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As filed with the Securities and Exchange Commission on March 15, 2017.

Registration No. 333-

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

NETSHOES (CAYMAN) LIMITED

(Exact name of registrant as specified in its charter)

 

 

 

The Cayman Islands   5961          98-1007784

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial      

Classification Code Number)      

  

(I.R.S. Employer

Identification No.)

 

 

Rua Vergueiro 961, Liberdade

01504-001 São Paulo, São Paulo, Brazil

+55 11 3028-3528

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Corporation Service Company

2711 Centerville Road, Suite 400

Wilmington, DE 19808

(800) 927-9801

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

 

S. Todd Crider, Esq.

Grenfel S. Calheiros, Esq.

Simpson Thacher & Bartlett LLP

425 Lexington Avenue

New York, NY 10017

(212) 455-2000

  Copies to:  

Nicolas Grabar, Esq.

Francesca Odell, Esq.

Cleary Gottlieb Steen & Hamilton LLP

One Liberty Plaza

New York, NY 10006

(212) 225-2000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

CALCULATION OF REGISTRATION FEE

 

Title of each class of securities
to be registered

  

Proposed maximum
aggregate
offering price(1)(2)

  

Amount of
registration fee

Common shares, nominal value US$0.01 per common share

   US$100,000,000.00    US$11,590.00

 

(1) Includes common shares that may be purchased by the underwriters pursuant to an over-allotment option to purchase additional common shares. Also includes common shares initially offered and sold outside the United States either as part of their distribution or within 40 days after the later of the effective date of this registration statement and the date the common shares are first bona fide offered to the public. The common shares are not being registered for purposes of sales outside the United States.

 

(2) Estimated solely for the purpose of determining the amount of registration fee in accordance with Rule 457(o) under the Securities Act.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.


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The information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any state or jurisdiction where the offer or sale is not permitted.

 

Subject to completion, dated                     , 2017

Preliminary Prospectus

PROSPECTUS

common shares

 

LOGO

NETSHOES (CAYMAN) LIMITED

(incorporated in the Cayman Islands)

This is an initial public offering of our common shares, nominal value US$                     per common share. We are selling                     common shares in this offering. The initial public offering price will be between US$                     and US$                     per common share.

Prior to the offering, there has been no public market for our common shares. We have applied for listing of our common shares on the New York Stock Exchange, or NYSE, under the symbol “NETS.” See “Description of Share Capital” for a description of the rights of holders of our common shares.

We are an “emerging growth company” under the federal securities laws as that term is used in the Jumpstart Our Business Startups Act of 2012 and, as a result, have elected to comply with certain reduced public company disclosure and financial reporting requirements.

Investing in our common shares involves a high degree of risk. See “Risk Factors” beginning on page 12 of this prospectus.

 

     Per Common
Share
     Total  

Initial public offering price

   US$                   US$               

Underwriting discount

   US$      US$  

Proceeds to us (before expenses)

   US$      US$  

The underwriters may also exercise their option to purchase up to an additional                     common shares from us, or the over-allotment option, at the public offering price, less the underwriting discount, for 30 days after the date of this prospectus to cover over-allotments.

Neither the Securities and Exchange Commission nor any state securities commission or any other regulatory body has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the common shares against payment in New York, NY on or about                     , 2017.

 

 

 

Goldman, Sachs & Co.

  J.P. Morgan   Bradesco BBI   Allen & Company LLC   Jefferies

The date of this prospectus is                     , 2017


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LOGO


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LOGO


Table of Contents

Table of Contents

 

   

Page

          Page  

Presentation of Financial and Other Information

    ii     

Principal Shareholders

     114  

Summary

    1     

Certain Relationships and Related Party Transactions

     118  

Risk Factors

    12     

Description of Share Capital

     121  

Forward-Looking Statements

    41     

Shares Eligible for Future Sale

     135  

Dividend Policy

    43     

Certain Tax Considerations

     137  

Use of Proceeds

    44     

Underwriting

     142  

Capitalization

    45     

Legal Matters

     149  

Dilution

    47     

Expenses of the Offering

     150  

Exchange Rates

    49     

Experts

     151  

Selected Financial and Operating Data

    50     

Service of Process and Enforcement of Judgments

     152  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

    55     

Where You Can Find More
Information

     154  

Business

    81     

Index to Consolidated Financial Statements

     F-1  

Management

    105        

 

 

We have not authorized anyone to give any information or make any representation about the offering that is different from, or in addition to, that contained in the prospectus, the related registration statement or in any of the materials that we have incorporated by reference into this prospectus. Therefore, if anyone does give you information of this type, you should not rely on it.

The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common shares. Our business, financial condition, results of operations and prospects may have changed since the date on the front cover of this prospectus.

This prospectus may only be used where it is legal to sell our common shares. We have not undertaken any efforts to qualify this offering for offers and sales to the public in any jurisdiction outside the United States, and we do not expect to make offers and sales to the public in jurisdictions located outside the United States. However, we may make offers and sales outside the United States in circumstances that do not constitute a public offer or distribution under applicable laws and regulations.

This prospectus is being used in connection with the offering of our common shares in the United States and, to the extent described above, elsewhere. This offering is being made in the United States and, to the extent described above, elsewhere solely on the basis of the information contained in this prospectus.

 

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PRESENTATION OF FINANCIAL AND OTHER INFORMATION

Certain Definitions

In this prospectus, unless expressly stated otherwise, references to “Netshoes,” “we,” “us” and “our company” refer to Netshoes (Cayman) Limited, an exempted company with limited liability incorporated under the laws of the Cayman Islands, and its consolidated subsidiaries. References to “NS2” are to our subsidiary NS2.com Internet S.A., a corporation (sociedade anônima) incorporated under the laws of Brazil. References to “common shares” refer to the common shares of Netshoes (Cayman) Limited, except where the context requires otherwise. The term “Brazil” refers to the Federative Republic of Brazil, and the phrase “Brazilian government” refers to the federal government of Brazil. All references to “real,” “reais,” “Brazilian real,” “Brazilian reais,” or “R$” are to the Brazilian real, the official currency of Brazil; all references to “U.S. dollar,” “U.S. dollars,” or “US$” are to U.S. dollars, the official currency of the United States, all references to “Argentine peso,” or “ARS” are to the Argentine peso, the official currency of Argentina, and all references to “Mexican peso,” or “MXN” are to the Mexican peso, the official currency of Mexico.

Financial Information

The financial information contained in this prospectus derives from our audited consolidated financial statements as of December 31, 2015 and 2016 and for the fiscal years ended December 31, 2014, 2015 and 2016. These financial statements and related notes included elsewhere in this prospectus are collectively referred to as our audited consolidated financial statements herein and throughout this prospectus. Our audited consolidated financial statements are prepared in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board, or IASB. Our fiscal year ends on December 31 of each year, so all references to a particular fiscal year are to the applicable year ended December 31. Following the completion of this offering, we will be required to file annual reports on Form 20-F with the Securities and Exchange Commission, or the SEC, under United States Securities Exchange Act of 1934, as amended, or the Exchange Act, and although not required under the Exchange Act, we expect to publish unaudited condensed consolidated interim financial statements on a quarterly basis.

Convenience Translation

The reporting currency for our audited consolidated financial statements is the Brazilian real and, solely for the convenience of the reader, we have provided convenience translations into U.S. dollars using offer exchange rates published by the Brazilian Central Bank (Banco Central do Brasil) on its website. Unless otherwise indicated, convenience translations from reais into U.S. dollars in this prospectus use the Brazilian Central Bank offer exchange rate published on December 31, 2016, which was R$3.2591 per US$1.00. No representation is made that the Brazilian reais amounts referred to could have been, or could be, converted into U.S. dollars at any particular rate. See “Exchange Rates” for information regarding historical exchange rates of reais to U.S. dollars.

 

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Market Data

This prospectus includes statistical and other industry and market data that we obtained from industry publications and research, government and non-government organization reports, surveys and studies conducted by third parties, including data and information we obtained from BMI Research, Claim Pages, e-Bit, eMarketer, Euromonitor International, IBOPE DTM, Statista, among others, and data derived from management’s knowledge and our experience in the industries in which we operate. Industry publications and third-party research, surveys and studies generally indicate that their information has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. Information derived from management’s knowledge and our experience is presented on a reasonable, good faith basis. Estimates of market and industry data are based on statistical models, key assumptions and limited data sampling, and actual market and industry data may differ significantly from estimated industry data.

Rounding

Certain figures included in this prospectus have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be exact arithmetic aggregations or percentages of the figures that precede them.

Emerging Growth Company Status

We are an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended, or the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual revenues of at least US$1.0 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common shares that is held by non-affiliates exceeds US$700.0 million as of the prior June 30, and (2) the date on which we have issued more than US$1.0 billion in non-convertible debt during the prior three-year period. As an emerging growth company, we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, exemptions from the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and any Public Company Accounting Oversight Board, or PCAOB, rules, including any future audit rule promulgated by the PCAOB (unless the SEC determines otherwise). Accordingly, the information about us available to you will not be the same as, and may be more limited than, the information available to shareholders of a non-emerging growth company.

 

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SUMMARY

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our common shares, you should carefully read this entire prospectus, including our audited consolidated financial statements and the related notes thereto and the information set forth under the sections “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in each case included in this prospectus.

Overview

Our mission is to be the leading online consumer platform in Latin America. We are the leading sports and lifestyle online retailer in Latin America and one of the largest online retailers in the region, as measured by net sales. We operate in Brazil, Argentina, and Mexico and, since our launch, we have sold to more than 12.8 million customers across our sites, solidifying our position as one of the few scaled online retailers in Latin America and creating a foundation of audience, brand and capabilities on top of which we are building a digital ecosystem capable of delivering increasing and significant value to customers and partners in the future. Through our desktop and mobile websites and applications, which we refer to as our “sites,” we deliver our customers a convenient and intuitive online shopping experience across our two core brands, Netshoes and Zattini. We believe that Netshoes has become one of the most recognized brands by consumers, in Brazil and Argentina, among both online and offline sports retailers. We believe that Zattini, a site we launched in December 2014, is quickly becoming a leading online brand for fashion and beauty in Brazil in terms of consumer recognition.

We were founded in January 2000 by Marcio Kumruian and Hagop Chabab as a single physical shoe store in São Paulo, Brazil. In 2007, we closed our brick-and-mortar stores and shifted to an online business to reach more customers across Brazil. Since then, we have built on our initial success, expanding across geographies and brands. We have also selectively introduced new product categories, maintaining our core strategy of focusing on product verticals with higher margins that have short replacement cycles and are easy to ship.

Core to our success has been a relentless focus on delivering a superior customer experience across each of the countries in which we operate, including remote locations not typically served by traditional retailers. As one of the first companies in Latin America to provide online retail offerings, we have emphasized the importance of customer service, and we have also developed technology that personalizes the shopping experience for our customers. This core customer focus has driven customer loyalty, as demonstrated by our high repeat purchasing. In the year ended December 31, 2016, 74.5% of our total orders came from repeat customers.

Our sites are also optimized for mobile shopping. Despite Latin America’s relatively low smartphone penetration rate, in the year ended December 31, 2016, 32.2% of the total orders placed by our active customers came from mobile devices (while in Brazil, mobile commerce accounted for 11.7% of eCommerce sales in 2015).

We are also a trusted partner and the go-to channel for the most important brands in sports and lifestyle retail in Brazil, Argentina and Mexico. We offer over 190,000 stock keeping units, or SKUs, from over 500 brands, including Nike, Adidas, Mizuno, Tommy Hilfiger, Ralph Lauren and Lacoste and work closely with our suppliers to promote and protect their brands and help manage product selection. We believe we are one of the largest distribution channels for these brands in Brazil and Latin America. We have also begun to develop our private label brands to supplement our existing supplier relationships in key categories.

Our success in the region has been dependent on our consistent ability to build a solid infrastructure network to support our operations, as well as our scalable and customized logistics capabilities. We have created a highly

 



 

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automated picking, packing and inventory management system, built to efficiently handle the products in which we specialize—easy-to-ship items with high margins and short replacement cycles. We are able to ship over one million orders a month, and on average, process the orders we receive within six hours after confirmation, achieving an on-time delivery rate of approximately 97.0% of total processed orders.

At the scale at which we operate, the combination of our customers, the brands we offer and infrastructure we have developed has resulted in powerful network effects, which we believe offer a significant competitive advantage. Our large and growing Latin America customer base has allowed us to attract and retain high quality brands, which in turn drives new and repeat customers. This has driven our growth and has allowed us to continually reinvest in and improve our product selection, technology and infrastructure while also driving significant cost efficiencies. These network effects are evident in our financial performance and scale. We also believe that these favorable network effects allow us to expand the reach of our sites to build the leading online consumer platform in Brazil and Latin America.

We have achieved the following significant milestones as of and for the year ended December 31, 2016:

 

    5.6 million active customers, an increase of 18.9% from the 4.7 million active customers we had as of December 31, 2015;

 

    10.3 million total orders on our sites, an increase of 20.8% from the 8.5 million total orders for the year ended December 31, 2015;

 

    74.5% of our total orders were invoiced to repeat customers (which are customers who have previously purchased from us), an increase from 72.9% for the year ended December 31, 2015;

 

    32.2% of our total orders were placed by customers on a mobile device, an increase from 20.2% for the year ended December 31, 2015; and

 

    In our Brazilian operations, positive cash flows from operations beginning in 2014 and positive EBITDA beginning in 2015.

Also, for the years ended December 31, 2015 and 2016, we reported:

 

    R$1,505.7 million and R$1,739.5 million in net sales, respectively, representing growth of 33.7% and 15.5% from 2014 and 2015, respectively;

 

    R$99.5 million and R$151.9 million in net loss, respectively, from R$144.4 million in net loss in 2014; and

 

    R$46.5 million and R$43.9 million in negative EBITDA, respectively, from R$100.0 million in negative EBITDA in 2014.

For information on how we define and calculate active customers, total orders, total orders placed from mobile devices and EBITDA, and for a reconciliation of our non-IFRS figures to their IFRS equivalents, see the section of this prospectus captioned “Selected Financial and Operating DataNon-IFRS Financial Measures.”

Our History

Our business has transformed substantially since 2000, when our founders Marcio Kumruian and Hagop Chabab opened a physical shoe store in São Paulo, Brazil. In 2007, we closed our brick-and-mortar retail stores, shifted our focus to eCommerce retail and launched Netshoes.com, our online store specialized in sports and active lifestyle goods. Since then, we have expanded in the following ways:

 

 



 

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Building Online Leadership. We invested heavily in our brand with the goal of developing the leading eCommerce sports footprint. In 2009, we received our first round of investments from financial investors and, with their support, grew our business to establish our market leadership and continue to improve our corporate governance and management structure.

Geographical Expansion. Recognizing promising income, consumer purchasing habits and online penetration trends, we expanded our operations to Argentina and Mexico in 2011. With our leadership in Brazil, Argentina and Mexico, we now cover an estimated two-thirds of the gross domestic product, or GDP, in Latin America.

Brand and Vertical Diversification. In December 2014, leveraging the success of Netshoes and our existing infrastructure, we launched Zattini, an online store originally designed to offer fashion products to our Brazilian customers. We have successfully introduced new categories of products over time, including beauty products to our Zattini offerings in 2016. We believe that Zattini is now the fastest growing online fashion and beauty site in Brazil, based on sales growth and for the year ended December 31, 2016, Zattini accounted for 11.5% of our online net sales in Brazil and 10.2% of our net sales on a consolidated basis. In addition, since November 2014, we began offering private label apparel across the Netshoes and Zattini platforms, and for the year ended December 31, 2016, the sales of those products accounted for 6.0% of our online net sales in Brazil and 5.4% of our net sales on a consolidated basis.

Traffic Monetization. More recently, we have begun to evaluate other ways to monetize our large customer base, and leverage our supplier relationships, technology and infrastructure. To this end, we have implemented additional products and services, such as creating a third-party marketplace, which increases the selection available to our customers, as well as launching financial services such as a co-branded credit card with a major Brazilian financial institution. We will continue to evaluate opportunities to add services to our digital ecosystem that tie consumers closer to our sites while maintaining our core customer experience. While we are still in the early stages of these initiatives, we believe that they have the potential to drive significant growth and increase customer loyalty going forward, enhancing Netshoes’ profitability.

Our Competitive Strengths

We are the leading sports and lifestyle online retailer in Latin America and one of the largest online retailers in the region. Our specific regional knowledge has allowed us to compete against international eCommerce sites, and our technology has differentiated us from traditional retailers. We have achieved our leadership position as a result of the following core strengths:

High market share in a large and expanding total addressable market. We benefit from our early mover advantage in Latin American eCommerce, which has allowed us to capture what we believe is a significant market share and achieve a leadership position in a large addressable market.

Focus on attractive verticals driving high operating leverage. We believe the lifestyle verticals in which we specialize are particularly suited for distribution online due to the following factors: (1) the vast inventory selection, benefitting customers by providing them with access to varied products in one place; (2) the lightweight nature of most of the products we offer, which makes them easy to ship and drives fast delivery speeds at significant volumes; (3) the high gross margin of these retail categories; and (4) the need for consistent replacement (compared to, for example, household appliances and electronics), which drives repetitive customer buying behavior.

Recognized and trusted brand for customers and partners. We have built a strong brand over the last 15 years as demonstrated by our significant scale, with 18.3 million registered members and 5.6 million active customers as of December 31, 2016 purchasing from the over 500 brands we offer (160 of which are available on our Zattini site, launched in December 2014). We engage with our customers, both on and off our sites, and with our partners, whose products we offer on our sites and for whom we manage branded online stores.

 



 

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A superior customer experience, resulting in strong customer loyalty. Through our eCommerce model and our expanding vertical presence, our mission is to become the leading online consumer platform in Latin America. We offer our customers a reliable and convenient online shopping experience with a wide selection of over 190,000 SKUs, visually inspiring browsing, compelling merchandise, easy product discovery, attractive prices and various shipping options.

Differentiated logistics and technology capabilities. We have invested in and built logistics capabilities, and innovative technology that is customized to our verticals and regions. On average, we process purchase orders placed by our customers within six hours after they are confirmed. Our technology is also highly scalable—we are able to process approximately 105,000 orders per day during our peak holiday season compared to an average of 35,000 orders per day in 2015.

Visionary founder and management team. We have built a culture of data-driven decision making, operational discipline and an unwavering focus on customer service. Our culture flows from our co-founder and CEO, Marcio Kumruian, who brings substantial industry expertise and led our shift to an online retailer, and from our experience as an early mover in the technology industry in the region.

Our Strategy

Our goal is to continue differentiating ourselves as the leading online consumer platform in Latin America. As we have done in the past, we plan to both grow our core business and expand our operations into attractive opportunities while maintaining our relentless focus on delivering a superior consumer experience. As we continue to scale, we are focused on growing in an efficient way that we expect will result in increased profitability for our business, including by launching new initiatives that are specifically focused on delivering increased revenue at higher margins. Specifically, we plan to:

Acquire new customers through increased traffic and conversion. We believe that there is significant room to further grow the customer base for our sites. We are well-positioned to benefit both from the expected industry shift to online retail, and from continuing to refine our marketing efforts to draw new consumers to our sites and then convert those consumers to active customers. We continually test new marketing channels and campaigns, measuring the returns on these campaigns, including building higher brand recognition for Zattini, which we launched more recently.

Increase the monetization of our existing traffic through enhancing customer loyalty. Collectively, as of December 31, 2016, our sites had 18.3 million registered members, of which 5.6 million were active customers. We believe that we can continue to drive increased monetization of our traffic, growing our sales through more frequent repeat purchasing and higher customer retention. We have also introduced and will continue to offer new products and services that tie our customers more closely to our sites. For example, we launched NCard—our co-branded credit card with Banco Itaú S.A—in April 2016, which offers exclusive benefits to users and in turn allows us to learn more about our customers’ spending habits as a result of their additional engagement with our sites.

Introduce new products in attractive verticals. We have found that by introducing new products in high margin verticals with short replacement cycles and that are easy to ship, we have been able to both attract new customers to our sites and increase purchases by existing customers, thereby continuously expanding our addressable market. For example, for the year ended December 31, 2016, approximately 55.6% of Zattini customers in Brazil were originally Netshoes customers and about 44.4% were new customers. We have also successfully launched new product categories within each of our sites. For example, we continue to invest in private label brands in verticals that have high customer price elasticity and margin potential, which help expand our profitability.

 



 

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Online Marketplace. In February 2016, we launched our online third-party marketplace across all of our sites. To date, we have attracted 283 qualified third-party business-to-consumer, or B2C, vendors to our sites. While in its early stages, we believe that the marketplace offers a significant opportunity to introduce increased product variety, particularly in less popular categories with lower demand, and scale new categories more quickly.

Expansion of our business into a consumer and services platform. We believe we have the opportunity to take advantage of the scale of our core business and our existing and large customer base, and leverage our technology and infrastructure to build a digital ecosystem capable of delivering increasing and significant value to customers and partners. For example, in November 2016, we started offering a mobile application relating to activity tracking, which closely aligns with our sports and lifestyle brand.

Replicate the success of our Brazil business in Argentina and Mexico. We benefit from the ability to transfer the learnings and successes of our more mature Brazil operations, which have already achieved positive operating cash flow, to our emerging Argentina and Mexico businesses. Beginning in 2011, we launched our first two international sites, with a small team based in Argentina and another in Mexico, and since then we have achieved significant growth. For the years ended December 31, 2015 and 2016, our non-Brazil, Latin America operations accounted for 13.3% and 10.6% of our total net sales, respectively. We believe that there is significant growth and profitability remaining in these businesses as they continue to scale and as we introduce brands and products such as Zattini to those markets.

Corporate Information

Our principal executive office is located at Rua Vergueiro 961, Liberdade, Zip Code 01504-001, in the city of São Paulo, State of São Paulo, Brazil. We were incorporated in the Cayman Islands as an exempted company with limited liability. Our registered office is located at Floor 4, Willow House, Cricket Square, Grand Cayman, KY1-9010, Cayman Islands. The telephone number of our investor relations department is +(55-11) 3028-8298. Our corporate investor relations website can be found at www.netshoes.com/institucional. Information contained on our website is not incorporated by reference into this prospectus, and you should not consider information contained on our website to be part of this prospectus or in deciding whether to invest in our common shares.

Conventions Used in this Prospectus

Unless the context otherwise requires, references in this prospectus to:

 

    “active customers” mean customers who made purchases online with us during the preceding twelve months as of the relevant dates;

 

    “average basket size” mean the sum of total order value from online purchases with us divided by the number of total orders for the relevant period;

 

    “convertible note purchase agreement” mean the note purchase agreement we entered into on February 22, 2017, pursuant to which we issued and sold the convertible notes to certain of our shareholders. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Indebtedness—Material Financing Agreements”;

 

    “convertible notes” mean convertible promissory notes issued by us on February 22, 2017 with an aggregate principal amount of US$30.0 million (or R$92.3 million, using the exchange rate on the date of the execution of the convertible note purchase agreement), held by our shareholders, Tiger Global Private Investment Partners V, L.P., Tiger Global Private Investment Partners VI, L.P., Archy LLC, Clemenceau Investments Pte. Ltd., Riverwood Capital Partners II, L.P., Riverwood Capital Partners II (Parallel-B) L.P., Macro Continental, Inc., Boscolo Intervest Limited, International Finance Corporation, CDK Net Fund IC and HCFT Holdings, LLC, which will be automatically converted into our common shares upon completion of this offering. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Indebtedness—Material Financing Agreements”;

 



 

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    “eCommerce” mean product purchases using desktops, tablets or mobile devices;

 

    “GMV” mean the sum of net sales, returns, GMV from marketplace and net sales taxes, less marketplace and NCard activation commission fees;

 

    “offline purchases with us,” in the context of our product orders or sales, mean our product sales through our business to business, or B2B, operations;

 

    “our sites” mean www.netshoes.com.br, www.netshoes.com.mx, www.netshoes.com.ar, and www.zattini.com.br;

 

    “mCommerce” mean product purchases using only mobile sites and applications;

 

    “purchases online with us” or “online purchases with us,” in the context of our active customers, average basket size and GMV, mean product sales through our sites (including those sales effected through our marketplace) and the third-party sites that we manage;

 

    “third-party sites that we manage” mean all partner-branded online stores that we manage. See “Business—Our Additional Sources of Revenues—Partner-Branded Stores”;

 

    “total orders” mean the total number of orders invoiced to active customers during the relevant period; and

 

    “total order value” mean the total amount invoiced to a customer in connection with a product sale (including shipping fees and taxes).

Except as otherwise indicated, all information in this prospectus assumes:

 

    the 1.00 for                     share split of our common shares to occur immediately prior to the completion of this offering, or the share split;

 

    the issuance of                     of our common shares upon the automatic conversion of the convertible notes upon the closing of this offering pursuant to the convertible note purchase agreement (using an assumed initial public offering price of US$             per common share, the midpoint of the estimated offering price range per common share set forth on the cover page of this prospectus). The convertible notes are convertible into our common shares with a 10% price discount relative to the initial public offering price of our common shares. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Indebtedness—Material Financing Agreements”;

 

    the number of common shares that will be outstanding after this offering is calculated based on                     common shares (which includes the share split) outstanding as of December 31, 2016, and excludes: (1) 117,599 common shares available for the exercise of share options at a weighted average exercise price of US$50.27 per common share as of December 31, 2016, of which 76,167 were exercisable as of December 31, 2016 (without giving effect to the share split), (2) 7,750 common shares available for the exercise of share options at a weighted average exercise price of US$24.30 per common share as of December 31, 2016, which shall become exercisable six months after completion of this offering (without giving effect to the share split), and (3) 51,935 common shares reserved for future grants under our Share Plan (without giving effect to the share split);

 

    the filing and effectiveness of our Fourth Amended and Restated Memorandum and Articles of Association, or Articles of Association, which will occur immediately upon completion of this offering;

 

    an initial public offering price of US$                     per common share, the midpoint of the estimated offering price range per common share set forth on the cover page of this prospectus; and

 

    no exercise by the underwriters of their over-allotment option.

 



 

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The Offering

 

Issuer  

Netshoes (Cayman) Limited.

 

Common shares offered by us  

                    shares.

 

Over-allotment options of common shares being offered by us

 

                      shares.

Common stock to be outstanding immediately after this offering

 

                    shares (or                     common shares if the underwriters exercise in full their over-allotment option).

 

Use of proceeds  

We expect to receive net proceeds of approximately US$                     million from our sale of common shares (or US$                     million if the underwriters fully exercise their over-allotment option), assuming an initial public offering price of US$                     per share, which is the midpoint of the estimated offering price range per common share set forth on the cover page of this prospectus and after deducting estimated underwriting discounts and estimated offering expenses payable by us.

 

 

The principal purposes of this offering are to increase our capitalization, provide us with greater financial flexibility, create a public market for our common shares and facilitate our future access to the capital markets. We currently intend to use our net proceeds from this offering to finance our working capital needs and capital expenditures, which may include, among others, investments in the development of software, acquisition of property and equipment for our distribution centers, although we have no present commitments or agreements to enter into any investments. Any remaining net proceeds will be used for other general corporate purposes. Pending determination of the use of our net proceeds, we may invest them in highly liquid time deposits and similar instruments. Our management will have broad discretion in allocating the net proceeds of this offering received by us to each use.

 

Dividend Policy  

We do not currently anticipate paying any dividends on our common shares in the foreseeable future. See “Dividend Policy.”

 

Proposed NYSE trading symbol  

“NETS.”

 

Risk Factors   See the section of this prospectus captioned “Risk Factors” beginning on page 12 and the other information in this prospectus for a discussion of factors you should carefully consider before deciding to invest our shares.

 



 

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The number of common shares to be outstanding after this offering is based on                     common shares outstanding (after giving effect to the share split) as of December 31, 2016, and assumes the issuance of                     of our common shares upon the automatic conversion of the convertible notes upon the closing of this offering pursuant to the convertible note purchase agreement (using an assumed initial public offering price of US$ per common share, the midpoint of the estimated offering price range per common share set forth on the cover page of this prospectus). The convertible notes are convertible into our common shares with a 10% price discount relative to the initial public offering price of our common shares. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Indebtedness—Material Financing Agreements.” This calculation excludes:

 

    117,599 common shares available for the exercise of share options at a weighted average exercise price of US$50.27 per common share as of December 31, 2016, of which 76,167 were exercisable as of December 31, 2016 (without giving effect to the share split);

 

    7,750 common shares available for the exercise of share options at a weighted average exercise price of US$24.30 per common share as of December 31, 2016, which shall become exercisable six months after completion of this offering (without giving effect to the share split); and

 

    51,935 common shares reserved for future grants under our Share Plan (without giving effect to the share split).

For further information about our share option plan, see “Management—Compensation of Directors and Officers—2012 Share Plan.”

 



 

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Summary Consolidated Financial and Operating Data

The following summary financial data as of December 31, 2015 and 2016 and for the years ended December 31, 2014, 2015 and 2016 have been derived from our audited consolidated financial statements included elsewhere in this prospectus.

Our audited consolidated financial statements have been prepared in accordance with IFRS, as issued by the IASB. See “Presentation of Financial and Other Information—Financial Information.” Our historical results are not necessarily indicative of results to be expected in future periods. The following summary financial and other data is qualified by reference to and should be read in conjunction with “Capitalization,” “Selected Financial and Operating Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements included elsewhere in this prospectus.

Unless otherwise indicated, the convenience translations from reais into U.S. dollars in this prospectus use the Brazilian Central Bank offer exchange rate published on December 31, 2016, which was R$3.2591 per US$1.00. No representation is made that the Brazilian reais amounts referred to could have been, or could be, converted into U.S. dollars at any particular rate.

Consolidated Statements of Profits or Loss

 

     Years Ended December 31,  
     2014     2015     2016     2016  

(In thousands, except per share data)

   R$     R$     R$     US$  

Net sales

     1,125,795       1,505,686       1,739,540       533,749  

Cost of sales

     (753,440     (1,010,501     (1,188,744     (364,746
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     372,355       495,185       550,796       169,003  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Selling and marketing expenses

     (322,643     (398,514     (443,692     (136,139

General and administrative expenses

     (147,375     (157,228     (174,564     (53,562

Other operating expense, net

     (4,724     (3,503     (5,252     (1,611
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     (474,742 )      (559,245 )      (623,508 )      (191,312 ) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (102,387 )      (64,060 )      (72,712 )      (22,309 ) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Financial income

     32,598       61,294       28,366       8,704  

Financial expense

     (74,447     (96,667     (107,550     (33,000

Loss before income tax

     (144,236     (99,433     (151,896     (46,605

Income tax expense

     (139     (80     —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (144,375 )      (99,513 )      (151,896 )      (46,605 ) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to:

        

Owners of Netshoes (Cayman) Limited

     (143,966     (98,676     (151,074     (46,355

Non-controlling interests

     (409     (837     (822     (250

 



 

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Consolidated Statements of Financial Position

 

     As of December 31,  
     2014      2015      2016      2016  

(In thousands)

   R$      R$      R$      US$  

Selected Statements of Financial Position Data

           

Cash and cash equivalents

     242,372        249,064        111,304        34,152  

Total current assets(1)

     743,408        938,358        824,711        253,050  

Total assets

     861,956        1,113,568        1,113,722        341,727  

Total current liabilities

     378,416        523,271        616,695        189,223  

Total long-term debt(2)

     335,410        333,993        387,382        118,862  

Share-based payment liability

     30,113        35,978        30,139        9,248  

Total liabilities

     616,949        824,566        989,697        303,672  

Total shareholders’ equity

     245,007        289,002        124,025        38,055  

 

(1) Inclusive of cash and cash equivalents.

 

(2) Includes current portion of long-term debt. See note 16 to our audited consolidated financial statements included elsewhere in this prospectus.

Operating Data

 

     Years Ended December 31  
     2014     2015     2016  

Active customers (in thousands)(1)

     3,753       4,676       5,562  

Total orders (in thousands)(2)

     6,846       8,497       10,268  

% of total orders placed from mobile devices(3)

     11.6     20.2     32.2

Average basket size(4)

     R$210.8       R$219.1       R$206.6  

 

(1) Customers who made purchases online with us during the preceding twelve months as of the relevant dates.

 

(2) Total number of orders invoiced to active customers during the relevant period.

 

(3) The sum of total orders placed by active customers through our mobile site and applications as a percentage of total orders placed by active customers for the relevant period. This operational metric is especially relevant as we expect sales made on mobile devices to become an increasingly important part of our business.

 

(4) The sum of total order value from online purchases with us divided by the number of total orders for the relevant period.

 



 

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Non-IFRS Financial Measures

 

     Years Ended December 31,  
     2014       2015       2016       2016  

EBITDA (in thousands)(1)

   R$ (99,958   R$ (46,534   R$ (43,871   US$ (13,459

EBITDA Margin(1)

     (8.9)%       (3.1)%       (2.5)%        

EBITDA Brazil (in thousands)(2)(3)

   R$ (55,030   R$ 10,569     R$ 5,395     US$ 1,655  

EBITDA International (in thousands)(2)(3)

   R$ (36,136   R$ (45,289   R$ (41,018   US$ (12,586

GMV (in thousands)(4)

   R$ 1,443,207     R$ 1,867,015     R$ 2,202,498     US$ 675,800  

 

(1) For a reconciliation of our net loss to EBITDA and EBITDA Margin and the limitations of these non-IFRS financial measures as an analytical tool, see “Selected Financial and Operating Data—Non-IFRS Financial Measures—EBITDA and EBITDA Margin.”

 

(2) Consists of EBITDA for each of our reportable business segments: Brazil and International. For a reconciliation of our Brazil business segment net loss to EBITDA Brazil and our International business segment net loss to EBITDA International, and the limitations of these non-IFRS financial measures as an analytical tool, see “Selected Financial and Operating Data—Non-IFRS Financial Measures—EBITDA Brazil and EBITDA International.”

 

(3) Items not allocated directly to our reportable business segments (operating expenses, financial income and financial expenses recorded in Netshoes (Cayman) Limited and Netshoes Holding, LLC) are recorded and disclosed separately as corporate and others. As a result, the sum of EBITDA Brazil and EBITDA International does not sum up to EBITDA.

 

(4) For a reconciliation of net sales to GMV and the limitations of this non-IFRS financial measure as an analytical tool, see “Selected Financial and Operating Data—Non-IFRS Financial Measures—GMV.”

We use EBITDA, EBITDA Margin, EBITDA Brazil, EBITDA International and GMV to inform our financial and operational decision-making. To provide investors and others with additional information regarding our financial results and operating performance, we have disclosed in the table above and within this prospectus our EBITDA, EBITDA Margin, EBITDA Brazil, EBITDA International and GMV, which are non-IFRS financial measures. We define: (1) “EBITDA” as net income (loss) plus net interest income/expense (which includes interest income, imputed interest on installment sales, interest expenses related to debt, imputed interest on credit purchases and debt issuance costs), income tax, and depreciation and amortization expenses; (2) “EBITDA Margin” as EBITDA divided by net sales for the relevant period, expressed as a percentage, (3) “EBITDA Brazil” as net income (loss) of our Brazil business segment plus net interest income/expense (which includes interest income, imputed interest on installment sales, interest expenses related to debt, imputed interest on credit purchases and debt issuance costs), income tax, and depreciation and amortization expenses, in each case, related to this business segment, (4) “EBITDA International” as net income (loss) of our international business segment plus net interest income/expense (which includes interest income, imputed interest on installment sales, interest expenses related to debt, imputed interest on credit purchases and debt issuance costs), income tax, and depreciation and amortization expenses, in each case, related to this business segment and (5) “GMV” as the sum of net sales, returns, GMV from marketplace and net sales taxes, less marketplace and NCard activation commission fees.

 



 

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RISK FACTORS

An investment in our common shares involves a high degree of risk. In addition to the other information in this prospectus, you should carefully consider the following risk factors in evaluating us and our business before purchasing our common shares. In particular, you should consider the risks related to an investment in companies operating in Brazil and Latin America generally, for which we have included information in these risk factors to the extent that information is publicly available. In general, investing in the securities of issuers whose operations are located in emerging market countries such as Brazil, Mexico, Argentina and other Latin American countries involves a higher degree of risk than investing in the securities of issuers whose operations are located in the United States or other more developed countries. If any of the risks discussed in this prospectus actually occur, alone or together with additional risks and uncertainties not currently known to us, or that we currently deem immaterial, our business, financial condition, results of operations and prospects may be materially adversely affected. If this were to occur, the value of our common shares may decline and you may lose all or part of your investment. When determining whether to invest, you should also refer to the other information contained in this prospectus, including our financial statements and the related notes thereto. You should also carefully review the cautionary statements referred to under “Forward-looking statements.” Our actual results could differ materially and adversely from those anticipated in this prospectus.

Risks Related to our Business and Industry

The eCommerce market in Brazil and in other countries where we operate is developing, and the expansion of our business depends on the continued growth of eCommerce, as well as increased availability, quality and usage of the Internet in Brazil and in other countries where we operate.

Our future sales depend substantially on consumers’ widespread acceptance and use of the Internet as a way to conduct commerce. Rapid growth in the use of the Internet (particularly as a way to provide and purchase products and services) is a relatively recent phenomenon in Brazil, Argentina and Mexico and we cannot assure you that this acceptance and use will continue or increase. In order to grow our customer base successfully, consumers who have historically used physical channels of commerce to purchase lifestyle, sporting, fashion and beauty goods must accept and use new ways of conducting business and exchanging information. Furthermore, if the penetration of Internet access in Brazil, Argentina and Mexico does not increase quickly, that may limit our potential growth, particularly in regions with low levels of Internet quality and access and/or low levels of income.

The Internet penetration in Brazil, Argentina and Mexico may never reach a percentage similar to more developed countries for reasons that are beyond our control, including the lack of necessary network infrastructure or delayed development of enabling technologies, performance improvements and security measures. The infrastructure for the Internet in Brazil, Argentina and Mexico may not be able to support continued growth in the number of users, their frequency of use or their bandwidth requirements. In addition, Internet reliability may not improve in the region due to delays in telecommunications, infrastructure development or other technology shortfalls, or due to increased government regulation. If telecommunications services are not sufficiently available to support the growth of the Internet in the region, response times could be slower, which would adversely affect the use of the Internet and our services in particular.

