a short time-to-market and efficient software life cycle management. Populus Suite is built upon a concept called Database Driven Human Machine Interface. Populus Editor is used to create the entire HMI layout and HMI logic in an XML database. It is also used to specify the functional interfaces to the applications that are part of the system. These applications are called Functional Units. An HMI design is created and verified in Populus Editor without having to write any software. The HMI is stored in a database and downloaded to the target environment in a binary format for improved efficiency. The HMI database contains all of the HMI logic and appearance. Populus Engine executes the HMI layout in run-time and communicates with the applications using the Open Display Interface protocol. The software needed for supporting this protocol can be automatically generated for the applications from the Populus Editor. The Editor
supports team collaboration and reuse of HMI parts between projects. An HMI can be divided into parts of any granularity and every part is a stand-alone unit which can be re-used by other HMI developments. The HMI design can be done directly within Populus Editor. Populus covers the entire HMI development process, from creating a system HMI architecture to developing a series production HMI ready for download to the embedded target.
Qt Automotive Suite. The Qt Automotive Suite was released in 2016, and we continue to build upon the suite and progress its development. Qt empowers developers to create stunning user experience and ease the integration toward the system backend. For frontend QML enables developers to composite beautiful UI screens by combining UI elements in a storytelling way. Qt also supports backend developers to mix QML with C++ components to fit the backend logic or Integration toward
micro services through IPC. While Qt Automotive suite complements the solution by providing multi-process and multi-app architecture through Qt Wayland Compositor and Qt Application Manager.
AllView. AllView is a holistic user-experience demonstrator. AllView utilizes Luxoft's reference design platform to create an in-vehicle user experience, or UX. AllView links together instrument cluster, head unit, head-up display and mobile devices. Based on our original, reference automotive grade user interface design and a combination of in-house and emerging third party technologies, AllView enables Luxoft to demonstrate to OEMs how to optimize
a car user experience and improve safety by reducing driver distraction, while encouraging third-party application development and introduction of new technologies such as touch, eye tracking, and native language recognition.
Symtavision Tools. We provide software tools and consulting services focused on scheduling analysis, architecture optimization, and timing verification. These tools and services are for planning, optimizing, and verifying embedded, real-time systems within all modern automobiles. Symtavision tools, building on our proprietary intellectual property, focus on increasingly important software integration and timing analysis in the chassis, powertrain, body, and driver assistance domains as well as in-vehicle networking. As the automotive industry increasingly adopts and implements Advance Driver Assisted Systems (ADAS) and Driver Automation, the demand for tooling and expertise around
real-time systems design and development creates a growing opportunity. Symtavision Timing Analysis Tools are market-leading for scheduling analysis, architecture optimization, and timing verification for ECUs and software integration, embedded networks, communication and distributed embedded systems (E/E).
Pelux. Pelux is a base development platform designed to provide the building blocks for automotive software development projects, which is now available on Open Source. PELUX 1.0 was developed from Luxoft’s PELUX software suite, which for over four years helped carmakers and tier one suppliers to develop converged automotive systems for infotainment, autonomous driving, body control and communication. PELUX 1.0 leverages well known open source projects such as Linux, Yocto and GENIVI in order to provide a base development platform. The platform is complemented with project blueprints and documentation
that provides a state of the art development experience in embedded Linux device creation, tailored specifically to automotive needs. Luxoft Automotive’s PELUX team leverages Open Source, Agile ways of working and smart integration concepts enabling carmakers to build next generation in-vehicle infotainment systems and accelerate HMI development projects.
ARP. ARP is Luxoft’s Automotive Hardware Reference Platform developed together with Intel. It is uniquely positioned to drive co-creation of smart solutions in the following areas: Designing for advanced prototyping of Digital Cockpit platforms; Capable of driving a vehicle’s instrument cluster, head unit display, cockpit occupant monitoring and driver assistance systems simultaneously; On-board FPGA - powerful expansion capabilities for advanced I/O requirements; Interchangeable SoC modules (supporting both Intel & ARM architectures) via open SMARC
2.0 standard; Fully supported by PELUX / Qt Automotive Suite software stacks. With ARP, Luxoft demonstrates the capabilities of the Silicon and Technology Vendor Practice as well as thought leadership through a unique technology knowledge portfolio that cultivates both the understanding of silicon, sensor, display, AI technologies as well as the relation between human and machine.
Our Lines of Business
We have developed specific expertise and grown our business in three lines of business:
•
Financial Services;
•
Automotive
and Transport; and
•
Digital Enterprise.
The following table sets forth our sales by line of business, both by dollar amount and as a percentage of our sales for the period indicated:
Financial Services is our largest line of business. Since we began working with financial services companies as clients in 2003, we have been engaged by global institutions to develop, deploy and maintain a broad range of systems. We provide our clients with complex, end-to-end engineering services and solutions, such as the development of trading platforms, risk management
systems, clearing and settlement solutions and low latency exchange connectivity adapters. We have also developed comprehensive risk visualization and mobile products and platforms that are specifically focused on clients in the financial
services sector. We possess not only expertise in technologies that are crucial for financial services players, such as big data, mobile, cloud and information security, but also in reference data management, risk management, and others.
Banks are currently aiming to streamline and simplify their IT infrastructure in response to narrowing margins and elevated regulatory and compliance requirements. As a result, they are deploying standard software solutions for core banking, enterprise trading and risk management. Our acquisition of Excelian, completed in February 2015, helped us enter this segment of the market. We help our clients to execute highly complex, business critical, technology transformation projects with precision and competitive pricing. Our Financial Services line of business provides an array of consulting, solutions, and system integration services to investment banks, commercial banks, asset managers, wealth
managers and private banks world-wide. We have partnered with major platform providers in this space, such as Murex, Calypso, and Avaloq that provide turnkey products. We also perform implementation of other packaged solutions like PEGA and IBM BPM. This allows us to embed our services into the ecosystem of the banks, providing end-to-end services around standard packages and custom software development, thereby gaining wallet share within our HPAs.
During fiscal year 2018, we continued to gain market share within the capital markets industry, particularly within wealth management, due to our unique combination of technology skill and deep understanding of the financial services market. We are also beginning to expand into Tier 2 banks, which have a high growth potential. Over the last 14 years, we transformed from a CEE software outsourcing partner to a global consultancy, operating in four regional markets (CEE, Western
Europe, North America, Asia Pacific). We've also expanded our delivery hubs from a local base in Europe to locations in North America and APAC. We will continue to focus our efforts on building a diversified business portfolio in the growing segments of the financial services market.
Automotive and Transport
In our Automotive & Transport line of business, we provide product development and system engineering services to various categories of automotive and transport industry players including car manufacturers (OEMs), tier-one and tier-two suppliers and diversified service companies. We enable the mobility revolution by co-creating smart solutions that empower our clients to make the transition to sustainable mobility. We have deep industry and technology know-how and the global delivery scale that allows us to partner independently with OEMs and tier-one suppliers.
Our
services cover the entire product development cycle from innovation vision and design to prototyping, development, system testing, verification and infield car drives. We have several platforms and products that may significantly reduce time and efforts required for development of new IVI and HMI solutions by our clients. Currently, our portfolio includes such products, platforms and demonstrators as Qt Automotive, Pelux, Populus, Allview. We are an active member of different industry associations focused on developing unified standards for Automotive systems, such as Autosar and GENIVI.
The automotive industry is currently experiencing rapid technological evolution driven by digital disruption and electrification of the vehicles, requiring complete re-design of in-vehicle architectures and off-board service infrastructure. We view ourselves to be one of the few sizeable independent software development service providers in
the automotive space. To further capitalize on this position we have developed expertise in Autonomous Driving space as well as enhanced our offering within Digital Cockpit space through the acquisition of Pelagicore, to complement our existing expertise in the IVI area. We fully integrated Pelagicore in fiscal year 2018 and continue to serve a large number of blue-chip corporations, enjoying industry recognition as thought leaders in the HMI space with deep expertise in open source technologies, the cross-platform user interface development framework Qt, and in IVI systems. Our end-to-end offering for our clients is covering four major areas:
•
Autonomous Driving - we offer system architecture and network design, along with large-scale integration of autonomous
technologies for Tier-1 suppliers. We additionally enable faster and higher quality software development with our technology & expertise-driven services in the areas of timing analysis and automated data annotation.
•
Digital Cockpit - we engineer solutions enabling carmakers to develop user experiences that are natural extensions of consumers digital lifestyles
•
Connected Mobility - we enable intelligent services in the cloud and connect the vehicle to core business processes. For example, remote diagnostics
is becoming increasingly important from the connected car advancement and safety standpoints. Remote diagnostics allows gathering data from the vehicle fleet in the field and using diagnostic tools to understand the condition and the performance data in each vehicle.
•
Silicon Vendors and Technology Partners - we collaborate with a variety of silicon vendors and technology partners in order to offer offer silicon software development and consulting services. These services include board support packages, Linux driver and related hardware enablement, and compiler and tooling support.
Our Digital Enterprise line of business supports digital transformation and capabilities across a wide variety of industries:
Media, Telecommunications, & Networks
Today's telecom & wireless carriers and Multiple System Operators (MSOs) face intense competition, profit margin pressures, challenges relating to network capacity, speed and quality, and new generation technologies requiring significant infrastructure investment. Our field engineers, software developers, solution architects and data scientists are currently engaged in networking and data communication development projects for several leading global infrastructure equipment and network analytics, service providers as well as test and measurement
market leaders in the telecom and networking industry sector. We predominantly deliver our services and solutions within the following four areas:
•
Analytics—we are working closely with our customers to understand their customers digital experience. Through Analytics, we are helping this specific global service provider understand how customers are using their infrastructure. This insight helps plan for current and future infrastructure needs. This "infrastructure" is not just your normal networking type infrastructure but also the OTT content that is running. We are helping our customers look at the networks and services in different ways to provide the best customer experience and increase revenue opportunities.
•
Over-the-top
content providers—in January of 2017 we have completed an acquisition of IntroPro, an engineering consultancy with deep expertise in complete lifecycle of enterprise and embedded software architecture, development, testing and QA, maintenance and managed services for content delivery. It is specifically focused on TV, Media, and Entertainment industry. Thus, this acquisition further deepened our vertical expertise and widened our offering for the wireless and cable/satellite providers.
•
Chatbots—we have seen strong interest in our chatbot technology to aid in customers retention and new customer services. During this year we have executed on our first communications chatbot offering with another
tier-one communications service provider in the U.S. This CSP is using Chatbot technology coupled with our work in AI to help in customer retention. Working with Customer Services divisions of our clients, we are providing a first responded chatbot to aid in customer support. We feel that this will help improve customer satisfaction and reduce operating costs.
•
Network Function Virtualization (NFV)—we continue see strong movement by service providers around NFV. Because of the immaturity of the standards and lack of tools required to deploy additional testing, our SDL (Software Defined Lab) assists communication providers in much needed testing and assurance measurement aspects. Based on our expertise with Network Equipment
Manufacturers, we have been in development of SDL for over 2 years. SDL will equip communications providers with a vendor-agnostic testing tool that can be used virtually, physically and as a hybrid. Thus, as communications providers look to reduce costs by moving to NFV, they can test a variety of scenarios in the environment of their choice.
Our capability to understand and add value to our customers' efforts depends on our ability to learn these new and emerging technologies at a rapid pace, and applying our knowledge in the carrier and enterprise environments. Our core engineering development services, including test automation, remain a valuable contribution to our customers' product plans. Furthermore, we see a tightening of the skills resource pools in our customer base, making our ability to recruit and hire talent particularly attractive to our customers.
Healthcare
and Pharmaceuticals
We believe our company is ideally positioned to leverage deep expertise of technologies, digital solutions and global scale to support significant opportunities across the Healthcare & Life Science landscape. Through our recent acquisition of Insys Group, Inc. we have obtained an existing client base in the payer/provider and large pharma segments. We are building this vertical to become one of the four verticals of our focus and believe that these two segments will be exposed to leading technology capabilities that drive both operational efficiencies (automation, analytics, cloud adoption, user experience) and business model innovation (NLP, IoT, AI, blockchain).
At the same time we plan on further investments into broader industry resources, acquiring talent and capabilities
from across the Healthcare and Pharmaceutical domain, focusing on deep client relationships and delivery-based reputations. We aspire that these investments will complement the existing technology assets and gain us greater access to other parts of the eco-system in this vertical, including contract research organizations, medical devices and biotechnology companies, and service providers.
Travel and Aviation
The travel industry faces many challenges, including changing regulatory and security requirements, fluctuating fuel prices, intense competition and industry consolidation. Therefore, OEMs, suppliers, airlines, aircraft manufacturers, e-commerce
travel providers and other participants in the travel and aviation industry are looking to optimize their operating expenses, reduce environmental impact and improve passenger comfort, convenience and safety. Our capabilities include design of engineering data, management and flight control systems, aircraft assembly and maintenance, airport ecosystem management and e-commerce and reservations system solutions for clients such as airlines, hotels, car rentals companies, travel agencies and cruise lines. There are two different types of IT needs generated within the travel and aviation industry: one is for airlines and hotels, which require product approach, and the other is for Global Distribution Systems ("GDS") companies, which largely look for technology services.
Technology
Our
technology expertise focuses on independent software vendors, chipset and computer electronics vendors and computer hardware providers who rely on us to help them create innovative software-intensive products, solve software integration challenges and create and implement complex algorithms, while helping to manage their costs. Partnering with us allows these vendors to increase their efficiency, for example by reducing time-to-market for their products and enhancing R&D productivity. We deliver embedded development and system verification of software components and tools for hardware produced by our technology clients, as well as high-performance transactional systems, real time embedded applications and application security. Additionally, as we continue to grow our global operating platform and software delivery capacity, we seek to have more of these customers engage us as a channel partner to deliver their product or service to their end customers.
Energy
& Utilities
Electricity transmission and distribution. We provide software and hardware development services to leading energy companies, smart grid vendors, energy service companies, energy solutions vendors and energy equipment manufacturers across the globe. We primarily provide distributed energy resource management, renewable generation monitoring and control, smart grid and metering solutions in the following areas: distribution and outage management; energy transmission management; market management; substation automation; supervisory control and data acquisition integration; solution integration and deployment. We have also independently developed innovative cloud-based renewable generation monitoring and control solutions, such as LuxSolar, which helps to aggregate, analyze and forecast generation from renewable sources of energy.
LuxSolar. We
provide solar system monitoring and control platform that would collect data from different devices (inverters, battery controllers and smart meters using IoT devices such as Raspberry PI that can be accessed wirelessly), clean, aggregate and analyze it, then store and visualize the data for customers of solar panel producers, electric utilities and industry vendors. We created a Web Portal for utilities, solar equipment manufacturers and end-users to monitor the systems installed. The portal has integrated GIS support with social media using a variety of pre-defined dashboards and diagrams, and system alerts.
Oil & Gas. We provide software development services for certain key industry vendors. We help with development of solutions on fields of transportation, geological and geophysical data visualization and interpretation, production allocation and modeling, field digitalization and unconventional
resources production enhancement. As technology development is the main driver for production costs optimization we expect opening new horizons with advanced analytics of reservoir testing and borehole seismic systems development. With this understanding we have developed two innovative products for this industry, which help to utilize information visualization on mobile platforms in a real-time collaborative manner:
Mobile Field Module (Mobile FM): Mobile FM is a software platform designed specifically for the Oil and Gas production filed digitalization. It significantly simplifies the process of collecting production data on oil and gas fields, and allows field engineers to use necessary parts of entire enterprise systems in the field, even without an internet or mobile connection. Mobile FM provides the functionality for entering, validating, processing and storing such types of data as daily readings,
oil hauls, well tests, gas analysis, downtimes, purchaser statements, integrated volumes, monthly LACT tickets and other. This platform enhances the existing process, and makes it more efficient and reliable by reducing human error. This solution can be implemented on such mobile platforms as Android, iOS and Windows Phone, which allows use of the full range of mobile functionality, such as geolocation and camera features, making the field engineers' work simpler and faster.
Geo Viewer: Geo Viewer is a smart suite of applications that uses a scientific approach to visualize geophysical and geological data for the petroleum industry. This application equips users with instant access to graphical representations of exploration data and with an innovative user interface that tells a story behind the numbers in a context that stakeholders understand. Geo Viewer provides an extensive set of advanced tools
to display geoscience data such as 2D/3D seismic data, well logs, survey deviation and scientific plots. It is lightweight, portable and compatible with all major devices and browsers, so it allows dynamic views and interacts with both remotely and locally stored data. The viewer set is implemented on Java technology as a platform-independent solution. It is easy to integrate with corporate systems and is installed and maintained on the server, enabling simple deployment and maintenance without a time-consuming installation process.
With a presence in 21
countries, offices in 42 cities and delivery centers in 37 cities, we service multinational organizations through our global dedicated delivery model that comprises an optimized mix of nearshore, offshore and on-site delivery capabilities.
During the fiscal year ended March 31, 2018, we expanded our delivery network organically and via acquisitions. This is in line with our strategy for continued growth and diversification of global sales and delivery. In order to meet increasing demand for our engineering services and deep domain expertise, we opened new delivery centers in Eindhoven, Berlin, Bangalore, and Tianjin.
We employ a number of on-site IT professionals in Canada, Germany, Singapore, Switzerland,
the United Kingdom, and the United States. The sophistication of our offshore delivery centers has allowed us to keep approximately 84% of our delivery personnel offshore as of March 31, 2018, deploying personnel to client sites on an as-needed basis. Our on-site and offshore delivery teams are linked through common processes, collaboration applications and tools, and a secure communications infrastructure that enables global collaboration. This connectivity gives our clients a choice between managing their work through offshore, near-shore and on-site delivery or any combination thereof.
As of March 31, 2018, we employed 1,872 IT professionals in Russia, representing approximately 17% of our IT professionals. Our Russian delivery centers
leverage the country's advanced technological climate and engineering legacy to build a talented, motivated team of IT professionals.
As of March 31, 2018, we employed 3,265 IT professionals in Ukraine, representing approximately 30% of our IT professionals. Our operations in Ukraine leverage a strong talent pool and relatively low average wages to provide effective software development services to both national and global clients.
As of March 31, 2018, we employed 1,477 IT professionals in Romania, representing approximately 14% of our IT professionals. Our operations in Romania leverage a substantial talent pool that primarily services clients within the telecom vertical. Romania, a member
of the European Union, provides geographic and cultural proximity to our clients throughout Europe and plays an important role in our global dedicated delivery model, providing geographic diversification and cost effectiveness.
As of March 31, 2018, we employed 1,741 IT professionals in Poland, representing approximately 16% of our IT professionals. According to the May 2017 Gartner Report, "The Polish government established 14 Special Economic Zones, which have attracted investors to Poland through incentives such as tax rebates. Polish Information and Foreign Investment Agency is one of the organizations backed by the government, dedicated to support investors planning to locate in Poland. Poland is part of the European Union and is familiar with Western culture. A common cultural understanding is beneficial in ease of doing
business, and Polish natives understand the context in how organizations operate in the U.S. or Europe."
As of March 31, 2018, we employed 978 IT professionals in North America, representing approximately 9% of our IT professionals. This number should continue to grow as we increase our focus on this market.
Quality and process management
We have built a suite of comprehensive, customized applications and tools to manage the quality, security and transparency of our delivery process.
Our quality management system is ISO 9001:2015, ISO 27001:2005 and CMMI level 5-certified to ensure timely and high-quality delivery to our clients. This system enables clients to objectively evaluate our performance
against their standards and procedures by identifying, documenting and resolving non-compliance issues and providing feedback to the client's project staff. It also includes systematic problem prevention activities like internal audits and causal analysis and resolution programs that detect root causes of problems and prevent them from occurring in the future.
We assure the quality of our execution via Delivery Transparency and Maturity controls that cover all of our delivery centers, provide comprehensive reporting on project execution and assessment of management quality, and enable proactive preventive and corrective actions concerning delivery milestones, quality and customer satisfaction.
We have developed the LuxProject system, a web-based collaborative project environment for software development that we consider critical to meeting the service levels required by our clients.
LuxProject is designed to reduce risks and provide control and visibility across all project lifecycles. Key features include:
•
multi-site, multi-project capabilities;
•
support of several types of software development processes, including waterfall, iterative and Agile;
•
tracking of all software development
activities;
•
role-based access control;
•
fully configurable workflow engine with built-in notification and messaging;
key
performance tracking indicators and broad reporting capabilities;
•
integration with Microsoft Project and Outlook; and
•
24x7 secured web-based and remote access for users.
LuxProject provides full transparency for work done by distributed teams aligned with best practices in the software development industry.
Clients
Our clients include large multinational corporations
in the financial services, automotive and transport, healthcare and life sciences, travel and aviation, technology, telecom, energy, and other industries. We have longstanding relationships with many of our clients, and five of our top ten clients have been with us for five years or more. We derive a large portion of our sales of services from clients who operate in a limited number of industries. In the fiscal year ended March 31, 2018, we derived 56.7%, 17.5% and 25.8% of our sales of services from clients operating in the financial services, automotive and transport, and digital enterprise industries, respectively. We have derived, and believe that in the foreseeable future we will continue to derive, a significant portion of our sales
from a small number of major clients. See "ITEM 3. Key Information—D. Risk Factors—Risks related to our business and our industry—We derive a large portion of our sales of services, and expect that we will derive a large portion of our sales of products, from clients who operate in a limited number of industries. While this gives us deep expertise in those industries, it increases our exposure to adverse conditions in any of them."
In the fiscal year ended March 31, 2018, our ten largest clients accounted for 57.6% of our sales. This includes both Deutsche Bank and UBS, whose relationships are described below. No other client represented more than 10.0% of our total sales. For the risks associated with our dependence on these major clients, see "ITEM 3. Key Information—D. Risk
Factors—Risks related to our business and our industry—We generate a significant portion of our sales of services, and anticipate deriving a large portion of our sales of products, from a limited number of clients and any significant loss of business from these clients or failure by such clients to pay for our services could materially and adversely affect our results of operations."
Our largest client is Deutsche Bank, with whom we have worked since 2003 and which accounted for 17.6% of our sales in the fiscal year ended March 31, 2018. Our outsourcing master service agreement with Deutsche Bank (the "DB Agreement") will be up for renewal on December 1, 2020. Typically we renew such client agreements upon their expiration in
the ordinary course of business. Prior to this date, the DB Agreement can be terminated by Deutsche Bank if, among other things: we commit a material breach of the DB Agreement and do not remedy it within 30 days; we breach the confidentiality provisions of the DB Agreement; we become insolvent; we experience a change of control; we experience more than a set amount of service level defaults or service disruptions; or a dispute arises regarding the credits owed to Deutsche Bank in the case of service defaults. We may terminate the DB Agreement if Deutsche Bank does not pay us, and does not remedy the non-payment within 30 days. Deutsche Bank can terminate the DB Agreement without cause by giving six months written notice. In addition, Deutsche Bank may terminate individual work orders of Framework Service Descriptions (year-long interim agreements) entered into under the DB Agreement with prior written notice.
UBS is our second
largest client which accounted for 17.1% of our total sales in the fiscal year ended March 31, 2018. The Global Framework Agreement (the «UBS GFA») signed with UBS in 2010 is up for renewal on September 30, 2019. Typically we renew such client agreements upon their expiration in the ordinary course of business. Either party is entitled to unilaterally terminate the UBS GFA for common business reasons such as: a material breach not cured within 30 days including non-payment of fees by UBS; in case of insolvency and/or winding-up procedure; entering into credit arrangements or court applications to protect assets from creditors. UBS can terminate the UBS GFA, among other reasons, in case of: our breach of the security and confidentiality undertakings; our staff turnover exceeding
a set threshold level during 6 months; a change of control event. Additionally, UBS can terminate the UBS GFA and any service order for convenience upon a 60 day written notice. For further discussion, see "ITEM 3. Key Information—D. Risk Factors—We generate a significant portion of our sales of services, and anticipate deriving a large portion of our sales of products, from a limited number of clients and any significant loss of business from these clients or failure by such clients to pay for our services could materially adversely affect our results of operations."
For the past several years, we have been building up a portfolio of HPAs. These are accounts that we believe have recurring annual revenue potential of at least $5 million within three years from the inception, and are capable of generating a three-year CAGR of at least 30%. Currently we have 55 such accounts,
representing a large variety of industries, including certain industries outside of our current core lines of business (such as healthcare, insurance, and retail).
The following table sets forth sales by our top five and top ten clients, by amount and as a percentage of our total sales for the periods indicated:
Our B2B (business to business) marketing and sales teams are organized by industries and located in London, Stuttgart, New York and Kirkland. The teams are focused on positioning Luxoft brands and offerings in key markets, growing brand awareness, and driving leads. In addition, we have an Employer Branding division that is focused on positioning Luxoft as an employer of choice in key markets where we hire talent and driving candidates to our recruitment pipeline. Our sales and marketing teams focus on expanding service offerings with existing clients and targeting new clients through subject matter technical experts responsible for business development. As part of our focus on increasing sales capabilities, we continue to invest in our sales organization. We have been increasing our number of client-facing practice - and line of business-focused senior staff who are located in key geographies (such as the United
Kingdom and the United States). These client-facing representatives manage relationships with new and emerging clients.
Further, we continue to increase the presence of on-site senior technology specialists who work with our clients internal IT teams.They provide process transformation consulting and aid internal IT process optimization, intended to generate cost savings to these clients.
Our strategy for winning new business includes:
•
Organic growth and expansion. This includes expanding our services into new areas of existing clients' businesses, and engaging in higher complexity work for clients who originally engaged us for more basic projects.
Referrals. Our strong reputation, along with excellent references from existing clients, provides a healthy pipeline of engagements and contacts from new and prospective clients. Many of the new companies that have become our clients in recent years have done so as a result of referrals from client decision makers who have worked with us and subsequently changed employment.
•
Brand
management, marketing and external relations activities. We actively participate in select industry trade shows, conferences and promotional events. These enable us to demonstrate our technological solutions and platforms and interact with industry representatives, analysts and potential clients. We also have a targeted external relations strategy that includes cultivating relations with industry analysts and research firms such as Forrester and IDC, along with third party advisory firms such as ISG, KPMG, Deloitte, and Avasant, and with the global media outlets. We are increasing our investments into brand equity and develop programs that increase our brand recognition in the key geographies for our brand recognition, such as Western Europe, APAC and the United States.
During the fiscal year ended March 31, 2018
we were recognized or mentioned by prominent independent technology research firms.
Luxoft was among the leading providers in The Breakthrough Sourcing Standouts category for the Americas, EMEA, APAC regions based on annual contract value won over the last 12 months, according to the ISG Global Outsourcing IndexTM.
•
Gartner, "Market Guide for Blockchain Consulting and Proof-of-Concept Development Services" authored by David Groombridge et al. and published on March 20, 2018.
•
Gartner,
"Competitive Landscape: Agile and DevOps Services" authored by Patrick Sullivan et al. and published on January 28, 2018.
•
Gartner, "Market Guide for Agile and DevOps Services" authored by Neil Barton et al. and published on October 31, 2017.
•
Gartner, "IoT: Think Big, Start Small, Move Fast" authored by Denise Rueb et al. and published on October 15,
2017.
•
Gartner, "Competitive Landscape: Mobile Application Testing Services" authored by Susanne Matson and published on August 25, 2017.
•
Gartner, "Hype Cycle for Personal Technologies, 2017" authored by Brian Blau and published on August 1, 2017.
•
Gartner,
"Hype Cycle for Connected Vehicles and Smart Mobility, 2017" authored by Martin Birkner et al. and published on July 28, 2017.
•
Gartner, "Hype Cycle for Drones and Mobile Robots, 2017" authored by Gerald von Roy et al. and published on July 28, 2017.
•
Gartner, "Hype Cycle for Hybrid Infrastructure Services, 2017" authored by Christine Tenneson et al. and published on July
26, 2017.
•
Gartner, "Hype Cycle for Managing Operational Technology, 2017" authored by Kristian Steenstrup et al. and published on July 25, 2017.
•
Gartner, “Hype Cycle for Artificial Intelligence, 2017" authored by Kenneth F. Brant et al. and published on July 24, 2017.
•
Gartner,
"Hype Cycle for the Internet of Things, 2017" authored by Alfonso Velosa, et al. and published on July 24, 2017.
•
Gartner, "Hype Cycle for Mobile Device Technologies, 2017" authored by Tuong Huy Nguyen, et al. and published on July 21, 2017.
•
Gartner, "Hype Cycle for Application Services, 2017" authored by Kris Doering and published on July 20, 2017.
•
Gartner,
"Market Guide for Mobile Application Testing Services" authored by Susan Matson, et al and published on June 28, 2017.
•
Gartner, "Market Share Analysis: Consulting Services, Worldwide, 2016" authored by Dean Blackmore, et al. and published on May 30, 2017.
The Gartner Report(s) described herein, (the "Gartner Report(s)") represent(s) research opinion or viewpoints published, as part of a syndicated subscription service, by Gartner, Inc. ("Gartner"), and are not representations of fact. Each Gartner Report
speaks as of its original publication date (and not as of the date of this Annual Report]) and the opinions expressed in the Gartner Report(s) are subject to change without notice.
We grow and develop talent through a combination of professional training and mentorship programs involving senior technology specialists and industry experts. Each new hire is exposed to a training curriculum that covers methodology and industry standards, technologies and tools, management and communication skills, software engineering processes, and domain knowledge.
Additionally,
our four training centers in Russia, three in Ukraine, one in Romania, one in Bulgaria, four in Poland, two in the UK, two in Germany, two in the United States, one in Vietnam, one in Malaysia, one in Mexico and one in India conduct more than 3,000 training sessions per year and host over 15,800 specialists (including our personnel and external students) for general training courses and client-specific education programs. We typically conduct between 200 and 300 resident training sessions per month with an average of 10 students per group, and fulfill nearly 1800 additional training requests per month via our e-learning system via LuxTalent and E-learning library.
During fiscal 2018, we completed 260 four-month foreign language training requests for English, Polish, and German. Our training program delivers different professional competencies, including disciplines rarely covered by university curriculums, such as system analysis,
system architecture and project management.
Each new hire is placed on a probation period for up to six months. During this time, new hires become part of a mentoring, monitoring, coaching and motivational program. Each IT professional is assigned to a People Manager, who is responsible for project evaluation, performance appraisal and planning of professional development of the new hire. Additionally, each IT professional undergoes a performance appraisal session at least once a year to measure technical performance, teamwork skills and possession of the core competencies required for his or her respective role within the Company.
Recruitment and retention
We believe our
Company's culture and reputation, along with the talent in the regions in which we operate, enhances our ability to recruit and retain sought after IT professionals. As of March 31, 2018, we had a dedicated human resources staff of 526 people including 250 recruiters and researchers. During the fiscal year ended March 31, 2018, we hired on average more than 500 IT professionals each month.
In order to keep our attrition rate low, we focus on retaining our personnel through mandatory monthly evaluation reports, an employee rotation program and a targeted approach to enable different career opportunities within the Company. We motivate and promote
key personnel through our High Performers Club, which identifies personnel with strong management potential and offers them additional training as well as direct interaction with top management. We also offer executive training programs, corporate MBA programs and executive leadership programs at top schools including the University of Pennsylvania, Harvard University, Stanford University and Massachusetts Institute of Technology, in which several of our top managers have already participated.
Competition
The markets in which we compete are changing rapidly and we face competition from global and Asia-based IT services providers as well as local providers based in CEE. We believe that the principal competitive factors in our business include breadth and depth of service offerings, technical expertise and industry knowledge, reputation and track record for high-quality and on-time
delivery of work, effective personnel recruiting, training and retention, responsiveness to clients' business needs, ability to scale, financial stability and price. Our industry is split between low-cost vendors that provide inexpensive, commoditized services and high-cost vendors that provide specialized and complex services at a premium cost. Our ability to provide complex, customized services at competitive cost has positioned us between these two classes of vendors.
We face competition primarily from:
•
IT service providers in India, such as Cognizant Technology and Infosys;
•
Global
multinational consulting and outsourcing firms such as Accenture, Capgemini and CSC;
•
Local CEE technology outsourcing IT service providers such as EPAM; and
•
In-house IT departments of our clients and potential clients.
Although we do not often compete for engagements with providers in Brazil, China, Israel or Mexico, we may experience competition from vendors in these countries in the future. We believe that we have a strong competitive position in the
market for complex software outsourcing and custom application development based on third-party industry rankings and client feedback. We believe our focus on complex software product development services, our skilled technical personnel base and continuous improvement of process methodologies, applications and platforms positions us to compete effectively in the future. Furthermore, we believe that the barriers to entry into our niche segment are relatively high, as new entrants must secure substantial amounts of financial and high-quality human resources to provide adequate services, flexibility and scale to compete for a comparable client base. See "ITEM 3. Key Information—D. Risk Factors—Risks related to our business and our industry—We operate in a highly competitive environment and may not be able to compete successfully."
We rely on a combination of intellectual property laws, trade secrets, confidentiality procedures and contractual provisions to protect our intellectual property. In addition, our intellectual property is protected under a number of international conventions. Russia, Ukraine, Romania, Poland and the United States are participants to the Berne Convention for the Protection of Literary Artistic Works and the Stockholm Convention establishing the World Intellectual Property Organization. Russia, Ukraine and the United States participate in the Universal Copyright Convention adopted under theGeneva Convention The United States, Ukraine and Romania participate in WTO agreements including the Agreement on Trade-Related Aspects of Intellectual Property Rights and ITA. We also rely on local civil legislation to protect our
intellectual property rights.
We customarily enter into master services agreements or general framework agreements with our clients that include terms for the transfer and use by our clients of intellectual property created by us. All intellectual property rights created by our employees and contractors are transferred to us subject to local laws and regulations and terms of agreements entered into with such employees and contractors. Most of our software development services are specifically ordered and custom-built for the client, and therefore all intellectual property rights created by our employees and contractors are transferred to the client at the time of delivery. Furthermore, our agreements with clients typically contain provisions that allow us to grant a perpetual, worldwide, royalty-free, non-exclusive, transferable and non-revocable license to our clients to use our own intellectual property, but only to the extent
necessary in order to use the software or systems we developed for them. Historically, we have rarely relied on and granted licenses under these provisions, but may do so in the future as we seek to commercialize our solutions. Sometimes the intellectual property rights for some of our software are not registered, which may expose us to intellectual property risks if we rely on these provisions to grant rights to our unregistered software in the future.
If requested by clients, we may incorporate third-party software into our software development for clients. In these cases, we acquire all necessary licenses for such software once we reach a preliminary agreement with clients. Intellectual property rights for such third-party software are always subject to separate license agreements with third parties. See "ITEM 3. Key Information—D. Risk Factors—Risks related to our business and our industry—We may be subject to third-party
claims of intellectual property infringement that could be time-consuming and costly to defend."
Government legislation and regulation
Due to the industry and geographic diversity of our operations and services, our operations are subject to a variety of rules and regulations, and several government agencies in the United States and abroad, especially in CEE countries, regulate various aspects of our business. See the following risk factors in "ITEM 3. Key Information—D. Risk Factors" for more information on regulation material to our business, financial condition and results of operations:
•
"—Risks Relating to Our Business and Our Industry—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."
•
"—Risks Relating to Our Business and Our Industry—Our effective tax rate could be adversely affected by a number of factors."
