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As filed with the Securities and Exchange Commission on April 25, 2019.

Registration No. 333-224065

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 2 to Form F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

HeadHunter Group PLC

(Exact Name of Registrant as Specified in its Charter)

 

 

Not Applicable

(Translation of Registrant’s Name into English)

 

 

 

Cyprus
  7370   Not Applicable

(State or other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

Dositheou 42,

Strovolos, 2028, Nicosia

Cyprus

+357-22-418200

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

 

 

Cogency Global Inc.

10 E. 40th Street, 10th floor

New York, NY 10016

+1-800-600-9540

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

 

 

Copies of all communications, including communications sent to agent for service, should be sent to:

 

J. David Stewart

Latham & Watkins LLP

Ul. Gasheka 6

Ducat III, Office 510

Moscow, 125047

Russia

+7-495-785-1234

 

David C. Boles

Latham & Watkins (London) LLP

99 Bishopsgate

London EC2M 3XF

United Kingdom

+44-20-7710-1000

 

Darina Lozovsky

White & Case LLP

5 Old Broad Street

London EC2N 1DW

United Kingdom

+44-20-7532-1000

 

 

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

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

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

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

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

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933.

Emerging growth company.  ☒

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 7(a)(2)(B) of the Securities Act.   ☐

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered(1)

  Amount to be
Registered(2)
  Proposed Maximum
Offering Price per
Share
 

Proposed Maximum
Aggregate

Offering Price(3)

 

Amount of

Registration Fee(4)

Ordinary shares, nominal value of €0.002 per share

 

18,750,000

 

$13.50

  $253,125,000   $30,679

 

 

(1)

American depositary shares issuable upon deposit of the ordinary shares registered hereby will be registered under a separate registration statement on Form F-6 (Registration No. 333-                ). Each American depositary share represents one ordinary share.

(2)

Includes the aggregate offering price of additional ordinary shares represented by American depositary shares that the underwriters have an option to purchase.

(3)

Estimated solely for purpose of calculating the amount of registration fee pursuant to Rule 457(a) of the Securities Act of 1933, as amended.

(4)

Registration fees totaling $31,125 were previously paid in connection with the initial filing of this registration statement.

 

 

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

 

 

 


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

 

SUBJECT TO COMPLETION, DATED APRIL 25, 2019

PRELIMINARY PROSPECTUS

 

LOGO

American Depositary Shares

HeadHunter Group PLC

16,304,348 American Depositary Shares Representing

16,304,348 Ordinary Shares

$             per ADS

 

 

This is the initial public offering of American Depositary Shares, or ADSs, of HeadHunter Group PLC, a public limited company organized under the laws of Cyprus. Each ADS will represent one ordinary share. Our existing shareholders, Highworld Investments Limited, a subsidiary of Elbrus Capital Fund II, L.P. and Elbrus Capital Fund IIB, L.P. (together, “Elbrus Capital”), and ELQ Investors VIII Limited, a subsidiary of The Goldman Sachs Group, Inc. (together with Highworld Investments Limited, the “Selling Shareholders”), are offering 16,304,348 of our ADSs in this offering. We will not receive any proceeds from the sale of ADSs by the Selling Shareholders. We currently expect the initial public offering price to be between $11.00 and $13.50 per ADS.

The underwriters may also exercise their option to purchase up to 2,445,652 additional ADSs from the Selling Shareholders at the public offering price, less the underwriting discount, for 30 days after the date of this prospectus.

We have been approved to have our ADSs listed on The Nasdaq Global Select Market under the symbol “HHR.”

We are a “controlled company” under the corporate governance rules of The Nasdaq Global Select Market. See “Management—Controlled Company Exemption.”

We are both an “emerging growth company” and a “foreign private issuer” under applicable U.S. Securities and Exchange Commission rules and will be eligible for reduced public company disclosure requirements. See “Prospectus Summary—Implications of Being an ‘Emerging Growth Company’ and a ‘Foreign Private Issuer.’”

Investing in our ADSs involves risks. See “Risk Factors” beginning on page 20.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

     Per ADS      Total  

Initial Public Offering Price

   $                    $                

Underwriting Discount(1)

   $                    $                

Proceeds to the Selling Shareholders (before expenses)

   $                    $                

 

(1)

We refer you to “Underwriting (Conflicts of Interest)” for additional information regarding underwriting compensation.

The underwriters expect to deliver the ADSs to purchasers on or about                     , 2019 through the book-entry facilities of The Depository Trust Company.

 

 

 

Morgan Stanley   Goldman Sachs & Co. LLC   Credit Suisse   VTB Capital
BofA Merrill Lynch   Sberbank CIB

                    , 2019


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LOGO

 

*

Data as of December 31, 2018

Data for the year ended December 31, 2018

1

According to LiveInternet


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TABLE OF CONTENTS

 

Prospectus Summary

     1  

Risk Factors

     20  

Cautionary Statement Regarding Forward-Looking Statements

     59  

Use of Proceeds

     61  

Dividend Policy

     62  

Capitalization

     63  

Dilution

     64  

Selected Consolidated Historical Financial and Other Data

     65  

Unaudited Pro Forma Consolidated Financial Data

     72  

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

     80  

Our Industry

     102  

Business

     111  

Regulation

     133  

Management

     137  

Principal and Selling Shareholders

     147  

Related Party Transactions

     149  

Description of Share Capital and Articles of Association

     153  

Shares and ADSs Eligible for Future Sale

     171  

Description of American Depositary Shares

     173  

Material Tax Considerations

     180  

Underwriting (Conflicts of Interest)

     197  

Expenses of the Offering

     205  

Legal Matters

     206  

Experts

     206  

Enforcement of Civil Liabilities

     207  

Where You Can Find More Information

     209  

Index to Consolidated Financial Statements

     F-1  

 

 

For investors outside the United States: Neither we, the Selling Shareholders nor the underwriters have taken any action that would permit this offering or possession or distribution of this prospectus in any jurisdiction, other than the United States, where action for that purpose is required. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of our ADSs and the distribution of this prospectus outside the United States.

We are incorporated in Cyprus, and a majority of our outstanding securities are owned by non-U.S. residents. Under the rules of the U.S. Securities and Exchange Commission (“SEC”) we are currently eligible for treatment as a “foreign private issuer.” As a foreign private issuer, we will not be required to file periodic reports and financial statements with the SEC as frequently or as promptly as domestic registrants whose securities are registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

We are responsible for the information contained in this prospectus. Neither we nor the Selling Shareholders have authorized anyone to provide you with different information, and neither we nor the Selling Shareholders take responsibility for any other information others may give you. We, the Selling Shareholders, and the underwriters are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than its date regardless of the time of delivery of this prospectus or of any sale of the ADSs.

 

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ABOUT THIS PROSPECTUS

Except where the context otherwise requires or where otherwise indicated, the terms “Zemenik Trading Limited,” “HeadHunter,” the “Company,” “Group,” “we,” “us,” “our,” “our company” and “our business” refer to HeadHunter Group PLC, together with its consolidated subsidiaries as a consolidated entity, during the Successor periods described below, and to Headhunter FSU Limited, together with its consolidated subsidiaries as a consolidated entity, during the Predecessor period described below.

All references in this prospectus to “rubles,” “RUB” or “P” refer to Russian rubles, the terms “dollar,” “USD” or “$” refer to U.S. dollars and the terms “€” or “euro” refer to the currency introduced at the start of the third stage of European economic and monetary union pursuant to the treaty establishing the European Community, as amended.

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

We report under International Financial Reporting Standards (“IFRS”) as adopted by the International Accounting Standards Board (the “IASB”). None of our financial statements were prepared in accordance with generally accepted accounting principles in the United States. We present our consolidated financial statements in rubles.

On February 24, 2016, Zemenik Trading Limited, which we converted into HeadHunter Group PLC, acquired all of the outstanding equity interests of Headhunter FSU Limited (the “Acquisition”) from Mail.Ru Group Limited (LSE: MAIL) (“Mail.Ru”), resulting in a change of control of Headhunter FSU Limited. Because the Company succeeded to substantially all of the businesses of Headhunter FSU Limited and the Company had no material operations before the Acquisition, we consider Headhunter FSU Limited the predecessor entity of the Company. As a result, the financial information provided in this registration statement is financial information of Headhunter FSU Limited when labeled as “Predecessor” and financial information of HeadHunter Group PLC when labeled as “Successor” to indicate whether such information relates to the period preceding the Acquisition or the period succeeding the Acquisition, respectively. Due to the change in the basis of accounting resulting from the Acquisition, the consolidated financial statement data for the Predecessor periods and the consolidated financial statements for the Successor periods included elsewhere in this prospectus are not necessarily comparable.

In this prospectus, we define (i) the Successor period year ended December 31, 2018 as the “Successor 2018 Period,” (ii) the Successor period year ended December 31, 2017 as the “Successor 2017 Period,” (iii) the Predecessor period from January 1 to February 23, 2016 as the “Predecessor 2016 Stub Period,” (iv) the Successor period from February 24 to December 31, 2016 as the “Successor 2016 Period” and (v) the Predecessor year ended December 31, 2015 as the “Predecessor 2015 Period.”

In order to improve the comparability of the year ended December 31, 2016 to the Successor 2018 Period, the Successor 2017 Period and the Predecessor 2015 Period, we have included supplemental unaudited pro forma consolidated financial information of the Group for the year ended December 31, 2016 as if the Acquisition had occurred on January 1, 2016. See “Unaudited Pro Forma Consolidated Financial Data.” The supplemental unaudited pro forma consolidated financial information of the Group for the year ended December 31, 2016 has been prepared solely for the purpose of this prospectus and is not prepared in the ordinary course of our financial reporting and has not been audited or reviewed by our Independent Registered Public Accounting Firm. The supplemental unaudited pro forma consolidated financial information of the Group for the year ended December 31, 2016 has been presented for illustrative purposes only and does not purport to represent what our financial results would have actually been had the Acquisition occurred on January 1, 2016, nor does it purport to project our financial results for any future period or our financial condition at any future date.

 

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Use of Non-IFRS Financial Measures

Certain parts of this prospectus contain non-IFRS financial measures, including, among others, EBITDA, Adjusted EBITDA, Adjusted Net Income, EBITDA Margin, Adjusted EBITDA Margin and Adjusted Net Income Margin. We define:

 

   

EBITDA as net income or net loss plus: (1) income tax expense; (2) net interest income or expense; and (3) depreciation and amortization.

 

   

Adjusted EBITDA as net income or net loss plus: (1) income tax expense; (2) net interest income or expense; (3) depreciation and amortization; (4) transaction costs related to business combinations; (5) gain on the disposal of subsidiary; (6) expenses related to equity-settled awards and (7) IPO-related costs.

 

   

Adjusted Net Income as net income or net loss plus: (1) transaction costs related to the Acquisition; (2) gain on the disposal of subsidiary; (3) transaction costs related to the disposal of subsidiary; (4) amortization of intangible assets recognized upon the Acquisition; (5) the tax effect of the adjustment described in (4) and (6) (gain)/loss related to the remeasurement and expiration of a tax indemnification asset.

 

   

EBITDA Margin as EBITDA divided by revenue.

 

   

Adjusted EBITDA Margin as Adjusted EBITDA divided by revenue.

 

   

Adjusted Net Income Margin as Adjusted Net Income divided by revenue.

EBITDA, Adjusted EBITDA, Adjusted Net Income, EBITDA Margin, Adjusted EBITDA Margin and Adjusted Net Income Margin are used by our management to monitor the underlying performance of the business and its operations. EBITDA, Adjusted EBITDA, Adjusted Net Income, EBITDA Margin, Adjusted EBITDA Margin and Adjusted Net Income Margin are used by different companies for differing purposes and are often calculated in ways that reflect the circumstances of those companies. You should exercise caution in comparing EBITDA, Adjusted EBITDA, Adjusted Net Income, EBITDA Margin, Adjusted EBITDA Margin and Adjusted Net Income Margin as reported by us to EBITDA, Adjusted EBITDA, Adjusted Net Income, EBITDA Margin, Adjusted EBITDA Margin and Adjusted Net Income Margin as reported by other companies. EBITDA, Adjusted EBITDA, Adjusted Net Income, EBITDA Margin, Adjusted EBITDA Margin and Adjusted Net Income Margin are unaudited and have not been prepared in accordance with IFRS or any other generally accepted accounting principles.

EBITDA, Adjusted EBITDA, Adjusted Net Income, EBITDA Margin, Adjusted EBITDA Margin and Adjusted Net Income Margin are not measurements of performance under IFRS or any other generally accepted accounting principles, and you should not consider EBITDA, Adjusted EBITDA, Adjusted Net Income, EBITDA Margin, Adjusted EBITDA Margin or Adjusted Net Income Margin as alternatives to net income, operating profit or other financial measures determined in accordance with IFRS or other generally accepted accounting principles. EBITDA, Adjusted EBITDA, Adjusted Net Income, EBITDA Margin, Adjusted EBITDA Margin and Adjusted Net Income Margin have limitations as analytical tools, and you should not consider them in isolation. Some of these limitations are:

 

   

EBITDA, Adjusted EBITDA, Adjusted Net Income, EBITDA Margin, Adjusted EBITDA Margin and Adjusted Net Income Margin do not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments,

 

   

EBITDA, Adjusted EBITDA, Adjusted Net Income, EBITDA Margin, Adjusted EBITDA Margin and Adjusted Net Income Margin do not reflect changes in, or cash requirements for, our working capital needs, and

 

   

the fact that other companies in our industry may calculate EBITDA, Adjusted EBITDA, Adjusted Net Income, EBITDA Margin, Adjusted EBITDA Margin and Adjusted Net Income Margin differently than we do, which limits their usefulness as comparative measures.

 

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Accordingly, prospective investors should not place undue reliance on EBITDA, Adjusted EBITDA, Adjusted Net Income, EBITDA Margin, Adjusted EBITDA Margin and Adjusted Net Income Margin or the other non-IFRS financial measures contained in this prospectus.

 

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MARKET AND INDUSTRY DATA

We obtained the industry, market and competitive position data in this prospectus from our own internal estimates and research as well as from publicly available information, industry and general publications and research, surveys and studies conducted by third parties. There are a number of studies that address either specific market segments, or regional markets, within our industry. However, given the rapid changes in our industry and the markets in which we operate, no industry research that is generally available covers some of the trends we view as key to understanding our industry and our place in it, such as the traffic on job and employment websites worldwide and in Russia in particular.

We believe that it is important that we maintain as broad a view on industry developments as possible. We have retained consultants to prepare general industry and market studies for us, including individual analyses of the online recruitment markets in the markets in which we operate, including the report called “Online Recruitment Landscape in Russia” by J’Son & Partners, and such information is included in this prospectus in reliance on J’Son & Partners’ authority as an expert in such matters. See “Experts.” In addition, we have obtained certain industry and market data from the report called “Brand Awareness Study” by Socis MR Rus and the report called “Headhunter LLC Loyalty and Satisfaction Study: Customer Satisfaction” by Ipsos Comcon. Where we refer to “Ipsos” throughout this prospectus, this reference is to the Ipsos Comcon report, which is based on the results of the “HeadHunter customer satisfaction” research conducted in November 2017 by Ipsos Komkon LLC in Russian cities with 1,204 interviews (plus 197 additional samples) representatives from companies that are current customers of the Company, consisting of employees responsible for staff recruitment and directly interacting with the Company. The Company provided the employee database used by Ipsos Komkon LLC.

To assist us in formulating our business plan and in anticipation of this offering, we retained J’Son & Partners in 2017 and 2018 to provide an independent view of the online recruitment landscape in Russia, including an overview of recent macroeconomic and labor market dynamics, the evolution of the recruitment market over time and analysis of its underlying trends and potential growth factors, an assessment of the current competitive landscape and other relevant topics. In connection with the preparation of the J’Son & Partners’ report, we furnished to J’Son & Partners certain historical information about our company and some data available on the competitive environment. J’Son & Partners, in conjunction with third-party experts with extensive experience in the Russian recruitment business, conducted research in preparation of the report, including a study of market reports prepared by other parties and a study of a broad range of secondary sources including other market reports, association and trade press publications, other databases and other sources. We use the data contained in J’Son & Partners’ report to assist us in describing the nature of our industry and our position in it.

Due to the evolving nature of our industry and competitors, we believe that it is difficult for any market participant, including us, to provide precise data on the market or our industry. However, we believe that the market and industry data we present in this prospectus provide accurate estimates of the market and our place in it. Industry publications and forecasts generally state that the information they contain has been obtained from sources believed to be reliable, but that the accuracy and completeness of such information is not guaranteed. Forecasts and other forward-looking information obtained from these sources are subject to the same qualifications and uncertainties as other forward-looking statements in this prospectus.

TRADEMARKS, SERVICE MARKS AND TRADENAMES

We have proprietary rights to trademarks used in this prospectus that are important to our business, many of which are registered under applicable intellectual property laws.

Solely for convenience, the trademarks, service marks, logos and trade names referred to in this prospectus are without the ® and ™ symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors to these

 

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trademarks, service marks and trade names. This prospectus contains additional trademarks, service marks and trade names of others, which are the property of their respective owners. All trademarks, service marks and trade names appearing in this prospectus are, to our knowledge, the property of their respective owners. We do not intend our use or display of other companies’ trademarks, service marks, copyrights or trade names to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

 

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PROSPECTUS SUMMARY

This summary highlights information contained in more detail elsewhere in this prospectus. This summary may not contain all the information that may be important to you, and we urge you to read this entire prospectus carefully, including the “Risk Factors,” “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections and our consolidated audited financial statements, including the notes thereto, included in this prospectus, before deciding to invest in our ADSs.

Overview

We are the leading online recruitment platform in Russia and the Commonwealth of Independent States (“CIS”) and focus on connecting job seekers with employers. We offer potential employers and recruiters paid access to our extensive curriculum vitae (“CV”) database and job postings platform. We also provide job seekers and employers with a value added services (“VAS”) portfolio centered around their recruitment needs. Our brand and the strength of our platform allow us to generate significant traffic, over 86% of which was free for us as of November, 2018 according to our internal data, and we were the third most visited job and employment website globally as of January 1, 2019, according to the latest available data from SimilarWeb. Our CV database contained 22.1 million, 26.4 million and 36.2 million total CVs (excluding Ukraine) as of December 31, 2016, 2017 and 2018, respectively, the growth partially due to our acquisition of Job.ru in January 2018, and our platform hosted a daily average of more than 344,000, 398,000 and 559,000 job postings (excluding Ukraine) in the years ended December 31, 2016, 2017 and 2018, respectively. For the years ended December 31, 2016, 2017 and 2018, our platform averaged 16.7 million, 17.5 million and 20.0 million unique visitors per month, respectively, according to LiveInternet.

Our user base consists primarily of job seekers who use our products and services to discover new career opportunities. The majority of the services we provide to job seekers are free. Our customer base consists primarily of businesses using our CV database and job posting service to fill vacancies inside their organizations.

The quality and quantity of CVs in our database attract an increasing number of customers, which leads to more job seekers turning to us as their primary recruitment and related services provider, creating a powerful network effect that has allowed us to continuously solidify our market leadership and increase the gap between us and our competitors.

Our portfolio of recruitment-centric VAS is designed to improve the customer experience, increase the effectiveness of the recruitment process for our customer base and enable us to penetrate each link of the recruitment value chain beginning with sourcing, to engaging, pre-selecting, interviewing and then onboarding the selected candidates. We are working to further integrate our VAS features into our core products in order to enhance efficiency throughout the overall recruitment process, which we believe will increase the value proposition of our services and improve retention rates and average revenue per customer.

We were founded in 2000 and have successfully established a strong, trusted brand and the leading market position, which have enabled us to achieve significant growth in recent years. We had approximately 253,000 paying customers on our platform for the year ended December 31, 2018. We have a highly diversified customer base, representing the majority of the industries active in the Russian economy. Our brand awareness is one of the highest among the Russian online recruitment players, according to Socis MR Rus, which, coupled with a nationwide sales force and broad customer reach, creates barriers for new entrants to our markets.

We engage with job seekers and employers via our desktop sites, mobile sites and mobile applications. Since launch, our mobile applications had been downloaded 15.3 million times cumulatively as of December 31, 2018,



 

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and our mobile platforms currently account for the majority of our traffic. Our scalable technology platform utilizes an increasingly clear and simple user interface enhanced by our search engine, which is powered by artificial intelligence (“AI”) and machine learning algorithms.

Our total revenue was P3,104 million, P453 million, P3,287 million, P3,740 million, P4,733 million and P6,118 million in the Predecessor 2015 Period, the Predecessor 2016 Stub Period, the Successor 2016 Period, the pro forma year ended December 31, 2016, the Successor 2017 Period and the Successor 2018 Period, respectively. During the same periods, our net income (loss) was P1,276 million, P133 million, P(56) million, P(29) million, P463 million and P1,033 million, respectively. In addition to our growth, we have consistently maintained strong profitability.

Our Industry

Russia is the 11th largest economy in the world, with a GDP of $1,578 billion in 2017 according to the World Bank, and was the 9th most populous country, with a population of 147 million as of December 31, 2017, according to the Federal State Statistics Service (“Rosstat”). GDP has increased by 2.3% in 2018, which is the second consecutive year of growth following an economic downturn in 2014 and 2015, according to Rosstat. Russia has the largest Internet audience among European countries with 84 million users in January/February 2018, and an Internet penetration rate of approximately 72% of the population above 18 years old, according to the Fund Public Opinion (“FOM”). The Internet has become an integral part of Russian consumers’ lifestyle, resulting in many activities and services, including job search, migrating online.

Although Russia had a large labor force of approximately 75.8 million people on average in 2017 according to the Ministry of Economic Development (“MED”), local businesses are experiencing a shortage of employees, which translates into a low unemployment rate, high turnover of employees and wage growth above real GDP growth. Competition for human capital supported the rapid expansion of job advertising services industry in the past decade. At the same time, as Internet usage becomes ubiquitous, job searching is moving online and increasingly to mobile platforms, and both employers and job seekers are rapidly adopting online services.

Recovery of the Russian Economy

The Russian economy demonstrated higher than expected growth in 2018 due to an increase in net exports and upward revision of construction sector output. Russia experienced 2.3% real GDP growth in 2018, according to Rosstat’s preliminary numbers. The MED expects Russia’s GDP to grow from 2.0% to 3.2% annually in real terms from 2020 to 2022, supported by the growth of fixed capital investments and the recovery in domestic demand as result of easing financial conditions and improving consumer confidence.

Large Internet Audience and Ubiquitous Internet Usage

Russia’s Internet audience has experienced significant growth over the last decade, bolstered by economic growth, the increasing affordability of personal computers and mobile devices and substantial investments in broadband infrastructure. According to the FOM, Russia’s monthly Internet audience was approximately 84 million users in January/February 2018, translating into an Internet penetration rate of approximately 72%, of the population above 18 years old, almost tripling the levels from July 2007.

The significant growth in Internet penetration rates has resulted in the shift of everyday activities of consumers and businesses online, further supported by the availability of websites and mobile applications catering to the various needs of consumers and businesses and an expansion in the range of services offered online, including job search.



 

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Shift of Marketing Expenditure Online

As Internet usage is rapidly growing and consumers are spending more time online and on mobile devices, a larger share of marketing budgets is being allocated to online media. In Russia, the share of total marketing spend on TV, newspapers, outdoor, radio and other offline media declined from 88% in 2010 to 57% in 2018, while the share of advertising budgets allocated to online media increased from 12% in 2010 to 43% in 2018, according to the Association of Communication Agencies of Russia. Despite significant growth in recent years, the online advertising market in Russia is far from realizing its full potential. For example, the share of marketing budgets spent online was significantly lower than the same share in China (53% in 2016) or the United Kingdom (55% in 2016), according to Zenith.

Russian Labor Market Structure and Fundamentals Support Growing Competition for Human Capital

The Russian labor market has historically had a number of fundamental characteristics that have resulted in a shortage of highly skilled and talented employees, high turnover of employees and real wage growth exceeding real GDP growth and consumer inflation rates. Although employee turnover and real wages declined during the last economic downturn, the fundamental market characteristics remain largely intact and are expected to continue to support strong competition for human capital, resulting in increased marketing spending on job advertising as the economy rebounds.

Growing Popularity of Online Recruitment Services

Historically, Russian companies looked for talent using offline recruitment services such as print classifieds, local newspapers, recruitment agencies, recruitment events and offline job advertising. As the use of Internet services among businesses and employees has increased, job advertising and HCM services have started migrating online and to mobile platforms. According to J’Son & Partners, the share of job postings advertised online is expected to increase from 29% in 2018 to 41% by 2022.