Furthermore, the price of Internet access and Internet-connected devices, such as personal computers, tablets, mobile phones and other portable devices, may limit our potential growth in parts of Brazil, Argentina and Mexico with low levels of income. Given the comparatively low level of income in the region, the penetration rate for Internet-connected devices is significantly lower in Brazil and in other countries in the region than it is in the United States and many other more developed countries, and the cost of Internet access is still relatively high as compared with other more developed countries. Also, despite our recent efforts to enable our customers in Brazil to have free access to Internet from their mobile devices when accessing our sites, the interpretation of recently enacted regulation regarding Internet neutrality by Brazilian authorities may require us to discontinue this initiative (see “Business—Regulation—Internet Neutrality”). In addition, there may be increases in Internet access fees or telecommunication fees in the region. If that happens, our potential number of customers may decrease, which in turn may adversely affect our sales.

 

 

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If the Internet or the markets for our Internet-based services in the region fail to grow as anticipated, such lack of growth may have a material adverse impact on our business prospects, results of operations and financial condition.

We operate in a rapidly evolving market. Accordingly, we may be unable to accurately forecast net sales or earnings and appropriately plan our future expenditures.

Considering the emerging nature of the markets in which we compete, the rapidly evolving nature of our business, the relative newness of eCommerce in Latin America, our business diversification and continuous innovation and the general economic and business conditions in Latin America, it is particularly difficult for us to forecast our net sales or earnings accurately. Our current and future expenditure levels are based largely on our investment plans and are, to a large extent, fixed. We may not be able to adjust spending in a timely manner to compensate for any unexpected net sales shortfalls arising from the rapidly evolving nature of our business or other conditions that affect our business. Accordingly, any significant shortfall in net sales relative to our planned expenditures would have an immediate adverse effect on our business, results of operations and financial condition.

Since our inception, we have never recorded profits or positive operating cash flow in a fiscal year.

Since our inception, we have not recorded profits or positive operating cash flow on a consolidated basis. Although we have been improving our results of operations year over year, we may not be able to record profits or positive operating cash flow on a consolidated basis in the near future or at all. If our operating activities do not provide us with sufficient cash flows to meet our operational needs, we may be required to seek additional sources of capital, which could include equity, equity-linked and debt financing. Equity financing would have a dilutive effect on our common shares, and new investors in any subsequent transactions could gain rights, preferences and privileges senior to those of our common shareholders. Debt financing, if available, may involve restrictive covenants and could reduce our operational flexibility and profitability. We cannot assure you that any additional financing will be available to us on acceptable terms, if at all. If adequate funds are not available or are not available on acceptable terms, we may not be able to fund our expansion, take advantage of acquisition opportunities, develop or enhance services or products or respond to competitive pressures. These inabilities may have a material adverse effect on our business, results of operations and financial condition.

We depend on search engines, e-mail, and other messaging services to attract a substantial portion of the customers who visit our sites, and changes in search engine logic, or any restrictions on the sending of emails or messages or an inability to timely deliver such communications could adversely affect our business and results of operations.

Our site traffic is generated by different advertising channels. A portion is generated by customers clicking on search results displayed by search engines, such as Google, Yahoo or Bing. These search engines typically provide two types of results: algorithmic and purchased listings. Algorithmic listings cannot be purchased and instead are determined and displayed solely by a set of formulas designed by the search engine provider. Purchased listings can be purchased by companies and other entities in order to attract users to their sites. We rely on both algorithmic and purchased listings to attract a substantial portion of the customers that we serve. The cost of purchased search listing advertising may increase as demand for such advertising channels grows, and further increases may have a negative impact on our ability to maintain or increase profitability. Further, search engines revise their algorithms from time to time in an attempt to optimize their search result listings and to maximize the advertising revenue generated by those listings. Search engines may also place websites on a “blacklist” or remove them from their indexes. We cannot guarantee that a removal by Google, Yahoo, Bing or another search engine will not happen to us in the future or that we will be able to adapt to changes in their algorithms in a timely manner.

 

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If the search engines on which we rely for site traffic remove us from their indices or otherwise modify their algorithms such that we have less favorable placement or do not appear among search results, our business will be adversely affected. Such circumstances may result in fewer customers clicking through to our sites, requiring us to resort to other more costly resources to attempt to replace that traffic, and this may reduce our net sales and harm our business. We may also be unable to purchase listings on alternative search engines and if we are able to purchase listings from such alternative search engines, those companies may charge higher prices for advertising or have fewer users.

Also, our business partially relies on email and other messaging services for promoting our sites and product offerings. We provide promotional emails to consumers in our database and we rely on a third-party service for the delivery of all our emails. Delays or errors in the delivery of such emails or other messaging we send may occur and are beyond our control. From time to time, Internet service providers or other third parties may block bulk email transmissions or otherwise experience technical difficulties that result in our inability to successfully deliver emails or other messages to our customers. Changes in the laws or regulations that limit our ability to send such communications or impose additional requirements upon us in connection with sending such communications could also materially and adversely impact our business. In addition, changes in how webmail applications organize and prioritize email may reduce the number of our emails being opened, including if our email messages are delivered to “spam” or similar folders. Actions by third parties to block, impose restrictions on or charge for the delivery of emails or other messages or delays in the distribution of such messages could materially and adversely impact our business. We also use social media services and other retargeting channels to send communications and product offerings to our customers. Changes in the terms of use of social media services and other retargeting channels that would limit our ability to send promotional communications or our customers’ ability to receive communications, disruptions or downtime experienced by these services or a decline in the use of or engagement with social media by customers and potential customers could harm our business.

Our success depends in part on our ability to increase our net sales per active customer. If our efforts to increase customer loyalty and repeat purchasing and to maintain high levels of customer engagement and the average basket size of our customers are not successful, our growth prospects and net sales will be materially adversely affected.

Our ability to grow our business depends on our ability to retain our existing customer base, generate increased sales and repeat purchases from this customer base, and maintain high levels of customer engagement. To do this, we must continue to provide our customers and potential customers with an intuitive, convenient, efficient and differentiated shopping experience and to continue to offer products that our customers find compelling. If we fail to increase net sales per active customer, generate repeat purchases or maintain high levels of customer engagement and average basket size, our growth prospects, operating results and financial condition could be materially adversely affected.

Failure to maintain sufficient working capital could limit our growth and harm our business, financial condition and results of operations.

We have significant working capital requirements primarily driven by payment terms agreed with our suppliers and extended payment terms that we offer our customers. For the year ended December 31, 2016, 72.8% of our product sales were paid in installments by our customers. Differences between the date when we pay our suppliers and the date when we receive payments from customers may negatively affect our liquidity and our cash flows. In addition, we expect our working capital needs to increase as our total number of products sold increases. In order to finance our working capital needs, we have recently been entering into financing arrangements to decrease the amount of time it takes for us to collect our trade accounts receivable, or factoring, and to increase the amount of time we have to pay our trade accounts payable, or reverse factoring. We believe factoring allows us to gain access to capital faster than we would otherwise without those financing arrangements. For the year ended December 31, 2016, our volume of factoring of trade accounts receivable with

 

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financial institutions reached R$789.2 million, and the monthly average amount of factored trade accounts receivable during the same period was R$65.7 million. There can be no assurance that these types of financing arrangements will continue to be available to us on acceptable terms, or at all. If we do not have sufficient working capital, we may not be able to pursue our growth strategy, respond to competitive pressures or fund key strategic initiatives, such as the development of our sites, which may adversely affect our business, financial condition and results of operations.

If we are unable to predict or effectively react to changes in consumer demand or shopping patterns, we may face significant inventory risk or lose customers and our sales may decline.

Our success depends in part on our ability to anticipate and respond in a timely manner to changing consumer demands and preferences and shopping patterns and seasonality regarding sporting, lifestyle, fashion and beauty goods. The products we sell must appeal to a broad range of consumers whose preferences cannot be predicted with certainty and are subject to change. Sudden changes in consumer spending patterns, consumer demands and preferences are especially likely in fashion and beauty, markets in which we recently began operating and have limited experience. Also, consumer preferences could shift rapidly and our future success depends in part on our ability to select and offer products in a way that anticipates and responds to those changes. If we misjudge the market for our merchandise and do not forecast consumer demand accurately, our sales may decline significantly.

We may experience excess inventory levels (for example, if we overstock unpopular products) and be forced to take significant inventory markdowns, which could have a negative impact on our profitability. Conversely, shortages of products that prove popular could negatively impact our net sales. In addition, a major shift in consumer demand away from sporting, fashion or beauty goods could have a material adverse effect on our business, results of operations and financial condition. We often agree to purchase products from our suppliers several months in advance of the proposed delivery; however, product demand can change significantly between the time we commit to buy a product and its expected date of sale. Also, we carry a broad selection of products—some at significant inventory levels—and we may be unable to sell products in sufficient quantities or during the selling seasons. Any one of these inventory risks may adversely affect our operating results.

A number of factors, many of which are outside our control, may affect consumer demand, shopping patterns or the predictability of our inventory levels, including: general economic conditions; lockouts or strikes involving professional sports teams; the retirement of sports or other celebrities used in marketing for the various products we sell; sports scandals or scandals involving celebrities we use in campaigns to advertise our sites; litigation; and pricing and other actions taken by our competitors.

Failure to anticipate and respond to changing consumer preferences and shopping patterns in a timely manner could lead to, among other things, lower sales and excess inventory levels.

Our business is subject to substantial fluctuation as a result of the seasonal buying patterns of our customers.

We experience seasonal fluctuations in our net sales and operating results, both of which may vary from quarter-to-quarter in the future. We have historically generated significantly higher net sales in the fourth quarter, which includes the Black November period and the holiday selling season. Accordingly, a reduction in consumer confidence during the holiday season would have a significant impact on our business. Further, in the fourth quarter we generally have increased expenses for personnel and advertising, due to anticipated higher purchase volumes. Seasonality also influences our buying patterns since we purchase merchandise for seasonal activities in advance of a season, which directly impacts our inventory and accounts payable levels and cash flows. If we miscalculate the demand for the amount of products we will sell or for the product mix during the fourth quarter, our net sales can decline, which can harm our financial performance. If fourth quarter net sales are not high enough to allow us to fully recoup our personnel and advertising expenses or are lower than the targets used to determine our inventory levels, this shortfall can negatively impact our results of operations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Seasonality and Quarterly Results of Operations.”

 

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Our quarterly results of operations may also fluctuate significantly as a result of a variety of other factors, including, among other things, the timing of the introduction of and advertising for new products and changes in our product mix. As a result of these seasonal and quarterly fluctuations, we believe that comparisons of our operating results between different quarters within a single year are not necessarily meaningful and that these comparisons cannot be relied upon as indicators of our future performance. Any seasonal or quarterly fluctuations that we report in the future may not match the expectations of market analysts and investors. This could cause the price of our common shares to fluctuate significantly.

We derive our net sales from product categories that represent discretionary spending, and changes in global macroeconomic conditions may decrease the demand for the products we sell and adversely affect our growth strategies and business prospects.

Our operating results are affected by the relative condition of the economy. Our business and financial performance may be adversely affected by current and future economic conditions that cause a decline in business and consumer spending, including a reduction in the availability of credit, increased unemployment levels, higher energy and fuel costs, rising interest rates, financial market volatility and recession. Additionally, we may experience difficulties in operating and growing our operations as a result of economic pressures.

As a business that depends on consumer discretionary spending, we may be adversely affected if our customers reduce their purchases due to continued job losses, foreclosures, bankruptcies, higher consumer debt and interest rates, reduced access to credit, lower consumer confidence, uncertainty or changes in tax policies and tax rates. Decreases in customer traffic or average value per transaction negatively affect our financial performance, and a prolonged period of depressed consumer spending could have a material adverse effect on our business. Promotional activities and decreased demand for consumer products, particularly higher-end products, could affect profitability and margins. The potential effects of the ongoing economic crisis in Brazil are difficult to forecast and mitigate. As a consequence, our sales, operating and financial results for a particular period are difficult to predict, and, therefore, it is difficult to forecast future results. Any of the foregoing could have a material adverse effect on our business, results of operations and financial condition and could adversely affect our share price.

A continued or future slowdown in Brazil, Argentina, Mexico or the global economy or a negative economic outlook could materially adversely affect consumer spending habits and potentially our future operating results.

If we are unable to appropriately address new market risks or the inherent risks in the lines of business into which we are expanding, our growth potential, reputation and results of operations could be materially and adversely affected.

We are engaged in an effort to expand our operations into other products and services in order to monetize our user traffic and distribution capabilities. Our ability to monetize our user traffic is critical to our envisioned plans for growth. As we expand into new business segments, such as fashion and beauty, we will face new risks associated with lines of business in which we have limited or no experience and in which we may be less well-known. We may be unable to attract a sufficient number of customers, fail to anticipate competitive conditions or face difficulties in operating effectively in these new segments. In addition, profitability, if any, in our newer activities may be lower than in our more mature lines of business, and we may not be successful enough to recover our investments in them.

Most of our new lines of business are subject to risks similar to those that our sporting goods business is subject, such as changes in consumer demands or shopping patterns, risks related to our suppliers and private

 

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label brands, seasonality and distribution risks. However, some of them are subject to their own set of inherent risks. For instance, we launched an online marketplace in February 2016, and maintaining a trusted status for its operations will be critical to its success. Any damage to our reputation related to, or loss of trust in, our online marketplace operations could have a negative impact on our business and result in consumers, merchants and other participants choosing not to carry out transactions or reducing their activity level on our online marketplace, which could limit our potential for growth. The success of our online marketplace will depend on, among other things, our ability to (1) attract both consumers and merchants to our online marketplace, (2) offer a secure and reliable transactional environment (including payment services) for both consumers and merchants, (3) create an effective set of rules governing our online marketplace, that is perceived as fair, (4) restrict access to our online marketplace for merchants who are not reliable or do not offer high-quality products and (5) ensure that third-party couriers used by merchants will be able to provide reliable logistics services in order to deliver products to customers within the agreed-upon timeframe.

The online retail industry is intensely competitive, and we may not compete successfully against new and existing competitors, which may materially and adversely affect our results of operations.

The retail market for the products we sell is intensely competitive. Consumers have many choices online and offline, including global, regional and local retailers. Our current and potential competitors include brick-and-mortar retailers specializing in sporting goods, fashion and beauty, general brick-and-mortar retailers and pure-play eCommerce players, such as other B2C eCommerce retailers. In the future, we may also face competition from new entrants, the consolidation of existing competitors or companies spun off from our larger competitors.

We face a variety of competitive challenges, including: sourcing products efficiently, pricing the products we sell competitively, maintaining optimal inventory levels, selling products effectively, maintaining the quality of the products we sell, building our customer base, conducting effective marketing activities, anticipating and responding quickly to changing consumer demands and preferences (which is especially true for the fashion and beauty segments), attracting visitors to our sites and maintaining favorable brand recognition. In addition, as we further develop our business, we will face increasing challenges to compete for and retain high quality suppliers. If we cannot properly address these challenges, our business and prospects would be materially and adversely affected. Other online retailers may be acquired by, receive investments from or enter into strategic relationships with well-established and well-funded companies or investors, which would help enhance their competitive positions. Certain of our competitors may be able to secure more favorable terms with suppliers, devote greater resources to marketing campaigns, adopt more aggressive pricing or inventory policies and devote substantially more resources to infrastructure and logistics development. Increased competition may reduce our sales performance, product margins, market share and brand recognition.

We cannot assure you that we will be able to compete successfully against current and future competitors, and competitive pressures may materially and adversely affect our business, financial condition and results of operations.

Interruption or failure of our information technology and communications systems could impair our operations, which could damage our reputation and harm our results of operations. Specifically, we rely on one third-party provider to provide us with Internet data centers to host our sites and keep them operational. Disruptions with this provider or in the services it provides to us could materially affect our reputation, operations or financial results.

Our success and ability to sell products online and provide high quality customer service depend on the efficient and uninterrupted operation of our computer and information technology systems. Any failure of our computer systems and information technology to operate effectively or to integrate with other systems, performance inadequacy or breach in security may cause interruptions in the availability of our sites, delays in product fulfillment and reduced efficiency of our operations. We experience service disruptions from time to

 

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time and on occasion, our site has not properly displayed promotions as marketed. Any failures, problems or security breaches may adversely affect the number of customers willing to purchase the products we offer in the future. Factors that could occur and significantly disrupt our operations include: system failures and outages caused by fire, floods, earthquakes, power loss, telecommunications failures, sabotage, vandalism, terrorist attacks and similar events; software errors; computer viruses, worms, physical or electronic break-ins and similar disruptions from unauthorized tampering with our computer systems and data centers; and security breaches related to the storage and transmission of proprietary information or customer information, such as credit card numbers or other personal information. Also, if too many customers access our sites within a short period of time due to increased holiday demand or any other reason, we have in the past and may in the future experience system interruptions that make our sites unavailable or prevent us from efficiently fulfilling orders, which may reduce the volume of goods we sell and the attractiveness of our products and services. We cannot assure you that such events will not occur and while we have backup systems and contingency plans for certain aspects of our operations and business processes, our planning does not account for all possible scenarios.

Specifically, we have contracted with one third party, Uol Diveo, to provide us with Internet data centers to host our eCommerce sites and keep them operational, and we rely on it and its operational, privacy and security procedures and controls and its ability to keep our sites operational. Failure by Uol Diveo to adequately keep our sites operational, including any prolonged or unscheduled service disruption that affects our customers’ ability to utilize our sites could result in the loss of sales and customers and/or increased costs, which could materially affect our reputation, operations or financial results. In addition, we rely in part on Uol Diveo to advise us of any security breaches, and if they do not provide notice on a timely basis, our reputation and results of operations may be adversely affected. We may have limited access to alternative services and may not be able to timely replace Uol Diveo, or find a replacement on a cost-efficient basis, in the event of disruptions, failures to provide services or other issues with them that may adversely affect our business.

Any disruptions or service interruptions that affect our sites could damage our reputation, require us to spend significant capital and other resources and expose us to a risk of loss or litigation and possible liability. We do not carry any business interruption insurance to compensate for losses that may occur as a result of any of these events and our agreements with third-party service providers do not require those providers to indemnify us for any losses resulting from any disruption in service. Accordingly, our results of operations may be adversely affected if any of the above disruptions should occur.

Our business may be harmed if we are unable to secure licenses for third-party technologies on which we rely.

We rely on licenses to utilize certain technology provided by third parties, such as our key database technology, our eCommerce platform, operating systems for our servers and other computers and components for our servers. These third-party technology licenses may cease to be available to us on commercially reasonable terms, or at all. If we are unable to obtain licenses for, or otherwise make use of this technology, we would need to obtain substitute technology, which may not be available. If substitute technology is available, it may be of lower quality or have lower performance standards or may only be available at a greater cost, any of which could materially adversely affect our business, results of operations and financial condition.

Also, because we often depend upon the successful operation of third-party products in conjunction with our software, any errors in these third-party products, which may be outside our control, may prevent the implementation or impair the functionality of our software and Internet-based services, delay the introduction of new services and harm our reputation.

 

 

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If we are not able to continue to innovate and adapt to changes in technology or in our industry, our business, financial condition and results of operations would be materially and adversely affected.

The Internet is characterized by rapidly changing technology, evolving industry standards, new mobile apps, protocols and technologies, new service and product introductions, triggering further changes in customer demands and shopping patterns. Our failure to innovate and adapt to these changes would have a material adverse effect on our business, financial condition and results of operations. For example, total orders placed from mobile devices are growing at a fast pace. In the year ended December 31, 2016, orders placed by our customers from mobile devices represented approximately 32.2% of our total orders (compared to 20.2% in the year ended December 31, 2015). The variety of technical and other configurations across different mobile devices and platforms increases the challenges associated with this environment. If we are unable to continue to (1) attract new mobile consumers and increase or maintain levels of mobile engagement or (2) to rapidly adapt to future changes in technology, our ability to maintain or grow our business would be materially and adversely affected.

We rely on a small number of third-party couriers to deliver the products we sell to our customers, and their failure to provide high quality delivery services or our failure to effectively manage our relationships with them may materially and adversely affect our business, financial condition and results of operations.

We currently rely on a small number of third-party courier companies to deliver products to our consumers, and any failure by our key third-party service couriers to perform or any adverse change to their financial conditions could have a material adverse effect on our reputation and results of operations. In particular, we rely significantly on the Brazilian official post office (Correios), Total Express and Transfolha, which together delivered 77.1% of the purchase orders shipped to our customers for the year ended December 31, 2016. Our third-party couriers may offer us less favorable terms in the future, which may increase our shipping costs and materially and adversely affect our financial condition and results of operation. Further, most of our agreements with third-party couriers can be terminated upon delivery of thirty days’ prior written notice by any of the parties. If any of these agreements are terminated, there can be no assurance that we will be able to successfully substitute another service provider to provide delivery services on the same terms, in a timely manner or at all.

Additionally, interruptions to or failures in these third parties’ shipping services could prevent the timely or successful delivery of our products and adversely affect our operations. These interruptions may be due to unforeseen events such as inclement weather, natural disasters, pressure from unions, labor unrest or a strike, which are all beyond our control or the control of these third-party couriers. For example, our distribution network is sensitive to fluctuation in oil prices, which may result in increased shipping costs for third-party courier companies (as well as our suppliers’ transportation costs), which may, in turn, increase the prices of the products we sell and make us less competitive. Also, products may not be delivered to certain limited regions impacted by urban violence, which may prevent us from delivering our products to our customers’ homes.

If we do not deliver products in a timely manner or if we deliver damaged products, our customers may refuse to accept them and lose confidence in us. Many of the products we sell may be especially sensitive to delivery delays given that they are often purchased in anticipation of a specific date. Other products have a limited shelf-life and become quickly outdated. Any inability to promptly and successfully deliver the products we sell to customers, may result in the loss of their business and a material and adverse effect on our financial condition and reputation.

We are partially dependent upon a select number of prime brands manufactured by certain retail companies. We do not have long-term agreements with our suppliers, and they can cease or limit our access to their products at any time, which could adversely impact our results depending on the importance of the supplier.

Our business partially depends on a select number of prime brands. For instance, for the years ended December 31, 2015 and 2016, Nike, Adidas, Mizuno and Asics made up approximately 41.2% and 34.4%, respectively, of our net sales. We currently do not have long-term agreements with our suppliers. If any of these suppliers choose not to sell their products to us or limit our access to their products (for example, by entering into exclusive distribution arrangements with other retailers), our capacity to grow, our market share and our financial results could be adversely impacted. Also, to the extent that the increase in the sales of our private label products on our sites negatively affects the sales of our suppliers’ products, our relationship with certain of them could be adversely impacted.

 

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In addition, our suppliers participate in an extremely competitive market with few global brands having the majority of the market share. In order to gain scale or market share, these brands could merge or acquire competitors. The further concentration of our suppliers could negatively impact our ability to negotiate with them and limit the number of companies that could act as our main suppliers.

If we are unable to successfully manage the logistical challenge of expanding our operations, including the requisite technological capabilities, our results of operations and business could be materially and adversely affected.

We have expanded our operations rapidly since our inception and our net sales have increased from R$252.9 million in 2010 to R$1,739.5 million in 2016 (a compound annual growth rate, or CAGR, of approximately 38.0%). Our substantial growth has placed, and is expected to continue to place, a significant strain on our management, operational and financial resources. If our operations continue to grow, we will be required to continue to expand our sales and marketing and distribution functions, upgrade our management information systems and other processes and technology, and obtain more space for our expanding workforce. This expansion could increase the strain on our resources, and we could experience serious operating difficulties, including difficulties in hiring, training and managing an increasing number of employees, difficulties in obtaining sufficient suppliers, and delays in shipments. These difficulties would likely result in the erosion of our brand image and a resulting decrease in net sales and the price of our common shares.

As a result of expansion efforts, we must consistently add new hardware, update software, enhance our billing and transaction systems, and add and train new engineering and other personnel to support the increased use of our sites and the new products and features we regularly introduce. This upgrade process is expensive, and the increasing complexity and enhancement of our sites results in higher costs. Failure to upgrade our technology, transaction processing systems, security infrastructure, or network infrastructure to accommodate increased traffic or transaction volume could harm our business. Adverse consequences could include unanticipated system disruptions, slower response times, degradation in levels of customer support, impaired quality of users’ experiences of our services and delays in reporting accurate financial information. Also, our net sales depend on prompt and accurate billing processes. Our failure to grow our transaction-processing capabilities to accommodate the increasing number of transactions that must be billed on our sites would harm our business and our ability to collect revenue.

Furthermore, we may need to enter into relationships with various strategic partners, sites and other online service providers and other third parties necessary to our business. The increased complexity of managing multiple commercial relationships could lead to execution problems that can affect current and future sales and operating margins. Our current and planned systems, procedures and controls, personnel and third-party relationships may not be adequate to support our future operations. Our failure to manage growth effectively could have a material adverse effect on our business, results of operations and financial condition.

We rely on third-party suppliers for the products we sell and any deterioration in those business relationships, the quality of their products or their reputation, especially in the case of any infringement by them on the intellectual property rights of others, may materially and adversely affect our reputation, business, financial condition and results of operations.

We source the products we sell (including our private label products) from over 500 suppliers. Our continued growth resulting from increased demand for the products we sell will require us to increase our ability to source commercial-quality products on reasonable terms.

Our suppliers (including those manufacturing our private label products) may:

 

    cease selling merchandise on terms acceptable to us or at all;

 

    fail to deliver goods that meet consumer demands;

 

    encounter financial difficulties;

 

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    terminate our relationships and enter into agreements with our competitors on more favorable terms;

 

    have economic or business interests or goals that are inconsistent with ours and take actions contrary to our instructions, requests or objectives;

 

    decide to initiate their own eCommerce operations, thereby directly competing with us;

 

    be unable or unwilling to fulfill their obligations, including their obligations to meet our production deadlines, quality standards and product specifications;

 

    fail to expand their production capacities to meet our growing demands;

 

    encounter raw material or labor shortages or increases in raw material or labor costs, which may impact our costs; or

 

    engage in other activities or employment practices that may harm our reputation.

Furthermore, agreements with our suppliers do not typically establish a fixed price for the purchase of products. As a result, we may be subject to price fluctuations based on changes in our suppliers’ businesses, cost structures or other factors. The occurrence of any of these events, alone or together, may have a material and adverse effect on our business, financial condition and results of operations. In addition, most of our agreements with suppliers do not contain non-compete or exclusivity clauses that would prevent those suppliers from producing similar products for any other third party. Any disruption in our relationships with suppliers or our failure to resolve disputes with or complaints from our suppliers in a timely manner, could materially and adversely affect our business, financial condition and results of operations.

Also, our suppliers may sell products that infringe on the intellectual property rights of third parties. As a result, in addition to product delays, we may be subject to claims or proceedings resulting from our suppliers’ infringement. We may also be involved in intellectual property rights claims for sports, fashion or beauty apparel or products sold on our sites that may contain unauthorized logos or brands. In case we have determined that products sold on our sites are infringing on the intellectual property rights of third parties, we will remove them from our sites; however, we could incur significant costs and efforts in defending against or settling such claims. If there is a successful claim against us, we may be required to refrain from further sales of these products, enter into royalty or licensing agreements with other third parties or pay substantial damages, and we may be unable to recoup any losses from our suppliers. Any of these events could have a material adverse effect on our business, financial condition and results of operations.

Failure to renew our current leases or locate desirable alternatives for our facilities could materially and adversely affect our business.

All of our offices and distribution centers are currently located on leased premises. At the end of each lease term, we may be unable to negotiate an extension of our leases or renew them on commercially acceptable terms. This could disrupt our operations and adversely affect our operating results. We compete with other businesses for premises at certain locations or of desirable sizes, and some landlords may have entered into long-term leases with other companies for our preferred premises. As a result, we may not be able to obtain new leases at desirable locations or renew our existing leases on acceptable terms or at all, which could materially and adversely affect our business.

We believe the interplay between the location of our distribution centers and our distribution network is an essential part of our business strategy. As we expand our operations, we cannot assure you that we will be able to lease suitable facilities on commercially acceptable terms in accordance with our growth strategy. The expansion of our logistics centers and distribution network, which could come in the form of expanding existing facilities or opening alternative or additional facilities, could put pressure on our managerial, financial, operational and other resources. If we are unable to secure new facilities or effectively manage our expanded logistical operations and control increasing costs, our growth potential, results of operations and business could be materially and adversely affected.

 

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We operate three distribution centers in Brazil, one in Argentina and one in Mexico, and if we fail to operate them efficiently, or if there is a serious disruption at one of these facilities, we may lose merchandise and be unable to effectively deliver it to our customers.

We currently operate three distribution centers in Brazil with approximately 63,000 square meters in total and two distribution centers outside Brazil with approximately 10,000 square meters in total. One of these distribution centers is in Barueri, in the State of São Paulo, Brazil, one is in Extrema, in the State of Minas Gerais, Brazil, one is in Jaboatão dos Guararapes, in the State of Pernambuco, Brazil, one is in the Buenos Aires metropolitan area, Argentina and one is in the Mexico City metropolitan area, Mexico. The operation, management and expansion of our distribution centers are key to our business and growth. If we fail to operate our distribution centers successfully and efficiently or there is a serious service disruption in one of these facilities, our deliveries could be delayed, a significant portion of our inventory could be damaged or our ability to adequately stock the products we sell and process returns of products to our suppliers could be impaired.

We have designed and built our own logistics infrastructure, including inbound receipt of items for sale, storage systems, packaging, outbound freight and the receipt, screening and handling of returns. These processes are complex and depend on sophisticated know-how and computerized systems which we have tailored to meet the specific needs of our business. Any failure or interruption, partial or complete, of these systems, for example as a result of software malfunctions or other serious disruptions, could impair our ability to timely deliver our customers’ purchases and harm our reputation. If we continue to add distribution capabilities, add new businesses or categories with different logistical requirements or change the mix of products that we sell, our logistics infrastructure will become increasingly complex and operating it will become even more challenging. We might encounter operational difficulties which could result in shipping delays and customer dissatisfaction or cause our logistical costs to become high and uncompetitive. Any failure to successfully address these challenges in a cost-effective and timely manner could severely disrupt our business and harm our reputation.

Our product delivery times can vary due to a variety of factors such as the location, our capacity to adequately manage and process multiple orders placed by our customers, the type of product sold, as well as the shipping option chosen by our customer. Our distribution capacity is dependent on the timely performance of services by third parties, including the shipping of products to and from our distribution facilities. Also, customers may expect or demand faster delivery times than we can provide in the future. If we are unable to meet customer expectations or demands in respect of delivery times or convenience, or if our competitors are able to deliver the same or equivalent products faster, more conveniently or for a lower cost, we could lose current or potential customers, our brand and reputation could suffer, and we could experience shortfalls in net sales.

Because many of the products that we sell are manufactured abroad, we may face delays, increased cost or quality control deficiencies in the importation of these products, which could reduce our net sales and profitability.

Although our direct imports of products represent 6.1% of the products we sold in 2016, like many other sporting, fashion and beauty goods retailers, a significant portion of the products that we purchase for resale is manufactured abroad in countries such as China, Taiwan and South Korea. For the year ended December 31, 2016, 41.3% of the products we sold were imported. Foreign imports subject us to the risks of changes in import duties or quotas, new restrictions on imports, work stoppages, delays in shipment, freight cost increases, product cost increases due to foreign currency fluctuations or revaluations and economic uncertainties (including the imposition of antidumping or countervailing duty orders, safeguards, remedies or compensation and retaliation due to illegal foreign trade practices). If any of these or other factors were to cause a disruption of trade from the countries in which the suppliers of our vendors are located, we may be unable to obtain sufficient quantities of products to satisfy our requirements or our cost of obtaining products may increase.

 

 

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In addition, we do not control our suppliers or the manufacturers of our private label products. To the extent that any foreign manufacturers that supply products to us directly or indirectly utilize quality control standards, production methods, labor practices or other practices that vary from those legally mandated, expected by our customers or commonly accepted in the world, we could be hurt by any resulting negative publicity or, in some cases, face potential liability. Historically, instability in the political and economic environments of the countries in which our suppliers or we operate has not had a material adverse effect on our operations. However, we cannot predict the effect that future changes in economic or political conditions in the foreign countries where our supplying manufacturers are located may have on our operations. In the event of disruptions or delays in supply due to economic or political conditions in foreign countries, those disruptions or delays could adversely affect our results of operations unless and until alternative supply arrangements are made. In addition, merchandise purchased from alternative sources may be of lesser quality or more expensive than the merchandise we currently purchase abroad.

Failure to maintain and further develop our brand recognition and maintain a positive public image could have a material adverse effect on our business and results of operations.

We believe developing our brand recognition is important to our sales and marketing efforts. If we fail to enhance the recognition of our brand, it could have a material adverse effect on our ability to sell products and, in turn, our business and results of operations. If we fail to maintain and develop a positive public image and reputation, our existing business with our customers could decline and we may fail to attract new customers, which could, in turn, adversely affect our prospects and results of operations.

For instance, complaints from customers or negative publicity about the products we sell (especially our private label products), the prices we charge or customer service have, from time to time, had a negative effect on our reputation in the past and could in the future reduce consumer confidence and the use of our services and adversely affect our business. In addition, some of the products we sell may expose us to product liability claims relating to personal injury, death, or property damage, and may require product recalls or other actions. To maintain good customer relations, we need prompt and accurate customer service to resolve irregularities and disputes. Effective customer service requires significant personnel expense and investment in developing programs and technology infrastructure to help customer service representatives carry out their functions. These expenses, if not managed properly, could significantly impact our profitability. Failure to manage or train our customer service representatives properly could compromise our ability to handle customer complaints effectively. If we do not handle customer complaints effectively, our reputation may suffer and we may lose our customers’ confidence.

In addition, from time to time we execute advertisement contracts with celebrities to promote our sites and brands in marketing campaigns. Harm to those celebrities’ reputations, even if not associated with our sites and brands, could also harm our brand image and result in a material decrease in our net sales, which could have a material adverse effect on our business, results of operations and financial condition.

Changes in tax laws, tax incentives, benefits or differing interpretations of tax laws may adversely affect our results of operations.

Changes in tax laws, regulations, related interpretations and tax accounting standards in, Brazil, Mexico, Argentina, the Cayman Islands and the United States may result in a higher tax rate on our earnings, which may result in a significant negative impact on our profits and cash flows from operations. Also, our results of operations and financial condition may be affected if certain tax incentives are not retained or renewed. For example, the ICMS (Imposto sobre Circulação de Mercadorias e Serviços) is a Brazilian state value-added tax with nominal rates of 18% to 25% depending on each state’s tax legislation. Sales to purchasers outside of the State of Pernambuco originating from our distribution center located in the city of Recife (State of Pernambuco, Brazil) currently enjoy Pernambuco State ICMS tax rates ranging from 0.5% to 1.0%, depending on the type of product offered. Also, sales to purchasers outside of the State of Minas Gerais originating from our distribution

 

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center located in the city of Extrema (State of Minas Gerais, Brazil) currently enjoy a Minas Gerais State ICMS tax rate of 1%. These ICMS tax benefits can be suspended or cancelled by the States of Pernambuco and Minas Gerais at any time. Benefits can also be suspended or cancelled by Brazilian judicial courts in the event of lawsuits filed by other States or legitimate parties challenging their constitutionality, and any loss of these incentives would result in increased taxes for the upcoming fiscal years and adversely affect our results if we are not able to pass this tax increase on to our customers. In 2015, our average ICMS tax burden was 3.6%, mainly as a result of tax reductions and incentives. As a result of a recent amendment to the Brazilian constitution, which changed the rules about the allocation of ICMS taxes collected in interstate sales between the state of origin of the products sold and the state where the final customer is located, we expect that our average ICMS tax burden will increase to 10.1% by 2019, as these changes are expected to partially offset the benefits we currently experience from these tax incentives. For further information regarding the changes prompted by this constitutional amendment and its impact on us, see “Business—Regulation.” If we are not capable of optimizing our cost structure to offset this tax increase or if we are not capable of passing on this tax increase to our customers, our financial condition, results of operations and cash flows could be adversely impacted.

In addition, governments are increasingly considering tax law changes as a means to cover budgetary shortfalls resulting from the recent downturn of the economic environment in Brazil and Mexico. If such proposals were enacted, or if modifications were to be made to certain existing tax benefits or treaties, the consequences may have a material adverse impact on us, including increasing our tax burden, increasing costs of our tax compliance or otherwise adversely affecting our financial condition, results of operations and cash flows.

Furthermore, we are subject to tax laws and regulations that may be interpreted differently by us and tax authorities. For instance, we and other retailers in Brazil are currently challenging the Brazilian tax authorities’ interpretation that the calculation basis for the Social Integration Program (Programa de Integração Social), or PIS, and the Contribution to Social Security Financing (Contribuição para o Financiamento da Seguridade Social), or COFINS, taxes over the products we sell should also consider the ICMS tax rate levied upon such products. Although based on recent rulings of the Brazilian Supreme Court our lawyers estimate our chances of losing this legal dispute as only possible, if Brazilian courts ultimately decide adversely to us, we may have to take unanticipated provisions and charges, which could have a negative impact on our financial condition and results of operations. For further information, see “Business—Legal and Administrative Proceedings—Tax and Social Security Matters.”

The expansion of our business partially depends on increased availability of credit and credit cards to our customers, and we are subject to payments-related risks.

Our business is highly dependent on credit cards as the preferred payment method of our customers. As of December 31, 2016, 72.8% of our net sales were derived from payments effected through credit cards. As a result, the continued growth of our business is also partially dependent on the expansion of credit card penetration in Brazil, Argentina and Mexico, which may never reach a percentage similar to more developed countries for reasons that are beyond our control, such as low credit availability for a relevant portion of the population in such countries.

In addition to credit cards, we accept payments using a variety of methods, including bank payment slips, electronic payment platforms (such as PayPal) and consumer invoicing. As we offer new payment options to our customers, we may be subject to additional regulations, compliance requirements, and additional fraud-related risks. For certain payment methods, including credit cards, we pay transaction and other fees, which may increase over time and raise our operating costs, lowering profitability. We rely on third parties to provide payment processing services and it could disrupt our business if these companies become unwilling or unable to provide these services to us. If we fail to comply with these third-party servicers’ rules or requirements, or if our data security systems are breached or compromised (similar to the increase in fraud attempts we experienced in 2016), we may be liable for chargebacks, credit card issuing banks’ costs, fines and higher transaction fees and we may lose our ability to accept credit card payments from our customers, process electronic funds transfers, or facilitate other types of online payments. Additionally, consumers and merchants in Brazil can bring claims against us for credit card and other losses due to third-party fraud on our marketplace platform. If any of these situations were to occur, our business and operating results could be adversely affected.

 

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In addition, as secure methods of payment for eCommerce transactions have not been widely adopted in certain emerging markets, consumers and other merchants may have relatively low confidence in the integrity of eCommerce transactions and remote payment mechanisms, which may have a material and adverse effect on our business prospects or limit our growth.

Our costs may change as a result of currency exchange rate fluctuations or inflation in the cost of merchandise manufactured and purchased abroad.