•
"—Risks Relating to Our Business and Our Industry - changes in the tax system in CEE and Asian countries or court practice, or unforeseen application of existing rules could adversely affect our financial condition
and results of operations."
•
"—Risks Relating to Our Business and Our Industry - we may encounter difficulties in obtaining withholding income tax benefits envisaged by the Cypriot double tax treaties for dividends distributed from our subsidiaries."
•
"—Risks Relating to Our Business and Our Industry - ongoing corporate tax reform in Switzerland may result in abolition of privileged tax regime and increase in our
effective tax rate."
•
"—Risks Relating to Our Business and Our Industry - we may incur additional liabilities if we fail to comply with UK Corporate Criminal Offense rules."
•
"—Risks Relating to Our Business and Our Industry - globally mobile employees may potentially create additional tax liabilities for us in different jurisdictions."
•
"—Risks
Relating to Our Business and Our Industry - our business may be materially adversely affected by tax reform in the United States."
•
"—Risks related to conducting business in CEE countries—loss of taxation benefits related to our employment-related taxes that are enjoyed in CEE countries could have a negative impact on our operating results and profitability."
•
"—Risks related to conducting business in CEE countries—we may be exposed to additional taxation in Ukraine related to the activities of our non-Ukrainian
subsidiaries or Ukrainian independent contractors."
•
"—Risks related to conducting business in CEE countries— our U.S. shareholders may suffer adverse tax consequences if we are classified as a passive foreign investment company or as a controlled foreign corporation."
We also benefit from tax incentives promulgated
by certain Eastern European governments. See "ITEM 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Income Taxes."
Seasonal trends in operations
Our business is moderately seasonal and our results of operations vary from quarter to quarter based in part upon the budget and work cycles of our clients. Our operating results are typically lower in the first fiscal quarter of each year due to increases in wages and other costs that typically occur in the beginning of each fiscal year. For more information, see "ITEM 5. Operating and Financial Review and Prospects—A. Operating Results—Quarterly results of operations and seasonality."
We are currently present in 42 cities with offices across twenty-one country, totaling 134,026 square meters of office space. As of March 31, 2018, we had the capacity for 14,705 workplaces, which provides us with a 37% reserve for growth. We lease all of our facilities except for one facility in Romania, which we acquired as part of our acquisition of ITC Networks in 2008.
The following table sets forth our office locations and the number of personnel at each office
as of March 31, 2018, excluding all on-site personnel and any personnel on long-term leave.
ITEM 5. Operating and Financial Review and Prospects
You
should read the following discussion and analysis of our financial condition and results of operations in conjunction with the section titled "ITEM 3. Key Information—A. Selected Financial Data" and the consolidated financial statements included elsewhere in this report. This discussion and analysis may contain forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. The words "believes,""anticipates,""plans,""expects," and similar expressions are intended to identify forward-looking statements. Our actual results may differ materially from those anticipated in the forward-looking statements made herein as a result of various risks, uncertainties and other important factors, including those set forth in "ITEM 3. Key Information—D. Risk Factors" of this annual report. Any such forward-looking statements represent management's estimates as of the date of this annual report.
While we may elect to update such forward-looking statements at some point in the future, we disclaim any obligation to do so, even if subsequent events cause our views to change. These forward-looking statements should not be relied upon as representing our views as of any date subsequent to the date of this annual report. Our financial statements have been prepared in accordance with U.S. generally accepted accounting principles.
A.
Operating Results
Factors affecting our results of operations
We believe the following factors have
had and may continue to have a significant effect on our results of operations:
•
Wage inflation: Wage inflation has been growing rapidly in the countries in which we maintain a significant number of personnel. Wage inflation contributes to increases in our cost of services, and selling, general and administrative expenses. The impact of wage inflation is heightened by increased attrition, which is caused by the increasing demand for qualified IT personnel. The impact of wage inflation is mitigated to a limited extent by several factors, including our ability to shift work away from delivery centers that may be disproportionately affected by wage inflation, as well as our ability to pass some of the cost to our clients
through provisions in a number of our contracts that permit us to increase prices based on inflation and related indicators.
•
Demand for IT services in the United States and Western Europe: The demand for IT services is growing steadily in the United States and Western Europe, the regions in which most of our clients operate. The growth in demand for IT services in key regions in which we operate gives us the ability to increase our sales of services and, therefore, may positively impact our results of operations. Conversely,
if the growth in demand for IT services slows or declines, our revenues may be negatively impacted. We focus on providing services primarily to mission critical aspects of our clients' businesses, which we believe reduces the risk of our clients decreasing their IT spending on our engagements during economic downturns relative to those IT services providers who focus on discretionary projects and business process outsourcing.
•
Client concentration: In the fiscal year ended March 31, 2018, 56.7% of our sales were derived from clients
in the financial services industry. We believe that revenue concentration in the financial services industry will continue decreasing in the near term. The developments in this industry that impact the demand for software development services and solutions are likely to have a greater impact on us than on competitors, who do not have a similarly high level of revenue concentration in this line of business. Furthermore, we have a high degree of client concentration and our top five clients represented an aggregate of 47.4% of our sales in the fiscal year ended March 31, 2018. We believe that the financial services industry will remain one of the most significant sources of demand for IT services in the near term, driven by ongoing pressure to restore growth and improve profitability, industry-wide regulatory reforms, requirements
to increase transparency and manage risk exposure, as well as the adoption of new technologies such as cloud computing, mobile and data analytics. We believe that the financial industry's strong reliance on IT services and the mission critical nature of the services we provide for key clients within the financial industry, should reduce the risks we face from client concentration. In addition, we have experienced very strong growth in our Automotive Line of Business and expect continued growth among these clients. In fact, in Fiscal Year 2018, 3 of our Top 10 Clients were in the Automotive industry. As we continue to build our solutions and capitalize on new markets, our overall client concentration should continue to fall.
•
Foreign
currency fluctuation: We operate in a multi-currency environment, and exchange rate fluctuations, especially between the U.S. dollar and the euro and currencies pegged to the euro, impact our results of operations. Our sales are largely denominated in U.S. dollars and euros, and, to a lesser extent, in British pounds and Russian rubles, whereas our expenses are largely denominated in U.S. dollars, Russian rubles, Polish zloty, British pounds and Romanian leu. As a result, currency fluctuations, especially the appreciation of the Russian ruble relative to the U.S. dollar and the depreciation of the euro and British pound relative to U.S. dollar, could negatively impact our results of operations. Currency exchange rates in the British pound and the euro with respect to each other and the U.S. dollar have been affected by the June 23, 2016 referendum in the United Kingdom, pursuant to which the people
of the United Kingdom voted for the United Kingdom's withdrawal from the European Union ("Brexit"), and the United Kingdom formally notified the European Union of its intention to withdraw from it. As a significant portion of our revenues are derived from sales to clients located in the United Kingdom and due to our operations in the United Kingdom and Europe, further exchange rate fluctuations as a result of Brexit could adversely affect our business and our results of operations. See "ITEM 3. Key Information—D. Risk Factors—The decision by the United Kingdom to exit from the European Union could materially adversely affect our business and results of operations."
•
Inflation in
CEE: Our results of operations are affected by inflation rates in CEE because our expenses are largely denominated in Russian rubles and other CEE currencies, such as Romanian leu and Polish zloty. If we are unable to increase our revenues in line with our costs in CEE, it could have a material effect upon our results of operations and financial condition. See "ITEM 3. Key Information—D. Risk Factors—Risks related to our business and our industry—Fluctuations in currency exchange rates and increased inflation could materially adversely affect our financial condition and results of operations."
•
Tax reduction programs: We benefit from tax reduction
programs in Russia, Switzerland and Poland.
•
In Russia, we benefit from a reduced social contributions tax rate program available to qualified IT service providers complying with certain conditions set out in the Russian law. Russia's social contributions are mandatory taxes consisting of contributions paid by employers to the Russian Pension Fund, the Russian Social Insurance Fund and the Federal Medical Insurance Fund. The
social
contributions tax rate varies depending on the employer's beneficial status and the status of a particular employee (such as a foreign citizen or Russian citizen). Under the program, the applicable aggregate tax rate is currently reduced from the maximum of 30% to 14%. However, the reduced tax rates for social contributions payable by qualified IT service providers are expected to be available until December 31, 2023 with clarity on further prolongation of this tax benefit.
•
Our Swiss subsidiary, which also serves as Group operational headquarters, has been enjoying mixed company regime in the canton of Zug since its incorporation in 2013. Under cantonal tax law
a mixed company is partially exempted from cantonal taxation of profits earned outside of Switzerland. Amount of profits exempted from cantonal taxation depend on the number of Swiss employees of the Group and in our case equals to 75% of profits. It is expected that this privileged taxation of foreign profits will be abolished from approx. 2020.
•
Our subsidiary in Poland conducts a part of its operational activities in the territory of Krakow special economic zone ("SEZ") under the permit, which entitles the Group to use a tax incentive. Our profit generated from operations in the SEZ is non-taxable within the amount of tax credit calculated based on eligible expenses. Since the amount
of the relevant tax credit currently exceeds the amount of income tax payable with respect to profits earned in the SEZ, we pay no income tax in relation to this subsidiary's operations in the SEZ.
•
Government grants: During the fiscal year ended March 31, 2018, we participated in government grants programs in Romania, Poland, Bulgaria, Mexico and Malaysia. The programs require certain investments in creation and maintaining new workplaces as well as certain capital expenditure during certain periods of up to year 2021. As a result
of fulfilling the programs' requirements, in the fiscal year ended March 31, 2018 we either received or were guaranteed further receipt of five government grants in the total amount of $1.8 million; in the fiscal year ended March 31, 2017 we received five government grants in the total amount of $3.8 million.
Acquisitions
During the fiscal years ended March 31, 2018 and 2017 we completed a number of acquisitions that allowed the
Company to expand the existing lines of business, increase revenue and create new offerings of services currently provided. The Company used the acquisition method of accounting to record these business combinations. All our acquisitions during these two fiscal years were settled in cash. For some transactions, purchase agreements contain contingent consideration in the form of an earnout obligation.
Acquisition of Unafortis AG (Excelian Luxoft Financial Services (Switzerland) AG)
On September 27, 2017, Luxoft Global Operations GmbH, a wholly owned subsidiary of the Company, acquired 100% of the registered shares
of Unafortis AG (subsequently renamed to Excelian Luxoft Financial Services AG) in consideration of: (i) $16.3 million paid in cash upon closing, (ii) $1.0 million to be paid in cash upon achievement of certain strategic milestones by the Group’s business unit into which Excelian Luxoft Financial Services will be integrated, and (iii) a series of deferred cash payments to be made to the sellers, contingent upon the achievement of certain financial performance milestones for the period from October 1, 2017 through March 31, 2020 up to a maximum of $28.0 million. As of March 31, 2018, the fair value of the contingent consideration was $1.0
million.
Excelian Luxoft Financial Services AG is a Swiss-based wealth management consultancy specializing in Avaloq implementations and business consulting anchored in IT services. Avaloq is a provider of fully integrated banking software for the back, middle, and front office.
Acquisition of DerivIT Solutions Pte Ltd.
On August 22, 2017, Luxoft International Ltd, a wholly owned subsidiary of the Company, acquired DerivIT Solutions Private Limited. DerivIT Solutions Private Limited is a Singapore-based financial services-focused technology consulting company. The initial consideration paid for 98% of the outstanding shares of DerivIT
was $18.7 million. $1.5 million was deposited in an escrow for funding indemnity claims of the sellers. Further, if certain conditions are satisfied, the sellers will be paid an amount equivalent to $4.1 million, subject to certain adjustments, towards the final consideration for the sale and purchase of 98% of the outstanding shares. The sellers will be entitled to additional cash payments for the 2% of the outstanding shares which shall be contingent upon the achievement of certain financial performance milestones by DerivIT for the period from April 1, 2017 through March 31, 2018. As of March
31, 2018, the fair value of the contingent consideration was $3.1 million.
On January 31, 2017, the Group closed an equity purchase transaction to acquire IntroPro, a group of engineering consultancy companies generating the majority of its revenue from the telecom and media sector, serving several blue chip clients based in North America.
Luxoft acquired all of the issued and outstanding shares of three companies constituting
the IntroPro group, namely Intro Pro US Inc., Intro Pro Software Company Limited and Intro Pro Ukraine LLC for $28.3 million of cash consideration, paid at closing, of which $5.0 million was placed in escrow by the sellers for up to 3 years as security for the indemnification and certain other obligations of the sellers under the terms of the purchase agreement. In accordance with the agreement, the Sellers are entitled to additional cash payments, subject to achievement of certain financial performance milestones by IntroPro for its 2017 and 2018 fiscal years. Subsequently additional non-financial milestones were introduced to the purchase agreement and $4.0 million was released from escrow with a corresponding decrease in contingent consideration. As of March 31, 2018, the fair value of the contingent consideration was $1.2 million
and the amount of current payable related to IntroPro performance up to date was $3.7 million which was fully paid in April 2018.
Acquisition of Pelagicore
On September 13, 2016, the Group has completed the acquisition of Pelagicore AB, a Swedish company, provider of open source software platforms and services for in-vehicle infotainment systems and human machine interface (HMI) development.
In accordance with the stock purchase agreement, Luxoft Global Operations GmbH paid €16.9 million, or $18.9 million, upon closing of this transaction. Additionally, Luxoft agreed to pay up to € 5.0 million or $5.5 million in 2017 subject to Pelagicore achieving certain conditions till the end of 2017 calendar year. As of March
31, 2018 all of Luxoft's additional obligations to the sellers were fully settled in amount of $5.3 million.
Acquisition of INSYS Group, Inc.
On July 15, 2016, Luxoft USA, Inc. completed the acquisition of INSYS Group, Inc. ("Insys"), an IT consulting provider focusing on advanced predictive analytics, business intelligence and data warehousing, digital marketing, and enterprise information management. Luxoft acquired all of the issued and outstanding shares of common stock of Insys for an initial payment of $37.9 million with the remaining amount payable being subject to certain revenue and EBITDA targets to be achieved by Insys for the six-month period ending December 31, 2016, and its 2017 and 2018 fiscal
years. The total amount of contingent purchase consideration was not to exceed $33.5 million. Additionally, under the Purchase Agreement, certain managers of Insys were eligible for incentive payments under a management earnout participation plan in an amount of up to $7.0 million. In conjunction with the mutual election under Section 338(h) of the U.S. Internal Revenue Code ("Section 338(h)"), Luxoft USA and the Insys Sellers agreed to treat the Insys purchase as an asset purchase for tax purposes.
In March 2017, the management of Luxoft and the former shareholders of Insys Group, Inc. reached an agreement in negotiations regarding certain changes to the original SPA. The main changes included re-allocation of the earn-out percentages among the former Insys shareholders and introduction of a minimum guaranteed amount of the earn-out of $2.6 million. Additionally the maximum amount of the management earnout participation
plan was decreased to a maximum of $3.0 million due to resignation of one of the participants. As of March 31, 2018, the fair value of contingent consideration was nil and the amount of current payable was $325.
Certain comprehensive income statement line items
Sales of services
Sales of services consist primarily of the provision of software development, which includes core custom software development and support, product engineering and testing and technology consulting services to our clients. Sales of services also includes sales generated from non-core activities, including external project consulting, quality management consulting, recruitment services provided to our clients and training services
provided to third parties, as well as reimbursements of expenses of our IT professionals by clients. Historically, non-core sales have accounted for a small portion of total sales. In the past two fiscal years, we derived a substantial majority of the growth in our sales of services to existing clients. Below is a discussion of our revenue organized by client location, line of business, client concentration and contract type.
We present client location based on the location of the client's key decision-maker.
We seek to maintain the current geographical balance of sales. Our revenue by client location has generally experienced balanced growth during the periods under review. For more information on sales by client location, see "ITEM 4. Information About Luxoft—B. Business Overview—Clients."
Lines of business
While financial services have historically been our largest line of business, we have deep expertise in each of the lines of business we serve. We target three lines of business within which we have maintained a relatively stable revenue mix during the periods under review. For information on sales by lines of business, see "ITEM 4. Information About Luxoft—B. Business Overview—Our lines of business."
Client concentration
As a percentage of total sales, revenue generated by our
top five clients declined from 54.6% for the fiscal year ended March 31, 2017, to 47.4% in the fiscal year ended March 31, 2018. Revenue generated by our top ten clients for the same periods decreased from 66.0% to 57.6% as a percentage of total sales. Over the long-term, we expect client concentration from our top ten clients to continue to decrease as a result of increase in demand from other existing clients, as well as business from new clients. New clients for any period are defined as clients who were not on our client list as of the end of the applicable prior fiscal year. For information on
sales by client, see "ITEM 4. Information About Luxoft—B. Business Overview—Clients."
We derive revenue from fixed price contracts and time-and-materials contracts. Under time-and-materials contracts, we are compensated for actual time incurred by our IT professionals at negotiated hourly, daily or monthly rates. The majority of our fixed price contracts allow monthly or quarterly revenue recognition based
on monthly and quarterly milestones, with clear customer acceptance criteria that could be assessed at the end of respective periods. We believe the use of proportional performance with monthly or quarterly contractual milestones for customer acceptance continues to be an appropriate revenue recognition method for fixed price contracts.
The following table sets forth sales by contract type, by amount and as a percentage of our total sales for the periods indicated:
Cost of services includes salaries and related benefits for our delivery center employees, compensation for our contractors and other project-related costs, including travel, materials and other direct costs. Most of our IT professionals are salaried employees except for personnel in Ukraine, Europe and the United States, where a substantial part are contractors. The majority of our costs of services comprise compensation to our employees and contractors, and we expect substantially the same composition of costs of services in the future. Where services are performed by contractors, the cost of contractors is included in cost of services. With respect to employees, the compensation for the time that our employees log for specific projects including non-billable time is included
in our cost of sales. The travel expenses of our employees and contractors directly related to specific projects are recorded in our cost of services. Cost of services also includes social contribution charges payable on the salaries for our employees.
Selling expenses include primarily advertising and marketing expenses. General and administrative expenses include compensation and other expenses of our senior management, administrative personnel, and R&D personnel, as well as compensation expenses for the time of our IT professionals not assigned to a specific
project. General and administrative expenses also include office rent and maintenance and professional services, including legal, audit and insurance services, relocation expenses, travel and entertainment expenses other than those directly related to projects for clients, and other expenses.
Depreciation and amortization
Depreciation and amortization includes depreciation of property and equipment and amortization of capitalized software costs, acquired contract-based client relationships and other intangible assets. We use the straight-line method to determine depreciation and amortization.
Loss/gain from revaluation of contingent liability
Loss from revaluation of contingent liability includes results
from revaluation of contingent liabilities arising as part of business combinations. Contingent liabilities are remeasured to fair value at each reporting date until the contingency is resolved.
Other income and expenses
Our other income and expenses consist of:
Interest income/(expense), net: Interest income and interest expense are accrued by reference to the principal amount outstanding at the applicable interest rate. We earn interest income on our cash deposits and loans provided to related parties.
Other gains/(loss), net: Other gains, net consists of government grants, subleasing office space, operational leasing of equipment and disposal of old computer equipment.
Unwinding of discount for contingent
liability, loss: is the amount of interest charged on discounted present value of contingent liabilities for acquisitions.
Gain/ (loss) from derivative financial instruments: is represented by gains and losses from settlement and revaluation of derivatives related to forward foreign currency exchange contracts not designated as cash flow hedges and swap contracts. We use swap contracts as a cash management tool to earn a fixed income.
Starting January 2016, due to an increased volume of hedged transactions, extended periods of foreign exchange contracts
and a risk of significant fluctuations of fair values of derivatives affecting our Statement of Comprehensive income, we started to apply hedge accounting to forward contracts offsetting our forecasted transactions denominated in Euro and British pounds.
All gain or loss on a derivative instrument designated as a cash flow hedge is recognized in other comprehensive income until reclassified into earnings in the same period when the hedged forecasted transaction affects earnings, i.e. when a forecasted sale actually occurs or an expense is incurred. Gains or losses related to hedging of forecasted sales are recognized in Sales of services, and those attributable to forecasted expense are recognized in Cost of services.
Net foreign exchange income/(loss): We enter into
foreign exchange transactions as we have contracts denominated in both U.S. dollars, euros, rubles, and, to a lesser extent, Swiss francs, British pounds and other currencies. Re-measurement of monetary assets, such as receivables, denominated in foreign currencies that are different from functional currencies of the respective subsidiaries, result in and are recorded as net foreign exchange income/ (loss).
Income tax expense
Our income tax includes both current and deferred income taxes. Because we operate in a number of countries, our income is subject to taxation in differing jurisdictions with a range of tax rates. Therefore, we need to apply significant judgment to determine our consolidated income
tax position. Due to our multi-jurisdictional operations, we are exposed to a number of different tax risks including, but not limited to, changes in tax laws or interpretations of these tax laws. In the fiscal year ended March 31, 2018, our effective income tax rate decreased to 9.2% comparing to 11.2% in the fiscal year ending March 31, 2017 mainly due to positive effect of the U.S. Tax reform, SOP tax deduction, utilization of tax losses and other beneficial tax planning strategies.
In the fiscal year ended March 31, 2018, our revenues demonstrated 15.4% growth year over year, increasing by $121.2 million to $906.8 million in the fiscal year ended March 31, 2018 from $785.6 million in the fiscal year ended March 31, 2017. The increase was
primarily due to a growing volume of sale in two of our lines of business, Automotive and Financial services, which contributed 6.1 pp and 3.9 pp of overall growth, respectively. Digital Enterprise line of business which includes healthcare and life sciences, technology, travel and aviation and energy practices, contributed 5.5 pp to the overall growth year-on-year.
From a geographical standpoint, our revenue increased primarily due to our Europe clients, providing 7.7 pp of overall revenue growth, as well as clients from the U.S., contributing 5.4 pp of total revenue growth. In comparison to the prior fiscal year, in the fiscal year ended March
31, 2018, our revenue generated from the North American clients increased by 15.9% from 33.9% to 34.1% of total revenue as a result of an increased volume of sales to our top clients in the telecom industry; Europe (excluding UK) increased by 25.6% from 0.3% to 32.6% of the total revenue primarily due to the growth of our automotive clients and APAC increased by 60.3% from 3.4% to 4.7% of the total revenue primarily due to an increased penetration of market with the new delivery centers as well as revenue from the DerivIT business, which
was acquired in August 2017.
We continuously develop relationships with our clients and as a result, sales to our existing clients accounted for 83.5% of the increase in sales of services for the fiscal year ended March 31, 2018, while sales to new clients accounted for 19.4% of the increase. Sales of services to new clients represented 11.3% of total sales in the fiscal year ended March 31, 2018, as compared to 10.0% of total sales in the fiscal year ended March 31, 2017.
Our non-core sales accounted for 0.0% and 0.4% of total sales in the years ended March 31, 2018 and 2017, respectively.
To support our growing sales, we increased the number of our IT professionals to 10,844 as of March 31, 2018, from
10,807 IT professionals as of March 31, 2017.
Operating expenses
Cost of services
Cost of services increased by $92.9 million, or 19.6%, to $567.9 million in the fiscal year ended March 31, 2018 from $475.0 million in the fiscal year ended March 31, 2017. Gross margin decreased from 39.5% to 37.4%
in the fiscal year ended March 31, 2018, when compared to the prior fiscal year. The increase in cost of services and related decrease in gross margin during the latter fiscal year was primarily attributed to a larger portion of the new business generated by HPAs compared to the prior fiscal year. Another contributing factor was a decrease in share of high margin top clients.
To enable faster growth of our HPAs we made certain upfront investments into these accounts, including training of our engineering personnel, the time which cannot be billed to a client, billing clients at lower rates during smaller proof of concept engagements, providing higher paid onshore consultants at the initial engagements with a low ratio of lower-salaried off-shore engineering support, which we usually increase at later, more mature stages of relationships.
As
a percentage of sales, cost of services increased to 62.6% for the fiscal year ended March 31, 2018, from 60.5% in the fiscal year ended March 31, 2017.
Selling, general and administrative expenses
During the fiscal year ended March 31, 2018, our selling, general and administrative expenses increased by $27.5 million, or 12.9%, to $241.2 million mainly due to an organic expansion
of our business functions including an expansion of the global sales organization and the regional management. As a percentage of sales, selling, general and administrative expenses decreased to 26.6% for the fiscal year ended March 31, 2018, from 27.2% in the fiscal year ended March 31, 2017. This decrease was attributable primarily to decrease of share-based payment as a percentage of the revenue.
Payroll and bonuses expenses, including payroll taxes and excluding share-based compensation, increased by $22.9 million, or 21.1%, from 108.8
million in the fiscal year ended March 31, 2017 to $131.7 million in the fiscal year ended March 31, 2018, primarily due to an expansion of the global sales organization and the regional management, contributing 10.7 pp of the total increase in our selling, general and administrative expenses.
Our spending on office rent and maintenance increased by $5.6 million, or 16.5%, from $34.0 million in the fiscal year ended March
31, 2017 to $39.6 million in the fiscal year ended March 31, 2018, contributing 2.6 pp to the total increase in our selling, general and administrative expenses, due to the expansion of total rented area.
Depreciation and amortization
Depreciation and amortization increased by $7.9 million, or 22.7%, to $42.7 million in the fiscal year ended March 31, 2018 from $34.8 million in the fiscal year
ended March 31, 2017. As a percentage of sales, depreciation and amortization increased from 4.4% in the fiscal year ended March 31, 2017 to 4.7% in the fiscal year ended March 31, 2018. The increase was primarily a result of increased amortization of intangible assets recognized in business combinations, specifically customer relationships of DerivIT and Unafortis. Another contributing factor was an increase in computer hardware and office equipment due to a growing headcount.
Income from revaluation of contingent liability
Income
from revaluation of contingent liability increased by $1.3 million from $12.0 million in the fiscal year ended March 31, 2017 to $13.3 million in the fiscal year ended March 31, 2018. The gain from revaluation of contingent liability was primarily associated with lowering of the performance forecasts for the companies acquired during the fiscal year ended March 31, 2018. The changes in the forecast have also resulted in an impairment loss discussed below.
Impairment loss
During
the fiscal year ended March 31, 2018, we recorded an impairment loss of $8.2 million related to the IntroPro client base. The principal factor leading to the impairment was the reduction in the projected future cash flows due to an adverse change in the cumulative average revenue growth rate.
Due to the increases in cost of services and general and administrative expenses discussed above, our operating income decreased by $8.6 million,
or 12.5%, to $60.1 million in the fiscal year ended March 31, 2018 from $68.7 million in the fiscal year ended March 31, 2017. As a percentage of sales, our operating income decreased to 6.6% in the fiscal year ended March 31, 2018, from 8.8% for the fiscal year ended March 31, 2017.
Other income and expenses
Other
gain, net
Other gains decreased by $2.3 million million from $5.1 million in the fiscal year ended March 31, 2017 to $2.8 million in the fiscal year ended March 31, 2018. The decrease is attributable to a lesser amount of government grants recognized in Romania, Poland, Bulgaria, Mexico and Malaysia during the fiscal years ended March 31, 2018 and March 31, 2017. See also "ITEM 4. Information About Luxoft—Government
support for the IT industry in CEE."
Unwinding of discount for contingent liability
In the fiscal year ended March 31, 2018 the Group changed the presentation of the revaluation of contingent liabilities; the unwinding of discount for contingent liability expense is excluded from operating income and shown as a separate line in the Consolidated statement of income.
Loss from unwinding of discount decreased by $0.8 million from $2.0 million in the fiscal year ended March 31, 2017 to $1.2 million
in the fiscal year ended March 31, 2018. The decrease is primarily due to overall decrease of contingent liabilities fair value as a result of lowering of the performance forecasts for the companies acquired during the fiscal year ended March 31, 2018.
Gain/ (loss) from derivative financial instruments
Loss from derivative financial instruments in the fiscal year ended March 31, 2018 amounted to $1.8 million compared to a gain of $1.3 million in the fiscal year ended March
31, 2017, mainly due to adverse change in fair value of our swap contracts entered in during the fiscal year ended March 31, 2018. The decrease of fair value was offset by foreign exchange gain on the underlying cash balances, which resulted in a fixed income of $205.
Net foreign exchange loss
Net foreign exchange gain increased by $5.4 million from a loss of $2.6 million in the fiscal year ended March 31, 2017 to a gain of $2.8
million in the fiscal year ended March 31, 2018, primarily due to appreciation of the euro against the U.S. dollar during the fiscal year ended March 31, 2018, which positively affected our euro-denominated receivables and gain on our swap contracts.
Income from continuing operations before income taxes
Income from continuing operations before income taxes decreased by $7.7 million, or 10.9%, to $62.8 million in the fiscal year ended March
31, 2018, from $70.5 million in the fiscal year ended March 31, 2017, and demonstrated a decrease as a percentage of sales from 9.0% to 6.9% in the years ended March 31, 2018 and 2017, respectively. The decrease was primarily due to a decrease in gross margin by 2.1 pp from 39.5% to 37.4%.
Income tax expense
Income
tax expense decreased by $2.1 million, or 26.6%, to $5.8 million in the fiscal year ended March 31, 2018 from $7.9 million in the fiscal year ended March 31, 2017. Our effective income tax rate decreased to 9.2% of income from continuing operations before income taxes in the fiscal year ended March 31, 2018 from 11.2% in the fiscal year ended March
31, 2017. The rate decrease represents a combined effect of the U.S. Tax Cuts and Jobs Act in the U.S. and our beneficial tax planning strategies.
In the fiscal year ended March 31, 2017, our revenues demonstrated 20.7% growth year over year, increasing by $134.8 million to $785.6 million in the fiscal year ended March 31, 2017 from $650.8 million in the fiscal year ended March 31, 2016. The increase was primarily due to a growing volume of sale in three of our lines of
business, Financial Services, Digital Enterprise, and Automotive and Transport, which contributed 5.8 pp, 10.0 pp and 4.9 pp of overall growth, respectively.
From a geographical standpoint, our revenue increased substantially due to our clients in Europe (excluding UK), providing 12.0 pp of overall revenue growth, as well as clients from North America, contributing 8.7 pp of total revenue growth. In comparison to the prior fiscal
year, in the fiscal year ended March 31, 2017, our revenue generated from the clients in North America increased by 27.1% from 32.2% to 33.9% of total revenue resulted both from increased volume of sales to our top clients in the digital enterprise line of business as well as revenue from the Insys and IntroPro businesses, which were acquired in July 2016 and January 2017, respectively; Europe increased by 49.5% from 0.242% to 0.3% of the total revenue primarily due to growth of our automotive line of business clients and continuing growth in our financial line of business.
We continuously develop relationships
with our clients and as a result, sales to our existing clients accounted for 43.6% of the increase in sales of services for the fiscal year ended March 31, 2017, while sales to new clients accounted for 39.8% of the increase. Sales of services to new clients represented 10.0% of total sales in the fiscal year ended March 31, 2017, as compared to 3.9% of total sales in the fiscal year ended March 31, 2016. Our non-core sales accounted for 0.4% and 0.2% of total sales in the years ended March 31, 2017 and 2016, respectively.
To support our growing sales, we increased the number of our IT professionals to 10,807 as of March 31, 2017,
from 9,239 IT professionals as of March 31, 2016.
Operating expenses
Cost of services
Cost of services increased by $95.6 million, or 25.2%, to $475.0 million in the fiscal year ended March 31, 2017 from $379.3 million in the fiscal year ended March 31, 2016. Gross margin decreased from 41.7% to 39.5% in the fiscal year ended March 31, 2017, when compared to the prior fiscal year. The increase in cost of services and related decrease in gross margin during the latter fiscal year was primarily attributed to a larger portion of the new business generated by HPAs compared to the prior fiscal year. To enable faster growth of our HPAs we made certain
upfront investments into these accounts, including training of our engineering personnel, the time which cannot be billed to a client, billing clients at lower rates during smaller proof of concept engagements, providing higher paid onshore consultants at the initial engagements with a low ratio of lower-salaried off-shore engineering support, which we usually increase at later, more mature stages of relationships.
As a percentage of sales, cost of services increased to 60.5% for the fiscal year ended March 31, 2017, from 58.3% in the fiscal year ended March 31, 2016.
Selling, general and administrative expenses
During the fiscal year ended March 31, 2017, our selling, general and administrative
expenses increased by $42.0 million, or 24.5%, to $213.7 million mainly due to organic expansion of our business functions. As a percentage of sales, selling, general and administrative expenses increased to 27.2% for the fiscal year ended March 31, 2017, from 26.4% in the fiscal year ended March 31, 2016. This increase was attributable primarily to the stock option plan and continuing investments in R&D activities.
Payroll and bonuses expenses, including payroll taxes and excluding share-based compensation, increased by $26.8 million, or 32.7%, from $82.0 million in the fiscal year ended March 31, 2016 to $108.8 million in the fiscal year ended March 31, 2017, primarily due to an expansion of our R&D activities, contributing
15.6 pp of the total increase in our selling, general and administrative expenses.
Share-based compensation increased by $11.2 million from $17.7 million in the fiscal year ended March 31, 2016 to $29.0 million in the fiscal year ended March 31, 2017, principally due to new grants under our SOP III program. The growth of share-based compensation expenses impacted the overall selling, general and administrative expenses by 6.5%.
Our spending on professional services increased by $1.8 million, or 7.6%, to $25.8 million in the fiscal year ended March 31, 2017, contributing 1.1 pp to the total increase in our selling, general and administrative expenses, primarily due to consulting fees to support our M&A activities.
Depreciation
and amortization
Depreciation and amortization increased by $11.0 million, or 46.3%, to $34.8 million in the fiscal year ended March 31, 2017 from $23.8 million in the fiscal year ended March 31, 2016. As a percentage of sales, depreciation and amortization increased from 3.7% in the fiscal year ended March 31, 2016 to 4.4% in the fiscal year ended March 31, 2017. The increase was primarily a result of increased amortization of intangible assets recognized in business combinations, specifically customer relationships of Insys and IntroPro. Another contributing factor was an increase in computers and office equipment due to a growing headcount.
Gain from revaluation of contingent liability increased by $7.5 million from $2.5 million in the fiscal year ended March 31, 2016 to $10.0 million in the fiscal year ended March 31, 2017. The gain from revaluation of contingent liability was primarily associated with lowering of the performance forecasts for the companies acquired during the fiscal year ended March 31, 2017. The changes in the forecast have also resulted in an impairment loss discussed below.
Impairment loss
During the fiscal year ended March 31, 2017,
we recorded an impairment loss of $5.3 million related to the Insys client base. The principal factor leading to the impairment was the reduction in the projected future cash flows due to an adverse change in the cumulative average revenue growth rate. No impairment of intangible assets occurred as of March 31, 2016.
Operating income
Due to the increases in cost of services and general and administrative expenses discussed above, our operating income decreased by $11.7 million, or 14.9%, to $66.8 million in the fiscal year ended March 31, 2017 from $78.4 million in the fiscal year ended March 31, 2016. As a percentage of sales, our operating income decreased to 8.5% in the fiscal year ended March 31,
2017, from 12.0% for the fiscal year ended March 31, 2016.