Russian Online Recruitment Market Size

According to J’Son & Partners, the Russian online recruitment market has grown by 28% in 2018 as compared to the previous year. J’Son & Partners estimates that the size of the market was approximately P10.3 billion in 2018 and expects it to grow at a CAGR of 21.7% from 2018 to 2022 and reach approximately P22.6 billion by 2022. The growth of online recruitment spend is expected to be driven by a combination of an increase in the number of small and medium enterprises using online recruitment services, wider adoption of online recruitment in the Russian regions and the enhanced monetization of online recruitment services and the transition of internal recruitment procedures into online recruitment platforms. Online recruitment platforms accounted for approximately 23% of total recruitment spend in Russia in 2018 and are expected to reach 46% of total spend by 2022, based on J’Son & Partners’ estimates. The share of recruitment spend by other online channels, mainly represented by professional social networks and social media, increased from 1.4% in 2015 to 1.5% in 2018. By 2022, J’Son & Partners expects the share of other online channels to increase to 3.5% of the Russian online recruitment market. The share of internal costs of recruitment spend is expected to decrease from 53% in 2018 to 35% in 2022, following the optimization of the recruitment process, driven by wider adoption of HR management software, such as applicant tracking systems, automated pre-screening solutions and career development services.

Our Strengths

We are the leading online recruitment platform in Russia and CIS focused on providing comprehensive talent acquisition services. We operate in a high growth market, as human resources (“HR”) services globally are



 

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undergoing continuous digitalization and the Russian market remains significantly underpenetrated in terms of the share of online recruitment spend relative to GDP. We believe the following competitive strengths have contributed to our success.

Number one online recruitment platform in Russia with a leading position in other CIS countries

We are the leading online recruitment platform in Russia, focusing on facilitating the recruitment process and connecting millions of job seekers with hundreds of thousands of employers annually. We are also the leading player in Kazakhstan and Belarus and are among the top three players in Azerbaijan, Kyrgyzstan and Uzbekistan, which makes us a leader in online recruitment in the CIS region.

We have more visible CVs in our database and more job postings on our platform than any of our direct competitors. We are also among the most visited online recruitment websites in our markets, with 20.0 million unique monthly visitors (“UMVs”) coming to our website on average during the year ended December 31, 2018, which is nearly three times more than our closest peer, according to LiveInternet. We enjoy strong user traffic dynamics and are the third most visited job and employment website based on this metric globally, according to the latest data available from SimilarWeb as of January 1, 2019.

Our strong operational performance has contributed to our clear number one position in the Russian market by revenue, which was almost three times higher than that of our closest online peer in the year ended December 31, 2017, according to J’Son & Partners.

Powerful network effect reinforcing our market leading position

Our extensive, high quality CV database (the owners of 17.4 million CVs, excluding those acquired from Job.ru and HeadHunter LLC (Ukraine), or 76% of our total visible CV database, have either applied at least once for a job posting or edited a CV in the last two years as of December 31, 2018), large database of job postings relevant to job seekers and significant user traffic create a strong network effect as employers and job seekers tend to use job classifieds resources that offer the widest range of options and the highest efficiency. This creates a cycle that reinforced our market leadership position and increased the gap between us and our competitors, despite the economic downturn in Russia in 2014 and 2015, as demonstrated by the following key performance metrics:

 

   

Job postings: The number of job postings on our website grew at a CAGR of 27% from 2016 to 2018.

 

   

CVs: The number of visible CVs in our database increased at a CAGR of 31% from 2016 to 2018.



 

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User traffic: The number of UMVs to our website increased at a CAGR of 9% from 2016 to 2018, while the gap with our nearest competitor based on this metric increased by 4.6 million UMVs, or 51%, according to LiveInternet. This gap has increased by approximately eleven times since 2010, as demonstrated by the chart below.

 

LOGO

We believe that our strong leadership position is highly defensible, and that it is becoming increasingly difficult for our competitors to overcome this competitive moat, as demonstrated by our consistent revenue growth linked to the growth of our key operating metrics presented above.

Most recognized brand and nationwide technology-empowered sales function creating strong customer relationships

We believe that our brand and our sales function are distinct competitive advantages as we expand our product offering and enter new market segments.

As one of the first online recruitment platforms in Russia (operating since 2000), we have established “HeadHunter” as a strong brand with top-of-mind brand awareness of 45%, which differentiates us from our competitors. Our nearest competitor had top-of-mind brand awareness of 27%, and other market participants had top-of-mind brand awareness in the single digits, according to Socis MR Rus as of September 30, 2018. We were ranked first among career-focused websites in Russia by SimilarWeb based on user traffic as of January 1, 2019. According to our internal data, as of November 2018, 86% of our traffic was free, which demonstrates strong user affinity for our brand and the high organic liquidity of our platform. Direct traffic, which is comprised of organic, type-in and email distributions traffic, accounted for 43% of our traffic. We intend to further increase the popularity of our brand and user loyalty through the efficient use of TV and online advertising in our markets and by focusing on the high quality of our user experience and customer service.

Our sales function consists of a sales force with an established and extensive presence across Russia and the CIS, a well-developed customer support function and a fully integrated customer relationship management (“CRM”) platform, incorporating predictive analytics tools.

As of December 31, 2018, our sales force consisted of 180 sales professionals making it, we believe, one of the largest and most experienced sales forces in the market, and has helped us to become the online recruiting



 

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platform of choice for Russian employers. We have also created strong relationships with the corporate HR departments of some of our key accounts, or customers who are organizations that, according to the Spark-Interfax database, have an annual revenue of P2 or more billion or a headcount of 250 or more employees and are not recruiting agencies (“Key Accounts”), dating back more than 10 years, positioning us to successfully cross sell and upsell our existing and developing services. Our sales team is efficiently organized and strategically placed in Moscow, St. Petersburg and other regional offices, and is further specialized by industry and customer type. We have 74 professionals, for example, who are dedicated to selling services to Small and Medium Accounts and 106 professionals covering Key Accounts, each with specialized expertise and training. This structure allows us to provide truly local, individualized high quality service to our customers.

Our CRM system serves as a powerful tool for our sales function. It is linked to our main platform and, combined with predictive analytics tools, provides real time analysis of customer activity on our website and suggests relevant actions to our sales force.

The performance of our sales function has contributed to the growth in the number of customers paying for our services, while average revenue per customer (“ARPC”) within each annual customer vintage has been increasing over the last decade.

Robust business model generating diversified and growing revenue streams from a loyal customer base

Our business model is built around four key pillars of monetization: subscription-based access to our CV database, job posting fees, bundled subscriptions and VAS. Our diversified revenue stream, including highly predictable, recurring subscription-based fees (for CV database access and bundled subscriptions) that accounted for 55% of our total revenue in the year ended December 31, 2018, allowed us to increase our revenue at a compound annual rate of 25% from 2015 to 2018 (including the economic downturn period in Russia) and achieve year over year growth at a rate of 31.5% from 2017 to 2018 (excluding the revenue from CV Keskus, which we disposed of in March 2017, and the revenue of HeadHunter LLC (Ukraine), which we disposed of in April 2018), resulting in total revenue of P6,118 million in the year ended December 31, 2018.

We believe that our business model provides a substantial degree of protection from the volatility of economic cycles. Our customers are spread across many sectors of the Russian economy, diversifying our exposure and protecting our revenue from downturns and unfavorable developments in any single sector. Furthermore, our customer mix in Russia is becoming increasingly diverse, as the number of Small and Medium Accounts increased as a percentage of our total customer base (Small and Medium Accounts revenue grew at a CAGR of 34.1% from 2015 to 2018, while revenue from our Key Accounts grew at a CAGR of 22.4% in the same period). The number of CVs in our database increased during the economic downturn in 2014 and 2015, which has generated increased monetization opportunities during economic recoveries as employers are attracted to a greater pool of active job seekers on our platform.

We strive to maintain and further improve our high standards of customer service. According to a customer survey conducted by Ipsos in November 2017, our Net Promoter Score reached 68 points, which reflects our relentless focus on customer satisfaction. Our business model and customer-oriented approach allow us to maintain high rates of customer retention. Given the relatively low cost of our services, underpinned by the relatively low elasticity of demand for our services, we believe there is still significant room for increased monetization.

Superior profitability and cash flow generation profile

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markets and increase our revenue from a growing customer base without significant investments, while maintaining negative working capital as we receive payments from customers for a number of our services in advance. Our net working capital as of December 31, 2016, December 31, 2017 and December 31, 2018 was P(1,231) million, P(1,956) million and P(2,623) million, respectively. This is reflected in our attractive profitability and cash conversion profile, both in the Russian and in the global context. Our Adjusted EBITDA Margin in the Successor 2018 Period and the Successor 2017 Period was 46.7% and 47.7%, respectively, and we believe that, considering the high operating leverage of our business and inspired by the example of the leading international players in their respective markets, we have significant further upside in margins as we further grow our market share and revenue base.

Strong technology foundation and scalable infrastructure to support future growth

We have developed a sophisticated technology platform, focused on scalability and security, which allows us to create additional value, to improve monetization of our products and maintain our competitive edge.

Scalable and robust proprietary platform. Our IT infrastructure was built to be highly agile and scalable enabling us to expand our product portfolio while significantly growing our user base. The scalability of our technology platform allows us to handle large volumes of traffic without significant incremental capital investment. In addition, we do not use third-party proprietary IT tools to avoid vendor lock, and instead we utilize well known and proven open source tools.

Continuously improving technology Key Performance Indicators (“KPIs”). We work to the highest technology standards and aim to constantly improve our platform. The number of technical bugs per release decreased by 12% in the year ended December 31, 2018 compared to the year ended December 31, 2017. Business continuity for our customers is paramount to us, and we have demonstrated an average uptime rate of 99.91%, 99.92% and 99.92% in the years ended December 31, 2016, 2017 and 2018, respectively. We create different types of user interfaces for different users and simplify user interface forms depending on the context, which we believe improves conversion rates and increases monetization.

Extensively employing machine learning algorithms and artificial intelligence at all key stages of interaction with job seekers and customers. AI lies at the core of our platform, moderating 100% of incoming CVs (with approximately 70% of all CVs ultimately approved for publication by AI in the year ended December 31, 2018) and we use machine learning algorithms to rank CVs in our database and match candidates with the relevant vacancies. As a result, we save on costs associated with CV moderation while improving conversion throughout the job seeker’s funnel, thereby increasing the value of core services to our customers and laying a solid base for monetization enhancement. Our average applications to invites conversion rate for the year ended December 31, 2018 increased by 21% compared to the year ended December 31, 2017 and reached 0.25 invites per job application.

Best mobile solution for job seekers and customers. We believe we are the leading HR mobile platform in Russia, with the majority of our traffic currently coming from mobile users. With both customers and job seekers increasingly demanding on-the-go and on-demand access to recruiting and HR services, we consider our mobile platform to be a strategic pillar of our business. We continuously enhance the user experience on our mobile apps and as of December 2018, our mobile app was ranked among the top business-related applications in iOS and Android appstore-generated lists in Russia, and since launch, our mobile applications have been downloaded 15.3 million times cumulatively as of December 31, 2018. Downloads for the year ended December 31, 2018 increased by 76% compared to the year ended December 31, 2017.

Data protection and security. We take protection of job seekers’ personal data and customers’ corporate data extremely seriously. All data between our servers and customers’ browsers is transmitted over secure protocols.



 

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We use monitoring and protection services to limit potential hacking attacks. Our application and database servers are located on an internal network that is isolated from the Internet and is additionally protected by a dual firewall. We perform regular penetration testing under multiple scenarios. Roskomnadzor inspects our compliance with applicable personal data processing laws, and we fully comply with all such requirements.

Strong and experienced management team backed by reputable international shareholder base

Our experienced management team has a proven track record of delivering on our focused and ambitious strategy as evidenced by our operating and financial results. Since 2010, our management has successfully grown the traffic gap between us and our key competitors, guided us through periods of macroeconomic uncertainty, defended our market positions against aggressive new market entrants and positioned us as the undisputed market leader in Russia and the CIS. We believe that our management team has a proven ability to identify key market opportunities, as demonstrated by our success in introducing AI and machine learning into HR processes, capturing the mobile trend and moving our services further into HR funnels, and has positioned us to capitalize on global HR trends as they gain relevance in our market.

We also benefit from the strong support of our shareholders—Elbrus Capital and The Goldman Sachs Group, Inc.—who bring best international practices and insights into our strategic development and corporate governance.

We believe that the skills, industry knowledge and operating expertise of our senior executives, combined with the support of our shareholders, provide us with a distinct competitive advantage as we continue to grow.

Our Growth Strategy

Consistent with the examples of the leading online classified businesses in both developed and emerging markets with certain “winner takes all” characteristics, we aim to continue growing faster than the Russian online recruitment market, thereby increasing our market share while maintaining profitability. To achieve our goals, we have designed our strategy around the following pillars:

Continue to broaden candidate reach

We plan to continue strengthening our candidate sourcing capabilities by enhancing coverage of the overall employable population of Russia. In addition to our traditional white collar and Moscow and St. Petersburg based markets, we are increasingly emphasizing penetration into the blue collar segment and the other Russian regions, as well as other specific categories of job seekers, such as passive candidates and youth, where we are noticing an increase in customer demand.

Increase the share of candidates from Russian regions

We see strong demand for both white collar and blue collar professionals in the Russian regions outside of Moscow and St. Petersburg. As of December 31, 2018, CVs from Russian regions accounted for 48% of our total visible CV database, compared to 45% as of December 31, 2017. We plan to further increase this share benefiting from our long-standing leadership by number of CVs in regions, as we were the leader by number of CVs (including those acquired from Job.ru) in 93% of Russian regions as of December 2018.

Increase the share of blue collar job seekers

We aim to diversify our job seeker base and increase the number of blue collar professionals using our platform, who we believe are a segment of the Russian online job seeker market that has historically been hard to reach online, and therefore, represents significant potential. Our key initiatives in this regard include:

 

   

further simplifying the CV preparation and application processes;



 

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focusing on offline marketing channels, which have proven to be effective to date in attracting blue collar job seekers; and

 

   

considering potential acquisitions of smaller competitors who have historically focused on blue collar job seekers.

In line with this strategy:

 

   

we increased our top-of-mind brand awareness among blue collar job seekers from 22% as of June 28, 2017 to 33% as of September 30, 2018, according to Socis MR Rus; and

 

   

in January 2018, we acquired the assets of Job.ru, a platform that has historically focused on blue collar job seekers.

Increase the share of young candidates

We believe that competition for entry level professionals is set to intensify in the coming years due to demographic factors (i.e., low birth rates in Russia in the 1990s into the beginning of the 2000s). Hence, we consider it essential to ensure high engagement and retention of the younger audience on our platform.

We aim to solidify our market leadership in this segment (by number of CVs of young professionals) by significantly increasing content targeted at youth (particularly internship postings), further improving our user interface and conducting selective marketing efforts aimed at young professionals (if considered necessary). We also intend to design innovative mobile solutions to suit young professionals’ needs and employment habits, such as elevated turnover rate, the preference for temporary or remote employment and higher activity on-the-go.

Increase and enhance job advertisements database

Our strategic goal is to be the leader by job advertisements across all regions of Russia and all customer segments.

Increase customer penetration in Russian Regions

We plan to capitalize on the relatively low penetration level of online recruitment services in Russia, which, according to J’Son & Partners, stood at approximately 10% in 2016, measured as the share of active businesses using online recruitment platforms compared to selected developed markets in 2016 (e.g., 30% in Australia and 25% in Germany, according to J’Son & Partners). We aim to continue expanding into Russian regions, focusing on cities with more than 50,000 inhabitants, where we believe high growth opportunities in our industry exist due to the ongoing shift from offline to online. The number of enterprises in Russian regions is forecasted to grow at a CAGR of 2.1% from 2018 to 2022, compared to only 0.6% for Moscow and St. Petersburg, according to J’Son & Partners, which we believe will further support this demand. The CAGR of our number of customers in the Russian regions, excluding Moscow and St. Petersburg, was 60% from 2015 to 2018, compared to 25% in Moscow and St. Petersburg during the same period, which demonstrates the importance of the regional focus of our geographical expansion strategy.

Besides benefiting from a steadily growing online recruitment market, we aim to gain market share from other regional and multi-regional online job classifieds platforms due to our strong competitive advantages, including our highly trained, local sales force, ability to publish job postings and CVs across broad geographies, technological edge and expansion of social media, TV and other marketing programs to further increase our brand awareness and engagement of job seekers and customers.

Increase the share of Small and Medium Accounts

We aim to substantially increase the number of Small and Medium Accounts on our platform, which we believe represent the most underpenetrated segment of the Russian job classifieds market. The number of our Small and Medium Accounts grew at a CAGR of 40% from 2015 to 2018, reaching approximately 223,000 accounts for the



 

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year ended December 31, 2018, while the number of Key Accounts grew on average by 13% during the same period, reaching approximately 11,000 accounts for the year ended December 31, 2018.

Our key initiatives in this regard include:

 

   

attracting additional candidates from regions and industries that are relevant to our Small and Medium Accounts;

 

   

increasing the effectiveness and engagement level of the Small and Medium Accounts-focused part of our sales function;

 

   

implementing offline and online advertising campaigns at a more granular, targeted level; and

 

   

simplifying and adopting our platform to better meet the needs of small and medium businesses (with a particular focus on onboarding requirements and user interface).

Provide the most effective candidate delivery product by maintaining technological edge across all platforms

As we continue to grow our candidate and employer databases and as traffic on our platform continues to increase, it is critical that we continue developing our technology and data capabilities to optimize job seeker and employer matching, thus enabling a streamlined and efficient recruitment process for both parties.

We will continue to extensively use and develop AI technology and machine learning algorithms at all key stages of interaction with job seekers and employers. Our main goals for our AI and machine learning algorithms are to further enhance our smart search and matching functionalities in job postings and our CV database and make our recommendation system more tailored to specific qualities and recruitment criteria, each of which we expect will improve the quality of our recommendations and matches and in turn increase the number of people hired through our platform.

We benefit from high barriers to entry combined with the ability to compile unique data based on the recruitment needs of our customers, which allows us to steadily develop innovative products. Our strategy is to continue collecting and using this data to feed into our Smart Matching and Machine Learning Recommendation systems, while also maintaining data protection standards and continuing to be in full compliance with all relevant personal data related regulations. In this regard, we will continue applying stringent information security standards and continue stress and access testing of our IT systems under different scenarios to meet evolving security challenges and ensure the safety and privacy of our job seekers’ and customers’ data.

We plan to pursue a platform agnostic approach and boost usage of our mobile platform by developing and improving access to a larger range of our services on “all screens.” Growing mobile internet and smartphone penetration in Russia is a major trend, and we aim to leverage this development to further increase our customer and job seeker reach. We consider mobile expansion to be not only a natural evolution of our desktop audience, but also a way to expand our ability to access such job seekers and customers who prefer mobile to desktop use. As of December 31, 2018, 52% of registered job seekers used our mobile platform only (including both mobile website and apps), while 27% used the desktop only. The share of registered job seekers only using our mobile applications increased from 19% in January 2017 to 39% in December 2018. We continuously seek to enhance the functionality of our mobile platform. Our mobile app for job seekers now provides full functionality and we continue to add functionality to our mobile app for customers. As a result, we see a growing share of our traffic from mobile devices, reaching 64% for the year ended December 31, 2018, and improving conversions of mobile traffic into applications from job seekers.

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needs of particular user categories to further improve conversion rates and increase monetization. We also intend to introduce new features that we believe will resonate with our customers and job seekers.

Enhanced customer monetization potential

We believe there is significant untapped monetization potential in our business due to the relatively low costs of our services to our customers, in both absolute terms and compared to foreign markets, which we believe leads to relatively low elasticity of demand, particularly from large enterprises. We aim to further enhance our monetization opportunities in order to close the gap in our pricing, measured by annual revenue per UMV, between us and global industry peers. We have a demonstrated track record of increasing customer monetization in all corporate segments during the last decade.

We believe that these efforts will be further supported by our pricing power stemming from our clear market leadership position, which we expect to maintain and increase due to the continuing network effect described above.

We are continuously working on additional monetization opportunities by tailoring our product portfolio to offer our Key Accounts premium levels of existing and new services, as well as adapting our pricing policies and strategies to suit particular customer segments and the broader marketplace and regulatory environment as it continues to rapidly evolve.

Well positioned to reach the entire recruiting value chain

We plan to continue transforming our business into a comprehensive, integrated recruiting platform by broadening our product range along the recruitment services value chain (from sourcing to onboarding). Our goal is to capture and automate the entire recruiting process and seamlessly manage it through our platform. We believe that our vast customer base, deep insight into its hiring needs as well as broad candidate sourcing capabilities give us advantages in creating value throughout the recruiting process while enhancing customer engagement and increasing our overall customer retention and ARPC.

Our proprietary Software-as-a-Service (“SaaS”) based applicant tracking system (“ATS”), Talantix, allows employers to automate candidate processing and talent acquisition, which is vital to creating value throughout the entire recruiting process. Talantix has been gaining traction among our midmarket customers that look for an end-to-end solution with minimal customization and integration requirements. This allows us to scale this offering across a broader customer base without embarking on long-lasting integrations.

Recently, we acquired a 25.01% stake in a rapidly developing HR technology company, Skillaz, which automates routine recruiting processes by implementing complex built-to-suit integration projects. This offering complements Talantix as it targets larger, high-end market customers who have a sophisticated recruitment function. We also entered into option contracts to purchase the additional 40.01% ownership interest in Skillaz, which are exercisable through the period from January 1, 2020 until June 30, 2021. These options will be exercised if we decide that this product gains traction with our customers and fits with our long-term strategy.

We aim to continue to seek out acquisitions in adjacent markets, such as ATS and automation software. We believe that integrating our online classified, program-based, off-platform lead generation capabilities and process management software in one solution will increase our customer value proposition, enhance customer loyalty and increase customer spend within our recruitment ecosystem.



 

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Corporate Information

We were incorporated in Cyprus on May 28, 2014 under the Cyprus Companies Law, Cap. 113 as Zemenik Trading Limited, and our registered office is located at 42 Dositheou Street, Strovolos, Nicosia, Cyprus. On March 1, 2018, Zemenik Trading Limited was converted from a private limited company incorporated in Cyprus into a public limited company incorporated in Cyprus, and the Company’s name changed, pursuant to a special resolution at a general meeting of the shareholders, to HeadHunter Group PLC. The legal effect of this conversion under Cypriot law was limited to the change of legal form. Following the completion of this offering, we are considering changing the place of management of HeadHunter Group PLC from Cyprus to Russia, which will result in HeadHunter Group PLC becoming a Russian tax resident. See “Material Tax Considerations—Material Cyprus Tax Considerations—Taxation of Dividends and Distributions.”

The principal executive office of our key operating subsidiary, Headhunter LLC, is located at 9/10 Godovikova Street, Moscow, 129085 Russia. The telephone number at this address is +7 495 974-6427. Our website address is www.hh.ru. The information contained on, or that can be accessed through, our website is not a part of, and shall not be incorporated by reference into, this prospectus. We have included our website address as an inactive textual reference only.

Risks Associated with our Business

Our business is subject to a number of risks that you should be aware of before making an investment decision. You should carefully consider all of the information set forth in this prospectus and, in particular, should evaluate the specific factors set forth in the “Risk Factors” section of this prospectus in deciding whether to invest in our securities. Among these important risks are the following:

 

   

significant competition in our markets;

 

   

our ability to maintain and enhance our brand;

 

   

our ability to improve our user experience, product offerings and technology platform to attract and retain job seekers;

 

   

our ability to respond effectively to industry developments;

 

   

our dependence on job seeker traffic to our websites;

 

   

our reliance on Russian Internet infrastructure;

 

   

global political and economic stability;

 

   

privacy and data protection concerns;

 

   

our ability to successfully remediate the material weaknesses in our internal control over financial reporting and our ability to establish and maintain an effective system of internal control over financial reporting;

 

   

our ability to effectively manage our growth; and

 

   

our ability to attract, train and retain key personnel and other qualified employees.

Implications of Being an “Emerging Growth Company” and a “Foreign Private Issuer”

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”). As such, we are eligible, for up to five years, to take advantage of certain exemptions from various reporting



 

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requirements that are applicable to other publicly traded entities that are not emerging growth companies. These exemptions include:

 

   

the ability to present more limited financial data, including presenting only two years of audited financial statements and only two years of selected financial data in the registration statement on Form F-1 of which this prospectus is a part;

 

   

not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”);

 

   

not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board (“PCAOB”), regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (i.e., an auditor discussion and analysis);

 

   

not being required to submit certain executive compensation matters to stockholder advisory votes, such as “say-on-pay,” “say-on-frequency” and “say-on-golden parachutes;” and

 

   

not being required to disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the chief executive officer’s compensation to median employee compensation.