We source goods from various countries (mainly from China) in currencies other than the Brazilian real (mainly the U.S. dollar). As a result, changes in the value of the U.S. dollar or in the functional currencies in which our subsidiaries operate compared to other currencies, or inflation affecting foreign labor and raw material costs, may affect the cost of goods that we purchase. If the cost of goods that we purchase increases, we may not be able to similarly increase the retail prices that we charge consumers without impacting our sales and our results of operations may suffer. If we do increase our retail prices, our reputation may suffer, which may also negatively impact our results of operations.

We depend on key management personnel, and the loss of our management or the inability to attract and retain other key personnel could harm our business.

Our future success depends largely on the skills and efforts of our senior management team, and in particular, Marcio Kumruian, one of our founders, and currently chairman of our board of directors and chief executive officer. The loss of members of our management could disrupt our operations and have an adverse effect on our business. If members of our senior management team resign, we may not be able to sustain our existing culture or replace them with individuals of the same experience and qualification. In particular, our business model was designed by Marcio Kumruian, and we believe that we will continue to be heavily dependent on his insights and experience for our continuing success.

Our future success also depends on our ability to identify, attract, hire, train, retain, motivate and manage other highly skilled technical, managerial, information technology, marketing and customer service personnel. Competition for these personnel is intense, and we may not be able to successfully attract, hire, train, retain, motivate and manage sufficiently qualified personnel.

We are susceptible to illegal uses of our platform, and we could potentially face liability for any illegal use of our platform.

We, like our platforms, are susceptible to potentially illegal or improper uses, including, fraudulent and illicit sales on the payment methods accepted by us and bank fraud. In addition, our services could be subject to unauthorized credit card use, identity theft, employee fraud or other internal security breaches. We may incur significant costs to protect against the threat of information security breaches or to respond to or alleviate problems caused by any breaches. Laws may require notification to regulators, customers or employees and we may be required to reimburse customers or credit card companies for any funds stolen as a result of any breaches or to provide credit monitoring or identity theft protection in the event of a privacy breach. These requirements, as well as any additional restrictions that may be imposed by credit card companies, could raise our costs significantly and reduce our attractiveness.

In addition to the direct costs of such losses, if they are related to credit card transactions and become excessive they could result in us losing the right to accept credit cards for payment. If we are unable to accept credit cards, our business will be adversely affected given that credit cards are the most widely used method for our customers to pay for the products we sell.

 

 

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We may pursue strategic acquisitions or investments and the failure of an acquisition or investment to produce the anticipated results or the inability to fully integrate an acquired company could have an adverse impact on our business.

We may from time to time acquire or invest in complementary companies or businesses. The success of acquisitions or investments is based on our ability to make accurate assumptions regarding the valuation, operations, growth potential, integration and other factors related to the respective business. We cannot assure you that our acquisitions or investments will produce the results that we expect at the time we enter into or complete a given transaction. Furthermore, acquisitions may result in difficulties integrating the acquired companies, and may result in the diversion of our capital and our management’s attention from other business issues and opportunities. We may not be able to successfully integrate operations that we acquire, including their personnel, financial systems, distribution or operating procedures. If we fail to successfully integrate acquisitions, our business could suffer. In addition, the integration of any acquired business and their financial results may adversely affect our operating results.

Requirements associated with being a public company in the United States will require significant company resources and management attention.

After the completion of this offering, we will become subject to certain reporting requirements of the Exchange Act, and the other rules and regulations of the SEC and the NYSE. We will also be subject to various other regulatory requirements, including the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act. We expect these rules and regulations to increase our legal, accounting and financial compliance costs and to make some activities more time-consuming and costly. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantial costs to maintain the same or similar coverage. New rules and regulations relating to information disclosure, financial reporting and controls and corporate governance, which could be adopted by the SEC, the NYSE or other regulatory bodies or exchange entities from time to time, could result in a significant increase in legal, accounting and other compliance costs and make certain corporate activities more time-consuming and costly, which could materially affect our business, financial condition and results of operations. These rules and regulations may also make it more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers.

These new obligations will also require substantial attention from our senior management and could divert their attention away from the day-to-day management of our business. Given that most of the individuals who now constitute our management team have limited experience managing a publicly traded company and complying with the increasingly complex laws pertaining to public companies, initially, these new obligations could demand even greater attention. These cost increases and the diversion of management’s attention could materially and adversely affect our business, financial condition and operation results.

If we fail to establish and maintain proper and effective internal control over financial reporting, our results of operations and our ability to operate our business may be harmed.

Prior to this offering, we have been a private company with limited accounting personnel and other resources to address our internal control over financial reporting. Neither we nor our independent registered public accounting firm undertook, nor were we required to undertake, a comprehensive assessment of our internal control for purposes of identifying and reporting material weaknesses and other control deficiencies in our internal control over financial reporting. We believe it is possible that, if we performed a formal assessment of our internal control over financial reporting or if our independent registered public accounting firm performed an audit of our internal control over financial reporting, internal control deficiencies could have been identified.

 

 

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After this offering, we will be subject to the Sarbanes-Oxley Act, which requires, among other things, that we establish and maintain effective internal control over financial reporting and disclosure controls and procedures. Under the SEC’s current rules, beginning with the year ending December 31, 2018, we are required to perform system and process evaluation and testing of our internal control over financial reporting to allow management to assess the effectiveness of our internal control over financial reporting. Our testing may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses or significant deficiencies and render our internal control over financial reporting ineffective. Because of our international corporate structure, our financial reporting requires substantial international activities, resources and reporting consolidation. We expect to incur substantial accounting and auditing expense and to expend significant management time in complying with these requirements. If we are not able to comply with these requirements in a timely manner, or if we or our management identifies material weaknesses or significant deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our shares may decline and we may be subject to investigations or sanctions by the SEC, the Financial Industry Regulatory Authority, Inc., or FINRA, or other regulatory authorities. In addition, we may be required to expend significant management time and financial resources to correct any material weaknesses that may be identified or to respond to any regulatory investigations or proceedings.

Our holding company structure makes us dependent on the operations of our subsidiaries.

We are a Cayman Islands exempted company with limited liability. Our material assets are our direct and indirect equity interests in our subsidiaries, particularly our Brazilian subsidiary. We are, therefore, dependent upon payments, dividends and distributions from our subsidiaries for funds to pay our holding company’s operating and other expenses and to pay future cash dividends or distributions, if any, to holders of our common shares, and we may have tax costs in connection with any dividend or distribution. Furthermore, exchange rate fluctuation will affect the U.S. dollar value of any distributions our subsidiaries make with respect to our equity interests in those subsidiaries. See “—We plan to continue expanding our international operations abroad. Inherent risks or developments in the international markets where we operate expose us to a number of risks, including risks beyond our control, and they could have an adverse effect on our financial condition and results of operations,” “—Risks Related to Doing Business in Brazil and the rest of Latin America—The Brazilian government has exercised, and continues to exercise, significant influence over the Brazilian economy. This involvement, as well as Brazilian political and economic conditions, could have an adverse effect on us and the market price of our common shares,” “—Risks Related to this Offering and our Common Shares—It is unlikely that we will declare any dividends on our common shares” and “Dividend policy.”

An occurrence of a natural disaster, widespread health epidemic or other outbreaks could have a material adverse effect on our business, financial condition and results of operations.

Our business could be materially and adversely affected by natural disasters, such as fires or floods, the outbreak of a widespread health epidemic, or other events, such as wars, acts of terrorism, environmental accidents, power shortages or communication interruptions. The occurrence of a disaster or similar event could materially disrupt our business and operations. These events could also cause us to close our operating facilities temporarily, which would severely disrupt our operations and have a material adverse effect on our business, financial condition and results of operations. In addition, our net sales could be materially reduced to the extent that a natural disaster, health epidemic or other major event harms the economy of the countries where we operate. Our operations could also be severely disrupted if our consumers, merchants or other participants were affected by natural disasters, health epidemics or other major events.

 

 

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Unauthorized disclosure of sensitive or confidential customer information or our failure or the perception by our customers that we failed to comply with privacy laws or properly address privacy concerns could harm our business and standing with our customers.

We collect, store, process, and use certain personal information and other user data in our business. A significant risk associated with eCommerce and communications is the secure transmission of confidential information over public networks. The perception of privacy concerns, whether or not valid, may adversely affect our business and results of operations. We must ensure that any processing, collection, use, storage, dissemination, transfer and disposal of data for which we are responsible complies with relevant data protection and privacy laws. The protection of our customer, employee and company data is critical to us. Currently, a number of our users authorize us to bill their credit card accounts directly. We rely on commercially available systems, software, tools and monitoring to provide secure processing, transmission and storage of confidential customer information, such as credit card and other personal information. Despite the security measures we have in place, our facilities and systems, and those of our third-party service providers, may be vulnerable to security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming or human errors, or other similar events. Any security breach, or any perceived failure involving the misappropriation, loss or other unauthorized disclosure of confidential information, as well as any failure or perceived failure to comply with laws, policies, legal obligations or industry standards regarding data privacy and protection, whether by us or our vendors, could damage our reputation, expose us to litigation risk and liability, subject us to negative publicity, disrupt our operations and harm our business. We cannot assure you that our security measures will prevent security breaches or that failure to prevent them will not have a material adverse effect on our business. Further, we do not carry and we do not require our vendors to carry cybersecurity insurance to compensate for any losses that may result from any breach of security. Therefore, our results of operations or financial condition may be materially adversely affected if our existing general liability policies did not cover a security breach.

Our inability or failure to protect our intellectual property and any intellectual property infringement against us could have a negative impact on our operating results.

Our trademarks, service marks, copyrights, trade secrets, domain names and other intellectual property (including those related to our private label products) are valuable assets that are critical to our success. In particular, the protection of our trademarks and service marks is an important factor in product recognition and in our ability to maintain or increase market share. If we do not adequately protect our rights in our various trademarks and service marks, unauthorized reproduction or other misappropriation of our intellectual property may arise. Such infringement of our intellectual property rights could diminish the value of our brands or goodwill and cause a decline in our sales. As a result, any failure to protect our intellectual property could have an adverse effect on our operating results.

Effective trademark and other intellectual property protection may not be available in every country in which we operate and we cannot guarantee that we will be able to adequately protect our intellectual property from misappropriation or unauthorized use. The process of seeking intellectual property protection is expensive and time-consuming. While we aim to acquire adequate protection of our brand through trademark registrations in key markets, occasionally third parties may have already registered or otherwise acquired rights to identical or similar marks for products or solutions that address our market. Policing unauthorized use of intellectual property is also difficult. Additionally, costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and our failure to successfully defend our proprietary rights could adversely affect our business.

Risks Related to Doing Business in Brazil and the Rest of Latin America

The Brazilian government has exercised, and continues to exercise, significant influence over the Brazilian economy. This involvement, as well as Brazilian political and economic conditions, could have an adverse effect on us and the market price of our common shares.

We conduct a substantial amount of our operations in Brazil, and we sell a substantial portion of our products to customers in the domestic market. For the year ended December 31, 2016, 89.4% of our net sales

 

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were derived from Brazil. Accordingly, our results of operations are substantially dependent on the economic conditions in Brazil. Brazil’s gross domestic product, or GDP, in real terms, grew by 2.7% in 2013 and 0.1% in 2014 and shrank by 3.8% in 2015 and 3.6% in 2016. In 2016, the real has fluctuated significantly, primarily as a result of Brazil’s political instability, and it has appreciated against the U.S. dollar since March 2016. In addition, the credit rating of the Brazilian federal government has been downgraded in 2015 and 2016 by all major credit rating agencies and is no longer investment grade. We cannot assure that Brazil’s GDP will increase or stabilize in the future. Future developments in the Brazilian economy may affect Brazil’s growth rates, employment rates, the availability of credit and average wages in Brazil and, consequently, the consumption level of the products we sell. As a result, these developments could impair our business strategies, results of operations or financial condition.

The Brazilian government frequently intervenes in the Brazilian economy and occasionally makes significant changes in policy and regulations. The Brazilian government’s actions to control inflation and implement other policies and regulations have often involved, among other measures, increases in interest rates, changes in tax policies, wage and price controls, currency devaluations, capital controls and limits on imports. Our business, financial condition, results of operations, trading price of the common shares and prospects may be adversely affected by changes in government policies or regulations, involving or affecting factors such as:

 

    interest rates;

 

    exchange rates and exchange control policies;

 

    restrictions on remittances abroad;

 

    currency fluctuation;

 

    inflation rates;

 

    tariff and export/import control policies;

 

    economic and social instability;

 

    liquidity of domestic financial and capital markets;

 

    electricity rationing and energy shortage;

 

    international trade policy;

 

    tax policies;

 

    regulatory framework governing our industry; and

 

    other political, diplomatic, social and economic developments in or affecting Brazil.

Historically, the Brazilian currency has suffered frequent devaluations against the U.S. dollar. Throughout the periods of currency depreciation, the Brazilian government has implemented certain measures and various economic plans for exchange controls. For instance, Brazilian law provides that whenever there is a serious imbalance in Brazil’s balance of payments or reason to foresee a serious imbalance, the Brazilian government may impose temporary restrictions on the remittance to foreign investors of the proceeds of their investments in Brazil. For example, for approximately six months in 1989 and early 1990, the Brazilian government froze all dividend and capital repatriations that were owed to foreign equity investors and held by the Central Bank in order to conserve Brazil’s foreign currency reserves. These amounts were subsequently released in accordance with Brazilian governmental directives. We cannot assure you that the Brazilian government will not take similar measures in the future. As a result, we may not be able to receive dividends or distributions from our Brazilian subsidiary in currencies other than reais and consequently be unable to pay dividends to our shareholders. The likelihood that the Brazilian government would impose such restrictions may be affected by the extent of Brazil’s foreign currency reserves, the availability of foreign currency in the foreign exchange markets on the date a payment is due, the size of Brazil’s debt service burden relative to the economy as a whole, and other factors.

 

 

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Uncertainty as to whether the Brazilian government will implement changes in policy or regulations affecting these or other factors in the future may contribute to economic uncertainty in Brazil and to heightened volatility in the Brazilian securities markets and the securities issued by Brazilian companies.

Also, Brazilian markets have been experiencing heightened volatility due to uncertainties derived from the ongoing Lava Jato investigation, which is being conducted by the Office of the Brazilian Federal Prosecutor, and its impact on the Brazilian economy and political environment. As a result of the ongoing Lava Jato investigation, a number of senior politicians, including congressmen and officers of some of the major state-owned companies in Brazil have resigned or been arrested. Other senior elected officials and other public officials in Brazil are being investigated for allegations of unethical and illegal conduct identified during the Lava Jato investigation. The matters that have come, and may continue to come, to light as a result of, or in connection with the Lava Jato investigation and related anti-corruption inquiries have adversely affected and we expect that they will continue to adversely affect the Brazilian economy, markets and trading prices of securities issued by issuers with Brazilian operating subsidiaries in the near future.

On August 31, 2016, the Brazilian Senate impeached President Dilma Rousseff for violations of fiscal responsibility laws and the then–Vice-President Michel Temer assumed office to complete the remainder of the presidential mandate. We cannot predict the outcome of recent political uncertainty in Brazil and its effects on the Brazilian economy, but it may cause further instability. We also cannot predict the policies Mr. Temer may adopt or change during his mandate as to the factors mentioned above or the effect that any such policies might have on our business and on the Brazilian economy. Any new policies or changes to current policies may have a material adverse effect on us.

We plan to continue expanding our international operations abroad. Inherent risks or developments in the international markets where we operate expose us to a number of risks, including risks beyond our control, and they could have an adverse effect on our financial condition and results of operations.

Our international activities represented 10.6% of our net sales for the year ended December 31, 2016, but international expansion is key for the future prospects of our business. We may enter into new international markets where we have limited or no experience and in which we may be less well-known. As we expand internationally, we are managing our business to address varied consumer customs and practices, in particular those dealing with sporting goods eCommerce and with respect to the Internet generally, as well as differing legal and regulatory environments. Our failure to accurately assess business opportunities and local consumer customs could have a material adverse effect on our business, results of operations and financial condition. In addition, we are subject to a variety of risks inherent in doing business internationally, including:

 

    political, social, or economic instability, including civil disturbances;

 

    fluctuations in currency exchange rates and its impact on our international operations (such as the recent sharp devaluation of the Argentine peso, which resulted in a material reduction of the results of operations of our subsidiary in Argentina in 2015 when denominated in reais, which reached ARS3.32 per R$1.00 on December 31, 2015 and ARS4.87 per R$1.00 on December 31, 2016 compared with ARS3.22 per R$1.00 on December 2014), compliance with currency controls and restrictions on remittances abroad;

 

    inflation rates (such as the current environment of high inflation rates in Argentina, which reached 38.5% in 2014, 27.7% in 2015 and 40.3% in 2016, according to IPC Congreso);

 

    risks related to the legal and regulatory environment in foreign jurisdictions, including with respect to consumer, privacy and data protection laws, tax, law enforcement, network security, trade compliance and intellectual property matters, as well as consumer litigation;

 

    government regulation of Internet and eCommerce and other services, electronic devices, and competition, and restrictive governmental actions (such as restrictions on importation and trade protection measures, including import duties and quotas and customs duties and tariffs);

 

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    burdens of complying with a variety of foreign laws;

 

    difficulties in identifying, attracting, hiring, training and retaining qualified personnel, and overseeing international operations, including the efficient management of our international operations;

 

    availability, quality and level of usage of the Internet in relevant jurisdictions, and lower levels of consumer spending;

 

    higher level of credit risk, fraud and the lack of secure payment methods;

 

    restrictions on sales or distribution of certain products or services and liability related to products sold to customers;

 

    limited technology infrastructure; among others.

Accordingly, any efforts we make to expand our cross-border operations may not be successful, which could limit our ability to grow our net sales.

Inflation and efforts by the Brazilian government to combat inflation may contribute significantly to economic uncertainty in Brazil and could have an adverse effect on us and the market price of our common shares.

Brazil has historically experienced high rates of inflation. Inflation, as well as governmental measures put in place to combat inflation, have had a material adverse effect on the Brazilian economy. Inflationary pressures persist, and actions taken in an effort to curb inflation, coupled with public speculation about possible future governmental actions, have in the past contributed to economic uncertainty in Brazil and heightened volatility in the Brazilian securities market. The inflation rate in Brazil, as reflected by the Broad Consumer Price Index (Índice Nacional de Preços ao Consumidor Amplo, or IPCA), published by the Brazilian Institute for Geography and Statistics (Instituto Brasileiro de Geografia e Estatística, or IBGE), was 6.41% in 2014, 10.67% in 2015 and 6.29% in 2016.

As a result of inflationary pressures and macroeconomic instability, the Brazilian government historically has adopted monetary policies that have resulted in Brazil’s interest rates being among the highest in the world. The Central Bank sets the base interest rates generally available to the Brazilian banking system, based on the expansion or contraction of the Brazilian economy, inflation rates and other economic indicators. In August 2012, the base interest rate (Sistema Especial de Liquidação e Custódia, or SELIC rate) set by the Central Bank was 7.50%. To control inflation during 2013, the Central Bank gradually raised the SELIC rate to 8.50% in July, 9.00% in August, 9.50% in October, and 10.00% in December. In 2014, the Central Bank raised the SELIC rate to 11.00% in April, 11.25% in October and 11.75% in December. In 2015, it was raised again to 12.25% in January, 12.75% in March, 13.25% in May and 14.25% in July. From July 2015 to September 2016 it remained at 14.25% and was reduced to 14% in October 2016 and to 13.75% in November 2016. As of March 14, 2017 the SELIC rate was 12.25%. Brazilian interest rates remain high and any increase in interest rates could negatively affect our profitability and results of operations and would increase the costs associated with financing our operations.

Inflation and government measures to combat inflation, along with speculation about possible future governmental measures, have had and are expected to continue to have significant negative effects on the Brazilian economy, including heightened volatility in the Brazilian securities market. In addition, measures to control inflation have often included maintaining a tight monetary policy with high interest rates, thereby restricting the availability of credit and limiting economic growth. On the other hand, these policies may be incapable of preventing increases in the inflation rate. Furthermore, the absence of such policies may trigger increases in the inflation rate and thereby adversely affect economic stability. In the event of an increase in inflation, we may not be able to adjust the prices we charge our customers to offset the effects of inflation on our cost structure, which may adversely affect our business, results of operations and the market price of our common shares.

Exchange rate instability may adversely increase our costs and affect our financial condition and results of operations.

The Brazilian currency has historically experienced frequent, sometimes significant, fluctuations relative to the U.S. dollar and other foreign currencies. On December 31, 2012 the real/U.S. dollar exchange rate was R$2.04 per US$1.00. During 2013, the real depreciated against the U.S. dollar, and on December 31, 2013, the

 

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exchange rate was R$2.34 per US$1.00. The real continued its decline against the U.S. dollar in 2014, reaching R$2.66 per US$1.00 on December 31, 2014. In 2015, the real further depreciated against the U.S. dollar, reaching R$3.90 per US$1.00 on December 31, 2015. On June 30, 2016, the exchange rate was R$3.21 per US$1.00, on December 31, 2016, the exchange rate was R$3.26 per US$1.00 and on March 14, 2017, the exchange rate was R$3.16 per US$1.00.

A devaluation of the real relative to the U.S. dollar could create inflationary pressures in Brazil and cause the Brazilian government to, among other measures, increase interest rates. Any depreciation of the real may generally restrict access to the international capital markets. It would also reduce the U.S. dollar value of our results. Restrictive macroeconomic policies could adversely affect the stability of the Brazilian economy, as well as adversely impact our results of operations and profitability. In addition, domestic and international reactions to restrictive economic policies could have a negative impact on the Brazilian economy. These policies and any reactions to them may adversely affect us by curtailing access to foreign financial markets and prompting further government intervention. A devaluation of the real relative to the U.S. dollar may also, as in the context of the current economic slowdown, decrease consumer spending, increase deflationary pressures and reduce economic growth.

On the other hand, an appreciation of the real relative to the U.S. dollar and other foreign currencies may deteriorate the Brazilian foreign exchange current accounts. Many of the goods we purchase are manufactured abroad, and the prices charged by foreign manufacturers may be affected by the fluctuation of their local currency against the U.S. dollar. We source goods from various countries, including China, and thus changes in the value of the U.S. dollar compared to other currencies may affect the costs of goods that we purchase. Depending on the circumstances, either devaluation or appreciation of the real relative to the U.S. dollar and other foreign currencies could adversely affect the growth of the Brazilian economy, as well as our business, results of operations and profitability.

Deterioration in general economic and market conditions or the perception of risk in other countries, especially the United States and emerging market countries, may adversely affect the countries in which we operate, the market price of our common shares, our access to the international capital markets and, accordingly, our results of operation and financial condition.

The market price of securities issued by Brazilian companies or holding companies with Brazilian subsidiaries is affected to varying degrees by economic and market conditions in other countries, including the United States and other Latin American and emerging market countries. Factors such as higher interest rates, higher fuel and energy costs, weakness in overall market conditions, higher levels of inflation and unemployment, decreases in consumer disposable income, unavailability of consumer credit or credit restrictions imposed by credit card companies, higher consumer debt levels and tax rates, among others, may adversely affect consumer demand for sporting, fashion and beauty goods, and significantly affect our business. Although economic conditions in certain countries may differ significantly from economic conditions in Brazil, investors’ reactions to developments in other countries may have an adverse effect on companies with operations in Brazil. Crises or investors’ perceptions of events in the United States and other emerging market countries or changes in economic policies of other countries may substantially affect capital flows into these countries and the market value of securities from issuers in other countries, and may especially impact the demand for securities of Brazilian issuers or issuers with Brazilian operating subsidiaries, including ours. Any of these factors could adversely affect the market price of our securities and restrict our ability to access international capital markets at all or on acceptable terms and finance our operations.

In the past, adverse economic conditions in other emerging markets resulted in a significant outflow of funds and a decrease in the quantity of foreign capital invested in Brazil. The financial crisis that began in the United States during the third quarter of 2008 contributed to a global recession. This had direct and indirect adverse effects on the Latin American economies where we operate and, more specifically, in the Brazilian economy and capital markets. These effects included fluctuations in the trading prices of listed securities, scarcity of credit, cost-cutting measures, general worldwide recession, exchange rate instability and inflationary pressures. Any of these events could adversely affect the market price of our common shares and limit our access to capital markets. As a result, we may be unable to finance our operations in the future on acceptable terms or at all.

 

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To the extent that economic problems in emerging market countries or elsewhere adversely affect Brazil or the other countries where we operate, our business and the market value of our common shares could be adversely affected. Furthermore, we cannot assure you that, in the event of adverse developments in emerging market economies, the international capital markets will remain open to companies with significant Brazilian operations or that the resulting interest rates in such markets will be advantageous to us. Decreased foreign investment in Brazil may negatively affect growth and liquidity in the Brazilian economy, which in turn may have a negative impact on our business.

Internet regulation in Brazil is recent and still limited and several legal issues related to the Internet are uncertain.

In 2014, Brazil enacted a law setting forth principles, guarantees, rights and duties for the use of the internet in Brazil, including provisions about Internet service provider liability, Internet user privacy and internet neutrality, or the Internet Act. In May 2016, further regulations were passed in connection with the Internet Act. However, unlike in the United States, little case law exists around the Internet Act and existing jurisprudence has not been consistent. Legal uncertainty arising from the limited guidance provided by current laws in force allows for different judges or courts to decide very similar claims in different ways and establish contradictory jurisprudence. This legal uncertainty allows for rulings against us and could set adverse precedents, which individually or in the aggregate could have a material adverse effect on our business, results of operations and financial condition. In addition, legal uncertainty may negatively affect our customers’ perception and use of our services.

We are subject to costs and risks associated with increased or changing laws and regulations affecting our business, including those relating to the sale of consumer products. Specifically, developments in data protection and privacy laws could have a material adverse effect on our business, financial condition or results or operations.

We operate in a complex regulatory and legal environment that exposes us to compliance and litigation risks and that could materially affect our operations and financial results. These laws may change, sometimes significantly, as a result of political, economic or social events. Some of the federal, state or local laws and regulations that affect us include: those relating to consumer products, product liability or consumer protection; those relating to the manner in which we advertise, market or sell products; labor and employment laws, including wage and hour laws; tax laws or interpretations thereof; data protection and privacy laws and regulations; customs or import laws and regulations; and securities and exchange laws and regulations. For instance, data protection and privacy laws are developing to take into account the changes in cultural and consumer attitudes towards the protection of personal data. There can be no guarantee that we will have sufficient financial resources to comply with any new regulations or successfully compete in the context of a shifting regulatory environment. Any additional privacy laws or regulations could have a material adverse effect on our business, financial condition or results of operations.

We may face restrictions and penalties under the Brazilian Consumer Protection Code in the future.

Brazil has a series of strict consumer protection statutes, or collectively the Consumer Protection Code (Código de Defesa do Consumidor), that are intended to safeguard consumer interests and that apply to all companies in Brazil that supply products or services to Brazilian consumers. These consumer protection provisions include protection against misleading and deceptive advertising, protection against coercive or unfair business practices and protection in the formation and interpretation of contracts, usually in the form of civil liabilities and administrative penalties for violations. These penalties are often levied by the Brazilian Consumer Protection Agencies (Fundação de Proteção e Defesa do Consumidor, or PROCONs), which oversee consumer issues on a district-by-district basis. Companies that operate across Brazil may face penalties from multiple PROCONs, as well as the National Secretariat for Consumers (Secretaria Nacional do Consumidor, or SENACON). Companies may settle claims made by consumers via PROCONs by paying compensation for violations directly to consumers and through a mechanism that allows them to adjust their conduct,

 

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called a conduct adjustment agreement (Termo de Ajustamento de Conduta, or TAC). Brazilian Public Prosecutor Offices may also commence investigations related to consumer rights violations and this TAC mechanism is also available for them. Companies that violate TACs face potential automatic fines. Brazilian Public Prosecutor Offices may also file public civil actions against companies in violation of consumer rights, seeking strict observation to the consumer protection law provisions and compensation for the damages consumers may have suffered.

As of December 31, 2016, we had approximately 1,120 active proceedings with PROCONs and small claims courts relating to consumer rights. Most of these disputes are related to delays in the delivery of products, chargeback disputes, and product returns. To the extent consumers file such claims against us in the future, we may face reduced revenue due to refunds and fines for non-compliance that could negatively impact our results of operations.

Risks Related to this Offering and our Common Shares

There has been no prior market for our common shares and an active trading market for our common shares may not develop.

Prior to this offering, there has been no public market for our common shares. Although we anticipate that our common shares will be approved for listing on the NYSE, we cannot assure you that an active public market will develop or be sustained after this offering or that investors will be able to sell the common shares should they desire to do so. We will negotiate with the representatives of the underwriters to determine the initial public offering price, and it may bear no relationship to the price at which the common shares will trade upon completion of this offering.

The price of our common shares may fluctuate substantially, and your investment may decline in value.

The initial public offering price for our common shares sold in this offering will be determined by negotiation between us and the representatives of the underwriters. This price may not reflect the market price of our common shares following this offering. Investors may not be able to sell their common shares at or above the initial public offering price.

Further, the trading price of our common shares is likely to be highly volatile and may be subject to wide fluctuations in response to factors, many of which are beyond our control, including those described above under “—Risks Related to our Business and Industry” and “—Risks Related to Doing Business in Brazil and the rest of Latin America.” The stock markets in general, and the NYSE and the market for Internet-related and technology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the companies involved. We cannot assure you that trading prices and valuations will be sustained. These broad market and industry factors may materially adversely affect the market price of our common shares, regardless of our operating performance. Market fluctuations, as well as general political and economic conditions in the markets in which we operate, such as recession or currency exchange rate fluctuations, may also adversely affect the market price of our common shares. Following periods of volatility in the market price of a company’s securities, that company may often be subject to securities class-action litigation. This kind of litigation may result in substantial costs and a diversion of management’s attention and resources, which would have a material adverse effect on our business, results of operations and financial condition.

Our largest shareholders and their affiliates will, in the aggregate, own approximately                     % of our outstanding common shares and, to the extent they act together, will control all matters requiring shareholder approval. This concentration of ownership limits your ability to influence corporate matters.

Our largest shareholders and their affiliates are parties of a shareholders’ agreement and own approximately 99.5% of our common shares, and will own approximately                     % of our shares after the consummation of this offering. See “Principal Shareholders.” Despite the termination of our shareholders’ agreement

 

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upon completion of this offering, these entities, to the extent they act together, will control a substantial majority of our voting power and will have the ability to control matters affecting, or submitted to a vote of, our shareholders. As a result, these shareholders may be able to elect all or a substantial majority of the members of our board of directors and set our management policies and exercise overall control over us. See “Management” and “Principal Shareholders” for more information.

The interests of these shareholders may conflict with, or differ from, the interests of other holders of our common shares. For example, these shareholders may cause us to make acquisitions that increase the amount of our indebtedness or outstanding common shares, sell revenue-generating assets or inhibit change of control transactions that benefit other shareholders. They may also pursue acquisition opportunities for themselves that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. So long as these shareholders continue to own a substantial number of our common shares, they will significantly influence all our corporate decisions and together with other shareholders they may be able to effect or inhibit changes in the control of our company.

Our Articles of Association contain anti-takeover provisions that may discourage a third party from acquiring us and adversely affect the rights of holders of our common shares.

Our Articles of Association contain certain provisions that could limit the ability of others to acquire our control, including a provision that grants authority to our board of directors to establish and issue from time to time one or more series of preferred shares without action by our shareholders and to determine, with respect to any series of preferred shares, the terms and rights of that series. These provisions could have the effect of depriving our shareholders of the opportunity to sell their shares at a premium over the prevailing market price by discouraging third parties from seeking to obtain our control in a tender offer or similar transactions.

If securities or industry analysts do not publish research or reports about our business, or publish unfavorable research or reports, our share price and trading volume may decline.

The trading market for our common shares will depend in part on the research and reports that securities or industry analysts publish about us, our business, our market or our competitors. We do not currently have and may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence covering us, the trading price for our common shares may be negatively impacted. In the event we obtain securities or industry analyst coverage, if one or more of the analysts who covers us downgrades us or releases negative publicity about our common shares, our share price would likely decline. Further, as we are not required to publish quarterly financial information, if we cease to publish that information, any analysts covering us may not have enough information to compare us to our peers on a regular basis and may choose to cease coverage. If one or more of these analysts ceases to cover us or fails to regularly publish reports on us, interest in our common shares may decrease, which may cause our share price or trading volume to decline.

It is unlikely that we will declare any dividends on our common shares and therefore, you must rely on price appreciation of our common shares for a return on your investment.

We do not anticipate paying any dividends in the foreseeable future. Instead, we intend to retain earnings, if any, for future operations and expansion. Any decision to declare and pay dividends in the future will be made at the discretion of our general meeting of shareholders, acting pursuant to a proposal by our board of directors, and will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions and other factors that our general meeting of shareholders or board of directors may deem relevant. Accordingly, investors will most likely have to rely on sales of their common shares, which may increase or decrease in value, as the only way to realize cash from their investment. There is no guarantee that the price of our common shares will ever exceed the price that you pay.

 

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Common shares eligible for future sale may cause the market price of our common shares to drop significantly, even if our business is doing well.

The market price of our common shares may decline as a result of sales of a large number of our common shares in the market after this offering or the perception that these sales may occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

After the consummation of this offering, we will have                     common shares outstanding. Subject to the lock-up agreements described below, the                     common shares sold in this offering (                     shares if the underwriters exercise their over-allotment option in full) will be freely tradable without restriction or further registration under the Securities Act by persons other than our affiliates within the meaning of Rule 144 of the Securities Act.

Our shareholders or entities controlled by them or their permitted transferees will, subject to the lock-up agreements described below, be able to sell their shares in the public market from time to time without registering them, subject to certain limitations on the timing, amount and method of those sales imposed by regulations promulgated by the SEC. If any of our shareholders, the affiliated entities controlled by them or their respective permitted transferees were to sell a large number of their shares, the market price of our common shares may decline significantly. In addition, the perception in the public markets that sales by them might occur may also adversely affect the market price of our common shares.

We, our officers, directors and holders of substantially all of our common shares have agreed to lock-up agreements that restrict us and these shareholders, subject to specified exceptions, from selling or otherwise disposing of any shares (including our common shares issuable upon conversion of our outstanding convertible notes) for a period of at least 180 days after the date of this prospectus without the prior consent of the representatives for the underwriters. Although there is no present intention to do so, the underwriters may, in their sole discretion and without notice, release all or any portion of the shares from the restrictions in any of the lock-up agreements described above. In addition, these lock-up agreements are subject to the exceptions described in “Underwriting.”

From time to time we may grant share based compensation to our management and employees, which may cause their interests to become excessively tied to the trading price of our common shares.

From time to time, we may grant share options to our management and employees. We have created a share option plan, which is in the process of being fully vested and exercised. We may introduce new share option plans for our senior management and employees in order to increase their efficiency, align their interests with the interests of our shareholders and retain executives who commit to long-term earnings and short-term performance.

If our shareholders or board of directors approve the issuance of new share option plans (or the issuance of additional share options under the existing share option plan), you may be diluted in the event that the exercise price under such share option plan is lower than the trading price of our common shares. In addition, new share option plans may cause the interests of our management to become excessively tied to the trading price of our common shares, which may have an adverse impact on our business and financial condition. For more information about our share based compensation, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Share-based Payments” and “Management—Compensation of Directors and Officers—2012 Share Plan.”

We are a Cayman Islands exempted company with limited liability. The rights of our shareholders may be different from the rights of shareholders governed by the laws of U.S. jurisdictions.

We are a Cayman Islands exempted company with limited liability. Our corporate affairs are governed by our amended and restated memorandum and articles of association and by the laws of the Cayman Islands. The

 

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rights of shareholders and the responsibilities of members of our board of directors may be different from the rights of shareholders and responsibilities of directors in companies governed by the laws of U.S. jurisdictions. In the performance of its duties, the board of directors of a solvent Cayman Islands exempted company is required to consider the company’s interests, and the interests of its shareholders as a whole, which may differ from the interests of one or more of its individual shareholders. See “Description of Share Capital—Corporate Governance.”

As a foreign private issuer and an “emerging growth company” (as defined in the JOBS Act), we will have different disclosure and other requirements than U.S. domestic registrants and non-emerging growth companies.

As a foreign private issuer and emerging growth company, we may be subject to different disclosure and other requirements than domestic U.S. registrants and non-emerging growth companies. For example, as a foreign private issuer, in the United States, we are not subject to the same disclosure requirements as a domestic U.S. registrant under the Exchange Act, including the requirements to prepare and issue quarterly reports on Form 10-Q or to file current reports on Form 8-K upon the occurrence of specified significant events, the proxy rules applicable to domestic U.S. registrants under Section 14 of the Exchange Act or the insider reporting and short-swing profit rules applicable to domestic U.S. registrants under Section 16 of the Exchange Act. In addition, we intend to rely on exemptions from certain U.S. rules which will permit us to follow Cayman Islands legal requirements rather than certain of the requirements that are applicable to U.S. domestic registrants.

We will follow Cayman Islands laws and regulations that are applicable to Cayman Islands companies. However, Cayman Islands laws and regulations applicable to Cayman Islands companies do not contain any provisions comparable to the U.S. proxy rules, the U.S. rules relating to the filing of reports on Form 10-Q or 8-K or the U.S. rules relating to liability for insiders who profit from trades made in a short period of time, as referred to above.

Furthermore, foreign private issuers are required to file their annual report on Form 20-F within 120 days after the end of each fiscal year, while U.S. domestic issuers that are accelerated filers are required to file their annual report on Form 10-K within 75 days after the end of each fiscal year. Foreign private issuers are also exempt from Regulation Fair Disclosure, aimed at preventing issuers from making selective disclosures of material information, although we will be subject to Cayman Islands laws and regulations having substantially the same effect as Regulation Fair Disclosure. As a result of the above, even though we are required to file reports on Form 6-K disclosing the limited information which we have made or are required to make public pursuant to Cayman Islands law, or are required to distribute to shareholders generally, and that is material to us, you may not receive information of the same type or amount that is required to be disclosed to shareholders of a U.S. company.