Other income and expenses
Other gain/(loss), net
Other gains increased by $1.2 million from $3.9 million in the fiscal year ended March 31, 2016 to $5.1 million in the fiscal year ended March 31, 2017. The increase is attributable to $3.4 million from five government grants received in Romania, Poland, Bulgaria, Mexico and Malaysia during the fiscal year ended March 31, 2017. See also "ITEM 4. Information About Luxoft—Government support for the IT industry in CEE."
Gain from foreign currency exchange contracts increased by $1.1 million from $0.3 million in the fiscal year ended March 31, 2016 to $1.3 million in the fiscal year ended March 31, 2017, mainly due to increased fluctuation in the U.S. dollar/euro exchange rates during the fiscal year ended March 31, 2017, when compared to the fiscal year ended March 31, 2016, resulting in higher gains realized on our euro/U.S. dollar forward contracts.
Net
foreign exchange loss
Net foreign exchange loss increased by $2.2 million from $0.4 million in the fiscal year ended March 31, 2016 to $2.6 million in the fiscal year ended March 31, 2017, primarily due to depreciation of the euro against the U.S. dollar during the fiscal year ended March 31, 2017, which adversely affected our euro-denominated receivables; and appreciation of the Russian ruble against the U.S. dollar resulting in a foreign exchange loss from our Ruble-denominated payables.
Income from continuing operations before income taxes
Income from continuing operations before income taxes decreased by $11.9 million, or 14.4%, to $70.5 million in the fiscal year ended March 31,
2017, from $82.4 million in the fiscal year ended March 31, 2016, and demonstrated a decrease as a percentage of sales from 12.7% to 9.0% in the years ended March 31, 2016 and 2017, respectively.
Income tax expense
Income tax expense decreased by $4.2 million, or 35.0%, to $7.9 million in the fiscal year ended March 31, 2017 from $12.1 million in the fiscal year ended March 31, 2016. Our effective income tax rate decreased to 11.2% of income from continuing operations before income taxes in the fiscal year ended March 31, 2017 from 14.7% in the fiscal year ended March 31,
2016. The rate decrease represents a combined effect of SOP tax deduction, utilization of tax losses and other beneficial tax planning strategies. Corporate income tax deduction was made for the amount of exercised SOP III instruments in the United States, the United Kingdom, Germany and Switzerland. We have successfully utilized some of the previously unrecognized tax losses mainly in the United Kingdom and Australia either through group relief or through availability of taxable income. Also, use of beneficial tax treatment and actualization of the income tax provisions upon filing of tax returns had a positive effect on our effective tax rate.
Our business is moderately seasonal and our results of operations vary from quarter to quarter based in part upon the budget and work cycles of our clients. Our operating results are typically lower in the first fiscal quarter of each year due to increases in wages and other costs that typically occur in the beginning of each fiscal year. The following table presents our unaudited condensed consolidated quarterly results of operations for the eight quarters in the period from April 1, 2016 to March 31, 2018.
Cost
of services (exclusive of depreciation and amortization)
148,638
144,332
139,305
135,599
129,632
124,688
114,908
105,752
Selling,
general and administrative expenses
61,492
63,485
58,199
58,063
56,193
54,291
54,315
48,924
Depreciation
and amortization
10,978
11,050
9,915
10,730
10,260
9,362
7,990
7,235
(Income)/loss
from revaluation of contingent liability
(7,320
)
(3,930
)
(870
)
(1,220
)
(9,434
)
(2,143
)
(44
)
(400
)
Impairment
loss
8,241
—
—
—
5,287
—
—
—
Operating
income
$
10,852
$
21,676
$
21,481
$
6,070
$
12,193
$
20,726
$
19,288
$
16,538
Other
income and expenses
Interest
income/(expense), net
97
17
42
17
(91
)
6
(28
)
32
Unwinding
of discount for contingent liability, loss
71
(588
)
103
(801
)
(766
)
(719
)
(388
)
(117
)
Other
gain, net
893
934
457
489
755
3,630
327
407
Gain/
(loss) from derivative financial instruments
(1,937
)
57
(3
)
92
—
953
(30
)
391
Net
foreign exchange gain/(loss)
1,466
177
(356
)
1,480
889
(2,847
)
21
(667
)
Income
from continuing operations before income taxes
11,442
22,273
21,724
7,347
12,980
21,749
19,190
16,584
Income
tax benefit/(expense)
264
(1,723
)
(3,284
)
(1,030
)
755
(3,217
)
(2,899
)
(2,504
)
Net
income
11,706
20,550
18,440
6,317
13,735
18,532
16,291
14,080
Less:
Net loss attributable to the non-controlling interest
—
—
—
—
—
—
—
—
Net
income attributable to the Group
$
11,706
$
20,550
$
18,440
$
6,317
$
13,735
$
18,532
$
16,291
$
14,080
Shares
repurchase program
On April 9, 2018, we announced that our Board of Directors had authorized the repurchase of up to $60 million of our Class A ordinary shares. The repurchases may be made from time to time on the open market at prevailing market prices and will be funded from available cash. As of June 30, 2018, a total of 455,655 of our Class A ordinary shares have been repurchased under this program for approximately $16.2 million at an average price paid of $35.84 per share. The shares repurchased under our share repurchase program were purchased in open market transactions and were canceled. The Company will continue to periodically evaluate market conditions and alternatives for deployment of the
Company’s capital over the coming months to determine whether repurchasing its shares is in the best interest of the Company’s shareholders. The number of shares to be purchased and the timing of purchases will be based on the level of the Company’s cash balances, general business and market conditions, and other factors, including alternative investment opportunities.
At March 31, 2018, our principal sources of liquidity were cash and cash equivalents totaling $104.4 million and $87.4 million of available borrowings under our revolving lines of credit. As of that date, $83.6 million was held in U.S. dollar denominated accounts primarily in Switzerland.
Under the legislation of the countries we operate in, there are no restrictions on our ability to distribute dividends from our subsidiaries to our parent company other than a requirement that dividends be limited to the cumulative net profits
of our operating subsidiaries, calculated in accordance with local accounting principles. The cumulative net profit of our subsidiaries calculated in accordance with local accounting principles differs from the cumulative net profit calculated in accordance with U.S. GAAP primarily due to the treatment of accrued expenses and differences arising from the capitalization and depreciation of property and equipment. In addition, these dividends cannot result in negative net assets at our subsidiaries or render them insolvent.
We have not provided for dividend withholding taxes on the unremitted earnings our subsidiaries
as they are either considered as permanently reinvested or are not taxed upon distribution.
Our cash requirements have principally been driven by working capital requirements and capital expenditures. Our working capital requirements are, in turn, generally driven by the growth in our business and the impact on our cash flows arising out of the difference in timing between when our payment obligations arise and when we receive payment from clients. We fund working capital primarily from cash and cash equivalents on hand, cash flows provided by our operating activities and our short term credit facilities in those cases when it is deemed necessary or most efficient way. Our average time for collecting receivables, which include trade receivables, unbilled revenue and deferred revenue balances, increased to 75 days for the fiscal year ended March
31, 2018, from 69 days for the fiscal year ended March 31, 2017.
As of March 31, 2018, we did not have any material commitments for capital expenditures. We believe that, based on our current business plan, our cash and cash equivalents on hand, cash from operations and borrowings available to us will be adequate to meet our working capital, capital expenditure requirements and liquidity needs for the foreseeable future. We may require additional capital to meet our longer term liquidity and future growth requirements.
Credit facilities
During the fiscal year ended March
31, 2018, INSYS Group Inc. utilized a credit facility provided by TD Bank N.A. pursuant to the Loan and Security Agreement in an aggregate amount of $8.0 million at LIBOR plus 2.00% interest rate. The agreement expired on May 31, 2017. There was no outstanding amount as of March 31, 2018, under this agreement.
On December 27, 2016, Luxoft USA Inc. and Luxoft Global Operations GmbH respectively entered into the Facility agreement with Amsterdam Trade Bank N.V. for the aggregate available credit amount up to $18.0 million. For both of the facilities the applied interest rate is the cumulative of the applicable LIBOR and a 3% margin. There was no outstanding amount as of March
31, 2018 under these agreements.
On November 20, 2013, Luxoft UK Ltd., Luxoft Eastern Europe Ltd. and Luxoft GmbH entered into an uncommitted Pre- and Post-Shipment Advances Facility Agreement with Citibank Europe PLC for up to $5.0 million. On November 13, 2014 Luxoft Global Operations GmbH acceded to the mentioned Facility Agreement as a Borrowing Entity. On November 25, 2016 Citibank increased the total credit amount available for the Group to $17.4 million. This is a continuing agreement and remains in full effect subject to its terms until 30 days after the bank's receipt of written notice of termination from the borrower's agent. Under this agreement the borrower can use pre- or post-shipment advance. The interest rate for pre-shipment is LIBOR
plus 2.0% per annum and the interest rate for post-shipment is LIBOR plus 1.25% per annum. There was no outstanding amount as of March 31, 2018 under this agreement.
On January 15, 2013, the Group entered into an uncommitted receivables purchase agreement with BNP Paribas Dublin Branch. Under the agreement the Group can assign certain receivables in exchange for cash based on LIBOR for the relevant purchase term (30/60 days) plus 2.1% per annum. The current limit available under this facility is up to $30.0 million. There was no outstanding amount as of March 31, 2018 under this agreement.
On December
31, 2017 certain credit facilities previously entered into by Excelian Ltd and Luxoft USA in amounts of £1.0 million and $5.5 million respectively were canceled.
Overdraft facilities
On December 27, 2016 Luxoft International Company Ltd. entered into the Facility agreement with Amsterdam Trade Bank N.V. for up to $2.0 million of the available overdraft limit. The overdraft facility bears interest at a rate of one-month LIBOR plus 3.75% per annum. There was no outstanding amount as of March 31, 2018, under this facility.
On November 12, 2013 Luxoft Professional Romania SRL entered into an overdraft facility agreement with ZAO Citibank for $0.9 million. As of March 31, 2018, this facility has not been drawn down. The overdraft facility bears interest at a rate of one-month LIBOR plus 2.00% per annum overnight interest rate paid monthly. The overdraft facility is guaranteed by Luxoft Holding, Inc. and Luxoft Professional, LLC. There was no outstanding amount as of March 31, 2018, under this agreement.
On October 25, 2012 Luxoft Professional, LLC entered into an overdraft facility
agreement with ZAO Citibank for $3.0 million. As of March 31, 2018, this facility has not been drawn down. The overdraft facility bears interest at a rate of one-month LIBOR plus 2.25% per annum overnight interest rate paid monthly. The overdraft facility is guaranteed by Luxoft Holding, Inc. There was no outstanding amount as of March 31, 2018, under this facility.
Cash flows
The following table presents the major components of net cash flows for the years ended March 31, 2018, 2017 and 2016.
Net cash provided by operating activities decreased by $47.0 million, or 38.5%, to $75.0 million in the fiscal year ended March 31, 2018, from $122.0 million in the fiscal year ended March 31, 2017, primarily due to the increase in amounts due from and to clients from $2.8 million in the fiscal year ended March 31, 2017 to $48.1 million in
the fiscal year ended March 31, 2018, as a result of decreased efficiency of our collecting cycle. Another contributing factor was the net effect of the decrease in net income, which includes higher depreciation and amortization charges as well as a higher impairment loss in 2018 fiscal year as compared to 2017 fiscal year.
Net cash provided by operating activities increased by $16.6 million, or 15.8%, to $122.0 million in the fiscal year ended March 31, 2017, from $105.4 million in the fiscal year ended March 31, 2016, primarily due to the decrease in amounts due from and to clients from $14.6 million in the fiscal year ended March 31,
2016 to $2.8 million in the fiscal year ended March 31, 2017, as a result of increased efficiency of our collecting cycle. Another contributing factor was the net effect of the decrease in net income, which includes impairment loss and higher incentive based compensation payments in 2017 fiscal year as compared to 2016 fiscal year, partially offset by the increase in non-cash gain from revaluation of contingent liabilities.
Net cash used in investing activities
Net cash used in investing activities decreased by $51.3 million, or 48.1%, to $55.2 million in the fiscal year ended March 31, 2018, from
$106.5 million in the fiscal year ended March 31, 2017. The change was mainly due to decreased investments in acquisitions of new businesses which together with deposits on escrow accounts amounted to $30.0 million in the fiscal year ended March 31, 2018, and $82.7 million in the fiscal year ended March 31, 2017.
Net cash used in investing activities increased by $73.7 million, or 225.3%, to $106.5 million in the fiscal year ended March 31, 2017, from $32.7 million
in the fiscal year ended March 31, 2016. The change was mainly due to increased investments in acquisitions of new businesses which together with deposits on escrow accounts amounted to $82.7 million in the fiscal year ended March 31, 2017, and $3.5 million in the fiscal year ended March 31, 2016. This increase was partially offset by decreased investments in our existing businesses, in particular purchases of new electronic and office equipment and other purchases of property and equipment, which decreased from $24.2 million to $19.6 million when comparing the years ended March 31, 2016 and 2017, respectively.
Net cash used in financing activities
Cash
used in financing activities increased by $11.6 million to $25.8 million in the fiscal year ended March 31, 2018, from $14.2 million in the fiscal year ended March 31, 2017. The increase was primarily attributable to payment of deferred purchase consideration for the acquired businesses, amounting to $19.3 million and $4.6 million in the years ended March 31, 2018 and 2017,
respectively. This increase was partially offset by the decrease in repayment of short-term borrowings from $5.9 million in the fiscal year ended March 31, 2017 to $0.8 million in the fiscal year ended March 31, 2018.
Cash used in financing activities increased by $5.3 million to $14.2 million in the fiscal year ended March 31, 2017,
from $8.9 million in the fiscal year ended March 31, 2016. The increase was primarily attributable to repayment of short-term borrowings, amounting to $5.9 million and $0.9 million in the years ended March 31, 2017 and 2016, respectively. The majority of these short-term borrowings belonged to the companies acquired during 2017 fiscal year. Another $1.8 million of increase was attributable to repurchase of ordinary shares as a result of personal income taxes withheld from SOP III participants upon exercise of vested RSUs, SARs and PSAs which increased from $1.8 million in the fiscal year March 31, 2016 to $3.6 million in the fiscal year March 31, 2017. This increase was partially offset by the decrease in the amount of deferred
purchase consideration paid for the acquired businesses from $6.1 million in the fiscal year ended March 31, 2016, to $4.6 million in the fiscal year ended March 31, 2017.
Critical accounting policies
We prepare our consolidated financial statements in accordance with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect: (i) the reported amounts of assets and liabilities; (ii) disclosure of contingent assets and liabilities at the end of each reporting period; and (iii) the reported amounts of sales and expenses during each reporting period. The most significant estimates relate to the recognition of revenue, allowance for doubtful accounts, income taxes, goodwill and other long-lived assets, assumptions used in valuing share-based compensation awards
and contingencies. We evaluate these estimates and assumptions based on historical experience, knowledge and assessment of current business and other conditions, and expectations regarding the future based on available information and reasonable assumptions, which together form a basis for making judgments about matters not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. When reviewing our consolidated financial statements, you should consider (i) our selection of critical accounting policies, (ii) the judgment and other uncertainties affecting the application of such policies and (iii) the sensitivity of reported results to changes in conditions and assumptions. We consider the policies discussed below to be critical to an understanding of our
consolidated financial statements as their application places significant demands on the judgment of our management.
An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements. We believe that the following critical accounting policies are the most sensitive and require more significant estimates and assumptions used in the preparation of our consolidated financial statements. You should read the following descriptions of critical accounting policies, judgments and estimates in conjunction with our consolidated financial statements and other disclosures included in this annual report.
Revenue
recognition
The Company derives its revenues from software development services, including in such areas of competence as (a) custom software development and support, (b) product engineering and testing and (c) technology consulting.
Revenues under time and materials and fixed price contracts are recognized in the period in which these services are performed and contract stages are accepted by clients by using a proportional performance method. We consider amounts to be earned once evidence of an arrangement has been obtained, services are delivered, fees are fixed or determinable, and collectability is reasonably
assured. In such contracts, our services, measured by time incurred, typically are provided in less than a year and represent the contractual stages or output measures which define the pattern of contractual earnings.
The complexity of the estimation process and factors relating to the assumptions, risks and uncertainties inherent with the application of the proportional performance method of accounting affects the amounts of sales reported in our consolidated financial statements. A number of internal and external factors can affect our estimates, including labor hours and changes in specification and testing requirements.
Time-and-material contracts. We recognize sales from
time-and-material contracts as services are performed, based on actual hours and applicable billing rates, with the corresponding cost of providing those services reflected as cost of sales. The majority of such sales are billed on a monthly basis whereby actual time is charged directly to the client at negotiated hourly billing rates.
Fixed price contracts. We recognize sales from fixed price contracts
based on the proportional performance method, during the period in which amounts become billable in accordance with the terms of the contracts. Services under fixed price contracts are delivered in stages. Revenues recognized for completed stages are generally representative of the percentage of completion of the entire contract, as they are based on actual hours incurred compared with the total hours estimated to complete the entire contract. Costs related to completed stages are expensed as incurred, while those related to uncompleted stages are recorded in work-in-progress on the balance sheet. In instances
where final acceptance is specified by the client, sales are deferred until all acceptance criteria have been met. In the absence of a sufficient basis to measure progress towards completion, sales are recognized upon receipt of final acceptance from the client. We have not yet had any significant contracts for which estimates of completion could not be developed or final project completion and client acceptance was so uncertain as to require deferral of revenue until the completion of the project.
Multiple elements arrangements. We evaluate our contracts for multiple deliverables, and, when appropriate, separate the contracts
into separate units of accounting for revenue recognition. Support services, if they are required by clients, are generally contracted for and commence upon completion of the software development services. We allocate revenue to these deliverables in a multiple element arrangement based upon their relative selling prices. The relative selling price is based on the price charged for the deliverable when it is sold separately. For multiple element arrangements under time-and-material contracts, revenue is recognized as services are performed for each deliverable based on hours incurred and applicable hourly rates. For arrangements under fixed price contracts, software development revenue is recognized upon delivery of development services under the proportional performance method, as described
above and for support services—on a straight-line basis over the support period, which is generally from 6 months to a year.
We report gross reimbursable travel and "out-of-pocket" expenses incurred as both sales and cost of sales in the consolidated statements of comprehensive income.
In May 2014, the FASB issued Accounting Standards Update 2014-9, "Revenue from Contracts with Customers" ("ASU 2014-9"). ASU 2014-9 and further issued Accounting Standards Updates to Topic 606(2) will replace all current U.S. GAAP guidance on this topic and eliminate all industry-specific guidance. The new guidance (i) removes inconsistencies, and weaknesses in revenue requirements, (ii) provides a more robust framework for addressing revenue issues,
(iii) improves comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets, (iv) provides more useful information to users of financial statements through improved disclosure requirements, and (v) simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer. The core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services.
The Group has completed its analysis of ASC 606 requirements and their impact on existing policies, processes, IT systems and internal control environment.
The Group will adopt ASC 606 starting 1 April, 2018 using the modified retrospective approach by applying the
new guidance to contracts that were not completed at the date of initial application. The Group does not expect a significant change in the timing or pattern of revenue recognition upon the adoption of ASC 606. For time-and-materials contracts the Group generally expects to recognize revenue as services are performed under the practical expedient in ASC 606-10-55-18, which is consistent with the Group’s current policy. For fixed price contracts the Group generally expects to recognize revenue over time using an appropriate progress measure of performance obligation satisfaction, which is consistent with the Group’s current proportional performance method. For royalty-based contracts
the Group expects to recognize revenue when subsequent sale or usage occurs, which is consistent with the Group’s current policy. For licenses of intellectual property the Group expects to recognize revenue over the license period or at the beginning of the license period depending on whether a right to access or a right to use is granted to a customer, which is consistent with the Group’s current policy.
The Group is planning to align its processes of collecting, analyzing and concluding on customer contracts with ASC 606 model and its disclosure requirements. In order to achieve this certain changes to existing IT systems will be made to enable the Group to capture the key features of contracts with customers and to prepare the required disclosures.
Starting April 1, 2018 the Group will implement additional internal controls over the process of collecting, analyzing and concluding on contracts with customers that fall within the scope of ASC 606 as well as internal controls over preparation of disclosures. As of March 31, 2018 the Group implemented additional internal controls over the process of adopting ASC 606 and preparing the respective transitional disclosure.
Accounts receivable
Accounts receivable are shown at their net realizable value, which approximates their fair value. Since we generally do not require collateral or other security from our clients, we establish an allowance for doubtful accounts based upon estimates, historical
experience and other factors surrounding the credit risk of specific clients. Allowances for doubtful
accounts are made for specific accounts in which collectability is doubtful. If the financial condition of our clients were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Recoveries of losses from accounts receivable written off in prior years are presented within income from operations on our consolidated statements of comprehensive income.
Our client base primarily consists of large multinational companies. The timing of invoicing and collection
of our accounts receivable under our contracts is impacted by the life cycle of each project and related payment milestones.
Our management periodically monitors outstanding receivables and collection status and assesses the adequacy of allowances for accounts where collection may be in doubt as frequency and amount of client defaults change due to our clients' financial condition or general economic conditions.
Goodwill
Goodwill represents an excess of the cost of business acquired over the fair value of the amounts assigned to tangible and intangible assets acquired less liabilities assumed. The determination of the fair value of intangible assets acquired involves certain judgments and estimates. These judgments can include, but are not limited
to, the cash flows that an asset is expected to generate in the future and the appropriate weighted average cost of capital.
We perform a test for impairment annually, or when indications of potential impairment exist, utilizing a fair value approach at the reporting unit level. We determine fair value using the income approach, which estimates the fair value of our operating units based on the future discounted cash flows.
The basis for the cash flow assumptions includes forecasted revenue, operational costs and other relevant factors, including estimated capital expenditures. Assumptions under this method have been adjusted to reflect increased risk due to current economic volatility. In testing for a potential impairment of goodwill, we estimate the fair value of our operating units to which goodwill relates and determine the carrying value (book value) of the assets and liabilities
related to those operating units. If an impairment of goodwill has occurred, we recognize a loss for the difference between the carrying amount and the implied fair value of goodwill.
Long-lived assets
We amortize intangible assets, principally software and acquired contract-based client relationships, on a straight-line basis over their estimated useful lives. We review long-lived assets, including intangible assets that are subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We base our evaluation on such impairment indicators as the nature of the assets, the future economic benefit of the assets, any historical or future profitability measurements, as well as other external market conditions
or factors that may be present. The carrying value is not recoverable if it exceeds the undiscounted future cash flows resulting from the use of the asset and its eventual disposition. If impairment has occurred, we measure any impairment of intangible assets based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our business. If such assets were determined to be impaired, we recognize a loss for the difference between the carrying amount and the fair value of the asset. As of March 31, 2018, we recorded impairment loss of $8.2 million relating to IntroPro client base. See Impairment of Long lived assets and Note 7, Impairment loss, below.
Government
Grants
We participate in government grants programs in several countries. Due to the absence of authoritative regulations for government grants in U.S. GAAP, we base our accounting on IFRS guidance as a non-authoritative source. We recognize a grant as non-operating income based on the evidence that the company has fulfilled the requirements of the program and the grant was received.
Income taxes
Determining the consolidated provision for income tax expense, deferred income tax assets and liabilities and related valuation allowance, if any, involves judgment. We are required to calculate and provide for income taxes in each of the jurisdictions where we operate. Changes in the geographic mix or estimated level of annual pre-tax income can also affect
the overall effective income tax rate.
Because we operate in a number of countries, our income is subject to taxation in differing jurisdictions with a range of tax rates. Therefore, we need to apply significant judgment in order to determine our consolidated income tax position. As a result of our multi-jurisdictional operations, we are exposed to a number of different tax risks including, but not limited to, changes in tax laws or interpretations of these tax laws. The tax authorities in the jurisdictions where we operate may audit our tax returns and may disagree with the position taken in those returns. An adverse outcome resulting from any settlement or
future
examination of our tax returns may result in additional tax liabilities and may adversely affect our effective tax rate, which could have a material adverse effect on our financial position, results of operations and liquidity.
Deferred tax assets and liabilities are recognized for the estimated future tax consequences of temporary differences between the consolidated financial statement carrying amounts and their respective tax bases at each reporting date. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which the temporary differences are expected to be reversed. Changes to enacted tax rates would result in either increases or decreases in the provision for income taxes in the period of changes. We evaluate the realization of deferred tax assets and recognize a valuation allowance when it is more likely than not that all or a portion of deferred tax
assets will not be realized.
The realization of deferred tax assets is primarily dependent on future taxable income. Any reduction in estimated forecasted results may require that we record valuation allowances against deferred tax assets. Once a valuation allowance has been established, it will be maintained until there is sufficient positive evidence to conclude that it is more likely than not that the deferred tax assets will be realized.
If the allowance is reversed in a future period, the income tax provision will be correspondingly reduced. Accordingly, the increase and decrease of valuation allowances could have a significant negative or positive impact on future earnings.
Our provision for income taxes also includes the impact of provisions established for uncertain income tax positions, as well as the related interest and penalties.
Tax exposures can involve complex issues and may require an extended period to resolve. Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given that the final tax outcome of these matters will not be different. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters differs from the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made.
Accounting for share-based employee compensation plans
Share-based employee compensation is determined based on the grant date fair value of the awards ultimately expected to vest. We recognize these compensation costs on a straight-line basis over the requisite service period of the entire
award, provided it is no less than the amount that would have been recognized for the vested portion of the award.
The expected life of an option usually represents the weighted-average period during which our option awards are expected to be outstanding. We have no experience or history to be able to determine the expected life over which our option awards will be held before exercise. However, we believe it is reasonable to assume exercise or issuance upon vesting, since the exercise price is nil.
If any of the assumptions used in the valuation model changes significantly, share-based compensation for future awards may differ materially compared to awards previously granted.
We estimate forfeitures at the time of a grant and revise our estimates, if necessary, in subsequent periods if actual forfeitures or vesting differ from those estimates.
The assumptions used in the valuation model are based on subjective future expectations combined with management judgment. We use an estimated 3% attrition rate based on the history of retention amongst key employees and management. If the actual forfeiture rate is materially different from the estimate, share-based compensation expense could be materially lower than what has been recorded.
Recent accounting pronouncements
See Note 2, Basis of presentation and significant accounting policies, below.
C.
Research and Development, Patents and Licenses
Research
and development costs are expensed as incurred. The total amount of research and development activities was $15.4 million, $15.4 million and $6.7 million for the years ended March 31, 2018, 2017 and 2016, respectively.
D.
Trend Information
Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the period from April 1,
2017 to March 31, 2018 that are reasonably likely to have a material adverse effect on our net revenue, income, profitability, liquidity or capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial condition.
We do not currently engage in off-balance sheet financing arrangements. In addition, we do not have any interest in entities referred to as variable interest entities, which includes special purposes entities and other structured finance entities.
F.
Contractual Obligations
The following table represents a summary of our estimated future payments under material contractual cash obligations as of March 31, 2018. Changes in our business needs, cancellation
provisions, changing interest rates and other factors may result in actual payments differing from these estimates. We cannot provide certainty regarding the timing and amounts of payments.
ITEM 6. Directors, Senior Management and Employees
A.
Directors and Senior Management
The following table sets forth the name, age, and position as of the date of this annual report regarding each of our directors, executive officers and director nominees.
Determined by our board of directors to be "independent" as defined in Rule 10A-3(b)(1) under the Exchange Act and the rules of the NYSE Listed Company Manual.
Dmitry
Loshchinin has served as our Chief Executive Officer since our inception in 2000. Mr. Loshchinin also became a director of Luxoft in November of 2013. Prior to joining Luxoft, Mr. Loshchinin served in management roles within software companies such as Kerntechnik, Entwicklung, Dinamyk GmbH, Siemens Nixdorf Informationssysteme, AG and IBM Corp. Beginning in 1998, he also oversaw IBS Group's initiative to offer offshore services. This initiative eventually became Luxoft. Mr. Loshchinin holds a Master of Science degree in Applied Mathematics from Moscow State University and completed an executive education program at the Wharton School of the University of Pennsylvania.
Michael Friedland has served as our Chief Operating Officer since April 2017 consolidating several corporate functions under the Global COO organization. Prior to that, Mr. Friedland held the position of an Executive Vice President leading Strategic Management and Continuous Improvement organization which consisted of four units: (i) infrastructure, operation, security and internal automation, (ii) organizational transparency, analytics and controls, focusing on global and cross-functional processes, management frameworks and capacity, post-merger integration activities, (iii) continuous improvement, and (iv) M&A. Mr. Friedland has more than 20 years of experience in the IT and software services industry. Prior to joining Luxoft, Mr. Friedland worked as a software engineer for Merrill Lynch, Lehman Brothers and Merck (formerly Medco). In 1993, Mr. Friedland co-founded IT Consulting International
("ICTI"), which provided consulting and later outsourcing services for various U.S. clients. In 2006, we acquired ICTI. Mr. Friedland completed an executive education program at the Wharton School of the University of Pennsylvania and London Business School.
Evgeny Fetisov—Chief Financial Officer
Evgeny Fetisov joined us as the Chief Financial Officer effective March 31, 2017. Prior to that from 2013, Mr. Fetisov served as the Chief Financial Officer and a management board member at the Moscow Exchange MICEX-RTS, where he led several successful major corporate M&A transactions and was responsible for overseeing the finance, investor relations, procurement and administrative functions. From 2007 to 2013, Mr. Fetisov served as a managing director and partner at Da Vinci Capital Management, an independent investment manager
focusing on mid-market private equity investments in Russia and other Eurasian Economic Union countries. From 2003 to 2007, Mr. Fetisov served as the deputy Chief Executive Officer at New Square, a real estate company. From 2001 to 2003, he served as a consultant at McKinsey and Company. From 2000 to 2001, he served as a Trader and Marketing Officer, Treasury at Citibank. Mr. Fetisov served as a board member at RTS Stock Exchange from 2009 to 2011 and at B2B-Center during 2012. He also served as a member of the Corporate Governance Committee, Remuneration Committee and the Strategy Committee at MICEX-RTS at various times between 2009 and 2013. Mr. Fetisov was ranked as a top CFO in Financial Services by Kommersant TOP-1000 in 2014-2016 and as a top CFO for Investor Relations by Extel in 2015. Mr. Fetisov received a university degree in international economics from the Finance Academy under the Government of the Russian Federation. He also completed Advanced Management
Program at Harvard Business School.
Roman Trachtenberg—Managing Director, Global Head of Excelian Luxoft Financial Services
Roman Trachtenberg joined us in 2009 as Financial Services Accounts Director, and has served as Chief Executive Officer of Luxoft North America since 2011 and as our Global Head of Excelian Luxoft Financial Services since April 2017. Prior to joining us, Mr. Trachtenberg served as Chief Operating Officer at SMINEX LLC and as Vice President of Operations at Rosbuilding Investment Company, both Russian private equity firms. Mr. Trachtenberg has also held management positions at companies including Republic National Bank of New York, Gateway, Deutsche Bank and AIG. Mr. Trachtenberg has more than 17 years of technology experience in various industries, including financial services, consumer retail and real estate. Mr. Trachtenberg holds a Bachelor's degree in Business
Administration from Southern State University. In 2015 Mr. Trachtenberg has successfully completed Advanced Management Program at Harvard Business School.
Alwin Bakkenes—Managing Director, Automotive
Alwin Bakkenes joined us in 2016 through the acquisition of Pelagicore, where he served as the CEO starting in 2011. Prior to that, Mr. Bakkenes held the position of Director Infotainment & Driver Information at Volvo Car Corporation responsible for the development of all electronics in the Cockpit, including HMI. Since 2013, Mr. Bakkenes has been serving as a Board Member on the GENIVI Alliance, a non-profit organization dedicated to driving the adoption of Open Source for in-vehicle infotainment. Mr. Bakkenes holds a Master's degree in Knowledge Management from the Middlesex University and a Bachelor's degree in Computer Science from the Amsterdam University of Applied Sciences.
Samuel
Mantle—Managing Director, Digital Enterprise
Samuel Mantle joined us in May 2017 and was most recently responsible for our Healthcare and Life Sciences business. Since March 2018, Mr. Mantle has served as a Managing Director for Digital Enterprise tasked with driving overall strategy, business development and governance across the Digital Enterprise vertical. Prior to joining us, he spent over 10 years at Novartis with global responsibility for Technology Strategy, Innovation, Operations & Organizational Effectiveness in CIO and Executive Technology positions. Mr. Mantle started his early career in SAP consulting followed by technology design and management roles at Sony and Merisant. He holds a Master of Aerospace Engineering graduate degree from the University of Bristol in the UK.
Grigory Kauzov joined us July 2009 and has served in various management roles. In November 2016, Mr. Kauzov was appointed the Vice President of Global Services overseeing Luxoft's portfolio of application development and infrastructure services. He is responsible for services delivery for all of our industry verticals, implementation of the best practices and continuous service transformation to drive value and productivity for our clients. Between August 2010 and November 2016, Mr. Kauzov served as Luxoft's Global Account Manager for UBS, managing all aspects of business development, client relationship, and service delivery for our strategic Financial Services client. Overall Mr. Kauzov has more than 20 years of experience in the IT and software services industry. Mr. Kauzov holds a Master’s degree
in Economic Geography from the Lomonosov Moscow State University. In 2008 Mr. Kauzov completed Economics and Management postgraduate program at the Lomonosov Moscow State University.
Directors
Esther Dyson—Director
Esther Dyson has been a member of our board of directors since February 2014. In May 2013, Ms. Dyson founded the Way to Wellville, a not-for-profit organization focused on community health. Previously, she worked as a journalist at Forbes and a technology analyst New Court Securities and Oppenheimer & Co. Additionally, Ms. Dyson worked as editor-in-chief for and was chairman of EDventure Holdings from 1983. Ms. Dyson is a member of the boards of 23andMe, Meetup Inc., Pressreader, Wellpass, and Yandex (NASDAQ: YNDX). She was also the founding chairman of the Internet Corporation for Assigned Names and Numbers (ICANN). Between
1997 and 2013, Ms. Dyson was a member of the advisory board of IBS Group. Ms. Dyson holds a Bachelor of Arts in economics from Harvard University and a certificate of training completion from Yuri Gagarin Cosmonaut Training Center.
Glen Granovsky—Director
Glen Granovsky has been a member of our board of directors since 2006. He has served as Director of IBS Group since 1999. Mr. Granovsky served as President and CEO of Luxoft USA, Inc. (formerly IBS USA, Inc.) between 2005 and 2010. Mr. Granovsky is also a Director of WB Services Inc., Discreet Management and Consulting Limited, The Custodians of Russian Culture Inc., Oradell Equities Inc., News 360 International Group Inc., Paramus Enterprises Ltd., RS-Technologies Ltd., BXA Investments Ltd. and Jazva Inc. Prior to joining us, Mr. Granovsky was head of the IT sales team at Intermicro
Joint Venture and a manager at Asiatronics Limited, U.K. Mr. Granovsky holds a Master's degree in Applied Mathematics and Information Systems Management from Gubkin Russian State University of Oil and Gas.