We may take advantage of these provisions until the last day of our fiscal year following the fifth anniversary of the completion of this offering or such earlier time that we are no longer an emerging growth company. As a result, we do not know if some investors will find our ADSs less attractive. The result may be a less active trading market for our ADSs, and the price of our ADSs may become more volatile.

Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 13(a) of the Exchange Act for complying with new or revised accounting standards. We are choosing to irrevocably opt out of this extended transition period and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Under federal securities laws, our decision to opt out of the extended transition period is irrevocable.

We will remain an emerging growth company until the earliest of: (i) the last day of the first fiscal year in which our annual gross revenue exceeds $1.07 billion; (ii) the last day of the fiscal year during which the fifth anniversary of the date of this offering occurs; (iii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our ADSs that are held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter; or (iv) the date on which we have issued more than $1.00 billion in non-convertible debt securities during any three-year period.

Upon completion of this offering, we will report under the Exchange Act as a non-U.S. company with foreign private issuer status. Even after we no longer qualify as an emerging growth company, as long as we qualify as a foreign private issuer under the Exchange Act we will be exempt from certain provisions of the Exchange Act that are applicable to U.S. domestic public companies, including:

 

   

the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act;

 

   

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the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q containing unaudited financial and other specific information, or current reports on Form 8-K, upon the occurrence of specified significant events.

Both foreign private issuers and emerging growth companies are also exempt from certain more stringent executive compensation disclosure rules. Thus, even if we no longer qualify as an emerging growth company, but remain a foreign private issuer, we will continue to be exempt from the more stringent compensation disclosures required of companies that are neither an emerging growth company nor a foreign private issuer.

Status as a “Controlled Company”

Upon the completion of this offering, our shareholders, Highworld Investments Limited, an investment vehicle associated with Elbrus Capital, and ELQ Investors VIII Limited, an investment vehicle associated with The Goldman Sachs Group, Inc., will collectively own 33,695,647 ordinary shares, representing 67.4% of the voting power of our issued and outstanding shares (or 31,249,995 ordinary shares representing 62.5% of the voting power of our issued and outstanding shares if the underwriters exercise their option to purchase additional ADSs in full). As a result, we will remain a “controlled company” within the meaning of the listing rules and therefore we are eligible for, and, in the event we no longer qualify as a foreign private issuer, we intend to rely on, certain exemptions from the corporate governance listing requirements, of The Nasdaq Global Select Market (“Nasdaq”). See “Management—Controlled Company Exemption.”



 

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The Offering

 

ADSs offered by the Selling Shareholders

16,304,348 ADSs, each representing one ordinary share.

 

Ordinary shares to be outstanding after this offering

50,000,000 ordinary shares.

 

Option to purchase additional ADSs

The Selling Shareholders have granted the underwriters an option to purchase up to 2,445,652 additional ADSs within 30 days of the date of this prospectus.

 

American Depositary Shares

The underwriters will deliver our ordinary shares in the form of ADSs. Each ADS, which may be evidenced by an American Depositary Receipt (“ADR”) represents an ownership interest in one of our ordinary shares. As an ADS holder, we will not treat you as one of our shareholders. The depositary, JPMorgan Chase Bank, N.A., will be the holder of the ordinary shares underlying your ADSs.

 

  You will have ADS holder rights as provided in the deposit agreement. Under the deposit agreement, you may only vote the ordinary shares underlying your ADSs if we ask the depositary to request voting instructions from you. The depositary will pay you the cash dividends or other distributions, if any, it receives on our ordinary shares after deducting its fees and expenses and applicable withholding taxes. You may need to pay a fee for certain services, as provided in the deposit agreement.

 

  You are entitled to the delivery of the ordinary shares underlying your ADSs upon the surrender of such ADSs, the payment of applicable fees and expenses and the satisfaction of applicable conditions set forth in the deposit agreement.

 

  To better understand the terms of the ADSs, you should carefully read “Description of American Depositary Shares.” We also encourage you to read the deposit agreement, the form of which is attached as an exhibit to the registration statement of which this prospectus forms a part. The Selling Shareholders are offering ADSs so that our company can be quoted on Nasdaq and investors will be able to trade our securities and receive dividends on them in U.S. dollars.

 

Depositary

JPMorgan Chase Bank, N.A.

 

Use of proceeds

The Selling Shareholders will receive all of the net proceeds from the sale of the ADSs. We will not receive any proceeds from the sale of ADSs by the Selling Shareholders.

 

Dividend policy

We have historically paid dividends, and while we have not adopted a formal dividend policy, we currently expect to continue to do so in the future. Beginning in 2019, subject to the recommendation of the



 

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board of directors, we plan to annually distribute at least 50% of our Adjusted Net Income, as defined in “Presentation of Financial and Other Information,” subject to our investment and debt repayment requirements. Any future determination regarding the payment of a dividend will depend on many factors, including the availability of distributable profits, our liquidity and financial position, our future growth initiatives and strategic plans, including possible acquisitions, restrictions imposed by our financing arrangements, tax considerations and other relevant factors. If we declare dividends on our ordinary shares, the depositary will pay you the cash dividend and other distributions it receives on our ordinary shares, after deducting its fees and expenses. See “Dividend Policy.”

 

Risk factors

See “Risk Factors” and the other information included in this prospectus for a discussion of factors you should consider before deciding to invest in our ordinary shares.

 

Lock-up agreements

We have agreed with Goldman Sachs & Co. LLC and Morgan Stanley & Co. LLC, as representative of the several underwriters, subject to certain exceptions, not to sell or dispose of any of our ADSs or securities convertible into or exchangeable or exercisable for our ADSs until 180 days after the date of this prospectus. All of our shareholders, consisting of the Selling Shareholders, our executive officers and our board members have agreed to similar lockup restrictions for a period of 180 days. See “Underwriting (Conflicts of Interest).”

 

Pre-emptive rights

Under the law of Cyprus, existing holders of shares in Cypriot public companies are entitled to pre-emptive rights on the issue of new shares in that company (if shares are issued for cash consideration). In addition, our shareholders authorized the disapplication of pre-emptive rights for a period of five years from the date of the completion of this offering. See “Description of Share Capital and Articles of Association—Pre-emptive Rights.”

 

Listing

We have been approved to list our ADSs on Nasdaq under the symbol “HHR.”

Unless otherwise indicated, all information contained in this prospectus assumes or gives effect to:

 

   

no exercise by the underwriters of their option to purchase additional ADSs in this offering; and

 

   

an initial public offering price of $12.25 per share, which is the midpoint of the price range set forth on the cover page of this prospectus.



 

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Corporate and Capital Structure

Historically, Headhunter FSU Limited, an entity incorporated in Cyprus, acted as a holding company for all of our operating subsidiaries. Zemenik Trading Limited was incorporated on May 28, 2014 and was subsequently acquired by Highworld Investments Limited, an investment vehicle associated with Elbrus Capital, and ELQ Investors VIII Limited, an investment vehicle associated with The Goldman Sachs Group, Inc. On February 24, 2016 (the “Acquisition Date”), Zemenik Trading Limited acquired all of the outstanding equity interests of Headhunter FSU Limited from Mail.Ru.

On March 1, 2018, Zemenik Trading Limited was converted from a private limited company incorporated in Cyprus into a public limited company incorporated in Cyprus, and the Company’s name changed, pursuant to a special resolution at a general meeting of the shareholders, to HeadHunter Group PLC. The legal effect of this conversion under Cypriot law was limited to the change of legal form. Following the completion of this offering, we are considering changing the place of management of HeadHunter Group PLC from Cyprus to Russia, which will result in HeadHunter Group PLC becoming a Russian tax resident. See “Material Tax Considerations—Material Cyprus Tax Considerations—Taxation of Dividends and Distributions.”

The following diagram illustrates our corporate structure following the completion of this offering (assuming the underwriters do not exercise their option to purchase additional ADSs in full):

 

LOGO

*We agreed to acquire a 25.01% equity interest in the charter capital of LLC Skilaz (“Skillaz”). Currently, we are going through state registration processes and formalities to finalize the acquisition and aim to have the acquisition completed prior to the completion of this offering.



 

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Summary Consolidated Historical and Pro Forma Financial and Other Data

The following tables present our summary consolidated financial and other data as of and for the periods indicated. The summary consolidated statements of operations data for: the Successor 2018 Period and the Successor 2017 Period and the summary consolidated balance sheet data as of December 31, 2017 and 2018 (Successor) are derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated statements of operations data for the Predecessor 2016 Stub Period, the Successor 2016 Period and the Predecessor 2015 Period are derived from our audited consolidated financial statements not included or incorporated by reference in this prospectus. Our historical audited results are not necessarily indicative of the results that should be expected in any future period.

In order to improve the comparability of the year ended December 31, 2016 to the Successor 2018 Period, the Successor 2017 Period and the Predecessor 2015 Period, we have included supplemental unaudited pro forma consolidated financial information of the Group for the year ended December 31, 2016 as if the Acquisition, including the related incurrence and repayment of debt, had occurred on January 1, 2016. The unaudited supplemental pro forma consolidated financial information of the Group for the year ended December 31, 2016 has been prepared solely for the purpose of this prospectus, has not been prepared in the ordinary course of our financial reporting and has not been audited or reviewed by our Independent Registered Public Accounting Firm. The unaudited supplemental pro forma consolidated financial information of the Group for the year ended December 31, 2016 has been presented for illustrative purposes only and does not purport to represent what our financial results would have actually been had the Acquisition occurred on January 1, 2016, nor does it purport to project our financial results for any future period or our financial condition at any future date.

The financial data set forth below should be read in conjunction with, and is qualified by reference to, “Selected Consolidated Historical Financial and Other Data,” “Unaudited Pro Forma Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto included elsewhere in this prospectus.

Income Statement Data

 

    Predecessor           Predecessor     Successor  
(in thousands of RUB)   For the
year ended
December 31,

2015
    Pro forma
for the year

ended
December 31,

2016(1)
    Period from
January 1 to

February 23,
2016
    Period from
February 24
to
December 31,

2016
    For the
year ended
December 31,
2017(2)
    For the
year ended
December 31,
2018
 

Revenue

    3,103,628       3,739,596       452,904       3,286,692       4,732,539       6,117,773  

Operating costs and expenses (exclusive of depreciation and amortization)

    (1,543,365     (2,065,999     (265,959     (1,847,885     (2,788,576     (3,432,860

Depreciation and amortization

    (88,657     (540,751     (8,743     (459,721     (560,961     (586,131
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    1,471,606       1,132,846       178,202       979,086       1,383,002       2,098,782  

Finance income

    123,943       28,510       4,246       24,264       70,924       90,602  

Finance costs

    —         (732,025     —         (635,308     (706,036     (644,326

Gain on disposal of subsidiary

    —         —         —         —         439,115       6,131  

Net foreign exchange gain/(loss)

    74,046       (16,190     9,720       (25,910     96,300       (8,742
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit before income tax

    1,669,595       413,141       192,168       342,132       1,283,305       1,542,447  

Income tax expense

    (393,817     (442,493     (59,176     (397,774     (820,503     (509,602
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    1,275,778       (29,352     132,992       (55,642     462,802    

 

1,032,845

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Pro forma for the year ended December 31, 2016 has been derived from the “Unaudited Pro Forma Consolidated Financial Data” located elsewhere in this prospectus.



 

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(2)

We adopted IFRS 15 at January 1, 2018 using the full retrospective approach. Under the transition method chosen, certain comparative information has been restated. Please refer to Note 4 of our consolidated financial statements for the year ended December 31, 2018 included elsewhere in this prospectus. The impact of the transition to IFRS 15 for the years ended December 31, 2015 and December 31, 2016 is immaterial, and therefore, the comparative information for any periods prior to January 1, 2017 has not been restated.

Balance Sheet Data

 

     Successor  
     As of
December 31,

2017(3)
     As of
December 31,
2018
 
(in thousands of RUB)

Total non-current assets

     10,640,174        10,373,068  

Total current assets

     1,530,424        2,966,214  

Total assets

     12,170,598        13,339,282  

Total equity

     1,955,248        3,003,420  

Total non-current liabilities

     7,425,329        6,287,899  

Total current liabilities

     2,790,021        4,047,963  

Total liabilities

     10,215,350        10,335,862  

 

 

(3)

We adopted IFRS 15 at January 1, 2018 using the full retrospective approach. Under the transition method chosen, certain comparative information has been restated. Please refer to Note 4 of our consolidated financial statements for the year ended December 31, 2018 included elsewhere in this prospectus. The impact of the transition to IFRS 15 for the years ended December 31, 2015 and December 31, 2016 is immaterial, and therefore, the comparative information for any periods prior to January 1, 2017 has not been restated.



 

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RISK FACTORS

You should carefully consider the risks described below before making an investment decision. Additional risks not presently known to us or that we currently deem immaterial may also impair our business operations. Our business, financial condition or results of operations could be materially and adversely affected by any of these risks. The trading price and value of our ADSs could decline due to any of these risks, and you may lose all or part of your investment. This prospectus also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks faced by us described below and elsewhere in this prospectus.

Risks Relating to our Business and Industry

We face significant competition, which may cause us to suffer from a weakened market position that would materially and adversely affect our results of operations.

The markets for our products and services are highly competitive and rapidly evolving. Successful execution of our strategy depends on our continuous ability to attract and retain job seekers and customers, expand the market for our products and services, maintain a technological edge and offer new capabilities to customers. We face competition in our various lines of services from competitors that focus exclusively on online recruitment, such as SuperJob, and from those that offer recruitment as part of their broader services portfolio, such as Avito. Other powerful internet companies with a broad local presence in our markets that have extensive and loyal user bases, such as Yandex and Mail.Ru, may decide to directly target our customers, thereby intensifying competition in the recruitment market. Further, our existing competitors or new market entrants may target new and emerging job seeker candidates, such as youths, which, if successful, could harm our business and reputation. Although professional social networking businesses with online recruitment functions historically have not had significant market positions in Russia, such businesses may dedicate extra resources to expand their operations and as a result, become a significant competitive threat in the future. In particular, should the current government block on the services of the social networking site LinkedIn be lifted, LinkedIn may choose to compete with us in the Russian market. Social networks or professional networking sites like LinkedIn may benefit from access to large pools of passive potential job seekers and a broad range of user information that they could leverage to tailor their recruitment services. See also “Business—Competition.

In addition, we may face competition in the future from new entrants in the recruitment advertising industry and other human resource industries in which we operate, such as dedicated recruitment ads aggregators like Indeed, social networking websites such as Facebook, career-related Internet portals and existing participants in the offline recruitment industry who may develop online recruitment services and products, as well as other HR service providers who may enter the market for any or all of our services. In particular, certain specialized HR technology companies have emerged that have advanced technological capabilities that may be difficult to replicate and/or compete against. Furthermore, Google recently enhanced its job search function in Russia, as well as in other countries globally, by adding a user function called “Google for Jobs.” There can be no assurances that this will not negatively impact our business. While we believe that achieving true scale in these markets would require significant investment, competitors may nonetheless attempt to enter the recruitment advertising industry or upscale operations with relatively limited initial investment. Current competitors may also consolidate or be acquired by an existing or prospective player, which could result in the emergence of another stronger competitor, leading to a potential loss of our market share. There can be no assurances that we will maintain our position as the leading online recruitment platform, particularly if our key competitors consolidate or if large search engines, social media or other online platforms successfully leverage their large user bases to gain access to our markets. To the extent such a competitor significantly increased its market share, our services may become relatively less attractive to our customers, which could reduce our websites’ traffic and demand for our services and products as well as advertising space.

 

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We also believe that there are relatively low existing penetration rates for online recruitment services in some of our regional markets, particularly in regions we view as key growth markets for our services. Our existing competitive advantages over new entrants may be reduced or we may be at a disadvantage compared to our competitors who have greater market penetration, a better understanding of the regional market and/or a superior marketing strategy, in particular, in markets where our brand and business model are relatively untested. If successful, competitors could acquire significant numbers of customers and establish a significant market share within a relatively short period, thereby curbing our growth potential in those regions.

We compete with these existing and future entities for both job seekers and customers. From time to time, our customers may decide not to renew their contracts upon expiration for various reasons. Our customers may also decide to switch to our competitors’ services. Some of our existing or potential new competitors may have greater resources, capabilities and expertise in management, technology, finance, product development, sales, marketing and other areas than we have. They may use their experience and resources to compete with us in a variety of ways, including by competing more heavily for customers, spending more on advertising and brand marketing, investing more in research and development and making acquisitions. If we are unable to compete effectively, successfully and at reasonable cost against our existing and future competitors, our business, prospects, financial condition and results of operations could be materially and adversely affected.

If we fail to maintain and enhance our brand, our business, results of operations and prospects may be materially and adversely affected.

We believe that maintaining and enhancing our brand are of significant importance to the success of our business. A well recognized brand is critical to increasing the number and the level of engagement of job seekers and, in turn, enhancing our attractiveness to customers. We have conducted and may continue to conduct various marketing and brand promotion activities, including print and television advertisements. We cannot assure you, however, that these activities will be successful or that we will be able to achieve the brand promotion effect we expect. In addition, our competitors may increase the intensity of their marketing campaigns, which may force us to increase our advertising spend to maintain our brand awareness.

In addition, any negative publicity relating to our products or services, regardless of its veracity, could harm our brand and the perception of our brand in the market. If our brand is harmed, we may not be able to continue to attract a growing job seeker base, and our business, prospects, financial condition and results of operations could be materially and adversely affected.

If we fail to improve our user experience, product offerings and technology platform, we may not be able to attract and retain job seekers and employers, which may have a material adverse effect on our business, financial condition and results of operations.

Our success depends upon our ability to attract and retain both employers and job seekers. Customers are the primary source of our revenue. A key factor in attracting and retaining employers is our ability to grow our CV database and attract and retain high-quality job seekers. A key factor in attracting and retaining job seekers, in turn, is maintaining and increasing the number of employers using our services and the quantity and quality of job postings on our system.

To satisfy both customers and job seekers, we need to continue to improve their experience as well as innovate and introduce products and services that employers and job seekers find useful and that cause them to return to our website and use our services more frequently. This includes continuing to improve our technology platform to optimize recruitment search results, tailoring our database to additional geographic and market segments and improving the user-friendliness of our website. In addition, we need to adapt, expand and improve our products, services and interfaces to keep up with changing user preferences. For example, with the growing propensity for our job seekers to use smartphones as their main job searching devices, we need to further optimize our mobile applications and continue modifying and updating them to successfully manage the transition to mobile devices

 

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of users of our products and services. It is difficult to predict the problems we may encounter in innovating and introducing new products and services, and we may need to devote significant resources to the creation, support and maintenance of our solutions.

We provide no assurances that our initiatives to improve our user experience will always be successful. We also cannot predict whether our new products or service offerings and delivery methods will be well received by employers and job seekers, or whether improving our technology platform or introducing new service delivery channels will be successful or sufficient to offset the costs incurred to offer these services. If we are unable to increase and retain our employers and job seekers, or maintain and increase the quantity or quality of CVs and job postings, our business, prospects, financial condition and results of operations could be materially and adversely affected.

If we are not able to respond successfully to technological or industry developments, including changes to the business models deployed in our industry, our business may be materially and adversely affected.

The market for online products and services is characterized by rapid technological developments, frequent launches of new product and services, changes in customer needs and behavior and evolving industry standards. As a result, our industry is constantly changing product offerings and business models in order to adopt and optimize new technologies, increase cost efficiency and adapt to customer preferences. There can be no assurances that our key competitors will not suddenly decide to change their business model or marketing strategy, which could be more successful than ours. If other industry participants rapidly shift their business models, for example, to a cost-per-action based model in which fees are generated by user actions, we may be unable to shift our business model or marketing strategy quickly or efficiently enough to compete with these changes. This could result in a loss of customers and our brand and reputation, business, prospects, financial condition and results of operations could be materially and adversely affected.

In addition, companies currently are developing products that directly compete with products in our recruitment-centric VAS portfolio. As our VAS portfolio is currently a relatively small part of our business, we may be at a disadvantage compared to other companies in this market that may be able to leverage greater resources, market knowledge or technical know-how to develop superior proprietary technologies. If such developments are successful, these competitors could attract our customers to their interfaces and away from our platform, limiting our ability to become a comprehensive, integrated full-scale HR platform. These developments may make our existing services obsolete or less competitive. In order to respond to such developments, we may be required to undertake substantial efforts and incur significant costs. In the event that we do not successfully respond to such developments in a timely and cost-effective manner, our business, prospects, financial condition and results of operations could be materially and adversely affected.

If job seeker traffic to our website declines for any reason, our business and results of operations may be harmed.

Our ability to attract and retain job seekers on our website is critical for our continuing growth. If job seeker traffic on our website declines for any reason, our business and results of operations may be harmed. Our competitors’ search engine optimization efforts may result in their websites receiving a higher search result page ranking than ours. Internet search engines could revise their methodologies, which may adversely affect our search result page ranking. Any such changes could decrease user traffic to our website and adversely affect the growth in our user base, and our business, prospects, financial condition and results of operations could be materially and adversely affected.

Any disruption in Internet access, telecommunications networks or our technology platform may cause slow response times or otherwise impair our users’ experience, which may in turn reduce user traffic to our website and significantly harm our business, financial condition and operating results.

Our online recruitment business is highly dependent on the performance and reliability of Russia’s Internet infrastructure, accessibility of bandwidth and servers to our service providers’ networks and the continuing

 

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performance, reliability and availability of our technology platform. Telecommunications capacity constraints in Russia may impede further development of our business and Internet usage more generally to the extent that users experience delays, transmission errors and other difficulties.

Our data center and all of our backup centers are located in Moscow and, therefore, we are heavily reliant on Russia’s Internet infrastructure to operate our business. Since these centers are located along with our headquarters in Moscow, our operations may also be negatively impacted by disruptions to power, natural disasters or other events affecting Moscow. In addition, if there were any system outages due to any Internet delays, disruptions, natural disasters or any other issues in Russia more generally, this would have a material adverse impact on our business and operating results depending on the length and severity of the issue.

We also rely on major Russian telecommunication companies, data center service providers and other infrastructure service providers to support us with bandwidth, data storage and other services. We may not have access to comparable alternative networks or services in the event of disruptions, failures or other problems. Any extreme disruption in Internet access or in the Internet generally could significantly harm our business, financial condition and operating results. In December 2018, a draft law aimed at ensuring the safe and sustainable functioning of the Internet in the Russian Federation was submitted for consideration to the State Duma. In April 2019, the Parliament adopted this draft law. The law provides requirements for Russian telecom operators to install new equipment to ensure that the Russian Internet functions autonomously in case the global Internet is not operating in Russia and introduces the notion of the Russian national domain zone. It is currently unclear how this law might affect our operations, and there can be no assurances that this may not negatively affect our business or operations. Furthermore, we may not timely and effectively scale and adapt our existing technology and network infrastructure to ensure our website is accessible within an acceptable load time, and our business, prospects, financial condition and results of operations could be materially and adversely affected.

We may experience website disruptions, outages and other website performance problems for a variety of reasons, including infrastructure changes, human or software errors, capacity constraints due to an overwhelming number of users accessing our website simultaneously and denial of service or fraud or security attacks. For example, we experienced a minor outage, which resulted in our website being temporarily blocked to a small percentage of our users and we quickly remedied. In addition, we may experience slow response times or system failures due to a failure of our information storage, retrieval, processing and management capabilities. Slow response times or system failures may drive our job seekers away, reduce the attractiveness of our products and services or discourage employers and recruiters from posting jobs on our websites. If we experience technical problems in delivering our services over the Internet, we could experience reduced demand for our services, lower revenue and increased costs.

Computer viruses, undetected software errors and hacking may cause delays or interruptions on our systems and may reduce the use of our services and damage our reputation and brand names.

Our online systems, including our website, apps and our other software applications, products and systems could contain undetected errors, or “bugs,” that could adversely affect their performance. Additionally, we regularly update and enhance our website and our other online systems and introduce new versions of our software products and applications. The occurrence of errors in any such update or enhancement may cause disruptions in our services and may, as a result, cause us to lose market share, and our reputation and brand name, business, prospects, financial condition and results of operations could be materially and adversely affected.