The JOBS Act contains provisions that, among other things, relax certain reporting requirements for emerging growth companies. Under this act, as an emerging growth company, we will not be subject to the same disclosure and financial reporting requirements as non-emerging growth companies. For example, as an emerging growth company we are permitted to, and intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. Also, we will not have to comply with future audit rules promulgated by the PCAOB (unless the SEC determines otherwise) and our auditors will not need to attest to our internal controls under Section 404(b) of the Sarbanes-Oxley Act. We may follow these reporting exemptions until we are no longer an emerging growth company. As a result, our shareholders may not have access to certain information that they deem important. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual revenues of at least US$1.0 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common shares that is held by non-affiliates exceeds US$700.0 million as of the prior June 30th, and (2) the date on which we have issued more than US$1.0 billion in non-convertible debt during the prior three-year period. Accordingly, the

 

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information about us available to you will not be the same as, and may be more limited than, the information available to shareholders of a non-emerging growth company.

We cannot predict if investors will find our common shares less attractive because we will rely on these exemptions. If some investors find our common shares less attractive as a result, there may be a less active trading market for our common shares and our share price may be more volatile.

We will be a foreign private issuer and, as a result, in accordance with the listing requirements of the NYSE we will rely on certain home country governance practices from the Cayman Islands, rather than the corporate governance requirements of the NYSE.

Upon consummation of this offering, we will report under the Exchange Act as a non-U.S. company with foreign private issuer status. The NYSE rules provide that foreign private issuers are permitted to follow home country practice in lieu of certain NYSE corporate governance standards. The standards applicable to us are considerably different than the standards applied to U.S. domestic issuers. For instance, we are not required to:

 

    have a majority of the board be independent (other than as may result from the requirements for the audit committee member independence under the Exchange Act);

 

    have a minimum of three members in our audit committee;

 

    have a compensation committee or a nominating and corporate governance committee;

 

    have regularly scheduled executive sessions with only independent directors; or

 

    adopt and disclose a code of business conduct and ethics for directors, officers and employees.

As a foreign private issuer, we may follow home country practice from the Cayman Islands in lieu of the above requirements. Therefore, our board of director’s approach to governance may be different from that of a board of directors consisting of a majority of independent directors, and, as a result, our management oversight may be more limited than if we were subject to all of the NYSE corporate governance standards. Accordingly, you may not have the same protections afforded to shareholders of companies that are not foreign private issuers.

Our shareholders may face difficulties in protecting their interests because we are a Cayman Islands exempted company.

Our corporate affairs are governed by our amended and restated memorandum and articles of association, by the Companies Law (as amended) of the Cayman Islands and the common law of the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under the laws of the Cayman Islands are not as clearly defined as under statutes or judicial precedent in existence in jurisdictions in the United States. Therefore, you may have more difficulty protecting your interests than would shareholders of a corporation incorporated in a jurisdiction in the United States, due to the comparatively less formal nature of Cayman Islands law in this area.

While Cayman Islands law allows a dissenting shareholder to express the shareholder’s view that a court sanctioned reorganization of a Cayman Islands company would not provide fair value for the shareholder’s shares, Cayman Islands statutory law does not specifically provide for shareholder appraisal rights in connection with a merger or consolidation of a company. This may make it more difficult for you to assess the value of any consideration you may receive in a merger or consolidation or to require that the acquirer gives you additional consideration if you believe the consideration offered is insufficient. However, Cayman Islands statutory law provides a mechanism for a dissenting shareholder in a merger or consolidation to apply to the Grand Court for a determination of the fair value of the dissenter’s shares if it is not possible for the company and the dissenter to agree on a fair price within the time limits prescribed.

 

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Shareholders of Cayman Islands exempted companies (such as us) have no general rights under Cayman Islands law to inspect corporate records and accounts or to obtain copies of lists of shareholders. Our directors have discretion under our amended and restated memorandum and articles of association to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.

Subject to limited exceptions, under Cayman Islands’ law, a minority shareholder may not bring a derivative action against the board of directors. Class actions are not recognized in the Cayman Islands, but groups of shareholders with identical interests may bring representative proceedings, which are similar.

United States civil liabilities and certain judgments obtained against us by our shareholders may not be enforceable.

We are a Cayman Islands exempted company and substantially all of our assets are located outside of the United States. In addition, the majority of our directors and officers are nationals and residents of countries other than the United States. A substantial portion of the assets of these persons is located outside of the United States. As a result, it may be difficult to effect service of process within the United States upon these persons. It may also be difficult to enforce in U.S. courts judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors who are not resident in the United States and the substantial majority of whose assets are located outside of the United States.

Further, it is unclear if original actions predicated on civil liabilities based solely upon U.S. federal securities laws are enforceable in courts outside the United States, including in the Cayman Islands and Brazil. Courts of the Cayman Islands may not, in an original action in the Cayman Islands, recognize or enforce judgments of U.S. courts predicated upon the civil liability provisions of the securities laws of the United States or any state of the United States on the grounds that such provisions are penal in nature. Although there is no statutory enforcement in the Cayman Islands of judgments obtained in the United States, courts of the Cayman Islands will recognize and enforce a foreign judgment of a court of competent jurisdiction if such judgment is final, for a liquidated sum, provided it is not in respect of taxes or a fine or penalty, is not inconsistent with a Cayman Islands’ judgment in respect of the same matters, and was not obtained in a manner which is contrary to the public policy of the Cayman Islands. In addition, a Cayman Islands court may stay proceedings if concurrent proceedings are being brought elsewhere.

As a new investor, you will experience substantial and immediate dilution in the net tangible book value per share of your common shares.

The initial public offering price of our common shares is substantially higher than the net tangible book value per share of our outstanding common shares. Investors purchasing common shares in this offering will incur an immediate dilution of US$                     in pro forma net tangible book value per common share (based on the midpoint of the estimated offering price range per common share set forth on the cover page of this prospectus and after giving effect to the share split and the automatic conversion of the convertible notes into our common shares). This means that investors in this offering will pay a price per common share that substantially exceeds the value of our tangible assets after subtracting liabilities. See “Dilution” for more information.

 

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Judgments of Brazilian courts to enforce our obligations with respect to our common shares may be payable only in reais.

Most of our assets are located in Brazil. If proceedings are brought in the courts of Brazil seeking to enforce our obligations in respect of our common shares, we may not be required to discharge our obligations in a currency other than the real. Under Brazilian exchange control laws, an obligation in Brazil to pay amounts denominated in a currency other than the real may only be satisfied in Brazilian currency at the exchange rate, as determined by the Central Bank, in effect on the date the judgment is obtained, and such amounts are then adjusted to reflect exchange rate variations through the effective payment date. The then-prevailing exchange rate may not afford non-Brazilian investors with full compensation for any claim arising out of or related to our obligations under the common shares.

 

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FORWARD-LOOKING STATEMENTS

The statements contained in this prospectus regarding our business, plans, possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment, potential growth opportunities, the effects of future regulation and the effects of competition, as well as statements relating to certain other information, particularly under the sections entitled “Prospectus Summary,” “Risk Factors,” “Dividend Policy,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” include forward-looking statements and projections that involve risks and uncertainties and, therefore, do not constitute guarantees of future results. Words such as “anticipate,” “believe,” “expect,” “intend,” “plan,” “aim,” “seek,” “estimate,” “target,” “project,” “should,” “may,” “might,” “could,” “can,” “would,” “likely,” “will” and similar words and expressions are intended to identify forward-looking statements and estimates.

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. There is no assurance that the expected events, trends or results will actually occur and we and the underwriters undertake no obligation to update publicly or revise any forward-looking statements and estimates whether as a result of new information, future events or otherwise.

Such forward-looking statements reflect, among other things, our current expectations, plans, forecasts, projections and strategies about future events and financial trends that affect, or may affect, our business, industry, market share, reputation, financial condition, results of operations, margins, cash flow and/or the market price of our common shares, all of which are subject to known and unknown risks and uncertainties. Our forward-looking statements are not guarantees of future performance and are subject to assumptions that may prove incorrect and to risks and uncertainties that are difficult to predict. Our actual results could differ materially from those expressed or forecast in any forward-looking statements as a result of a variety of assumptions and factors. These factors include, but are not limited to, the following:

 

    our ability to continuously record profits and positive operating cash flows;

 

    the growth of eCommerce;

 

    the inherent risks related to eCommerce, such as the interruption or failure of our computer or information technology systems;

 

    reliance on one third-party data hosting service providers;

 

    the efficient operation of our distribution centers;

 

    our dependence on key suppliers and third-party couriers;

 

    logistics and transportation challenges;

 

    our ability to appropriately manage our working capital needs;

 

    the inherent risks of the lines of business into which we are expanding;

 

    our ability to innovate and respond to technological advances and changing customer demands and shopping patterns;

 

    current competition and the emergence of new market participants in our industry;

 

    the maintenance of tax incentives;

 

    our ability to attract and retain qualified personnel;

 

    failure to enhance our brand recognition or maintain a positive public image;

 

    failure to protect our intellectual property rights;

 

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    the occurrence of natural disasters that could have a material adverse effect on our business;

 

    impacts of future legislation changes on our business;

 

    the macroeconomic, political and business environment in the countries where we operate and their impact on our business, notably with respect to inflation, exchange rates, interest rates;

 

    our ability to maintain our classification as an emerging growth company under the JOBS Act; and

 

    the other factors discussed under section “Risk factors” in this prospectus.

We caution you that the foregoing list of significant factors may not contain all of the material factors that are important to you. In addition, in light of these risks and uncertainties, the matters referred to in the forward-looking statements contained in this prospectus may not in fact occur. Many of these risks are beyond our ability to control or predict. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained throughout this prospectus.

 

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DIVIDEND POLICY

Since our inception, we have not declared or paid any dividends on our common shares, and we have no present plan to pay any dividends on our common shares in the foreseeable future. We intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business. See “Risk Factors—Risks Related to this Offering and our Common Shares—It is unlikely that we will declare any dividends on our common shares.”

We may make any future determination to pay dividends based on an ordinary shareholder resolution, but no dividend may exceed the amount recommended by our board of directors. Even if our board of directors recommends a dividend payment, the form, frequency and amount will depend on a number of factors, including our future operations and earnings, our capital requirements and surplus, our general financial condition, impositions of restrictions on conversions and remittances of funds abroad in the jurisdictions where we operate, contractual restrictions and other factors that the board of directors may deem relevant. Cash dividends on our common shares, if any, will be paid in U.S. dollars.

We are a holding company incorporated in the Cayman Islands. We rely on dividends and distributions from our subsidiaries in Brazil and elsewhere for our cash requirements, including funds to pay our operating expenses, service any debt we may incur and pay dividends and other cash distributions to our shareholders. Our holding company structure makes us dependent on the operations of our subsidiaries and therefore, any determination to pay dividends in the future will depend on our ability to receive distributions from them, particularly our main Brazilian subsidiary, NS2. See “Risk Factors—Risks Related to this Offering and our Common Shares—Our holding company structure makes us dependent on the operations of our subsidiaries.”

Certain Cayman Islands Legal Requirements Related to Dividends

Under the Companies Law and our Articles of Association, a Cayman Islands company may pay a dividend out of either its profit or share premium account, but a dividend may not be paid if this would result in the company being unable to pay its debts as they fall due in the ordinary course of business. According to our Articles of Association, dividends can be declared and paid out of funds lawfully available to us, which include the share premium account. Dividends, if any, would be paid in proportion to the number of common shares a shareholder holds. For further information, see “Certain Tax Considerations—Cayman Islands Tax Considerations.”

 

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USE OF PROCEEDS

We expect to receive net proceeds of approximately US$                     million from our sale of                     common shares (or US$                     million if the underwriters exercise in full their over-allotment option) after deducting the underwriting discount and estimated offering expenses payable by us.

We believe that the offering will provide additional capital to support the development and growth of our business. The principal purposes of this offering are to increase our capitalization, provide us with greater financial flexibility, create a public market for our common shares and facilitate our future access to the capital markets. We currently intend to use our net proceeds from this offering to finance our working capital needs and capital expenditures, which may include, among others, investments in the development of software, acquisition of property and equipment for our distribution centers, although we have no present commitments or agreements to enter into any investments. Any remaining net proceeds will be used for other general corporate purposes. Pending determination of the use of our net proceeds, we may invest them in highly liquid time deposits and similar instruments. Our management will have broad discretion in allocating the net proceeds of this offering received by us to each use.

Each US$1.00 increase (decrease) in the public offering price per common share would increase (decrease) our net proceeds by approximately US$                     million, assuming the number of common shares offered by us as set forth on the cover page of this prospectus remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each increase (decrease) of 1.0 million in the number of common shares offered by us would increase (decrease) our net proceeds by approximately US$                     million, assuming an offering price of US$                     per common share, which is the midpoint of the estimated offering price range per common share set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents, long-term debt, shareholders’ equity and capitalization as of December 31, 2016, which are presented:

(1) on an actual basis;

(2) as adjusted to give effect to the issuance and automatic conversion of the convertible notes into of our common shares upon the closing of this offering at an assumed initial public offering price of US$ per common share, the midpoint of the estimated offering price range per common share set forth on the cover page of this prospectus; the convertible notes are convertible into our common shares with a 10% price discount relative to the initial public offering price of our common shares; and

(3) as further adjusted to give cumulative effect to both (a) the adjustment set forth in (2) above; and (b) the sale of                     common shares by us in this offering at an assumed initial public offering price of US$                     per common share, the midpoint of the estimated offering price range per common share set forth on the cover page of this prospectus, assuming no exercise of the over-allotment option by the underwriters, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Other than this offering and certain recent financial agreements disclosed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Indebtedness—Material Financing Agreements,” there has been no material change to our capitalization since December 31, 2016.

You should read this table together with the sections of this prospectus entitled “Selected Financial and Operating Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our audited consolidated financial statements included elsewhere in the prospectus.

 

     As of December 31, 2016  

(In thousands)

   Actual R$     Actual
US$
    As
Adjusted
R$
     As
Adjusted
US$
     As
Further
Adjusted
R$
     As
Further
Adjusted
US$
 

Cash and cash equivalents

     111,304       34,152             
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Convertible notes(1)

                       
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total long-term debt(2)

     387,382       118,862             
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Shareholders’ equity:

               

Share capital

     141       43             

Treasury shares

     (1,533     (470           

Additional paid-in capital

     821,988       252,213             

Accumulated other comprehensive loss

     (19,577     (6,007           

Accumulated losses

     (677,379     (207,842           
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Equity attributable to the owners of Netshoes (Cayman) Limited

     123,640       37,937             

Equity attributable to non-controlling interest

     385       118             
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total shareholders’ equity

     124,025       38,055             
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total capitalization(3)

     511,407       156,917             
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Represents the full consideration received upon the issuance of the convertible notes (US$30.0 million (or R$92.3 million, using the exchange rate on the date of the execution of the convertible note purchase agreement)). See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Indebtedness—Material Financing Agreements.”

 

(2) Includes current portion of long-term debt.

 

(3) Total capitalization consists of long-term debt and total shareholders’ equity.

 

 

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An increase or reduction of US$1.00 in the assumed initial public offering price of US$                     per common share, which is the midpoint of the price range per common share indicated on the cover page of this prospectus, would, after the completion of this offering, increase (decrease) (1) the value of our shareholders’ equity by US$                     million, and (2) our total capitalization by US$                     million, assuming that the number of common shares offered herein, as set forth on the cover page of this prospectus, remains the same and assuming no exercise of the over-allotment option, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

An increase (decrease) of 1.0 million shares in the number of shares sold in this offering by us would increase (decrease) (1) the value of our shareholders’ equity by US$                     million, and (2) our total capitalization by US$                     million, assuming an initial public offering price of US$                     per share, the midpoint of the price range per common share set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and the estimated offering expenses payable by us.

The table above is based on the number of common shares outstanding as of December 31, 2016. The discussion and table above do not reflect:

 

    117,599 common shares available for the exercise of share options at a weighted average exercise price of US$50.27 per common share as of December 31, 2016, of which 76,167 were exercisable as of December 31, 2016 (without giving effect to the share split);

 

    7,750 common shares available for the exercise of share options at a weighted average exercise price of US$24.30 per common share as of December 31, 2016, which shall become exercisable six months after completion of this offering (without giving effect to the share split); and

 

    51,935 common shares reserved for future grants under our Share Plan (without giving effect to the share split).

For further information about our share option plan, see “Management—Compensation of Directors and Officers—2012 Share Plan.”

 

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DILUTION

Dilution is the amount by which the offering price paid by purchasers of the common shares to be sold in this offering exceeds the net tangible book value per common share after this offering. If you invest in our common shares in this offering, your ownership interest in us will be diluted to the extent of the difference between the public offering price per common share and the pro forma as adjusted net tangible book value per common share immediately after this offering.

Our net tangible book value as of December 31, 2016 was US$                     million, based on the offer exchange rate published by the Brazilian Central Bank on December 31, 2016 for conversion of reais into U.S. dollars which was R$3.2591 per US$1.00, or US$                     per common share. Our pro forma net tangible book value as of December 31, 2016 would have been US$                     million, based on the same offer exchange rate, or US$                     per common share. Net tangible book value is determined by subtracting the total amount of our liabilities from the total amount of our tangible assets as of December 31, 2016. To arrive at net tangible book value per common share, we then divide this difference by the number of our common shares outstanding as of December 31, 2016 and to calculate pro forma net tangible book value per common share, we divide by the number of our common shares outstanding as of December 31, 2016 after giving effect to the share split and to the issuance and automatic conversion of the convertible notes into our common shares upon the closing of this offering (subject to rounding to eliminate any fractional shares), at an assumed initial public offering price of US$                     per common share, the midpoint of the estimated offering price range per common share set forth on the cover page of this prospectus. The convertible notes are convertible into our common shares with a 10% price discount relative to the initial public offering price of our common shares.

After giving effect to this offering and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of December 31, 2016 would have been US$                    , representing US$                     per common share, assuming no exercise of the underwriters’ over-allotment option. This represents an immediate increase in pro forma net tangible book value of US$                     per common share to our existing shareholders and a dilution in the pro forma net tangible book value of US$                     per common share to new shareholders participating in the offering. Dilution represents the difference between the offering price per common share paid by new shareholders and the pro forma as adjusted net tangible book value per common share, immediately after giving effect to the share split, the automatic conversion of the convertible notes into our common shares upon the closing of this offering.

Assuming the underwriters’ over-allotment option is exercised in full, our pro forma as adjusted net tangible book value as of December 31, 2016 would have been US$                     per common share. This represents an immediate increase in net tangible book value of US$                     or                     % per common share to our existing shareholders and an immediate dilution in net tangible book value of US$                     or                     % per common share to shareholders participating in this offering.

The following table illustrates this dilution to new investors on a per common share basis assuming either no exercise or full exercise by the underwriters of their over-allotment option:

 

     No Exercise      Full Exercise  

Assumed initial public offering price per common share(1)

     

Pro forma net tangible book value per common share as of December 31, 2016(2)

     

Pro forma as adjusted net tangible book value per common share after completion of this offering

     
  

 

 

    

 

 

 

Increase in pro forma net tangible book value per common share attributable to existing shareholders

     

Dilution in pro forma net tangible book value per common share to new shareholder(3)

     
  

 

 

    

 

 

 

 

(1) Corresponds to the midpoint of the price range set forth on the cover page of this prospectus.

 

(2) Using the offer exchange rate published by the Brazilian Central Bank on December 31, 2016 for conversion of reais into U.S. dollars which was R$3.2591 per US$1.00.

 

(3) Dilution represents the difference between the offering price per common share paid by new shareholders and the pro forma net tangible book value per common share immediately after giving effect to this offering.

 

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The offering price per common share is not based on the pro forma net tangible book value of our common shares, and will be established based on a book building process.

The following table summarizes, on the same pro forma as adjusted basis as of December 31, 2016 the number of common shares acquired from us, the total consideration paid to us and the average price per common share paid by existing shareholders and new shareholders purchasing common shares in this offering, based upon an assumed initial public offering price of US$                     per common share, which is the midpoint of the price range per common share set forth on the cover page of this prospectus. The number of shares outstanding in the table below is based on the number of shares outstanding as of December 31, 2016, after giving effect to the share split and the automatic conversion of the convertible notes into our common shares upon the closing of this offering (subject to rounding to eliminate any fractional shares).

 

     Common Shares Purchased      Total Consideration      Average Price per
Common Share
 
     Number      Percentage      Amount      Percentage     

Existing shareholders(1)

        %        US$                            %        US$                      

New shareholders

              
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

        100%        US$                            100%     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes holders of convertible notes whose notes will automatically convert into our common shares upon completion of this offering.

If the underwriters’ over-allotment option is fully exercised, the total consideration paid by new shareholders and the average price per common share paid by new shareholders would be US$                     million and US$                     per common share, respectively, and the percentage of common shares purchased by new shareholder would be                     %.

An increase (decrease) of US$1.00 in the assumed initial public offering price of US$                     per common share, which is the midpoint of the price range per common share indicated on the cover page of this prospectus, would, after the conclusion of this offering, increase (decrease) (1) the value of our shareholders’ equity by US$                     million, and (2) the value of our pro forma as adjusted net tangible book value per common share to new investors by US$                    , assuming that the number of common shares offered herein, as set forth on the cover page of this prospectus, remains the same and assuming no exercise of the over-allotment option, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The discussion and tables above give effect to the share split and the automatic conversion of the convertible notes into our common shares upon the closing of this offering but do not reflect:

 

    117,599 common shares available for the exercise of share options at a weighted average exercise price of US$50.27 per common share as of December 31, 2016, of which 76,167 were exercisable as of December 31, 2016 (without giving effect to the share split);

 

    7,750 common shares available for the exercise of share options at a weighted average exercise price of US$24.30 per common share as of December 31, 2016, which shall become exercisable six months after completion of this offering (without giving effect to the share split); and

 

    51,935 common shares reserved for future grants under our Share Plan (without giving effect to the share split).

For further information about our share option plan, see “Management—Compensation of Directors and Officers—2012 Share Plan.”

 

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EXCHANGE RATES

The Brazilian foreign exchange system allows the purchase and sale of foreign currency and the international transfer of reais by any person or legal entity, regardless of the amount, subject to certain regulatory procedures.

The real depreciated against the U.S. dollar from mid-2011 to early 2016. In particular, during 2015, due to the poor economic conditions in Brazil, including as a result of political instability, the real depreciated at a rate that was much higher than in previous years. On September 24, 2015, the real fell to its lowest level since the introduction of the currency, at R$4.1945 per US$1.00. Overall in 2015, the real depreciated 47.0%, reaching R$3.9048 per US$1.00 on December 31, 2015. In 2016, the real has fluctuated significantly, primarily as a result of Brazil’s political instability, but has appreciated against the U.S. dollar since March 2016. Overall, the real appreciated 16.5%, reaching R$3.2591 per US$1.00 on December 31, 2016. On March 14, 2017, the exchange rate was R$3.1639 per US$1.00. There can be no assurance that the real will not depreciate or appreciate further against the U.S. dollar. The Brazilian Central Bank has intervened occasionally in the foreign exchange market to attempt to control instability in foreign exchange rates. We cannot predict whether the Brazilian Central Bank or the Brazilian government will continue to allow the real to float freely or will intervene in the exchange rate market by re-implementing a currency band system or otherwise. The real may depreciate or appreciate substantially against the U.S. dollar in the future. Furthermore, Brazilian law provides that, whenever there is a serious imbalance in Brazil’s balance of payments or there are serious reasons to foresee a serious imbalance, temporary restrictions may be imposed on remittances of foreign capital abroad. We cannot assure you that the Brazilian government will not place restrictions on remittances of foreign capital abroad in the future.

The following tables set forth the offer exchange rates, expressed in reais per U.S. dollar (R$/US$), for the periods indicated, as reported by the Brazilian Central Bank:

 

Year

   Period-end      Average(1)      Low      High  

2011

     1.8758        1.6746        1.5345        1.9016  

2012

     2.0435        1.9550        1.7024        2.1121  

2013

     2.3426        2.1605        1.9528        2.4457  

2014

     2.6562        2.3547        2.1974        2.7403  

2015

     3.9048        3.3387        2.5754        4.1949  

2016

     3.2591        3.4833        3.1193        4.1558  
           

Month

   Period-end      Average(2)      Low      High  

September 2016

     3.2462        3.2564        3.1934        3.3326  

October 2016

     3.1811        3.1858        3.1193        3.2359  

November 2016

     3.3967        3.3420        3.2024        3.4446  

December 2016

     3.2591        3.3523        3.2391        3.4650  

January 2017

     3.1270        3.1966        3.1270        3.2729  

February 2017

     3.0993        3.1042        3.0510        3.1479  

March (through March 14)

     3.1639        3.1379        3.0976        3.1735  

 

Source: Brazilian Central Bank.

(1) Represents the average of the exchange rates on the closing of each day during the year.

 

(2) Represents the average of the exchange rates on the closing of each day during the month.

 

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SELECTED FINANCIAL AND OPERATING DATA

The following selected financial data, as of December 31, 2015 and 2016 and for the years ended December 31, 2014, 2015 and 2016 have been derived from our audited consolidated financial statements included elsewhere in this prospectus.

Our historical results are not necessarily indicative of results to be expected in future periods. The following selected financial and other data is qualified by reference to and should be read in conjunction with “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our audited consolidated financial statements included elsewhere in this prospectus.

Unless otherwise indicated, the convenience translations from reais into U.S. dollars in this prospectus use the Brazilian Central Bank offer exchange rate published on December 31, 2016, which was R$3.2591 per US$1.00. No representation is made that the Brazilian reais amounts referred to could have been, or could be, converted into U.S. dollars at any particular rate.

Consolidated Statements of Profits or Loss

 

     Years Ended December 31,  
     2014     2015     2016     2016  

(In thousands, except per share data)

   R$     R$     R$     US$  

Net sales

     1,125,795       1,505,686       1,739,540       533,749  

Cost of sales

     (753,440     (1,010,501     (1,188,744     (364,746
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     372,355       495,185       550,796       169,003  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Selling and marketing expenses

     (322,643     (398,514     (443,692     (136,139

General and administrative expenses

     (147,375     (157,228     (174,564     (53,562

Other operating expense, net

     (4,724     (3,503     (5,252     (1,611
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     (474,742 )      (559,245 )      (623,508 )      (191,312 ) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (102,387 )      (64,060 )      (72,712 )      (22,309 ) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Financial income

     32,598       61,294       28,366       8,704  

Financial expense

     (74,447     (96,667     (107,550     (33,000

Loss before income tax

     (144,236     (99,433     (151,896     (46,605

Income tax expense

     (139     (80            
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (144,375 )      (99,513 )      (151,896 )      (46,605 ) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to:

        

Owners of Netshoes (Cayman) Limited

     (143,966     (98,676     (151,074     (46,355

Non-controlling interests

     (409     (837     (822     (250

Loss per common share attributable to owners of Netshoes (Cayman) Limited

     (22.63     (13.97     (21.14     (6.49

Basic and diluted(1)

        

Pro forma loss per common share attributable to

owners of Netshoes (Cayman) Limited

        
        

(unaudited)

        

Pro forma basic and diluted(1)(2)

        

 

(1) When we report net loss attributable to the owners of Netshoes (Cayman) Limited, the diluted loss per common share is equal to the basic loss per common share due to the anti-dilutive effect of the outstanding share options.

 

(2) Pro forma basic and diluted loss per common share attributable to owners of Netshoes (Cayman) Limited is computed by dividing net loss attributable to owners of Netshoes (Cayman) Limited by the weighted average common shares outstanding after giving effect to the share split and the automatic conversion of the convertible notes into our common shares upon the closing of this offering (subject to rounding to eliminate any fractional shares). The computation of pro forma basic and diluted loss per common share is set forth below:

 

 

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     Years Ended December 31,  
     2014     2015     2016     2016  

(In thousands, except per share data)

   R$     R$     R$     US$  

Numerator:

        

Net loss attributable to Netshoes (Cayman) Limited

     (143,966     (98,676     (151,074     (46,355

Denominator:

        

Weighted average common shares

        

Pro forma adjustment to reflect the share split and the automatic conversion of the convertible notes into our common shares

        
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma basic and diluted weighted average common shares

        
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma loss per common share attributable to owners of Netshoes (Cayman) Limited:

        

Basic and diluted

        
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated Statements of Financial Position

 

     As of December 31,  
     2014      2015      2016      2016  

(In thousands)

   R$      R$      R$      US$  

Selected Statements of Financial Position Data

           

Cash and cash equivalents

     242,372        249,064        111,304        34,152  

Total current assets(1)

     743,408        938,358        824,711        253,050  

Total assets

     861,956        1,113,568        1,113,722        341,727  

Total current liabilities

     378,416        523,271        616,695        189,223  

Total long-term debt(2)

     335,410        333,993        387,382        118,862  

Share-based payment liability

     30,113        35,978        30,139        9,248  

Total liabilities

     616,949        824,566        989,697        303,672  

Total shareholders’ equity

     245,007        289,002        124,025        38,055  

 

(1) Inclusive of cash and cash equivalents.

 

(2) Includes current portion of long-term debt. See note 16 to our audited consolidated financial statements included elsewhere in this prospectus.

Selected Operating Data

 

     Years Ended December 31,  
     2014      2015      2016  

Active customers (in thousands)(1)

     3,753        4,676        5,562  

Total orders (in thousands)(2)

     6,846        8,497        10,268  

% of total orders placed from mobile devices(3)

     11.6%        20.2%        32.2%  

Average basket size(4)

     R$210.8        R$219.1        R$206.6  

 

 

(1) Customers who made purchases online with us during the preceding twelve months as of the relevant dates.

 

(2) Total number of orders invoiced to active customers during the relevant period.

 

(3) The sum of total orders placed by active customers through our mobile site and applications as a percentage of total orders placed by active customers for the relevant period. This operational metric is especially relevant as we expect sales made on mobile devices to become an increasingly important part of our business.

 

(4) The sum of total order value from online purchases with us divided by the number of total orders for the relevant period.

 

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Non-IFRS Financial Measures

We use non-IFRS financial measures for financial and operational decision-making purposes. To provide investors and others with additional information regarding our financial results and operating performance, we have disclosed in the tables below and within this prospectus our EBITDA, EBITDA Margin, EBITDA Brazil, EBITDA International and GMV which are non-IFRS financial measures.

EBITDA and EBITDA Margin

We define: (1) “EBITDA” as net income (loss) plus net interest income/expense (which includes interest income, imputed interest on installment sales, interest expenses related to debt, imputed interest on credit purchases and debt issuance costs), income tax, and depreciation and amortization expenses; and (2) “EBITDA Margin” as EBITDA divided by net sales for the relevant period, expressed as a percentage. EBITDA and EBITDA Margin are not measures of financial performance in accordance with IFRS and should not be considered as a substitute for other measures of financial performance reported in accordance with IFRS. These measurements assist our management and may be useful to investors in comparing our operating performance consistently over time as they eliminate the impact of our capital structure (primarily interest charges), asset base (primarily depreciation and amortization) and items outside the control of our management (primarily taxes). These measurements have limitations as analytical tools, including:

 

    EBITDA does not reflect changes in, or cash requirements for, our working capital needs or contractual commitments;

 

    EBITDA does not reflect our tax expense or the cash requirements to pay our taxes;

 

    Although depreciation and amortization are non-cash charges, the assets being depreciated or amortized will often need to be replaced in the future, and EBITDA does not reflect any cash requirements for these replacements; and

 

    Other companies may calculate EBITDA differently than we do, and therefore this presentation of EBITDA may not be comparable to other similarly titled measures used by other companies.

Because of these limitations, you should consider EBITDA and EBITDA Margin alongside other financial performance measures, like net income (loss) and our other IFRS results. The following table reflects the reconciliation of our net loss to EBITDA and EBITDA Margin for each of the periods indicated:

 

     Years Ended December 31,  

(In thousands)

   2014     2015     2016     2016  

Net loss

     R$(144,375     R$(99,513     R$(151,896     US$(46,605

Add (subtract):

        

Interest income/expense, net(1)

     27,755       32,484       76,823       23,572  

Income tax expense

     139       80              

Depreciation and amortization

     16,523       20,415       31,202       9,574  
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

     R$(99,958     R$(46,534     R$(43,871     US$(13,459
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Sales

     R$1,125,795       R$1,505,686       R$1,739,540       US$533,749  
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA Margin

     (8.9 )%      (3.1 )%      (2.5 )%       

 

(1) Includes interest income, imputed interest on installment sales, interest expenses related to debt, imputed interest on credit purchases and debt issuance costs.

 

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EBITDA Brazil and EBITDA International

We define: (1) “EBITDA Brazil” as net income (loss) of our Brazil business segment plus net interest income/expense (which includes interest income, imputed interest on installment sales, interest expenses related to debt, imputed interest on credit purchases and debt issuance costs), income tax, and depreciation and amortization expenses, in each case, related to this business segment and (2) “EBITDA International” as net income (loss) of our international business segment plus net interest income/expense (which includes interest income, imputed interest on installment sales, interest expenses related to debt, imputed interest on credit purchases and debt issuance costs), income tax, and depreciation and amortization expenses, in each case, related to this business segment. EBITDA Brazil and EBITDA International are not measures of financial performance in accordance with IFRS and should not be considered as a substitute for other measures of financial performance reported in accordance with IFRS. These measurements assist our management and may be useful to investors in comparing the operating performance of our business segments consistently over time as they eliminate the impact of our capital structure (primarily interest charges), asset base (primarily depreciation and amortization) and items outside the control of our management (primarily taxes). These measurements have similar limitations as analytical tools as those applicable for EBITDA.

Because of these limitations, you should consider EBITDA Brazil and EBITDA International alongside other financial performance measures of our business segments, like net income (loss) and our other IFRS results. For further information, see note 3 to our audited consolidated financial statements included elsewhere in this prospectus The following tables reflect the reconciliation of the net loss of each of our business segments to their respective EBITDA for each of the periods indicated:

EBITDA Brazil

 

     Years Ended December 31,  

(In thousands)

   2014     2015     2016     2016  

Net loss (Brazil)

   R$ (95,521   R$ (30,493   R$ (88,237   US$ (27,074

Add (subtract):

        

Interest income/expense, net(1)

     25,086       22,592       65,855       20,206  

Income tax expense

                        

Depreciation and amortization

     15,405       18,470       27,777       8,523  
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA Brazil

   R$ (55,030   R$ 10,569     R$ 5,395     US$ 1,655  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes interest income, imputed interest on installment sales, interest expenses related to debt, imputed interest on credit purchases and debt issuance costs related to our Brazil business segment.

EBITDA International

 

     Years Ended December 31,  

(In thousands)

   2014     2015     2016     2016  

Net loss (International)

   R$ (40,062   R$ (56,781   R$ (53,329   US$ (16,363

Add (subtract):

        

Interest income/expense, net(1)

     2,669       9,892       11,049       3,390  

Income tax expense

     139       80              

Depreciation and amortization

     1,118       1,520       1,262       387  
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA International

   R$ (36,136   R$ (45,289   R$ (41,018   US$ (12,586
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes interest income, imputed interest on installment sales, interest expenses related to debt, imputed interest on credit purchases and debt issuance costs related to our International business segment.

 

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GMV

We define “GMV” as the sum of net sales, returns, GMV from marketplace and net sales taxes, less marketplace and NCard activation commission fees. GMV is a metric useful to investors as it provides an indication of the total volume of product sales (in terms of gross merchandise value) transacted in online and offline purchases with us as well as the growth trend of our marketplace, which we believe will become increasingly important to our business. GMV is not a measure of financial performance in accordance with IFRS and should not be considered as a substitute for other measures of financial performance reported in accordance with IFRS. Because of these limitations, you should consider GMV alongside other financial performance measures, like net sales and our other IFRS results. The following table reflects the reconciliation of our net sales to GMV for each of the periods indicated:

 

     Years Ended December 31,  
     2014      2015      2016     2016  

(In thousands)

          

Net sales(1)

   R$ 1,125,795      R$ 1,505,686      R$ 1,739,540     US$ 533,749  

Add (subtract):

          

Net sales taxes(2)

     243,875        262,227        291,646       89,487  

Returns(3)

     73,536        99,102        142,464       43,713  

Marketplace commission fees(4)

                   (9,086     (2,788

NCard activation commission fees(5)

                   (354     (109

Sub-Total:

   R$ 1,443,207      R$ 1,867,015      R$ 2,164,210     US$ 664,052  
  

 

 

    

 

 

    

 

 

   

 

 

 

GMV from marketplace(6)

                   38,288       11,748  

GMV

   R$ 1,443,207      R$ 1,867,015      R$ 2,202,498     US$ 675,800  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) Net sales includes revenue from product sales and other revenues, net of promotional discounts, returns and net sales taxes. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Components of our Results of Operations.”

 

(2) Value added taxes added in our product sales, net of value added taxes incentives granted to us and recorded in our net sales. For further discussion regarding the tax incentives applicable to us, see notes 5 and 7 to our audited consolidated financial statements included elsewhere in this prospectus.

 

(3) Represents revenue from product sales that are returned by our customers.

 

(4) Represents the commission revenue arising from product sales of qualified third-party B2C vendors through our marketplace, launched in February 2016, that we record as net sales on a net basis. For further information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Components of our Results of Operations.”

 

(5) Represents the commission revenue generated by customers’ activation of NCards, an initiative launched in April 2016. For further information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Components of our Results of Operations.”

 

(6) Means the gross merchandise value of product sales through our online marketplace, launched in February 2016.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of the financial condition and results of our operations in conjunction with our “Selected financial and other data” and our audited consolidated financial statements included elsewhere in this prospectus. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the section entitled “Risk factors” and elsewhere in this prospectus.

Our reporting currency is the Brazilian real, and solely for the convenience of the reader, this prospectus contains translations of amounts listed in Brazilian reais into U.S. dollars using offer exchange rates published by the Brazilian Central Bank (Banco Central do Brasil). Unless otherwise indicated, the convenience translations from reais into U.S. dollars in this prospectus use the Brazilian Central Bank offer exchange rate published on December 31, 2016, which was R$3.2591 per US$1.00. No representation is made that the Brazilian reais amounts referred to herein could have been, or could be, converted into U.S. dollars at any particular rate.

Overview

Our mission is to be the leading online consumer platform in Latin America. We are the leading sports and lifestyle online retailer in Latin America and one of the largest online retailers in the region, as measured by net sales. We operate in Brazil, Argentina, and Mexico and, since our launch, we have sold to more than 12.8 million customers across our sites, solidifying our position as one of the few scaled online retailers in Latin America and creating a foundation of audience, brand and capabilities on top of which we are building a digital ecosystem capable of delivering increasing and significant value to customers and partners in the future. Through our sites, we deliver our customers a convenient and intuitive online shopping experience across our two core brands, Netshoes and Zattini. We believe that Netshoes has become one of the most recognized brands by consumers, in Brazil and Argentina, among both online and offline sports retailers. We believe that Zattini, a site we launched in December 2014, is quickly becoming a leading online brand for fashion and beauty in Brazil in terms of consumer recognition.