Marc Kasher—Director
Marc Kasher has been a member of our board of directors since September of 2013. Mr. Kasher is the Founder and CEO of Sapiens Advisors, an international consulting company working with global institutions providing advisory services in raising capital, strategic acquisitions, corporate governance, financial management, and investor relations. Prior to founding Sapiens Advisors, Mr. Kasher was a Managing Director at PineBridge Investments (formerly known as AIG Investments). Prior to PineBridge Investments, Mr. Kasher worked for the United States Agency for International Development, where he was involved in projects that focused on privatization strategies
in several countries of the former Soviet Union. Mr. Kasher served in the past as a director of several Pine Bridge Investments' portfolio companies. Mr. Kasher holds a Master of Business Administration with a concentration in finance from Georgetown University and a Bachelor of Arts degree from Tufts University.
Anatoly Karachinskiy—Director
Anatoly Karachinskiy has been a member of our board of directors since 2013. Mr. Karachinskiy is the co-founder of IBS Group. Prior to founding IBS Group, Mr. Karachinskiy was the technical director of Intermicro Joint Venture. Mr. Karachinskiy previously worked at PROSYSTEM, an Australian computer hardware company, and at the All-Union Research and Development Institute for Railroad Transport. Mr. Karachinskiy has an undergraduate degree in systems engineering from the Moscow Institute of Railroad Engineers.
Thomas
Pickering—Director
Thomas Pickering has been a member of our board of directors since June 2013. Mr. Pickering is the Vice Chairman at international consulting firm Hills & Company. He served as Senior Vice President for International Relations at the Boeing Company until his retirement in 2006. Prior to joining the Boeing Company, Mr. Pickering served as Undersecretary of State for Political Affairs at the U.S. Department of State. Mr. Pickering was U.S. ambassador to the Russian Federation, India, Israel, El Salvador, Nigeria and the Hashemite Kingdom of Jordan. Mr. Pickering received a Bachelor's degree in history from Bowdoin College and a Master's degree from the Fletcher School of Law and Diplomacy at Tufts University.
Dmitry Loshchinin was appointed to our board of directors in November 2013. See "ITEM 6. Directors. Senior Management and Employees—A. Directors and Senior Management—Executive Officers."
Sergey Matsotsky—Director
Sergey Matsotsky has been a member of our board of directors since November 2013. Mr. Matsotsky is a co-founder and Senior Vice President of IBS Group, and Chief Executive Officer of IBS IT Services. Prior to founding IBS Group in 1992, Mr. Matsotsky was commercial director of a large Russian IT company. Mr. Matsotsky
holds an undergraduate degree in Automation and Applied Mathematics from the Gubkin Russian State University of Oil and Gas.
Yulia Yukhadi—Director
Yulia Yukhadi has been a member of our board of directors since February 2015. Ms. Yukhadi has served as Chief Financial Officer of IBS Group since 2006 and as Chief Financial Officer of PressReader Inc. since 2017. Prior to that, Ms. Yukhadi served as financial director and vice president of finance with various consumer goods and telecom companies between 2003 and 2006, and held a position as the financial controller in the financial department of IBS Group between 1998 and 2003. She holds an undergraduate degree in mathematical economics from the Moscow State University. Ms. Yukhadi is a Certified Management Accountant.
B. Compensation
The
aggregate compensation paid to or accrued on behalf of our directors and executive officers as a group during the year ended March 31, 2018 consisted of approximately $14.9 million in salary, bonuses, stock-based compensation and directors' fees. This amount includes approximately $0.2 million set aside or accrued to provide pension, severance, retirement or similar benefits or expenses. This amount does not include any professional and business association dues, business travel, relocation costs and other expenses and benefits commonly reimbursed or paid by companies in our industry and geographies.
We pay each of our three independent directors, Ms. Dyson and Messrs. Kasher and Pickering, an annual fee of $70,000. Each independent director
receives an additional annual fee of $10,000 for his or her service on any Board committee, and a further annual fee of $10,000 for serving in the role of a Chairperson of any Board committee. We also reimburse our directors for reasonable and documented travel expenses incurred to attend board meetings. None of our directors is party to a service contract that provides for benefits upon the termination of the director's engagement.
During the year ended March 31, 2018, a total amount of 130,273 RSUs, 14,571 PSAs and 53,782 SARs have been vested into the ownership of our directors and executive officers
under our Incentive Plan described below. Upon vesting or exercise of these instruments, 271,443 Class A ordinary shares have been issued. RSUs have zero exercise price and no expiration date. PSAs and SARs have exercise price ranging from 46.95 to 65.60 US dollars and expiration dates ranging from December 16, 2019 to December 16, 2021.
Agreements with our Chief Executive Officer
Second Amended and Restated Employment Agreement
In November 2015, Mr. Dmitry
Loshchinin, our President and CEO, entered into a Second Amended and Restated Employment Agreement, effective as of August 12, 2014, with Luxoft Global Operations GMBH ("LGO"). Under Mr. Loshchinin's employment agreement, he has agreed to serve as our President and CEO. Mr. Loshchinin also is a member of our board of directors. Mr. Loshchinin's initial term of service under this agreement continues until August 11, 2019. Thereafter, the agreement continues for successive one-year terms unless terminated by either party, generally by delivering six months' prior written notice on or before February 11 of any year. Mr. Loshchinin's salary and annual bonus are subject to review for increase at the discretion of our board of directors. Mr. Loshchinin may also participate in certain executive benefit plans, in particular a pension plan established by LGO in accordance
with the Swiss Federal Law on occupational pension schemes, as well as a loss of earnings insurance in case of illness, accident insurance and health insurance. We believe these are customary benefits made available to executive officers resident in Switzerland by employers of similar size operating in our industry. LGO currently pays 100% of the premium for all insurance coverages listed above.
If Mr. Loshchinin's employment is terminated (i) by us without cause (as defined in the employment agreement and described below), (ii) by Mr. Loshchinin with good reason (as defined in the employment agreement, and which includes a material reduction in his base salary or bonus, a material reduction in his title, duties and authority or a material adverse change in the reporting structure, LGO's material breach of the employment agreement or our material breach of the RSU agreement
(described below), or our failure or LGO's failure to obtain assumption of the employment agreement by a successor), in each case of (i) and (ii) whether or not in connection with a change in control, or (iii) due to disability or death, he or his designated beneficiary or estate administrator, as applicable, is entitled to receive: (1) accrued salary and accrued but unused vacation through the termination date, (2) any earned but unpaid annual bonus for our completed fiscal year immediately preceding the termination date, pro-rated through the termination date, (3) a payment equal to twelve months of his then base salary, payable over the twelve-month period following the termination date, and (4) the continuation of life, accident and health insurance coverage in the same scope as covering Mr. Loshchinin and his family immediately prior to termination date, for eighteen months following
the termination date. Additionally, the unvested portion of Mr. Loshchinin's RSU award (as described below) will immediately vest pro-rated based upon the portion of the period of restriction (as defined in the RSU agreement) that Mr. Loshchinin was employed prior to the date of termination, and all remaining unvested RSUs will be forfeited. Mr. Loshchinin also will be entitled to sell or otherwise transfer the shares underlying his vested RSUs upon expiration of 12 months from the termination date, notwithstanding the transfer restrictions contained in his Restricted Stock Unit Award Agreement, provided that Mr. Loshchinin complies with restrictive covenants described below.
In addition, in the event of a change in control (as defined in the employment agreement), if Mr. Loshchinin resigns his employment within one year following such change in control with at least six months' prior written notice of such termination, Mr. Loshchinin's
resignation will be deemed a resignation for good reason and he will be entitled to the above described severance and related benefits. Additionally, the unvested portion of Mr. Loshchinin's RSU award under the RSU agreement (described below) will immediately vest pro-rated based upon the portion of the period of restriction (as defined in the RSU agreement) that Mr. Loshchinin was employed prior to the date of a change in control ("Pro-Rata Vesting"), and one-half of any RSUs not vested after application of the Pro-Rata Vesting provisions will also vest immediately prior to the date of a change in control. All remaining unvested RSUs will be forfeited, if our Board does not exercise its right to fully vest all of Mr. Loshchinin's RSUs in connection with a change of control, or the parties to a change in control do not assume or convert the RSUs into a substitute award for successor's stock on an economically equivalent basis.
If
we terminate Mr. Loshchinin's employment agreement for cause, which includes his material breach of the employment agreement, gross negligence or gross misconduct, conviction of, or pleading nolo contendere to, a crime involving moral turpitude or a felony, or willful failure to comply with any valid and legal direction of our board of directors, or if Mr. Loshchinin voluntarily terminates his employment agreement with us without good reason and not due to death or disability, which can be done by an immediately effective written notice delivered by the terminating party to the other party, then Mr. Loshchinin will only be entitled to receive his accrued base salary and to sell or otherwise transfer the shares underlying his vested RSUs upon expiration of 24 months from the termination date, notwithstanding the transfer restrictions contained in his RSU agreement, (described below) provided that Mr. Loshchinin complies with restrictive covenants described below. All
of Mr. Loshchinin's unvested RSUs will be forfeited.
Mr. Loshchinin is also subject under the terms of his employment agreement to non-competition covenants in the CEE, the United States and Asia, and to non-solicitation covenants with respect to our clients and employees, in each case for a period of twelve months after termination of employment, along with ongoing confidentiality and non-disclosure requirements.
The employment agreement is governed by Swiss law.
Restricted Stock Unit Award Agreement
In December 2014, Mr. Loshchinin was granted RSUs in respect of 328,513 of our Class A ordinary shares with no par value pursuant to the Incentive Plan and a Restricted Stock Unit Award Agreement (the "RSU agreement"). See "ITEM 6. Directors, Senior Management and Employees—C. Board Practices—Stock
Option Plans—Luxoft Holding, Inc 2014 Incentive Compensation Plan." The RSUs vest annually in equal installments over a period of five years (each referred to as a period of restriction), commencing on August 12, 2015. In order to receive the shares underlying his vested RSUs, Mr. Loshchinin must deliver an exercise notice to us, specifying the number of our Class A ordinary shares he wishes to receive in settlement of such vested RSUs. As soon as practicable after receipt of such notice, we will deliver to Mr. Loshchinin the number of shares stated in the notice, in accordance with the Incentive Plan. In October 2017, Mr. Loshchinin exercised his right to receive 197,109 shares underlying vested RSUs. The Restricted Stock Unit Award Agreement contains transfer restrictions with respect to shares underlying vested RSUs. In particular, Mr. Loshchinin agrees not to sell or otherwise transfer more than 25% of the shares
underlying each vested annual portion of RSUs during the period ending August 12, 2019, subject to customary exceptions for estate planning purposes. Mr. Loshchinin may additionally participate in the Incentive Plan and our other long-term incentive plans thereafter.
In November 2015, Mr. Loshchinin received performance-based RSUs ("Performance Units") in respect of up to 328,513 of our Class A ordinary shares with no par value pursuant to the Incentive Plan, as amended and restated, and a Performance Unit Agreement thereunder.
The Performance Units are eligible to vest on August 31, 2019, subject to Mr. Loshchinin's continued service through such date (or upon an earlier termination of Mr. Loshchinin's employment by us without "cause" or by him for "good reason" (each as defined in his employment agreement, as described above) and the number of Performance Units which will vest on such date will be calculated based upon our achievement of a weighted average market cap of at least $2,000 million for the six-month period prior to such date, with 100% of the Performance Units vesting in the event that our weighted average market cap for such period is at least $3,000 million (and with ratable vesting of 70% of the Performance Units if our weighted average market cap is between $2,000 million and
$2,500 million for such period, and the vesting of 70% of the Performance Units and ratable vesting of the remaining 30% of the Performance Units if our weighted average market cap is between $2,500 million and $3,000 million for such period). In the event of the occurrence of a "change in control" (as defined in the Incentive Plan) prior to such vesting date, if the parties do not agree to the assumption or substitution of this award, then the performance Units will be eligible to vest immediately prior to the consummation of such change in control, and the number of Performance Units which will vest on such date will be calculated ratably based upon our achievement of a weighted average market cap for the six-month period prior to such date above the base amount of $1,188 million,
with 100% of our the Performance Units vesting in the event that our weighted average market cap for such period is at least $3,000 million (subject to our discretion to increase the number of Performance Units that vest upon a change in control, based upon such factors as the investment multiples achieved in such transaction, Mr. Loshchinin's personal contributions to the economic results obtained for our shareholders, and/or in consideration for achievement of management retention objectives). The shares underlying the Performance Units shall be delivered to Mr. Loshchinin no later than 15 days following the applicable vesting date. The award of Performance Units to Mr. Loshchinin will not affect his eligibility for, participation in or benefits under the Incentive Plan or any other plan maintained by us or our affiliates.
C.
Board
Practices
Corporate governance practices
We are a foreign private issuer under SEC and NYSE rules and a "controlled company" under NYSE rules. While we voluntarily follow certain NYSE corporate governance rules that normally would not bind foreign private issuers, we take advantage of exemptions from other NYSE rules due to our status as a "controlled company."
A "controlled company" is a company of which more than 50% of the voting power is held by an individual, group or another company. We are a controlled company on the basis that IBS Group through its two wholly-owned subsidiaries has 83.2% of our voting power. As a controlled company, we are not required to follow certain corporate governance rules of
the NYSE. In particular, we are exempt from the requirement to maintain a nominating and corporate governance committee and a compensation committee, each of which is composed entirely of independent directors, has a written charter addressing the committee's purpose and responsibilities and is subject to an annual performance evaluation, and from the requirement to maintain a majority independent board of directors.
We have elected to follow the corporate governance rules of the NYSE applicable to controlled companies, with the exception of maintaining an internal audit function, even though, as a foreign private issuer, we are permitted to follow the corporate governance practices of our home country, the British Virgin Islands, instead of most of these NYSE requirements. Nevertheless, we may in the future follow home country corporate governance practices instead of some or all of the NYSE's requirements, including in the
event we are no longer eligible for the "controlled company" exemption.
A foreign private issuer that elects to follow home country practice instead of the NYSE's requirements must submit to the NYSE in advance a written statement from an independent counsel in such issuer's home country certifying that the issuer's practices are not prohibited by the home country's laws. In addition, a foreign private issuer must disclose in its annual reports filed with the SEC each such requirement that it does not follow and describe the home country practice followed instead of any such requirement.
Certain NYSE corporate governance requirements are not reflected in the BVI Act or other British Virgin Islands law, such as the requirements to obtain shareholder approval for certain dilutive issuances of shares, including the sale of our Class A ordinary shares in below-market private placement
transactions if greater than 20% of our pre-transaction issued and outstanding shares are sold, or are subject to different approval requirements, such as in connection with the establishment or amendment of equity compensation plans. Moreover, the BVI Act does not require the implementation of a nominating committee or establishment of a formal director nomination process, the formation of an audit committee or, if such a
committee is formed, that it have any specific composition, that a board of directors consist of a majority of independent directors or that independent directors be involved in the determination of executive compensation. Accordingly,
our shareholders may not be afforded the same protection as provided under the NYSE corporate governance rules.
Furthermore, as a foreign private issuer, we are exempt from the rules and regulations under the Exchange Act related to the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. We are also exempt from Regulation FD, which prohibits issuers from making selective disclosures of material non-public information. In addition, we are not required under the Exchange Act to file annual, quarterly and current reports and financial statements with the SEC, as frequently or as promptly as domestic companies whose securities are registered under the Exchange Act.
Board structure
Our
board of directors consists of eight members. Our board has determined that Thomas Pickering, Marc Kasher and Esther Dyson are independent under applicable SEC and NYSE rules. Each director serves until the next annual shareholders meeting or earlier resignation, removal or death.
Board committees
Audit committee
Our audit committee (the "Audit Committee") consists of Mr. Kasher, Mr. Pickering and Ms. Dyson. Pursuant to SEC and NYSE corporate governance rules, we maintain an audit committee consisting of at least three independent directors. Our board of directors has determined that Mr. Pickering, Mr. Kasher and Ms. Dyson are "independent" as such term is defined in Rule 10A-3(b)(1) under the Exchange Act, and the independence requirements under the NYSE corporate governance rules.
All
members of our Audit Committee meet the requirements for financial literacy under the applicable rules of the NYSE. Our board of directors has determined that Mr. Kasher is an "audit committee financial expert," as such term is defined by the SEC.
Our board of directors has adopted an audit committee charter setting forth the responsibilities of the audit committee consistent with the rules of the SEC and the NYSE, which include:
•
retaining and terminating our independent auditors, subject to board of directors and shareholder ratification;
•
pre-approval
of audit and non-audit services to be provided by the independent auditors;
•
reviewing with management and our independent directors our quarterly and annual financial reports prior to their submission to the SEC; and
•
approval of certain transactions with office holders and controlling shareholders, as described above, and other related party transactions.
Our compensation committee (the "Compensation Committee") consists of Messrs. Kasher, Karachinskiy and Granovsky, and Ms. Yukhadi. Mr. Kasher serves as the Chairman of the compensation committee. Our board of directors has adopted a compensation committee charter setting forth the responsibilities of the committee which include:
•
reviewing and recommending
overall compensation policies with respect to our Chief Executive Officer and other executive office holders;
•
reviewing and approving corporate goals and objectives relevant to the compensation of our Chief Executive Officer and other office holders including evaluating their performance in light of such goals and objectives and determining their compensation based on such evaluation;
•
implementing and administering our stock option plans for all employees, including reviewing and approving the granting of options and
other incentive awards; and
•
reviewing, evaluating and making recommendations regarding the compensation and benefits for our non-employee directors.
Under British Virgin Islands law, our board of directors has a duty to act honestly in good faith with a view to our best interest. Our directors also have a duty to exercise the care, diligence and skills that a reasonable director would exercise in comparable circumstances. In fulfilling their duty of care to us, our board of directors must ensure compliance with the BVI Act and our Amended and Restated Memorandum and Articles of Association. Under the Section 184B of the BVI Act, "if a company or a director of a company engages in, proposes to engage in or has engaged in, conduct that contravenes this Act or the memorandum or articles of the company,
the Court may, on the application of a member or a director of the company, make an order directing the company or director to comply with, or restraining the company or director from engaging in conduct that contravenes, this Act or the memorandum or articles."
Under the BVI Act, the board of directors has the responsibility and has all the powers necessary for managing, directing or supervising our business and affairs, including, but not limited to, the following:
•
convening
shareholders' annual general meetings and reporting its work to shareholders at such meetings;
•
appointing officers and determining the term of office of officers;
•
exercising the borrowing powers of our company and mortgaging the property of our company; and
During the financial year ended March 31, 2015, the Company launched a share-based remuneration plan, "The Luxoft Holding, Inc Amended and Restated 2014 Incentive Compensation Plan" (the "Incentive Plan"), for management of the Luxoft group of companies. The Incentive Plan consists of remuneration programs for the CEO, the top management of the Company and other employees and consultants ("participants"). A total of 2,300,000 Class A ordinary shares, with no par value,
of the Company were initially authorized for issuance under the Incentive Plan. The shares that may be issued under the Incentive Plan may be authorized and unissued shares, shares held in treasury or shares purchased on the open market or by private purchase.
On November 10, 2015, the share pool available for the Incentive Plan was increased to 2,452,000 Class A ordinary shares, with no par value. Additionally, on that date, the Company's Board of Directors approved an amendment to the Incentive Plan pursuant to which the number of Class A ordinary shares available for issuance under the Incentive Plan automatically increases on January 1 of each calendar year during the term of the Incentive Plan, commencing
on January 1, 2016, by an amount equal to the lesser of: (i) an amount determined by the Company's board of directors, if so determined prior to the January 1 of the calendar year in which the increase will occur, (ii) 2% of the total number of Class A ordinary shares outstanding on December 31 of the immediately preceding calendar year and (iii) 1,000,000 Class A ordinary shares.
During the financial year ended March 31, 2018, we granted certain of our key employees and executive officers 160,699 RSUs at a weighted average fair value of $57.36 per RSU and 48,733 PSAs at a weighted average fair value of $22.00
per PSA.
All awards, except for RSUs and performance-based RSUs granted to our CEO as described above (See "Item 6. Directors, Senior Management and Employees—B. Compensation—Agreements with our Chief Executive Officer—Restricted Stock Unit Award Agreement;—Performance Unit Agreement"), vest in installments over four years, commencing on January 1, 2016. The number of shares that can be received by participants pursuant to PSAs and SARs depends on certain market-related conditions.
On August 12, 2014, our Board of Directors adopted a share-based remuneration plan ("Top Bonus") for certain members of our management. In accordance with the terms of the Top Bonus, the Company provided 164,257
RSUs which entitle the Top Bonus recipients to receive our Class A shares, allocated for issuance under this plan, at no cost subject to continued service conditions and approval by our Compensation Committee and the Board of Directors. The RSUs are subject to service conditions and are vesting in annual increments on March 31 over a five-year period starting March 31, 2015. For additional details, please see "Part III. ITEM 17. Financial Statements—Note 18 Share-Based Compensation."
Any stock options granted under the Incentive Plan may be either "incentive stock options," which may be eligible for special tax treatment under the U.S. Internal Revenue Code, or options other than incentive stock options (referred to as "non-qualified stock options"), as determined by our compensation committee and stated in the option agreement. The option price of each
option granted under the Incentive Plan must be equal to or greater than the fair market value of a share on the option grant date, with certain limited exceptions for options that may be granted in exchange for other outstanding awards in connection with a corporate transaction. The exercise price of any stock options granted under the Incentive Plan may be paid in cash, by withholding of shares otherwise deliverable upon exercise, a cashless broker-assisted exercise that complies with law, a net exercise where the exercise price is satisfied by our withholding shares of equal value otherwise deliverable to the
option holder upon exercise or any other
method permitted by law and approved by the compensation committee. Options expire at such time as determined by the compensation committee as of the grant date and set forth in the award agreement, provided, however, that incentive stock options that are not exercised within ten years from the grant date expire, unless otherwise determined by our board of directors or the compensation committee, as applicable. In the event of termination of employment or services, any stock option will cease to become exercisable, provided, however, that the compensation committee may determine that a stock option may be exercised following any such termination of service as set forth in the Incentive Plan. We do not expect to grant stock options under the Incentive Plan.
SARs may be granted under the Incentive Plan alone or together with specific stock options granted under the Incentive Plan. SARs are awards that, upon their exercise, give
a participant the right to receive from our company an amount equal to (1) the number of shares for which the SAR is exercised, multiplied by (2) the excess of the fair market value of a share on the exercise date over the grant price of the SAR. The grant price of each SAR granted under the Incentive Plan is equal to or greater than the fair market value of a share on the SAR's grant date, with certain limited exceptions for SARs that may be granted under the Incentive Plan in exchange for other outstanding awards in connection with a corporate transaction. As a general matter, a SAR may be settled in cash, shares or a combination of cash and shares, as determined by the compensation committee; however, it is our present intention that any SARs granted under the Incentive Plan may only be settled in shares. If an option and a SAR are granted in tandem, the option and the SAR may become
exercisable and will terminate at the same time, but the holder may exercise only the option or the SAR, but not both, for a given number of shares.
Restricted stock awards are shares that are awarded to a participant subject to the satisfaction of terms and conditions established by the compensation committee. Until such time as the applicable restrictions lapse, restricted shares are subject to forfeiture and may not be sold, transferred, assigned, pledged or otherwise disposed of by the participant who holds those shares. Restricted stock units are denominated in units of shares, except that no shares are actually issued to the participant on the grant date. When a restricted stock unit award vests, the participant is generally entitled to receive shares, a cash payment based on the value of the shares or a combination of shares and cash; however, it is our present intention that any restricted stock units granted under
the Incentive Plan may only be settled in shares.
Other stock-based awards are share-based or share-related awards generally payable in shares or cash on terms and conditions set by the compensation committee and may include a grant or sale of unrestricted shares. It is our present intention that any other stock-based awards granted under the Incentive Plan, including performance share awards, may only be settled in shares. The compensation committee may provide for the payment of dividend equivalents with respect to shares subject to an award, such as restricted stock units, that have not actually been issued under that award. A cash-based award entitles a participant to receive a payment in cash upon the attainment of applicable performance goals, and/or satisfaction of other terms and conditions, determined by the compensation committee. We do not expect to grant cash-based awards under the Incentive Plan.
Our
compensation committee administers the Incentive Plan. Our board of directors may, subject to any legal limitations, exercise any powers or duties of the compensation committee concerning the Incentive Plan. The compensation committee will select eligible employees, directors and/or consultants of us and our subsidiaries or affiliates to receive awards under the Incentive Plan and will determine the sizes and types of awards, the terms and conditions of awards and the form and content of the award agreements representing awards.
Holders of options, SARs, unvested restricted stock and other awards may not transfer those awards, unless they die or, except in the case of incentive stock options, the compensation committee determines to allow transfer of an award for customary estate planning purposes.
A
change in control of our Company (as defined in the Incentive Plan) will have no effect on outstanding awards under the Incentive Plan that our board of directors or the compensation committee determines will be honored or assumed or replaced with new rights by a new employer so long as any such alternative award is substantially equivalent to the outstanding award and has certain terms that appropriately protect the holder of the award, as determined under criteria set forth in the Incentive Plan. These criteria require (among other things) that if the holder's employment with the new employer terminates under any circumstances, other than due to termination for cause or resignation without good reason, within two years following the change in control (or prior to a change in control, but following the date on which we agree in principle to enter into that change in control transaction),
the holder's assumed or alternative awards will become fully vested and exercisable. If our board of directors or the compensation committee does not make this determination with respect to any outstanding awards, then (a) the awards will fully vest and, if applicable, become fully exercisable and will be settled in cash and/or publicly traded securities of the new employer, generally based on the fair market value of our shares on the change in control date, in the case of options or SARs, reduced by the option price or grant price of the option or SAR, or the price per share offered for our share in the change in control transaction, or, in some cases, the highest fair market value of our share during the 30 trading days preceding the change in control date, in the case of restricted stock, restricted stock units and any other awards denominated in shares, (b) the target performance goals applicable to any outstanding awards will be deemed to be fully attained, unless
actual
performance exceeds the target, in which case actual performance will be used, for the entire performance period then outstanding; and (c) our board of directors or the compensation committee may otherwise adjust or settle outstanding awards as it deems appropriate, consistent with the plan's purposes.
In the event of a change in our capital structure, a corporate transaction or any unusual or non-recurring event (including a change in control), the compensation committee may in its discretion make adjustments that it deems equitable to the Incentive Plan and outstanding awards, such as adjusting the securities
available under the Incentive Plan and outstanding awards, the option or other prices of securities subject to outstanding awards and other terms of outstanding awards, cancellation of outstanding awards in exchange for payments of cash and/or property or substitution of stock of another company for our shares subject to outstanding awards.
Subject to particular limitations specified in the Incentive Plan, our board of directors may amend or terminate the Incentive Plan, and the compensation committee may amend awards outstanding under the Incentive Plan. The Incentive Plan will continue in effect until all shares available under the Incentive Plan are delivered and all restrictions on those shares have lapsed, unless the Incentive Plan is terminated earlier by the board of directors. No awards may be granted under the Incentive Plan on or after the tenth anniversary of the effective date of the Incentive Plan.
Indemnification
British
Virgin Islands law does not limit the extent to which a company's articles of association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the British Virgin Islands courts to be contrary to public policy, such as to indemnify for liability relating to civil fraud or criminal offenses. Our articles of association provide for the indemnification of our directors against all losses or liabilities incurred or sustained by him or her as a director of our company in defending any proceedings, whether civil or criminal, and this indemnity only applies if he or she acted honestly and in good faith with a view to our best interests and, with respect
to any criminal action, he or she must have had no reasonable cause to believe his or her conduct was unlawful. See "ITEM 10. Additional Information—B. Memorandum and Articles of Association."
D.
Employees
As of March 31, 2018, we had 12,898 employees worldwide. The geographical breakdown of our personnel is as follows:
(1)This department consists of all of our IT professionals.
(2)Human Resources includes recruitment and training departments.
Most of our personnel are salaried employees. While the majority of our personnel in Ukraine are engaged as independent contractors, they otherwise have a substantially equal basis and terms with our salaried employees in Russia. None of our employees are members of unions or are represented by collective bargaining agreements. We believe we have a good working relationship with our employees and contractors and we have not experienced any labor disputes.
E.
Share
Ownership
For information regarding the share ownership of our directors and executive officers, please refer to "ITEM 6. Directors, Senior Management and Employees—C. Board Practices—2014 Incentive Compensation Plan" and "ITEM 7. Major Shareholders and Related Party Transactions—A. Major Shareholders."
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A.
Major Shareholders
The
following table sets forth information regarding the beneficial ownership of our outstanding ordinary shares as of June 30, 2018 by:
•
each person or entity that, to our knowledge, beneficially owns 5% or more of our ordinary shares;
•
each of our directors and executive officers individually; and
•
all
of our directors and executive officers as a group.
The beneficial ownership of ordinary shares is determined in accordance with the rules of the SEC and generally includes any ordinary shares over which a person exercises sole or shared voting or investment power, or the right to receive the economic benefit of ownership. For purposes of the table below, we deem shares subject to options, warrants or other exercisable or convertible securities that are exercisable or convertible currently or within 60 days of June 30, 2018, to be outstanding and to be beneficially owned by the person holding the options, warrants or other exercisable or convertible securities for the purposes of computing the percentage ownership of that person but we do not treat them as outstanding for the purpose of computing the percentage
ownership of any other person. The percentage of shares beneficially owned is based on 33,643,383 ordinary shares outstanding as of June 30, 2018, comprising 22,525,801 Class A shares and 11,117,582 Class B shares. Holders of our Class A and Class B ordinary shares have identical rights, including dividend and liquidation rights, provided that, on any matter that is submitted to a vote of our shareholders, holders of our Class A ordinary shares are entitled to one vote per Class A ordinary share and holders of our Class B ordinary shares are entitled to ten votes per Class B ordinary share. Furthermore, one Class B ordinary share is convertible at any time at the option of the holder into one Class A ordinary share. See "ITEM 10. Additional Information—B. Memorandum and Articles of Association—Voting
rights." Unless otherwise indicated below, to our knowledge, all persons named in the table have sole voting and investment power with respect to their shares, except to the extent authority is shared by spouses under community property laws. We have set forth below information regarding any significant change in the percentage ownership of our shares by any of our major shareholders during the past three years. Unless otherwise noted below, each shareholder's address is c/o Luxoft Holding, Inc, Commerce House, Wickhams Cay 1, PO Box 3140, Road Town, Tortola, British Virgin Islands.
For a description of any material relationship that our principal shareholders have had with us or any of our predecessors or affiliates during the periods under review, see "—B. Related Party Transactions."
Based on a Schedule 13G/A jointly filed on February 7, 2018 by IBS Group Holding Limited ("IBS Group"), Awosting Ltd. ("Awosting") and Codeffroy Ltd. ("Codeffroy"), IBS Group has shared voting power and shared dispositive power over 11,117,582 of our Class B ordinary shares and 67,266 of our Class A ordinary shares. IBS Group holds these shares indirectly through Awosting and Codeffroy, its wholly owned subsidiaries. Awosting has shared voting power and shared dispositive power over 8,387,100 Class B ordinary shares and 5,000 Class A Ordinary shares. Codeffroy has shared
voting power and shared dispositive power over 2,730,482 Class B ordinary shares and 62,266 Class A ordinary shares. All Class B ordinary shares (which are convertible into Class A ordinary shares) held by each shareholder were deemed to be converted for the purposes of (i) determining the aggregate amount of Class A ordinary shares beneficially owned by it and (ii) calculating the percentages of Class A ordinary shares owned by it. IBS Group is controlled by Croyton Limited, which serves as the trustee for IBS Group founders trust. Croyton Limited has sole voting and dispositive power over the shares. The address for IBS Group, Awosting and Codeffroy is c/o IBS Group Holding Limited, 11 Hope Street, Douglas, Isle of Man, IM1 1AQ.
(2)
Based on
a Schedule 13G/A filed on February 13, 2018, FMR LLC ("FMR") holds sole dispositive power over 2,165,594 Class A ordinary shares and sole voting power over 430,843 Class A ordinary shares. FMR reported its securities holdings in the Company on behalf of itself and certain of its affiliates and subsidiaries. Members of the Johnson family, including Abigail P. Johnson, are the predominant owners, directly or through trusts, of Series B shares of FMR LLC, representing 49% of the voting power of FMR LLC. The Johnson family group and all other Series B shareholders have entered into a shareholders' voting agreement under which all Series B shares will be voted in accordance with the majority vote of Series B shares. Accordingly, through their
ownership of voting common shares and the execution of the shareholders' voting agreement, members of the Johnson family may be deemed, under the Investment Company Act of 1940, to form a controlling group with respect to FMR LLC. Neither FMR LLC nor Abigail P. Johnson has the sole power to vote or direct the voting of the shares owned directly by the various investment companies registered under the Investment Company Act ("Fidelity Funds") advised by Fidelity Management & Research Company ("FMR Co"), a wholly owned subsidiary of FMR LLC, which power resides with the Fidelity Funds' Boards of Trustees. Fidelity Management & Research Company carries out the voting of the
shares
under written guidelines established by the Fidelity Funds' Boards of Trustees. The address of FMR LLC is 245 Summer Street, Boston, MA02210.
(3)
Based on a Schedule 13G filed on February 14, 2018, M&G Investment Management Limited (“M&G”) holds sole voting power over 999,544 Class A ordinary shares and sole dispositive power over 1,295,540 Class A ordinary shares. The address of M&G is Governor’s House, Laurence Pountney Hill,
London, EC4R 0HH.
(4)
Including 13,500 Class A ordinary shares held by Mr. Friedland's spouse.
(5)
Including 65,702 restricted stock units that vest on August 12, 2018. The receipt of the underlying Class A shares is subject to Mr. Loshchinin's submission of an exercise notice to us. Mr. Loshchinin's address is c/o Luxoft Global Operations GmbH, Gubelstrasse 24, 6300 Zug, Switzerland.
Significant Changes
Pursuant
to Schedule 13G/A filed with the SEC on July 9, 2018, Morgan Stanley ceased to be a beneficial owner of 5% or more of our ordinary shares.
Pursuant to Schedule 13G/A filed with the SEC on March 8, 2018, Wasatch Advisors, Inc. ceased to be a beneficial owner of 5% or more of our ordinary shares.
Pursuant to Schedule 13G/A filed with the SEC on October 5, 2017, JPMorgan Chase & Co. ceased to be a beneficial owner of 5% or more of our ordinary shares.
Pursuant to Schedule 13G/A filed with the SEC on March 9, 2017, BlackRock Inc. ceased to be a beneficial owner of 5% or more of our ordinary shares.
Record
Holders
Based on a review of the information provided to us by our transfer agent, as of June 30, 2018, there were twelve registered holders of our Class A ordinary shares in the United States, representing 98.5% of our outstanding Class A ordinary shares. Additionally, as of that date, none of our Class B ordinary shares were held in the United States. The United States record holders included Cede & Co., the nominee of the Depositary Trust Company. The number and the U.S. residence of record holders may not be representative of the number of beneficial owners or where the beneficial owners have residence because it includes beneficial owners whose shares are held in street name by brokers and other nominees.
B.
Related
Party Transactions
The following is a description of material transactions, or series of related material transactions, since March 31, 2017, to which we were or will be a party and in which the other parties included or will include our directors, executive officers, holders of 10% or more of our voting securities or any member of the immediate family of any of the foregoing persons.