In addition, computer viruses and hacking may cause delays or other service interruptions on our systems. “Hacking” involves efforts to gain unauthorized access to information or systems or to cause intentional malfunctions, loss or corruption of data, software, hardware or other computer equipment.

While we currently employ various antivirus and computer protection software in our operations, we cannot assure you that such protections will successfully prevent hacking or the transmission of any computer virus,

 

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which could result in significant damage to our hardware and software systems and databases, disruptions to our business activities, including to our e-mail and other communications systems, breaches of security and the inadvertent disclosure of confidential or sensitive information, interruptions in access to our website through the use of “denial of service” or similar attacks and other material adverse effects on our operations.

We may incur significant costs to protect our systems and equipment against the threat of, and to repair any damage caused by, computer viruses and hacking. Moreover, if a computer virus or hacking affects our systems and is highly publicized, our reputation and brand names could be materially damaged and usage of our services may decrease. In addition, the inadvertent transmission of computer viruses could expose us to a material risk of loss or litigation and possible liability.

Privacy and data protection concerns, including evolving government regulation in the area of consumer data privacy or data protection, could adversely affect our business and operating results.

The effectiveness our technology, including our AI and platforms, and our ability to offer our products and services to job seekers and our customers rely on the collection, storage and use of data concerning job seekers and employers, including personally identifying or other sensitive data. Our collection and use of this data for job searches, job matching, data analytics or communications outreach might raise privacy and data protection concerns that could negatively impact the demand for our services. For example, our AI relies on the collection and use of data that we gather from job seekers, employers and various other sources, including external sources. Privacy and data protection laws could restrict or add regulatory and compliance processes to our ability to effectively use and profit from those services, and any security breach or incident that we experience could result in unauthorized access to, misuse of, or unauthorized acquisition of our or our users’ data. Any such incidents could expose us to claims, litigation, regulatory or other governmental investigations, administrative fines and potential liability.

The government of the Russian Federation, for example, has enacted consumer data privacy or data protection legislation, including laws and regulations applying to the solicitation, collection, transfer, processing and use of personal data. This legislation could reduce the demand for our recruiting services if we fail to design or enhance our services to comply with the privacy and data protection measures required by the legislation. Moreover, we may be exposed to liability under existing or new consumer privacy or data protection legislation.

If we were found to be subject to and in violation of any privacy or data protection laws or regulations, our business may be materially and adversely impacted and we would likely have to change our business practices and potentially our product portfolio. In addition, these laws and regulations could impose significant costs on us and could make it more difficult for us to use our current technology to match job seekers with employers and vice-versa. In addition, if a breach of data security were to occur, or other violation of privacy or data protection laws and regulations were to be alleged, solutions may be perceived as less desirable and our business, prospects, financial condition and results of operations could be materially and adversely affected.

We may use open source software in a manner that could be harmful to our business.

We use open source software in connection with our technology and services. The original developers of the open source code provide no warranties on such code. Moreover, some open source software licenses require users who distribute open source software as part of their software to publicly disclose all or part of the source code to such software and/or make available any derivative works of the open source code on unfavorable terms or at no cost. The use of such open source code may ultimately require us to replace certain code used in our products, pay a royalty to use some open source code or discontinue certain products. Our business, prospects, financial condition and results of operations could be materially and adversely affected by any of the above requirements.

 

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Real or perceived inaccuracies of our internally calculated or third-party sourced operating metrics may harm our reputation and adversely affect our business and operating results.

We source most of our operating statistics, which are included in this prospectus and which we regularly communicate to the market, from independent online statistics providers such as LiveInternet, comScore, SimilarWeb and others. Some of our data providers calculate the number of our UMVs based on the number of different cookies or device IDs from which a website or a mobile application of ours is visited during a given day based on our internal data, which has not been independently verified. There are inherent challenges in measuring our UMVs accurately. For example, user devices with poor internet connectivity may fail to trigger the Java script code to record the unique visitor data. On the other hand, a user who visits our websites as well as our mobile applications on a given day may be counted as multiple UMVs due to the different cookies and IDs of the devices used to visit our websites and mobile applications.

Our measures of calculating operating metrics may differ from estimates published by third parties or from similarly titled metrics used by our competitors or other parties due to differences in methodology. In addition, our metrics may immaterially change retroactively if, for example, a job seeker is blocked and his/her CV is removed. If customers, employers or investors do not perceive our operating metrics to be accurate representations of our user base, or if we discover material inaccuracies in our operating metrics, our reputation may be harmed, and our business, prospects, financial condition and results of operations could be materially and adversely affected.

We are subject to potential legal liability from both employers and job seekers with respect to our job matching suggestions and other human resource related services.

We are exposed to potential claims associated with the recruitment process, including claims by customers seeking to hold us liable for recommending a candidate who subsequently proves to be unsuitable for the position filled, claims by current or previous employers of our candidates alleging interference with employment contracts, claims by candidates against us alleging our failure to maintain the confidentiality of their employment search or alleging discrimination or other violations of employment law or other laws or regulations by our customers, and claims by either employers or candidates alleging the failure of our business process outsourcing services to comply with laws or regulations relating to employment, employee’s insurance or benefits, individual income taxes or other matters.

We may also be subject to claims or regulatory sanctions over actions by third parties beyond our control, such as misrepresentation of information, misuse of personal data or other inappropriate or unlawful actions by candidates or customers using our platform. In our user agreements and customer contracts, we have specific clauses where we explicitly deny any responsibility for actions by third parties or for the accuracy of information they provide to us, and it is a violation of our terms and conditions to misuse our services. Nevertheless, there can be no assurance that these preventative measures will fully protect us from any such claims, which, regardless of merit, may force us to participate in time-consuming, costly litigation or investigation, divert significant management and staff attention, and damage our reputation and brand names. We do not maintain insurance coverage for liabilities arising from claims by employers, candidates or third parties.

Our business may suffer if we do not successfully manage our current and potential future growth.

We have grown significantly in recent years and we intend to continue to expand the scope and geographic reach of the services we provide. Our total revenue increased from P3,104 million in the Predecessor 2015 Period to P6,118 million in the Successor 2018 Period. Our anticipated future growth will likely place significant demands on our management and operations. Our success in managing our growth will depend, to a significant degree, on the ability of our executive officers and other members of senior management to operate effectively, and on our ability to improve and develop our financial and management information systems, controls and procedures. In addition, we will likely have to successfully adapt our existing systems and introduce new systems, expand, train and manage our employees and improve and expand our sales and marketing capabilities.

 

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Revenue growth may slow or revenue may decline for any number of reasons, including our inability to attract and retain job seekers, decreased customer spending, increased competition, slowing growth of the overall online job search market, the emergence of alternative business models, changes in government policies and general economic conditions. We may also lose users for other reasons, such as a failure to deliver satisfactory search results or transaction experiences or high quality services.

Certain factors may also prevent or delay growth in our industry, which could adversely affect our development and growth plans. Despite relatively high overall internet penetration levels in Russia, penetration of online recruitment services has historically been low and may not increase as quickly as we anticipate. Internet penetration levels throughout Russia have historically been uneven, with much higher penetration levels in urban areas, and these discrepancies could continue. The use of online services in general may decelerate, for example, as a result of slower economic development, declining population levels or declining investment in infrastructure. In addition, the pace of adoption of online recruitment services by blue collar job seekers could be slower than anticipated due to the continuing popularity of traditional recruitment channels, such as newspapers, billboards and word-of-mouth. The number of small and medium enterprises, which we believe represent an underpenetrated and growing segment of our market, could remain stable or start to decline, driven, for example, by adverse macroeconomic conditions. Any of these factors could frustrate our ability to realize our growth strategy and cause us to reevaluate our strategic goals and development priorities.

If we are unable to properly and prudently manage our operations as they continue to grow, or if the quality of our services deteriorates due to mismanagement, our brand name and reputation could be severely harmed, and our business, prospects, financial condition and results of operations could be materially and adversely affected.

If we are unable to maintain and expand our scale of operations and generate a sufficient amount of revenue to offset the associated fixed and variable costs, our results of operations may be materially and adversely affected.

Online businesses like ours tend to involve certain fixed cost bases, and our ability to achieve desired operating margins in our recruitment business depends largely on our success in maintaining a scale of operations and generating a sufficient amount of revenue to offset the associated fixed and variable costs. Our fixed costs typically include compensation of employees, data storage and bandwidth expenses and office rental expenses. Our variable costs typically include commission-based compensation of sales employees and marketing expenses. As we have established the technology and network infrastructure to support an online business model, the incremental cost of adding new job postings and CVs online is relatively insignificant. We can serve additional customers and users with decreasing average cost. If we are unable to maintain economies of scale, our operating margin may decrease and our business, prospects, financial condition and results of operations could be materially and adversely affected.

We may not be able to successfully halt the operations of copycat websites or misappropriation of our data.

From time to time, third parties have misappropriated our data, including CV data, through website scraping, robots, copying CV or other data or other means and have aggregated this data on their websites with data from other companies. In addition, “copycat” websites may attempt to imitate the functionality of our website. Specifically, we have in the past experienced attempts by third parties or businesses who have purchased a paid subscription and received authorized access to our website to copy CV or other data from our website and use such information in a manner that violates our contractual the terms of use with such party (such as setting up copycat websites). We cannot assure you that similar events will not occur in the future and may materially and adversely impact our results of operations.

If we become aware of such websites, businesses or third parties, we would employ technological or legal measures, including initiating lawsuits, in an attempt to halt their operations. However, we may not be able to detect all such activities in a timely manner and, even if we could, technological and legal measures may be insufficient to stop

 

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their operations. In some cases, our available remedies may not be adequate to protect us against such activities. Regardless of whether we can successfully enforce our rights against these websites or third parties, any measures that we may take could require us to expend significant financial or other resources, and our business, prospects, financial condition and results of operations could be materially and adversely affected.

In addition, Russian law requires that operators (controllers) of personal data, such as us, undertake certain organizational and technical measures to protect the personal data that we process and to prevent unauthorized or illegal actions with respect to such data. Should it be determined by the relevant governmental body that such unauthorized copying and further use of job seekers’ CVs and personal data contained therein became possible due to our failure to undertake such measures, we may be subject to administrative penalties and civil litigation. See also “Applicable legislation imposes restrictions and requirements on us with respect to processing of certain types of personal and other data and data retention which may impose additional obligations on us, limit our flexibility, or harm our reputation with users.

If we fail to protect our intellectual property rights, our business, prospects, financial condition and results of operations could be materially and adversely affected.

We rely on registered trademarks and confidentiality agreements to protect our intellectual property rights. To date, we have not sought patent protection for our platform or any portion of it. Third parties may obtain, copy, reverse engineer or use without our authorization our intellectual property, which includes trademarks related to our brand, products and services, registered domain names, trade secrets and other intellectual property rights and licenses.

Historically, the Russian legal system and courts have not protected intellectual property rights to the same extent as the legal system and courts of the United States. Companies operating in Russia continue to face an elevated risk of intellectual property infringement as compared to other jurisdictions such as the United States. Furthermore, the validity, application, enforceability and scope of protection of intellectual property rights for many internet-related activities, such as internet commercial methods patents, are uncertain and still evolving, which may make it more difficult for us to protect our intellectual property, and our business, prospects, financial condition and results of operations could be materially and adversely affected.

We may be vulnerable to intellectual property infringement claims brought against us by others.

We rely to some extent on third-party intellectual property, such as licenses to use software to operate our business and certain other copyrighted works. Although we have never experienced any material intellectual property claims against us in the past, as we face increasing competition and as litigation becomes more common in Russia as a way of resolving commercial disputes, we face a higher risk of being subject to intellectual property infringement claims. A successful infringement claim against us could result in monetary liability or a material disruption in our business. Although we require our employees not to infringe others’ intellectual property, we cannot be certain that our products, services, content and brand names do not or will not infringe on valid patents, trademarks, copyrights or other intellectual property rights held by third parties. We may be subject to legal proceedings and claims from time to time relating to the intellectual property of others in the ordinary course of our business.

We may incur substantial expenses in defending against third party infringement claims, regardless of their merit. As a result, due to diversion of management time, expenses required to defend against any claim and the potential liability associated with any lawsuit, any significant litigation could significantly harm our business, financial condition and results of operations. If we were found to have infringed on the intellectual property rights of a third party, we could be liable to that party for license fees, royalty payments, lost profits or other damages, and the owner of the intellectual property may be able to obtain injunctive relief to prevent us from using the technology, software or brand name in the future. If the amount of these payments were significant, if we were prevented from incorporating certain technology or software into our products or services or if we were prevented from using our brand name, our business, prospects, financial condition and results of operations could be materially and adversely affected.

 

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We may not be able to successfully execute future acquisitions or efficiently manage any acquired business.

As part of our growth strategy, we may decide to expand, in part, by acquiring certain complementary businesses. The success of any material acquisition will depend upon several factors, including our ability to: identify and acquire businesses cost-effectively; conduct due diligence and identify key issues prior to the acquisition; integrate acquired personnel user data, operations, products and technologies into our organization effectively; and retain and motivate key personnel and to sustainably retain the customers of acquired firms.

Any such acquisition may require a significant commitment of management time, capital investment and other management resources. We may not be successful in identifying and negotiating acquisitions on terms favorable to us. Any such acquisition could involve us taking on additional debt or give rise to new liabilities. In addition, we cannot be certain that any acquisition, if completed, will be successfully integrated into our existing operations or will perform according to our expectations. If we are unable to effectively integrate or partner with an acquired business, our business, financial condition and results of operations may be materially and adversely affected. In addition, if we use our equity securities as consideration for acquisitions, we may dilute the value of the common shares or ADSs. To date, we have not engaged in any material acquisitions.

We are exposed to the risk of violations of anti-corruption laws, anti-money laundering laws, and other similar laws and regulations.

We operate and conduct business in Russia, Kazakhstan, Belarus, Georgia, Kyrgyzstan, Azerbaijan and Uzbekistan. These are countries where there is a high risk of fraud, money laundering, bribery and corruption. We have policies and procedures designed to assist compliance with applicable laws and regulations and we are subject to the US Foreign Corrupt Practices Act of 1977 (“FCPA”) and the UK Bribery Act 2010 (the “Bribery Act”). The FCPA prohibits providing, offering, promising, or authorizing, directly or indirectly, anything of value to government officials, political parties, or political candidates for the purposes of obtaining or retaining business or securing any improper business advantage. The provisions of the Bribery Act extend beyond bribery of government officials and create offences in relation to commercial bribery. These provisions are more onerous than the FCPA in a number of other respects, including jurisdiction, non-exemption of facilitation payments and penalties. In particular, the Bribery Act (unlike the FCPA) does not require proof of corrupt intent to be established in relation to bribery of a public official and also creates offences for being bribed as well as bribing another person. Furthermore, unlike the vicarious liability regime under the FCPA, whereby corporate entities can be liable for the acts of its employees, the Bribery Act introduced a new offense applicable to corporate entities and partnerships which carry on part of their business in the UK that fail to prevent bribery, which can take place anywhere in the world, by persons who perform services for or on behalf of them, subject to a defense of having adequate procedures in place to prevent the bribery from occurring. This offence can render parties criminally liable for the acts of their agents, joint venture, or commercial partners even if done without their knowledge.

We maintain internal compliance policies and procedures, however, we can provide no assurances that these policies and procedures will be followed at all times or effectively detect and prevent all violations of the applicable laws and every instance of fraud, money laundering, bribery and corruption. We can provide no assurances that internal reports of potential violations of our internal compliance policies will not be made in the future or that violations of applicable anti-bribery or money laundering laws, including the FCPA will not occur. As a result, we could be subject to potential civil or criminal penalties under relevant applicable laws which may have adverse consequences on our business, prospects, financial condition or results of operations if we fail to prevent any such violations or are the subject of investigations into potential violations. In addition, such violations could also negatively impact our reputation and consequently, our ability to win future business. The consequences that we may suffer due to the foregoing may cause our business, prospects, financial condition and results of operations or reputation to be materially and adversely affected.

 

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We engage in de minimis activities relating to Crimea, and these activities could impede our ability to raise funding in international capital markets and subject us to liability for noncompliance relating to various trade and economic sanctions laws and regulations.

In response to certain geopolitical tensions, a number of countries, including the United States, EU countries and Canada, imposed a variety of trade and economic sanctions aimed at Russia as well as certain individuals and entities within Russia and Ukraine. In December 2014, the President of the United States issued Executive Order Number 13685, which established a region-specific embargo under U.S. law for the Crimea region. Among other things, this embargo generally prohibits U.S. persons and U.S. companies from engaging in investments in the Crimea region or most import or export trade in goods and services with parties in the Crimea region. Pursuant to Executive Order Number 13685, the U.S. Department of the Treasury, Office of Foreign Assets Control (“OFAC”), has also placed parties operating in the Crimea region on the OFAC list of Specially Designated Nationals and Blocked Persons (“SDN List”). U.S. persons and U.S. companies are generally prohibited from engaging in most transactions or dealings with parties on the SDN List. Currently, less than one percent of paying job seekers and customers who use our product and services are self-identified as being located in the Crimea region. In addition, since 2015, significantly less than one percent of our revenue has been generated from job seekers and customers located in the Crimea region. While we believe that current United States and EU sanctions do not preclude us from conducting our current business, new sanctions imposed by the United States and certain EU member states may restrict certain of our operations in the future. To the extent applicable, existing and new or expanded future sanctions may negatively impact our revenue and profitability, and could impede our ability to effectively manage our legal entities and operations both in and outside of Russia or raise funding from international financial institutions or the international capital markets. Although we take steps to comply with applicable laws and regulations, our failure to successfully comply with applicable sanctions may expose us to negative legal and business consequences, including civil or criminal penalties, government investigations and reputational harm.

We depend upon talented employees, including our senior management, product and development specialists to grow, operate and improve our business, and if we are unable to retain and motivate our personnel and attract new talent, we may not be able to grow effectively.

Our success depends on our continued ability to identify, hire, develop, motivate and retain talented employees. Our ability to execute and manage our operations efficiently is dependent upon contributions from all of our employees. Competition for senior management and key product and development personnel is intense and the pool of qualified candidates is to an extent limited. From time to time, some of our key personnel may choose to leave our company for various reasons, including change of interests or career development plans, compensation, or working relations with our board or with other team members, which could result in management turnover. If we are unable to retain the services of our key personnel or properly manage the working relationship among our management and employees, this may mean we will become exposed to legal or administrative proceedings or adverse publicities and our reputation may be harmed, and our business, prospects, financial condition and results of operations could be materially and adversely affected.

Training of new employees with no prior relevant experience could be time-consuming and require a significant amount of resources. We may also need to increase the compensation we pay in order to retain our skilled employees. If competition in our industry further intensifies, it may be more difficult for us to hire, motivate and retain highly skilled personnel, especially high quality developers as there is currently significant market demand for this role. If we fail to attract additional highly skilled personnel or retain or motivate our existing personnel, we may be unable to grow effectively or at all, and our business, prospects, financial condition and results of operations could be materially and adversely affected.

Employee misconduct is difficult to determine and detect and could harm our reputation and business.

We face a risk that may arise out of our employees’ lack of knowledge or willful, negligent or involuntary violations of laws, rules and regulations or other misconduct. Misconduct by employees could involve, among

 

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other things, the improper use or disclosure of confidential information (including trade secrets), embezzlement or fraud, any of which could result in regulatory sanctions or fines imposed on us, as well as cause us serious reputational or financial harm. Misconduct by employees may result in unknown and unmanaged risks and losses. It is not always possible to guard against employee misconduct and ensure full compliance with our risk management and information policies, and the precautions we take to detect such activity may not always be effective. The direct and indirect costs of employee misconduct can be substantial and our business, prospects, financial condition and results of operations could be materially and adversely affected.

We do not have and may be unable to obtain sufficient insurance to protect ourselves from business risks.

The insurance industry in the Russian Federation is not yet fully developed, and many forms of insurance protection common in more developed countries are not yet fully available or are not available on comparable or commercially acceptable terms. We do not currently maintain insurance coverage for our offices or servers, business interruptions or third party liability in respect of property or environmental damage arising from accidents on our property or relating to our operations. Until we obtain adequate insurance coverage, there is a risk of loss or destruction of certain assets, and our business, prospects, financial condition and results of operations could be materially and adversely affected.

Our substantial indebtedness may adversely affect our financial health.

We currently have substantial indebtedness. As of December 31, 2018, we had total indebtedness of P6.4 billion, which consisted of a P7 billion syndicated credit facility with VTB Bank (PJSC), dated May 16, 2016, as amended and restated (the “Credit Facility”), of which P790 million and P1,085 million has been repaid as of December 31, 2018 and April 23, 2019, respectively, and a P270 million loan that was provided by an associate of our non-controlling shareholder, which was fully repaid on March 13, 2019. The Credit Facility is collateralized with the shares of Headhunter FSU Limited, HeadHunter Group PLC (formerly Zemenik Trading Limited), and participation interests in Headhunter LLC and Zemenik LLC. The Credit Facility was amended on December 29, 2017 simultaneously with the guarantee agreement to which we are a party, to allow us, subject to customary conditions, to proceed with offering-related matters including, inter alia, changing our corporate name and converting to a public company, completing the split of shares, issuing additional shares, providing indemnities in connection with this offering, decreasing additional capital, amending the charter documents and others (“Amendment No. 4”). Simultaneously with Amendment No. 4, we executed the release of the security over the shares of HeadHunter Group PLC.

Since Amendment No. 4 allowed us to proceed with matters relating to this offering for a definite period, on April 22, 2019, we signed a new amendment agreement to the Credit Facility (“Amendment No. 5”), which provides, among other things, for an extension of such period until December 31, 2019. Prior to signing Amendment No. 5, our subsidiary, Zemenik LLC, was the immediate borrower of the P7 billion loan under the Credit Facility, which consisted of Tranches A, B, C and D of P4 billion, P1 billion, P1 billion and P1 billion, respectively, of which P850 million, P135 million, P50 million and P50 million were repaid, respectively. In order to simplify our intra-group arrangements, in accordance with Amendment No. 5, the outstanding debt related to Tranches C and D in the total principal amount of P1.9 billion as well as any interest accrued thereon and outstanding as of the date of the Amendment No. 5, were assigned to HeadHunter Group PLC. Amendment No. 5 provides that if we decide to withdraw an additional P3 billion (“Tranche E”), the immediate borrower of Tranche E will be HeadHunter Group PLC and after the completion of this offering, we do not intend to draw upon Tranche E. Amendment No. 5 also provides that HeadHunter Group PLC can borrow Tranche E or any portion hereof within 120 days from the date of Amendment No. 5, thus increasing the Credit Facility up to P10 billion. As of the date of this prospectus HeadHunter Group PLC has not submitted the withdrawal notice in relation to Tranche E. Matching amendment agreements have also been signed to the security documentation. Capitalized terms in this paragraph have the definitions provided in the Credit Facility. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual obligations and commitments—Credit Facility.”

 

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Our substantial indebtedness may have important consequences for us. For example, it may:

 

   

make it more difficult for us to make payments on our indebtedness;

 

   

increase our vulnerability to general economic and industry conditions, including recessions and periods of significant inflation and financial market volatility;

 

   

require us to use a substantial portion of cash flow from operations to service our indebtedness, thereby reducing our ability to fund capital expenditures and other expenses;

 

   

limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

 

   

place us at a competitive disadvantage compared to competitors that have less indebtedness;

 

   

limit our ability to borrow additional funds that may be needed to operate and expand our business; and

 

   

restrict our ability to pay dividends.

Any of the above would materially and adversely affect our business, prospects, financial condition and results of operations.

We have significant intangible assets on our balance sheet. Consequently, potential impairment of intangible assets may have an adverse material effect on our profitability.

Since the Acquisition, intangible assets have represented a significant portion of our assets. Goodwill and other intangible assets, which are comprised primarily of our brand name, CV database and non-contractual customer relationships, collectively amounted to 76% of our total consolidated assets as of December 31, 2018. We assess the potential impairment of intangible assets on at least an annual basis, as well as whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We may be required to record significant impairments in the future. Some of the developments, which could cause us to recognize impairment of goodwill or other intangible assets, include significant underperformance relative to historical or projected future operating results or significant negative industry or economic trends. Although the recording of such impairments does not trigger an immediate cash impact, our business, prospects, financial condition and results of operations could be materially and adversely affected, and significant future impairments of our intangible assets could reduce our profitability to such an extent that we would not be permitted under Cypriot law to declare and pay dividends.

We may need to raise additional funds to finance our future capital needs, which may dilute the value of our outstanding ADSs or prevent us from growing our business.