Since we were founded in 2000, we have built on our initial success, expanding across geographies and brands. We have also selectively introduced new product categories, maintaining our core strategy of focusing on lifestyle verticals, which we believe are particularly well-suited for distribution online due to the following factors: (1) the vast inventory selection, benefitting customers by providing them with access to varied products in one place; (2) the lightweight nature of most of the products we offer, which makes them easy to ship and drives fast delivery speeds at significant volumes; (3) the high gross margin of these retail categories; and (4) the need for consistent replacement (compared to, for example, household appliances and electronics), which drives repeat purchasing. Our focus on these verticals has resulted in over 30.0% gross margins (defined as gross profit divided by net sales), including the cost of shipping, for the last three years, which provides substantial operating leverage as we continue to invest in additional parts of our business.

We focus on delivering a superior customer experience and providing service across all areas of the countries in which we operate, including remote locations not typically served by traditional retailers. As one of the first companies in the region to provide online retail offerings, we have emphasized the importance of customer service. We have also developed technology that personalizes the shopping experience for our customers, and our sites have advanced features including enhanced search capabilities, easy navigation, and product recommendations. This core customer focus has driven customer loyalty, as demonstrated by repeat purchasing. In the year ended December 31, 2016, 74.5% of our total orders came from repeat customers.

We benefit from our early mover advantage in Latin American eCommerce, which has allowed us to capture what we believe is a significant market share and achieve a leadership position in a large addressable market. As our market continues to expand, we believe that we are and will continue to be well-positioned as a leading established player to benefit from these macro-economic trends.

 

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Our sites are also optimized for mobile shopping, and to facilitate our customers’ access to our sites, we were the first Latin American eCommerce company to partner with local telecommunication service providers to offer customers with free access to the Internet from their mobile devices for such purposes. Despite Latin America’s relatively low mobile penetration rate, in the year ended December 31, 2016, 32.2% of the total orders placed by our active customers came from mobile devices.

We are a trusted partner for the most important brands in sports and lifestyle retail. We offer over 190,000 SKUs from over 500 brands, including Nike, Adidas, Mizuno, Tommy Hilfiger, Ralph Lauren and Lacoste, working closely with our suppliers to promote and protect their brands and help manage product selection. We believe we are one of the largest distribution channels for these brands in Brazil and Latin America. We have also begun to develop our private label brands which supplement our existing supplier relationships in key categories.

Our success in the region has been dependent on our consistent ability to build a solid infrastructure network to support our operations. We have created scalable and customized logistics capabilities. Our highly automated picking, packing and inventory management systems are built to efficiently handle the products in which we specialize—easy-to-ship items with high margins and short replacement cycles. Today, we have three automated distribution centers in Brazil, one in Argentina and one in Mexico. We are able to ship over one million orders a month, and on average, process the orders we receive within six hours after confirmation, achieving an on-time delivery rate of approximately 97.0% of total processed orders.

For the years ended December 31, 2015 and 2016, we reported:

 

    R$1,505.7 million and R$1,739.5 million in net sales, representing growth of 33.7% and 15.5% from 2014 and 2015, respectively;

 

    R$99.5 million and R$151.9 million in net loss, respectively, from R$144.4 million in net loss in 2014; and

 

    R$46.5 million and R$43.9 million in negative EBITDA, respectively, from R$100.0 million in negative EBITDA in 2014.

For the year ended December 31, 2016, we derived 89.4% of our net sales from our operations in Brazil and 10.6% from our international operations.

As we have done in the past, we plan to both grow our core business and expand our operations into attractive new geographies and brands while maintaining our relentless focus on delivering a superior consumer experience. As we continue to scale, we are focused on growing in an efficient way that we expect will result in increased profitability for our business, including by launching new initiatives that are specifically focused on delivering increased revenue at higher margins.

Key Trends and Factors Affecting Our Business

We believe that our results of operations and financial performance will be driven by the following trends and factors:

 

    Continuous Engagement of our Customers: We benefit from our early mover advantage in Latin American eCommerce, which has allowed us to capture what we believe is a significant market share and a leadership position in a large addressable market, but there is still significant room to further expand the customer base for our sites and increase customer loyalty and repeat purchasing. Since our launch, we have used several marketing channels to promote our sites, including television, sponsorship of sport clubs, internet search engines, social media and promotional emails, which has resulted in a substantial increase in the engagement of our customers with our brands.

 

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    Launch of New Products and Services: Our continuous ability to monetize our user traffic remains critical to our envisioned plans for growth. Our net sales have increased from R$252.9 million in 2010 to R$1,739.5 million in 2016 (a CAGR of approximately 38.0%), and in the same period our GMV grew at a CAGR of approximately 35.0%. We have launched new initiatives that are specifically focused on delivering increased revenue at higher margins, and we expect that the success of these initiatives will play a key role in our long-term growth strategy. In December 2014, we launched Zattini, an online retail store for fashion and beauty products. We have also offered private label apparel to our customers across our Netshoes platform since November 2014 and through our Zattini platform since its launch, and for the year ended December 31, 2016, the sales of those products accounted for 6.0% of the net sales of our online net sales in Brazil and 5.4% of our net sales on a consolidated basis. For the year ended December 31, 2016, Zattini accounted for 11.5% of the net sales of our online operations in Brazil and 10.2% of our net sales on a consolidated basis. We have developed other initiatives that tie our customers more closely to our sites, such as extended payment terms to our customers through our co-branded credit card with Banco Itaú S.A., which we refer to as “NCard,” launched in April 2016. Our expansion efforts also led us to launch our online marketplace platform in February 2016. We expect that marketplace and these new initiatives will play a role in our strategy to attract new customers to our sites and increase spending per active customer.

 

    Growth of eCommerce: Our sales depend substantially on consumers’ widespread acceptance and use of the Internet as a way to conduct commerce. Consumers who have historically used physical channels of commerce to purchase sporting, fashion and beauty goods have started to transition to eCommerce, and we expect they will continue to do so. With only a 1.6% share of the total retail market in 2015, online retail penetration in Latin America offers significant potential relative to developed economies such as the United States, which has 7.3% online retail penetration, according to eMarketer. Despite recent macroeconomic volatility in certain countries such as Brazil and Argentina, eCommerce in Latin America has grown at a CAGR of 27.9% from 2012 to 2015, according to eMarketer, which compares favorably to markets of more developed countries and the 3.8% and 3.6% decrease in Brazil’s GDP in 2015 and 2016, respectively. Also, our customers have been increasingly accessing our sites using mobile devices. In the year ended December 31, 2016, orders placed by our customers from mobile devices represented approximately 32.2% of our total orders (compared to 20.2% in the year ended December 31, 2015), and we believe there is room for further growth in mobile commerce. We are focused on the continuous development of our mobile platforms as we expect sales made on mobile devices to become an increasingly important part of our business. We believe that we are and will continue to be well positioned to benefit from these growth opportunities.

 

    Changing Customer Demands, Shopping Patterns and Technologies: We believe that the current scale of our business reflects in part our consistent ability to anticipate and respond in a timely manner to changing consumer demands and shopping patterns. We believe that there has been an increased focus on education and health, which is translating into more active lifestyles and higher participation in sports. We have been directing our efforts to address the needs of consumers in this growing market, which we believe is a primary component behind our growth in net sales from R$252.9 million in 2010 to R$1,739.5 million in 2016. Also, our ability to innovate and be at the forefront of technological trends and incorporate technology into all aspects of our business has been key to our success, and we expect to benefit from the growth of eCommerce (which, according to eMarketer, has grown from 1.3% of the retail market in Brazil in 2012 to 2.2% in 2015).

 

    Performance of our International Segment: We are committed to developing our businesses in Argentina and Mexico, and despite the difference of the operating environment in these countries and in Brazil, we believe we are now one of the main eCommerce players in these countries. Compared to Brazil, in Argentina and Mexico we currently have lower market share and negative cash flows from operations, and we have had different rates of growth in recent periods than in Brazil. We are working to develop sufficient scale in these different markets to overcome these challenges. The impact of the international segment on our results as reported in reais is also affected by exchange rate variations between the real and the currencies of Argentina and Mexico.

 

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    Political Environment and Macroeconomic Conditions in the Countries in which We Operate: All of our business is currently carried out in Latin America and primarily in Brazil. Our results of operations and financial condition are significantly influenced by political and economic developments in the countries in which we operate and the effect that these factors have on the availability of credit, employment rates, disposable income and average wages in those countries. In the mid- to long-term, we expect strong macro tailwinds due to an expanding middle class, increased disposable income and reduced unemployment and interest rates, among other factors.

Key Business Metrics

Our management regularly reviews the key operational and financial metrics described below to evaluate our business, monitor and measure performance, identify business trends, prepare financial projections and make strategic decisions.

 

     Years Ended December 31,  
     2014     2015     2016     2016  

Operational

        

Active customers (in thousands)

     3,753       4,676       5,562       —    

Total orders (in thousands)

     6,846       8,497       10,268       —    

% of total orders placed from mobile devices

     11.6%       20.2%       32.2%       —    

Average basket size

     R$210.8       R$219.1       R$206.6       US$63.4  

Financial

        

EBITDA (in thousands)(1)

     R$(99,958     R$(46,534     R$(43,871     US$(13,459

EBITDA Margin(1)

     (8.9)%       (3.1)%       (2.5)%       —    

EBITDA Brazil (in thousands)(2)(3)

     R$(55,030     R$10,569       R$5,395       US$1,655  

EBITDA International (in thousands)(2)(3)

     R$(36,136     R$(45,289     R$(41,018     US$(12,586

GMV (in thousands)(4)

     R$1,443,207       R$1,867,015       R$2,202,498       US$675,800  

 

(1) For a reconciliation of net loss to EBITDA and EBITDA Margin, see “Selected Financial and Operating Data—Non-IFRS Financial Measures—EBITDA and EBITDA Margin.”

 

(2) Consists of EBITDA for each of our reportable business segments: Brazil and International. For a reconciliation of our Brazil business segment net loss to EBITDA Brazil and our International business segment net loss to EBITDA International, and the limitations of these non-IFRS financial measures as an analytical tool, see “Selected Financial and Operating Data—Non-IFRS Financial Measures—EBITDA Brazil and EBITDA International.”

 

(3) Items not allocated directly to our reportable business segments (operating expenses, financial income and financial expenses recorded in Netshoes (Cayman) Limited and Netshoes Holding, LLC) are recorded and disclosed separately as corporate and others. As a result, the sum of EBITDA Brazil and EBITDA International does not sum up to EBITDA.

 

(4) For a reconciliation of net sales to GMV, see “Selected Financial and Operating Data—Non-IFRS Financial Measures—GMV.”

Active Customers: Customers who made purchases online with us during the preceding twelve months as of the relevant dates.

Total Orders: Total number of orders invoiced to active customers during the relevant period.

% of Total Orders Placed from Mobile Devices: The sum of total orders placed by active customers through our mobile site and applications as a percentage of total orders placed by active customers for the relevant period. This operational metric is especially relevant as we expect sales made on mobile devices to become an increasingly important part of our business.

Average Basket Size: The sum of total order value from online purchases with us divided by the number of total orders for the relevant period.

 

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EBITDA and EBITDA Margin: We define: (1) “EBITDA” as net income (loss) plus net interest income/expense (which includes interest income, imputed interest on installment sales, interest expenses related to debt, imputed interest on credit purchases and debt issuance costs), income tax, and depreciation and amortization expenses; and (2) “EBITDA Margin” as EBITDA divided by net sales for the relevant period, expressed as a percentage. EBITDA and EBITDA Margin are not measures of financial performance in accordance with IFRS and should not be considered as a substitute for other measures of financial performance reported in accordance with IFRS. These measurements assist our management and may be useful to investors in comparing our operating performance consistently over time as they eliminate the impact of our capital structure (primarily interest charges), asset base (primarily depreciation and amortization) and items outside the control of our management (primarily taxes). These measurements have limitations as analytical tools, including:

 

    EBITDA does not reflect changes in, or cash requirements for, our working capital needs or contractual commitments;

 

    EBITDA does not reflect our tax expense or the cash requirements to pay our taxes;

 

    Although depreciation and amortization are non-cash charges, the assets being depreciated or amortized will often need to be replaced in the future, and EBITDA does not reflect any cash requirements for these replacements; and

 

    Other companies may calculate EBITDA differently than we do, and therefore this presentation of EBITDA may not be comparable to other similarly titled measures used by other companies.

Because of these limitations, you should consider EBITDA alongside other financial performance measures, like net income (loss). For a reconciliation of net loss to EBITDA, see “Selected Financial and Operating Data—Non-IFRS Financial Measures—EBITDA and EBITDA Margin.”

EBITDA Brazil and EBITDA International: We define: (1) “EBITDA Brazil” as net income (loss) of our Brazil business segment plus net interest income/expense (which includes interest income, imputed interest on installment sales, interest expenses related to debt, imputed interest on credit purchases and debt issuance costs), income tax, and depreciation and amortization expenses, in each case, related to this business segment and (2) “EBITDA International” as net income (loss) of our international business segment plus net interest income/expense (which includes interest income, imputed interest on installment sales, interest expenses related to debt, imputed interest on credit purchases and debt issuance costs), income tax, and depreciation and amortization expenses, in each case, related to this business segment. These measurements assist our management and may be useful to investors in comparing the operating performance of our business segments consistently over time as they eliminate the impact of our capital structure (primarily interest charges), asset base (primarily depreciation and amortization) and items outside the control of our management (primarily taxes). These measurements have similar limitations as analytical tools as the limitations applicable for EBITDA. Because of these limitations, you should consider EBITDA Brazil and EBITDA International alongside other financial performance measures of our business segments, like net income (loss) and our other IFRS results. For a reconciliation of our Brazil business segment net loss to EBITDA Brazil and our International business segment net loss to EBITDA International, see “Selected Financial and Operating Data—Non-IFRS Financial Measures—EBITDA Brazil and EBITDA International.”

GMV: Gross Merchandise Value, or GMV, is the sum of net sales, returns, GMV from marketplace and net sales taxes, less marketplace and NCard activation commission fees. This metric indicates the total volume of product sales (in terms of gross merchandise value) transacted in online and offline purchases with us, as well as the growth trend of our marketplace, which we believe will become increasingly important to our business. For a reconciliation of net sales to GMV, see “Selected Financial and Operating Data— Non-IFRS Financial Measures—GMV.”

 

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Our Business Segments

We have organized our operations into two reportable segments: Brazil and International, which consists of our operations in Argentina and Mexico. For further information, see note 2.6 to our audited consolidated financial statements included elsewhere in this prospectus.

Components of Our Results of Operations

The following is a summary of the items comprising our statements of profit and loss:

Net Sales

Net sales includes revenue from product sales and other revenues, net of promotional discounts and returns. Revenue from product sales includes those arising from (1) online purchases with us (except marketplace) and (2) offline purchases with us. Other revenues mainly include (1) shipping services related to our product sales, (2) commission revenue representing a percentage of the total order value of product sales through our marketplace, where qualified third-party B2C vendors can sell their own products to customers through our sites and (3) commission revenue generated by customers’ activation of NCards. We launched our marketplace platform in February 2016 and NCard in April 2016. For the year ended December 31, 2016, online purchases with us (except marketplace) represented 93.5% of our net sales, while offline purchases with us and other revenues represented 4.3% and 2.2% of our net sales, respectively.

Our net sales are also recorded net of certain taxes, principally Taxes on Sale of Goods and Services (Imposto sobre Circulação de Mercadoria e Serviços), or ICMS. We have received ICMS tax incentives from the States of Pernambuco and Minas Gerais in Brazil, and the impact of these tax incentives is reflected in net sales because the amount of ICMS we pay to those states is lower than the amount we invoice to our customers who order from outside of these states. For further discussion regarding the tax incentives applicable to us, see notes 5 and 7 to our audited consolidated financial statements included elsewhere in this prospectus.

Cost of Sales

Cost of sales consists primarily of costs related to our product sales (except marketplace), including the purchase price of goods for resale (net of rebates from suppliers) and related non-recoverable taxes, as well as shipping costs.

Selling and Marketing Expenses

Selling and marketing expenses consist primarily of marketing and advertising costs, personnel expenses for employees engaged in selling, marketing and distribution activities, rental expenses in connection with our distribution centers, credit card fees paid to financial institutions and other expenses. See note 7(b) to our audited consolidated financial statements.

General and Administrative Expenses

General and administrative expenses consist primarily of personnel expenses for management and employees involved in general corporate functions, including finance, accounting, tax, legal, information technology and human resources, and our share option plan granted to key management personnel. General and administrative expenses also include rental expenses incurred in connection with our corporate offices, technology and related infrastructure costs, professional and consulting fees, depreciation costs of equipment used by our corporate departments and insurance expenses. See note 7(c) to our audited consolidated financial statements.

 

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Other Operating Expense, Net

Other operating income consists primarily of the income related to our agreement with Banco Itaú S.A. to provide it with exclusive access to our customer database and gains on the disposal of fixed assets and intangible assets. Other operating expense consists primarily of losses on the disposal of fixed assets and provisions for civil and labor risks.

Financial Income

Financial income consists primarily of interest income on cash and cash equivalents, imputed interest income on installment sales and gains on derivative financial instruments. See note 17 to our audited consolidated financial statements for further information regarding our derivative financial instruments.

Imputed interest on installment sales represents the interest component of the stated purchase price for goods that the customer pays for in installments. We recognize imputed interest over the payment term offered to our customers paying in installments.

We enter into derivative financial instruments to protect us against foreign exchange volatility arising from the import of products and debt denominated in U.S. dollars.

Financial Expense

Financial expense consists primarily of interest expense on debt, bank fees and imputed interest expense on credit purchases and losses on derivative financial instruments.

Imputed interest on credit purchases represents the interest component of the stated purchase price when we purchase inventory from our suppliers on extended payment terms. We recognize imputed interest expense over the payment term of the trade account payable.

We enter into derivative financial instruments to protect us against foreign exchange volatility arising from the import of products and debt denominated in U.S. dollars.

Income Tax Expense

Income tax expense consists primarily of current tax. Current income tax is measured as the amount expected to be paid (or recovered, to the extent applicable) to tax authorities based on the taxable profit for the period. We have reported pretax losses, giving rise to substantial tax loss carryforwards in Brazil, Argentina and Mexico. We will not recognize deferred tax assets until we begin to experience future sustainable taxable profits and it is probable that we will be able to utilize these tax benefits. See below “—Critical Accounting Policies and Estimates—Income Taxes” and notes 2.27 and 19 to our audited consolidated financial statements included elsewhere in this prospectus.

 

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Results of Operations

Year Ended December 31, 2014 Compared to Year Ended December 31, 2015

Unless the context otherwise requires, in the discussion that follows, references to 2014 and 2015 are to the years ended December 31, 2014 and 2015, respectively. The following table sets forth our audited consolidated financial information for the years ended December 31, 2014 and 2015.

 

(In thousands)

   Year Ended
December 31, 2014
    Year Ended
December 31, 2015
    % Change  
     R$     R$        

Net sales

     1,125,795       1,505,686       33.7%  

Cost of sales

     (753,440     (1,010,501     34.1  
  

 

 

   

 

 

   

 

 

 

Gross profit

     372,355       495,185       33.0  
  

 

 

   

 

 

   

 

 

 

Operating expenses:

      

Selling and marketing

     (322,643     (398,514     23.5  

General and administrative

     (147,375     (157,228     6.7  

Other operating expense, net

     (4,724     (3,503     (25.8
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     (474,742     (559,245     17.8  
  

 

 

   

 

 

   

 

 

 

Operating loss

     (102,387     (64,060     (37.4

Financial income

     32,598       61,294       88.0  

Financial expense

     (74,447     (96,667     29.8  
  

 

 

   

 

 

   

 

 

 

Loss before income tax

     (144,236     (99,433     (31.1

Income tax expense

     (139     (80     (42.4
  

 

 

   

 

 

   

 

 

 

Net loss

     (144,375     (99,513     (31.1 )% 
  

 

 

   

 

 

   

 

 

 

Net Sales

Total net sales increased by 33.7% from R$1,125.8 million in 2014 to R$1,505.7 million in 2015. The following table sets forth the breakdown of our net sales by segment for the periods indicated:

 

(In thousands)

   Year Ended
December 31, 2014
     Year Ended
December 31, 2015
     % Change  
     R$      R$         

Brazil

     1,015,612        1,304,853        28.5%  

International

     110,183        200,833        82.3  
  

 

 

    

 

 

    

 

 

 

Total

     1,125,795        1,505,686        33.7%  
  

 

 

    

 

 

    

 

 

 

Brazil net sales increased by 28.5% from R$1,015.6 million in 2014 to R$1,304.9 million in 2015, primarily due to the following factors:

 

    a 24.7% increase in the number of total orders placed by our customers in Brazil to 7.7 million in 2015, derived mainly from a 24.4% increase in active customers to 4.3 million as of December 31, 2015, which was partially driven by the successful launch of Zattini in December 2014;

 

    a reduced ICMS tax burden in 2015 as a result of (1) tax incentives granted by the State of Minas Gerais beginning in 2015 and (2) a greater proportion of our sales being processed through our distribution center in the State of Pernambuco, which also provides ICMS tax incentives. The reduction in ICMS taxes in 2015 led to a 4.6% increase in our net sales. For further discussion regarding the tax incentives from which we currently benefit, see note 5 to our audited consolidated financial statements; and

 

    the increase in orders was partially offset by a 2.2% decrease in the average basket size per order (from R$212.0 in 2014 to R$207.3 in 2015), primarily attributable to changes in product mix as a result of the effect of the recent downturn in the Brazilian economy on the disposable income of our customers.

 

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International net sales increased by 82.3% from R$110.2 million in 2014 to R$200.8 million in 2015, primarily due to the following factors:

 

    a 19.0% increase in the number of total orders placed by our customers to 0.8 million as of December 31, 2015, which was derived mainly from a 26.5% increase in active customers to 413 thousand in 2015; and

 

    a 65.3% increase in the average basket size per order (from R$200.3 in 2014 to R$331.2 in 2015) as a result of (1) an increase in the prices we charge for the products we sell, primarily attributable to inflation in Argentina (24.75% in 2015, according to IPC Congreso) and (2) exchange translation effects resulting from the depreciation of the Brazilian real against the Mexican and Argentine pesos.

On a local currency basis, the net sales of our Argentine subsidiary increased by 66.0% (from ARS246.3 million in 2014 to ARS408.9 million in 2015) and the net sales of our Mexican subsidiary increased by 11.7% (from MXN220.5 million in 2014 to MXN246.2 million in 2015), primarily attributable to our continuing efforts to ramp up operations in these countries, and, in the case of Argentina, inflation.

Cost of Sales and Gross Margin

Our cost of sales increased by 34.1% from R$753.4 million in 2014 to R$1,010.5 million in 2015, which is substantially in line with the increase in our net sales. Our cost of sales as a percentage of our net sales remained relatively flat (66.9% in 2014 compared to 67.1% in 2015). Our gross margin also remained relatively stable (33.1% in 2014 compared to 32.9% in 2015).

Operating Expenses

Selling and Marketing Expenses

Selling and marketing expenses increased by 23.5% from R$322.6 million in 2014 to R$398.5 million in 2015. However, as a percentage of our net sales, selling and marketing expenses decreased from 28.7% in 2014 to 26.5% in 2015, which reflects the success of our continued strategy to improve the efficiency of our marketing efforts by focusing on traffic conversion and monetization. Key drivers leading to the increase in selling and marketing expenses are discussed in further detail below:

 

    Personnel expenses increased by R$32.7 million, resulting from (1) an increase in average headcount in our Brazil operations from 1,798 in 2014 to 1,985 in 2015, due to (a) the launch of Zattini in December 2014, and (b) the development of our marketplace, and (2) increased sales volume during the 2015 Black November Period, requiring additional temporary employees at our distribution centers. As a percentage of our net sales, personnel expenses remained relatively stable (7.6% in 2014 compared to 7.9% in 2015);

 

    Marketing expenses increased by R$21.5 million, primarily due to increased investments in marketing campaigns to (1) attract new customers to our sites (and to specifically promote Zattini’s brand-building) and (2) increase our active customers by reengaging our registered members. As a percentage of our net sales, marketing expenses decreased from 13.8% in 2014 to 11.7% in 2015; and

 

    Credit card fees paid to financial institutions increased by R$9.2 million, which is substantially in line with the increase in net sales. As a percentage of our net sales, credit card fees paid to financial institutions remained relatively stable (2.1% in 2014 compared to 2.2% in 2015).

 

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General and Administrative Expenses

General and administrative expenses increased by 6.7% from R$147.4 million in 2014 to R$157.2 million in 2015. However, as a percentage of our net sales, general and administrative expenses decreased from 13.1% in 2014 to 10.4% in 2015 mainly as a result of scaling our business. The increase in general and administrative expenses was primarily attributable to (1) the R$4.4 million increase in information technology services expenses due to higher maintenance expenses as a result of an upgrade in our information technology infrastructure and (2) the increase of R$3.3 million in the amortization of software, resulting from new software acquired and developed in 2015.

Financial Income

Financial income increased by 88.0% from R$32.6 million in 2014 to R$61.3 million in 2015. This increase was primarily due to (1) the R$17.4 million increase in our interest income on cash and cash equivalents, resulting from the increase of our contractual interest rate weighted by the month-end average balance from 10.6% to 13.4% and our average monthly balance of cash and cash equivalents increasing from R$146.0 million in 2014 to R$226.1 million in 2015 following our equity offerings in 2014 and 2015, (2) the R$8.9 million increase in gains on derivative financial instruments mainly as a result of gains on the hedge of U.S. dollar-denominated debt, which was fully paid in November 2015, and (3) the R$1.7 million increase in imputed interest income on installment sales.

Financial Expense

Financial expense increased by 29.8% from R$74.4 million in 2014 to R$96.7 million in 2015. This increase was primarily attributable to (1) the R$12.0 million increase in imputed interest expense on purchases with extended payment terms offered by our suppliers, which was in line with our strategy to extend our payment terms with suppliers and (2) the R$11.2 million increase in interest expenses on debt, resulting from the increase in our weighted average interest rate from 13.2% to 16.4%, which was partially offset by a decrease in our average monthly balance of debt outstanding from R$397.5 million in 2014 to R$336.5 million in 2015.

Income Tax Expense

Income tax expense was recorded in 2014 and 2015 at the amount expected to be paid to tax authorities. However, we recorded R$0 in deferred income tax assets in 2014 or 2015. See below “—Critical Accounting Policies and Estimates—Income Taxes—Deferred Income Tax.”

Net Loss

Our net loss decreased by 31.1% from R$144.4 million in 2014 to R$99.5 million in 2015, primarily due to the fact that our net sales grew faster than our total operating expenses and our net financial expense decreased. As a percentage of our net sales, our total operating expenses decreased from 42.2% in 2014 to 37.1% in 2015 and our net financial expense decreased from 3.7% in 2014 to 2.3% in 2015.

 

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Year Ended December 31, 2015 Compared to Year Ended December 31, 2016

The following table sets forth our audited consolidated financial information ended in 2015 and 2016:

 

(In thousands)

   Year Ended
December 31,
2015
    Year Ended
December 31,
2016
    % Change     Year Ended
December 31,
2016
 
     R$     R$    

 

    US$  

Net sales

     1,505,686       1,739,540       15.5     533,749  

Cost of sales

     (1,010,501     (1,188,744     17.6       (364,746
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     495,185       550,796       11.2       169,003  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Selling and marketing

     (398,514     (443,692     11.3       (136,139

General and administrative

     (157,228     (174,564     11.0       (53,562

Other operating expense, net

     (3,503     (5,252     49.9       (1,611
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     (559,245 )      (623,508 )      11.5       (191,312 ) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (64,060 )      (72,712 )      13.5       (22,309 ) 

Financial income

     61,294       28,366       (53.7     8,704  

Financial expense

     (96,667     (107,550     11.3       (33,000
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax

     (99,433     (151,896     52.8       (46,605
  

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense

     (80                  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (99,513 )      (151,896 )      52.6 %      (46,605 ) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Sales

Total net sales increased by 15.5% from R$1,505.7 million in 2015 to R$1,739.5 million (US$533.7 million) in 2016. The following table sets forth the breakdown of our net sales by segment for the periods indicated:

 

(In thousands)

   Year Ended
December 31,
2015
     Year Ended
December 31,
2016
     % Change      Year Ended
December 31,
2016
 
     R$      R$             US$  

Brazil

     1,304,853        1,554,405        19.1%        476,943  

International

     200,833        185,135        (7.8)        56,806  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1,505,686        1,739,540        15.5%        533,749  
  

 

 

    

 

 

    

 

 

    

 

 

 

Brazil net sales increased by 19.1% from R$1,304.9 million in 2015 to R$1,554.4 million (US$476.9 million) in 2016, primarily due to the following factors:

 

    a 22.2% increase in the number of total orders placed by our customers in Brazil to 9.4 million in 2016, derived mainly from a 19.8% increase in active customers to 5.1 million as of December 31, 2016, which was partially driven by the ramp up of Zattini operations in 2016 as well as the successful launch of our marketplace in February 2016;

 

    a reduced ICMS tax burden in 2016 as a result of a greater proportion of our sales being processed through our tax incentivized distribution centers in the States of Minas Gerais and Pernambuco. This reduction in ICMS taxes in 2016 led to a 1.3% increase in our net sales. For further discussion regarding the tax incentives from which we currently benefit, see note 5 to our audited consolidated financial statements; and

 

    the increase in orders was partially offset by a 3.7% decrease in the average basket size per order (from R$207.3 in 2015 to R$199.6 in 2016), primarily attributable to changes in product mix as a result of (1) our strategy to increase the number of products we sell with promotional discounts in response to the effect of the recent downturn in the Brazilian economy on the disposable income of our customers and (2) our efforts to expand sales of fashion and beauty products, which have a lower average ticket price per product sold.

 

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International net sales decreased by 7.8% from R$200.8 million in 2015 to R$185.1 million (US$56.8 million) in 2016 primarily due to a 14.9% decrease in the average basket size per order (from R$331.2 in 2015 to R$281.8 in 2016) as a result of exchange translation effects resulting from the appreciation of the Brazilian real against the Mexican and Argentine pesos, which was partially offset by an 8.0% increase in the number of total orders placed by our customers from 0.8 million in 2015 to 0.9 million in 2016, derived mainly from a 9.9% increase in active customers to 453 thousand in 2016.

On a local currency basis, the net sales of our Argentine subsidiary increased by 36.8% (from ARS408.9 million in 2015 to ARS559.6 million in 2016) and the net sales of our Mexican subsidiary increased by 18.7% (from MXN246.2 million in 2015 to MXN292.2 million in 2016), primarily attributable to the expansion of our operations in these countries and inflation in Argentina.

Cost of Sales and Gross Margin

Our cost of sales increased by 17.6% from R$1,010.5 million in 2015 to R$1,188.7 million (US$364.7 million) in 2016. Our cost of sales as a percentage of our net sales increased from 67.1% in 2015 to 68.3% in 2016. Our gross margin decreased from 32.9% in 2015 compared to 31.7% in 2016, mainly attributable to a 3.7% decrease in average basket size per order in Brazil in 2016, primarily resulting from the challenging economic environment in Brazil which has had a negative impact in the disposable income of our customers, and our strategy to counteract these effects by increasing the number of products we sell with promotional discounts.

Operating Expenses

Selling and Marketing Expenses

Selling and marketing expenses increased by 11.3% from R$398.5 million in 2015 to R$443.7 million (US$136.1 million) in 2016. However, as a percentage of our net sales, selling and marketing expenses decreased from 26.5% in 2015 to 25.5% in 2016, which reflects our continued efforts to focus our marketing strategies on traffic conversion and monetization. Key drivers leading to this increase in selling and marketing expenses are discussed in further detail below:

 

    Marketing expenses and other expenses collectively increased by R$17.9 million, resulting primarily from (1) an increase in chargeback expenses of R$9.3 million primarily due to (a) the growth of our operations and (b) an increase in the number of fraud attempts in 2016, which impacted NS2 and other retailers in Brazil; and (2) increased investments in marketing campaigns to (a) attract new customers to our sites (and to specifically promote Zattini’s brand-building) and (b) increase our active customers by reengaging our registered members. As a percentage of our net sales, marketing and other expenses decreased from 13.2% in 2015 to 12.5% in 2016;

 

    Personnel expenses increased by R$15.3 million, resulting from (1) higher employee compensation costs attributable to collective bargaining agreements executed in September 2015 and 2016, which led to an approximate 8% average increase in salaries in both years, and (2) an increase in our average headcount, mainly in our distribution center in Minas Gerais, which began operations in June 2015. As a percentage of our net sales, personnel expenses remained relatively stable (7.9% in 2015 compared to 7.7% in 2016); and

 

    Operating lease, facilities, and amortization and depreciation expenses collectively increased by R$13.4 million, resulting from (1) the beginning of our operations at our distribution center in Minas Gerais and (2) the relocation to our new main corporate office in São Paulo. As a percentage of our net sales, operating lease, facilities, and amortization and depreciation expenses increased from 1.8% in 2015 to 2.3% in 2016.

 

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General and Administrative Expenses

General and administrative expenses increased by 11.0% from R$157.2 million in 2015 to R$174.6 million (US$53.6 million) in 2016. However, as a percentage of our net sales, general and administrative expenses decreased slightly from 10.4% in 2015 compared to 10.0% in 2016, mainly as a result of scaling our business, following the trend reported in previous years. The increase in general and administrative expenses was primarily attributable to (1) a R$6.0 million increase in personnel expenses, resulting from (a) higher employee compensation costs attributable to collective bargaining agreements executed in September 2015 and 2016, which led to an approximate 8% average increase in salaries in both years, and (b) an increase in average headcount, which was mainly related to the expansion of our information technology department as a result of our strategic decision to cease outsourcing most of our information technology personnel, (2) the increase of R$5.6 million in the amortization of software, resulting from new software acquired and developed in 2016 and (3) the increase of R$2.5 million in information technology services expenses, due to higher maintenance expenses as a result of an upgrade in our information technology infrastructure. As a percentage of our net sales, personnel expenses decreased slightly from 5.3% in 2015 to 4.9% in 2016 and information technology services expenses remained relatively stable from 2.2% in 2015 to 2.0% in 2016.

Financial Income

Financial income decreased by 53.7% from R$61.3 million in 2015 to R$28.4 million (US$8.7 million) in 2016. This decrease was primarily due to the following factors:

 

    The R$15.5 million decrease in our interest income on cash and cash equivalents, resulting from a decrease in our average monthly balance of cash and cash equivalents from R$226.1 million in 2015 to R$72.8 million in 2016 due to a reduction in financing activities, partially offset by the increase in our contractual interest rate weighted by the month-end average balance from 13.4% to 14.0%;

 

    The R$10.8 million decrease in imputed interest income on installment sales was primarily due to the substantial increase in the use of factoring of trade accounts receivable with financial institutions (from a volume of R$332.8 million in 2015 to R$789.2 million in 2016). The monthly average amount of factored trade accounts receivable during the year ended December 31, 2016 was R$65.8 million. As we transfer trade accounts receivables to financial institutions, we cease to recognize imputed interest income in installment sales from the transferred accounts receivables; and

 

    The non-recurrence in 2016 of gains on derivative financial instruments as we had in 2015.

Financial Expense

Financial expense increased by 11.3% from R$96.7 million in 2015 to R$107.6 million (US$33.0 million) in 2016. This increase was primarily attributable to (1) an R$8.5 million increase in interest expenses on debt, resulting from (a) an increase in our weighted average interest rate from 16.4% to 18.0% and (b) an increase in our average monthly balance of debt outstanding from R$336.5 million in 2015 to R$342.8 million in 2016 and (2) an R$8.2 million increase in imputed interest expense on credit purchases which was in line with our strategy to extend our payment terms with suppliers. This increase was partially offset by a reduction (1) in bank charges of R$4.5 million from 2015 to 2016 and (2) in foreign exchange loss of R$3.5 million from 2015 to 2016.

Income Tax Expense

Income tax expense was recorded in 2015 and 2016 at the amount expected to be paid to tax authorities. However, we recorded R$0 in deferred income tax assets in 2015 or 2016. See below “—Critical Accounting Policies and Estimates—Income Taxes—Deferred Income Tax” and note 19 to our audited consolidated financial statements.

 

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Net Loss

Our net loss increased by 52.6% from R$99.5 million in 2015 to R$151.9 million (US$46.6 million) in 2016 primarily due to a R$43.8 million increase in net financial expense. As a percentage of our net sales, net financial expense increased from 2.3% in 2015 to 4.6% in 2016.

Seasonality and Quarterly Results of Operations

Like most retail businesses, we experience seasonal fluctuations in our net sales and operating results. Historically, we have generated higher net sales in the fourth quarter, which includes the Black November period in Brazil (a commercial sale season introduced by Brazilian eCommerce websites in 2010 that is a month-long equivalent to the Black Friday in the United States) and the Christmas season in Brazil, Argentina and Mexico. As a result, most of our profits are generated during the fourth quarter. On the other hand, the first quarter of the year is our slowest period, as the months of January, February and March correspond to vacation time in Brazil and Argentina. For a discussion of the effects of such seasonal fluctuation in our cash flows from operations, see “—Liquidity and Capital Resources—Net Working Capital.”

The following table sets forth our unaudited quarterly results from the three months ended March 31, 2015 to the three months ended December 31, 2016. The unaudited quarterly results set forth below have been prepared on a basis consistent with our audited consolidated financial statements, and we believe they include all normal recurring adjustments necessary for a fair statement of the financial information presented below. The following table should be read in conjunction with our audited consolidated financial statements included elsewhere in this prospectus.