Relationship with IBS Group
Our principal shareholders are Awosting and Codeffroy, two wholly-owned subsidiaries of IBS Group. IBS Group's business consists of two primary segments: IT services and software development. Luxoft's business comprises IBS Group's
entire software development segment. As described in more detail below, historically, IBS Group's business segments have been operated on a substantially independent basis, with the exception of certain financing arrangements and limited service agreements, equipment purchases and leasing arrangements. We continue to provide to and purchase from IBS Group certain services on a limited basis in the ordinary course of our business on terms similar to those in arm's-length transactions, but do not plan to obtain financing from IBS Group as we have in the past. As of June 30, 2018, IBS Group beneficially owned through its two wholly-owned subsidiaries 33.2% of our Class A ordinary shares, 100% of our Class B ordinary shares and 83.2% of our total voting power.
We have previously entered into, and continue to enter into, a number of agreements with IBS Group affiliates for the provision to IBS Group affiliates of software development services, recruitment services, consulting services and services related to staffing and creating dedicated delivery centers. The majority of these agreements are framework agreements entered into for an indefinite term or for a term ranging from one to three years, such as our recruiting services agreements which have one-year automatically renewable terms (unless either party terminates by an advance notice). Our framework agreements do not contain exclusivity provisions or minimum purchase requirements or service commitments. The services agreements include customary limitations on liability and indemnification provisions, and are subject to customary termination provisions. Each project under these framework agreements
is governed by an individual statement of work. In the aggregate, our sales of
services to IBS Group affiliates amounted to $2.4 million, $0.6 million and $5.6 million for the years ended March 31, 2018, 2017 and 2016, respectively.
In addition to providing services to IBS Group, we have previously entered into, and continue to enter into, numerous written agreements and arrangements with IBS Group affiliates through which we purchase IT and telecom services, management services, marketing services and consulting services from the affiliates of IBS Group. The agreements have a term of one year, which automatically renews unless either party terminates. The agreements also contain customary termination provisions, but lack exclusivity provisions and minimum purchase requirements and service commitments. The agreements include customary limitations on liability and indemnification provisions. In the aggregate, our purchases of services from IBS Group affiliates amounted to $0.2 million and less than $0.1 million for the years ended March
31, 2018 and 2017 respectively.
We have previously entered into, and continue to enter into several agreements for the purchase of software, computers and related components and other equipment from IBS Group affiliates. The purchases are not on an installment basis, and we did not enter into any financing arrangements in connection with these purchases. We purchase this equipment on an "as-is" basis.
During the years ended March 31, 2018 and 2017,
our total expenses in connection with the purchase of software, computers, related components and other equipment, excluding software licenses, amounted to $0.6 million and $0.4 million, respectively.
Other related party transactions
On June 5, 2015, LGO and Area 52 Property AG, a company controlled by our Chief Executive Officer and Roman Yakushkin, our former Chief Financial Officer, entered into a lease agreement for an office space of 388 square meters located at the 21st floor of the building in Zug, Switzerland, as well as some parking space, where our operating headquarters are situated at a different floor. The lease term is from January 1, 2016
through December 31, 2020. The base rent is $0.3 million per annum and is subject to annual increases based on index of consumer prices not to exceed 2%. We entered into the foregoing leases as part of our efforts to expand our operating headquarters. The agreements were negotiated at arm's length and were approved by the Company's audit committee.
C.
Interests of Experts and Counsel
Not applicable.
ITEM
8. FINANCIAL INFORMATION
A.
Consolidated Statements and Other Financial Information
Consolidated financial statements
We have appended our consolidated financial statements at the end of this annual report, starting at page F-1, as part of this annual report.
Legal proceedings
From time to time, we are involved in routine legal proceedings incidental to the ordinary course of business. We do not believe that the outcome of these legal proceedings
has had in the recent past material effects on our financial position or profitability. Currently, we are not a party to any material legal proceeding, nor are we aware of any material legal or governmental proceeding against us, or contemplated to be brought against us.
Dividend policy
Although we have declared and paid dividends in prior years, we do not intend to declare or pay any regular dividends on our Class A ordinary shares and Class B ordinary shares for the foreseeable future. While we currently intend to retain all available funds and any future earnings to fund the development and growth of our business, we may, by a resolution of the board of directors, authorize a special one-time dividend or other form of distribution to our shareholders at such time and such
amount as the board of directors determines to be appropriate and in the best interest of the Company. Any future determination relating to our dividend policy will be made at the discretion of our board of directors, subject to the BVI Act, and will depend on a number of factors, including future earnings, capital requirements, contractual restrictions, financial condition and future prospects, strategic plans of the Company and other factors our board of directors may deem relevant. Any future dividend that our board of directors declares will be shared equally on a per share basis.
B.
Significant
Changes
No significant changes have occurred since March 31, 2018, except as otherwise disclosed in this annual report.
Our Class A ordinary shares have been trading on the NYSE since June 26, 2013 under the symbol "LXFT." Prior to that time, there was no public market for our Class A ordinary shares. The following table sets forth for the periods indicated the high and low prices per Class A ordinary share as reported by the NYSE:
We are a company incorporated in the British Virgin Islands and our affairs are governed by the provisions of our memorandum of association and articles of association, as amended and restated from time to time (the "Amended and Restated Memorandum and Articles of Association"), and by the provisions of applicable British Virgin Islands laws.
As of June 30, 2018, pursuant to our Amended and Restated Memorandum and Articles of Association,
we are authorized to issue a maximum of 80,000,000 ordinary shares of no par value of which 34,002,107 shares are issued and outstanding.
The following are summaries of material terms and provisions of our Amended and Restated Memorandum and Articles of Association and the BVI Act, insofar as they relate to the material terms of our ordinary shares. Unless otherwise stated, the following summaries are of the terms of our shares as of the date of this annual report. This summary is not intended to be complete, and for a full discussion, you should directly consult our Amended and Restated Memorandum and Articles of Association, which was filed as an exhibit to our registration statement on Form F-1.
Shareholder
Rights
Voting rights of shareholders
In line with British Virgin Islands law, the voting rights of shareholders are governed by the Company's Amended and Restated Memorandum and Articles of Association and, in certain circumstances, the BVI Act. The Amended and Restated Memorandum and Articles of Association governs matters such as the quorum for the transacting business, the rights of shareholders and the voting standards required to approve any action or resolution at a meeting of the shareholders.
Holders of our Class A ordinary shares and Class B ordinary shares have identical
rights, including dividend and liquidation rights, provided that, except as otherwise expressly provided in our Amended and Restated Memorandum and Articles of Association or required by any applicable law, on any matter that is submitted to a vote of our shareholders, holders of our Class A ordinary shares are entitled to one vote per Class A ordinary share and holders of our Class B ordinary shares are entitled to ten votes per Class B ordinary share. Except as required by any applicable law or as provided for in this annual report, the holders of Class A ordinary shares and Class B ordinary shares will vote together as a single class on all matters (including the election of directors) submitted to a vote of shareholders. There are no limitations on the rights of non-resident shareholders to hold or exercise voting rights on the
Company's securities.
Under the BVI Act, the ordinary shares are deemed to be issued when the name of the shareholder is entered in a company's register of members. Our register of members is maintained by our transfer agent, American Stock Transfer & Trust Company, LLC. If (a) information that is required to be entered in the register of shareholders is omitted from the register or is inaccurately entered in the register, or (b) there is unreasonable delay in entering information in the register, a shareholder of the company, or any person who is aggrieved by
the omission, inaccuracy or delay, may apply to the British Virgin Islands courts for an order that the register be rectified, and the court may either refuse the application or order the rectification of the register. The court may also direct the company to pay all costs of the application and any damages the applicant may have sustained.
Meetings of shareholders
Pursuant to our Amended and Restated Memorandum and Articles of Association, we are required to convene a meeting of shareholders upon written request of the shareholders entitled to
exercise at least 30% of the voting rights with respect to the meeting's subject matter. Under British Virgin Islands law,
we may not increase the required percentage to call a meeting above 30%.
Subject to our Amended and Restated Memorandum and Articles of Association, a meeting of shareholders of the Company must be announced with at least ten days' prior written notice. Notice of every meeting of shareholders may be delivered electronically and will be given to all of our shareholders. However, the meeting can still be validly held even if a shareholder does not receive notice, including in the event that the convener(s) inadvertently failed to provide it.
Meetings may also be called with shorter notice than that mentioned above. Subject to our Amended and Restated Memorandum and Articles
of Association, notice may be waived by the vote of shareholders representing at least 90% of the total voting rights on all the matters to be considered at the meeting. A shareholder waives notice for all shares he or she holds by appearing at the meeting.
A meeting of shareholders is duly constituted if, at the start of the meeting, at least 50% of the votes of the shares entitled to vote at the meeting are present. A single shareholder or proxy may constitute a quorum and may, by signing a certificate, pass a valid resolution of shareholders if authorized to act as a proxy. A shareholder may not vote, and his or her vote may not count for the purposes of a quorum, unless he or she is registered as of the record date.
Subject to any rights or restrictions attached to any shares, at any general meeting on a show of hands every shareholder of record who is present in person (or,
in the case of a shareholder being a corporation, by its duly authorized representative) or by proxy shall have one vote and on a poll every shareholder present in person (or, in the case of a shareholder being a corporation, by its duly appointed representative) or by proxy shall have one vote for each share held. Voting at any meeting of the shareholders is by show of hands unless a poll is demanded. A poll may be demanded by shareholders present in person or by proxy if the shareholder disputes the outcome of the vote on a proposed resolution. Shareholders of record may also pass written resolutions without a meeting.
Cumulative voting
There is nothing under the laws of the British Virgin Islands that specifically prohibits or restricts the creation of cumulative voting rights for the election of our directors, unlike the requirement under Delaware General Corporation Law where
cumulative voting for the election of directors is permitted only if expressly authorized in the certificate of incorporation. As a British Virgin Islands company, we have made provisions in our Amended and Restated Memorandum and Articles of Association to prohibit cumulative voting for such elections.
Protection of minority shareholders
Under the laws of the British Virgin Islands, there is little statutory law protecting minority shareholders other than the provisions of the BVI Act granting shareholder remedies. The principal protection under statutory law is that shareholders may bring an action to enforce the BVI Act or the constituent documents of the
company, our Amended and Restated Memorandum and Articles of Association. Shareholders are entitled to have our affairs conducted in accordance with the BVI Act and the Amended and Restated Memorandum and Articles of Association.
There are common law rights for the protection of shareholders that may be invoked, largely dependent on English company law, since the common law of the British Virgin Islands is limited. Under the general rule pursuant to English company law known
as the rule in Foss v. Harbottle, a court will generally refuse to interfere with the management of a company at the insistence of a minority of its shareholders who express dissatisfaction with the company's affairs as conducted by the majority of shareholders or the board of directors. However, every shareholder is entitled to have the affairs of the company conducted properly according to British Virgin Islands law and the constituent documents of the company. As such, if those who control the company have persistently disregarded the requirements of British Virgin Islands company
law or the provisions of the company's Amended and Restated Memorandum and Articles of Association, the courts may grant relief. Generally, the areas in which the courts will intervene are the following: (1) an act that is outside the scope of the authorized business, illegal or not capable of ratification by the majority; (2) acts that constitute fraud on the minority where the wrongdoers control the company; (3) acts that infringe or are about to infringe on the personal rights of the shareholders, such as the right to vote; and (4) failure by the company to comply with applicable rules requiring approval of a special or
extraordinary majority of shareholders. These protections are more limited than the rights afforded minority shareholders under the laws of many states in the United States.
Conversion of shares
Each Class B ordinary share is convertible at any time at the option of the holder into one Class A ordinary share. In addition, each Class B ordinary share converts automatically into one Class A ordinary share upon the earlier of (i) any date specified by the affirmative vote or written consent of the holders of two-thirds or more of the outstanding Class B ordinary shares, (ii) the death or disability of a holder of such Class B ordinary share, (iii) a change of control transaction (as described in the Amended and Restated Memorandum and Articles of Association) with respect to a holder of such Class B
ordinary share, (iv) any transfer, whether or not for value, except for certain transfers described in our Amended Restated Memorandum and Articles of Association, including, without limitation, transfers to certain affiliates and for tax and estate planning purposes, so long as the transferring holder of Class B ordinary shares continues to hold exclusive voting and dispositive power with respect to the shares transferred, (v) the first trading day after the earliest date on which the number of outstanding Class B ordinary shares represents less than 10% of the aggregate combined number of outstanding Class A and Class B ordinary shares or (vi) June 7, 2020 (the seventh anniversary of the adoption of the Amended and Restated Memorandum and Articles
of Association).
Preferred shares
Our board of directors may, without shareholder consent, fix the rights, preferences, privileges and restrictions of a number of preferred shares determined in its discretion and authorize the issuance of the preferred shares. Specifically, with respect to preferred shares, the board of directors may fix dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, sinking fund terms and the number of shares constituting any series or the designation of such series, and in turn give preferred shareholders greater rights than those afforded to holders of Class A ordinary shares. The issuance of our preferred shares could thus adversely affect the voting power of holders of our Class A ordinary shares and their ability to receive dividends and liquidation payments. In addition, the issuance of preferred shares
could have the effect of delaying, deferring or preventing a change of control or other corporate action. Presently we have no preferred shares outstanding, and we have no present plan to issue any preferred shares.
Pre-emption rights of shareholders
British Virgin Islands law does not distinguish between public and private companies, and does not provide some of the protections and safeguards investors might otherwise expect of a publicly traded company. In particular, there are no pre-emption rights applicable to the issuance of new shares under British Virgin Islands law, unless specifically created in a company's corporate documents. Our Amended and Restated Memorandum and Articles of Association do not grant preemption rights.
Liquidation rights
of shareholders
As permitted by British Virgin Islands law and our Amended and Restated Memorandum and Articles of Association, we may voluntarily liquidate under Part XII of the BVI Act if we have no liabilities or we are able to pay our debts as they fall due and the value of our assets equals or exceeds our liabilities by both director and shareholder resolutions. Further, as permitted by British Virgin Islands law and our Amended and Restated Memorandum and Articles of Association, shareholders have the rights to an equal share in the distribution of the surplus assets of the company at its liquidation.
As permitted by British Virgin Islands law, and our Amended and Restated Memorandum and Articles of Association, we may vary the rights attached to our Class A and Class B ordinary shares only with the written consent of or by the vote (at a meeting) of at least 50% of the issued shares of the respective class of shares.
Transfer of shares
Subject to any applicable restrictions set forth in our Amended and Restated Memorandum and Articles of Association, any of our shareholders may transfer all or any of his or her shares in writing in the
common form or in any other form approved by our directors.
Our board of directors may, in its absolute discretion, resolve to refuse or delay the registration of any transfer of any share for reasons that shall be specified in the Resolution of Directors. If our directors refuse or delay the registration of a transfer, they must send notice of the refusal or delay in agreed form to each of the transferor and the transferee.
Share repurchase
As permitted by the BVI Act and our Amended and Restated Memorandum and Articles of Association, shares may be repurchased, redeemed or otherwise acquired by us.
Forfeiture of shares
British Virgin Islands law does not impose
any procedures or timelines whereby the board may make calls on shareholders in terms of outstanding taxes or fees. See "ITEM 10. Additional Information—E. Taxation—Taxation in the British Virgin Islands." However, where a shareholder is issued a par value share and does not pay the full share price, section 47(3) of the BVI Act requires the shareholder to pay the company the difference between the price and the par value. Additionally, Article 5 of our Amended and Restated Memorandum and Articles of Association sets out certain forfeiture procedures with respect to shares not fully paid by recipient shareholders on issue. We may deliver a written call notice requiring payment within 14 days from the date notice is served. If the shareholder fails to pay for the shares, at or before the
time set out in the notice, the shares may be forfeited. Despite the forfeiture rules set forth in our Amended and Restated Memorandum and Articles of Association, these rules do not apply to our Class A and Class B shares, because they are of no par value.
Dividends
Subject to the BVI Act and our Amended and Restated Memorandum and Articles of Association, our directors may, by resolution, authorize a distribution to shareholders at such time and of such an amount as they think fit, if they are satisfied, on reasonable grounds, that, immediately after the distribution, we would satisfy the "solvency test." A British Virgin Islands company will satisfy the solvency test if (i) the value of the
company's assets exceeds its liabilities; and (ii) the company is able to pay its debts as they fall due. Where a distribution is made to a shareholder at a time when the company did not, immediately after the distribution, satisfy the solvency test, it may be recovered by the company from the shareholder unless (i) the shareholder received the distribution in good faith and without knowledge of the company's failure to satisfy the solvency test; (ii) the shareholder has altered his position in reliance on the validity of the distribution; and (iii) it would be unfair to require repayment in full or at all.
Untraceable
shareholders
We are entitled to sell any shares of a shareholder who is untraceable, as long as:
•
all checks, but no less than three, for any sums payable in cash to the holder of such shares have remained uncashed for a period of 12 years;
•
we have not during that time or before the expiry of the three-month period received any indication that the shareholder, or a person entitled to such shares by death, bankruptcy or operation of law, indeed exists; and
•
upon
expiration of the 12-year period, we have published in newspapers notice of our intention to sell these shares, and a period of three months or such shorter period has elapsed since the date of such advertisement.
The net proceeds of any such sale shall belong to us, and when we receive these net proceeds we shall become indebted to the former shareholder for an amount equal to such net proceeds.
We are managed by a board of directors that currently consists of eight directors. Our Amended and Restated Memorandum and Articles
of Association provide that the board of directors will consist of at least two directors. There are no share ownership qualifications for directors.
Our shareholders may, pursuant to our Amended and Restated Memorandum and Articles of Association, at any time remove any director before the expiration of his or her period of office for cause, and may, pursuant to our Amended and Restated Memorandum and Articles of Association, elect another person in his or her stead. Subject to our Amended and Restated Memorandum and Articles of Association, the directors have power at any time and from time to time to appoint any person to be a director, either as an addition
to the existing directors or to fill a vacancy, as long as the total number of directors (exclusive of alternate directors) does not at any time exceed the maximum number fixed by or in accordance with our Amended and Restated Memorandum and Articles of Association (if any).
Meetings of our board of directors may be convened at any time deemed necessary by any of our directors. A meeting of our board of directors may make lawful and binding decisions if at least a majority of the directors are present or represented. At any meeting of our directors, each director, whether by his or her presence or by his or her alternate, is entitled to one vote.
Questions arising at a meeting of our board of directors are required to be decided by simple majority votes of the directors present or represented
at the meeting. In the case of a tie vote, the chairman of the meeting may have a second or deciding vote. Our board of directors may also pass unanimous written resolutions without a meeting.
The compensation to be paid to the directors is determined by the directors by a resolution under our Amended and Restated Memorandum and Articles of Association. Under our Amended and Restated Memorandum and Articles of Association, the independent directors are also entitled to reimbursement of out-of-pocket expenses in connection with the performance of their duties as director.
Issuances of additional ordinary shares
Our Amended and Restated Memorandum and Articles
of Association permit our board of directors to issue additional ordinary shares from time to time as our board of directors shall determine.
Our Amended and Restated Memorandum and Articles of Association authorize our board of directors from time to time to issue ordinary shares to the extent permitted by the BVI Act.
Changes in authorized shares
We are authorized to issue 50,000,000 Class A ordinary shares and 30,000,000 Class B ordinary shares, which are subject to the same provisions with reference to the payment of calls, liens, transfers, transmissions, forfeitures and otherwise as the shares in issue. We may by resolution:
•
combine
and divide all or any of our ordinary shares, thus increasing the number of ordinary shares;
•
sub-divide our ordinary shares into shares of a smaller number than that fixed by our Amended and Restated Memorandum and Articles of Association, subject to the provisions of the BVI Act;
•
cancel any ordinary shares which have not been taken or agreed to be taken by any person by the date of the resolution; or
•
create
new classes of ordinary shares with preferences as determined by the board of directors, although any such new classes of shares may only be created with prior shareholder approval.
Inspection of books and records
Under British Virgin Islands law, holders of our ordinary shares are entitled, on giving written notice to us, to inspect and make copies or take extracts of our: (a) Amended and Restated Memorandum and Articles of Association; (b) register of shareholders; (c) register of directors; and (d) minutes of meetings and resolutions of shareholders and those classes of shareholders to which the inspecting shareholder belongs.
Subject to our Amended and Restated Memorandum and Articles
of Association, our board of directors may, if they are satisfied that it would be contrary to our interest to allow a shareholder to inspect any document, or part of a document as referenced above, refuse to permit the shareholder to inspect the document or limit the inspection of the document, including limiting the making of copies or the taking of extracts from the records. Where our directors exercise their powers in these circumstances, they must notify the shareholder as soon as reasonably practicable.
We were incorporated under, and are governed by, the laws of the British
Virgin Islands. The flexibility available under British Virgin Islands law has enabled us to adopt the Amended and Restated Memorandum and Articles of Association that provides shareholders with rights that do not vary in any material respect from those under the Delaware Corporate Law.
Conflicts of interest
Pursuant to the BVI Act and the Company's Amended and Restated Memorandum and Articles of Association, a director of a company who has an interest in a transaction and who has declared such interest to the other directors, may:
•
vote
on a matter relating to the transaction;
•
attend a meeting of directors at which a matter relating to the transaction arises and be included among the directors present at the meeting for the purposes of a quorum; and
•
sign a document on behalf of the Company, or do any other thing in his capacity as a director, that relates to the transaction.
Anti-money laundering laws
In
order to comply with legislation or regulations aimed at the prevention of money laundering, we are required to adopt and maintain anti-money laundering procedures, and may require subscribers to provide evidence to verify their identity. Where permitted, and subject to certain conditions, we may also delegate the maintenance of our anti-money laundering procedures (including the acquisition of due diligence information) to a suitable person.
We reserve the right to request such information as is necessary to verify the identity of a subscriber. In the event of delay or failure on the part of the subscriber in producing any information required for verification purposes, we may refuse to accept the application, in which case any funds received will be returned without interest to the account from which they were originally debited.
If any person resident in the British Virgin Islands
knows or suspects that another person is engaged in money laundering or terrorist financing and the information for that knowledge or suspicion came to their attention in the course of their business, the person will be required to report his belief or suspicion to the Financial Investigation Agency of the British Virgin Islands, pursuant to the Proceeds of Criminal Conduct Act 1997 (as amended). Such a report shall not be treated as a breach of confidence or of any restriction upon the disclosure of information imposed by any enactment or otherwise.
Duties of directors
British Virgin Islands law provides that each director of a company in exercising his or her powers or performing his or her duties must act honestly and in good faith and in what the director believes to be in the best interests of the
company. Additionally, the director must exercise the care, diligence and skill that a reasonable director would exercise in the same circumstances taking into account the nature of the company, the nature of the decision and the position of the director and his responsibilities. British Virgin Islands law requires that a director exercise his powers for a proper purpose and not act, or agree to the company acting, in a manner that contravenes British Virgin Islands law or the Amended and Restated Memorandum and Articles of Association.
Anti-takeover provisions
The BVI Act does not prevent companies from adopting a wide
range of defensive measures, such as staggered boards, blank check preferred shares, removal of directors only for cause and provisions restricting the rights of shareholders to call meetings and to submit shareholder proposals. Our Amended and Restated Memorandum and Articles of Association contain the following provisions which may be regarded as defensive measures: (i) a requirement of the affirmative vote of two-thirds or more of the shares entitled to vote on special matters such as mergers or acquisitions; (ii) the prevention of "business combinations" with "interested shareholders" for a period of three years after the date of the transaction in which the person became an interested shareholder, unless the business combination is approved in accordance with our Amended and Restated Memorandum and Articles
of Association by a general meeting of our shareholders or satisfies other requirements specified in our Amended and Restated Memorandum and Articles of Association; (iii) directors' ability, in their absolute discretion, to decline to register any transfer of shares without assigning any reason; (iv) our board of directors' ability to issue, from time to time, one or more classes of preferred shares and, with respect to each such class, to fix the terms thereof by resolution; (v) restrictions on the ability of shareholders to call meetings and bring proposals before meetings; and (vi) the requirement of the affirmative vote of 75% of the shares entitled to vote to amend certain provisions of our Amended and Restated Memorandum and Articles of Association.
The BVI Act provides that a director must, after becoming aware that he is interested in a transaction entered into or to be entered into by the company, disclose that interest to the company's board of directors. The failure of a director to disclose that interest does not invalidate the subject transaction, so long as the director's interest is disclosed to the board before the company enters into the transaction or is not required to be disclosed (for example, where the transaction is between the
company and the director or is otherwise in the ordinary course of business). As permitted by British Virgin Islands law and our Amended and Restated Memorandum and Articles of Association, a director interested in a particular transaction may vote on it, attend meetings at which it is considered and sign documents on our behalf which relate to the transaction.
Voting rights and quorum requirements
Under British Virgin Islands law, the voting rights of shareholders are regulated by the company's Amended Memorandum and Articles of Association and, in certain circumstances, the BVI Act. The Amended and Restated Memorandum
and Articles of Association governs matters such as quorum for the transaction of business, rights of shares, and majority votes required to approve any action or resolution at a meeting of the shareholders or board of directors. Unless the Amended and Restated Memorandum and Articles of Association otherwise provides, the requisite majority is usually a simple majority of votes cast.
Mergers and similar arrangements
Under the BVI Act, two or more companies may merge or consolidate in accordance with the statutory provisions. A merger means the merging of two or more constituent companies into one of the constituent companies, and a consolidation means the uniting of two or more constituent companies into
a new company. In order to merge or consolidate, the directors of each constituent company must approve a written plan of merger or consolidation which must be authorized by a resolution approved at a duly convened and constituted meeting of the shareholders of the Company by the affirmative vote of a majority of two- thirds or more of the votes of the shares entitled to vote thereon which were present at the meeting and voted, or a resolution consented to in writing by the same number of the votes of the Shares entitled to vote thereon.
Shareholders not otherwise entitled to vote on the merger or consolidation may still acquire the right to vote if the plan or merger or consolidation contains any provision which, if proposed as an amendment to the Amended
and Restated Memorandum and Articles of Association, would entitle them to vote as a class or series on the proposed amendment. In any event, all shareholders must be given a copy of the plan of merger or consolidation irrespective of whether they are entitled to vote at the meeting or consent to the written resolution to approve the plan of merger or consolidation.
Shareholder suits
We are not aware of any reported class action or derivative action having been brought against the Company in a British Virgin Islands court.
Under
the BVI Act, if a company or a director of a company engages in, or proposes to engage in, conduct that contravenes the BVI Act or the memorandum of association or articles of the company, the British Virgin Islands court may, on the application of a shareholder or a director of the company, issue an order directing the company or director to comply with, or restraining the company or director from engaging in that conduct.
In addition, under the BVI Act, a British Virgin Islands court may, upon the shareholder's request, grant leave to a shareholder to bring proceedings on the
company's behalf or to intervene in proceedings to which the company is a party for the purpose of continuing, defending or discontinuing the proceedings on the company's behalf. In determining whether to grant leave for such derivative actions, the court must take into account certain matters, including whether the shareholder is acting in good faith, whether the derivative action is in the interests of the company taking account of the views of the company's directors on commercial matters and whether an alternative remedy to the derivative claim is available.
A shareholder of
a company may bring an action against the company for breach of a duty owed by the company to him as a shareholder. The BVI Act also includes provisions for actions based on oppression and for representative actions where the interests of the claimant are substantially the same as those of other shareholders.
Corporate governance
British Virgin Islands laws do not restrict transactions with directors, requiring only that directors exercise a duty to act honestly, in good faith and in what the directors believe to be in the best interests to the companies for which they serve.
British Virgin Islands law does not limit the extent to which a company may provide for indemnification of its officers and directors, unless such indemnification would violate public policy in the view of the British Virgin Islands courts, such as where the director has committed civil fraud or a criminal offense. Our Amended and Restated Memorandum and Articles of Association provide for the indemnification of our directors against all losses or liabilities incurred or sustained by him or her as a director of our Company in defending any proceedings, whether civil or criminal. To be entitled to indemnification, the director must have acted honestly and
in good faith with a view to our best interests and, with respect to any criminal action, must not have had reasonable cause to believe his or her conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted for directors, officers or persons controlling us under the foregoing provisions, we have been advised that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and therefore is unenforceable.
Staggered board of directors
The BVI Act does not contain statutory provisions that require staggered board arrangements for a British Virgin Islands company and our Amended and Restated Memorandum and Articles of Association does not provide for
a staggered board.
The following summarizes each material contract, other than contracts entered into in the ordinary course of business, to which we or any of our subsidiaries is a party, for
the two years immediately preceding the filing of this annual report:
Summaries of the following material contracts and amendments to these contracts are included in this annual report in the places indicated:
Amended
and Restated Global Framework Agreement with UBS AG
"ITEM 3. Key Information—D. Risk Factors—We generate a significant portion of our sales of services, and anticipate deriving a large portion of our sales of products, from a limited number of clients, and any significant loss of business from these clients or failure by such clients to pay for our services would materially adversely affect our results of operations"
Outsourcing Master Service Agreement with Deutsche Bank
"ITEM 4. Information About Luxoft—B. Business Overview—Clients"
Credit Agreement with Amsterdam
Trade Bank, N.V. and amendments thereto
"ITEM 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Credit facilities"
There
is no income or other tax of the British Virgin Islands imposed by withholding or otherwise on any payment to be made by us.
We are free to acquire, hold and sell foreign currency and securities without restriction. There is no exchange control legislation under British Virgin Islands law and accordingly there are no exchange control regulations imposed under British Virgin Islands law that would prevent us from paying dividends to shareholders in U.S. dollars or any other currencies, and all such dividends may be freely transferred out of the British Virgin Islands, clear of any income or other tax of the British Virgin Islands imposed by withholding or otherwise without the necessity of obtaining any consent of any government or authority of the British Virgin Islands.
The following description is not intended to constitute a complete analysis of all tax consequences relating to the acquisition, ownership and disposition of our Class A ordinary shares. Investors should consult their own tax advisor concerning the tax consequences of your particular situation, as well as any tax consequences that may arise under the laws of any state, local, foreign or other taxing jurisdiction.
Taxation in the British Virgin Islands
The Government of the British Virgin Islands will not, under existing legislation, impose any income, corporate or capital gains tax, estate duty, inheritance tax, gift tax or withholding tax upon the company or its security holders (who are not tax resident in the British
Virgin Islands).
The company, and all distributions, interest and other amounts paid by the company to persons who are not tax residents in the British Virgin Islands are exempt from any income, withholding or capital gains taxes in the British Virgin Islands, with respect to the shares in the company owned by them and dividends received on such shares, nor will they be subject to any estate or inheritance taxes in the British Virgin Islands.
No estate, inheritance, succession or gift tax, rate, duty, levy or other charge is payable by persons who are not tax resident in the British Virgin Islands with respect to any shares,
debt obligations or other securities of the company.
All instruments relating to transactions in respect of the shares, debt obligations or other securities of the company and all instruments relating to other transactions relating to the business of the company are exempt from the payment of stamp duty in the British Virgin Islands, provided that they do not relate to real estate situated in the British Virgin Islands.
There are currently no withholding taxes or exchange control regulations in the British Virgin Islands applicable to the
company or its shareholders.
United States federal income taxation
The following discussion sets forth the material U.S. federal income tax consequences to U.S. Holders (as defined below) of owning and disposing of Class A ordinary shares as of the date hereof. This discussion is not a complete analysis or listing of all of the possible tax consequences and does not address all tax considerations that may be relevant to investors in light of their particular circumstances. This summary applies only to U.S. Holders that hold Class A ordinary shares as capital assets for U.S. federal income tax purposes (generally, property held for investment), and it does not describe all of the U.S. federal income tax consequences that may be relevant to U.S. Holders subject to special rules, such as:
•
banks
and other financial institutions;
•
insurance companies;
•
regulated investment companies;
•
real estate investment trusts;
•
dealers
and traders in securities that use mark-to-market accounting for U.S. federal income tax purposes;
•
U.S. Holders holding Class A ordinary shares as part of a hedging transaction, straddle, conversion transaction or other integrated transaction;
•
U.S. Holders whose functional currency for U.S. federal income tax purposes is not the U.S. dollar;
•
tax-exempt
organizations or entities;
•
U.S. Holders that received the Class A ordinary shares as compensation for the performance of services;
•
U.S. Holders holding Class A ordinary shares that own or are deemed to own 10% or more of the voting shares of the Company; or
•
former
citizens and residents of the United States subject to tax as expatriates.
Moreover, this description does not address the Medicare tax on net investment income, any U.S. federal estate, gift or alternative minmum tax conseqeunces, or any state, local or foreign tax consequences, in each case, with respect to the ownership and disposition of the Class A ordinary shares.
This summary is based on the Internal Revenue Code of 1986, as amended (the "Code"), administrative pronouncements, judicial decisions and final, temporary and proposed Treasury regulations, all as currently in effect and available. These authorities are subject to change, possibly with retroactive effect. U.S. Holders should consult their own tax advisers concerning the U.S. federal, state, local, and non-U.S. tax consequences of owning and disposing of Class A ordinary shares in their particular
circumstances.
For purposes of this summary, a "U.S. Holder" is a beneficial owner of Class A ordinary shares who is, for U.S. federal income tax purposes:
•
a citizen or individual resident of the United States;
a
corporation, or other entity taxable as a corporation for U.S. federal income tax purposes, created or organized in or under the laws of the United States, any state thereof or the District of Columbia;
•
an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or
•
a trust that (1) is subject to the primary supervision of a U.S. court and one or more U.S. persons that have the authority to control all substantial decisions of the trust or (2) has a valid election in effect under
applicable Treasury regulations to be treated as a U.S. person.
If a partnership (or other entity treated as a partnership for U.S. federal income tax purposes) holds the Class A ordinary shares, the tax treatment of a partner in such partnership generally will depend upon the status of the partner and upon the activities of the partnership. Prospective investors who are partners in a partnership should consult their tax advisers as to the particular U.S. federal income tax consequences of owning and disposing of Class A ordinary shares in their particular circumstances.
This discussion assumes that the Company is not, and will not become, a "passive foreign investment company," or a PFIC, for U.S. federal income tax purposes. See "ITEM 10. Additional Information—E. Taxation—Passive
foreign investment company considerations" below. Further, this summary does not address the U.S. federal estate and gift, state, local or non-U.S. tax consequences to U.S. Holders of owning, and disposing of Class A ordinary shares. Prospective investors should consult their own tax advisors regarding the U.S. federal, state, local and non-U.S. income and other tax consequences of owning and disposing of Class A ordinary shares in their particular circumstances.
Taxation of distributions
Distributions paid on Class A ordinary shares will be treated as dividends to the extent paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). Such dividends paid to a U.S. Holder with respect to Class A ordinary shares generally will be taxable as ordinary income at the time of receipt. Distributions in excess of our current and
accumulated earnings and profits will be treated first as a non-taxable return of capital, thereby reducing a U.S. Holder's adjusted tax basis in Class A ordinary shares (but not below zero), and thereafter as either long-term or short-term capital gain depending upon whether the U.S. Holder has held the Class A ordinary shares for more than one year at the time such distribution is received. Because we do not maintain calculations of our earnings and profits under U.S. federal income tax principles, it is expected that distributions generally will be reported as dividends. Distributions of additional Class A ordinary shares to U.S. Holders that are part of a pro rata distribution to all of our shareholders generally will not be subject to U.S. federal income tax. The amount of any distribution of property other than cash will be the fair market value of such property on the date of distribution. As used below, the term
"dividend" means a distribution that constitutes a dividend for U.S. federal income tax purposes.