We may need to raise additional funds to finance our existing and future capital needs, including developing new services and technologies, and to fund ongoing operating expenses. If we raise additional funds through the sale of equity securities, these transactions may dilute the value of our outstanding ADSs. We may also decide to issue securities, including debt securities that have rights, preferences and privileges senior to our ADSs. Any debt financing would increase our level of indebtedness and could negatively affect our liquidity and restrict our operations. We also can provide no assurances that the funds we raise will be sufficient to finance our existing indebtedness. We may be unable to raise additional funds on terms favorable to us or at all. If financing is not available or is not available on acceptable terms, we may be unable to fund our future needs. This may prevent us from increasing our market share, capitalizing on new business opportunities or remaining competitive in our industry.

Changes in accounting standards or inaccurate estimates or assumptions in the application of accounting policies could adversely affect our financial condition and results of operations.

Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Future changes in accounting standards, pronouncements or interpretations could require us

 

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to change our policies and procedures. The materiality of such changes is difficult to predict, and such changes could materially impact how we record and report our financial condition and results of operations. For example, we adopted IFRS 15, a new standard for recognition, measurement and disclosure of revenue from contracts with customers, at January 1, 2018 using the full retrospective approach. Under this transition method, our comparative financial information for the year ended December 31, 2017 is restated. The impact of the transition to IFRS 15 for the years ended December 31, 2015 and December 31, 2016 is immaterial, and therefore, the comparative information for any periods prior to January 1, 2017 has not been restated. See our consolidated financial statements for the year ended December 31, 2018 and notes thereto included elsewhere in this prospectus. In addition, some accounting policies require the use of estimates and assumptions that may affect the reported value of our assets or liabilities and results of operations and are critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain. If those assumptions, estimates or judgments were incorrectly made, we could be required to correct and restate prior period financial statements, and there can be no assurances that we will make the correct judgments in the future, should any new standards be issued. Accounting standard-setters and those who interpret the accounting standards may also amend or even reverse their previous interpretations or positions on how various standards should be applied. Any of these changes are difficult to predict and can materially impact how we record and report our financial condition and results of operations, which could have a significant impact on our future financial statements.

Risks Relating to the Russian Federation and Other Markets in which We Operate

Investing in securities of issuers in emerging markets, such as the Russian Federation, Kazakhstan and other CIS countries, generally involves a higher degree of risk than investments in securities of issuers from more developed countries and carries risks that are not typically associated with investing in more mature markets.

Emerging markets such as the Russian Federation, Kazakhstan, Belarus and other CIS countries are subject to greater risks than more developed markets, including significant legal, economic, tax and political risks. Investors in emerging markets should be aware that these markets are subject to greater risk and should note that emerging economies such as the economies of the Russian Federation, Kazakhstan, Belarus and other CIS countries are subject to rapid change and that the information set out herein may become outdated relatively quickly.

Financial or economic crises, whether global or limited to a single large emerging market country, tend to adversely affect prices in equity markets of most or all emerging market countries as investors move their money to more stable, developed markets. Over the past few years, the Russian equity markets have been highly volatile, principally due to the impact of the global economic slowdown resulting from various factors, including the European sovereign debt crisis, the slowdown in Chinese economic growth and the dramatic fall in oil prices, as well as the deteriorating conditions of the Russian economy. As has happened in the past, financial problems such as significant ruble depreciation, capital outflows and a deterioration in other leading economic indicators or an increase in the perceived risks associated with investing in emerging economies due to, inter alia, geopolitical disputes such as the crisis in Ukraine and imposition of certain trade and economic sanctions in connection therewith, could dampen foreign investment in Russia and adversely affect the Russian economy. In addition, during such times, businesses that operate in emerging markets can face severe liquidity constraints as funding sources are withdrawn. Furthermore, in doing business in various countries of the CIS, we face risks similar to (and sometimes more significant than) those that we face in Russia. As we operate in emerging markets throughout the world, we may be exposed to any one or a combination of these risks, and our business, prospects, financial condition and results of operations could be materially and adversely affected.

Political risks could adversely affect the value of investments in the Russian Federation.

While the political situation in the Russian Federation has been relatively stable since 2000, future policy and regulation may be less predictable than in less volatile markets. Any future political instability could result in a

 

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worsening overall economic situation, including capital flight and a slowdown of investment and business activity. In addition, any change in the Russian Government or its programs or lack of consensus between the Russian President, the Prime Minister, the Russian Government, the Parliament and powerful political, social, religious, regional, economic or ethnic groups could lead to political instability and a deterioration in Russia’s investment climate that might limit our ability to obtain financing in the international capital markets, and our business, prospects, financial condition and results of operations could be materially and adversely affected.

According to some commentators, politically motivated actions, including claims brought by the Russian authorities and state-owned companies against several major Russian companies, as well as cases of confiscation or renationalization of assets, have called into question the security and enforceability of property and contractual rights, progress of the free market and political reforms, the independence of the judiciary and the certainty of legislation. This has, in turn, resulted in significant fluctuations in the market price of Russian securities and had a negative impact on foreign investments in the Russian economy, over and above the general market turmoil recently. Any similar actions by the Russian authorities which result in a further negative effect on investor confidence in Russia’s business and legal environment could have a further material adverse effect on the Russian securities market and prices of Russian securities or securities issued or backed by Russian entities, including the shares.

Russia is a federative state consisting of 85 constituent entities, or “subjects.” The Russian Constitution reserves some governmental powers for the Russian Government, some for the subjects and some for areas of joint competence. In addition, eight “federal districts” (federal’nye okruga), which are overseen by a plenipotentiary representative of the President, supplement the country’s federal system. The delineation of authority among and within the subjects is, in many instances, unclear and contested, particularly with respect to the division of tax revenues and authority over regulatory matters. Subjects have enacted conflicting laws in areas such as privatization, land ownership and licensing. For these reasons, the Russian political system is vulnerable to tension and conflict between federal, subject and local authorities. This tension creates uncertainties in the operating environment in Russia, which may prevent businesses from carrying out their strategy effectively.

In addition, ethnic, religious, historical and other divisions have on occasion given rise to tensions and, in certain cases, military conflict. Moreover, various acts of terrorism have been committed within the Russian Federation. The risks associated with these events or potential events could materially and adversely affect the investment environment and overall consumer and entrepreneurial confidence in the Russian Federation, and our business, prospects, financial condition and results of operations could be materially and adversely affected.

Deterioration of Russia’s relations with other countries could negatively affect the Russian economy and those of the nearby regions.

Over the past several years, Russia has been involved in conflicts, both economic and military, involving other countries. On several occasions, this has resulted in the deterioration of Russia’s relations with other members of the international community, including the United States and various countries in Europe. Many of these jurisdictions are home to financial institutions and corporations that are significant investors in Russia and whose investment strategies and decisions may be affected by such conflicts and by worsening relations between Russia and its immediate neighbors.

For example, relations between Ukraine and Russia, as well as Georgia and Russia, have recently been strained over a variety of issues. In September 2015, following a formal request from the Syrian government, the Russian Federal Council approved the use of Russian forces in Syria. Operations in Syria commenced in late September 2015. In December 2017, the Russian President ordered the partial removal of operations in Syria, but the Russian military contingent is still involved in operations in Syria. Furthermore, in November 2015, the Turkish Air Force shot down a Russian strike aircraft over Syria that resulted in tensions between Russia and Turkey, and led to the imposition of a wide range of sanctions by Russia against Turkey, which were then partially removed in the second half of 2016 and in 2017. In March 2018, more than 140 Russian diplomats were expelled worldwide, and Russia in turn

 

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announced the expulsion of 60 American diplomats and the closure of the United States consulate in St. Petersburg, Russia. On April 6, 2018, the United States imposed new sanctions that targeted a number of Russian state officials and prominent Russian businessmen and their businesses. On November 25, 2018, Ukrainian Navy vessels attempted to pass from the Black Sea into the Sea of Azov and were captured by the Russian Federal Security Service in the Kerch Straight, leading to further tensions between Russia and Ukraine. More recently, in December 2018, the United States expanded sanctions by designating 15 members of the Russian military intelligence organization, GRU, for their involvement in a wide range of activities, including attempting to interfere with the 2016 U.S. elections. The emergence of new or escalated tensions between Russia and other countries, including any escalation of the conflict or renewed fighting, or the imposition of international trade and economic sanctions in response to these tensions, could negatively affect the economies in the regions where we are present, including the Russian economy. This, in turn, may result in a general lack of confidence among international investors in the region’s economic and political stability and in Russian investments generally. Such lack of confidence may result in reduced liquidity, trading volatility and significant declines in the price of listed securities of companies with significant operations in Russia, including our shares, and in our inability to raise debt or equity capital in the international capital markets, which may affect our ability to achieve the level of growth to which we aspire. Additionally, the relationship between the U.S. and Russia is subject to fluctuation and periodic tension. Changes in political conditions in Russia and changes in the state of Russian-U.S. relations are difficult to predict and could adversely affect our operations or cause our company to become less attractive for U.S. investors.

Political and governmental instability in Russia and other countries of our operations could materially adversely affect our business, prospects, financial condition, results of operations and the value of our ADSs.

Economic instability in the countries where we operate could adversely affect our business.

Since the dissolution of the Soviet Union in 1991, the economies of Russia and other CIS countries where we operate have experienced periods of considerable instability and have been subject to abrupt downturns. From 2000 until the first half of 2008, Russia experienced rapid growth in its gross domestic product, higher tax collections and increased stability of the ruble, providing some degree of economic soundness. However, the Russian economy was adversely affected by the global economic crisis that began in the second half of 2008, which manifested itself through extreme volatility in debt and equity markets, reductions in foreign investment, sharp decreases in GDP and rise of unemployment around the world. While the situation globally has stabilized since to a certain extent, the Russian economy began to experience a new slowdown in 2013. As Russia produces and exports large quantities of crude oil, natural and metal products and other commodities, its economy is particularly vulnerable to fluctuations in the prices of commodities on the global market. In particular, the Brent Crude oil price suffered a significant decrease during 2014 and 2015. The commodity’s price declined from $111.03 per barrel on June 30, 2014 to $37.28 per barrel on December 31, 2015. During 2016 and 2017, the Brent Crude oil price continued to be volatile with $56.82 per barrel on December 31, 2016, $66.73 per barrel on December 29, 2017 and $50.57 per barrel on December 28, 2018.

While the Russian economy experienced some stabilization in 2016, 2017 and 2018, a financial downturn, as well as any future economic downturns or slow turns in Russia or the other CIS countries where we operate could lead to decreased demand for our services, decreased revenue and negatively affect our liquidity and ability to obtain debt financing, and our business, prospects, financial condition and results of operations could be materially and adversely affected.

Inflation may increase our costs and exert downward pressure on our operating margins.

The Russian economy and certain other CIS economies in which we operate have generally been characterized by high rates of inflation in recent years. According to the Russian Federal State Statistics Service, Rosstat, the consumer price index in Russia stood at 5.4%, 2.5% and 4.3% in 2016, 2017 and 2018, respectively. Because substantially all of our operations are in Russia and the CIS, our costs are sensitive to increases in prices in the region. As a result, high rates of inflation increase our costs, these increases in cost could negatively impact our

 

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operating margin, and our business, prospects, financial condition and results of operations could be materially and adversely affected.

Social instability could increase support for renewed centralized authority, nationalism or violence and could materially adversely affect our operations.

A decrease in the price of oil, as well as increased unemployment rates, the failure of the government and many private enterprises to pay full salaries on a regular basis and the failure of salaries and benefits generally to keep pace with the rapidly increasing cost of living have led in the past, and could lead in the future, to labor and social unrest in the markets in which we operate. Labor and social unrest may have political, social and economic consequences, such as increased support for a renewal of centralized authority; increased nationalism, including restrictions on foreign involvement in the economies of the countries where we have operations; and increased violence. An occurrence of any of the foregoing events could restrict our operations and lead to the loss of revenue, and our business, prospects, financial condition and results of operations could be materially and adversely affected.

Crime and corruption could disrupt our ability to conduct our business and thus, materially adversely affect our operations.

The political and economic changes in recent years in the countries where we operate have resulted in significant changes in authority. In addition, the local and international press have reported high levels of corruption, including the bribing of officials for the purpose of initiating investigations by government agencies. Press reports have also described instances in which government officials engaged in selective investigations and prosecutions to further the commercial interests of certain government officials or certain companies or individuals. Additionally, some members of the media in the countries in which we operate regularly publish disparaging articles in return for payment. The depredations of organized or other crime, demands of corrupt officials or claims that we have been involved in official corruption could result in negative publicity, disrupt our ability to conduct our business, and our business, prospects, financial condition and results of operations could be materially and adversely affected.

Applicable legislation imposes restrictions and requirements on us with respect to processing of certain types of personal and other data and data retention which may impose additional obligations on us, limit our flexibility, or harm our reputation with users.

Collection and handling of user data by any entity or person in Russia and other countries may be subject to certain requirements and restrictions. If these requirements and restrictions are amended, interpreted or applied in a manner not consistent with current practice, we could face fines or orders requiring that we change our operating practices, and our business, prospects, financial condition and results of operations could be materially and adversely affected.

In Russia, in order to store an individual’s personal data, we must obtain his or her written or e-consent and use encryption and other technical means to protect his or her personal data. We do not collect or perform any operations on our users’ personal data, except when such collection or processing is in accordance with our terms of services and privacy policies which are available on our websites. Subject to several exemptions, processors of personal data must notify the appropriate Russian authority, we are included into the register of such processors.

According to the Federal Law No. 242-FZ “On Introduction of Changes to Certain Legislative Acts of the Russian Federation in Connection with Usage of Information Technologies in the Field of Healthcare” dated July 29, 2017 (the “Federal Law No. 242”), processors of personal data are obliged to record, systematize, accumulate, store, clarify (update, modify) and retrieve Russian citizens’ personal data using databases located only within Russia (subject to a limited number of exceptions), as well as to provide Roskomnadzor with the information on location of databases containing all citizens’ personal data.

 

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Federal Law No. 242 may cause restrictions on the provision of information services as well as impose penalties on processors of personal data for failure to comply with the legal requirements (some of which may be subject to broad interpretation) for a number of reasons including the following:

 

   

“Localization” requirement with respect to personal data of Russian citizens introduced by Federal Law No. 242 and may, therefore, be interpreted as prohibiting to effect cross-border personal data processing; and

 

   

No standard definition of a database exists within the law. According to definitions of a database given in the Article 1260 of the Civil Code of the Russian Federation, as amended (the “Civil Code”), and GOST 20886, different documents and virtual objects (for example, MS Office files) may be referred to as a database. The information resources of our company, including personal data, may be stored in a virtual environment (including as part of cloud computing), which may significantly hinder the determination of the exact location of each virtual object and complicate provision of information on such location within the period stipulated by the Federal Law of the Russian Federation No. 152-FZ “On Personal Data” dated July 27, 2006 (the “Personal Data Law”). Therefore, the combination of such objects and their location in a complex information structure may be prone to ambiguous interpretation.

Although we believe we are in compliance with this legislation, compliance with the requirements provided may be practically difficult, require significant efforts and resources, lead to legal liability in other jurisdictions and limit functionality of our services. Compliance with these requirements may also limit our ability to compete with other companies located in other jurisdictions that do not require mandatory local storage of personal data relating to their users. However, any non-compliance with this requirement could lead to legal liability and potentially to restriction of the availability of the service in Russia. For example, in 2016, a Russian court ordered the blocking of access to a popular professional social networking website for violation of data protection legislation.

Due to the nature of the services we offer and the fact that we have a presence in a number of countries, we may also be subject to data protection laws of other jurisdictions, especially laws regulating the cross-border transfer of personal data, which may require significant compliance efforts and could result in liability for violations in other jurisdictions. As our business grows, we may also encounter increased pressure from foreign state authorities with respect to production of information related to users in circumvention of the international legal framework regulating the provision of such information. Any non-compliance with such requests may lead to liability, and our business, prospects, financial condition and results of operations could be materially and adversely affected.

Weaknesses relating to the legal system and legislation in the countries where we operate create an uncertain environment for investment and business activity, which could have a material adverse effect on the value of our shares.

Each of the countries in which we operate is still developing the legal framework required to support the market economy. The following risks relating to these legal systems create uncertainties with respect to the legal and business decisions that we make, many of which do not exist in countries with more developed market economies:

 

   

inconsistencies between and among the constitution, federal and regional laws and subordinate legislation (presidential decrees and governmental, ministerial and local orders, decisions and resolutions) and other acts;

 

   

the lack of judicial and administrative guidance on interpreting certain legislation as well as conflicting interpretations of supreme general jurisdiction and arbitrazh courts;

 

   

the relative inexperience of judges and courts in interpreting certain aspects of legislation;

 

   

the lack of an independent judiciary;

 

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a high degree of discretion on the part of governmental authorities, which could result in arbitrary actions such as suspension or termination of our licenses;

 

   

the possibility of rapid change in the current legislation, which could create ambiguities in interpretation and potential non-compliance; and

 

   

poorly developed bankruptcy and liquidation procedures and court practice that create possibilities of abuse.

The recent nature of much of the legislation in the CIS countries, the lack of consensus about the scope, content and pace of economic and political reform and the rapid evolution of these legal systems in ways that may not always coincide with market developments place the enforceability and underlying constitutionality of laws in doubt and result in ambiguities, inconsistencies and anomalies. In addition, legislation in these countries often contemplates implementing regulations that have not yet been promulgated, leaving substantial gaps in the regulatory infrastructure. Any of these weaknesses could affect our ability to enforce our rights under our licenses and contracts, or to defend ourselves against claims by others. Moreover, it is possible that regulators, judicial authorities or third parties may challenge our internal procedures and bylaws, as well as our compliance with applicable laws, decrees and regulations.

Selective or arbitrary government action could have a material adverse effect on our business, financial condition, results of operations and prospects.

Governmental authorities in the countries where we operate have a high degree of discretion and, at times, act selectively or arbitrarily, without hearing or prior notice, and sometimes in a manner that is inconsistent with legislation or influenced by political or commercial considerations.

Selective or arbitrary governmental actions have reportedly included the denial or withdrawal of licenses, sudden and unexpected tax audits and claims, criminal prosecutions and civil actions. Federal and local government entities have also used ordinary defects in matters surrounding share issuances and registration as pretexts for court claims and other demands to invalidate such issuances and registrations or to void transactions. Moreover, the government also has the power in certain circumstances, by regulation or government acts, to interfere with the performance of, nullify or terminate contracts.

In addition, the Russian tax authorities have aggressively brought tax evasion claims relating to Russian companies’ use of tax-optimization schemes, and press reports have speculated that these enforcement actions have been selective. Selective or arbitrary government action could be directed at us, and our business, prospects, financial condition and results of operations could be materially and adversely affected.

Russian companies can be forced into liquidation on the basis of formal non-compliance with certain applicable legal requirements.

Certain provisions of Russian law may allow government authorities to seek a court order for the liquidation of a Russian legal entity on the basis of its formal non-compliance with certain requirements during formation, reorganization or during its operation. For example, under Russian corporate law, if the net assets of a Russian joint stock company calculated on the basis of Russian accounting standards are lower than its charter capital as at the end of its third or any subsequent financial year, the company must either decrease its charter capital or be placed in liquidation. If the company fails to comply with these requirements, governmental or local authorities can seek the involuntary liquidation of such company in court, and the company’s creditors will have the right to accelerate their claims or demand early performance of the company’s obligations as well as demand compensation of any damages.

The existence of negative assets may not accurately reflect the actual ability to pay debts as they fall due. Many Russian companies have negative net assets due to very low historical asset values reflected on their Russian

 

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accounting standards balance sheets; however, their solvency is not otherwise adversely affected by such negative net assets. Courts have, on rare occasions, ordered the involuntary liquidation of a company for having net assets less than the minimum charter capital required by law, even if the company had continued to fulfill its obligations and had net assets in excess of the minimum charter capital at the time of liquidation.

There have also been cases in the past in which formal deficiencies in the establishment process of a Russian legal entity or non-compliance with provisions of Russian law have been used as a basis to seek the liquidation of a legal entity. Weaknesses in the Russian legal system create an uncertain legal environment, which makes the decisions of a Russian court or a governmental authority difficult, if not impossible, to predict. If involuntary liquidation were to occur, such liquidation could lead to significant negative consequences to our business and financial condition.

Failure to comply with existing laws and regulations or to obtain all approvals, authorizations and permits, or the findings of government inspections or increased governmental regulation of our operations, could result in a disruption in our business and substantial additional compliance costs and sanctions.

Our operations and properties are subject to regulation by various government entities and agencies in connection with obtaining and renewing various licenses, approvals, authorizations and permits, as well as with ongoing compliance with existing laws, regulations and standards. Regulatory authorities exercise considerable discretion in matters of enforcement and interpretation of applicable laws, regulations and standards, the issuance and renewal of licenses, approvals, authorizations and permits and in monitoring licensees’ compliance with the terms thereof. Russian authorities have the right to, and frequently do, conduct periodic inspections of our operations and properties throughout the year. Any such future inspections may conclude that we or our subsidiaries have violated laws, decrees or regulations, and we may be unable to refute such conclusions or remedy the violations.

Our failure to comply with existing laws and regulations of the countries where we operate or to obtain all approvals, authorizations and permits or the findings of government inspections including the State Labor Inspection Service may result in the imposition of fines or penalties or more severe sanctions including the suspension, amendment or termination of our licenses, approvals, authorizations and permits, or requirements that we cease certain of our business activities, or criminal and administrative penalties applicable to our officers. Moreover, an agreement or transaction entered into in violation of law may be invalidated and/or unwound by a court decision. Any such decisions, requirements or sanctions, or any increase in governmental regulation of our operations, could result in a disruption of our business and substantial additional compliance costs, and our business, prospects, financial condition and results of operations could be materially and adversely affected.

In addition, the Federal Law No. 374-FZ dated July 6, 2016, also known as the “Yarovaya Law” (named after the Russian senator who initiated this law) (the “Yarovaya Law”) amending, among others, the Federal Law No. 149-FZ “On Information, Information Technology and Data Protection” dated July 27, 2006 (the “Law on Information”) requires arrangers of information distribution by means of Internet (the “arranger”) to store certain data for a period of one year. The norm of the law relating to the storage of messages content entered into force on July 1, 2018, see “Regulation—Privacy and Personal Data Protection Regulation.” We believe that this regulation will not cause us to incur substantial additional costs. However, the range of penalties for non-compliance with the Yarovaya Law is not entirely clear and may potentially entail other types of administrative penalties in addition to fines. If any of these were material or we were found to be in non-compliance, our business prospects, financial condition and results of operations could be materially and adversely affected.

 

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According to Russian legislation, shareholders and participants of Russian companies have an opportunity to demand either liquidation of a company in a judicial proceeding or exclusion of other shareholders or participants (except for public joint stock companies) from the company.

According to the amendments to the Civil Code of the Russian Federation which came into effect on September 1, 2014, shareholders and participants of Russian companies have certain rights, including the following, which can be enforced through court order:

 

   

to demand the liquidation of a company in case of failure to achieve targets for which it was created, including a case when an operation of a company becomes impossible or is substantially hampered; and

 

   

to demand exclusion of a shareholder or participant (except for public joint stock companies) whose actions or inactivity either cause significant harm to or hamper the company’s operations.

In this regard, considering the lack of practice in applying these regulations, we cannot rule out the possibility of having such claims filed against us. Should such claims be brought, our business, prospects, financial condition and results of operations could be materially and adversely affected.

Shareholder liability under Russian corporate law could cause us to become liable for the obligations of our subsidiaries.

Russian law generally provides that shareholders in a Russian joint-stock company or participants in a limited liability company are not liable for that company’s obligations and risk only the loss of their investment. This may not be the case, however, when one legal entity is capable of determining decisions made by another entity. The legal entity capable of determining such decisions is called the effective parent entity (osnovnoye obshchestvo). The legal entity whose decisions are capable of being so determined is called the effective subsidiary entity (docherneye obshchestvo). The effective parent bears joint and several liability for transactions concluded by the effective subsidiary in carrying out business decisions if:

 

   

the effective parent gives binding directions to the effective subsidiary or provides consent to the relevant transactions entered into by the subsidiary; and

 

   

the right of the effective parent to give binding instructions is based on its share in the subsidiary’s capital, or is set out in a contract between such entities or stems from other circumstances.