 

     Three Months Ended  
     March 31,
2015
    June 30,
2015
    September
30, 2015
    December
31, 2015
    March 31,
2016
    June 30,
2016
    September
30, 2016
    December
31, 2016
 

(In thousands)

   R$     R$     R$     R$     R$     R$     R$     R$  

Net sales

     270,503       326,050       388,928       520,205       347,863       401,644       414,245       575,788  

Cost of sales

     (182,547     (214,862     (256,806     (356,286     (242,820     (259,567     (276,753     (409,604
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     87,956       111,188       132,122       163,919       105,043       142,077       137,492       166,184  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

                

Selling and marketing

     (87,634     (89,347     (102,869     (118,664     (103,940     (105,886     (108,923     (124,943

General and administrative

     (31,948     (44,557     (42,269     (38,454     (46,336     (45,815     (44,516     (37,897

Other operating expenses, net

     (1,599     (36     (977     (891     (1,663     (1,724     (644     (1,221
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     (121,181 )      (133,940 )      (146,115 )      (158,009 )      (151,939 )      (153,425 )      (154,083 )      (164,061 ) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (33,225 )      (22,752 )      (13,993 )      5,910       (46,896 )      (11,348 )      (16,591 )      2,123  

Financial income

     11,991       12,512       26,765       10,026       7,754       4,737       8,624       7,251  

Financial expenses

     (20,093     (20,088     (30,428     (26,058     (22,494     (27,026     (22,335     (35,695
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax

     (41,327     (30,328     (17,656     (10,122     (61,636     (33,637     (30,302     (26,321

Income tax expense

                       (80                        

Net loss

     (41,327 )      (30,328 )      (17,656 )      (10,202 )      (61,636 )      (33,637 )      (30,302 )      (26,321 ) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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The following table sets forth a reconciliation of our net loss to EBITDA for each of the periods indicated below:

 

     Three Months Ended  
     March
31, 2015
    June 30,
2015
    September
30, 2015
    December
31, 2015
    March
31, 2016
    June 30,
2016
    September
30, 2016
    December
31, 2016
 

(In thousands)

   R$     R$     R$     R$     R$     R$     R$     R$  

Net loss

     (41,327     (30,328     (17,656     (10,202     (61,636     (33,637     (30,302     (26,321

Add (subtract):

                

Interest income / expense, net(1)

     4,346       5,645       9,463       13,030       12,120       19,704       19,769       25,230  

Income tax expense

                       80                          

Depreciation and amortization

     4,814       5,398       4,840       5,363       6,926       8,112       8,221       7,943  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

     (32,167 )      (19,285 )      (3,353 )      8,271       (42,591 )      (5,820 )      (2,312 )      6,852  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net sales

     270,503       326,050       388,928       520,205       347,863       401,644       414,245       575,788  

EBITDA Margin

     (11.9)%       (5.9)%       (0.9)%       1.6%       (12.2)%       (1.4)%       (0.6)%       1.2%  

 

(1) Includes interest income, imputed interest on installment sales, interest expenses related to debt, imputed interest on credit purchases and debt issuance costs.

Liquidity and Capital Resources

Use and Sources of Funds

We have experienced negative cash flows from operations, which we have funded through bank financing arrangements, by selling common shares to financial investors in May 2014 and March 2015 and by selling convertible notes to financial investors in February 2017. In 2015, we raised R$146.2 million from sales of common shares to financial investors. In 2016, we primarily used cash on hand and debt to fund our operations. In February 2017, we raised capital from financial investors by issuing notes convertible into our common shares with total proceeds amounting to US$30.0 million (or R$92.3 million, using the exchange rate on the date of the execution of the convertible note purchase agreement). For further information, see “Management’s Discussion and Analysis of Financial Condition and Results Of Operations—Indebtedness—Material Financing Agreements.”

Going forward, we expect that cash provided by our operating activities will become an incremental source of funding for our operations. Although we have experienced negative cash flows from operating activities at the consolidated level, we have generated positive cash flows from operating activities on an annual basis in Brazil since 2014. We have recently engaged in several initiatives designed to deliver increased net sales at higher margins while taking advantage of our existing infrastructure (such as the introduction of new verticals with Zattini, the launch of our online marketplace, the offering of private label products and our B2B operations), and we believe that these initiatives will play a key role in our long-term growth strategy and improve our operating cash flows. See “Business—Our Strategy.”

As described under “Use of Proceeds,” we intend to use the net proceeds from this offering for general corporate purposes focused on expanding the scale of our business. In addition, we do not currently expect to pay any cash dividends to our common shareholders in the foreseeable future. Although we believe that upon the completion of this offering we will have a sufficient level of cash and cash equivalents to cover our working capital needs in the ordinary course of business and to continue to expand our business, we may, from time to time, explore additional financing sources and means to lower our cost of capital, which could include equity, equity-linked and debt financing. In addition, from time to time, we review acquisition and investment opportunities to further implement our business strategy and may fund these investments with internally generated funds, bank financing, the issuance of debt or equity or a combination thereof.

 

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We believe, based on our current operating plan, that our existing cash and cash equivalents, together with other sources of financing (which may include proceeds from this offering) and cash generated from our operations, will be sufficient to meet our anticipated cash needs for working capital, financial liabilities, capital expenditures and business expansion through at least the next twelve months.

Restricted and Unrestricted Cash and Cash Equivalents

As of December 31, 2015 and 2016, we had unrestricted cash and cash equivalents of R$249.1 million and R$111.3 million (US$34.2 million), respectively, which primarily consisted of cash, bank deposits and short-term financial investments. This decrease of unrestricted cash and cash equivalents from December 31, 2015 to December 31, 2016 relates primarily to a reduction of net cash provided by financing activities. See “—Consolidated Cash Flows—Financing Activities.”

Additionally, as of December 31, 2015 and 2016, we had restricted cash and cash equivalents amounting to R$44.9 million and R$43.2 million (US$13.3 million), respectively, which were pledged as collateral under import letters of credit and certain financial arrangements (see below “—Indebtedness”).

Net Working Capital

The amount of cash flows and working capital we require to support our operations fluctuates throughout the year, primarily driven by the seasonality of our business. Our working capital requirements are also affected by extended payment terms offered to our customers (see “Business—Billing and Collection”) and payment terms agreed with our suppliers.

Typically, we generate higher cash flows during the fourth quarter, given the increase in the volume of sales we generally experience in the Black November period and the holiday selling season. Conversely, our cash flow requirements increase during the first quarter of the year, as a result of (1) the maturity of the payment terms with our suppliers for inventory acquired in advance of our peak selling season and (2) a decrease in sales volume that typically follows the holiday season.

We have taken a number of initiatives designed to improve liquidity and help us manage our net working capital requirements, which led us to reduce our net working capital cycle—defined as the amount of time we take to convert our inventory and trade accounts receivable into cash, net of trade accounts payable—from an average of 98 days for the year ended December 31, 2014 to an average of 43 days for the year ended December 31, 2016. These initiatives include the following:

Trade Accounts Payable

 

    Given our scale and the significance of our business to our suppliers, we have been able to further diversify our supplier portfolio and deepen relationships with our existing suppliers, allowing us to renegotiate and further extend our payment terms with them.

 

    Our strategy to focus on the introduction of new products in attractive verticals has also contributed to lowering our working capital requirements. We focus on new products in verticals, such as Zattini, that not only have higher margins with short replacement cycle but also benefit from a diversified supplier chain, which in conjunction with the scale of our business, allows us to negotiate better terms with our suppliers, such as further extending the average period we take to pay our trade accounts payable. Zattini was initially focused solely on fashion, but in the short time since its launch, we have successfully introduced new categories, including beauty products in 2016. We will continue to launch new products in existing and future verticals in a targeted way that grows our lifestyle brand while achieving not only higher margins but also lower working capital requirements.

 

    We use reverse factoring of trade accounts payable, in which a financial institution pays our supplier in advance in exchange for a discount, and we agree to pay the financial institution either at a discount on the original payment date or at the full face value at a later date.

 

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As a result of all these initiatives, we extended the average period we take to pay our trade accounts payable from an average of 58 days for the year ended December 31, 2014 to an average of 111 days for the year ended December 31, 2016.

Trade Accounts Receivable

 

    We have entered into factoring arrangements with financial institutions, in which we transfer our rights to receive payment on a portion of our trade accounts receivable to financial institutions and they pay us up front at a discount. This resulted in a reduction in the average period we take to collect trade accounts receivable. The volume of our factoring of trade accounts receivable increased from R$332.8 million for the year ended December 31, 2015 to R$789.2 million for the year ended December 31, 2016, and the monthly average amount of factored trade accounts receivable during the year ended December 31, 2016 was R$65.8 million. As of December 31, 2016, 40% (or R$86.1 million) of our trade accounts receivable were unrestricted and available for transfer to financial institutions.

 

    We have established a policy requiring a minimum installment payment of R$25.0, which given the comparatively low average ticket price of the products in the verticals in which we operate, has positively contributed to the management of our trade accounts receivable.

 

    For customers other than those purchasing using NCard, we have steadily reduced the number of monthly credit card installments available to effect purchases on our sites. In July 2016, we reduced our maximum extended payment term from a maximum of 12 months to a maximum of 10 months, and in the near future we plan to further lower the extended payment terms we offer to customers.

As a result of all these initiatives, we reduced the average period we take to collect trade accounts receivable from an average of 70 days for the year ended December 31, 2014 to an average of 49 days for the year ended December 31, 2016.

Inventories

 

    Our marketplace initiative allows us to extend product offerings to our customers without having to hold associated inventory (or incurring related costs), thus contributing to improved liquidity.

Consolidated Cash Flows

The following table sets forth certain consolidated cash flow information for the periods indicated:

 

     Years ended December 31,  
     2014     2015     2016     2016  

(In thousands)

   R$     R$     R$     US$  

Net cash (used in) operating activities

     (27,266     (23,094     (20,857     (6,400

Net cash provided by (used in) investing activities

     (3,969     (31,967     (64,553     (19,807

Net cash provided by (used in) financing activities

     157,481       59,097       (47,207     (14,484

Effect of exchange rate changes on cash and cash equivalents(1)

     1,955       2,656       (5,143     (1,578
  

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     128,201       6,692       (137,760     (42,269
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Effect of exchange rate changes on cash and cash equivalents held by Netshoes (Cayman) Limited and our subsidiaries in accounts in the United States, Argentina and Mexico.

 

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Operating Activities

On a consolidated basis, our net cash used in operating activities decreased (1) by 15.3% from R$27.3 million in 2014 to R$23.1 million in 2015, and (2) by 9.7% to R$20.9 million (US$6.4 million) in 2016. Our operating cash flows during these periods were significantly affected by the growth in our net sales, and the initiatives we implemented to manage working capital described above, in “—Net Working Capital,” as well as by changes in (a) judicial deposits, primarily due to an ongoing dispute with Brazilian tax authorities, (b) recoverable taxes, primarily resulting from the purchase of products we sell from non-tax incentivized distribution centers and their subsequent resale from tax incentivized distribution centers, where we enjoy lower ICMS tax rates, resulting in increased ICMS tax credits, and (c) restricted cash used to secure our import letters of credit.

In our most mature market, Brazil, we generated positive cash flows from operating activities of R$10.7 million, R$38.5 million and R$25.3 million (US$7.8 million) in 2014, 2015 and 2016, respectively. Our positive cash flows from operating activities in Brazil were primarily attributable to (1) several initiatives in place to improve working capital dynamics, as explained under “—Liquidity and Capital Resources—Net Working Capital,” (2) our continued operating leverage resulting from the scale of our business and (3) the introduction of new lifestyle verticals with higher margins into our portfolio. The positive cash flows from operating activities in Brazil were offset by cash used to continue developing our international operating activities, which consumed R$37.7 million, R$61.5 million and R$46.1 million (US$14.1 million) in 2014, 2015 and 2016, respectively.

Investing Activities

Our primary investing activities have consisted of equipment purchases, leasehold improvements, purchase of intangible assets, and hardware, software and furniture purchases for our fulfillment centers and our overall business growth, and interest received from installment sales. These may vary from period to period depending on when we expand our operations.

Our net cash used in investing activities changed from R$4.0 million of net cash used in 2014 to R$32.0 million of net cash used in investing activities in 2015, primarily attributable to the expansion of our distribution centers, leasehold improvements in our corporate offices and the launch of Zattini. During 2015, we invested R$21.8 million to expand our distribution centers in the State of Pernambuco and Minas Gerais. Additionally, in 2015 we acquired and developed software in an amount of R$24.6 million to continue improving our information technology infrastructure. Our net cash used in investing activities increased to R$64.6 million (US$19.8 million) in 2016, primarily attributable to (1) the acquisition and development of software in an amount of R$36.6 million, (2) leasehold improvements in our distribution centers and our main corporate office in São Paulo in the amount of R$25.2 million and (3) the initial consideration paid for the acquisition of the Shoestock brand in an amount of R$10.5 million.

Our capital expenditures (consisting of purchase of property and equipment and intangible assets) represented 1.9%, 3.1% and 4.2% of our net sales in 2014, 2015 and 2016, respectively. This increase between periods is mainly attributable to increased expenditures due to the acquisition and development of software and the acquisition of Shoestock in February 2016. As of the date hereof, for 2017, we have budgeted capital expenditures of R$70.4 million, including R$28.2 million for the acquisition of property and equipment and R$42.2 million for the acquisition of intangible assets (including software and Shoestock), which will be funded through our operating activities, debt financing and proceeds from this offering.

Financing Activities

Cash flows from financing activities reflect activities such as the issuance of common shares, debt financing and the payment of our existing debt at maturity.

 

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Our net cash provided by financing activities decreased by 62.5% from R$157.5 million in 2014 to R$59.1 million in 2015, primarily as a result of a decrease of R$231.3 million in proceeds from the issuance of common shares, partially offset by a decrease of R$177.9 million in payments of interest and principal amount of debt at maturity.

Our net cash provided by (used in) financing activities changed from R$59.1 million of cash provided in 2015 to R$47.2 million (US$14.5 million) of net cash used in financing activities in 2016, mainly because we did not issue equity in 2016, as we did in 2015. Our cash outflows were partially offset by a R$49.9 million (US$15.3 million) decrease in payments of interest and principal amount of debt due to the refinancing of certain of our indebtedness. See “—Indebtedness—Material Financing Agreements.”.

In 2014 and 2015, we raised capital from financial investors by issuing common shares with total proceeds amounting to R$377.5 million and R$146.2 million, respectively. We mainly used these proceeds to invest in the expansion of our operating activities and to repay outstanding debt. In February 2017, we raised capital from financial investors by issuing notes convertible into our common shares with total proceeds amounting to US$30.0 million (or R$92.3 million, using the exchange rate on the date of the execution of the convertible note purchase agreement). We expect to use these proceeds in the expansion of our operating activities. See Management’s Discussion and Analysis of Financial Condition and Results Of Operations—Indebtedness—Material Financing Agreements” and “Certain Relationships and Related Party Transactions—Private Equity Placements.”

Indebtedness

We had total indebtedness of R$387.4 million as of December 31, 2016, as compared to R$334.0 million as of December 31, 2015. As of December 31, 2016, our total indebtedness comprised (1) 20% short-term debt, which consisted primarily of the short-term portion owed under our debentures and bank financing and (2) 80% long-term debt, which consisted of the long-term portion owed under our debentures and bank financing.

Material Financing Agreements

The table below sets forth selected information regarding our material outstanding indebtedness as of December 31, 2016:

 

(in thousands)

   As of December 31, 2016  
     Maturity    Currency    Interest Rate    Current      Non-Current      Total     Total  

Debentures

   March 2020    R$    100% of CDI + 3.23% p.a.      R$38,647        R$83,637        R$122,284       US$37,520  

Working Capital Financing

   August 2020    R$    138.5% of CDI p.a.      14,816        115,185        130,001       39,889  

Working Capital Financing

   August 2020    R$    100% of CDI + 4.74 p.a.      7,368        57,451        64,819       19,889  

Working Capital Financing

   September
2020
   R$    100% of CDI + 3.65 p.a.      4,611        54,608        59,219       18,170  
           

 

 

    

 

 

    

 

 

   

 

 

 

Total

     65,441        310,882        R$376,323 (1)      US$115,468  
           

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) Does not include US$30.0 million (or R$92.3 million, using the exchange rate on the date of the execution of the convertible note purchase agreement) related to the convertible notes we issued in February 2017.

 

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Our principal financing agreements are described below:

Debentures

On March 5, 2015, our Brazilian subsidiary NS2, completed a local offering in Brazil of secured non-convertible debentures in the aggregate amount of R$150.0 million, with an interest rate equal to the daily average rates of 100% of the Brazilian Interbank Deposit Rate (Certificado de Depósito Interbancário, or CDI) plus 3.231% per year, payable quarterly. Amortization of the principal amount also occurs quarterly. Under the terms of the debentures, the totality of NS2’s Visa and American Express credit and debit card account receivables are automatically deposited into a linked escrow account at Banco Bradesco S.A. managed by the debentures’ fiduciary agent, and upon NS2’s request (provided it is not in breach of any of the terms of the debenture deed) the fiduciary agent is required to release the balance of the linked escrow account that exceeds 50% of the outstanding balance under the debentures at the time of any such request.

The debenture deed requires NS2 to maintain a ratio of financial indebtedness (defined as the balance of loans and financings) to credit card accounts receivable not greater than 3.00, to be calculated every six months. As of December 31, 2016, NS2 was in compliance with this covenant with a ratio of 1.82. The debenture deed also provides for certain customary covenants that limit NS2’s ability to, among other things, (1) undertake transactions that deviate from the corporate purpose set forth in its by-laws and (2) distribute dividends and pay interest on equity if NS2 is in breach of any of the terms of the debenture deed. It further includes customary events of default provisions, such as NS2’s failure to perform or observe certain terms, covenants or other agreements referred to in the debenture deed, and certain corporate restructurings that result in a change of its control.

Working Capital Financing

In August 2014, NS2 entered into a working capital agreement with Banco do Brasil S.A. for an aggregate principal amount of R$200.0 million. Principal and interest on the loan are payable on a monthly basis. This loan is secured by the fiduciary assignment (cessão fiduciária) of R$20.0 million in financial assets (NS2’s investment in a mutual fund managed by Banco do Brasil S.A.) and a portion of NS2’s existing and future credit card account receivables, limited to a percentage of the outstanding balance of the loan. This agreement was amended in August 2016 to, among other things, (1) extend the maturity of the outstanding balance to August 2020, (2) change the interest rate applicable for the period from August 2016 to August 2020 to 138.5% of the CDI rate, (3) and include one of our founders, Marcio Kumruian, as a guarantor. This agreement also requires NS2 to comply with the following financial covenants: (1) maintain a shareholder’s equity greater than zero, and (2) maintain a ratio of financial indebtedness to credit card receivables not greater than 3.00, as calculated every six months. As of December 31, 2016, NS2 was in compliance with these covenants with a ratio of 1.82.

In August 2016, NS2 entered into a working capital facility agreement with Banco do Brasil S.A. for an aggregate principal amount of R$66.7 million with an interest rate equal to 100% of the CDI rate plus 4.74% per year. Principal and interest on the loan are payable on a monthly basis, and the facility matures in August 2020. This loan is secured by the fiduciary assignment (cessão fiduciária) of R$6.7 million in financial assets (NS2’s investment in a mutual fund managed by Banco do Brasil S.A.) and a portion of NS2’s credit card account receivables, limited to a percentage of the outstanding balance of the loan. This agreement also requires NS2 to maintain a ratio of financial indebtedness to credit card accounts receivable not greater than 3.00, as calculated every six months, and includes customary events of default provisions, such as NS2’s payment of dividends and interest on equity if NS2 is in breach of any of the terms of this agreement, and certain corporate restructurings that result in a change of its control. This facility agreement is also guaranteed by Marcio Kumruian.

In September 2016, NS2 entered into a working capital facility agreement with Banco Bradesco S.A. for an aggregate principal amount of R$60.0 million with an interest rate equal to 100% of the CDI rate plus 3.65% per year. Principal and interest on the loan are payable on a monthly basis, with maturity in September 2020. This loan is secured by the fiduciary assignment (cessão fiduciária) of NS2’s Visa and American Express credit card account receivables deposited from time to time into an escrow account with the lender, limited to 25% of the outstanding balance of the loan.

 

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Convertible Notes

On February 22, 2017, we entered into the convertible note purchase agreement, pursuant to which we issued and sold unsecured promissory notes convertible into our common shares, or the convertible notes, in the aggregate principal amount of US$30.0 million (or R$92.3 million, using the exchange rate on the date of the execution of the convertible note purchase agreement) to some of our current shareholders. See “Certain Relationships and Related Party Transactions—Private Equity Placements.” The convertible notes bear interest on the principal amount (1) at a rate of 4.0% per annum, compounded semiannually, for one year following the date the convertible notes are issued and, thereafter, (2) at a rate of 6.0% per annum, compounded semiannually, and they are due and payable, along with the aggregate principal amount, on February 22, 2019. The convertibles notes are subject to customary events of default.

Upon completion of this offering, the then outstanding principal and unpaid accrued interest of the convertible notes will be automatically converted into our common shares, or the conversion shares. The number of conversion shares to be issued upon this conversion will be equal to the quotient obtained by dividing the outstanding principal and unpaid accrued interest due on the convertible notes on the date of the closing of this offering by 90% of the initial public offering price of our common shares in this offering. Other provisions in the convertible note purchase agreement will become applicable in the event this offering is not completed as currently contemplated. See note 25 to our audited consolidated financial statements included elsewhere in this prospectus.

Contractual Obligations

The following table sets forth our contractual obligations as of December 31, 2016:

 

     Payments due by period  

(in thousands of R$)

   Total      Less than
1 year
     1-3 Years      3-5
Years
     More
than 5
years
 

Long-term debt obligations(1)

   R$ 514,902      R$ 134,358      R$ 380,554      R$      R$  

Operating lease obligations(2)

     237,968        26,441        79,323        52,882        79,323  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   R$ 752,870      R$ 160,799      R$ 459,877      R$ 52,882      R$ 79,323  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes current portion of long-term debt. Also includes estimated interest payments of R$130.9 million, of which R$61.8 million and R$69.1 million are due in less than one year and one to three years, respectively. Estimated interest payments were calculated based on the interest rate indexes of our floating interest rate indebtedness in effect as of December 31, 2016.

 

(2) Operating lease obligations primarily include non-cancellable lease commitments for our offices and distribution centers.

Off-Balance Sheet Arrangements

As of December 31, 2016, except for operating lease obligations as described above, we did not have any off-balance sheet arrangements.

Research and Development

Our research and development activities are primarily focused on the development of software, which we view as an important element of the investments we make in our technology and our business. Our primary software development activities have been focused on technology to personalize the shopping experience of our customers, and to set up our marketplace. In the years ended December 31 2014, 2015 and 2016, we spent R$16.2 million, R$24.6 million and R$36.6 million, respectively, on software development.

 

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Critical Accounting Policies and Estimates

Overview

Our consolidated financial statements are prepared in conformity with IFRS. In preparing our audited consolidated financial statements, we make assumptions, judgments and estimates that can have a significant impact on amounts reported in our consolidated financial statements. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. We regularly reevaluate our assumptions, judgments and estimates. Our significant accounting policies are described in note 2 to our audited consolidated financial statements included elsewhere in this prospectus. We believe that the following critical accounting policies are more affected by the significant judgments and estimates used in the preparation of our consolidated financial statements.

Income Taxes

Income tax comprises current and deferred tax. Income tax expense is recognized in consolidated statements of profit or loss, except to the extent it relates to items directly recognized in other comprehensive income. Significant judgments are involved in determining the provision for income taxes including estimates. The recognition of taxes that are subject to certain legal or economic limits or uncertainties is assessed individually by our management based on the specific facts and circumstances. Although we consider all these variables in order to estimate our income taxes, there could be an unfavorable resolution on such issues that may affect the results of our operations.

Deferred Income Tax

Deferred income tax is recognized in respect of (A) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes and (B) unused tax losses carryforwards. Deferred income tax assets are recognized for unused tax losses, unused tax credits and deductible temporary differences to the extent that it is probable that future taxable profits will be available against which they can be recovered. We have not recognized deferred income tax assets, but they are reviewed at each reporting date and will be recognized when we begin to experience future sustainable taxable profits during the carryforward period and it is probable that we will be able to utilize the related tax benefits. There is no expiration date for unused tax loss carryforwards in Brazil, but, under Brazilian law, NS2 can only offset up to 30 percent of its taxable profit in any given year. The expiration date for unused tax loss carryforwards in Argentina and Mexico is five years from the date they are recorded. As of December 31, 2016, we had R$224.1 million of unrecognized deferred income tax assets. For additional information, see note 2.27 and 19 to our audited consolidated financial statements included elsewhere in this prospectus.

Share-based Payments

Under the Share Plan, or the Plan, our board of directors may grant up to 210,490 share options to key employees, directors and independent contractors, which as of the date of this prospectus represents approximately 3% of our total equity on a fully diluted basis. The options currently granted under the Plan were made at the discretion of our board of directors, which has full authority to establish the terms and conditions of any award consistent with the provisions of the Plan and to waive terms and conditions at any time.

Prior to the completion of this offering, we have provided our employees whose employment relationship was terminated (whether voluntarily or involuntarily), with a repurchase proposal to buy back their common shares at a discount to their fair value. In addition, we have a practice of providing holders of vested awards that terminate their relationship with us (whether voluntarily or involuntarily) with a bonus equal to the exercise price of their exercisable option.

 

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Given our practice of providing former employees with common share repurchase proposals, we have historically considered our Share Plan a cash-settled plan and classified most of our granted awards as liabilities. We have then generally recognized the costs related to share-based payments, net of an estimated forfeiture rate, over the vesting period based on the fair value of our common shares, adjusted for the discount we will receive when repurchasing common shares. Estimated forfeitures are developed based upon historical experience. This liability is remeasured at each reporting date.

On November 14, 2016, we granted a limited number of share options available under our Plan (7,750 share options) to certain of our employees. The exercisability of these share options is conditioned on the completion of this offering and requires the holder of the relevant share option to continue in employment with us for a minimum of six months after our initial public offering. Given the economic characteristics of this share option grant, we consider this arrangement to be an equity-settled plan and have classified it as equity. Since we expect that all of these conditions will be satisfied during the second half of 2017, we have recognized an expense for these share options since their grant date, and we estimate it will be fully recorded by the end of 2017. As we expect to extend to holders of vested awards classified as equity our non-contractual practice of providing a bonus equal to the exercise price of their exercisable option, the fair value of these awards were estimated based on the fair value of our shares.

We considered numerous objective and subjective factors to determine our best estimate of the fair value of our common shares, including but not limited to, sales of our common shares in the private placements, our operating and financial performance and forecast, market performance of our comparable publicly traded technology companies, Brazilian and Latin American macroeconomic trends, and the capital market conditions.

In 2014 and 2015, our fair value of common shares was estimated based on the following private placements:

 

    On May 12, 2014, we issued 1,250,184 common shares with a purchase price of US$134.86 per share to investors, on an arms-length sale of our common shares. Therefore, we concluded this price represented the fair value of our common shares as of such date. From May 2014 to December 2014, there was no meaningful change in our business that we concluded would have positively or negatively impacted the fair value of our common shares.

 

    On March 25, 2015, we issued 333,678 common shares with a purchase price of US$134.86 per share to investors, on an arms-length sale of our common shares. Therefore, we concluded this price represented the fair value of our common shares as of such date. From March 2015 to December 2015, there was no meaningful change in our business that we concluded would have positively or negatively impacted the fair value of our common shares.

In 2016, our board of directors, with the assistance of our management, reassessed the fair value of our common shares based on the guideline public company method, or GPCM. Our valuation approach utilized the implicit enterprise multiple, which was calculated by multiplying the average EBITDA growth multiples of certain comparable companies by our estimated EBITDA long-term growth. GPCM assumes that businesses operating in the same industry will share similar characteristics and that the subject business’s value correlates to those characteristics. Therefore, a comparison of the subject business to similar businesses whose financial information and public market value are available may provide a reasonable basis to estimate the subject business’s value. GPCM provides an estimate of value using multiples derived from the total capitalization of publicly traded companies. In selecting guideline public companies for this analysis, we focused primarily on quantitative considerations, such as financial performance and other quantifiable data, as well as qualitative considerations, such as industry and economic drivers. As of December 31, 2016, we determined the fair value of common shares to be US$121.37 per share. The assumptions we use in this valuation model are based on future expectation combined with management judgment, with inputs of numerous subjective factors to determine the fair value of our common shares, including the following factors: (1) discount rate of 20.0%, (2) inflation rate of 4.5%, (3) dividend yield of 0.0% and (4) estimated EBITDA long-term growth of 17.0%.

For additional information regarding our Plan, see “Management—Compensation of Directors and Officers—2012 Share Plan.”

 

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Provision for Tax, Civil and Labor Risks and Contingent Liabilities

Provisions for tax, civil and labor risks are recorded when we have a present obligation (legal or constructive) as a result of a past event, the amount of the obligation can be reliably estimated and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation.

We are a party to various lawsuits and administrative proceedings. The assessment of the likelihood of an unfavorable outcome in these lawsuits and proceedings includes the analysis of the evidence available, the hierarchy of the laws, available jurisprudence, and their importance to the relevant legal system, as well as the opinion of external legal counsel. Provisions are reviewed and adjusted to reflect changes in circumstances, such as applicable statutes of limitations, conclusions of tax audits or additional exposures identified based on new matters or court decisions.

Where it is not probable that a payment will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of a payment is remote. Possible obligations, whose existence will only be confirmed by the occurrence or non-occurrence of one or more future events, are also disclosed as contingent liabilities, unless the probability of a payment is remote.

We are engaged in several legal proceedings, including civil, labor, tax and social security and other proceedings, for which we had established provisions in an aggregate amount of R$5.2 million, as of December 31, 2016. See “Business—Legal and Administrative Proceedings.”

Recent Accounting Pronouncements

For information about recent accounting pronouncements that will apply to us in the near future, see note 2.31 to our audited consolidated financial statements included elsewhere in this prospectus.

Public Company Cost

Upon consummation of our initial public offering, we will become a public company, and our shares of common stock will be publicly traded on the NYSE. As a result, we will need to comply with new laws, regulations and requirements that we did not need to comply with as a private company, including provisions of the Sarbanes-Oxley Act, other applicable SEC regulations and the requirements of the NYSE. Compliance with the requirements of being a public company will require us to increase our general and administrative expenses in order to pay our employees, legal counsel and independent registered public accountants to assist us in, among other things, instituting and monitoring a more comprehensive compliance and board governance function, establishing and maintaining internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act and preparing and distributing periodic public reports in compliance with our obligations under the federal securities laws. In addition, as a public company, it will be more expensive for us to obtain directors’ and officers’ liability insurance.

 

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Jumpstart Our Business Startups Act of 2012

On April 5, 2012, the JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. We are in the process of evaluating the benefits of relying on the other reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, if, as an “emerging growth company,” we choose to rely on such exemptions we may not be required to, among other things, provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404, and these exemptions will apply until we are no longer an “emerging growth company.” See “Risk Factors—Risks Related to our Business and Industry—If we fail to establish and maintain proper and effective internal control over financial reporting, our results of operations and our ability to operate our business may be harmed.”

Quantitative and Qualitative Disclosures about Market Risk

We are exposed to the market risks described in “Risk Factors,” “Forward-Looking Statements” and elsewhere in this prospectus. We are also exposed to a variety of risks in the ordinary course of our business, including foreign currency exchange risk, interest rate risk, customer and credit risk and liquidity risk. We regularly assess each of these risks to minimize any adverse effects on our business as a result of those factors. For sensitivity analysis of our exposure to these risks, see note 18 to our audited consolidated financial statements included elsewhere in this prospectus.

Foreign Currency Exchange Risk

Our net sales are denominated in the functional currencies of the countries in which our operational subsidiaries are located. Accordingly, our receivables are generally not subject to foreign currency exchange risks.

In the ordinary course of business, our subsidiaries purchase goods from vendors in both local functional currency and foreign currencies (mainly U.S. dollars). Generally, when we purchase goods in foreign currencies, except as noted below, we enter into foreign currency forward exchange contracts in order to hedge our exposure to purchase commitments denominated in those currencies.

However, when our subsidiary in Argentina purchases certain goods from vendors in currencies other than its local functional currency, it does not enter into foreign currency forward exchange contracts given the current immateriality of our operations in this country and the financing costs involved in these types of transactions in Argentina. Consequently these purchase commitments are not hedged. As a result, we are exposed to foreign currency exchange risk to the extent there is fluctuation between the currencies in which these purchase commitments are made and the local functional currency of our subsidiary in Argentina.

Fluctuations in currency exchange rates may also generally impact our net sales and results of operations. See “Risk Factors—Risks Related to our Business and Industry—Our costs may change as a result of currency exchange rate fluctuations or inflation in the cost of merchandise manufactured and purchased abroad” and “Risk Factors—Risks Related to Doing Business in Brazil and the Rest of Latin America—We plan to continue expanding our international operations abroad. Inherent risks or developments in the international markets where we operate expose us to a number of risks, including risks beyond our control, and they could have an adverse effect on our financial condition and results of operations.”

Also, see note 18 to our audited consolidated financial statements for a sensitivity analysis of the impact of a hypothetical 10% appreciation or depreciation of foreign exchange rates to which we have exposure (mostly US$) in our income or (loss) before tax.

 

 

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Inflation and Interest Rate Risk

Brazil and countries in Latin America in general, have historically experienced high rates of inflation. Inflationary pressures persist, and actions taken in an effort to curb inflation, coupled with public speculation about possible future governmental actions, have in the past contributed to economic uncertainty in Brazil and other Latin America countries and heightened volatility in the Latin America securities market. The inflation rate in Brazil, as reflected by the IPCA index was 6.41% in 2014, 10.67% in 2015 and 6.29% in 2016. Interest rates are highly sensitive to many factors, including fiscal and monetary policies to combat inflation and Brazilian and international economic and political considerations, as well as other factors beyond our control. See “Risk Factors—Risks Related to Doing Business in Brazil and the Rest of Latin America—Inflation and efforts by the Brazilian government to combat inflation may contribute significantly to economic uncertainty in Brazil and could have an adverse effect on us and the market price of our common shares.”

We have floating interest rate indebtedness, so we are exposed to interest rate risk as a result of changes in the level of interest rates and any increase in interest rates could negatively affect our results of operations and would increase the costs associated with financing our operations.

As of December 31, 2016, substantially all of our total indebtedness consisted of floating rate debt and was principally indexed to interest rate indexes such as the CDI and the Mexican Interbank Equilibrium Interest Rate, or TIIE.

Furthermore, our exposure to interest rate risk is also applicable to our cash and cash equivalents deposited in interest-bearing accounts which are indexed to the CDI, which can affect our results of operations and cash flows.

See note 18 to our audited consolidated financial statements for a sensitivity analysis of the impact of a hypothetical 50 basis point increase or decrease on the variable interest rate indexes of our floating rate indebtedness and cash and cash equivalents for the relevant twelve month period.

Customer and Credit Risk

We regularly monitor our trade accounts receivable and consider the risk of not collecting receivables from our customers as limited given the intrinsic nature of the methods we have adopted to receive payments from most of our customers (credit card and bank direct deposits). Substantially all of our past due receivables are related to disputes we have with our third-party couriers in connection with loss of or damage to products to be delivered to our customers. Historically, we have recovered a substantial amount of these past due receivables. As of December 31, 2016, we had past due receivables amounting to approximately R$18.1 million.

Liquidity Risk

We manage liquidity risk through the daily monitoring of our cash flows, control of financial assets and maturity of our liabilities, as well as maintaining a close relationship with financial institutions. Any additional cash in our activities not spent in operating and capital expenditure activities is invested into interest-bearing accounts and we choose investments with appropriate maturity and liquidity terms based on our cash flow estimates. Our liquidity is also dependent on factoring a portion of our trade accounts receivable and extending the payment terms of our trade accounts payable in connection with our reverse factoring arrangements. See “Liquidity and Capital Resources.”

 

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BUSINESS

Overview

Our mission is to be the leading online consumer platform in Latin America. We are the leading sports and lifestyle online retailer in Latin America and one of the largest online retailers in the region, as measured by net sales. We operate in Brazil, Argentina, and Mexico and, since our launch, we have sold to more than 12.8 million customers across our sites, solidifying our position as one of the few scaled online retailers in Latin America and creating a foundation of audience, brand and capabilities on top of which we are building a digital ecosystem capable of delivering increasing and significant value to customers and partners in the future. Through our desktop and mobile websites and applications, which we refer to as our “sites,” we deliver our customers a convenient and intuitive online shopping experience across our two core brands, Netshoes and Zattini. We believe that Netshoes has become one of the most recognized brands by consumers, in Brazil and Argentina, among both online and offline sports retailers. We believe that Zattini, a site we launched in December 2014, is quickly becoming a leading online brand for fashion and beauty in Brazil in terms of consumer recognition.

We were founded in January 2000 by Marcio Kumruian and Hagop Chabab as a single physical shoe store in São Paulo, Brazil. In 2007, we closed our brick-and-mortar stores and shifted to an online business to reach more customers across Brazil. Since then, we have built on our initial success, expanding across geographies and brands. We have also selectively introduced new product categories, maintaining our core strategy of focusing on product verticals with higher margins that have short replacement cycles and are easy to ship.

Core to our success has been a relentless focus on delivering a superior customer experience across each of the countries in which we operate, including remote locations not typically served by traditional retailers. As one of the first companies in Latin America to provide online retail offerings, we have emphasized the importance of customer service, including introducing short delivery times (with same-day delivery in capital cities of each of the countries in which we operate and certain other densely populated areas in Brazil), free return shipping for the first return or exchange, one-click purchasing, secure payment options and post-sales support. We have also developed technology that personalizes the shopping experience for our customers, and our sites have advanced features including enhanced search capabilities, easy navigation, product recommendations and customized ordering. This core customer focus has driven customer loyalty, as demonstrated by our high repeat purchasing. In the year ended December 31, 2016, 74.5% of our total orders came from repeat customers.

Our sites are also optimized for mobile shopping, and to facilitate our customers’ access to our sites, we were the first Latin American eCommerce company to partner with local telecommunication service providers to offer customers with free access to the Internet from their mobile devices for such purposes. Despite Latin America’s relatively low smartphone penetration rate, in the year ended December 31, 2016, 32.2% of the total orders placed by our active customers came from mobile devices (while in Brazil, mobile commerce accounted for 11.7% of eCommerce sales in 2015).

We are also a trusted partner and the go-to channel for the most important brands in sports and lifestyle retail in Brazil, Argentina and Mexico, and are increasingly establishing similar partnerships with fashion and beauty brands. We offer over 190,000 SKUs from over 500 brands, including Nike, Adidas, Mizuno, Tommy Hilfiger, Ralph Lauren and Lacoste and work closely with our suppliers to promote and protect their brands and help manage product selection. We believe we are one of the largest distribution channels for these brands in Brazil and Latin America. We have also begun to develop our private label brands to supplement our existing supplier relationships in key categories.

Our success in the region has been dependent on our consistent ability to build a solid infrastructure network to support our operations, as well as our scalable and customized logistics capabilities. We have created a highly automated picking, packing and inventory management system, built to efficiently handle the products in which we specialize — easy-to-ship items with high margins and short replacement cycles. Today, we have three automated distribution centers in Brazil, one in Argentina and one in Mexico. We have also established innovative partnerships with

 

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over 35 local companies, across all of our operations, including Correios, the largest shipping provider in Brazil which has established shipping centers within our distribution centers to facilitate more efficient distribution. We are able to ship over one million orders a month, and on average, process the orders we receive within six hours after confirmation, achieving an on-time delivery rate of approximately 97.0% of total processed orders.