With respect to non-corporate U.S. Holders, dividends received may be subject to reduced rates of taxation provided that our Class A ordinary shares are readily tradable on a qualifying U.S. securities market and that (i) such U.S. Holder holds such Class A ordinary shares for 61 days or more during the 121-day period beginning on the date which is 60 days before the date on which such shares become ex-dividend with respect to such dividends and (ii) the U.S. Holder is not under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to existing or substantially similar or related property. Our Class A ordinary shares currently trade on the NYSE, which is currently treated as a qualifying U.S. securities market. However, there is no
assurance that our Class A ordinary shares will remain "readily tradable" and, additionally, such reduced rate will not apply if we are a PFIC for the taxable year in which we pay a dividend or were a PFIC for the preceding taxable year (see "ITEM 10. Additional Information—E. Taxation—Passive foreign investment company considerations" below).
Dividends received on the Class A ordinary shares will be treated as foreign source income and will not be eligible for the dividends-received deduction generally allowed to U.S. corporations under the Code.
Sale or other taxable disposition of shares
For U.S. federal income tax purposes, gain or loss realized on the sale or other taxable disposition of Class A ordinary shares will be capital gain or loss, and will be long-term capital gain or loss if a U.S. Holder held such Class A
ordinary shares for more than one year. Non-corporate U.S. Holders may be eligible for preferential rates of U.S. federal income tax in respect of long-term capital gains. The deductibility of capital losses is subject to limitations under the Code.
The amount of the gain or loss realized will be equal to the difference between a U.S. Holder's adjusted tax basis in the Class A ordinary shares disposed of and the amount realized on the sale or other taxable disposition. A U.S. Holder's initial tax basis in its Class A ordinary shares generally will be the amount paid for the Class A ordinary shares. Such gain or loss generally will be U.S.-source gain or loss for U.S. foreign tax credit purposes.
The Company will be classified as a PFIC in any taxable year in which, either:
•
at least 75% of its gross income is passive income; or
•
at least 50% of the average quarterly value of its total gross assets (which may be determined, in part, by the market value of its Class A ordinary shares, which is subject to change) is attributable to assets that produce passive income
or are held for the production of passive income.
Passive income for this purpose generally includes, among other things, dividends, interest, royalties, rents and gains from commodities and securities transactions. If a non-U.S. corporation owns at least 25% by value of the stock of another corporation, the non-U.S. corporation is treated for purposes of the PFIC tests as owning its proportionate share of the assets of the other corporation and as receiving directly its proportionate share of the other corporation's income. Under the PFIC rules, if we were considered a PFIC at any time a U.S. Holder holds Class A ordinary shares, we would continue to be treated as a PFIC with respect to such holder's investment unless (i) we cease to be a PFIC and (ii) the U.S. Holder has made a "deemed sale" election under the PFIC rules.
Based on our financial statements,
relevant market data and the projected composition of our income and the valuation of our assets, including goodwill, we do not believe we were a PFIC for the taxable year ended March 31, 2017 and do not anticipate becoming a PFIC in the foreseeable future. Because PFIC status is based on our income, assets and activities for the entire taxable year, it is not possible to determine whether we will be characterized as a PFIC for the current taxable year until after the close of the year. In addition, because the market price of our Class A ordinary shares is likely to fluctuate and because that market price may affect the determination of whether we will be considered a PFIC, there can be no assurance that we will not be considered a PFIC for any future taxable year.
If, however, we were a PFIC for any taxable year during which a U.S. Holder held Class A ordinary shares, gain
recognized by a U.S. Holder upon a disposition (including, under certain circumstances, a pledge) of Class A ordinary shares would be allocated ratably over the U.S. Holder's holding period for such shares. The amounts allocated to the taxable year of disposition and to years before we became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for that taxable year for individuals or corporations, as appropriate, and an interest charge would be imposed on the tax attributable to the allocated amount. Further, to the extent that any distribution received by a U.S. Holder on Class A ordinary shares exceeds 125% of the average of the annual distributions on such shares received during the preceding three years or the U.S. Holder's holding period, whichever is shorter, that distribution would be subject to taxation in the same manner as gain, described immediately above. Certain elections
may be available that would result in alternative treatments (such as mark-to-market treatment) of the Class A ordinary shares. We do not intend to provide information necessary for U.S. Holders to make qualified electing fund elections if, contrary to our expectation, we are classified as a PFIC. U.S. Holders should consult their tax advisers to determine whether any of these elections would be available and if so, what the consequences of the alternative treatments would be in their particular circumstances. U.S. Holders should consult their tax advisers concerning their annual filing requirements if the Company were to become a PFIC.
If we are classified as a PFIC, the PFIC tax consequences described in the previous paragraph would also apply to distributions and gains deemed to be received by U.S. Holders in respect of any of our subsidiaries
that are also classified as PFICs.
U.S. Holders should consult their tax advisers regarding whether we are a PFIC and the potential application of the PFIC rules.
Information reporting and backup withholding
Payments of dividends and proceeds from the sale or other taxable disposition that are made within the United States or through certain U.S.-related financial intermediaries generally are subject to information reporting, and may be subject to backup withholding, unless (1) the U.S. Holder is a corporation or other exempt recipient or (2) in the case of backup withholding, the U.S. Holder provides a correct taxpayer identification number and certifies that it is not subject to backup withholding.
Backup withholding is not an additional tax. The amount of any backup withholding from a payment
to a U.S. Holder will be allowed as a credit against the U.S. Holder's U.S. federal income tax liability and may entitle such holder to a refund, provided that the required information is timely furnished to the U.S. Internal Revenue Service.
Foreign asset reporting
Certain non-corporate U.S. Holders are required to report information relating to ownership of our Class A ordinary shares in excess of certain thresholds, subject to certain exceptions (including an exception for Class A ordinary shares held in
accounts maintained
by certain financial institutions). U.S. Holders are urged to consult their tax advisors regarding their information reporting obligations, if any, with respect to their ownership and disposition of Class A ordinary shares.
United Kingdom Taxation
In May 2014, we completed transfer of the tax residence of our holding company from the British Virgin Islands to the UK to better align our legal and operating structures with business needs of the Group.
The following summary is intended to apply only as a general guide to certain UK tax considerations and is based on current UK tax law and current published practice of HM Revenue and Customs, both of which are subject to change at any time, possibly with retrospective effect. This summary relates only to certain limited aspects of the UK taxation treatment of investors who are resident outside
the UK, who will hold the Class A ordinary shares as investments and who are the beneficial owners of the Class A ordinary shares.
Any shareholder or potential investor should obtain advice from his or her own investment or taxation advisor. Shareholders and/or potential investors who are in any doubt as to their tax position, or who are subject to tax in any jurisdiction other than the UK, should consult a suitable professional adviser.
Taxation of dividends
A dividend payment in respect of a Class A ordinary share may be made without withholding or deduction for or on account of UK tax.
An individual holder of a Class A ordinary share who is non-UK resident for UK tax purposes will not be chargeable to UK income tax on a dividend paid by the
Company unless such holder carries on (whether solely or in partnership) a trade, profession or vocation in the UK through a branch or agency in the UK to which the Class A ordinary share is attributable. In these circumstances, such holder may, depending on his or her individual circumstances including the application of any available relief, be chargeable to UK income tax on a dividend received from the Company.
A corporate holder of a Class A ordinary share who is non-UK resident for UK tax purposes will not be subject to UK corporation tax on a dividend received from the company unless it carries on a trade in the UK through a permanent establishment to which the Class A ordinary share is attributable. In these circumstances, such holder may, depending
on its particular circumstances including the application of any available relief, be chargeable to UK corporation tax on a dividend received from the Company.
Taxation of capital gains
An individual holder who is non-UK resident for UK tax purposes will not be liable to UK capital gains tax on a capital gain realized on the disposal of a Class A ordinary share unless such holder carries on (whether solely or in partnership) a trade, profession or vocation in the UK through a branch or agency in the UK to which the Class A ordinary share is attributable. (In these circumstances, such holder may, depending on his or her individual circumstances including the application of any available relief, be chargeable to UK capital gains tax on a chargeable gain arising from a disposal of his or her Class A
ordinary share.)
However, an individual shareholder who ceases to be resident in the UK for UK tax purposes for a period of five years or less (or, for departures before April 6, 2013, ceases to be resident or ordinarily resident or becomes treaty non-resident for a period of less than five tax years) and who disposes of Class A ordinary shares during that period may be liable upon his or her return to the UK to UK taxation on any capital gain realized (or upon ceasing to be regarded as resident outside the UK for the purposes of double taxation relief), subject to the application of any available relief.
A corporate holder of a Class A ordinary share who is non-UK resident for UK tax purposes will not be liable for UK corporation tax on a capital gain realized on the disposal of a Class A ordinary share unless it carries on a trade
in the UK through a permanent establishment to which the Class A ordinary share is attributable. In these circumstances, a disposal of a Class A ordinary share by such holder may give rise to a chargeable gain or an allowable loss for the purposes of UK corporation tax, subject to the application of any available belief.
Stamp duty and stamp duty reserve tax
No UK stamp duty or stamp duty reserve tax ("SDRT") will be payable on the issue of Class A ordinary shares and UK stamp duty should generally not be chargeable on a transfer of Class A ordinary shares provided that the instrument of transfer is executed outside the UK and does not relate to any matter or thing done or to be done in the UK. No UK SDRT will be payable in respect of any agreement to transfer Class A ordinary shares provided that
the shares are registered in a register kept outside the UK by or on behalf of the Company.
We are currently subject to the informational requirements of the Exchange Act applicable to foreign private issuers. We fulfill these requirements by filing annual, quarterly and current reports and other information with the SEC, which you can access using the means described below. As a foreign private issuer, we are exempt from the rules under the Exchange Act relating to the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and short-swing
profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act. However, we intend to file with the SEC, within 120 days after the end of each subsequent fiscal year, an annual report on Form 20-F containing financial statements which will be examined and reported on, with an opinion expressed, by an independent public accounting firm. We also intend to file with the SEC reports on Form 6-K containing unaudited quarterly financial information within 90 days after the end of each quarter.
You may read and copy any document we file with the SEC without charge at the SEC's public reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may also obtain copies of the documents at prescribed
rates by writing to the Public Reference Section of the SEC at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Reports and other information regarding issuers that file electronically with the SEC, including our filings with the SEC, are also available to the public through the SEC's website at http://www.sec.gov.
I.
Subsidiary Information
Not applicable.
ITEM
11. QUANTITATIVE AND QUALITATIVE DISLOSURES ABOUT MARKET RISK.
We are exposed to a variety of risks, including foreign currency exchange fluctuations, changes in interest rates and inflation. We regularly assess currency, interest rate and inflation risks to minimize any adverse effects on our business as a result of those factors. See also Note 2 included in our accompanying audited consolidated financial statements.
Foreign currency risk
We conduct business in multiple countries, which exposes us to risks associated with fluctuations in currency exchange rates. In the year ended March 31, 2018, 54.9% of our sales were denominated in U.S. dollars and 26.5%
were denominated in euros. On the cost side, however, in the year ended March 31, 2018, 10.9% of our expenses (excluding currency losses and changes in deferred tax) were denominated in Russian rubles and 9.5% in Polish Zloty. As a result, weakening of euro against U.S. Dollar and strengthening of the Russian ruble relative to the U.S. dollar present the most significant risks to us. Fluctuations in currency exchange rates may impact our business significantly.
Based on our results in the year ended March 31, 2018, a 1.0% increase (decrease) in the value of euro against the U.S. dollar would have increased (decreased) our sales by $2.4 million.
Based on our results in the year ended March 31, 2018, a 1.0% increase (decrease) in the value of the Russian ruble against the U.S. dollar would have decreased (increased) our cost of services and operating expenses by $0.4 million.
We manage our foreign currency risk primarily through short-term forward contracts in order to reduce our exposure to volatility in the currency markets. During the year ended March 31, 2018, we engaged in forward sales contracts to hedge the euro against the U.S. dollar. Typically,
our outstanding instruments have maturities from one to six months, with the longest maturity not exceeding 12 months. We have obtained credit limits from our counterparty banks and therefore are not required to maintain deposits on margin accounts in case of adverse market movements.
Currency forward contracts concluded before January 2016 were not designated as hedging accounting instruments under ASC 815, Derivatives and Hedging (originally issued as SFAS 133). Therefore, we have been incurring financial loss or income as a result of these derivatives. Currency
forward contracts concluded starting January 2016 were designated as cash flow hedges and qualified for hedge accounting under ASC 815. Changes in the intrinsic value of such contracts are accounted in accumulated other comprehensive loss in our consolidated condensed balance sheet, until the forecasted transaction occurs. As of March 31, 2018, we had $0.6 million payable for our hedging positions. See also Note 10 included in our accompanying audited consolidated financial statements.
Inflation risk
Inflationary factors such as increases in the cost of our services
and overhead costs may adversely affect our operating results. Wage inflation in Russia, Ukraine, Romania, Poland, South Africa, Bulgaria and Vietnam, where we operate our delivery centers, could also lead to payroll increases,
which may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and operating expenses as a percentage of sales if the selling prices of our services do not increase in line with increases in costs.
Interest rate risk
Our exposure to market risk for changes in interest rates relates primarily to our variable rate borrowings. See "ITEM 5. Operating and Financial Review and Prospectus—B.
Liquidity and Capital Resources."
We have not been exposed to material risks due to changes in market interest rates. However, our future interest expense may increase and interest income may fall due to changes in market interest rates.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM
14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
Not applicable.
ITEM 15. CONTROLS AND PROCEDURES
(a)
Disclosure Controls and Procedures. Our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2018. Based on such evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that, as of March 31, 2018, our disclosure controls and procedures were effective.
(b)
Management's Annual Report on Internal Control over Financial Reporting. Our management, under the supervision of our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
•
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with general accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
•
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect all errors or misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies and procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of the end of the period covered by this report. In making this assessment, we used the criteria set forth in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment, we determined that, as of the end of the period covered by this annual report, our internal control over financial reporting was effective.
Our management has excluded DerivIT and Unafortis AG from its assessment of internal control over financial reporting as of March 31,
2018, as these companies were acquired by us in August and September 2017, respectively. These companies are included in our consolidated financial statements as of and for the year ended March 31, 2018 and combined constituted $56.6 million or 9.4% and $39.4 million or 8.4% of total and net assets, respectively, as of March 31, 2018. For the year ended March 31, 2018, these entities contributed $23.5 million or 2.6%
of revenue and $0.5 million or 0.9% of net income. Under guidelines established by the Securities and Exchange Commission, companies are allowed to exclude acquisitions from their assessment of internal control over financial reporting during the first year of an acquisition. Our independent registered public accounting firm, Ernst & Young LLC, has issued an attestation report on the effectiveness of our internal control over financial reporting as of March 31, 2018, which appears below.
(c)
Attestation
Report of the Registered Public Accounting Firm.
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Luxoft Holding, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Luxoft Holding, Inc. and subsidiaries’ internal control over financial reporting as of March 31, 2018, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion,
Luxoft Holding, Inc. maintained, in all material respects, effective internal control over financial reporting as of March 31, 2018, based on the COSO criteria.
As indicated in the accompanying Management’s Report on Internal Controls, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of DerivIT and Unafortis AG, which are included in the 2018 consolidated financial statements of Luxoft Holding, Inc. and constituted 9.4% and 8.4% of total and net assets, respectively, as of March 31, 2018 and 2.6% and 0.9% of revenues and net income, respectively, for the year then ended. Our audit of internal control over financial reporting of Luxoft Holding, Inc. also did not include an evaluation of
the internal control over financial reporting of DerivIT and Unafortis AG.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Luxoft Holding, Inc. as of March 31, 2018 and 2017, the related consolidated statements of comprehensive income, shareholders‘ equity, and cash flows, for each of the three years in the period ended March 31, 2018, and the related notes and our report dated July 23, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
The
Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides
a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes
in Internal Control over Financial Reporting. During the period covered by this report, no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) have occurred that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16. [RESERVED]
ITEM 16A: Audit Committee Financial Expert
Our board of directors has determined that Marc Kasher is an "audit committee financial expert" as defined under the U.S. federal securities laws and has the requisite
financial experience defined by the NYSE Listed Company Manual. In addition, Mr. Kasher is independent as such term is defined in Rule 10A-3(b)(1) under the Exchange Act and under the applicable listing standards of the NYSE. For further discussion, see "ITEM 6. Directors, Senior Management and Employees—A. Directors and Senior Management."
Our board of directors has adopted a Code of Ethics applicable to all of our directors and employees (subject to local laws and regulations), part of which is a
"code of ethics" as defined in Item 16B of Form 20-F promulgated by the SEC. The full text of the Code of Ethics can be found on our website at www.investor.luxoft.com. Information contained on, or that can be accessed through, our website does not constitute a part of this annual report and is not incorporated by reference herein. Under Item 16B of Form 20-F, if a waiver or amendment of the Code of Business Conduct and Ethics applies to our principal executive officer, principal financial officer, principal
accounting officer, controller or other persons performing similar functions and relates to standards promoting any of the values described in Item 16B(b) of Form 20-F, we will disclose such waiver or amendment (i) on our website within five business days following the date of amendment or waiver in accordance with the requirements of Instruction 4 to such Item 16B or (ii) through the filing of a report on a Form 6-K.
We granted no waivers under and have made no amendments to our Code of Ethics during the fiscal year ended March 31, 2018.
ITEM 16C: Principal Accountant Fees and Services
Fees
paid to the auditors
The following table sets forth, for each of the years indicated, the fees expensed by our independent registered public accounting firm.
"Audit
Fees" include fees for services performed by our independent public accounting firm in connection with our annual audit for the years ended March 31, 2018 and 2017, certain procedures regarding our quarterly financial results submitted on Form 6-K for the fiscal year ended March 31, 2018, the filing of our annual reports on Form 20-F, and consultation concerning financial accounting and reporting standards.
(2)
"Audit-Related Fees" relate to assurance
and associated services that are traditionally performed by the independent auditor, including accounting consultation and consultation concerning financial accounting and reporting standards.
(3)
"Tax Fees" include fees for professional services rendered by our independent registered public accounting firm for advice related to tax compliance, transfer pricing and tax on actual or contemplated transactions.
(4)
"All Other Fees" include fees for services rendered by our independent registered public accounting
firm with respect to government incentives and other matters.
Audit Committee's Pre-Approval Policies and Procedures
Our Audit Committee has adopted a pre-approval policy for the engagement of our independent accountant to perform certain audit and non-audit services. Pursuant to this policy, which is designed to assure that such engagements do not impair the independence of our auditors, the Audit Committee pre-approves annually a catalog of specific audit and non-audit services in the categories of audit service, audit-related service and tax services that may be performed by our independent accountants. Our Audit Committee pre-approved all audit and non-audit services provided to us and to our subsidiaries during the periods listed above.
ITEM
16D: Exemptions From the Listing Standards for Audit Committees
ITEM 16E: Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
ITEM 16F: Change in Registrant's Certifying Accountant
None.
ITEM
16G: Corporate Governance
As a foreign private issuer, we are permitted under the NYSE rules to follow home country corporate governance practices instead of the NYSE requirements, except that we must maintain an audit committee of the board of directors that meets the requirements of Exchange Act Rule 10A-3 and disclose any significant ways in which our corporate governance practices differ from those followed by U.S. domestic companies under NYSE listing standards.
We have elected to apply the corporate governance rules of the NYSE applicable to controlled companies, with the exception of maintaining an internal audit function, even though, as a foreign private issuer, we are permitted to follow the corporate governance practices of our home country, the British Virgin Islands, instead of most of these requirements. Nevertheless, we may in the future follow home country corporate
governance practices instead of some or nearly all of the NYSE's requirements, including in the event we are no longer eligible for the "controlled company" exemption.
Certain corporate governance requirements of U.S. domestic companies under NYSE listing standards are not reflected in the BVI Act or other British Virgin Islands law, such as the requirements to obtain shareholder approval for certain dilutive issuances of shares, including the sale of our Class A ordinary shares in below-market private placement transactions if greater than 20% of our pre-transaction issued and outstanding shares are sold, or are subject to different approval requirements, such as in connection with the establishment or amendment of equity compensation plans. Moreover, the BVI Act does not require the implementation of a nominating committee or establishment of a formal director nomination process, the formation of an audit committee
or if such a committee is formed that it have any specific composition, that a board of directors consist of a majority of independent directors or that independent directors be involved in the determination of executive compensation. See "ITEM 6. Directors, Senior Management and Employees—C. Board Practices—Corporate governance practices."
ITEM 16H: Mine Safety Disclosure
Not applicable.
PART III
ITEM 17: Financial Statements
Not applicable.
ITEM
18: Financial Statements
See Financial Statements included at the end of this annual report.
Portions of this exhibit were omitted and have been filed separately with the Secretary of the Securities and Exchange Commission pursuant to the Company's application requesting confidential treatment under Rule 406 of the U.S. Securities Act of 1933 which was approved by the SEC.
The
registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
Report of Independent Registered Public Accounting Firm
To the shareholders and the board of directors of Luxoft Holding, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Luxoft Holding, Inc. as of March 31, 2018 and 2017, the related statements of income, comprehensive income, shareholders’ equity and cash flows, for each of the three years in the period ended March 31, 2018, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position
of the Company as of March 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of March 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (2013 framework) and our report dated July 23, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Trade
accounts receivable, net of allowance for doubtful accounts of $1,232 at March 31, 2018 and $435 at March 31, 2017
186,991
144,862
Unbilled revenue
33,310
14,454
Work-in-progress
3,734
2,805
Due
from related parties (Note 13)
1,272
1,084
VAT and other taxes receivable
4,082
1,732
Advances issued
1,777
2,740
Other
current assets
8,041
5,224
Total current assets
$
343,634
$
286,459
Non-current
assets
Restricted cash, non-current
2,775
1,399
Deferred tax assets (Note 15)
4,349
3,423
Property
and equipment, net (Note 4)
52,739
49,571
Intangible assets, net (Note 6 and 7)
106,368
120,430
Goodwill (Note 5)
88,908
76,918
Other
non-current assets
5,047
9,007
Total non-current assets
$
260,186
$
260,748
Total
assets
$
603,820
$
547,207
Liabilities and shareholders' equity
Current liabilities
Short-term
borrowings (Note 8)
$
856
$
633
Accounts payable
25,964
24,402
Accrued
liabilities (Note 12)
49,593
38,513
Deferred revenue
4,105
3,815
Due to related parties (Note 13)
14
460
Taxes
payable
22,916
21,283
Payable under foreign currency forward contracts (Note 10)
776
295
Payables
for acquisitions, current (Note 2 and 9)
6,415
17,221
Other current liabilities
2,302
2,025
Total current liabilities
$
112,941
$
108,647
Deferred
tax liability, non-current (Note 15)
10,830
16,907
Payables for acquisitions, non-current (Note 2 and 9)
2,895
32,206
Other non-current
liabilities
7,205
2,629
Total liabilities
$
133,871
$
160,389
Shareholders'
equity
Share capital (80,000,000 shares authorized; 34,063,981 issued and outstanding with no par value as at March 31, 2018, and 80,000,000 shares authorized; 33,540,034 issued and outstanding with no par value as at March 31, 2017)
(In thousands of U.S. dollars, except share amounts)
1. Description of business and environment
Luxoft
Holding, Inc (the "Company") was incorporated as a company limited by shares under the laws of the British Virgin Islands ("BVI") on March 7, 2006. The Company has 43 subsidiaries across Europe, North America, Asia, Australia and Africa collectively referred to as "Subsidiaries". The Company and its Subsidiaries are collectively referred to as the "Group".
The
Group is a leading provider of software development services and innovative IT solutions to a global client base consisting primarily of large, multinational corporations. The Group's software development services consist of core and mission custom critical software development and support, product engineering and testing, and technology consulting. The Group's solutions are based on its proprietary products and platforms that directly impact the Group's clients' business outcomes and efficiently deliver continuous innovation. The Group's products are part of its current portfolio of proprietary solutions that have not been commercialized in the past. However, the Group intends to grow its future sales using these products as stand-alone software and as a part of its software development services offering. The Group's platforms are also a part of its proprietary solutions portfolio that it utilizes within the scope of its software development services to clients. Most
of the Group's platform components are available under non-commercial open source license to allow any potential user to quickly evaluate the characteristics of the technology, but these components are not sufficient for a commercial use.
2. Basis of presentation and significant accounting policies
Basis of presentation
The functional currency of the majority of the Group's subsidiaries is the United States dollars ("USD"). The Group operates in a multi-currency environment having transactions in such currencies as the euros ("EUR"), British pounds ("GBP"), Romanian lei ("RON"), Polish zloty ("PLN"),
Swiss francs ("CHF"), Russian rubles ("RUR") and others. The subsidiaries maintain their accounting records in accordance with the local or statutory requirements of the jurisdictions in which they are incorporated. The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("US GAAP"). The accompanying consolidated financial statements differ from the financial statements of the subsidiaries issued for statutory purposes because they reflect certain adjustments, not recorded in the respective statutory accounting books that are appropriate to present the financial position, results of operations and cash flows.
In the fiscal year ended March
31, 2018 the Group changed the presentation of the revaluation of contingent liabilities; the unwinding of discount for contingent liability is excluded from operating income and shown as a separate line in the Consolidated statement of income. The comparative amounts have been amended accordingly.
Principles of consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly and majority owned Subsidiaries. This generally includes all companies over which the Company directly or indirectly exercises control, which generally means that the Group
owns more than 50% of the voting rights in the Subsidiary. Consolidation is also required when the Company is subject to a majority of the risk of loss or is entitled to receive a majority of the residual returns or both from a variable interest entity's activities. The financial statements of the Subsidiaries are prepared for the same reporting period as the Company, using consistent accounting policies. Adjustments are made to conform any dissimilar material accounting policies that may exist. All intercompany accounts and transactions have been eliminated from the consolidated financial statements.
Notes to consolidated financial statements (Continued)
(In thousands of U.S. dollars, except share amounts)
2. Basis of presentation and significant accounting policies (Continued)
The non-controlling interest is reported in the consolidated balance sheets as a separate component of equity and represents the aggregate ownership interests in the subsidiaries that are held by owners other than the Company.
Foreign currency translation
For
the majority of the Subsidiaries, the functional currency is USD because the majority of their revenues, expenditures, debt and trade liabilities are either priced, incurred, payable or otherwise measured in USD. Transactions and balances not already measured in the functional currency have been re-measured in USD in accordance with the relevant provisions of ASC 830 Foreign Currency Matters. Monetary assets and liabilities denominated in currencies different from the functional currencies are re-measured at exchange rates prevailing on the balance sheet dates:
Non-monetary assets
and liabilities, capital, revenues and costs are re-measured at historical exchange rates prevailing on the relevant transaction dates. Gains and losses on foreign currency transactions are charged or credited to operations.
The Group uses the U.S. dollar as its reporting currency. Therefore, the financial statements of the Subsidiaries that use a functional currency other than USD are translated into USD in accordance with ASC 830 using the current rate method. Assets and liabilities are translated at the rate of exchange prevailing at the balance sheet dates. Shareholders' equity is translated at the applicable historical rate. Revenue and expenses are translated at the monthly average rates of exchange. Translation gains and losses are included in accumulated other comprehensive income.
Comprehensive
income
ASC 220 Comprehensive Income, requires the reporting of comprehensive income in addition to net income. Comprehensive income is defined as the change in equity of a business enterprise during a period from non-owner sources. Comprehensive income consists of foreign currency translation adjustments; effective portion of gains and losses on forward contracts that are designated as, and qualify as, cash flow hedges in accordance with ASC Subtopic No. 815-20, Hedging—General; and adjustments to record changes in the funded status of the Group's defined benefit pension plan in accordance with ASC Subtopic No. 715-30, Defined Benefit Plans—Pension.
Notes to consolidated financial statements (Continued)
(In thousands of U.S. dollars, except share amounts)
2. Basis of presentation and significant accounting policies (Continued)
Cash and cash equivalents
The Group considers all highly liquid investments with a maturity of 90 days or less from the time of purchase to be cash equivalents.
Restricted cash
Restricted cash is represented by deposits on escrow accounts, related to new businesses acquisitions. As of March 31,
2018, the Group had $2,845 as restricted cash, and $5,399 as of March 31, 2017.
Accounts receivable, net
Accounts receivable are non-interest bearing and shown at their net realizable value, which approximates their fair value. Allowances for doubtful accounts are made for specific accounts in which collectability is doubtful, the Group does not make any general allowance based on the aging of accounts receivable.
Recoveries of losses from accounts receivable written-off in prior years are presented within income from operations in the Group's consolidated statements of comprehensive income. Collections in respect of prior year
write-offs amounted to $43 for the year ended March 31, 2018; $60 for the year ended March 31, 2017 and $818 for the year ended March 31, 2016.
The table below summarizes changes in qualifying accounts for the years ended March 31, 2016, 2017 and 2018:
Work-in-progress
includes costs related to uncompleted contract stages. Costs include direct costs such as professional compensation (payroll and related benefits), subcontracting, travel, materials and other items.
Notes to consolidated financial statements (Continued)
(In thousands of U.S. dollars, except share amounts)
2. Basis of presentation and significant accounting policies (Continued)
Property
and equipment
Property and equipment are carried at cost less accumulated depreciation. Depreciation is computed over the estimated useful lives of depreciable assets using the straight-line method. The estimated useful lives for property and equipment are as follows:
Goodwill represents
an excess of the cost of business acquired over the fair value of identifiable net assets at the date of acquisition. Intangible assets, principally software and acquired contract-based customer relationships, software and brands are amortized on a straight-line basis over their estimated useful lives, on average 5 to 10 years. The Group does not have any intangible assets with indefinite useful lives.
Goodwill and Long-lived intangible assets are reviewed for impairment annually or whenever it is determined that one or more impairment indicators exist. Upon such review, the Group considers the following factors: under-performance of the reporting unit or significant changes in its projected results; changes in the manner of utilization of an
asset; severe and sustained declines in the traded price of the Company's common stock that are not attributable to factors other than the underlying value of its assets; negative market conditions or economic trends; changes in technology; new legislation, and other factors. The Group determines whether impairment has occurred by assigning goodwill to the reporting unit identified in accordance with ASC 350 Intangibles—Goodwill and Other, and comparing the carrying amount of the reporting unit to the fair value of the reporting unit. If an impairment of goodwill has occurred, the Group recognizes a loss for the difference between the carrying amount and the implied fair value of goodwill.
The Group has one major reporting unit Luxoft Integrated and several reporting units corresponding to certain
newly acquired entities which have not yet been integrated into the Group's common processes and systems. These entities are considered businesses as defined by ASC 805 for which discrete financial information is available and management regularly reviews their operating results.
See also Impairment of Long lived assets and Note 7, Impairment loss, below.
Software costs
Under the provisions of ASC 350 Intangibles—Goodwill and Other, the Group capitalizes costs associated with software developed or obtained for internal use when both the preliminary project stage is completed and the Group's management has authorized further funding of the project which it deems probable to be completed and used to perform the function intended. Capitalization of
such costs ceases no later than the point at which the project is substantially complete and ready for its intended purpose. Capitalized software development costs are amortized using the straight-line method over the expected useful life of the software (generally 3 to 5 years).
Notes to consolidated financial statements (Continued)
(In thousands of U.S. dollars, except share amounts)
2. Basis
of presentation and significant accounting policies (Continued)
Research and development costs
Research and development costs are expensed as incurred.
Impairment of Long-lived assets
In accordance with ASC 360 Property, Plant, and Equipment, and ASC 205 Presentation of Financial Statements, long-lived assets to be held and used by the Group, including intangible assets that are subject to amortization are reviewed to determine whether an event or change in circumstances indicates that the carrying amount of the asset may not be recoverable. For long-lived assets to be held and used, the Group bases its evaluation on such impairment indicators as the nature of the assets, the future economic benefit
of the assets, any historical or future profitability measurements, as well as other external market conditions or factors that may be present. When such impairment indicators are present or other factors exist that indicate that the carrying amount of these of an undiscounted cash flow analysis of assets at the lowest level for which identifiable cash flows exist. If impairment has occurred, the Group recognizes a loss for the difference between the carrying amount and the fair value of the asset. The fair value of the asset is measured using discounted cash flow analysis or other valuation techniques.
As of March 31, 2018, the Group performed its impairment review, which resulted in impairment loss of $8,241 attributable to the client base recognized upon acquisition of Intro Pro group.
During the years ending March 31, 2017 and 2016 impairment expense related to long-lived assets was recognized in amount of $5,287 and $0 respectively.
See below—"Fair value measurement and Intangible Assets Impairment Tests" and Note 7, Impairment loss, for valuation techniques and quantitative information about the significant unobservable inputs used in the fair value measurement.
Income taxes
The Group computes and records income tax expense in accordance with ASC 740, Income Taxes.
Under the asset and liability method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities at each reporting date, and are measured using the enacted tax rates and laws that will be in effect when differences are expected to reverse.
ASC 740 Income Taxes, clarifies the accounting for uncertainty in income taxes. ASC 740 prescribes a recognition threshold and measurement attribute for the recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Group believes that its recognized income tax filing positions will be sustained on audit and does not anticipate any adjustments that will result in a material change to
its financial position. However, the Group cannot predict with certainty the interpretations or positions that tax authorities may take regarding specific tax returns filed by the Group.
Notes to consolidated financial statements (Continued)
(In thousands of U.S. dollars, except share amounts)
2. Basis of presentation and significant accounting policies (Continued)
Revenue recognition
The Group generates
revenues primarily from software development services, including in such areas of competence as (a) custom software development and support, (b) product engineering and testing and (c) technology consulting. The Group recognizes revenues when realized or realizable and earned, which is when the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred; the sales price is fixed or determinable; and collectability is reasonably assured.
The Group recognizes sales from time-and-material contracts as services are performed, based on actual hours and applicable billing rates, using the proportional performance method, with the corresponding cost of providing those services reflected as cost of sales. The majority of such sales are billed on a monthly basis whereby actual time is charged directly to the
client at negotiated hourly billing rates.
The Group recognizes sales from fixed price contracts based on the proportional performance method, during the period in which amounts become billable in accordance with the terms of the Group's contracts. Services under fixed price contracts are delivered in stages. Revenues recognized for completed stages are generally representative of the percentage of completion of the entire contract, as they are based on hours incurred compared to the total hours estimated for the completion of the entire contract.
Costs related to completed stages are expensed as incurred, while those related to uncompleted stages are recorded in work-in-progress on the balance sheet. In instances where final acceptance is specified by the client, sales are deferred until all acceptance criteria have been met. In the absence of a sufficient basis to measure progress towards completion, sales are recognized upon receipt of final acceptance from the client.
Revenue is stated net of any value-added taxes ("VAT") or other similar indirect taxes charged to clients.