In addition, under Russian law, an effective parent is secondarily liable for an effective subsidiary’s debts if an effective subsidiary becomes insolvent or bankrupt as a result of the action of an effective parent. In these instances, the other shareholders of the effective subsidiary may claim compensation for the effective subsidiary’s losses from the effective parent that causes the effective subsidiary to take action or fail to take action knowing that such action or failure to take action would result in losses. We could be found to be the effective parent of our subsidiaries, in which case we would become liable for their debts, and our business, prospects, financial condition and results of operations could be materially and adversely affected.

The Russian banking system remains underdeveloped, the number of creditworthy banks in Russia is limited and another banking crisis could place severe liquidity constraints on our business.

Russia’s banking and other financial systems are less developed or regulated as compared to other countries, and Russian legislation relating to banks and bank accounts is subject to varying interpretations and inconsistent application. The August 1998 financial crisis resulted in the bankruptcy and liquidation of many Russian banks and almost entirely eliminated the developing market for commercial bank loans at that time. Many Russian banks currently do not meet international banking standards, and the transparency of the Russian banking sector in some respects still lags far behind internationally accepted norms. Aided by inadequate supervision by the regulators, certain banks do not follow existing regulations of the Central Bank of Russia with respect to lending criteria, credit quality, loan loss reserves or diversification of exposure. Furthermore, in Russia, bank deposits made by corporate entities generally are not insured.

 

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In recent years, there has been a rapid increase in lending by Russian banks, which has been accompanied by a deterioration in the credit quality of the borrowers. In addition, a robust domestic corporate debt market is leading Russian banks (including the banks with which we conduct banking transactions) to hold increasingly large amounts of Russian corporate ruble bonds in their portfolios, which is further deteriorating the risk profile of Russian bank assets. Serious deficiencies in the Russian banking sector, combined with a deterioration in the credit portfolios of Russian banks, may result in the banking sector suffering large losses during market downturns or economic slowdowns, including due to Russian corporate defaults that may occur during any such market downturn or economic slowdown, and thus becoming unable to lend or fulfill their obligations, including to their corporate depositors. In addition, the Central Bank of Russia has a practice of revoking from time to time the licenses of certain Russian banks, which resulted in market rumors about additional bank closures and many depositors withdrawing their savings. Recently a number of banks and credit institutions have lost their licenses due to deficiency of capital and failure to meet the Central Bank of Russia requirements. During a banking crisis, Russian companies may be subject to severe liquidity constraints due to the limited supply of domestic savings and the withdrawal of foreign funding sources that may occur during such a crisis.

The recent disruptions in the global markets have generally led to reduced liquidity and increased cost of funding in Russia. Borrowers have generally experienced a reduction in available financing both in the inter-bank and short-term funding market, as well as in the longer term capital markets and bank finance instruments. The non-availability of funding to the banking sector in the Russian Federation has also negatively affected the anticipated growth rate of the Russian Federation. During the course of 2014 and the first quarter of 2015, the credit rating of the Russian Federation was placed for review and downgraded by each of Moody’s, Fitch Ratings and Standard & Poor’s several times. As of February 2019, Russia has a Baa3 sovereign credit rating with a stable outlook from Moody’s, BBB- long-term sovereign rating from Fitch Ratings and BBB- foreign currency sovereign credit rating with a stable outlook from Standard & Poor’s.

Russian securities law may require us to list our securities on a stock exchange in Russia, which could impose additional administrative burdens on us and decrease the liquidity of trading in our shares on Nasdaq.

Russian companies that list their securities on an exchange outside of Russia are required by law to first list their securities concurrently on a licensed Russian stock exchange and to offer their securities in Russia. We are not covered by such requirement, as we are incorporated outside Russia. The Russian securities regulator, the Central Bank of Russia, has at various times officially emphasized that foreign issuers with substantial assets in Russia should undertake concurrent listings in Russia, and has proposed to change the securities regulations with the view to making such requirement mandatory. As a result, we can provide no assurances that we will not experience pressure to list our shares in Russia, which may impose additional administrative burdens on us and may result in a reduction of the liquidity of trading in our shares on Nasdaq.

The Federal Antimonopoly Service of Russia (the “FAS”) initiated an administrative proceeding against us alleging that we violated antitrust laws, which, if successful, may adversely affect our business, financial condition and results of operations.

The Russian Federal Law No. 135-FZ “On Protection of Competition” dated July 26, 2006, as amended (the “Competition Law”), establishes certain restrictions on activities of companies that occupy a dominant position in any markets of their operation. When determining market dominance, the FAS needs to identify and define the relevant market, in which the entity in question operates. There are numerous aspects to be taken into account when making this determination, including the interchangeability or substitutability of the products and/or services for the consumer, their pricing and intended use, and then calculate market shares of companies operating in this market. Different approaches may be applied in this respect by the FAS and market participants.

In September 2018, the FAS requested that we provide information in connection with a complaint by Stafori LLC alleging violation of antitrust legislation by restricting access to our CV database for Stafori LLC’s “Robot Vera”

 

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software, which offers automated candidate search services. Following a review of the provided materials, the FAS prepared an analytical report defining the market as “the market of internet-based services related to ensuring information coordination between employees, employers and staffing agencies” and analyzing competition in such market, and based on the report, initiated an administrative proceeding in mid-April 2019 against us and two of our competitors. The FAS alleges that we and our competitors collectively hold a dominant market position in the defined market and have used it to limit access to the market in violation of Russian antitrust legislation. We, two of our competitors and Stafori LLC are required to provide our views on the case and various information and explanations, including legal, technical and economical justifications for including in our terms of use a provision prohibiting the use of third-party software by May 20, 2019. We, among other things, are also required to provide information on our use of Talantix. The case hearing is currently set for May 27, 2019, however, Russian legislation permits case hearings to be postponed upon motions filed by the case participants.

Russian legislation provides for various possible penalties for violations of this kind: (a) the FAS may order us to cease activities limiting the access of third parties (like Stafori LLC and similar companies) to the market, and/or (b) impose either (i) a fine in the fixed amount of up to P1 million (approximately $15,000) or (ii) a revenue-based fine, depending on extenuating or aggravating circumstances based on the revenue of Headhunter LLC under Russian Accounting Standards, ranging between 1% of the revenue generated in 2018 in a market where the FAS believes we held a dominant position (which we estimate to be up to approximately P14 million (approximately $215,000)) to up to 2% of Headhunter LLC’s total revenue for 2018 (which we estimate to be approximately P120 million (approximately $1.9 million) with all possible aggravating circumstances). In the case of a first-time violation, the FAS has the discretion to limit the amount of the fine.

We are coordinating with the FAS and intend to vigorously defend our interests and keep protecting personal data of our users from third-party unauthorized access. Such administrative proceedings in Russia usually take several months, and it is currently impossible to reliably predict the outcome. See also “—Selective or arbitrary government action could have a material adverse effect on our business, financial condition, results of operations and prospects” and “Business—Legal Proceedings.”

Our current terms of use placed on our website allow us to block plugins of third parties (like those of “Robot Vera”), and if the FAS requires us to cease blocking or otherwise change our terms of use, we would have to allow access to third-party plugins. We could respond to these changes by introducing limits on the number of CVs used by the subscribers, providing access to a larger amount of CVs at a significant additional fee. The impact of these and other potential changes to our terms of use and monetization strategy is uncertain.

If the FAS were to conclude that we hold a dominant position in one or more of the markets in which we operate, it could result in heightened scrutiny of our business and industry, possibly limit our ability to complete future acquisitions, and the FAS could require that we pre-clear with them any substantial changes to our standard agreements with merchants and agents, as well as maintain our current agreements with business partners. In addition, if we were to decline to conclude a contract with a third party this could, in certain circumstances, be regarded as abuse of a dominant market position. Any abuse of a dominant market position could lead to administrative penalties and the imposition of fines linked to our revenue.

We may be subject to existing or new advertising legislation that could restrict the types and relevance of the ads we serve, which would result in a loss of advertisers and therefore a reduction in our revenue.

Russian law prohibits the sale and advertising of certain products and heavily regulates advertising of certain products and services. Ads for certain products and services, such as financial services, as well as ads aimed at minors and some others, must comply with specific rules and must in certain cases contain required disclaimers.

Further amendments to legislation regulating advertising may impact our ability to provide some of our services or limit the type of advertising we may offer. The application of these laws to parties that merely serve or distribute ads and do not market or sell the product or service, however, can be unclear. Pursuant to our terms of service, we require that our advertisers have all required licenses or authorizations. If our advertisers do not comply with these requirements, and these laws were to be interpreted to apply to us, or if our ad serving system failed to include necessary disclaimers, we may be exposed to administrative fines or other sanctions, and may have to limit the types of advertisers we serve.

 

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The regulatory framework in Russia governing the use of behavioral targeting in online advertising is unclear. If new legislation were to be adopted, or current legislation were to be interpreted, to restrict the use of behavioral targeting in online advertising, our ability to enhance the targeting of our advertising could be significantly limited, which could result in a loss of advertisers or a reduction in the relevance of the ads we serve, which would reduce the number of clicks on the ads and therefore, reduce our revenue.

Risks Relating to Russian Taxation

Changes in Russian tax law could adversely affect our Russian operations.

Generally, Russian taxes to which we are subject are substantial and include, among others: corporate income tax, value added tax, property tax, employment-related social security contributions; we are also subject to duties and corresponding liabilities of a tax agent with respect to withholding taxes due from some of its counterparties. Although the Russian tax climate and the quality of tax legislation have generally improved with the introduction of the Russian Tax Code, the possibility exists that Russia may impose arbitrary and/or onerous taxes and penalties in the future. Russia’s tax collection system increases the likelihood of such events, which could adversely affect our business.

Russian tax laws are subject to frequent change and some of the sections of the Russian Tax Code are comparatively new and continue to be redrafted. Since 2014, several important new rules have been introduced into the Russian Tax Code as a part of the Russian Government’s policy focused on curtailing Russian businesses from using foreign companies mostly or only for tax reasons and imposing significant limitations on tax planning, and aimed at allowing Russian tax authorities to tax foreign income attributable to Russian businesses (known as “deoffshorization measures”). These new rules include, in particular, (i) rules governing the taxation of “controlled foreign companies” (CFC rules) (without limitation of jurisdictions to which this definition applies which residents may fall under); (ii) rules determining the tax residence status of non-Russian legal entities (tax residence rules); (iii) rules defining the “beneficial ownership” (“actual recipient of income”) concept and (iv) taxation of capital gains derived from the sale of shares in real estate rich companies (more than 50% of the value of the assets of which directly or indirectly consists of real estate located in Russia), all in effect from January 1, 2015; and (v) general anti-abuse rules (that base on the judicial concept of “unjustified tax benefits”, defined by the Supreme Arbitration Court in 2006, and provide a few tests to support a tax reduction or tax base deduction, including the “main purpose test”), in effect from August 18, 2017. These changing conditions create tax risks in Russia that are more significant than those typically found in jurisdictions with more developed tax systems; they have significant effect on us, complicate our tax planning and related business decisions and may expose us to additional tax and administrative risks, as well as to extra costs necessary to secure compliance with the new rules. In addition, there can be no assurance that the current tax rates will not be increased, that new taxes will not be introduced.

Federal Law No. 303-FZ of August 3, 2018 introduced a number of amendments to the Russian Tax Code. The standard VAT rate rose from 18% to 20%, and the VAT rate applied to e-services rendered by foreign providers increased from 15.25% to 16.67%. The new rates are applicable to sales of goods (work, services, and property rights) made starting from January 1, 2019. Also in accordance with the recent amendments to the Russian Tax Code that entered into force as of January 1, 2019, VAT on e-services rendered by foreign suppliers and deemed supplied in Russia will have to be accounted for and paid by the foreign e-service providers.

The interpretation and application of the Russian Tax Code generally and the afore-mentioned new rules in particular have often been unclear or unstable. Differing interpretations may exist both among and within government bodies at the federal, regional and local levels; in some instances, the Russian tax authorities take positions contrary to those set out in clarification letters issued by the Ministry of Finance in response to specific taxpayers’ queries and apply new interpretations of tax laws retroactively. This increases the number of existing uncertainties and leads to the inconsistent enforcement of the tax laws in practice. Furthermore, over the recent years, the Russian tax authorities have shown a tendency to take more assertive positions in their interpretation of tax legislation, which has led to an increased number of material tax assessments issued by them as a result of tax

 

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audits of taxpayers. Taxpayers often have to resort to court proceedings to defend their position against the Russian tax authorities. In the absence of binding precedent or consistent court practice, rulings on tax matters by different courts relating to the same or similar circumstances may be inconsistent or contradictory. In practice, courts may deviate from the interpretations issued by the Russian tax authorities or the Ministry of Finance in a way that is unfavorable for the taxpayer.

The Russian tax system is, therefore, impeded by the fact that, at times, it continues to be characterized by inconsistent judgment of local tax authorities and the failure by Russian tax authorities to address many of the existing problems. It is, therefore, possible that our transactions and activities that have not been challenged in the past may be challenged in the future, which may have a material adverse effect on our business, financial condition and results of operations and prospects and the trading price of the ADSs.

We estimated tax contingencies of approximately P719 million as at December 31, 2018 connected with development of the above-mentioned practices and interpretations, as compared to P550 million as at December 31, 2017. These contingencies relate to application of a concept of beneficial ownership of dividend income and additional taxation on the grounds of permanent establishment in Russia. See “—Risks relating to Russian taxation—We may encounter difficulties in obtaining lower rates of Russian withholding tax for dividends distributed from our Russian subsidiaries” and “—Risks relating to Russian taxationOur non-Russian entities may be exposed to taxation in Russia if they are treated as having a Russian permanent establishment or as being Russian tax residents.”

We are subject to tax audits by the Russian tax authorities, which may result in additional tax liabilities.

Generally, tax returns together with related documentation are subject to audit by tax authorities, which are authorized by Russian law to impose severe fines and penalties. As a rule, the tax authorities may audit tax periods within three years immediately preceding the year when the tax audit is initiated. Tax audit may be repeated (within the same general three-year limit) in a few specifically defined circumstances, such as the taxpayer’s reorganization or liquidation, or re-filing of a tax return (amended to decrease the tax payable), or if the tax audit is conducted by a higher-level tax authority as a measure of control over the activities of lower-level tax authority. Therefore, previous tax audits may not preclude from subsequent tax claims relating to the audited period.

The Russian Tax Code defines the three-year statute of limitations for imposition of tax penalties; the statute of limitation extends however if the taxpayer obstructed the performance of the tax audit (such that it created an insurmountable obstacle for the performance and completion of the tax audit). However, the terms “obstructed” and “insurmountable obstacles” are not specifically defined in Russian law; therefore, the tax authorities may interpret these terms broadly, effectively linking any difficulty experienced by them in the course of the tax audit with obstruction by the taxpayer and use that as a basis to seek additional tax adjustments and penalties beyond the three-year limitation term. Therefore, the statute of limitations is not entirely effective.

Tax audits may result in additional costs if the tax authorities conclude that we did not satisfy our tax obligations in any given tax period. Such audits may also impose additional burdens on us by diverting the attention of management resources. The outcome of these audits could have a material adverse effect on our business, prospects, financial condition, results of operations or the trading price of the ADSs.

Russian transfer pricing rules may adversely affect the business of our Russian operations, financial condition and results of operations.

Russian transfer pricing rules apply to “controlled transactions” that include transactions with related parties and certain types of cross-border transactions and oblige the taxpayers to notify the tax authority on “controlled transactions” and to keep specific documentation proving the conformance with the “arm’s length principle.” Starting from January 2019, transactions between related parties are not treated as “controlled transactions,” in case such related parties are the Russian tax residents and/or located in Russia, and apply the general corporate

 

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income tax rate. As we are considering changing the place of management of HeadHunter Group PLC from Cyprus to Russia, this would result in a change of our tax residency from Cyprus to Russia. Starting from the date of such change, transactions between Russian companies in our group applying the general corporate income tax rate and transactions with HeadHunter Group PLC shall not be treated as “controlled transactions.”

Although the transfer pricing rules are supposed to be in line with international transfer pricing principles developed by the OECD, there are certain significant differences with respect to how these principles are reflected in the local rules. Special transfer pricing rules apply to transactions with securities and derivatives. It is difficult to evaluate what effect transfer pricing rules may have on us.

In addition, although pricing applied in “controlled transactions” shall be audited by the Federal Tax Service (by its central office), in observance of the transfer pricing methods, in practice, lower-level tax authorities often attempt to scrutinize pricing and other terms in transactions between related parties more broadly, based on the “unjustified tax benefit” concept.

Accordingly, due to uncertainties in the interpretation and application of Russian transfer pricing rules, no assurance can be given that the Russian tax authorities will not challenge our transaction prices and make adjustments that could affect our tax position unless we are able to confirm the use of market prices, supported by appropriate transfer pricing documentation. The imposition of additional tax liabilities as a result of Russian transfer pricing rules may have a material adverse effect on our business, prospects, financial condition, results of operations or the trading price of the ADSs.

Russian thin capitalization rules and general interest deductibility rules allow different interpretations, which may affect our business.

The Russian Tax Code provides for three main restrictions that limit the deductibility of expense for interest accruing on indebtedness; these are, first, that a loan is obtained (indebtedness is incurred) with a proper economic reasoning (for a business purpose or justification); second, that the interest rate, if paid on related-party indebtedness, fits within certain interest rate (safe-harbor) ranges; and third, the thin capitalization rules (that apply to “foreign controlled debt” (i.e., indebtedness where a foreign direct or indirect shareholder or its affiliate act as a lender or a guarantor) and operate the 3:1 debt-to-equity ratio). In particular, under the thin capitalization rules, the ability to deduct interest is restricted to the extent the foreign controlled debt exceeds the equity by more than three times (12.5 times for banks and leasing companies). Interest on excess debt is non-deductible and treated as a dividend subject to withholding tax. The whole amount of interest accrued on foreign controlled debt would be treated for tax purposes as dividend (including would not be deductible) if the balance-sheet equity (the net asset value) of the indebted taxpayer is negative. The statutorily defined scope of the foreign controlled debt was amended recently such that loans obtained from banks or Russian affiliates are under certain conditions excluded; at the same time, loans obtained from foreign affiliates are explicitly included (basically, in line with the position developed previously in the administrative and court practice).

Our Russian operations may be affected by requalification of interest into dividend (including by our inability to deduct interest) based on the Russian thin capitalization rules in Russia if at any time the respective indebtedness qualifies as foreign controlled debt or by the inability to deduct interest based on other reasons.

Our non-Russian entities may be exposed to taxation in Russia if they are treated as having a Russian permanent establishment or as being Russian tax residents.

The Russian Tax Code provides for extended taxation and related tax obligations for foreign legal entities that carry on commercial activities in Russia in such a manner to create the tax status of either a permanent establishment or a tax resident (in the first case, the foreign legal entity is subject to Russian corporate income tax with regard to income derived from activities conducted through the permanent establishment; in the second case, the Russian corporate income tax applies to worldwide income of the foreign legal entity; in addition, in both cases, other taxes may apply depending on the circumstances). Although tax residency rules for legal

 

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entities as defined in the Russian Tax Code are broadly similar to the respective concepts known in the international context (including those developed by the OECD for tax treaty purposes), they have not yet been sufficiently tested in the Russian administrative and court practice (since they were introduced from 1 January 2015). The permanent establishment concept has been in effect for a while, but several key elements of this concept (for example, the allocation of income and expenses to the permanent establishment) still lack any application guidelines.

While we do not believe that prior to us changing the conduct of our affairs and taking steps resulting in our non-Russian entities changing the place of our management and creating a tax residence or a permanent establishment in Russia, our non-Russian entities will be treated as having a tax residence or a permanent establishment in Russia, we cannot assure you that our non-Russian entities (even prior to us changing the conduct of our affairs) will not be treated as having a permanent establishment or as a Russian tax resident. If any of these occurs, additional Russian taxes (as well as related penalties) would be imposed on us and our business, prospects, financial condition and results of operations could be materially and adversely affected.

Russian tax residence rules are relatively untested, and the tax residence status may be challenged, if the rules are challenged or changed in the future.

The Russian Tax Code provides that a non-Russian entity may establish a branch office in Russia and, under certain conditions, may self-declare its Russian tax residence. In such circumstances, such non-Russian entity with a Russian tax residence should be treated, for Russian corporate income tax purposes, in the same manner as other Russian taxpayers, which implies that such entity should be subject to a Russian corporate income tax on worldwide income and be entitled to all tax exemptions and benefits as provided under the Russian Tax Code, including being entitled (under certain conditions) to a 0% tax rate on dividends received. However, the relevant tax residence rules have not been sufficiently tested, particularly by publicly traded companies that have migrated to Russia for tax purposes, and it is possible that the self-declared tax residence status may be challenged in the future and, as a result, the 0% tax rate on incoming dividends may be denied.

It should be added that the mechanics of the application of Russian withholding tax on dividends by public companies that have migrated to Russia for tax purposes have not been tested, and there is a risk that we will not be in the position to apply reduced tax rates as applicable to Russian tax resident Holders or the reduced rates available under Double Tax Treaties, therefore we will have to withhold the tax at the generally applicable 15% tax rate. See “Taxation—Material Russian Tax Considerations—Taxation of dividends on the ADSs.”

The anticipated change of tax residence of HeadHunter Group PLC from Cyprus to Russia may have impact on taxation of income derived by Holders of the ADSs (dividends to be paid by HeadHunter Group PLC). See “Taxation—Material Russian Tax Considerations.”.

We may encounter difficulties in obtaining lower rates of Russian withholding income tax for dividends distributed from our Russian subsidiaries.

Dividends paid by Russian subsidiaries to their foreign corporate shareholders are generally subject to Russian withholding income tax at a rate of 15%; although this tax rate may be reduced under an applicable tax treaty if certain conditions defined in the tax treaty are met (in particular, if the shareholder receiving the dividend is a beneficial owner of respective dividends and does not have a permanent establishment in Russia).

The concept of “beneficial ownership” was introduced into the Russian Tax Code as of January 1, 2015, as a part of the deoffshorization rules, and then amended in 2016 (mainly to bring it in line with the OECD-defined concept). In accordance with this concept, if a person serves as an intermediary and has an obligation to transfer part or all of the income received from the company to a third party (i.e., a person that is not able to act independently with respect to the use and disposition of the received income), such person may not be treated as beneficial owner of income. The result of the denial of beneficial owner’s treatment would be the denial of tax treaty benefits (such as the reduced tax on dividends). Although the “beneficial ownership” concept as currently defined in the Tax Code is in line with the relevant internationally known rules, the application of this concept in

 

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the Russian administrative and court practice currently shows rather broad and conflicting interpretations. Given the current conflicting interpretation of the “beneficial ownership” concept, the application of this concept may lead to excessive taxation of our retained earnings on their distribution, and additional taxation may also arise on the grounds of a permanent establishment in Russia.

Risks Relating to Our Organizational Structure

The rights of our shareholders are governed by Cyprus law and our amended and restated memorandum and articles of association, and differ in some important respects from the typical rights of shareholders under U.S. state laws.

Our corporate affairs are governed by our amended and restated memorandum and articles of association and by the laws governing companies incorporated in Cyprus. The rights of our shareholders and the responsibilities of members of our board of directors under Cyprus law and our amended and restated memorandum and articles of association are different than under the laws of some U.S. state laws. For example, by law, existing holders of shares in Cypriot public companies are entitled as a matter of law to pre-emptive rights on the issue of new shares in that company (if shares are issued for cash consideration). The pre-emptive rights, however, may be disapplied by our shareholders at a general meeting for a period of five years.

In addition, our amended and restated memorandum and articles of association include other provisions, which differ from provisions typically included in the governing documents of most companies organized in the U.S.:

 

   

our board of directors can only take certain actions by means of a supermajority vote of 75% of its members, including issuing shares for consideration other than cash and other actions;

 

   

our shareholders are able to convene an extraordinary general meeting; and

 

   

if our board of directors exercises its right to appoint a director to fill a vacancy on the board created during the term of a director’s appointment, such appointment is valid until the next annual general meeting, where the director is eligible for re-election and the shareholders may choose whether to reappoint the director or appoint a new director.

Further, our amended and restated memorandum and articles of association also require the approval of no less than 75% of present and voting shareholders for certain matters, including, among other things, amendments to our constitutional documents, dissolution or liquidation of our company, reducing the share capital and buying back shares.

As a result of the differences described above, our shareholders may have rights different to those generally available to shareholders of companies organized under U.S. state laws, and our board of directors may find it more difficult to approve certain actions.

We may be deemed a tax resident outside of Cyprus.