At the scale at which we operate, the combination of our customers, the brands we offer and infrastructure we have developed has resulted in powerful network effects, which we believe offer a significant competitive advantage. Our large and growing Latin America customer base has allowed us to attract and retain high quality brands, which in turn drives new and repeat customers. This has driven our growth and has allowed us to continually reinvest in and improve our product selection, technology and infrastructure while also driving significant cost efficiencies. These network effects are evident in our financial performance and scale. We also believe that these favorable network effects allow us to expand the reach of our sites to build the leading online consumer platform in Brazil and Latin America.

We have achieved the following significant milestones as of and for the year ended December 31, 2016:

 

    5.6 million active customers, an increase of 18.9% from the 4.7 million active customers we had as of December 31, 2015;

 

    10.3 million total orders on our sites, an increase of 20.8% from the 8.5 million total orders for the year ended December 31, 2015;

 

    74.5% of our total orders were invoiced to repeat customers (which are customers who have previously purchased from us), an increase from 72.9% for the year ended December 31, 2015;

 

    32.2% of our total orders were placed by customers on a mobile device, an increase from 20.2% for the year ended December 31, 2015; and

 

    In our Brazilian operations, positive cash flows from operations beginning in 2014 and positive EBITDA beginning in 2015.

Also, for the years ended December 31, 2015 and 2016, we reported:

 

    R$1,505.7 million and R$1,739.5 million in net sales, respectively, representing growth of 33.7% and 15.5% from 2014 and 2015, respectively;

 

    R$99.5 million and R$151.9 million in net loss, respectively, from R$144.4 million in net loss in 2014; and

 

    R$46.5 million and R$43.9 million in negative EBITDA, respectively, from R$100.0 million in negative EBITDA in 2014.

For information on how we define and calculate active customers, total orders, total orders placed from mobile devices and EBITDA, and for a reconciliation of our non-IFRS figures to their IFRS equivalents, see the section of this prospectus captioned “ Selected Financial and Operating DataNon IFRS Financial Measures.”

Our History

Our business has transformed substantially since 2000, when our founders Marcio Kumruian and Hagop Chabab opened a physical shoe store in São Paulo, Brazil. In 2001, while remaining focused on our brick-and-mortar store, we began selling online, targeting small businesses. In 2003, we started partnering with sports centers and gyms and established small, on-premise storefronts where customers of those sports centers or gyms could try our shoes and sporting equipment and place a customized order of those products through our website. Over the years, although our brick-and-mortar operations grew into nine vendor facilities by 2005, our experience led us to believe that eCommerce would represent a larger opportunity. In 2007, we closed our brick-

 

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and-mortar retail stores, shifted our focus to eCommerce retail and launched Netshoes.com, our online store specialized in sports and active lifestyle goods. Since then, we have expanded in the following ways:

Building Online Leadership. We invested heavily in our brand with the goal of developing the leading eCommerce sports footprint. In 2008, we began to manage the online stores of other sports brands and professional soccer clubs. In 2009, we received our first round of investments from financial investors and, with their support, grew our business to establish our market leadership and continue to improve our corporate governance and management structure.

Geographical Expansion. As we continued to grow in Brazil, we identified the opportunity to transfer our expertise across Latin America. Recognizing promising income, consumer purchasing habits and online penetration trends, we expanded our operations to Argentina and Mexico in 2011. With our leadership in Brazil, Argentina and Mexico, we now cover an estimated two-thirds of the gross domestic product, or GDP, in Latin America.

Brand and Vertical Diversification. In December 2014, leveraging the success of Netshoes and our existing infrastructure, we launched Zattini, an online store originally designed to offer fashion products to our Brazilian customers. In the short time since launching Zattini, we have served over 930,000 customers and delivered over 1.7 million orders. We have successfully introduced new categories of products over time, including beauty products to our Zattini offerings in 2016. We believe that Zattini is now the fastest growing online fashion and beauty site in Brazil, based on sales growth and for the year ended December 31, 2016, Zattini accounted for 11.5% of our online net sales in Brazil and 10.2% of our net sales on a consolidated basis. In addition, since November 2014, we began offering private label apparel across the Netshoes and Zattini platforms, and for the year ended December 31, 2016, the sales of those products accounted for 6.0% of our online net sales in Brazil and 5.4% of our net sales on a consolidated basis.

Traffic Monetization. More recently, we have begun to evaluate other ways to monetize our large customer base, and leverage our supplier relationships, technology and infrastructure. To this end, we have implemented additional products and services, such as creating a third-party marketplace, which increases the selection available to our customers, as well as launching financial services such as a co-branded credit card with a major Brazilian financial institution. We will continue to evaluate opportunities to add services to our digital ecosystem that tie consumers closer to our sites while maintaining our core customer experience. While we are still in the early stages of these initiatives, we believe that they have the potential to drive significant growth and increase customer loyalty going forward, enhancing Netshoes’ profitability.

 

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Our Competitive Strengths

We are the leading sports and lifestyle online retailer in Latin America and one of the largest online retailers in the region. Our specific regional knowledge has allowed us to compete against international eCommerce sites, and our technology has differentiated us from traditional retailers. We have achieved our leadership position as a result of the following core strengths:

High market share in a large and expanding total addressable market. We benefit from our early mover advantage in Latin American eCommerce, which has allowed us to capture what we believe is a significant market share and achieve a leadership position in a large addressable market. We have operated for over fifteen years in Brazil and approximately five years in Argentina and Mexico, which we believe provides us with deep knowledge of the local culture, customer preferences, buying trends and regional infrastructure. As our market continues to expand through increased online and mobile penetration, a growing middle class, continuous focus on active lifestyles, and an increased consumer willingness to shop online, we believe that we are and will continue to be well-positioned as a leading established player to benefit from these macro-economic trends.

Focus on attractive verticals driving high operating leverage. We believe the lifestyle verticals in which we specialize are particularly suited for distribution online due to the following factors: (1) the vast inventory selection, benefitting customers by providing them with access to varied products in one place; (2) the lightweight nature of most of the products we offer, which makes them easy to ship and drives fast delivery speeds at significant volumes; (3) the high gross margin of these retail categories; and (4) the need for consistent replacement (compared to, for example, household appliances and electronics), which drives repetitive customer buying behavior. Our focus on these verticals has resulted in over 30.0% gross margins (defined as gross profit divided by net sales), including the cost of shipping, for the last three years, which provides substantial operating leverage as we continue to invest in additional parts of our business. As a result, we have achieved positive operating cash flow in our most mature market, Brazil, on an annual basis since 2014.

Recognized and trusted brand for customers and partners. We have built a strong brand over the last 15 years as demonstrated by our significant scale, with 18.3 million registered members and 5.6 million active customers as of December 31, 2016 purchasing from the over 500 brands we offer (160 of which are available on our Zattini site, launched in December 2014). We engage with our customers both on and off our sites, and we have over 10.0 million Facebook fans. We believe we have also forged deep and trusted relationships with our partners, whose products we offer on our sites and for whom we manage branded online stores. Our presence across the three largest economies in Latin America in terms of GDP, with a customer interface and back-end infrastructure built on our cultural and geographic expertise, has provided access for many of our partners to an otherwise difficult-to-reach demographic.

A superior customer experience, resulting in strong customer loyalty. Through our eCommerce model and our expanding vertical presence, our mission is to become the leading online consumer platform in Latin America. We offer our customers a reliable and convenient online shopping experience with a wide selection of over 190,000 SKUs, visually inspiring browsing, compelling merchandise, easy product discovery, attractive prices and various shipping options. Additionally, we offer our customers the ability to customize officially licensed merchandise from leading sporting brands. We also provide our customers free return shipping for the first return or exchange and the ability to process an exchange or return directly on our platforms. As we continue to add new customers in larger monthly numbers, existing customers continue to purchase from our sites at a consistent rate. In the year ended December 31, 2016, 74.5% of our total orders came from repeat customers. As a result of our focus on customer service, we are one of the best-in-class service providers as recognized by major Brazilian consumer complaint and recommendation websites such as Reclameaqui and Elogieaki (Você S/A) and in 2015 we were awarded by Elogieaki as “one of the most acclaimed companies in Brazil.”

 

 

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Differentiated logistics and technology capabilities. We have invested in and built logistics capabilities, and innovative technology that is customized to our verticals and regions. Our highly automated picking, packing and inventory management systems have enabled us to achieve high order accuracy and delivery speed at significant volumes. On average, we are able to process the purchase orders placed by our customers within six hours after they are confirmed. Our technology is also highly scalable—we are able to process approximately 105,000 orders per day during our peak holiday season compared to an average of 35,000 orders per day in 2015. We have also assembled a team of over 290 dedicated technology professionals who have built a sophisticated platform that enables transactions across three countries, multiple languages and devices.

Visionary founder and management team. We have built a culture of data-driven decision making, operational discipline and an unwavering focus on customer service. Our culture flows from our co-founder and CEO, Marcio Kumruian, who brings substantial industry expertise and led our shift to an online retailer, and from our experience as an early mover in the technology industry in the region. We believe our management team is well positioned to execute our long term growth strategy. This corporate culture has contributed to our ability to win multiple awards, including “One of the Ten Most Innovative Businesses in Brazil” from Forbes Magazine in June 2015, and allows us to attract and retain best-in-class talent to our offices across the region.

Our Strategy

Our goal is to continue differentiating ourselves as the leading online consumer platform in Latin America. As we have done in the past, we plan to both grow our core business and expand our operations into attractive opportunities while maintaining our relentless focus on delivering a superior consumer experience. As we continue to scale, we are focused on growing in an efficient way that we expect will result in increased profitability for our business, including by launching new initiatives that are specifically focused on delivering increased revenue at higher margins. Specifically, we plan to:

Acquire new customers through increased traffic and conversion. We believe that there is significant room to further grow the customer base for our sites. We are well-positioned to benefit both from the expected industry shift to online retail, and from continuing to refine our marketing efforts to draw new consumers to our sites and then convert those consumers to active customers. We continually test new marketing channels and campaigns, measuring the returns on these campaigns, including building higher brand recognition for Zattini, which we launched more recently. We continually A/B test methods of customer acquisition and conversion by deploying new versions of the site several times a day.

Increase the monetization of our existing traffic through enhancing customer loyalty. Collectively, as of December 31, 2016, our sites had 18.3 million registered members, of which 5.6 million were active customers. We believe that we can continue to drive increased monetization of our traffic, growing our sales through more frequent repeat purchasing and higher customer retention. We are consistently investing in data collection and analysis to more effectively market products and personalize our sites for each individual customer. We have also introduced and will continue to offer new products and services that tie our customers more closely to our sites. For example, we launched NCard — our co-branded credit card with Banco Itaú S.A — in April 2016, which offers exclusive benefits to users and in turn allows us to learn more about our customers’ spending habits as a result of their additional engagement with our sites. While still in its early stages, we have found that NCard users purchase from our sites at much more frequent rates than our average customers do.

Introduce new products in attractive verticals. We have found that by introducing new products in verticals with short replacement cycles and that are easy to ship, we have been able to both attract new customers to our sites and increase purchases by existing customers, thereby continuously expanding our addressable market. For example, for the year ended December 31, 2016, approximately 55.6% of Zattini customers in Brazil were originally Netshoes customers and about 44.4% were new customers. We have also successfully launched new product categories within each of our sites, and will continue to do so in a targeted way that grows our lifestyle brand while preserving higher margins on our sales. For example, we also will continue to invest in private label brands in verticals that have high customer price elasticity and margin potential, which help expand our profitability. For the year ended December 31, 2016, our six private label brands accounted for 6.0% of our online net sales in Brazil and 5.4% of our net sales on a consolidated basis, and ranked third on our platform on a combined basis.

 

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Online Marketplace. In February 2016, we launched our online third-party marketplace across all of our sites. To date, we have attracted 283 qualified third-party B2C vendors to our sites. While in its early stages, we believe that the marketplace offers a significant opportunity to introduce increased product variety, particularly in less popular categories with lower demand, and scale new categories more quickly. Using a marketplace model, we are also able to take advantage of our existing infrastructure and cost base to generate incremental high-margin returns while not having to hold inventories (or record associated costs) and positively impacting our working capital requirements.

Expansion of our business into a consumer and services platform. We believe we have the opportunity to take advantage of the scale of our core business and our existing and large customer base, and leverage our technology and infrastructure to build a digital ecosystem capable of delivering increasing and significant value to customers and partners. We intend to build this platform on the foundation as a leading sports and lifestyle eCommerce destination. This platform includes our recently launched NCard, a consumer finance solution, and B2B logistics solutions. In addition, in November 2016, we started offering a mobile application relating to activity tracking, which closely aligns with our sports and lifestyle brand. Our expansion into new verticals such as fashion and beauty and the recent launch of our online marketplace is evidence of our ability to further develop into adjacent online businesses, which we believe will generate long-term growth and value to our consumers.

Replicate the success of our Brazil business in Argentina and Mexico. We benefit from the ability to transfer the learnings and successes of our more mature Brazil operations, which have already achieved positive operating cash flow, to our emerging Argentina and Mexico businesses. Beginning in 2011, we launched our first two international sites, with a small team based in Argentina and another in Mexico, and since then we have achieved significant growth. We have distribution centers strategically located near each of their respective capital cities, Buenos Aires and Mexico City. We also have the ability to leverage our technology infrastructure in Brazil to grow our Argentina and Mexico businesses. For the years ended December 31, 2015 and 2016, our non-Brazil, Latin America operations accounted for 13.3% and 10.6% of our total net sales, respectively. We believe that there is significant growth and profitability remaining in these businesses as they continue to scale and as we introduce brands and products such as Zattini to those markets.

Our Industry

We believe eCommerce is becoming the universal solution for consumers to access products, anytime, anywhere.

In Latin America in particular, eCommerce presents a significant opportunity, with a number of factors supporting its expansion: increasing online penetration and mobile adoption, the emergence of new payment methods, and better network and logistics infrastructure, amongst others.

Additionally, despite recent macroeconomic volatility in certain countries such as Brazil and Argentina, eCommerce in Latin America has grown at an attractive CAGR of 27.9% from 2012 to 2015, according to eMarketer. In the mid- to long-term, we expect strong macro tailwinds due to an expanding middle class, increased disposable income, and reduced unemployment and interest rates, among others.

 

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Overview of our market and the opportunity

Large and growing online audience in Latin America and Brazil

 

    Latin America has the third largest online audience in the world. Internet penetration is rapidly growing in Latin America with 325 million Internet users in 2015, representing 53.1% penetration in the region, according to eMarketer. The number of Internet users in Latin America grew at an 11.5% CAGR from 2010 to 2015, almost four times the growth in the United States at 3.1%. Additionally, network infrastructure in Latin America continues to improve, driving higher levels of Internet penetration which is expected to reach 61.0% by 2019.

 

    Brazil alone has the fourth largest online audience in the world. In 2015, Brazil had 114 million Internet users. According to eMarketer, the portion of Brazil’s population that is connected to the Internet is expected to grow at a 3.1% CAGR between 2015 and 2019, compared to 1.6% for the United States.

Our market verticals, in particular, represent a large opportunity, driven by an increased use of technology

 

    Sports, fashion and beauty represent a significant opportunity in Latin America. We operate in the sports, fashion and beauty categories, which represent a significant opportunity in the countries where we are present. For instance, in Brazil, our largest operation, these categories represented 28% of the country’s total online sales in 2015, which reached US$3.8 billion, according to e-Bit and eMarketer. These categories reached US$8.3 billion in online sales in Latin America in 2015.

 

    Online retail penetration is low, but accelerating. With only 2.2% share of the total retail market in 2015, eCommerce in Brazil has significant potential vis-à-vis developed economies such as the United States, at a 7.3% market share, according to eMarketer. Broader Latin America offers higher potential given an even lower eCommerce market share as a percentage of the total retail market, at 1.6% during the same year (representing approximately US$30 billion against a total retail market of US$1,828 billion). Total eCommerce in Latin America is expected to reach US$64.4 billion by 2019, representing a 21.2% CAGR since 2015. In Brazil, Argentina and Mexico in particular, online retail penetration (as a percentage of total retail sales) is expected to reach 3.3%, 3.2% and 2.2%, respectively, in 2019. Also, we believe we are well-positioned to take advantage of the popularity of the verticals we sell. In 2016, sports, fashion and beauty products, together with clothing and shoes, were among the most popular online searches for retail verticals in Brazil.

 

    New technology-enabled business models empowering online consumption. We believe the continued evolution of both web and mobile technology is enabling the emergence of new business models that better address customer needs. These new business models are creating new and innovative ways to interact more closely with consumers, providing them with access to a larger assortment of goods, and higher levels of service and convenience that were previously not achievable. We believe that consumers now have access to more brands and more retail channels than ever before, and brands are in turn increasingly using online retail channels to gain access to a broader set of consumers.

Mobile becoming more prevalent and rapidly gaining share in eCommerce

 

    Mobile adoption is high and rapidly growing. Mobile devices have achieved rapid adoption in Latin America, with rates of 63.8% in Brazil and 65.0% in Latin America as a whole for the year ended 2015, according to eMarketer. During 2015, smartphone users represented, on average, 41.6% of the population using mobile devices in Brazil, and 40.7% in Latin America. According to BMI Research, as 3G/4G and network infrastructure continues to improve, population coverage in Latin America is expected to reach 73.5% by 2020, increasing from 48.7% in 2015, driving higher levels of smartphone penetration.

 

   

Mobile commerce is growing and gaining share. The growth and proliferation of smartphones and tablets has made mobile commerce one of the fastest growing retail channels in Brazil and all of Latin America. Based on data from eMarketer, in Brazil, mobile commerce accounted for 11.7% of

 

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eCommerce sales in 2015, increasing from 1.9% in 2012, but still low compared to 25.6% in the United States in 2015. Other major economies, such as Argentina and Mexico, provide further upside for mobile commerce, as mobile commerce accounted for approximately 10.1% and 15.2% of eCommerce sales in 2015, respectively, according to eMarketer.

Greater focus on sports, apparel, accessories, footwear, fashion and beauty, which are the most attractive categories in online retail

 

    Increasing focus on active lifestyles and sports, resulting in a very attractive business opportunity. We believe that there has been an increased focus on education and health in Latin America, which is translating into more active lifestyles and participation in sports. While soccer remains the most popular sport in Latin America, other sports including running, volleyball, mixed martial arts, basketball, tennis and motor sports have become increasingly popular. We believe that the Olympic Games that took place in Rio de Janeiro, Brazil in the summer of 2016 has further increased the exposure and interest in sports across Latin America. Overall, we believe that sports are a very attractive category to operate in.

 

    Sports, fashion, beauty and footwear are among the retail categories with the highest gross margins in the retail sector. Sporting goods, clothing, beauty and footwear retailers have some of the highest gross margins among retail businesses in the United States, with 43.3% gross margin on average compared to 34.1% gross margin for household appliances and 20.0% for electronics, a trend which we believe also applies to Latin America.

 

    Short replacement cycles. We believe that these retail categories are highly attractive due to their relatively short replacement cycles compared to other product categories. For instance, in the United States, according to Claims Pages, sneakers and clothes have on average 1 and 4 years of useful life, respectively, compared to 15 years for houseware and electronics. As a result, there are opportunities for recurring purchases of these goods. In addition, by having shorter replacement cycles, these product categories have higher inventory turnover, which in turn leads to lower inventory levels and capital requirements.

Dynamics in Latin America eCommerce

Unique dynamics driving eCommerce adoption

 

    Low but growing penetration of credit cards and evolution of online payment methods. According to the Brazilian Central Bank and Statista, as of 2015, personal credit card penetration in Brazil reached 79.5% compared to 131.1% in the United States. In addition, other payment alternatives have emerged in Brazil as well as in broader Latin America, such as Pagoseguro, PayPal and MercadoPago, among other alternatives. We believe the emergence of these payment alternatives, along with the increasing penetration of credit cards, is driving the adoption of online payments and enabling more consumers to transact online securely.

 

    Prevalence of installment payments as widely preferred method in Brazil. According to e-Bit, over 60% of eCommerce payments in Brazil were made with extended payment terms during 2015. As a result, the ability to manage net working capital dynamics through the asymmetric payment cycle is an important local expertise needed to operate in the Brazilian market.

 

    Increasing trust and confidence in online retailers. In the past, online retailing in Latin America suffered from consumer lack of confidence due to a lack of secure payment options and low visibility in the delivery of products, among other factors. However, we believe that the emergence of more secure online payment methods, coupled with the higher reliability of mail networks for delivery, is making consumers more confident in purchasing through online retailers, particularly for small-volume goods.

 

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    eCommerce as a unique solution to a geographically disperse universe of customers. We believe eCommerce is particularly well suited to Latin America and Brazil. With expanding and geographically dispersed populations, brick-and-mortar retailers have difficulties in serving a large portion of consumers in Latin America. Brick-and-mortar retailers tend to concentrate in specific cities or regions, leaving large percentages of the population without convenient access to their products. For this reason, we believe that eCommerce provides a unique solution to consumers who are looking to access a variety of goods from various brands, irrespective of their location.

Our Competition

eCommerce in Latin America includes a number of local players and a few global companies focused on a wide variety of categories. Based on management’s experience in, and knowledge of, the industry, we do not believe we have a relevant direct competitor in the eCommerce sports category in the region, where we are the leader in Brazil, and while we face competition in our fashion and beauty categories, in just one year of operation we believe we have become a clear contender for the market leader in Brazil. Our current or potential competitors include the following:

 

    Brick-and-mortar stores: We face competition from brick-and-mortar retailers specialized in sporting goods, fashion and beauty and general brick-and-mortar retailers, some of which currently also sell, or in the future may sell, their products online. Based on management’s experience in, and knowledge of, the industry, we believe that most existing brick and mortar retail players in Latin America have limited eCommerce presence and are often focused on specific categories which, in general, are not core to us; such as electronics and household appliances. We believe that most retailers’ constraint to physical locations results in limited product offerings and restricts their operations to narrower geographies. In summary, we believe, based on management’s experience in, and knowledge of, the industry, that the nature of the eCommerce platforms developed by most brick-and-mortar stores is more of a complementary service rather than a priority for their business. Our platform, on the other hand, provides a unique solution to customers and focuses on more attractive product categories with a team of professionals solely dedicated to delivering a best-in-class customer service; and

 

    Pure-play eCommerce players: We face competition from (a) other B2C eCommerce retailers; (b) retailers and other sellers that conduct commerce through online marketplaces; and (c) a number of indirect competitors, including Internet portals and Internet search engines that are involved in online commerce, either directly or in collaboration with other retailers. We believe that, based on management’s experience in, and knowledge of, the industry, pure-play sports eCommerce players are fragmented within the region with no company having achieved scale other than us. Moreover, no consolidation strategy has been deployed by any local or global player.

We believe our 19.1% growth in consolidated net sales for the year ended December 31, 2016 was above the average of retail industries in Brazil. According to Euromonitor International, in 2016 the total retail market in Brazil grew by 4.4%, the internet retail market in Brazil grew by 8.0% and the market for pure play internet retailers in Brazil grew by 8.3%.

Our Customers

With 5.6 million active customers as of December 31, 2016, a highly recognized consumer brand and a large selection of verticals and products, we attract a highly diversified customer base as measured across multiple attributes: gender, age and income. In particular, the launch of Zattini in December 2014, with new categories such as fashion and beauty, introduced our sites to a larger number of women and, for the year ended December 31, 2016, women represented 39.1% of our customer base (versus 36.7% in 2015 and 32.0% in 2014). The launch of Zattini has also helped create a cycle where Netshoes customers are expanding into Zattini and Zattini is bringing a new customer base onto the Netshoes platform. For example, for the year ended December 31, 2016, approximately 55.6% of Zattini customers in Brazil were originally Netshoes customers.

 

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Our customer base is also diversified in terms of age, income and geographic dispersion. As of December 31, 2016, our customer base was comprised of 27.3% customers under 25 years of age, 36.2% between 26 and 35 years, 22.5% between 36 and 45 years and 14.1% over 45 years of age, showing no significant concentration within any specific age group. In addition, our customer base spans across all levels of income, from low- (54%) to middle- (33%) and high-end customers (13%). Our customers are distributed nationwide in the countries where we operate and our solid infrastructure network allows us to reach customers in all zip codes of Brazil, Argentina and Mexico.

In order to improve traffic, attract more customers to our sites and increase conversion rates, we actively use data analytics and other technology tools. The insights collected from our customers’ engagement with our sites and marketing are used to improve customer experience, enhance conversion, and increase repeat purchases by further personalizing marketing and communication campaigns. Given our practice to analyze consumer behavior and engagement with our sites (including browsing and purchasing activities), we believe we are in a better position than brick-and-mortar stores to predict and react to any changes in consumer demand and shopping patterns and to recommend to our customers specific products that might be of interest to them based on their behavior.

Our Partner Suppliers

We are a trusted partner for the most important brands in the sports and lifestyle retail industry in Latin America, with a network of partner suppliers spanning over 500 brands, including Nike, Adidas, Mizuno, Tommy Hilfiger, Ralph Lauren and Lacoste. We are the go-to-channel for global sports brands to reach customers in Brazil, Argentina and Mexico, and we are increasingly establishing similar partnerships with fashion and beauty brands.

Different from many of our competitors whose operations rely on a smaller number of suppliers, our diversified network of partner suppliers allows us to offer our customers a comprehensive product portfolio while reducing operational risk and dependency on specific suppliers. For the year ended December 31, 2016, our top 10 partner suppliers represented 47.8% of our net sales, as compared to 53.4% for the year ended December 31, 2015. As of December 31, 2016, we had expanded our sporting and lifestyle product offerings to more than 190,000 SKUs compared to approximately 111,000 SKUs as of December 31, 2014, reflecting our diversified product offerings achieved through broadening our network of partner suppliers.

In order to continuously improve our relationship with partner suppliers, further developing brand recognition and streamlining processes, we have a fully dedicated team responsible for the constant management and evaluation of our partner suppliers. The results of these measurements are periodically shared with our partner suppliers in an effort to promote higher efficiency and profitability.

Our Private Labels

In November 2014, we began offering private label sports brands on the Netshoes site, and in 2016, we started to offer private label brands on our fashion and beauty site, Zattini. Our private label brands span product categories in which we believe we can compete to provide online shoppers lower cost, high quality options. Our private label products are higher margin items and our six brands cover the majority of the categories we currently offer. Private label is a key part of our future strategy and we plan to continue investing in the growth of this aspect of our business. For the year ended December 31, 2016, the sales of private label products accounted for 6.0% of the net sales of our online operations in Brazil and for 5.4% of our net sales on a consolidated basis.

Gonew, our first private label brand was created in September 2014 and today is our third largest brand in terms of net sales, currently selling over 1,700 SKUs within the sports apparel, equipment and footwear categories. We also have private labels such as “Mood,” “Burn” and “Treebo” covering apparel, equipment and footwear for Surfing & Skating activities and other casual shoes and clothes. In June 2016 we launched a new private label brand called “Zeep!”, designed to offer shoes and clothes for kids. We outsource the production of 100% of our private label products from qualified national and international third-party suppliers.

 

 

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Our Sites

We currently operate under two primary brands: Netshoes and Zattini. Although we connect the brands through cross promotional links and the user interface of our sites, each brand has a unique identity and product set to cater to specific consumer tastes, styles and purchasing goals. Across our brands and sites, we offer the same personalized shopping and rich product selection for which we are known, focusing on delivering an intuitive online experience for all consumers regardless of the brand with which they engage.

Netshoes: Netshoes was our first to market brand and is the leading sporting goods retailer in the region. Our website offers consumers a superior and personalized shopping experience for sporting and active lifestyle products and features a user-friendly and intuitive interface designed to allow users to conveniently search for, find, compare and purchase sporting and active lifestyle goods. We are the one stop shop for consumers across sporting goods and active lifestyle products and we operate this business through our websites www.netshoes.com.br, www.netshoes.com.mx and www.netshoes.com.ar.

Currently we offer our customers a wide selection of athletic shoes, jerseys, apparel, accessories and sporting equipment from leading international and local brands, including Nike, Adidas, Puma, Mizuno, Asics, Umbro, Olympikus, Fila, Wilson, Topper, Oakley, Timberland and Reebok. In addition, we have licenses to sell a number of exclusive products from brands such as Kappa, Pretorian, Disney, Camaro and Corvette and private label offerings. We also offer personalized products, such as jerseys, footwear and bicycles, where customers can print or engrave words or images on the item. We were the first large scale Brazilian retailer to offer personalized products from Nike, Puma and Adidas online.

Zattini: Launched in December 2014, Zattini is the fastest growing fashion and beauty site in Brazil. Our website offers consumers a superior and personalized shopping experience for fashion and beauty products such as shoes, clothes, accessories, fragrances and hair care products, and features a user-friendly and intuitive interface similar to our Netshoes sites. We offer over 160 leading international and local brands (including, among others, Calvin Klein, Revlon, Shiseido, Maybelline, L’Oreal, Joico, Dolce & Gabbana and Carolina Herrera) and, to capitalize on consumer openness to private label in apparel, in February 2016, we acquired Shoestock, a strong fashion brand in Brazil. Zattini is currently only in Brazil, and we operate this business through our websites www.zattini.com and www.zattini.com.br. As of December 31, 2016, our Zattini platform had over 80,000 SKUs offered to our customers.

The Features of Our Sites

Our sites consist of desktop websites and our mobile websites and applications. We designed our sites to be customer friendly, visually appealing, stable, secure and responsive to customers’ preferences. We manage our desktop sites, mobile websites and mobile applications differently, each optimized for the screens they fit and the way our customers use them.

 

 

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We are focused on providing consumers the most user-friendly and efficient way to find products that meet their needs and preferences. The central part of our home page is the search tool, where consumers can type in product keywords or brands to search for specific products in our merchandise database. Relevant listings, pictures and custom editorial content are also placed throughout the site.

 

LOGO

Mobile access is a key component of our long-term strategy and we have made significant investments in our mobile functionality. Our mobile website and applications were custom built for our unique needs and are powered by the same core platform that powers our eCommerce sites. mCommerce has grown on our sites as a result of the continued success of our applications, increasing mobile penetration and the launch of programs such as our partnership with local telecommunication service providers to offer free access to the Internet from mobile devices when accessing our sites.

 

LOGO

Browsing: Our sites provide users with detailed product information, including a description, rich media images, typically with multiple pictures from different angles, size and color availabilities, sizing charts and customer reviews of products. In addition, for our Netshoes sites, our customers have access to the following features that were designed to optimize their browsing experience: (a) Shop by Sport, (b) Shop by Brand, (c) Special Stores, which allows users to browse certain specialized product categories, such as UFC, Nike Soccer, Nike Basketball, Nike Running, Adidas Soccer and Adidas Original, among others and (d) Super Discount, which allows users to find products with promotions and discounts.

For Zattini, our customers have access to the following features that were designed to optimize their browsing experience: (a) Shop by Gender, (b) Shop by Brand, (c) Beauty Products and (d) Super Discount.

 

 

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Our sites use algorithms across many dimensions, including visits, product margin, revenue and available inventory, to optimize product sorting and search results to rank relevance and test the optimal results for specific customers.

Site Personalization: We offer a personalized eCommerce experience through product recommendations by enabling our users to build online shopper profiles reflecting their preferences and interests and by tracking users’ browsing and purchase history. Each of our customers has a user name and password, which allows him or her to track order status and previous purchases. Prior to logging into their accounts, our system can typically customize the initial landing page for our customers by reviewing their browsing records. In addition, we analyze each customer’s purchase patterns and send personalized e-mails to our registered members periodically. Our e-mails update our customers on new product arrivals, tailored promotions and other related items that might be of interest based on their preferences.

Product Reviews: We now have a solid customer review database, which helps customers find the right product for their needs and our merchandising team in its buying decisions. Our customers are generally engaged in writing reviews on our website, and for the year ended December 31, 2016, we registered more than 400,000 new reviews of products on our sites.

Our Additional Sources of Revenues

A portion of our net sales is generated from sources other than product sales effected by us directly from our Netshoes and Zattini sites. These sources include our services to customers through our marketplace, NCard and lifestyle applications, as well as products sold through partner-hosted sites and our B2B operations. These sources allow us to continue to reach a broader consumer base, help us build our brand, improve customer loyalty to the platform and drive incremental net sales.

Online Marketplace: Our marketplace enables customers to purchase products from a multitude of third-party qualified B2C vendors through a seamless purchase experience on our sites. In February 2016, we launched a marketplace service to supplement our direct sales site. Our marketplace collects product photos and merchandise from approved sellers and showcases them on our platform to supplement products we have in inventory. We have focused the marketplace on helping extend our product offering into merchandise for which it is not economical to hold inventory. For example, when a customer searches for a baseball bat and gloves, we can show products from an approved seller, and we leverage our platform for checkout and reviews.

NCard: In partnership with Banco Itaú S.A., a major Brazilian financial institution, we offer consumers an International MasterCard on par with credit cards readily available in Brazil. NCards also provide special loyalty rewards and benefits for our customers, which we believe improve customer loyalty. Customers using their NCards receive 10% off throughout most of our sites, personalized birthday gifts and free customization on products throughout our sites. Although the NCard is in the early stages, we have found that NCard holders visit our sites more often than our average customer, driving their annual purchase value higher.

Partner-Branded Stores: In addition to offering merchandise through our sites, we offer and deliver merchandise to our customers through a number of partner-branded store sites managed by us. These include the online Ultimate Fighting Championship, or UFC, store for Brazil and the sub-home of the National Basketball Association, or NBA, within our site in Brazil; the Brazilian online stores of multiple global and local brands including Puma and Chivas, and the online stores of major Brazilian soccer clubs including Corinthians, São Paulo, Palmeiras, Santos, Internacional, Vasco da Gama, Cruzeiro and Sport. As of December 31, 2016, we managed 20 partner-branded stores.

B2B Operations: As a result of our solid infrastructure network and logistics capabilities, we have also begun to engage in B2B operations. Since January 2016, we have the exclusive license to sell and distribute Midway Labs USA nutrition supplements and vitamins in Brazil. In the year ended December 31, 2016, we sold and distributed such products to over 105 drugstores and supermarkets in Brazil.

 

 

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Lifestyle Applications: In November 2016, we started offering a lifestyle application, Sou run, which targets to Latin American consumers and is connected to our Netshoes platform. It offers three types of subscription options that provides guidance to users’ on developing running programs. With input from dedicated health professionals, it offers customized training programs for different goals, from losing weight to running half marathons.

We continuously analyze the possibility of developing new adjacent businesses, which we believe could generate long-term growth and value to our consumers.

Our Customer Service

As a result of our efforts to deliver a superior customer experience, we have been widely recognized by our customers and the industry. We have been awarded several prizes, including: the E-award Prize – Best Customer Service (Braspag, 2015 and 2016) and, Modern Consumer Award in Customer Excellence – Company that Most Respects its Customers (Grupo Padrão, 2013 and 2015).

On a monthly basis, we monitor our clients’ shopping experience by measuring Net Promoter Score, or NPS, a widely known survey methodology used to capture customers’ overall satisfaction. For the year ended December 31, 2016, on a survey made by IBOPE DTM, a well-known marketing research company in Brazil, Netshoes was ranked first in NPS among the 34 most well-known e-commerce retailers operating in Brazil, with a 71.7 score (against an average of 54.0). High NPS scores are recognized by the industry as having strong correlation with higher client repurchase rates and positive referrals.

A key element of our sales strategy is our ability to provide our users with a high level of customer service and support. We believe our rapid growth has been driven in part by our excellence in customer service. By helping consumers navigate our sites, answering their questions and completing their orders, our team helps us to continue building trust with consumers, enhance our reputation and drive sales.

We provide our customers with an array of online self-service features including the ability to track orders and shipment status, review estimated delivery dates, cancel unshipped items, change delivery information and process exchanges or returns. We also respond to 99% of emails sent to our customer service desk within 24 hours, and we are continuing to reduce our contact per order as we implement electronic systems that answer the most frequent questions in our region – delivery timing and order completion.

Our customers can contact our customer service representatives through real-time online chat, our customer service e-mail address or our customer service hotline. As of December 31, 2016, our customer service department had more than 580 in-house employees empowered to keep our customers happy and satisfied. Our decision to have all of our customer service professionals in-house was driven by our relentless focus on customer experience.

We maintain service quality by placing emphasis on selecting personnel carefully and regularly monitoring the performance of our employees. Our employees are trained to have in-depth product knowledge, professional service attitudes and communication skills to best address customer needs and inquiries. Each of our new customer service employees is required to complete a rigorous training program for more than 12 days followed by working alongside a senior customer service professional for one month before having their first direct contact with a customer.

 

 

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In addition, while we offer our customers the ability to return items, we benefit from low return rates as compared to similar retailers in the United States due to cultural norms and more limited credit availability.

Sales & Marketing

Our sales and marketing efforts are focused on driving organic traffic to our sites and increasing the monetization of our existing traffic. Given that Netshoes is one of the most recognizable brands in the region, we have focused on performance marketing for this site to drive measurable customer acquisition. For Zattini, given its early stage, we continue to focus on growing brand awareness as well as performance marketing. We aim to maintain the right balance between marketing across brand-building channels and performance-based customer acquisition strategies.

Our Sales & Marketing is integrated with our business strategy and supported by our technology development efforts. We evaluate each of our marketing initiatives for its return on investment and performance versus our business objectives. Although some of the visitors to our sites make purchases when they first register, we have noticed that visitors may register to receive our emails and “push” communications months before they make their first purchase. We consider 5.5 million (or approximately one-third) of our users to be Prospects (i.e., registered users who have not made purchases yet), and we believe an opportunity exists to convert them to customers. A portion of our marketing spend is meant to target these visitors for whom the conversion to purchasing comes after we have built a substantial relationship with them through regular contact and outreach over time. We also benefit from the breadth of our platform as purchasers often first engage on either Netshoes or Zattini and then move over to the other site. This means we can acquire a member once for either site and benefit continuously across both sites.

Due to our market leadership in the region, we have pioneered many new regional marketing programs with third parties, such as Facebook, Google and Criteo, which allow us to deepen our knowledge about online consumer behavior and, consequently, results in a better shopping experience for our customers. We constantly share data analytics about our respective experiences with digital consumers in order to take advantage of new latent opportunities related to our markets.