The Group enters into multiple elements arrangements with the customers that purchase license and further maintenance and support. The Group accounts for these revenues in accordance with guidance of ASC 605-25, Revenue recognition—multiple elements arrangements. The selling price of each element is
based on vendor specific objective evidence ("VSOE") if available or estimated selling price. The estimation of selling price is made through consultation with and approval by the Group's management, taking into consideration the Group's pricing model and go-to-market strategy. Some of the software arrangements include consulting implementation services sold. Consulting revenues from these arrangements are generally accounted for separately from new software licenses revenues because the arrangements qualify as services transactions as defined in ASC 985-605, Revenue recognition—Software. The more significant factors considered in determining whether the revenues should be accounted for separately include the nature of services (i.e., consideration of whether the services are essential to the functionality of the licensed product), degree of risk, availability of services from other vendors, timing of payments and
impact of milestones or acceptance criteria on the realizability of the software license fee. Revenues for consulting services are generally recognized as the services are performed.
For multiple element arrangements under time-and-material contracts, revenue is recognized as services are performed for each deliverable. For arrangements under fixed-price contracts, software development revenue is recognized upon delivery of development services under the proportional performance method, as described above and for support services—on a straight-line basis over the support period, which is generally from 6 months to a year.
Notes to consolidated financial statements (Continued)
(In thousands of U.S. dollars, except share amounts)
2. Basis of presentation and significant accounting policies (Continued)
The Group reports gross reimbursable travel and "out-of-pocket" expenses incurred as both sales and cost of sales in the consolidated statements of operations.
Warranty Costs
In most contracts the Group warrants that the technology solutions it developed for its clients would operate in accordance with the project specifications
without defects for a specified warranty period. In the event that defects that the Group is held responsible for are discovered during the warranty period, the Group is obligated to remedy the defects.
The Group provides for the estimated cost of warranties at the time the related revenue is recognized based on historical and projected warranty claim rates, historical and projected cost-per-claim and knowledge of specific product failures that are outside of the Group's typical experience. The Group has never incurred any material amounts with respect to the warranties for its solutions. Each quarter, the Group re-evaluates these estimates to assess the adequacy of its recorded warranty liabilities considering the size of the installed base of products subject to warranty protection and adjusts the amounts as necessary. If actual product failure rates or repair costs differ from estimates, revisions to the estimated warranty
liabilities would be required and could materially affect the Group's results of operations.
Cash Flow
The Group utilizes invoice discounting and receivable purchase facilities as a source of short-term borrowings. The volume of such borrowings decreased significantly since the year ended March 31, 2017 as the Group changed the presentation for the year ended March 31, 2016 and 2017. Due to the fact that all short-term borrowings of the Group have quick turnover and short maturities the Group chooses, in accordance with ASC 230-10-45-8, Statement of Cash Flows—Other Presentation
Matters, to present only net changes during the period in the Statement of Cash Flows, because the knowledge of the gross cash receipts and payments related to them is believed to be not necessary to understand the Group's financing activities.
Government Grants
The Group participates in government grants programs in several countries. Due to the absence of authoritative regulations for government grants in U.S. GAAP, the Group refers to IAS 20 guidance as to a non-authoritative source. The company evaluates a received grant as related to expenses or losses already incurred and recognizes it in profit or loss of the period in which the grant becomes receivable.
Business combinations
The
Group accounts for its business acquisitions under the purchase method. The total cost of an acquisition is allocated to the underlying assets, including intangible assets acquired, and liabilities assumed based on their respective estimated fair values. Determining the fair value of assets acquired and liabilities assumed requires management's judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, intangible and other asset lives and market multiples, among other items. The results of operations of acquired companies are included in the consolidated financial statements from the date of acquisition. After control is obtained, changes in ownership interests in subsidiaries that do not result in a loss of control are accounted for as equity transactions.
Notes to consolidated financial statements (Continued)
(In thousands of U.S. dollars, except share amounts)
2. Basis of presentation and significant accounting policies (Continued)
Acquisition-related costs are costs the Group incurs to effect a business combination. Those costs include advisory, legal, accounting, valuation, and other professional or consulting fees; general administrative costs, including the costs of maintaining an internal acquisitions department; and costs of registering and issuing debt and equity securities. The Group accounts for acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received.
Advertising
The
Group expenses the cost of advertising as incurred. Advertising expenses for the years ended March 31, 2018, 2017 and 2016 were $2,881, $3,316 and $2,942 respectively, and are classified as selling expenses.
Social contributions
The Group contributes to various government pension and social funds in accordance with the legislation applicable to each of the subsidiaries. The employer's part of these contributions amounted to approximately, $56,881,
$42,824 and $31,284 for the years ended March 31, 2018, 2017 and 2016, respectively, and was expensed as incurred.
The majority of social contributions are made by subsidiaries in Poland, United States, Romania and Russia where social contributions charges is a mandatory tax consisting of contributions paid by employers at their own expense and on behalf of employees to the relevant pension, social security, medical and other similar funds. In most countries, where subsidiaries
of the Company are located, the social contributions tax rate varies depending on employee's annual compensation and maximum taxable amount of annual or monthly compensation.
Derivative financial instruments
To protect itself from possible changes related to forecasted transactions denominated in currencies different from U.S. dollars, the Group uses forward currency exchange contracts. In accordance with ASC 815 Derivatives and Hedging, the Group recognizes all derivative financial instruments, such as foreign exchange contracts at fair value. Estimates of fair value
were determined in accordance with ASC 820 Fair Value Measurements.
Due to increased volume of hedged transactions and extended periods of foreign exchange contracts there is a risk of significant fluctuations of fair values of derivatives, affecting the Company's Statement of Comprehensive income. In order to reduce such fluctuations, the Group started to apply hedge accounting to forward contracts offsetting its forecasted transactions denominated in euro and British pounds in accordance with the guidance of ASC 815-30, Cash Flow Hedges. The forward contracts
are designed so that the critical terms of the hedging instrument and of the hedged forecasted transaction are the same, therefore there is no ineffectiveness to be recognized in earnings, and the Group recognizes all gain or loss on a derivative instrument designated as a cash flow hedge in other comprehensive income. Amounts in accumulated other comprehensive income are reclassified into earnings in the same period when the hedged forecasted transaction affects earnings, i.e. when a forecasted sale actually occurs or an expense is incurred. Gains or losses related to hedge of forecasted sales are recognized in Sales of services, and those attributable to forecasted expense are recognized in Cost of services.
Notes to consolidated financial statements (Continued)
(In thousands of U.S. dollars, except share amounts)
2. Basis of presentation and significant accounting policies (Continued)
Forward contracts concluded before January 2016 were not designated as cash flow hedge at inception and did not qualify for hedge accounting as defined by ASC 815. Gain or loss on revaluation of these contracts is recognized directly in earnings as gain or loss from foreign currency exchange contract.
In
October 2016, as the euro started to depreciate against the US dollar, the Group decided to early close some of its forward euro contracts with maturity dates in 6 months or more. In accordance with ASC 815-30-40-1 and 40-2, the Group calculated the fair value of these contracts and recognized the result of the valuation in accumulated other comprehensive income. All further changes in the fair value of de-designated hedges were recognized directly in earnings in the period of revaluation. In order to lock the speculation gain achieved by the early closing, in November 2016, the Group entered into reverse contracts, i.e. to buy euros for US dollars. The
new contracts matched those de-designated both in the amounts and maturity dates, resulting in early fixing of the results of the deals. The result of matching the pairs of forward contracts in amount of $941 was recognized in earnings for the year ended March 31, 2017.
Concentration of credit risk
The concentrations of credit risk associated with trade and other receivables are mitigated by ongoing procedures to monitor the creditworthiness of customers and other debtors. The Group's balances with and cumulative revenues from the largest clients were as follows:
Use
of estimates in preparation of financial statements
The preparation of these consolidated financial statements, in conformity with US GAAP, requires management to make estimates and assumptions that affect amounts in the financial statements and accompanying notes and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Notes to consolidated financial statements (Continued)
(In thousands of U.S. dollars, except share amounts)
2.
Basis of presentation and significant accounting policies (Continued)
Fair value of financial instruments
The fair value of financial instruments, including cash and cash equivalents, short-term borrowings, which are included in current assets and liabilities, accounts receivable and accounts payable approximate the carrying value of these items due to the short-term maturities of such instruments.
Fair value measurement and Intangible Assets Impairment Tests
The Group follows the provisions of ASC 820 Fair Value Measurements and Disclosures, and considers the following three levels of inputs to measure the fair value:
Level 1: Quoted prices for identical assets or liabilities in active markets that the
entity has the ability to access as of the measurement date.
Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are non-active; inputs other than quoted prices that are observable and derived from or corroborated by observable market data.
The Group classifies its derivative assets and liabilities as Level 2. The fair value of foreign currency forward and option contracts are based on internally developed valuation models that discount cash flows resulting from the differential between the contractual foreign currency exchange rate and the reporting date market-based forward foreign currency exchange rate for a similar instrument.
The Group classifies its defined benefit
pension assets as Level 2. The fair value of defined benefit pension assets is determined by multiplying the savings accounts with the coverage ratio of the pension foundation adjusted by current accounts.
Level 3: Valuations derived from valuation techniques in which one or more significant inputs are unobservable.
The Group used Level 3 inputs when determining the fair value of contingent payable for business acquisitions (Note 3); contingent payable for software acquisition (Note 9); reportable unit for the purposes of determining goodwill impairment; intangible assets for the purposes of determining their impairment (see Note 7), and the value of shares issued under the stock option plans of the Company (Note 18).
In determining the estimated fair
values of the reporting units and intangible assets, the Group employed a Discounted Cash Flow ("DCF") analysis. Determining estimated fair values requires the application of significant judgment.
The basis for the Group's cash flow assumptions includes attributable forecasted revenue, operating costs and other relevant factors, including estimated capital expenditures. Assumptions under this method have been adjusted to reflect increased risk due to current economic volatility. In addition to that, the Group has to estimate the applicable discount rate and the terminal growth rates, where applicable. The significant unobservable inputs used in the fair value estimations are as following:
•
Cost of capital: The
cost of capital reflects the return a hypothetical market participant would require for a long-term investment in an asset and can be viewed as a proxy for the risk of that asset. Changes in the financial markets, such as an increase in interest rates or an increase in the expected required return on equity by market participants within the industry, could increase the discount rate, thus decreasing the fair value of the assets. The cost of capital used by the Group in its analysis ranged from 14.0% to 16.0% based on the level of risk related to each particular asset or reporting unit.
Notes to consolidated financial statements (Continued)
(In thousands of U.S. dollars, except share amounts)
2. Basis of presentation and significant accounting policies (Continued)
•
Cost of debt: The cost of debt reflects the effective rate paid for use of current debt facilities. The cost of debt used by the Group in its analysis ranged from 2.0% to 4.2%.
•
Short-
and medium-term growth rates: Short- and medium-term growth rates reflect the level of economic growth in each of the Group's markets from the last forecasted period. These assumptions are inherently uncertain and are subject to management discretion based on reasonable market expectations and the company's performance.
•
Forecasted operating costs: The level of cash flow generated by each operation is ultimately governed by the extent to which the Group manages the relationship between revenues and costs. The Group forecasts the level of operating costs by reference to (a) the historical absolute and relative levels of costs the Group has incurred in generating
revenue, (b) the operating strategy of each business, (c) specific forecasted operating costs to be incurred and (d) expectations as to what these costs would be for an average market participant. The Group's estimates of forecasted operating costs are developed from a number of external sources, in combination with a process of on-going consultation with operational management.
•
Forecasted capital expenditure: The size and phasing of capital expenditure, both recurring expenditure to replace retired assets and investments in new projects, has a significant impact on cash flows. The Group forecasts the level of future capital expenditure based on current strategies and specific forecast costs to be incurred, as well as expectations of what these
costs would be like for an average market participant. The Group's estimate of forecasted capital expenditure is developed from a number of external sources, in combination with a process of on-going consultation with operational management.
The most significant unobservable input used in the valuation of contingent payable is discount rate. Cost of debt is applied when the certainty of future payments is higher and cost of capital is applied where the certainty of future payments is lower.
The fair value of Group's assets and liabilities measured at fair value at the reporting date is presented below:
The
Group's policy is to recognize transfers to and out of Level 3 as of the date of change in circumstances that caused the transfer. During the year ended March 31, 2018, only contingent liabilities were transferred out of Level 3 due to resolution of contingencies in deferred considerations payable for business acquisitions and acquisitions of software. No transfer between Level 1 and Level 2 of the fair value hierarchy occurred during the period. The reconciliation from the opening balance to the closing balance for recurring fair value measurements categorized within Level 3 of the fair value hierarchy is presented below:
Notes to consolidated financial statements (Continued)
(In thousands of U.S. dollars, except share amounts)
2. Basis of presentation and significant accounting policies (Continued)
Share-based compensation
The Group accounts for stock-based compensation plans in accordance with ASC 718 Compensation—Stock Compensation. Under ASC 718, companies must calculate and record the cost of equity instruments, such as stock options or restricted stock, awarded to employees for services received in their consolidated statements of comprehensive income. The cost of the equity instruments is measured based on the fair
value of the instruments on the date they are granted (with certain exceptions) and is required to be recognized over the period during which the employee is required to provide services in exchange for the equity instruments (see Note 18). The Group accounts for forfeitures by estimating the forfeiture rate.
The Group recognizes compensation cost for an award with service conditions on a straight-line basis over the requisite service period for the entire award.
Recent accounting pronouncements
With the exception of the below, there have been no recent accounting pronouncements or changes in accounting pronouncements during year ended March 31, 2018 that are of significance, or potential significance, to the
Company's consolidated financial statements:
In May 2018, the FASB has issued Accounting Standards Update (ASU) No. 2018-06, Codification Improvements to Topic 942, Financial Services—Depository and Lending. The amendments in this Update supersede the guidance in Subtopic 942-740, Financial Services—Depository and Lending—Income Taxes, that is related to Circular 202 because that guidance has been rescinded by the Office of the Comptroller of the Currency (OCC) and no longer is relevant. The amendments in this Update are effective upon issuance of this Update. The ASU did not have any material effect on the Company’s consolidated financial statements.
In March 2018, the FASB has issued Accounting Standards Update (ASU) No. 2018-05 to amend SEC paragraphs
in ASC 740, Income Taxes, to reflect SAB 118, which provides guidance for companies that are not able to complete their accounting for the income tax effects of the Tax Cuts and Jobs Act in the period of enactment. The ASU did not have any material effect on the Company’s consolidated financial statements.
In February 2018, the FASB has issued Accounting Standards Update (ASU) No. 2018-02, Reclassification of Certain Tax Effects From Accumulated Other Comprehensive Income. The ASU allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. In addition, under the ASU, an entity will be required to provide certain disclosures regarding stranded tax effects. The update will be effective for the Group
starting April 1, 2019, and is not expected to have a material effect on the consolidated financial statements.
In January 2018, the FASB has issued Accounting Standards Update (ASU) No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842. The ASU provides “an optional transition practical expedient to not evaluate under Topic 842 land easements that exist or expired before the entity’s adoption of Topic 842 and that were not previously accounted for as leases under Topic 840.” In addition, the ASU clarifies that a “new or modified land easement should be assessed prospectively under Topic 842 to determine whether it is or contains a lease.
In August 2017, the FASB issued ASU 2017-12-Derivatives and Hedging (Topic 815): Targeted Improvements
to Accounting for Hedging Activities. The ASU amends ASC 815 to "better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results." The Group is currently assessing the impact the new guidance will have on its consolidated financial statements and/or related disclosures.
In July 2017, the FASB issued ASU 2017-11-Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily
Redeemable Noncontrolling Interests with a Scope Exception. The ASU will (1) change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features and (2) improve the readability of ASC 480-10 by replacing the indefinite deferral of certain pending content with scope exceptions. The ASU did not have any material effect on the Company’s consolidated financial statements.
Notes to consolidated financial statements (Continued)
(In
thousands of U.S. dollars, except share amounts)
2. Basis of presentation and significant accounting policies (Continued)
In May 2017, the FASB issued ASU 2017-10-Service Concession Arrangements (Topic 853): Determining the Customer of the Operation Services (a consensus of the FASB Emerging Issues Task Force). The amendments in this Update apply to the accounting by operating entities for service concession arrangements within the scope of Topic 853. The ASU did not have any material effect on the Company’s consolidated financial statements.
In May, 2017, the FASB issued ASU 2017-09, Scope of Modification Accounting, which amends the scope
of modification accounting for share-based payment arrangements, provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. The ASU did not have any material effect on the Company’s consolidated financial statements.
In March, 2017, the FASB issued ASU 2017-07-Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The amendments in this Update require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost as
defined in paragraphs 715-30-35-4 and 715-60-35-9 are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented.
If a separate line item or items are used to present the other components of net benefit cost, that line item or items must be appropriately described. If a separate line item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed.
In January 2017, the FASB issued ASU 2017-4, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendments in this Update modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition
that exists when the carrying amount of a reporting unit exceeds its fair value. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. The amendments will be effective for the Group for the fiscal year beginning April 1, 2020, and are not expected to have a material effect on the consolidated financial statements.
In January 2017, the FASB issued ASU 2017-1, Business Combinations (Topic 805): Clarifying the Definition of a Business. The amendments in this update provide guidance on evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The ASU amends ASC 805 to "provide
a more robust framework to use in determining when a set of assets and activities is a business." In addition, the amendments "provide more consistency in applying the guidance, reduce the costs of application, and make the definition of a business more operable." The update will be effective for the Group starting April 1, 2018, and is not expected to have a material effect on the consolidated financial statements.
In August 2016, the FASB issued Accounting Standards Update 2016-15—Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This Update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The Group adopted the amendments of this update from April 1, 2016. The ASU
did not have any material effect on the Company's consolidated financial statements.
In March 2016, the FASB issued Accounting Standards Update 2016-9, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments in this update simplify the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross share-based compensation expense with actual forfeitures recognized as they occur, and classification on the statement of cash flows. The Group adopted the amendment for the fiscal year beginning April 1, 2016. The amendment resulted in recognition of $1,411
excess tax benefit in the previous year's earnings—see Note 15 Income Tax below.
Notes to consolidated financial statements (Continued)
(In thousands of U.S. dollars, except share amounts)
2. Basis of presentation and significant accounting policies (Continued)
In February 2016, the FASB issued Accounting Standards Update 2016-2, "Leases (Topic 842)". The purpose of this update is to increase
transparency and comparability among organizations by requiring the recognition of lease assets and lease liabilities on the balance sheet. Most prominent among the amendments is the recognition of assets and liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. Under the new standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The amendment is effective for fiscal years beginning after December 15, 2018, including interim reporting periods within those fiscal years. The Group is currently evaluating the impact of this accounting update on its consolidated financial statements.
In November 2015, the FASB issued Accounting Standards Update 2015-17, "Income Taxes (Topic 740): Balance Sheet
Classification of Deferred Taxes", which requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position to simplify disclosure. The Group adopted the new standard from April 1, 2016, and, as a result of the implementation of this standard, changed the presentation of the prior year's deferred tax current assets and liabilities to noncurrent.
In September 2015, the FASB issued ASU 2015-16, "Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments". The amendments in this update require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The update eliminates the current requirement
to retrospectively adjust provisional amounts recognized at the acquisition date. The amendment is effective for the Group beginning April 1, 2016. The implementation of this standard did not have a material effect on the Group's consolidated financial statements.
In May 2014, the FASB issued Accounting Standards Update 2014-9, "Revenue from Contracts with Customers" ("ASU 2014-9"). ASU 2014-9 and further issued Accounting Standards Updates to Topic 606(2) will replace all current U.S. GAAP guidance on this topic and eliminate all industry-specific
guidance. The new guidance (i) removes inconsistencies, and weaknesses in revenue requirements, (ii) provides a more robust framework for addressing revenue issues, (iii) improves comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets, (iv) provides more useful information to users of financial statements through improved disclosure requirements, and (v) simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer. The core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services.
The Group has completed its analysis of ASC 606 requirements and their impact on existing policies, processes, IT systems and internal control environment.
The
Group will adopt ASC 606 starting 1 April, 2018 using the modified retrospective approach by applying the new guidance to contracts that were not completed at the date of initial application. The Group does not expect a significant change in the timing or pattern of revenue recognition upon the adoption of ASC 606. For time-and-materials contracts the Group generally expects to recognize revenue as services are performed under the practical expedient in ASC 606-10-55-18, which is consistent with the Group’s current policy. For fixed price contracts the Group generally expects to recognize revenue over time using an appropriate progress measure of performance obligation satisfaction, which is consistent
with the Group’s current proportional performance method. For royalty-based contracts the Group expects to recognize revenue when subsequent sale or usage occurs, which is consistent with the Group’s current policy. For licenses of intellectual property the Group expects to recognize revenue over the license period or at the beginning of the license period depending on whether a right to access or a right to use is granted to a customer, which is consistent with the Group’s current policy.
The Group is planning to align its processes of collecting, analyzing and concluding on customer contracts with ASC 606 model and its disclosure requirements. In order to achieve this certain changes to existing IT systems will be made to enable the Group to
capture the key features of contracts with customers and to prepare the required disclosures. Starting April 1, 2018 the Group will implement additional internal controls over the process of collecting, analyzing and concluding on contracts with customers that fall within the scope of ASC 606 as well as internal controls over preparation of disclosures. As of March 31, 2018 the Group implemented additional internal controls over the process of adopting ASC 606 and preparing the respective transitional disclosure.
Notes to consolidated financial statements (Continued)
(In thousands of U.S. dollars, except share amounts)
3. Business combinations
During the twelve months ended March 31, 2018, the Group has completed a number of business combinations discussed below. The following is a summary of revenues and net income included in the consolidated statements of income and comprehensive income for the year ended March 31, 2018:
Unafortis
AG
DerivIT
Revenue
$
5,298
$
18,241
Net income/(loss), including:
$
(8
)
$
518
Amortization
of intangible assets identified in business combinations
$
(535
)
$
(707
)
The unaudited pro-forma revenue and net income of the combined entity as though Unafortis AG and DerivIT were acquired as of April 1, 2016 would have been $921,460 and $58,426 for the year ended March
31, 2018, and $817,685 and $65,844 for the year ended March 31, 2017.
These unaudited pro-forma financial amounts are being provided for informational purposes only and do not necessarily reflect what the combined Group's financial condition or results of operations would have been had the acquisition occurred on the dates indicated. The actual financial position and results of operations may differ significantly from these unaudited pro-forma amounts reflected herein due to a variety of factors.
Acquisition of Unafortis AG (Excelian Financial Services (Switzerland) AG)
On September 27,
2017, Luxoft Holding, Inc completed acquisition of Unafortis AG, a Swiss-based wealth management consultancy specializing in Avaloq implementations and business consulting anchored in IT services. Avaloq is a provider of fully integrated banking software for the back, middle, and front office.
Luxoft intends to offer Avaloq-based services beyond the predominantly Swiss-client base of Unafortis. Luxoft therefore plans to work with Avaloq to develop more wealth management and private banking clients, taking advantage of synergies in the shared markets of Excelian and DerivIT in the UK, APAC, Germany and North America.
Pursuant to the Share purchase agreement, Luxoft acquired 100% of the Unafortis registered shares. The initial consideration for the sale and purchase of the Shares was CHF 15,757
or $16,257 paid in cash upon closing, subject to post-closing adjustments per SPA based on the final determination of the net debt and net working capital of Unafortis. In addition, (i) CHF 1,000 or $1,032 will be paid in cash to the Sellers upon achievement of certain strategic milestones for the Company’s business unit into which Unafortis will incorporate and (ii) a series of deferred cash payments will be made to the Sellers, contingent upon the achievement of certain financial performance milestones (Avaloq Practice EBITDA margin and Avaloq Practice Revenue) by the Avaloq Practice for the period from October 1, 2017 to March 31, 2020 up to maximum
CHF 27,000 or $27,960. As of September 27, 2017 and March 31, 2018, the fair value of the contingent consideration was $945 and $1,017 respectively, both of which related to achievement of strategic milestones.
This acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations. The results of Unafortis were included in the consolidated statements of comprehensive income from September 27, 2017.
On March
6, 2018 Unafortis AG was renamed to Excelian Luxoft Financial Services (Switzerland) AG.
Notes to consolidated financial statements (Continued)
(In thousands of U.S. dollars, except share amounts)
3. Business combinations (Continued)
The Group's financial statements reflect the preliminary purchase price allocation based on the fair value of identified Customer relations in the amount of $10,699
which will be amortized over a period of 10 years. The following schedule reflects the preliminary purchase price allocation to the net assets acquired:
As
the value of certain assets and liabilities are preliminary in nature, they are subject to adjustment as additional information is obtained about the facts and circumstances that existed at the acquisition date. The Group is currently assessing forecasted inputs used in valuation of assets and liabilities. Any changes in this assessment may result in adjustments to identified client base, goodwill and deferred taxes.
Notes to consolidated financial statements (Continued)
(In thousands of U.S. dollars,
except share amounts)
3. Business combinations (Continued)
Acquisition of DerivIT Solutions Pte Ltd.
On August 22, 2017, Luxoft International Ltd completed the acquisition of DerivIT Solutions Private Limited, a Singapore-based financial services-focused technology consulting company. The Company acquired 100% of the issued and paid up share capital of DerivIT in two separate tranches. This transaction was closed upon the receipt of the approval by Reserve Bank of India, as well as satisfaction of several other customary conditions precedent.
Luxoft
expects significant synergies in servicing current high-potential clients in the Asia Pacific region, anchoring new business opportunities in financial, automotive, telecom and other sectors, as well as taking advantage of the immediate cross-selling opportunities.
Pursuant to the Agreement, the initial consideration for the sale and purchase of 98% of the Shares was SGD 25,462 or $18,697, adjusted pursuant to the adjustment provisions set forth in the Agreement, payable upon the completion of the first tranche of the transaction in addition to SGD 2,000 or $1,526 was deposited in an escrow for funding indemnity claims of the Sellers. Further, if certain conditions are satisfied, the Sellers will be
paid an amount equivalent to SGD 5,569 or $4,089, subject to certain adjustments towards the final consideration for the sale and purchase of 98% of the Shares. Further, as part of the second tranche, the Sellers would receive additional cash payments for the 2% of the Shares which shall be contingent upon the achievement of certain financial performance milestones by DerivIT for the period from April 1, 2017 to March 31, 2018. As of August 22, 2017 and March 31, 2018,
the fair value of the contingent consideration was $3,005 and $3,059 respectively, both of which consisted of the escrow deposit and payment related to retention.
This acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations. The results of DerivIT were included in the consolidated statements of comprehensive income from August 22, 2017.
The Group's financial statements reflect the preliminary purchase price allocation based on the fair value of identified Customer relations in the amount of $12,120 which will be amortized over a period of 10 years. The following schedule reflects the preliminary purchase
price allocation to the net assets acquired:
Notes to consolidated financial statements (Continued)
(In thousands of U.S. dollars, except share amounts)
3. Business combinations (Continued)
As the value of certain assets and liabilities are preliminary in nature, they are subject to adjustment as additional information is obtained about the facts and circumstances that existed at the acquisition date. The Group is currently assessing forecasted inputs used in valuation of assets and liabilities. Any changes in this assessment may result in adjustments to identified client base, goodwill and deferred taxes.
Acquisition of Science, Management and Engineering AG (SME)
On
February 9, 2017, Luxoft Global Operations GmbH has completed the acquisition of Science, Management and Engineering AG (SME), a system-independent consultancy and development company, based in Garching, Germany.
Luxoft acquired all of the issued and outstanding shares of SME for $218 of cash consideration.
This acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations. The results of SME were included in the consolidated statements of comprehensive income from February 9, 2017.
The Group's financial statements reflect the preliminary purchase price allocation based on the fair value of identified Customer relations in the amount of $1,061
which will be amortized over a period of 10 years. The following schedule reflects the final purchase price allocation to the net assets acquired:
Notes to consolidated financial statements (Continued)
(In
thousands of U.S. dollars, except share amounts)
3. Business combinations (Continued)
Acquisition of IntroPro
On January 31, 2017, the Group closed an equity purchase transaction to acquire IntroPro, a group of engineering consultancy companies generating the majority of its revenue from the telecom and media sector, serving several blue chip clients based in North America.
Luxoft acquired all of the issued and outstanding shares of three companies constituting the IntroPro group, namely Intro Pro US Inc., Intro Pro Software Company Limited and Intro Pro Ukraine LLC for $28,254 of cash consideration, paid at closing, of which $5,000
was placed in escrow by the sellers for up to 3 years as security for the indemnification obligations of the sellers under the terms of the stock purchase agreement. In accordance with the agreement, the Sellers are entitled to additional cash payments, subject to achievement of certain financial performance milestones by IntroPro for its 2017 and 2018 fiscal years. Subsequently additional non-financial milestones were introduced to the purchase agreement and $4,000 was released from escrow with a corresponding decrease in contingent consideration. As of March 31, 2018, the fair value of the contingent consideration was $1,212 and the amount of current payable related to IntroPro performance up to date was $3,664
million which was fully paid in April 2018 (Note 21).
This acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations. The results of IntroPro were included in the consolidated statements of comprehensive income of the Group from January 31, 2017.
The Group's financial statements reflect the final purchase price allocation based on the fair value of identified Customer relations in the amount of $25,278 which will be amortized over a period of 10 years. The original and final allocation of the purchase price to the net assets acquired comprises the following:
Notes to consolidated financial statements (Continued)
(In
thousands of U.S. dollars, except share amounts)
3. Business combinations (Continued)
Acquisition of Pelagicore
On September 13, 2016, the Group has completed the acquisition of Pelagicore AB, a Swedish company, provider of open source software platforms and services for in-vehicle infotainment systems and human machine interface (HMI) development.
In accordance with the stock purchase agreement, Luxoft Global Operations GmbH paid €16,862 or $18,898 upon closing of this transaction. Additionally, Luxoft agreed to pay further up to €5,000 or $5,540
in 2017 subject to Pelagicore achieving certain order backlog from defined clients till the end of 2017 calendar year. As of March 31, 2018 all of Luxoft's additional obligations before the sellers were fully settled in the amount of $5,292.
This acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations. The results of Pelagicore were included in the consolidated statements of comprehensive income from September 13, 2016.
The Group's financial statements reflect the final purchase price allocation based on the fair value of identified IP rights in the amount of $19,225 which will be amortized over
a period of 8 years.
The following reflects allocation of the final purchase price to the assets and liabilities of Pelagicore:
Notes to consolidated financial statements (Continued)
(In thousands of U.S. dollars, except share amounts)
3. Business combinations (Continued)
Acquisition of Insys Group, Inc. (Insys)
On July 15, 2016, the Group has completed the acquisition of Insys Group, Inc., a New Jersey corporation, an IT consulting provider focusing on advanced predictive analytics, business intelligence and data warehousing, digital marketing, and enterprise information management.
On the closing date, Luxoft USA, Inc. paid $37,896.
In addition, according to the agreement, the sellers of Insys were entitled to a maximum of $2,500, $13,000 and $18,000, subject to Insys achieving certain revenue and EBITDA targets for the 2nd half of 2017 and 2018 and 2019 calendar years, respectively.
In conjunction with the mutual election under Section 338(h) of the U.S. Internal Revenue Code ("Section 338(h)"), Luxoft USA and the Insys Sellers agreed to treat the Insys purchase as an asset purchase for tax purposes.
This acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations. The results of Insys
were included in the consolidated statements of comprehensive income from July 15, 2016.
The Group's financial statements reflect the final purchase price allocation based on the fair value of identified Customer relations in the amount of $34,320 which will be amortized over a period of 10 years. The following schedule reflects the final purchase price allocation to the net assets acquired on July 15, 2016:
In March 2017, the management of Luxoft and the former shareholders of Insys Group Inc. reached an agreement in negotiations regarding certain changes to the original SPA. The main changes include re-allocation of the earn-out percentages among the former Insys shareholders and introduction of a minimum guaranteed amount of the earn-out of $2,574. Additionally
the maximum amount of the management earnout participation plan was decreased to a maximum of $3,000 due to resignation of one of the participants.
As of March 31, 2018, the fair value of contingent consideration was $325.
Notes to consolidated financial statements (Continued)
(In
thousands of U.S. dollars, except share amounts)
4. Property and equipment
Property and equipment consisted of the following as of March 31:
2018
2017
Land
$
5,277
$
5,277
Buildings
3,580
3,580
Motor
vehicles, furniture and fixtures
19,798
16,737
Assets under capital lease
661
647
Leasehold improvements
16,362
15,894
Software
27,330
17,855
Computers
and office equipment
57,798
55,183
Total cost
130,806
115,173
Accumulated depreciation
(79,262
)
(66,141
)
51,544
49,032
Assets
under construction
1,195
539
Property and equipment, net
$
52,739
$
49,571
Depreciation
expense, including amortization of assets recorded under capital leases, was $21,587, $19,544 and $14,069 in 2018, 2017 and 2016, respectively.
5. Goodwill
Goodwill as of March 31, 2018, 2017 and 2016 comprises the following:
During the year ended March 31, 2018, the Group recorded an impairment loss of $8,241 related to IntroPro client base, an asset identified upon acquisition of IntroPro, as discussed in Note 3. The impairment loss was caused primarily by a decrease in originally anticipated revenue growth rates, resulting in lower projections of the future cash flows that were not sufficient to support the carrying value of the asset. Assumptions used in measuring the fair value of the client base included the discount rates, attrition and revenue growth rates. In determining the estimated fair values of the client base, the Group employed a discounted cash flow analysis. The Group believes it is reasonably possible that the estimate of undiscounted cash flows may change in the near term
resulting in additional impairment of the IntroPro customer base in amount of up to 3.3 mln USD. The Group’s estimate of cash flows might change because of the deterioration in the customer base attrition rate due to increased competition.
The Group also performed annual goodwill impairment test, which included a qualitative assessment of impairment indicators for all reporting units. No indicators of goodwill impairment were identified as of March 31, 2018.
The Group considers all current information in determining the need for or calculating the amount of any impairment charges, however, future changes in events or circumstances, could result in decreases in the fair values of its intangible assets and goodwill.
Notes to consolidated financial statements (Continued)
(In thousands of U.S. dollars, except share amounts)
8. Short-term borrowings
Credit facilities
Insys Group Inc. utilizes a credit facility provided by TD Bank N.A. The Loan and Security agreement was modified effective August 29, 2016, to provide an aggregate amount of $8.0 million at LIBOR plus 2.00% interest rate. The agreement expired on May 31, 2017. There was no
outstanding amount as of March 31, 2018 and as of March 31, 2017 under this agreement.
Excelian Ltd uses an invoice discounting facility of up to £3.0 million provided by Royal Bank of Scotland. On November 19, 2016, the facility was reduced to £1.0 million. Under this arrangement Excelian Ltd can assign certain receivables in exchange for cash less a discount based on 1.90% per annum. On December 31, 2017 the facility was canceled.
On December 27,
2016, Luxoft USA Inc. and Luxoft Global Operations GmbH respectively entered into the Facility agreement with Amsterdam Trade Bank N.V. for the aggregate available credit amount up to $18.0 million. For both of the facilities the applied interest rate is the cumulative of the applicable LIBOR and a 3% margin. There was no outstanding amount as of March 31, 2018 under these agreements.
On February 20, 2014, Luxoft USA, Inc. entered into a credit facility agreement with Citibank, N.A. for up to $5.5 million. The loan bears an interest rate LIBOR plus 1.25%
per annum. On December 31, 2017 the facility was canceled.