According to the provisions of the Cyprus Income Tax Law, a company is considered a resident of Cyprus for tax purposes if its management and control are exercised in Cyprus. The concept of “management and control” is not defined in the Cypriot tax legislation. However, certain criteria generally considered as having to be taken into account in order to determine whether a company will be considered as being a tax resident of Cyprus include: (i) whether the company is incorporated in Cyprus and is a tax resident only in Cyprus; (ii) whether the board of directors has a decision making power that is exercised in Cyprus in respect of key management, strategic and commercial decisions necessary for the company’s operations and general policies and, specifically, whether the majority of the board of directors meetings take place in Cyprus and, also, whether the majority of the board of directors are tax residents of Cyprus; (iii) whether the shareholders’ meetings take place in Cyprus; (iv) whether the company has issued general powers of attorney delegating the board’s power to exercise control and make decisions; (v) whether the corporate filings and reporting functions are performed by representatives located in

 

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Cyprus; (vi) whether the agreements relating to the company’s business or assets are executed or signed in Cyprus. If we are deemed not to be a tax resident in Cyprus, we may not be subject to the Cypriot tax regime other than in respect of Cyprus sourced income and we may be subject to the tax regime of the country in which we are deemed to be a tax resident. Further, we would not be eligible for benefits under the tax treaties entered into between Cyprus and other countries. A company incorporated and currently a tax resident in Cyprus, due to the recent amendments to the Russian legislation, can, in specific circumstances, be considered by the Russian tax authorities to be a tax resident in Russia. See “Risks relating to Russian taxation—Our non-Russian entities may be exposed to taxation in Russia if they are treated as having a Russian permanent establishment or as being Russian tax residents.” However, the tax treaty in force between Cyprus and Russia provides that such a company shall be deemed to be a tax resident of the state in which the place of effective management of the company is situated; the process of determining the effective management in this case will be achieved through the two states endeavoring to determine the place of effective management by mutual agreement having regard to all relevant factors. Where the majority of our board of directors comprises tax residents or citizens outside of Cyprus, this may pose a risk that we, even if we are managed and controlled in Cyprus and therefore a tax resident in Cyprus, may be deemed to have a permanent establishment outside of Cyprus. Such a permanent establishment could be subject to taxation of the jurisdiction of the permanent establishment on the profits allocable to the permanent establishment. See “Material Tax Considerations—Material Cyprus Tax Considerations—Taxation of Dividends and Distributions.” If we are tax resident in a jurisdiction outside of Cyprus or are deemed to have a permanent establishment outside of Cyprus, our tax burden may increase significantly, and our business, prospects, financial condition and results of operations could be materially and adversely affected.

As a holder of our ADSs, you may not be able to exercise your pre-emptive rights in relation to future issuances of ordinary shares.

To raise funding in the future, we may issue additional ordinary shares, including in the form of ordinary shares. Generally, existing holders of shares in Cypriot public companies are entitled by law to pre-emptive rights on the issue of new shares in that company (provided that such shares are paid in cash and the pre-emption rights have not been disapplied by our shareholders at a general meeting for a specific period). You may not be able to exercise pre-emptive rights for ordinary shares where there is an issue of shares for non-cash consideration or where pre-emptive rights are disapplied. In the United States, we may be required to file a registration statement under the Securities Act to implement pre-emptive rights. We can give no assurances that an exemption from the registration requirements of the Securities Act would be available to enable U.S. holders of ordinary shares to exercise such pre-emptive rights and, if such exemption is available, we may not take the steps necessary to enable U.S. holders of ordinary shares to rely on it. Accordingly, you may not be able to exercise your pre-emptive rights on future issuances of ordinary shares, and, as a result, your percentage ownership interest in us would be diluted. As our shareholders authorized the disapplication of pre-emptive rights for a period of five years from the date of the completion of this offering, any issuances of shares after the five-year period will be subject pre-emptive rights unless those rights are additionally disapplied. Furthermore, rights offerings are difficult to implement effectively under the current U.S. securities laws, and our ability to raise capital in the future may be compromised if we need to do so via a rights offering in the United States.

Because of their significant voting power, our principal shareholders will be able to exert control over us and our significant corporate decisions.

Immediately prior to this offering, our principal shareholders, Highworld Investments Limited, an investment vehicle associated with Elbrus Capital, and ELQ Investors VIII Limited, an investment vehicle associated with The Goldman Sachs Group, Inc., controlled 100% of our issued and outstanding ordinary shares. Upon completion of this offering, the shares owned by our principal shareholders will collectively represent 67.4% of the voting power of our outstanding capital stock (or 62.5% if the underwriters exercise their option to purchase additional ADSs in full). As a result, our principal shareholders will have the ability to determine the outcome of all matters submitted to our shareholders for approval, including the election and removal of directors and any

 

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merger, consolidation, or sale of all or substantially all of our assets. The interests of our principal shareholders might not coincide with the interests of the other holders of our capital stock. This concentration of ownership may harm the value of our ordinary shares, among other things:

 

   

delaying, deferring or preventing a change in control of our Company;

 

   

impeding a merger, consolidation, takeover or other business combination involving our Company; or

 

   

causing us to enter into transactions or agreements that are not in the best interests of all shareholders.

We may be subject to defense tax in Cyprus.

Cypriot companies must pay a Special Contribution for the Defense Fund of the Republic of Cyprus, or the defense tax, at a rate of 17% on deemed dividend distributions to the extent that their ultimate beneficial owners are Cypriot tax residents. A Cypriot company that does not distribute at least 70% of its after tax profits within two years from the end of the year in which the profits arose, is deemed to have distributed this amount as a dividend two years after that year end. The amount of this deemed dividend distribution, subject to the defense tax, is reduced by any actual dividend paid out of the profits of the relevant year at any time up to the date of the deemed distribution and the resulting balance of profits will be subject to the defense tax to the extent of the appropriation of shares held in the company at that time by Cyprus tax residents. The profits to be taken into account in determining the deemed dividend do not include fair value adjustments to any movable or immovable property.

The defense tax payable as a result of a deemed dividend distribution is paid in the first instance by the Company which may recover such payment from its Cypriot shareholders by deducting the amount from an actual dividend paid to such shareholders from the relevant profits. To the extent that we are unable to recover this amount due to a change in shareholders or no actual dividend is ever paid out of the relevant profits, we will suffer the cost of this defense tax. Imposition of this tax could have a material adverse effect on our business, financial condition and operating results if we are unable to recover the tax from shareholders as described above.

In September 2011, the Commissioner of the Inland Revenue Department of Cyprus issued Circular 2011/10, which exempted from the defense tax any profits of a company that is tax resident in Cyprus imputed indirectly to shareholders that are themselves tax residents in Cyprus to the extent that these profits are indirectly apportioned to shareholders who are ultimately not Cyprus tax residents.

Our interest expenses may not be tax deductible.

In May 2012, the House of Representatives of Cyprus enacted laws, effective as of January 1, 2012 that provide that if a Cyprus parent company incurs an interest expense on the acquisition of shares of a company that is a wholly owned subsidiary (whether directly or indirectly and irrespective of whether the subsidiary is a Cyprus or foreign company), the interest expense will not be deductible for tax purposes by the parent company. This deduction will only be available provided the subsidiary owns assets that are used in its business and the amount of interest deducted is limited and proportionate to the amount and value of assets used in the business. If we are unable to deduct our interest expenses for tax purposes, our business, prospects, financial condition and results of operations could be materially and adversely affected.

We may be treated as a passive foreign investment company, which could result in material adverse tax consequences for investors in the ADSs subject to U.S. federal income tax.

Special U.S. federal income tax rules apply to U.S. persons owning shares of a “passive foreign investment company” as defined in the Internal Revenue Code of 1986 (a “PFIC”). If we are treated as a PFIC for any taxable year during which a U.S. Holder (as defined in “Material Tax Considerations—Material U.S. Federal Income Tax Considerations for U.S. Holders) holds the ADS (or ordinary shares represented by the ADSs), the U.S. Holder may be subject to certain material adverse tax consequences upon a sale, exchange, or other disposition of the ADSs

 

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(or such ordinary shares), or upon the receipt of distributions in respect of the ADSs (or such ordinary shares). Based on the current and anticipated composition of our income, assets and operations, we do not expect to be treated as a PFIC for the current taxable year or in the foreseeable future. This is a factual determination, however, that depends on, among other things, the composition of our income and assets from time to time, and thus the determination can only be made annually after the close of each taxable year. Therefore, there can be no assurance that we will not be classified as a PFIC for the current taxable year or for any future taxable year. U.S. Holders should consult their tax advisors about the potential application of the PFIC rules to their investment in the ADSs.

Risks Relating to our Initial Public Offering and Ownership of our ADSs

As a foreign private issuer and “controlled company” within the meaning of the Nasdaq’s corporate governance rules, we are permitted to, and we will, rely on exemptions from certain of the Nasdaq corporate governance standards, including the requirement that a majority of our board of directors consist of independent directors. Our reliance on such exemptions may afford less protection to holders of our ordinary shares.

As a company not listed on the regulated market of the Cyprus Stock Exchange, we are not required to comply with any corporate governance code requirements applicable to Cypriot public companies.

The Nasdaq corporate governance rules require listed companies to have, among other things, a majority of independent board members and independent director oversight of executive compensation, nomination of directors and corporate governance matters. As a foreign private issuer, we are permitted to, and we will, follow home country practice in lieu of the above requirements. As long as we rely on the foreign private issuer exemption to certain of the Nasdaq corporate governance standards, a majority of the directors on our board of directors are not required to be independent directors, our remuneration committee is not required to be comprised entirely of independent directors and we will not be required to have a nominating committee. Therefore, our board of directors approach to governance may be different from that of a board of directors consisting of a majority of independent directors, and, as a result, the management oversight of our Company may be more limited than if we were subject to all of the Nasdaq corporate governance standards.

In the event we no longer qualify as a foreign private issuer, we intend to rely on the “controlled company” exemption under the Nasdaq corporate governance rules. A “controlled company” under the Nasdaq corporate governance rules is a company of which more than 50% of the voting power is held by an individual, group or another company. Following this offering, our principal shareholder will control a majority of the voting power of our outstanding ordinary shares, making us a “controlled company” within the meaning of the Nasdaq corporate governance rules. As a controlled company, we would be eligible to, and, in the event we no longer qualify as a foreign private issuer, we intend to, elect not to comply with certain of the Nasdaq corporate governance standards, including the requirement that a majority of directors on our board of directors are independent directors and the requirement that our remuneration committee and our nominating committee consist entirely of independent directors.

Accordingly, our shareholders will not have the same protection afforded to shareholders of companies that are subject to all of the Nasdaq corporate governance standards, and the ability of our independent directors to influence our business policies and affairs may be reduced.

We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our ADSs less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and we intend 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, not being required to comply with the auditor

 

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attestation requirements of Section 404(b) of the Sarbanes-Oxley Act. We cannot predict if investors will find our ADSs less attractive because we will rely on these exemptions. If some investors find our ADSs less attractive as a result, there may be a less active trading market for our ADSs and the price of our ADSs may be more volatile.

In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the “Securities Act”), for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We intend to take advantage of such extended transition period.

We may lose our foreign private issuer status in the future, which could result in significant additional costs and expenses.

As discussed above, we are a foreign private issuer, and therefore, we are not required to comply with all of the periodic disclosure and current reporting requirements of the Exchange Act. The determination of foreign private issuer status is made annually on the last business day of an issuer’s most recently completed second fiscal quarter, and, accordingly, the next determination will be made with respect to us on June 30, 2019. We would lose our foreign private issuer status if, for example, more than 50% of our total assets are located in the United States as of June 30, 2019. If we lose our foreign private issuer status on this date, we will be required to file with the SEC periodic reports and registration statements on U.S. domestic issuer forms beginning on January 1, 2020, which are more detailed and extensive than the forms available to a foreign private issuer. We will also have to mandatorily comply with U.S. federal proxy requirements, and our officers, directors and principal shareholders will become subject to the short-swing profit disclosure and recovery provisions of Section 16 of the Exchange Act. In addition, we will lose our ability to rely upon exemptions from certain corporate governance requirements under the listing rules of Nasdaq. As a U.S. listed public company that is not a foreign private issuer, we will incur significant additional legal, accounting and other expenses that we will not incur as a foreign private issuer, and accounting, reporting and other expenses in order to maintain a listing on a U.S. securities exchange. These expenses will relate to, among other things, the obligation to present our financial information in accordance with U.S. GAAP in the future.

As we are a “foreign private issuer” and intend to follow certain home country corporate governance practices, our shareholders may not have the same protections afforded to shareholders of companies that are subject to all Nasdaq corporate governance requirements.

As a foreign private issuer, we have the option to follow certain Cypriot corporate governance practices rather than those of Nasdaq, provided that we disclose the requirements we are not following and describe the home country practices we are following. We intend to rely on this “foreign private issuer exemption” with respect to the Nasdaq requirements to have the audit committee appoint our Independent Registered Public Accountants, Nasdaq rules for shareholder meeting quorums and record dates and Nasdaq rules requiring shareholders to approve equity compensation plans and material revisions thereto. We may in the future elect to follow home country practices in Cyprus with regard to other matters. As a result, our shareholders may not have the same protections afforded to shareholders of companies that are subject to all Nasdaq corporate governance requirements.

 

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We have identified material weaknesses and significant deficiencies in our internal control over financial reporting. These material weaknesses in our internal control over financial reporting could result in material misstatements in our historical financial reports and, if not remediated, can adversely affect the accuracy and timing of our financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports, and the market price of our ADSs may be materially and adversely affected.

Prior to this offering, we have been a private company with limited accounting personnel and other relevant resources with which to address our internal controls and procedures. Although we are not yet subject to the certification or attestation requirements of Section 404 of the Sarbanes-Oxley Act, in the course of reviewing our financial statements in preparation for this offering, our management and our Independent Registered Public Accounting Firm identified deficiencies that we concluded represented material weaknesses and significant deficiencies in our internal control over financial reporting primarily attributable to our lack of an effective control structure and sufficient financial reporting and accounting personnel. SEC guidance defines a material weakness as a deficiency or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. SEC guidance defines a significant deficiency as a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the registrant’s financial reporting.

Our findings related to our financial reporting as of the years ended December 31, 2015 and 2016 include material weaknesses where: (i) we did not design, implement and maintain an effective control environment with the appropriate functions, bodies (including an audit committee or equivalent body at the board level and internal audit control function) and formalized processes and procedures in order to independently review and challenge the financial statements prepared by the financial reporting group; (ii) we did not have a sufficient number of accounting personnel with appropriate expertise required for the timely preparation and review of accounting schedules and financial statements in order to adequately meet the reporting and compliance requirements as an SEC registrant; (iii) we did not maintain effective allocation and segregation of duties in our financial reporting process (specifically for identifying, accumulating and reviewing all required supporting information) to ensure the completeness and accuracy of the preparation and review of consolidated financial statements and disclosures; (iv) we did not retain the evidence of review of significant contracts and non-routine transactions that could lead to potential misstatements in the financial statements as well as other adverse effects; and (v) our information systems access, the segregation of duties and user access rights within information systems and change management controls were not operating effectively.

Our findings related to our financial reporting as of the year ended December 31, 2017 include material weaknesses where: (i) we did not design, implement and maintain an effective control environment with the appropriate functions, bodies (including an audit committee or equivalent body at the board level and internal audit control function) and formalized processes and procedures in order to independently review and challenge the financial statements prepared by the financial reporting group; (ii) we did not have a sufficient number of accounting personnel with appropriate expertise required for the timely preparation and review of accounting schedules and financial statements in order to adequately meet the reporting and compliance requirements as an SEC registrant; and (iii) our information systems access, the segregation of duties and user access rights within information systems and change management controls were not operating effectively.

In the year ended December 31, 2018, we undertook substantial measures to address material weaknesses and significant deficiencies in our internal controls. In particular, we (i) engaged a Big Four advisory and accounting firm to assess our existing control environment, recommend necessary changes and assist us in designing and implementing improved internal processes and controls; (ii) hired additional finance and accounting personnel with expertise in preparation of financial statements in accordance with IFRS; (iii) established an audit committee and an internal audit function in order to independently review and challenge the financial statements

 

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prepared by the financial reporting group; (iv) further developed and documented our accounting policies and financial reporting procedures, improved existing control processes and implemented new control processes; (v) established an access policy for our accounting system; and (vi) improved access rights and change management control procedures for our information systems. There can be no assurance that we will be successful in pursuing these measures, or that these measures will significantly improve or remediate the material weaknesses described above.

Notwithstanding these efforts, in the course of preparing our financials for the year ended December 31, 2018, we identified a continuing material weakness relating to our information systems, whereby our information systems access, the segregation of duties and user access rights within information systems and change management controls were not operating effectively. We are committed to taking measures to remediate the material weakness related to our financial reporting as of the year ended December 31, 2018 by further improving our user access and segregation duties policies and change management control procedures for our information systems. There can be no assurance that we have identified all of our material weaknesses or that we will not in the future have additional material weaknesses. If we fail to remediate the material weaknesses or to meet the demands that will be placed upon us as a public company, including the requirements of the Sarbanes-Oxley Act, we may be unable to accurately report our financial results, or report them within the timeframes required by law, our consolidated financial statements may be restated, investors may lose confidence in the accuracy and completeness of our financial reports the market price of our ADSs could be materially and adversely affected, our ADSs may be suspended or delisted from Nasdaq and our reputation, results of operations and financial condition may be adversely affected. Failure to comply with Section 404 could also potentially subject us to sanctions or investigations by the SEC or other regulatory authorities.

If we fail to establish and maintain proper internal controls as required by Section 404(a) of the Sarbanes-Oxley Act, our ability to produce accurate financial statements or comply with applicable regulations could be impaired.

Section 404(a) of the Sarbanes-Oxley Act (“Section 404(a)”) requires that beginning with our second annual report following our initial public offering, management assess and report annually on the effectiveness of our internal control over financial reporting and identify any material weaknesses in our internal control over financial reporting. Although Section 404(b) of the Sarbanes-Oxley Act (“Section 404(b)”) requires our Independent Registered Public Accounting Firm to issue an annual report that addresses the effectiveness of our internal control over financial reporting, we have opted to rely on the exemptions provided in the JOBS Act, and consequently will not be required to comply with SEC rules that implement Section 404(b) until such time as we are no longer an EGC.

We expect our first Section 404(a) assessment will take place for our annual report for the fiscal year ending December 31, 2020. As discussed above in “—We have identified material weaknesses and significant deficiencies in our internal control over financial reporting. These material weaknesses in our internal control over financial reporting could result in material misstatements in our historical financial reports and, if not remediated, can adversely affect the accuracy and timing of our financial, investors may lose confidence in the accuracy and completeness of our financial reports, and the market price of our ADSs may be materially and adversely affected,” we and our Independent Registered Public Accounting Firm identified certain material weaknesses in connection with our December 31, 2015, 2016, 2017 and 2018 audits. The continued presence of these or other material weaknesses and/or significant deficiencies in any future financial reporting periods could result in financial statement errors that, in turn, could lead to errors in our financial reports, delays in our financial reporting, and that could require us to restate our operating results, or our auditors may be required to issue a qualified audit report, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our ADSs could be materially and adversely affected. We might also not identify one or more material weaknesses in our internal controls in connection with evaluating our compliance with Section 404(a). In order to achieve and maintain compliance with the requirements of Section 404(a), we will need to expend significant resources and provide significant management oversight. Implementing any

 

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appropriate changes to our internal controls may require specific compliance training of our directors and employees, entail substantial costs in order to modify our existing accounting systems, take a significant period of time to complete and divert management’s attention from other business concerns. These changes may not, however, be effective in maintaining the adequacy of our internal controls.

If either we are unable to conclude that we have effective internal control over financial reporting or, at the appropriate time, our Independent Registered Public Accounting Firm is unwilling or unable to provide us with an unqualified report on the effectiveness of our internal control over financial reporting as required by Section 404(b), investors may lose confidence in our operating results, the price of our ADSs could decline, and we may be subject to litigation or regulatory enforcement actions. In addition, if we are unable to meet the requirements of Section 404, we may not be able to remain listed on Nasdaq.

The obligations associated with being a public company will require significant resources and management attention.

As a public company in the United States, we will incur legal, accounting and other expenses that we did not previously incur. We will become subject to the reporting requirements of the Exchange Act, and the Sarbanes-Oxley Act, the listing requirements of Nasdaq and other applicable securities rules and regulations. Compliance with these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase the demand on our systems and resources, particularly after we are no longer an “emerging growth company.” The Exchange Act requires that we file annual and current reports with respect to our business, financial condition and results of operations. The Sarbanes-Oxley Act requires, among other things, that we establish and maintain effective internal controls and procedures for financial reporting. Furthermore, the need to establish the corporate infrastructure demanded of a public company may divert management’s attention from implementing our growth strategy, which could prevent us from improving our business, financial condition and results of operations. We have made, and will continue to make, changes to our internal controls and procedures for financial reporting and accounting systems to meet our reporting obligations as a public company. However, the measures we take may not be sufficient to satisfy our obligations as a public company. In addition, these rules and regulations will increase our legal and financial compliance costs and will 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 incur substantial costs to maintain the same or similar coverage, and our business, prospects, financial condition and results of operations could be materially and adversely affected.

In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us, and our business, prospects, financial condition and results of operations could be materially and adversely affected.

For as long as we are an “emerging growth company” under the JOBS Act, our Independent Registered Public Accounting Firm will not be required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act. We could be an emerging growth company for up to five years. See “Prospectus Summary—Implications of Being an ‘Emerging Growth Company’ and a ‘Foreign Private Issuer.’” Furthermore, after the date we are no longer an emerging growth company, our Independent

 

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Registered Public Accounting Firm will only be required to attest to the effectiveness of our internal control over financial reporting depending on our market capitalization. Even if our management concludes that our internal controls over financial reporting are effective, our Independent Registered Public Accounting Firm may still decline to attest to our management’s assessment or may issue a report that is qualified if it is not satisfied with our controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. In addition, in connection with the implementation of the necessary procedures and practices related to internal control over financial reporting, we may identify deficiencies that we may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404. Failure to comply with Section 404 could subject us to regulatory scrutiny and sanctions, impair our ability to raise revenue, cause investors to lose confidence in the accuracy and completeness of our financial reports and negatively affect the price of our ADSs.

There is no existing market for our ADSs, and we do not know if one will develop to provide you with adequate liquidity.

Prior to this offering, there has been no public market for our ADSs. We cannot predict the extent to which investor interest in our Company will lead to the development of an active trading market on Nasdaq or otherwise or how liquid that market might become. If an active trading market does not develop, you may have difficulty selling any shares of our ADSs that you purchase, and the value of such shares might be materially impaired. The initial public offering price for our ADSs will be determined by negotiations between us and the representative of the several underwriters and may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell your ADSs at prices equal to or greater than the price you paid in this offering.

HeadHunter Group PLC is a holding company and depends on its subsidiaries, who are separate legal entities, for cash to fund its operations and expenses, including future dividend payments, if any.

As a holding company, our principal source of cash flow will be distributions from our operating subsidiaries. Therefore, our ability to fund and conduct our business, service our debt and pay dividends, if any, in the future will depend on the ability of our subsidiary to generate sufficient cash flow to make upstream cash distributions to us. Our operating subsidiaries are separate legal entities, and although they are directly or indirectly wholly owned and controlled by us, they have no obligation to make any funds available to us, whether in the form of loans, dividends or otherwise. The ability of our subsidiaries to distribute cash to us will also be subject to, among other things, restrictions that may be contained in our subsidiary agreements (as entered into from time to time), availability of sufficient funds in such subsidiary and applicable laws and regulatory restrictions. Claims of any creditors of our subsidiary generally will have priority as to the assets of such subsidiary over our claims and claims of our creditors and shareholders. In addition, as our material subsidiary generates profits and declares dividends in rubles and any dividends paid to holders of our ADSs in the future would be paid in U.S. dollars, any significant fluctuation of the value of the ruble against the U.S. dollar and other currencies may materially and adversely affect the dividend amounts received by holders of our ADSs. To the extent the ability of our subsidiary to distribute dividends or other payments to us is limited in any way, our ability to fund and conduct our business, service our debt and pay dividends, if any, could be harmed.

Anti-takeover provisions in our organizational documents and Cyprus law may discourage or prevent a change of control, even if an acquisition would be beneficial to our shareholders, which could depress the price of our ADSs and prevent attempts by our shareholders to replace or remove our current management.

As we are incorporated in Cyprus, we are subject to Cypriot law. Our amended and restated memorandum and articles of association contain provisions that may discourage unsolicited takeover proposals that shareholders may consider to be in their best interests. In particular, our amended and restated memorandum and articles of association will permit our board of directors to issue preference shares from time to time, with such rights and preferences as they consider appropriate.