We acquire new email-registered members through a diverse set of paid and unpaid marketing channels. Our paid advertising efforts include search engine marketing, display advertising, paid social media, affiliate channels and specific offline marketing channels (such as television ads). Our non-paid advertising efforts include search engine optimization, non-paid social media, mobile “Push” notifications, customer referrals and email. Upon acquiring a customer or a potential customer’s email address, we focus on how to increase their engagement with our platform and drive consistent repeat purchases. This effort to increase engagement and repeat purchasing is primarily accomplished by providing consistent customer service and email marketing efforts. We consistently track our member base across their current activity status—Prospect (as defined above), New Purchaser (customers whose first online purchases with us were in the preceding month prior to the relevant dates), Active (customers who made purchases online with us during the preceding twelve months prior to the relevant dates), Inactive (customers who made purchases online with us between thirteen and twenty four months prior to the relevant date the relevant dates) and Churn (customers who have not made purchases online with us for more than twenty four months prior to the relevant dates)—and we focus on engaging or reengaging each member depending on their current status.

 

 

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Our Technology

We are proud of our technology leadership in Brazil and Latin America and were awarded the Sales Innovator of the Year Award in 2016 by eCommerce Brasil. As one of the first online retailers in the region, we have adopted a technology-forward and data-driven approach to all aspects of our business.

We use our technology platform to improve the experience of our customers, increase the purchase frequency and average order size placed by our customers and optimize the efficiency of our business operations. We have successfully built an innovative technology culture that is unique in our geography and enables us to attract and retain some of the best technological minds in Latin America. We employ over 290 dedicated technology professionals and our research and development is centralized in São Paulo.

We have organized our technology team into 15 small, nimble and autonomous squads that tackle problems across each of our sites. Our squads are aligned with business goals, such as improving conversion and revenue per visit. Our technology team adopts a continuous improvement, high-frequency testing approach to our business, aimed at improving both traffic and conversion rates. Our site updates several times a day with changing imagery, product descriptions and inventory, based on updated revenue and margin targets. These constant site refreshes also allow our technology professionals to A/B test multiple site features over the course of each day.

Our platform is engineered to provide a personalized experience to our customers. We collect insights from our customers’ interactions through our algorithms and through traditional information retrieval techniques, such as cookies. We then use these insights to customize our sites in real-time for individual customers, with product suggestions and category highlights. These insights also form the basis of our enhanced conversion strategies as we continue to target a customer between 0 – 15 days after they view an item. We use email, social media marketing and retargeting campaigns to remind customers of their searches, items left in carts and items browsed.

We strive to keep customers engaged wherever they are, by providing the functionality of our website in iOS and Android mobile apps. Our mobile apps include search and discovery, personalization and social shopping features similar to those that customers enjoy on our desktop site. Our mobile apps had been downloaded approximately 7.0 million times prior to December 31, 2016, and represented, on average, 19.2% of mobile traffic in the year ended December 31, 2016.

In addition, we are also capable of managing significantly higher volumes of site traffic during peak periods, such as those generally experienced during the Black November period. We routinely test and expand the capacity of our servers so we are prepared to provide our customers with uninterrupted access to our sites during periods with high levels of user traffic. We also have in place two redundant data centers and back-up systems located in two different cities designed to ensure the uninterrupted operation of our information technology systems and sites.

 

 

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We believe we can continue to scale our technology to accommodate significantly higher volumes of site traffic, customers, orders and the overall growth in our business. We have built a technology stack with a proven record of an ability to scale.

Security and Privacy Policy

We are committed to operating a secure online business. We use various security methods in an effort to protect the integrity of our networks and the confidential data collected and stored on our servers. For example, we use hierarchical levels of firewall technology to protect access to our networks and to our servers and databases on which we store confidential data. We have developed and use internal policies and procedures to protect the personal information of our customers.

We believe that issues relating to privacy and use of personal information relating to Internet users are becoming increasingly important as the Internet and its commercial use continue to grow. We have adopted what we believe is a detailed privacy policy that complies with local legal requirements and outlines the information that we collect concerning our users and how we use it, and the extent to which other registered Netshoes and Zattini users may have access to this information. Users must acknowledge and expressly agree to this policy when registering with our sites. For more information, see “Risk Factors—Risks Related to our Business and Industry—Unauthorized disclosure of sensitive or confidential customer information or our failure or the perception by our customers that we failed to comply with privacy laws or properly address privacy concerns could harm our business and standing with our customers.”

Although we send marketing communications to our users periodically, we use our best efforts to ensure that they respect users’ notification preferences. When users register with us, they can opt out of receiving marketing e-mails from us. They can modify their notification preferences at any time in the “My Account” section of our sites.

We do not sell or rent any personally identifiable information about our users to any third party. However, for our marketplace operations, we do disclose information to merchants and purchasers so they can complete the transaction (respective names and addresses of purchasers, among other relevant information). We only use information about our users for internal purposes in order to improve marketing and promotional efforts and to improve our content, product offerings and site layout. We may also disclose information about our users in response to legal requirements. All information is stored on our servers located in Brazil.

Our Facilities, Logistics and Operations

Fundamental to our success is our custom-built logistics and operations infrastructure. We were recently selected for the Best Logistics award by e-Commerce Brasil, and we believe that we are market leaders in developing a proprietary infrastructure that supports our specific product verticals and regions. We manage all of the key components of our supply chain, including fulfillment and customer service. We monitor each step of our order fulfillment process from the time a product is inspected and stocked, to when the product is delivered to a customer, which we believe enables us to maintain a high level of shipping accuracy and timely delivery.

 

 

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We currently lease all properties for our operations in Brazil and Argentina and our executive office in Mexico. Our corporate headquarters are located in São Paulo, Brazil. We lease three distribution centers in Brazil, one of which is located in the State of São Paulo (Barueri), one in the State of Minas Gerais (Extrema) and one in the State of Pernambuco (Jaboatão dos Guararapes). We also lease one physical store location for Shoestock in São Paulo, Brazil. Our operations in Argentina and Mexico each have one executive office and one distribution center. We have entered into a logistics services agreement with Onelogistic, S.A. de C.V., or Onelogistic, through which Onelogistic provides us with fulfillment services in Mexico. We believe that our properties are generally suitable to meet our needs for the foreseeable future, and we will continue to seek additional space as needed to pursue our growth strategy.

The following table sets forth a summary of our distribution centers as of December 31, 2016:

 

Location

   Square
meters
     Storage Capacity
(m²)
   Agreement
Expiration Date

Barueri (State of São Paulo, Brazil)

     19,143      45,843    May 31, 2019

Extrema (State of Minas Gerais, Brazil)

     28,656      27,850    October 22, 2020

Jaboatão dos Guararapes (State of Pernambuco, Brazil)

     15,321      23,915    January 31, 2018

Buenos Aires (Argentina)

     6,470      16,800    April 1, 2017

Mexico City (Mexico)(1)

     3,250      11,480    January 1, 2018(2)

 

(1) Operated and leased by our third-party service provider Onelogistic.

 

(2) Expiration date of our logistics services agreement with Onelogistic.

In Brazil, we have three distribution centers with a total storage capacity of over 97,000 square meters across all floors and a high level of automation. Our distribution centers located in Brazil have the capacity to handle over 7 million items at peak capacity and are able to ship products across all 26 Brazilian states and the Federal District of Brazil. Our operations in Argentina and Mexico have the capacity to handle over 700,000 items at one time and to distribute to customers in all regions of each country. Products are delivered from our suppliers to our distribution centers for quality inspection before being shipped out to customers.

In Brazil, we have a nationwide delivery network consisting of almost 20 third-party courier companies and were the first retail company to develop an on-site partnership with Brazil’s national post office, Correios, which expedites the delivery of our products. We leverage our large scale of operations and reputation to obtain favorable contractual terms with the courier companies. We monitor and review the courier companies’ performance and its compliance with our contractual terms.

Our distribution centers and delivery network are strategically located and designed for reliable and timely product delivery. In general, orders are automatically allocated to one of our distribution centers for fulfillment. We then process our orders within six hours after the orders are confirmed on average, and we can deliver on the same day in the main Brazilian urban centers, Buenos Aires and Mexico City. We offer a wide range of delivery options to cater to our customers’ individual requirements and preferences. Our delivery options include normal delivery within four to five days, express delivery within one to two days and super express delivery for delivery on the same day the order was placed. We have an on-time delivery rate of approximately 97.0% of total processed orders. Our infrastructure also includes two data centers that are critical to our operations (see “—Our Technology”).

We also use our distribution centers and delivery network to manage the logistics and distribution of a number of our suppliers’ and partners’ online stores.

 

 

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Billing and Collection

We provide our online customers in Brazil the flexibility to choose from a number of payment options including online payment through all major credit cards and bank payment slips, known as “boleto” in Brazil. We offer our credit card paying customers the option to pay in monthly installments (up to 15 for customers using NCard and up to 10 for customers using other types of credit cards), with a minimum installment payment of R$25.00. Paying by credit card in monthly installments is the most popular option among our customers in Brazil. In Argentina and in Mexico, we offer our online customers similar payment methods as those offered in Brazil. For the year ended December 31, 2016, 72.8% of our product sales were paid in installments by our customers. In conjunction with third-party service providers, we have a dedicated risk department that conducts a rigorous analysis of each transaction to help reduce the risk of fraudulent payments and decrease payment default.

Our Culture and Employees

We have built our culture to be relentlessly focused on delivering a best-in-class customer experience, to make data-driven decisions and to collaborate across our organization in pursuit of our mission to be the leading online consumer platform in Latin America. We pride ourselves on our ability to attract engaged employees who in turn deliver outstanding customer service. We have instated programs such as “Birthdays Off,” flexible working hours and “Bermuda Everyday” in order to foster a “tech” culture in our workforce. Furthermore, we have redesigned our offices to deliver to our employees a modern and comfortable environment with a sports court, game room, food trucks, a TV room and other common areas to continue to integrate our team.

We are proud of our employees and believe our team is one of our most important assets. As of December 31, 2016, we had 2,687 employees including 2,414 in Brazil, 175 in Argentina and 98 in Mexico. We had a total of 937 employees in our distribution centers, 587 customer service representatives, 222 employees in information technology, 141 employees in risk management and 146 employees in marketing. We believe that having most of our employees in-house enables us to foster a better customer experience-focused culture. We had a total of 2,040 and 2,405 employees as of December 31, 2014 and 2015, respectively.

We hire temporary employees to handle fluctuations in activity experienced throughout the year. In particular, we hire additional temporary workers during the fourth quarter of each year due to the significant increase in sales volume typically experienced in this period. During the fourth quarter of 2015 and 2016, we contracted 375 and 711 temporary workers, respectively, to handle the increased Black November and the subsequent holiday selling season demand. Temporary employees primarily work at our distribution centers and in our customer service. In the first three quarters of the year, we generally do not use temporary workers.

We are a leading equal opportunity employer, hiring in the region with women representing approximately 50% of our employee base. We believe that we offer our employees competitive compensation packages and a differentiated culture, and as a result, we have generally been able to attract and retain qualified personnel and maintain a stable management team. We generally enter into standard employment contracts with our employees. Our employees in are represented by five labor unions in Brazil, two in Argentina and one in Mexico. We believe that we have a good working relationship with our employees and their labor unions, and we have not experienced any significant labor disputes.

Our management team’s clear sense of mission, long-term focus and commitment to the values that define our culture, combined with our practice of fostering responsible autonomy and maintaining a startup mindset among our employees, have been fundamental to our successful track record. In addition, our leadership team has been remarkably stable and has created and developed leading new businesses organically, including Zattini.

These factors combined have given us the honor of being named amongst the best companies to work for in Brazil for six consecutive years since 2011 and placing first in the eCommerce category in 2015 according to “Revista Você S/A,” a leading business-focused magazine in Brazil. Furthermore, “Revista Apertura,” a leading Argentine general news magazine, recognized us as one of the best companies to work for in Argentina in 2015 and 2016.

 

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Our Corporate Structure

The following is a chart of our current corporate structure:

 

LOGO

Seasonality

We experience the effects of seasonality throughout the calendar year. Typically, the fourth quarter of the year is the strongest for our sales due to the Black November period in Brazil and the Christmas season in all countries where we operate. The first quarter of the year is our slowest period, as the months of January, February and March correspond to vacation time in Brazil and Argentina. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Seasonality and Quarterly Results of Operations” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Net Working Capital.”

Intellectual Property

We rely on a combination of trademark, trade secret and other intellectual property laws as well as confidentiality agreements with our employees and suppliers for the purpose of protecting the proprietary rights associated with the products branded under our private labels. We have also registered the domain names www.netshoes.com, www.netshoes.com.br, www.zattini.com, www.zattini.com.br, www.shoestock.com, www.shoestock.com.br and their variations. Our “Netshoes” and “Zattini” trademarks and logos have also been registered with the relevant authorities in Brazil, Argentina and Mexico (as well as in other regions, such as the European Union and, with respect to “Netshoes,” the United States; we have applied for and are currently awaiting the grant of registration for “Zattini” in the United States). Trademark registrations for “Shoestock” have been assigned to us in the United States and Europe and we have filed applications to register those trademarks in Brazil. Furthermore, we have applied for the registration of the trademarks and logos of all of our private labels, such as Gonew, Burn and Mood and are currently awaiting the grants of such registrations.

In addition to the protection of our intellectual property, we are focused on ensuring that our product offerings (and especially those products branded under our private labels) do not infringe the intellectual property of others. Generally, our agreements with suppliers of private label products contain provisions to safeguard us against potential intellectual property infringement by our suppliers and impose penalties in the event of any infringement. We reserve the right to refuse to work with or terminate our relationship with suppliers where it comes to our attention that they are violating the intellectual property rights of a third party. For more

 

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information, see “Risk Factors—Risks Related to our Business and Industry—Our inability or failure to protect our intellectual property and any intellectual property infringement against us could have a negative impact on our operating results” elsewhere in this prospectus.

Insurance

We have insurance policies with reputable insurers in amounts considered sufficient by our management to cover potential losses arising from events that may affect our assets, as well as for any indemnities that we may have to pay to third parties as a result of our operations. These policies include insurance covering our distribution centers including equipment, machinery and inventory stored therein (or in transit) and have coverage limits of up to R$193.0 million. We seek coverage against risks that are compatible with our scale and type of operations, considering the nature of our activities, the risks we are exposed to, market practices in our industry, and the advice of our insurance consultants.

The insured amounts are reviewed every year when policies are renewed, to ensure the amounts are consistent with the value of our assets and our liabilities from operations. We do not anticipate having any difficulties in renewing any of our insurance policies.

While we believe our insurance contracts reflect standard market practices, there are certain types of risks that may not be covered by the policies (such as war, terrorism, acts of God and force majeure, liability for certain harm or interruption of certain activities). Therefore, if any of these uncovered events occur, we may be obliged to incur additional costs to remedy the situation, reconstitute our assets and/or indemnify our customers, which may adversely affect us. Furthermore, even in the event that we incur a loss that is covered by our policies, we cannot assure that damages awarded by our insurers will be sufficient to cover the losses arising from the insured event.

Material Contracts

On October 21, 2016, we entered into two hosting services agreements with Uol Diveo Tecnologia Ltda., or Uol Diveo, or the Hosting Services Agreements, in which Uol Diveo agrees to provide us with two Internet data centers to host our eCommerce sites. Currently, they are the only provider of hosting services for our sites, and we depend on Uol Diveo to keep our sites operational and accessible to our customers. See “Risk Factors—Risks Related to our Business and Industry—Interruption or failure of our information technology and communications systems could impair our operations, which could damage our reputation and harm our results of operations. Specifically, we rely on one third-party provider to provide us with Internet data centers to host our sites and maintain them operational, and disruptions with this provider or in the services it provides to us could materially affect our reputation, operations or financial results.”

Pursuant to the terms of the Hosting Services Agreements, we are obligated to pay Uol Diveo a total monthly fee of approximately R$205,000.00, including taxes, and Uol Diveo is required to provide us with the necessary hardware, equipment and software licenses to keep our sites operational, among other requirements, as well as technical monitoring, ensuring the security of our sites and allowing us to have access to the data centers that host our sites. The Hosting Services Agreements will expire on October 2017, one year following their execution and are not automatically renewable.

For additional information concerning other contracts important to our business, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Indebtedness—Material Financing Agreements.”

 

 

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Regulation

Our business is subject to a number of laws and regulations that affect companies conducting business on the Internet, many of which are still evolving and could be interpreted in ways that could harm our business. While it is difficult to fully ascertain the extent to which new developments in the field of law will affect our business, there has been a trend towards increased consumer and data privacy protection. It is possible that general business regulations and laws, or those specifically governing the Internet, eCommerce or mCommerce, may be interpreted and applied in a manner that may place restrictions on the conduct of our business. Below is a summary of the most relevant laws that apply to the operations of eCommerce companies in Brazil:

Consumer Protection Laws. Brazil’s consumer Protection Code sets forth the legal principles and requirements applicable to consumer relations in Brazil. This law regulates, among other things, commercial practices, product and service liability, strict liability of the supplier of products or services, reversal of the burden of proof to the benefit of consumers, the joint and several liability of all companies within the supply chain, abuse of rights in contractual clauses, advertising and information on products and services offered to the public. Specifically, as an Internet-based retailer, we are subject to several laws and regulations designed to protect consumer rights — most importantly Law No. 8,078 of September 11, 1990 — known as the Consumer Protection Code, and Decree No 7,962 of March 15, 2013, that regulates eCommerce in Brazil, or the eCommerce Decree. The Consumer Protection Code establishes the legal framework for the protection of consumers, setting out certain basic rights, among which is the right to clear and accurate information about products and services offered in the consumer market, with correct specification of characteristics, structure, quality and price and the risks they pose, and the consumers’ rights to access and modify personal information collected about them and stored in private databases. The eCommerce Decree complements the Consumer Protection Code and sets forth specific rights and obligations of consumers and eCommerce retailers. Pursuant to the eCommerce Decree, online retailers are required to break-down pricing and disclose fees and shipping charges. Online retailers are also required to provide clear and accurate terms and conditions for the sales, including the consumers’ right to cancel a transaction without charges (direito de arrependimento) and to return or exchange products. In addition, the eCommerce Decree sets forth general guidelines that must be followed by online retailers’ consumer services. The growth and demand for eCommerce could result in more stringent consumer protection laws that impose additional compliance burdens on online companies. These consumer protection laws could result in substantial compliance costs.

Data Privacy and Protection. The Internet Act establishes principles, guarantees, rights and duties for the use of the Internet in Brazil, including regulation about data privacy for Internet users. Under Brazilian Laws personal data may only be treated (i.e., collected, used, transferred, etc.) upon users’ prior and express consent. Privacy policies of any company must be clear and detailed and include information regarding all contemplated uses for such users’ data and excessively ample or vague consent for data treatment may be deemed invalid in Brazil. Brazilian courts have applied joint and several liability among all entities that shared and/or used personal data subject to a breach. See “Risk Factors—Risks Related to Doing Business in Brazil and the Rest of Latin America— We are subject to costs and risks associated with increased or changing laws and regulations affecting our business, including those relating to the sale of consumer products.”

We are also subject to similar laws and regulations that govern consumer and data protection in Argentina and Mexico.

 

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Recent Changes in Brazilian Laws Relevant for our Business:

Value Added Tax Laws. On April 2015, an amendment to the Brazilian Constitution became effective to change the then-existing rules as to the allocation of ICMS taxes collected in interstate sales between the state of origin of products sold and the state where the final customer is located, or State of Destination. Under the prior rules, ICMS taxes levied on sales to customers characterized as the final customers of certain goods were entirely collected by the state from where the product was shipped and invoiced, or State of Origin. As a result of this constitutional amendment, since 2016 ICMS taxes in interstate sales have been allocated between the States of Origin and States of Destination on the following basis: (a) States of Origin have the right to collect the value corresponding to the ICMS interstate tax rate applicable for the product while (b) the States of Destination have the right to collect the value corresponding to the difference between the ICMS interstate tax rate applicable for the product and the internal ICMS tax rate of such State of Destination applicable for the relevant product (assuming that the internal ICMS tax rate of the State of Destination is higher than the ICMS interest tax rate). While these constitutional changes did not affect the benefits we currently extract from tax incentives in the States of Origin from where we generally ship and invoice our products (i.e., Minas Gerais and Pernambuco), we expect that our average ICMS tax burden will increase from 3.6% in 2015 to 10.1% by 2019 as we are now required to also pay ICMS taxes to States of Destination of our products in which we currently have no tax benefits. See “Risk Factors—Risks Related to our Business and Industry— Changes in tax laws, tax incentives, benefits or differing interpretations of tax laws may adversely affect our results of operations.”

Internet Neutrality. Brazil has recently enacted laws related to Internet neutrality, which require that Internet service providers treat all Internet traffic equally, subject to strict and clearly-identified exceptions. The Brazilian Anti-Trust authority (Conselho Administrativo de Defesa Econômica, or CADE) is currently analyzing whether initiatives that provide users with free-of-cost access to only certain selected sites rather than open access to the Internet would constitute an anticompetitive act. Depending on the outcome of this administrative proceeding, we may be required to discontinue our initiatives with certain telecommunication companies to provide our customers with free access to the Internet from their mobile devices when accessing our sites.

Legal and Administrative Proceedings

From time to time, we are involved in disputes that arise in the ordinary course of our business. Any claims against us, whether meritorious or not, can be time consuming, result in costly litigation, require significant management time and result in the diversion of significant operational resources.

We are engaged in several legal proceedings, including civil, labor, tax and social security and other proceedings, for which we have established provisions in an aggregate amount of R$5.2 million and have made judicial deposits in an aggregate amount of R$71.8 million, as of December 31, 2016.

We record a provision in our balance sheet for losses arising from litigation based on an evaluation of the likelihood of loss by our external and internal legal counsel, the progress of related proceedings, the history of losses in similar cases and the individual analysis of each contingency. We record provisions for contingencies based on probable loss or when so required under accounting rules.

We are currently not a party to, and we are not aware of any threat of, any legal, arbitration or administrative proceedings that, in the opinion of our management, are likely to have a material and adverse effect on our business, financial condition or results of operations. We may from time to time become party to various legal, arbitration or administrative proceedings arising in the ordinary course of our business.

 

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Civil Matters

As of December 31, 2016, we were party to approximately 1,120 judicial and administrative proceedings of a civil nature for which we recorded a provision of approximately R$1.2 million. The civil claims to which we are a party generally relate to consumer claims, including those related to delays in delivery and product returns, among others. We believe these proceedings are unlikely to have a material adverse impact, individually, or in the aggregate, on our results of operations or financial condition.

Labor Matters

As of December 31, 2016, we were party to 104 labor-related judicial and administrative proceedings for which we recorded a provision of R$0.5 million. In general, the labor claims to which we are a party were filed by former employees or third parties employees seeking our joint and/or subsidiary liability for the acts of our suppliers and service providers. The principal claims involved in these labor suits relate to overtime, salary equalization termination fees, and indemnities based on Brazilian labor laws. We believe these proceedings are unlikely to have a material adverse impact, individually or in the aggregate, on our results of operations or financial condition.

Tax and Social Security Matters

As of December 31, 2016, we were involved in 73 judicial and administrative tax and social security proceedings for which we recorded a provision of R$3.4 million, each as a plaintiff. In our most significant tax proceeding, we are party to a judicial proceeding in which we have challenged the Brazilian federal tax authority’s interpretation that the calculation basis for PIS and COFINS taxes over the products we sell should also consider the ICMS tax rate levied upon such products. We have not recorded a provision for this proceeding as our lawyers estimate our chances of losing this legal dispute as possible. Nevertheless we have been depositing the taxes under dispute on a monthly basis with the relevant court. As of December 31, 2016, we had judicial deposits in an aggregate amount of R$71.8 million. If Brazilian courts ultimately decide against us on this judicial proceeding, we may have to take unanticipated provisions and charges, which could have a negative impact on our financial condition and results of operations. See “Risk Factors—Risks Related to our Business and Industry— Changes in tax laws, tax incentives, benefits or differing interpretations of tax laws may adversely affect our results of operations.”

 

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MANAGEMENT

Pursuant to Cayman Islands law and our Fourth Amended and Restated Memorandum and Articles of Association, or Articles of Association, which will become effective upon completion of this offering, our board of directors is responsible for the operation of our business.

Directors

The following table sets forth certain information relating to our directors and director nominees upon closing of this offering. The business address of each of our directors and director nominees is Rua Vergueiro 961, Liberdade, CEP 01504-001, São Paulo, SP, Brazil.

 

Name

   Age      Position/Title    Directors’
Class
   Current
Term
Expires
 

Marcio Kumruian

     43      Director, Chairman and

Chief Executive Officer

   Class I   

Francisco Alvarez-Demalde

     38      Director    Class I   

Nilesh Lakhani

     57      Director    Class III   

Hagop Chabab(1)

     37      Director      

Wolfgang Schwerdtle(1)

     47      Director      

Nicolas Szekasy(1)

     52      Director      

Frederico Brito e Abreu(2)

     38      Director Nominee    Class II   

Ricardo Knoepfelmacher(2)

     50      Director Nominee    Class II   

 

(1) Upon completion of this offering, Messrs. Chabab, Szekasy and Schwerdtle will cease to serve as members of our board of directors.

 

(2) Upon completion of this offering, Messrs. Brito e Abreu and Knoepfelmacher will become members of our board of directors.

Marcio Kumruian. Mr. Kumruian is our co-founder. He has been the chairman of our board of directors and chief executive officer since 2000, primarily and is responsible for leading Netshoes into becoming a leading sports and lifestyle online retailer in Latin America. Mr. Kumruian also served on the boards of directors of Modnet until August 2016, and Netfarma until January 2016. Mr. Kumruian holds a degree in Economics from Mackenzie University. In 2013, Mr. Kumruian was awarded Entrepreneur of the year in the category of Technology by IstoÉ Dinheiro, a leading Brazilian business and economic magazine. In March 2013, Mr. Kumruian was named a finalist in the master category for the Entrepreneur of the Year award by Ernst & Young Terco.

Francisco Alvarez-Demalde. Mr. Alvarez-Demalde has been a member of our board of directors since March 2015. Mr.Alvarez-Demalde is the co-founder and General Partner of Riverwood Capital Partners, a technology-focused private equity firm focused on high growth technology companies globally. Previously, he was an investment executive with KKR & Co. L.P., where he focused on leveraged buyouts in the Technology Industry and other sectors in both North America and emerging markets. Previously, he worked at Goldman, Sachs & Co. and Eton Park Capital Management. Mr. Alvarez-Demalde has invested and been actively involved in the development and growth of several successful businesses across Latin America and North America. He has also been a board member of Industrious LLC since 2016, Nubox LLC since 2016, Navent Group Ltd since 2012, Golntegro since 2012, Globant S.A. since 2007 and LAVCA (The Latin America Private Equity Venture Capital Association) since 2012. Mr. Alvarez-Demalde holds a degree in economics from San Andres University, Argentina (including an exchange program at the Wharton School). He previously served on the board of directors of companies such as CloudBlue Technologies, Inc, ALOG Data Centres do Brasil S.A., Motionpoint Corp., among others. Mr. Alvarez-Demalde was appointed by our shareholder Riverwood Capital Partners pursuant to our Shareholders Agreement.

 

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Nilesh Lakhani. Mr. Lakhani has been a member of our board of directors since April 2013. Mr. Lakhani has over 25 years of experience working with international companies. He has served as an independent director on the boards of Decolar.com, Inc. since 2012, and GetGoing, Inc. since 2013, and has also been an operating partner at Lumia Capital LLC, an emerging markets focused technology venture fund since 2015. He has held key executive positions with growth companies in the technology, media and financial services industries. From 2013 to 2014, Mr. Lakhani was a member of the board and of the audit committee of QIWI, which is a Nasdaq-listed company. From 2010 to 2012, he was the chief financial officer of oDesk Corporation. Prior to that, from 2007 to 2010, he was the chief financial officer of Yandex N.V. (Nasdaq: YNDX). He also served as chief financial officer of CTC Media, Inc. from 2004 to 2007, which he led to a successful IPO in 2006. Prior to that, Mr. Lakhani was the chief financial officer of Pogo.com, and was vice president of Global Operations at Electronic Arts Inc after it acquired Pogo.com. Mr. Lakhani also served as senior vice president with Transamerica Corporation from 1991 to 1997, and worked with GE Capital from 1984 to 1991. Mr. Lakhani received a degree in economics from the University of Manchester and an MBA in finance from the University of San Francisco. Mr. Lakhani is an independent director.

Hagop Chabab. Mr. Chabab is our co-founder. He has been a member of our board of directors since April 2011. Mr. Chabab served as our executive vice-president and as our chief commercial officer from 2000 to 2013. Upon completion of this offering, Mr. Chabab will cease to serve as a member of our board of directors.

Wolfgang Schwerdtle. Mr. Schwerdtle has been a member of our board of directors since May 2014. Previously, he served as a member of the board of directors of BMC Software, Inc. from September 2013 to January 2014. Currently, Mr. Schwerdtle is the head of the Brazil office of the Government of Singapore Investment Corporation (GIC). He has also been a board member of Somos Educação S.A. since November 2014, as well as a member of their Culture and Organization Committee. He has also been a member of the board of directors of Rede D’Or Sao Luiz, S.A. since May 2015. Mr. Schwerdtle holds a bachelor’s degree and MSc in economics from Oxford University, an MBA from University of Chicago and a PHD in finance from the European Business School. Mr. Schwerdtle was appointed by our shareholder Archy LLC pursuant to our Shareholders Agreement. Upon completion of this offering, Mr. Schwerdtle will cease to serve as a member of our board of directors.

Nicolas Szekasy. Mr. Szekasy has been a member of our board of directors since September 2012. Previously, Mr. Szekasy served as an advisor to Tiger Global Management LLC and was an angel investor. From 2000 to 2009 he was the chief financial officer of MercadoLibre Inc., where he led its IPO in 2007. Before MercadoLibre, he was chief financial officer of Supermercados Norte S.A. for two years and served as chief financial officer, commercial director and strategic planning director at Pepsico Latin America for seven years. Mr. Szekasy is the co-founder of and, since 2011, has been the managing partner of Kaszek Ventures. Mr. Szekasy is also a board member of Endeavor Global, Endeavor Argentina, and Consejo Económico Empresarial de Universidad Torcuato Di Tella. Mr. Szekasy holds a degree in economics from the University of Buenos Aires and an MBA from Stanford University. Mr. Szekasy was appointed by our shareholder Kaszek Investors pursuant to our Shareholders Agreement. Upon completion of this offering, Mr. Szekasy will cease to serve as a member of our board of directors.

Frederico Brito e Abreu. Mr. Brito e Abreu has been appointed to our board of directors and his appointment will become effective upon completion of this offering. Mr. Brito e Abreu is currently the chief financial officer of Kroton Educacional S.A. (BM&FBovespa: KROT3), where he started to work in 2010 and is responsible for planning and internal controls, treasury, tax and accounting, credit and collections, IT, compliance, procurement and legal, and also heads its M&A department. Prior to joining Kroton Educacional S.A., Mr. Brito e Abreu served as a director of the private equity firm Advent International (from 2007 to 2010) and as a manager of McKinsey & Company in São Paulo, New York and Lisbon (from 2001 to 2007). Mr. Brito e Abreu was the recipient of the Best CFO award in the education sector in Latin America every year from 2013 to 2016, awarded by Institutional Investor Magazine, and received the 2016 CFO Award in Latin America by Finance Monthly. Mr. Brito e Abreu holds a degree in business administration from the Catholic University of Portugal in Lisbon and an MBA from INSEAD.

 

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Ricardo Knoepfelmacher. Mr. Knoepfelmacher has been appointed to our board of directors and his appointment will become effective upon completion of this offering. Mr. Knoepfelmacher is the founder of RK Partners, an advisory firm focused on financial and operational restructuring and corporate turnarounds, and is currently the Managing Partner of the firm. Mr. Knoepfelmacher has also served on the board of directors of NII Holdings, Inc. (Nextel) since 2013 and Vicunha Têxtil S.A. since 2013. Prior to founding RK Partners, Mr. Knoepfelmacher led several corporate restructurings, which included Brasil Ferrovias S.A. (railway operator in Brazil), EBX Group (OGX, OSX and MMX), PDG, UTC, Rossi Residencial, Bombril, Galvão Engenharia, Paranapanema, Usina Caeté and Property Brasil, among others. Previously, Mr. Knoepfelmacher was the Chief Executive Officer of Brasil Telecom S.A. from 2005 to 2009, Chief Executive Officer of Pegasus Telecom S.A. from 2000 to 2002, and Chief Executive Officer of Bicicletas Caloi from 1997 to 1999. Mr. Knoepfelmacher also worked at Citibank and McKinsey & Company before launching his own company, MGDK & Associados, a restructuring and consulting firm later sold to the Monitor Group, currently owned by Deloitte. Mr. Knoepfelmacher holds a master’s degree in international management from the Thunderbird School of Global Management and a bachelor degree in economics from Universidade de Brasília.

Executive Officers

The following presents summary biographical information of our executive officers:

 

Name

   Age      Position/Title

Marcio Kumruian

     43      Director, Chairman and Chief Executive Officer

Leonardo Tavares Dib

     42      Chief Financial Officer

Graciela Kumruian Tanaka

     40      Chief Operating Officer

André Luiz Shinohara

     42      Chief Sales and Marketing Officer

Marcio Kumruian. Mr. Kumruian is our co-founder and he has been the chairman of our board of directors and chief executive officer since 2000. For biographical information regarding Mr. Kumruian, see “—Directors.”

Leonardo Tavares Dib. Mr. Dib has been our chief financial officer since 2013. Previously, he held the following financial and strategic planning positions: chief financial officer at Editora Globo, the publishing branch of Organizações Globo, from 2011 to 2012; business planning and strategy director at Pepsico from 2008 to 2011; and senior finance executive and acting finance director at Unilever do Brasil from 1998 to 2008. Mr. Dib holds a degree in electrical engineering from the Federal University of Minas Gerais-UFMG and an MBA in finance from IBMEC—Brazilian Institute of Capital Markets.

Graciela Kumruian Tanaka. Ms. Tanaka joined us in 2008 and has been our acting chief operating officer since 2013. Previously, she was our projects and process officer from 2008 to 2012. Ms. Tanaka also worked as projects manager at Diebold Procomp from 1999 to 2005, and as IT officer at the Federal Regional Court of the 3rd Region (Tribunal Reginal Federal da 3a Região), where she developed systems to streamline processes and workflow technologies with digital certification. Ms. Tanaka holds a degree in technology sciences from Saint Judas Tadeu University (Universidade São Judas Tadeu).

André Luiz Shinohara. Mr. Shinohara has been our chief sales and marketing officer since March 2017. Mr. Shinohara has more than 15 years of experience in the retail and eCommerce business sectors. From September 2013 to January 2017, Mr. Shinohara served as a vice president of Máquina de Vendas and, from June 2012 to July 2013, he was the vice president of Fast Shop S.A. From 2009 to 2012, Mr. Shinohara served as country manager of Privalia in Brazil, and from 2007 to 2009 he accumulated experience in the electronics industry working as a commercial director for Royal Philips Electronics. From 2000 to 2007, Mr. Shinohara served as commercial and marketing director of Submarino S.A. Mr. Shinohara holds a degree in civil engineering from Universidade de São Paulo and an MBA from Insper São Paulo.

 

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Duties of Directors

As a matter of Cayman Islands law, a director of a Cayman Islands company is considered a fiduciary of the company. Accordingly, directors owe fiduciary duties to their companies to act in accordance with the best interests of the company, to exercise their powers for the purposes for which they are conferred and not to place themselves in a position where there is a conflict between their personal interests and their duty to the company. Accordingly, a director owes a company a duty not to make a profit based on his or her position as director (unless the company permits him or her to do so) and a duty not to put himself or herself in a position where the interests of the company conflict with his or her personal interests or his or her duties to a third party. However, a company’s articles of association may permit a director to vote on a matter in which he or she has a personal interest if he or she has disclosed the nature of his or her interest to the board of directors. Our Articles of Association provide that a director must disclose the nature and extent of any material interests in any contract or arrangement, and that he or she may not vote at any meeting on any resolution concerning an interested matter.

A director of a Cayman Islands company also owes to the company duties to exercise independent judgment in carrying out his functions and to exercise reasonable skill, care and diligence, which has both objective and subjective elements. Recent Cayman Islands case law confirmed that directors must exercise the care, skill and diligence that would be exercised by a reasonably diligent person having the general knowledge, skill and experience reasonably to be expected of a person acting as a director. Additionally, a director must exercise the knowledge, skill and experience that he or she actually possesses.

Election and Terms of Directors and Executive Officers

Our Articles of Association provide that persons standing for election as directors at a duly constituted general meeting with requisite quorum shall be elected by an ordinary shareholders’ resolution, which requires the affirmative vote of a simple majority of the votes cast on the resolution by the shareholders entitled to vote who are present in person or by proxy at a meeting. Upon being elected, each director is appointed to a term of three years to succeed the directors of the class whose terms expire at such annual general meeting. See “Description of Share Capital—Appointment, Disqualification and Removal of Directors.” Our executive officers are elected by and serve at the discretion of our board of directors.

Board Committees

Upon the completion of this offering, we will establish one committee of our board of directors, namely the audit committee and we have adopted a charter for this committee.

The responsibilities and membership of our audit committee are described below.

Under the terms of the convertible note purchase agreement (as defined above), on or prior August 22, 2017, we are required to establish a compensation committee and a nominating and corporate governance committee of our board of directors to assist with the board’s responsibilities.

In the future, our board of directors may establish other committees, as it deems appropriate, to assist with its responsibilities.

Audit Committee

Upon completion of this offering, our board of directors will have established an audit committee. Members will serve on this committee until the earliest of (1) the moment they cease to be a director, (2) their resignation and (3) as otherwise determined by our board of directors. Our audit committee will initially consist of Nilesh Lakhani, Frederico Brito e Abreu and Ricardo Knoepfelmacher. Nilesh Lakhani will be the chairman of our audit committee. Nilesh Lakhani satisfies the criteria of an audit committee financial expert as set forth under the applicable rules of the SEC. Nilesh Lakhani, Frederico Brito e Abreu and Ricardo Knoepfelmacher will meet the criteria for independence set forth in Rule 10A-3 of the Exchange Act.

 

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The audit committee will oversee our accounting and financial reporting processes and the audits of our financial statements. Our audit committee will be responsible for, among other things:

 

    selecting our independent auditor, approving related fees and terminating our relationship with our independent auditor in the committee’s discretion;

 

    pre-approving audit and non-audit services permitted to be performed by the independent auditor;

 

    annually reviewing the independent auditor’s report describing the auditing firm’s internal quality control procedures, any material issues raised by the most recent internal quality control review, or peer review, of the independent auditors and all relationships between the independent auditor and our company;

 

    setting clear hiring policies for employees and former employees of the independent auditors;

 

  &