On November 20, 2013, Luxoft UK Ltd., Luxoft Eastern Europe Ltd. and Luxoft GmbH entered into an uncommitted Pre- and Post-Shipment Advances Facility Agreement with Citibank Europe PLC for up to $5.0 million. On November 13, 2014 Luxoft Global Operations GmbH acceded to the mentioned Facility Agreement as a Borrowing Entity. On November 25, 2016 Citibank increased the total credit amount available for the Group to $17.4 million. This is a continuing agreement and remains in full effect subject to its terms until 30 days after the bank's
receipt of written notice of termination from the borrower's agent. Under this agreement the borrower can use pre- or post-shipment advance. The interest rate for pre-shipment is LIBOR plus 2.0% per annum and the interest rate for post-shipment is LIBOR plus 1.25% per annum. There was no outstanding amount as of March 31, 2018 and as of March 31, 2017 under this agreement.
On January 15, 2013, the Group entered into an uncommitted receivables purchase agreement with BNP Paribas Dublin Branch. Under the agreement the Group can assign certain receivables
in exchange for cash based on LIBOR for the relevant purchase term (30/60 days) plus 2.1% per annum. The current limit available under this facility is up to $30 million. There was no outstanding amount as of March 31, 2018 and as of March 31, 2017 under this agreement.
Overdraft facilities
On December 27, 2016 Luxoft International Company Ltd. entered into the Facility agreement with Amsterdam Trade Bank N.V. for up
to $2.0 million of the available overdraft limit. The overdraft facility bears interest at a rate of one-month LIBOR plus 3.75% per annum. There was no outstanding amount as of March 31, 2018 and as of March 31, 2017, under this facility.
On November 12, 2013 Luxoft Professional Romania SRL entered into an overdraft facility agreement with ZAO Citibank for $0.9 million. The overdraft facility bears interest at a rate of one-month LIBOR plus 2.00% per annum overnight
interest rate paid monthly. The overdraft facility is guaranteed by Luxoft Holding, Inc. and Luxoft Professional, LLC. There was no outstanding amount as of March 31, 2018 and as of March 31, 2017, under this agreement.
Notes to consolidated financial statements (Continued)
(In thousands of U.S. dollars, except share
amounts)
8. Short-term borrowings (Continued)
On October 25, 2012 Luxoft Professional, LLC entered into an overdraft facility agreement with ZAO Citibank for $3.0 million. The overdraft facility bears interest at a rate of one-month LIBOR plus 2.25% per annum overnight interest rate paid monthly. The overdraft facility is guaranteed by Luxoft Holding, Inc. There was no outstanding amount as of March 31, 2018 and as of March 31, 2017, under this facility.
9.
Consideration payable for acquisitions
Payables for acquisitions consist of contingent consideration payable for acquisitions of businesses and software and deferred consideration payable for which contingencies have resolved. Contingent consideration, resulting from business combinations, is valued at fair value at the acquisition date as part of the business combination and is subsequently remeasured to fair value at each reporting date as discussed in Note 2 above. The determination of the fair value is based on discounted cash flows. The key assumptions take into consideration the probability of meeting each performance target and the discount factor. Contingent consideration is categorized within Level 3 of the fair value hierarchy and transferred out of recurring fair value measurements when the contingency is resolved as current payable for business acquisition or software acquisition.
The
following table presents the Group's consideration payable for acquisitions as of March 31, 2018 and 2017:
Notes to consolidated financial statements (Continued)
(In thousands of U.S. dollars, except share amounts)
9. Consideration payables for acquisitions (Continued)
The reconciliation from the opening balance to the closing balance for the Group's consideration payable is presented below:
For
the years ended March 31
2018
2017
As of the beginning of the period
$
49,427
$
17,381
Additions
12,456
47,951
Payments
(19,258
)
(4,577
)
Measurement
period adjustment
(21,812
)
—
Transfers to additional paid-in capital
—
(1,107
)
Foreign currency (gain) loss
622
(190
)
Unwinding
of discount for contingent liability
1,215
1,990
Gain from revaluation
(13,340
)
(12,021
)
As of the end of the period
$
9,310
$
49,427
10.
Derivatives and hedging activities
Operating in multiple currencies, the Group uses foreign exchange forward contracts to hedge certain exposures resulting from changes in foreign currency exchange rates. These foreign exchange contracts, carried at fair value, have maturities of up to twelve months and are recognized as derivative instruments. The Group enters into these foreign exchange contracts to hedge a portion of its forecasted foreign currency denominated revenue and expense in the normal course of business and accordingly, they are not speculative in nature.
From time to time the Group may also enter
into foreign exchange SWAP contracts to buy and sell foreign currency at predetermined exchange rates in order to earn a fixed income as an alternative to placing a bank deposit. In such situations the Company may temporarily purchase the actual underlying (cash denominated in a foreign currency) as well as the derivative in one contract. Although the Group views the temporary purchase of the underlying as an integral part of the SWAP contract, it presents revaluation of the underlying under the "Net foreign exchange gain (loss)" caption of the consolidated statement of income. The change in fair value of
the derivative itself is presented under the "Gain (loss) from derivative instruments" caption of the consolidated statement of income. During the year ended March 31, 2018 the Group earned fixed income in amount of $205.
Foreign exchange contracts are classified as either assets or liabilities on the balance sheet and measured on a recurring basis at fair value. Gains and losses resulting from changes in fair value are accounted for depending on the use of the contract and whether it is designated and qualifies for hedge accounting.
The critical terms
of forward contracts concluded in 2017 calendar year are the same as those of the hedged forecasted transaction; all hedging relationships are formally documented at the inception of the hedge; therefore there is no ineffectiveness to be recognized in earnings and the Group recognizes changes in the intrinsic value of these cash flow hedges in accumulated other comprehensive income in its Consolidated Balance Sheets, until the forecasted transaction occurs.
Forward contracts concluded before January 2016 were not designated as cash flow hedge at inception and did not qualify for hedge accounting. Gain or loss on revaluation of these contracts is recognized
directly in earnings as gain or loss from foreign currency exchange contract.
Notes to consolidated financial statements (Continued)
(In thousands of U.S. dollars, except share amounts)
10. Derivatives and hedging activities (Continued)
The reconciliation from the opening balance to the closing balance of foreign currency derivative instruments designated
as cash flow hedges, respective accumulated other comprehensive income and foreign currency derivative instruments not designated as hedges for the years ended March 31, 2018 and 2017 is as follows:
As of March 31, 2018, the Group has entered into forward contracts to buy £7.6 million in total for $10.4 million in order to hedge the risk of U.S. dollar
depreciation against the British pound for GBP-denominated expense; and forward contracts to sell €24.3 million in total for $29.5 million to hedge the risk of U.S. dollar appreciation against the Euro for Euro-denominated revenue. All forward contracts are subject to net settlement.
The fair values of the Group's derivative assets of $158 and liabilities of $776 have been classified as Level 2 as discussed in Note 2 above.
Notes to consolidated financial statements (Continued)
(In thousands of U.S. dollars, except share amounts)
During the year ended March 31, 2018, the Group either received cash or guaranteed cash receipts under 5 government grants across multiple jurisdictions in a total amount of $1,825, out of which $1,423 was recognized in other gain. The grants require certain investments in creation and maintaining new workplaces as well as certain capital expenditure during certain periods of up to year 2021.
The Group recognizes grants received as other non-operating income based on the evidence that the company has fulfilled the grant's requirements.
12. Accrued liabilities
Accrued liabilities consist of the following as of March 31:
2018
2017
Due
to employees
$
41,961
$
32,328
Professional services
5,603
3,886
Other
2,029
2,299
Total
$
49,593
$
38,513
13.
Related party transactions
The following table provides the balances with related parties as of March 31:
Notes to consolidated financial statements (Continued)
(In
thousands of U.S. dollars, except share amounts)
13. Related party transactions (Continued)
In the ordinary course of business, the Group provides services to and purchases goods (computers and related components) and services (rent, professional, marketing, outstaffing and management services) from IBS Group subsidiaries and affiliated companies.
On June 5, 2015, Luxoft Global Operations and Area 52 Property AG, a company controlled by the Company's Chief Executive Officer and then current Chief Financial Officer, entered into a lease agreement for an office space of 388
square meters located at the 21st floor of the building in Zug, Switzerland where the Group's operating headquarters are situated at a different floor. The lease term is from January 1, 2016 through December 31, 2020. The base rent is $300 per annum and is subject to annual increases based on index of consumer prices not to exceed 2%.
The goods and services include software customization and other software subcontracting services to IBS Group subsidiaries and other companies affiliated with IBS Group.
Sales of services included software customization and other
software subcontracting services to IBS Group subsidiaries and other companies affiliated with IBS Group.
The Company is authorized to issue 50,000,000
Class A ordinary shares and 30,000,000 Class B ordinary shares which will be subject to the same provisions with reference to the payment of calls, liens, transfers, transmissions, forfeitures and otherwise as the shares in issue. As of March 31, 2018 and 2017, the Company' issued and outstanding share capital was as follows:
The
Company's authorized and issued common stock shares have no par value.
During the year ended March 31, 2018, the Company's shares held in treasury decreased by 31,939 shares or $2,604. The treasury shares were withheld to pay the withholding taxes upon the vesting of the instruments granted under SOP III program discussed in Note 18 below.
Notes to consolidated financial statements (Continued)
(In thousands of U.S. dollars, except share amounts)
14. Shareholders' equity (Continued)
In November, 2017, the Company's Board approved cancellation of the treasury shares in the amount of 134,900 shares so that they can be returned to authorized and unissued capital.
During the year ended March 31, 2018, 318,440 Class B ordinary shares were converted to Class A ordinary shares.
15.
Income taxes
The Group's income is subject to taxation in the United States, United Kingdom, Switzerland and various other states and foreign jurisdictions. Our major tax jurisdictions are Switzerland, United States,Russia, Poland, Romania, United Kingdom and Germany.
The reconciliation between the income tax expenses reported in the accompanying consolidated financial statements and income before taxes applicable to the Group's income is provided below:
Total
deferred tax assets after valuation allowance
$
11,322
$
10,223
Deferred tax liabilities
Accounts receivable and revenue accruals
(2,516
)
(766
)
Inventory
and deferred cost of revenue
(769
)
(523
)
Property and equipment
(2,294
)
(2,116
)
Intangible assets and goodwill
(12,224
)
(20,302
)
Total
deferred tax liabilities
$
(17,803
)
$
(23,707
)
Net deferred tax asset, non-current
4,349
3,423
Net
deferred tax liability, non-current
(10,830
)
(16,907
)
Net deferred tax liabilities
$
(6,481
)
$
(13,484
)
For
financial reporting purposes, a valuation allowance was recorded to reflect management's best estimate of the realization of deferred tax assets related to net operating loss carryforwards of certain loss-making subsidiaries of the Group. Valuation allowance is provided when it is more likely than not that some or all of the deferred tax assets will not be realized in the foreseeable future. These evaluations are based on expectations of future taxable income, reversals of the various taxable temporary differences and tax planning strategies.
At March 31, 2018 the Group had net operating loss carryforwards of $17,652. Majority of those losses were incurred in Sweden, Germany, United Kingdom, United
States, and Canada. Group's net operating loss carryforwards are not going to expire in the foreseeable future. Tax benefit related to recognition of net operating losses was $477 for the year ended March 31, 2018.
On December 22, 2017, the United States enacted Tax Cuts and Jobs Act ("TCJA"), which is generally effective for the tax years beginning after December 31, 2017. TCJA includes the reduction of a headline U.S. federal rate from 35% to 21%, a major overhaul of the U.S. international taxation principles, as well as changes in several domestic taxation provisions. The Group’s U.S. subsidiaries
are not expected to be materially affected by the international provisions of TCJA. As a result of TCJA enactment the Group has recorded a provisional one-time deferred income tax benefit of $1,861 resulting from the revaluation of U.S. net deferred income tax liabilities to the new lower U.S. income tax rate. The U.S. government and state tax authorities are expected to continue to issue guidance regarding the TCJA, which may result in adjustments to the recorded provisional amounts.
Undistributed earnings of foreign subsidiaries that are indefinitely reinvested were $17,464 and $15,736 as of March 31, 2018
and 2017, respectively. The Group has not recognized deferred tax liability for temporary differences related to investments in foreign Subsidiaries of the Group that are essentially permanent in duration. If such earnings and other basis differences in our investment in foreign Subsidiaries were to be repatriated in the future, they would be subject to various income taxes and applicable withholding taxes. The amount of the unrecognized deferred tax liability related to such investments in foreign Subsidiaries that are indefinitely reinvested were $905 and
$804 as of March 31, 2018 and 2017, respectively.
Notes to consolidated financial statements (Continued)
(In thousands of U.S. dollars, except share amounts)
15. Income taxes (Continued)
The subsidiary in Poland
conducts a part of its operational activities in the territory of Krakow special economic zone ("SEZ") under the permit, which entitles the Group to use a tax incentive. The Group's profit generated from operations in the SEZ is tax exempt within the amount of tax credit calculated based on eligible investments. Since the amount of the relevant tax credit currently exceeds the amount of tax payable with respect to profits earned in the SEZ, the Group pays no income tax in relation to its operations in the SEZ. The amount of tax benefit received through the utilization of investment tax credit was $393 for the year ended March 31, 2018 and $581 for the year ended March 31, 2017.
Goodwill
deductible for income tax purposes amounted to $19,861 as of March 31, 2018.
Income before income tax is attributed to the geographic locations as follows:
The Group's policy is to recognize interest and penalties related to
uncertain tax positions as a component of its provision for income taxes. There was no accrued interest and penalties resulting from such unrecognized tax benefits at March 31, 2018 and March 31, 2017. The aggregate changes in the balance of unrecognized tax benefits were as follows:
The
total amount of unrecognized tax benefits of $293 as of March 31, 2018 and $408 as of March 31, 2017, if recognized would affect Group's effective tax rate for the respective years. It is reasonably possible that $293 of unrecognized tax benefits may significantly increase or decrease within 12 months, subject to finalization of administrative proceedings with IRS related to 2010-2014 tax audit.
Notes to consolidated financial statements (Continued)
(In thousands of U.S. dollars, except share amounts)
15. Income taxes (Continued)
Group's operations in major tax jurisdictions are subject to examination for tax years 2012 through 2018, some of which are currently under audit by local tax authorities. The IRS completed its examination up to and including 2014 tax year. All issues have been concluded except for one issue related to application of R&D tax credits, which is being resolved. The Russian tax authorities are currently examining our 2014 through 2016 tax returns.
16.
Commitments and contingencies
The Group leases office space from third and related parties, total rent expense incurred under operating leases is the following:
In the ordinary course of business, the Group may be party to various legal and tax proceedings, and subject to claims, certain of which relate to the developing markets and evolving fiscal and regulatory environments in which the Group operates. In the opinion of management, the Group's liability, if any, in all pending litigation, other legal proceedings or other matters will not have a material effect
upon the financial condition, results of operations or liquidity of the Group.
Operating environment of the Group
Economic environment—A significant portion of the Group's business operations relate to the Central and Eastern Europe ("CEE") countries. CEE includes Poland, Romania, Bulgaria, Russia and Ukraine. CEE countries continue economic reforms and development of their legal, tax and regulatory frameworks as required by a market economy. The future stability of the CEE countries' economies is largely dependent upon these reforms and developments and the effectiveness of economic, financial and monetary measures undertaken by the governments.
Notes to consolidated financial statements (Continued)
(In thousands of U.S. dollars, except share amounts)
16. Commitments and contingencies (Continued)
Exchange Rate—Although the Company's reporting currency is the U.S. dollar, the Group's sales are largely denominated in U.S. dollars and euros, and, to a lesser extent, in British pounds and Russian rubles, whereas the Group's expenses are largely denominated in U.S. dollars, Russian rubles, Polish zloty, British pounds and Romanian leu. As a result, currency fluctuations, and especially the appreciation of the Russian ruble relative
to the U.S. dollar and the depreciation of the euro relative to U.S. dollar, affect the Company's results of operations.
During year ended March 31, 2018, USD depreciated against Euro by 13.3% and was on average 6.1% lower than during year ended March 31, 2017. British pound and Russian ruble were on average 1.7% higher and 8.1% lower, respectively, than during year ended March 31, 2017.
Taxation
The
tax legislation and practice in some jurisdictions in which the Group operates is unpredictable and gives a rise to significant uncertainties. In particular, the tax, currency and customs legislation in Central and Eastern European (CEE) and Asia Pacific (APAC) jurisdictions are subject to varying interpretations and changes, which can occur frequently. Tax laws in these jurisdictions have been in force for a relatively short period of time as compared to tax laws in more developed market economies, and tax authorities are often somewhat less advanced in their interpretation of tax laws, as well as in their enforcement and tax collection methods. It is possible that tax positions that have not been challenged by tax authorities in the past may be contested. Significant developments in transfer pricing rules, introduction of controlled foreign corporation legislation and other recent changes in tax laws bring additional uncertainty to the Group's tax affairs.
As
of March 31, 2018, management believes that its interpretation of the relevant legislation is appropriate and that the Group's tax positions will be sustained. However, due to the above reasons, it is at least reasonably possible that relevant governmental authorities in CEE and APAC countries may attempt to assess additional income and non-income taxes, against the Group or certain of its Subsidiaries. It is not practicable to determine the amount of unasserted claims that may manifest, if any, or the likelihood of any unfavorable outcome. Management will vigorously defend its positions if such claims are raised.
The Group's operations and financial position will continue to be affected by CEE and APAC countries' application and interpretation
of existing and future legislation and tax regulations. Such possible occurrences and their effect could have a severe impact on the Group's operations and its financial position.
Accrued Warranty and Indemnification
The Group offers a basic labor warranty on its services. The basic warranty period for hardware products is typically one year from the date of acceptance of works by the customer. The Group provides currently for the estimated cost that may be incurred under its basic limited warranties at the time related revenue is recognized. Factors considered in determining appropriate accruals for product warranty obligations include the nature of services provided, historical and projected warranty claim rates, historical and projected cost-per-claim and knowledge of specific product failures that are outside of the Group's typical
experience. The Group assesses the adequacy of its pre-existing warranty liabilities and adjusts the amounts as necessary based on actual experience and changes in future estimates.
Notes to consolidated financial statements (Continued)
(In thousands of U.S. dollars, except share amounts)
16. Commitments and contingencies (Continued)
In the normal course of business, the Group is a party to a variety of agreements under which it may be obligated
to indemnify the other party for certain matters. These obligations typically arise in contracts where the Group customarily agrees to hold the other party harmless against losses arising from a breach of representations or covenants for certain matters such as title to assets and intellectual property rights associated with certain arrangements. The duration of these indemnifications varies, and in certain cases, is indefinite.
17. Segment information
ASC 280 Disclosure about Segments of an Enterprise and Related Information, established standards for reporting information about operating segments in financial statements. Operating segments are defined as components of
an enterprise engaging in business activities about which separate financial information is available that is evaluated regularly by the chief operating decision maker ("CODM") in deciding how to allocate resources and in assessing performance.
The Group's chief operating decision maker has been identified as the Chief Executive Officer, who reviews consolidated results when making decisions about allocating resources and assessing performance of the Group. Consequently, the Group operates only in one operating segment.
Geographic area information
Revenues by geographical location are as follows, based on the location of the customers:
Notes to consolidated financial statements (Continued)
(In thousands of U.S. dollars, except share amounts)
17. Segment information (Continued)
Geographical information about the Group's long-lived assets is based on locations where the assets are accumulated:
As of
March March 31
2018
2017
North America
$
94,121
$
133,394
Europe (excl. UK)
118,908
97,461
UK
12,538
14,238
Russia
10,886
10,030
APAC
24,563
1,230
Other
and intercompany elimination
(830
)
4,395
Total
$
260,186
$
260,748
Client
Information
Revenues from the transactions with external customers with individual turnover over 10% and over 5% of total revenues are the following:
For the years ended March 31
2018
2017
2016
Revenues
over 10% of total revenues
$
314,574
$
340,538
$
340,189
Revenues over 5% of the total revenues
314,574
388,863
387,114
18.
Share-based compensation
During the financial year ended March 31, 2015, the Company launched a share-based remuneration plan (the Plan) for management of the Group. The Plan consists of remuneration programs for the CEO, the top management of the Company and other employees and consultants (hereinafter—"participants"). A total of 2,300,000 Class A common shares, with no par value, of the Company were authorized for issuance under the Plan. The shares that may be issued under the Plan may be authorized and unissued shares, shares held in treasury or shares purchased
on the open market or by private purchase.
On November 10, 2015, the share pool available for the Plan was extended to 2,452,000 Class A common shares, with no par value. Additionally, on that date, the Company's Board approved further annual allocation of Class A common shares to the Plan. The available for issuance share pool will be not more than the lesser of 2% of the total Company's outstanding number of shares on December 31 of the immediately preceding calendar year, and 1,000,000 shares.
Notes to consolidated financial statements (Continued)
(In thousands of U.S. dollars, except share amounts)
18. Share-based compensation (Continued)
The Plan provides for the grant of options, stock appreciation rights ("SARs"), restricted stock awards, performance share awards ("PSA"), restricted stock units ("RSUs"), cash-based awards, dividend equivalents and other stock-based awards to the Company's directors and to the Company's or affiliates' current and prospective employees and consultants and
prospective employees or consultants.
All instruments currently granted within the Plan by the Company are accounted for as equity instruments. The compensation expense is recognized over the requisite service period which coincides with the vesting period.
Upon exercise of the instruments, the participants receive a certain number of the Company's shares. For residents of the USA, the UK, Switzerland, Sweden or Germany personal income tax arising from exercise of the instruments in accordance with the tax legislation of the country of the participant's residence is withheld by the Company in form of treasury shares.
The
amount of expenses for the years ended March 31, 2018, 2017 and 2016 included in the accompanying statements of comprehensive income was as follows:
2018
2017
2016
SOP
III
19,078
19,094
12,043
CEO remuneration
8,702
8,702
4,970
Top
Management bonus
1,188
1,188
1,188
Total
28,968
28,984
18,201
The
details of each program within the Plan are discussed below.
Top Management Bonus
On August 12, 2014, the Board of Directors adopted share-based remuneration plan ("Top bonus") for management of the Group. The program was approved by the Company's shareholders on November 14, 2014. In accordance with the terms of the Top bonus, the Company granted 164,257 RSUs which entitle the holders to receive a fixed number of Class A shares, allocated for issuance under this plan, at no cost subject to continued service conditions. The grant-date fair value of each RSU was
$36.17.
The first, second and third tranches were vested and exercised as of March 31, 2018. The fourth tranche was pending approval of the Company's Board of Directors which took place in May 2018. The following schedule presents the information about the RSUs outstanding as of March 31, 2018
and March 31, 2017:
As of March 31
2018
2017
The quantity of RSUs outstanding, units
65,704
98,555
The
weighted-average remaining contractual term, days
365
548
The intrinsic value of the RSUs outstanding
$
2,691
$
6,165
The
intrinsic value of the RSUs exercised during financial years 2017 and 2018 was $1,915 and $2,155 respectively.
As of March 31, 2018, the total compensation cost related to non-vested RSUs not yet recognized was $1,188.
Additionally, based on the results of the fiscal year ended March 31, 2017, the Board of Directors approved bonus in the form of shares in amount of $613, which resulted in issuance of 9,130
shares respectively. This expense was included in the total expense on Top Management bonus in the form of shares.
CEO remuneration
In accordance with the program approved on November 14, 2014, 328,513 RSUs were granted to the CEO of the Company on December 16, 2014. The RSUs are subject to vesting in annual increments over a five-year period. The program does not provide for an automatic exercise of the vested RSUs and requires a submission of an exercise notice.
On November 10, 2015, additional 328,513
RSUs, subject to service and market conditions, were granted to the CEO. The RSUs will vest on August 12, 2019, subject to continued employment and certain level of average market capitalization of the Company during the last 6 months prior to the vesting date.
As
of March 31, 2018, the first, second and third tranches were vested and exercised. The following schedule presents the information about the RSUs outstanding as of March 31, 2018 and 2017:
The weighted-average remaining contractual term, days
447
727
The intrinsic value of
the RSUs outstanding
$
18,834
$
30,026
The intrinsic value of the RSUs exercised during financial years 2018 and 2017 was $9,313 and nil respectively.
As of March 31,
2018, the total compensation cost related to non-vested instruments not yet recognized was $11,873.
SOP III
On November 11, 2014, the Board of directors adopted the Incentive Compensation Plan for the employees and consultants of the Group ("SOP III"). The SOP III became effective on November 14, 2014, the date on which the Company's shareholders approved the program.
Notes to consolidated financial statements (Continued)
(In thousands of U.S. dollars, except share amounts)
18. Share-based compensation (Continued)
The SOP III provides for the grant of SARs, RSUs and PSA to the current and prospective employees and consultants of the Group. The following table presents the vesting schedule of the instruments granted:
RSUs
awarded under the SOP III entitle the holder to receive a fixed number of Class A shares at no cost subject to continued service conditions. The holders of RSUs have no rights to dividends or dividends equivalent. Since the exercise price of the RSUs granted under the SOP III is zero, the fair values of the grants were measured using fair values of shares at the date of grant adjusted for 3% annual attrition rate.
SARs issued under the SOP III to certain participants who reside in the US entitle the holder to receive a number of Class A shares at no cost determined by reference to appreciation from and after the date of grant in the fair market value of a Class A share over the grant price.
PSAs awarded under the SOP III to certain participants who reside outside the US entitle the holder to receive a fixed number of Class A shares at
no cost subject to continued service conditions and determined by reference to the fair market value of Class A share at the exercise date.
The fair value of SARs and PSAs was measured using Longstaff—Schwartz model. Valuation of SARs and PSAs was made using the following assumptions:
Risk free interest rate
2
%
Expected dividend yield
—
%
Attrition
rate
3
%
Volatility factor
40
%
The following grant-date share prices were used in the valuation:
Notes to consolidated financial statements (Continued)
(In thousands of U.S. dollars, except share amounts)
18. Share-based compensation (Continued)
The following table reconciles the quantity of restricted stock units, stock appreciation rights and performance share awards as of March 31, 2017, to the quantity as of March 31, 2018:
The following table summarizes information about restricted stock units, stock appreciation rights and performance share awards for the period from March 31, 2017 to March 31,
2018:
Notes to consolidated financial statements (Continued)
(In thousands of U.S. dollars, except share amounts)
18. Share-based compensation (Continued)
The schedule below summarizes the information about restricted stock units, stock appreciation rights and performance share awards outstanding and exercisable as of March 31, 2018:
The following table summarizes information about the intrinsic value of Company's restricted stock units, stock appreciation
rights and performance share awards exercised during 2017 and 2018:
2018
2017
Total intrinsic value of RSUs exercised
$
11,837
$
11,052
Total
intrinsic value of SARs exercised
$
1,476
$
680
Total intrinsic value of PSAs exercised
$
5,073
$
4,746
The
total compensation cost related to non-vested awards not yet recognized is $22,842 at March 31, 2018.
19. Earnings per share
Net income per common share for all periods presented has been determined in accordance with ASC 260, Earnings per Share, by dividing income available to ordinary shareholders of the Group by the weighted average number of ordinary shares outstanding during the period.
The vested rights to the Group's shares granted to employees under the stock option plans are considered participating securities since they have non-forfeitable rights to dividends or dividend
equivalents during the period from the vesting date to the date they are transferred to the participant from Luxoft SOP S.A. and thus require the two-class method of computing EPS. When calculating diluted EPS, the numerator is computed by adding back the undistributed earnings allocated to the participating securities in arriving at the basic EPS and then reallocating such undistributed earnings among the Company's ordinary shares, participating securities and the potential ordinary shares that result from the assumed exercise of all dilutive options. The denominator is increased to include the number of additional ordinary shares that would have been outstanding had the options been exercised.
Stock splits are accounted for retrospectively assuming the number of shares for all periods presented.
Notes to consolidated financial statements (Continued)
(In thousands of U.S. dollars, except share amounts)
19. Earnings per share (Continued)
The rights, including the liquidation and dividend rights, of the holders of the Groups' Class A and Class B ordinary shares are identical, except with respect to voting and dividends in the form of shares or rights to acquire shares. Each Class A ordinary share is entitled to one vote per share. Each Class B ordinary share is entitled to 10 votes per share and will be convertible at any time into one Class A ordinary share. As a result, the undistributed earnings
for each year are allocated based on the contractual participation rights of the Class A and Class B ordinary shares as if the earnings for the year had been distributed. As the liquidation and dividend rights are identical (save for where dividends are paid in the form of shares or rights to acquire shares), the undistributed earnings are allocated on a proportionate basis. Further, as the Group assumes the conversion of Class B common stock in the computation of the diluted net income per Class A ordinary share, the undistributed earnings are equal to net income for that computation. The computation of the diluted net income per Class A ordinary share assumes the conversion of Class B ordinary shares, while the diluted net income per Class B ordinary share does not assume the conversion of those shares.
The following table sets forth the computation of basic and diluted earnings per share:
(In
thousands U.S. dollars, except share amounts and EPS)
Basic EPS
Numerator
Net
income attributable to the Group
$
37,986
$
19,027
$
40,346
$
22,292
$
42,976
$
27,275
Denominator
Weighted
average number of ordinary shares
22,455,494
11,247,575
21,436,667
11,844,104
20,156,818
12,792,989
Basic
EPS
Net income attributable to the Group
$
1.69
$
1.69
$
1.88
$
1.88
$
2.13
$
2.13
Net
income attributable to the Group
37,986
19,027
40,346
22,292
42,976
27,275
Reallocation
of net income as a result of conversion of Class B to Class A ordinary shares
19,027
—
22,292
—
27,275
—
Net
income attributable to the Group
$
57,013
$
19,027
$
62,638
$
22,292
$
70,251
$
27,275
Denominator
Conversion
of Class B to Class A shares
11,247,575
—
11,844,104
—
12,792,989
—
Stock
option plans
544,736
544,736
719,903
719,903
1,138,407
1,138,407
Diluted
weighted average number of ordinary shares outstanding
34,247,805
11,792,311
34,000,674
12,564,007
34,088,214
13,931,396
Diluted
net income attributable to the Group per share
$
1.66
$
1.61
$
1.84
$
1.77
$
2.06
$
1.96
20.
Employee Benefit Plans
Luxoft Global Operations GmbH and Excelian Luxoft Financial Services AG maintain mandatory defined benefit pension plans in accordance with the legislation of Switzerland, which obliges all Swiss employers to provide a minimum
Notes to consolidated financial statements (Continued)
(In thousands of U.S. dollars, except share amounts)
20. Employee Benefit Plans (Continued)
pension
plan for their employees. According to the plan, contributions are defined by the plan regulations and cannot be decreased without amending the plan regulations. In pension funds the employer has to pay at least as much as the employees. Swiss pension funds are legally independent from the employer. Funding is granted there by means of defined savings contributions on individual retirement assets implementing a guaranteed interest rate (1.25% for 2016, 1.00% for 2017 and 1.00% for 2018) and a fixed conversion rate of 6.8% for old age pensions mandatory part of the of the retirement asset.
The Group accounts
for its defined benefit pension plans in accordance with ASC Subtopic 715-30, Defined Benefit Plans—Pension. Benefits under this plan are based on the employees' years of service and compensation.
The present value of the Projected Benefit Obligation (PBO) is determined using the projected unit method. The following inputs were used in benefit calculations:
Mortality
and disability rates used were in accordance with the mortality tables "BVG 2015" (generation tables) published in December 2015.
Luxoft Global Operations GmbH is affiliated via contract with the collective foundation AXA Foundation for Occupational Benefits. Excelian Luxoft Financial Services AG is affiliated via contract with the pension fund Profond. As there is no financial statement for each contract separately, the plan assets at fair value correspond to the lump sum of savings of the plan participants at reporting date. The collective foundation is responsible for the investment of the assets. The plan assets consist entirely of insurance
assets.
On 3rd April 2018, Profond announced to decrease the future conversion rates from 6.80% in 2018 to 6.20% in 2021 (men, retirement age 65). The reduction of future benefits was calculated as of March 31, 2018 and decreases the projected benefit obligation by 412. The plan amendment was accounted for as a prior service credit in accumulated other comprehensive loss as of March 31, 2018 to be amortized in profit or loss over the remaining service years starting next financial year.
Acquisition
of Excelian Luxoft Financial Services AG
7,213
—
Interest cost
33
9
Current service cost
623
458
Prior
service costs
132
—
Contributions by plan participants
2,708
(742
)
Actuarial loss on obligation
1,304
(619
)
Plan
amendments
(412
)
—
Foreign currency exchange rate changes
369
(54
)
Balance at the end of period
$
13,011
$
1,041
The
fair value of pension plan's investments is presented below. The valuation techniques used to measure the fair value of these assets are discussed in Note 2 and have been applied consistently.
Acquisition of Excelian Luxoft Financial Services AG
5,010
—
Actual
return on plan assets
484
(50
)
Contribution paid
403
251
Contributions by plan participants
132
—
Benefits
(paid)/deposited
2,708
(742
)
Foreign currency exchange rate changes
253
(33
)
Balance at the end of period
$
9,615
$
625
The
funding status of the plan and the amounts recognized in the statement of financial position as of March 31, 2018 and 2017, respectively, are as follows:
At
March 31, 2018 and 2017, the net plan liabilities in amounts of $3,396 and $416, respectively, were recognized within other non-current liabilities.
Notes to consolidated financial statements (Continued)
(In thousands of U.S.
dollars, except share amounts)
20. Employee Benefit Plans (Continued)
For the years ended March 31, 2018, 2017 and 2016, the Group recognized $566, $483 and $413 respectively, of net periodic pension cost within selling, general and administrative expenses and $498 loss, $583 gain and $378 gain in accumulated other comprehensive loss.
At March 31,
2018 and 2017, accumulated other comprehensive loss was $545 and $47, respectively.
In 2019 financial year, the Group estimates to amortize $45 of prior service cost and $8 of net actuarial loss from accumulated other comprehensive income into pension cost.
21. Subsequent events
In April 2018, the Group made a payment to former IntroPro shareholders in accordance with the share purchase agreement in the amount of $3,664
(Note 3).
On April 9, 2018 the Group announced a program to repurchase up to an aggregate of $60 million of its outstanding Class A ordinary shares. The repurchases may be made from time to time on the open market at prevailing market prices and will be funded from available cash. As of June 30, 2018 the Group repurchased 382,585 shares in amount of $13,752.
On June 1, 2018, Luxoft USA, Inc. and Insys Group, Inc. entered into a Credit Agreement with TD Bank, N.A. for the aggregate available credit amount of up to $20.0 million. Concurrently with that, each
borrower entered into a Security Agreement in favor of the lender. The interest rate is the cumulative of the applicable LIBOR and a 2.00% margin.
On June 15, 2018, the Group completed the acquisition of Smashing Ideas LLC, a Seattle-based design and innovation agency. Pursuant to the share purchase agreement the total consideration for the sale and purchase of 100% of shares of Smashing Ideas LLC was $11,493 cash payment. The Group expects that a significant portion of the purchase price will be allocated to goodwill.
F-56
Dates Referenced Herein and Documents Incorporated by Reference