 

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Our board of directors could also authorize the issuance of preference shares with terms and conditions and under circumstances that could have an effect of discouraging a takeover or other transaction. We are also subject to certain provisions under Cyprus law which could delay or prevent a change of control. In particular, any merger, consolidation or amalgamation of the Company would require the active consent of our board of directors. Our board of directors may be appointed or removed by the holders of the majority of the voting power of our shares (which, upon completion of this offering, will be controlled by our principal shareholders). Together these provisions may make more difficult the removal of management and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our ADSs.

Neither Cypriot or the broader EU takeover laws apply to us and the mandatory offer requirements in our amended and restated memorandum and articles of association do not apply to any of our existing shareholders or its affiliates as of the date of the adoption of our amended and restated memorandum and articles of association and do not preclude either of those shareholders from acquiring or re-acquiring, as the case may be, a majority of the voting rights in the Company, and accordingly our minority shareholders do not benefit in such cases from the same protections that the minority shareholders of a Cypriot company that is listed on an EU regulated market would be entitled to.

As of the date of this prospectus, Cypriot law does not contain any requirement for a mandatory offer to be made by a person acquiring shares of a Cypriot company even if such an acquisition confers on such person control if such company’s shares are not listed on a regulated market in the European Economic Area unless the acquirer acquires 90% or more of all the shares of a target company or of any class of shares in the target company, or acquires sufficient shares to aggregate, together with those which it already holds (in its own name or that of a nominee or held by its subsidiary) 90% or more of the target’s shares. Neither our shares nor our ADSs are listed on a regulated market in the EEA. Consequently, a prospective bidder acquiring either our shares or ADSs may gain control over us in circumstances in which there is no requirement to conduct a mandatory offer under an applicable statutory takeover protection regime.

Our amended and restated memorandum and articles of association contain a mandatory tender offer provision that requires a third party acquiror that acquires, together with parties acting in concert, 30% or 50% or more of the voting rights in our shares, either in the form of shares or ADSs, to make a tender offer to all of our other shareholders and ADS holders at the highest price paid for shares in the Company by that third party (or parties acting in concert) in the preceding 12 months (see ‘‘Description of Share Capital and Articles of Association - Mandatory offer requirements’’). However, the provision does not apply to any of our existing shareholders or their affiliates as of the date of the adoption of our amended and restated memorandum and articles of association, which means such shareholders (including Highworld Investments Limited and ELQ Investors VIII Limited, and their respective affiliates) can individually or collectively go below 30% or 50% of the voting power, as the case may be, and subsequently acquire more than 30% or 50% of the voting power, as the case may be, without making a tender offer.

Accordingly, the mandatory tender offer provision in our amended and restated memorandum and articles of association does not provide a minority shareholder with a right to dispose of its shares in a number of scenarios in which a shareholder, together with parties acting in concert if applicable, may acquire control over us. As a result, holders of ADSs may not be given the opportunity to receive treatment equal to what may be received, in the event of an offer made by a potential bidder with a view to gaining control over us or by certain other holders of ADSs or, as the case may be, shares at the relevant time.

The price of our ADSs might fluctuate significantly, and you could lose all or part of your investment.

Volatility in the market price of our ADSs may prevent you from being able to sell your ADSs at or above the price you paid for such shares. The trading price of our ADSs may be volatile and subject to wide price fluctuations in response to various factors, including:

 

   

the overall performance of the equity markets;

 

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issuance of new or changed securities analysts’ reports or recommendations;

 

   

additions or departures of key personnel;

 

   

sale of our ADSs by us, our principal shareholders or members of our management;

 

   

general economic conditions;

 

   

changes in interest rates; and

 

   

availability of capital.

These and other factors might cause the market price of our ADSs to fluctuate substantially, which might limit or prevent investors from readily selling their ADSs and may otherwise negatively affect the liquidity of our ADSs. In addition, in recent years, the stock market has experienced significant price and volume fluctuations. This volatility has had a significant impact on the market price of securities issued by many companies across many industries. The changes frequently appear to occur without regard to the operating performance of the affected companies. Accordingly, the price of our ADSs could fluctuate based upon factors that have little or nothing to do with our Company, and these fluctuations could materially reduce our share price. Securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price of a company’s securities. This litigation, if instituted against us, could result in substantial costs, divert our management’s attention and resources, and our business, prospects, financial condition and results of operations could be materially and adversely affected.

Future sales of our ADSs, or the perception in the public markets that these sales may occur, may depress our stock price.

Sales of substantial amounts of our ADSs in the public market after this offering, or the perception that these sales could occur, could adversely affect the price of our ADSs and could impair our ability to raise capital through the sale of additional shares. Upon completion of this offering, we will have 50,000,000 ordinary shares outstanding. The ADSs offered in this offering will be freely tradable without restriction under the Securities Act, except for any of our ADSs that may be held or acquired by our directors, executive officers and other affiliates, as that term is defined in the Securities Act, which will be restricted securities under the Securities Act. Restricted securities may not be sold in the public market unless the sale is registered under the Securities Act or an exemption from registration is available.

We, our executive officers, directors and the selling shareholder have agreed, subject to specified exceptions, with the underwriters not to directly or indirectly sell, offer, contract or grant any option to sell (including any short sale), pledge, transfer, establish an open “put equivalent position” within the meaning of Rule 16a-l(h) under the Exchange Act; or otherwise dispose of any shares, options or warrants to acquire shares, or securities exchangeable or exercisable for or convertible into shares currently or hereafter owned either of record or beneficially; or publicly announce an intention to do any of the foregoing for a period of 180 days after the date of this prospectus without the prior written consent of Goldman Sachs & Co. LLC and Morgan Stanley & Co. LLC. See “Underwriting (Conflicts of Interest).”

All of our ADSs outstanding as of the date of this prospectus may be sold in the public market by existing shareholders 180 days after the date of this prospectus, subject to applicable limitations imposed under federal securities laws. See “Shares and ADSs Eligible for Future Sale” for a more detailed description of the restrictions on selling our ADSs after this offering.

In the future, we may also issue our securities if we need to raise capital in connection with a capital raise or acquisition. The amount of ADSs issued in connection with a capital raise or acquisition could constitute a material portion of our then-outstanding ADSs.

 

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If securities or industry analysts do not publish research or reports or publish unfavorable research about our business, or we fail to meet the expectations of industry analysts, our stock price and trading volume could decline.

The trading market for our ADSs will depend in part on the research and reports that securities or industry analysts publish about us, our business or our industry. We may have limited, and may never obtain significant, research coverage by securities and industry analysts. If no additional securities or industry analysts commence coverage of our Company, the trading price for our ADSs could be negatively affected. In the event we obtain additional securities or industry analyst coverage, if one or more of the analysts who covers us downgrades our stock, the price of our ADSs will likely decline. If one or more of these analysts, or those who currently cover us, ceases to cover us or fails to publish regular reports on us, interest in the purchase of our ADSs could decrease, which could cause the price of our ADSs or trading volume to decline.

You may not be able to exercise your right to vote the ordinary shares underlying your ADSs.

Holders of ADSs may exercise voting rights with respect to the ordinary shares represented by their ADSs only in accordance with the provisions of the deposit agreement. The deposit agreement provides that, upon receipt of notice of any meeting of holders of our ordinary shares, including any general meeting of our shareholders, the depositary will, as soon as practicable thereafter, fix a record date for the determination of ADS holders who shall be entitled to give instructions for the exercise of voting rights. Upon timely receipt of notice from us, the depositary shall distribute to the holders as of the record date (i) the notice of the meeting or solicitation of consent or proxy sent by us, (ii) a statement that such holder will be entitled to give the depositary instructions and a statement that such holder may be deemed, if the depositary has appointed a proxy bank as set forth in the deposit agreement, to have instructed the depositary to give a proxy to the proxy bank to vote the ordinary shares underlying the ADSs in accordance with the recommendations of the proxy bank and (iii) a statement as to the manner in which instructions may be given by the holders.

You may instruct the depositary of your ADSs to vote the ordinary shares underlying your ADSs. Otherwise, you will not be able to exercise your right to vote unless you withdraw our ordinary shares underlying the ADSs you hold. However, you may not know about the meeting far enough in advance to withdraw those ordinary shares. The depositary, upon timely notice from us, will notify you of the upcoming vote and arrange to deliver voting materials to you. We cannot guarantee that you will receive the voting materials in time to ensure that you can instruct the depositary to vote the ordinary shares underlying your ADSs. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for the manner of carrying out voting instructions. This means that you may not be able to exercise your right to vote, and there may be nothing you can do if the ordinary shares underlying your ADSs are not voted as you requested. Under the deposit agreement for the ADSs, we may choose to appoint a proxy bank. In this event, the depositary will be deemed to have been instructed to give a proxy to the proxy bank to vote the ordinary shares underlying your ADSs at shareholders’ meetings if you do not vote in a timely fashion and in the manner specified by the depositary.

The effect of this proxy is that you cannot prevent the ordinary shares representing your ADSs from being voted, and it may make it more difficult for shareholders to exercise influence over our company, which could adversely affect your interests. Holders of our ordinary shares are not subject to this proxy.

You may not receive distributions on the ordinary shares represented by our ADSs or any value for them if it is illegal or impractical to make them available to holders of ADSs.

The depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it receives on our ordinary shares after deducting its fees and expenses. You will receive these distributions in proportion to the number of our ordinary shares your ADSs represent. However, the depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any holders of ADSs. We have no obligation to take any other action to permit the distribution to any holders of our ADSs or ordinary shares. This means that

 

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you may not receive the distributions we make on our ordinary shares or any value from them if it is illegal or impractical for us to make them available to you. These restrictions may have a material adverse effect on the value of your ADSs.

You may be subject to limitations on the transfer of your ADSs.

Your ADSs, which may be evidenced by ADRs, are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems expedient in connection with the performance of its duties. The depositary may refuse to deliver, transfer or register transfers of your ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary think it is advisable to do so because of any requirement of law, government or governmental body, or under any provision of the deposit agreement, or for any other reason.

It may be difficult to enforce a U.S. judgment against us, our directors and officers named in this prospectus outside the United States, or to assert U.S. securities law claims outside of the United States.

All of our current directors and senior officers reside outside the United States, principally in the Russian Federation. Substantially all of our assets and the assets of our current directors and executive officers are located outside the United States, principally in the Russian Federation. As a result, it may be difficult or impossible for investors to effect service of process upon us within the United States or other jurisdictions, including judgments predicated upon the civil liability provisions of the federal securities laws of the United States. See “Enforcement of Civil Liabilities.” Additionally, it may be difficult to assert U.S. securities law claims in actions originally instituted outside of the United States. Foreign courts may refuse to hear a U.S. securities law claim because foreign courts may not be the most appropriate forums in which to bring such a claim. Even if a foreign court agrees to hear a claim, it may determine that the law of the jurisdiction in which the foreign court resides, and not US law, is applicable to the claim. Further, if U.S. law is found to be applicable, the content of applicable U.S. law must be proved as a fact, which can be a time-consuming and costly process, and certain matters of procedure would still be governed by the law of the jurisdiction in which the foreign court resides.

In particular, investors should be aware that there is uncertainty as to whether the courts of the Russian Federation would recognize and enforce judgments of U.S. courts obtained against us or our directors or management as well as against the Selling Shareholders predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States or entertain original actions brought in Russian courts against us or our directors or officers as well as against the Selling Shareholders predicated upon the securities laws of the United States or any state in the United States. There is no treaty between the United States and the Russian Federation providing for reciprocal recognition and enforcement of foreign court judgments in civil and commercial matters. As a result of the difficulty associated with enforcing a judgment against us, you may not be able to collect any damages awarded by either a U.S. or foreign court.

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that relate to our current expectations and views of future events. These forward-looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” These statements relate to events that involve known and unknown risks, uncertainties and other factors, including those listed under “Risk Factors,” which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

In some cases, these forward-looking statements can be identified by words or phrases such as “believe,” “may,” “will,” “expect,” “estimate,” “could,” “should,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “potential,” “continue,” “is/are likely to” or other similar expressions. Forward-looking statements contained in this prospectus include, but are not limited to, statements about:

 

   

our future financial performance, including our revenue, operating expenses and our ability to achieve and maintain profitability;

 

   

our expectations regarding the development of our industry and the competitive environment in which we operate;

 

   

the growth in the usage of our mobile platform and our ability to successfully monetize this usage;

 

   

the growth of our brand awareness and overall business; and

 

   

our ability to improve our user experience, product offerings and technology platform and product offerings to attract and retain job seekers.

These forward-looking statements are subject to risks, uncertainties and assumptions, some of which are beyond our control. In addition, these forward-looking statements reflect our current views with respect to future events and are not a guarantee of future performance. Actual outcomes may differ materially from the information contained in the forward-looking statements as a result of a number of factors, including, without limitation, the risk factors set forth in “Risk Factors” and the following:

 

   

significant competition in our markets;

 

   

our ability to maintain and enhance our brand;

 

   

our ability to improve our user experience, product offerings and technology platform to attract and retain job seekers;

 

   

our ability to respond effectively to industry developments;

 

   

our dependence on job seeker traffic to our websites;

 

   

our reliance on Russian Internet infrastructure;

 

   

global political and economic stability;

 

   

privacy and data protection concerns;

 

   

our ability to successfully remediate the material weaknesses in our internal control over our financial reporting and our ability to establish and maintain an effective system of internal control over financial reporting;

 

   

our ability to effectively manage our growth; and

 

   

our ability to attract, train and retain key personnel and other qualified employees.

We operate in an evolving environment. New risks emerge from time to time, and it is not possible for our management to predict all risks, nor can we assess the effect of all factors on our business or the extent to which

 

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any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

The forward-looking statements made in this prospectus relate only to events or information as of the date on which the statements are made in this prospectus. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this prospectus and the documents that we have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results or performance may be materially different from what we expect.

 

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USE OF PROCEEDS

The Selling Shareholders are selling all of the ADSs being sold in this offering. Accordingly, we will not receive any proceeds from the sale of ADSs in this offering. We will bear all costs, fees and expenses in connection with this offering, which are estimated to be approximately $4.4 million.

In connection with the Acquisition, Highworld Investments Limited entered into a profit sharing arrangement with an affiliate of Ivan Tavrin, and ELQ Investors VIII Limited in turn entered into a pro rata arrangement with Highworld Investments Limited, pursuant to which Mr. Tavrin’s affiliate will receive approximately 9% of any profit that Highworld Investments Limited and ELQ Investors VIII Limited realize with regard to their investment in the Company, including any profit realized upon the sale of its ADSs in this offering. Pursuant to this arrangement, Mr. Tavrin’s affiliate will receive approximately $16.0 million from the sale of ADSs by the Selling Shareholders in this offering, assuming an initial public offering price per share of $12.25, which is the midpoint of the price range set forth on the cover page of this prospectus (or approximately $18.7 million if the underwriters exercise their option to purchase additional ADSs in full). Neither Mr. Tavrin nor his affiliate provided services in connection with the Acquisition or to the Company. Neither Mr. Tavrin nor his affiliate is a shareholder of the Company and neither has rights in the Company or its shares or with regard to its management. Instead, the profit sharing arrangement with Mr. Tavrin settles the Selling Shareholders’ obligation to Mr. Tavrin arising from his relinquishing a previously existing position as the preferred purchaser in the Acquisition. Mr. Tavrin is a well-known Russian telecom, media and technology entrepreneur who was a founder, shareholder and head of a number of Russian companies. He was CEO of Megafon from 2012 to 2016. Mr. Tavrin previously held a position on the board of directors of Mail.Ru (but did not hold such position at the time of the Acquisition) and affiliates of Highworld Investments Limited have historically had and continue to have joint investment projects with Mr. Tavrin in other businesses that are not related to the Company. Neither Mr. Tavrin nor his affiliate is otherwise affiliated with the Selling Shareholders or the Company, and the Company has no obligations to Mr. Tavrin or his affiliate.

 

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DIVIDEND POLICY

We have historically paid dividends, and while we have not adopted a formal dividend policy, we currently expect to continue to do so in the future. Beginning in 2019, subject to the recommendation of the board of directors, we plan to annually distribute at least 50% of our Adjusted Net Income, as defined in “Presentation of Financial and Other Information,” subject to our investment and debt repayment requirements. Any future determination regarding the payment of a dividend will depend on a range of factors, including the availability of distributable profits, our liquidity and financial position, our future growth initiatives and strategic plans, including possible acquisitions, restrictions imposed by our financing arrangements, tax considerations and other relevant factors. The payment of all future dividends, if any, must be recommended by our board of directors, at its sole discretion.

We may only pay out dividends of the profits as shown in our annual IFRS accounts. Under Cyprus law, we are not allowed to make distributions if the distribution would reduce our net assets below the total sum of the issued share capital and the reserves that we must maintain under Cyprus law and our amended and restated memorandum and articles of association.

As a holding company, the level of our income and our ability to pay dividends depend primarily upon the receipt of dividends and other distributions from our subsidiaries. The payment of dividends by our subsidiaries is contingent upon the sufficiency of their earnings, cash flows, regulatory capital requirements and distributable profits.

Our Credit Facility contains certain restrictions on our ability to declare and pay dividends, including that we cannot declare and pay dividends without the prior written consent of VTB Bank (PJSC) except in the following cases: (i) dividends distributions within our Group; (ii) payments of dividends to minority shareholders provided that similar payments are effected in favor of controlling shareholders; (iii) semi-annual dividends in the maximum principal amount equal to 100% of the Adjusted Consolidated Net Profit of the Group for the last 12 months or less, so that the Net Debt to EBITDA ratio calculated under terms of the Credit Facility does not exceed 2.75:1; (iv) payment (on or before June 30, 2019) of a special dividend in such lump sum that, upon such payment, (a) pro forma Net Debt to EBITDA ratio as of December 31, 2018 calculated under the terms of the Credit Facility does not exceed 3.5:1 and (b) total cash balance of HeadHunter Group PLC, Zemenik LLC, Headhunter FSU Limited and Headhunter LLC is not less than P500 million; and (v) dividends distributions to our shareholders from the Tranche E proceeds. In addition, (a) we may not pay out the special dividend referred to in paragraph (iv) above if we have paid any dividends out of the profits for the year 2018 in accordance with paragraph (iii) above and (b) we are not allowed to pay dividends out of the profits for the year 2018 in accordance to paragraph (iii) above if we have paid the special dividend referred to in paragraph (iv) above. Capitalized terms have the definitions provided in the Credit Facility, which is filed as an exhibit to this registration statement, of which this prospectus forms a part. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual obligations and commitments—Credit Facility.

During the Predecessor 2016 Stub Period, Successor 2016 Period, Successor 2017 Period and Successor 2018 Period, we paid dividends in the aggregate amount of P205 million, P0 million, P3,375 million, P0 million, respectively. See “Related Party Transactions—Relationship with Elbrus Capital and The Goldman Sachs Group, Inc.—Loans to Shareholders.”

To the extent that we declare and pay dividends, holders of ADSs on the relevant record date will be entitled to receive dividends payable in respect of ADSs. Cash dividends may be paid to the depositary in any currency and, except as otherwise described under “Description of American Depositary Shares,” will be converted into U.S. dollars by the depositary and paid to holders of ADSs net of applicable fees and charges of, and expenses incurred by, the depositary and net of taxes withheld.

 

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CAPITALIZATION

The table below sets forth our cash and cash equivalents and capitalization as of December 31, 2018 derived from our audited financial statements included elsewhere in this prospectus.

Investors should read this table in conjunction with our audited financial statements included in this prospectus as well as “Selected Consolidated Historical Financial and Other Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

(P in thousands)    Actual as of
December 31, 2018
 

Cash and cash equivalents

     P2,861,110  
  

 

 

 

Total debt, including current portion

     P6,437,616  
  

 

 

 

Shareholders’ equity:

  

Issued capital:

  

Ordinary shares

     8,547  

Share premium

     1,729,400  

Foreign currency translation reserve

     (66,957

Retained earnings/(deficit)

     1,302,981  
  

 

 

 

Total equity attributable to owners of the Company

     2,973,971  

Non-controlling interest

     29,449  
  

 

 

 

Total capitalization

     P9,441,036  
  

 

 

 

 

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DILUTION

If you invest in our ADSs, your interest will be diluted to the extent of the difference between the initial public offering price per ADS and our net tangible book value per ADS after this offering. Dilution results from the fact that the initial public offering price per ordinary share underlying our ADSs is substantially in excess of the net tangible book value per ordinary share. Our net tangible book deficit as of December 31, 2018 was P7,140,440 thousand ($102,784 thousand), or P142.81 per ordinary share ($2.06 per ordinary share). Net tangible book deficit per ordinary share represents the amount of total assets, excluding intangible assets and goodwill, minus the amount of total liabilities, divided by the total number of ordinary shares outstanding as of that date.

Without taking into account any other changes in such net tangible book value after December 31, 2018, based upon an assumed initial public offering price of $12.25 per ADS, which is the midpoint of the range set forth on the cover page of this prospectus, new investors of ADSs in this offering would be diluted by $14.31 or 116.8%. Dilution is determined by subtracting net tangible book value per ordinary share immediately upon the completion of this offering from the assumed initial public offering price per ADS. The U.S. dollar amounts in this section have been calculated at an exchange rate of $1 to P69.4706 as of December 31, 2018.

 

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SELECTED CONSOLIDATED HISTORICAL FINANCIAL AND OTHER DATA

The following tables present our selected consolidated historical financial and other data as of and for the periods indicated. The selected consolidated statements of operations data for the Successor 2018 Period and the Successor 2017 Period and the summary consolidated balance sheet data as of December 31, 2017 (Successor) and 2018 (Successor) are derived from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statements of operations data for the Predecessor 2016 Stub Period, the Successor 2016 Period and the Predecessor 2015 Period and the summary consolidated balance sheet data as of December 31, 2016 are derived from our audited consolidated financial statements not included or incorporated by reference in this prospectus. Our historical audited results are not necessarily indicative of the results that should be expected in any future period.

In order to improve the comparability of the year ended December 31, 2016 to the Successor 2018 Period, the Successor 2017 Period and the Predecessor 2015 Period, we have included supplemental unaudited pro forma consolidated financial information of the Group for the year ended December 31, 2016 as if the Acquisition, including the related incurrence and repayment of debt, had occurred on January 1, 2016. The unaudited supplemental pro forma consolidated financial information of the Group for the year ended December 31, 2016 has been prepared solely for the purpose of this prospectus and has not been prepared in the ordinary course of our financial reporting and has not been audited or reviewed by our Independent Registered Public Accounting Firm. The unaudited supplemental pro forma consolidated financial information of the Group for the year ended December 31, 2016 has been presented for illustrative purposes only and does not purport to represent what our financial results would have actually been had the Acquisition occurred on January 1, 2016, nor does it purport to project our financial results for any future period or our financial condition at any future date.

The financial data set forth below should be read in conjunction with, and is qualified by reference to, “Presentation of Financial and Other Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Unaudited Pro Forma Consolidated Financial Data” and the consolidated financial statements and notes thereto included elsewhere in this prospectus.

Income Statement Data

 

    Predecessor           Predecessor     Successor  
(in thousands of RUB)   For the
year ended
December 31,

2015
    Pro forma
for the year

ended
December 31,

2016(1)
    Period from
January 1 to

February 23,
2016
    Period from
February 24
to
December 31,

2016
    For the
year ended
December 31,
2017(2)
    For the
year ended
December 31,
2018
 

Revenue

    3,103,628       3,739,596       452,904       3,286,692       4,732,539       6,117,773  

Operating costs and expenses (exclusive of depreciation and amortization)

    (1,543,365     (2,065,999     (265,959     (1,847,885     (2,788,576     (3,432,860

Depreciation and amortization

    (88,657     (540,751     (8,743     (459,721     (560,961     (586,131
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    1,471,606       1,132,846       178,202       979,086       1,383,002       2,098,782  

Finance income

    123,943       28,510       4,246       24,264       70,924       90,602  

Finance costs

    —         (732,025     —         (635,308     (706,036     (644,326

Gain on the disposal of a subsidiary

    —         —         —         —         439,115       6,131  

Net foreign exchange gain/(loss)

    74,046       (16,190     9,720       (25,910     96,300       (8,742
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit before income tax

    1,669,595       413,141       192,168       342,132       1,283,305       1,542,447  

Income tax expense

    (393,817     (442,493     (59,176     (397,774     (820,503     (509,602
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    1,275,778       (29,352     132,992       (55,642     462,802       1,032,845  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Pro forma for the year ended December 31, 2016 has been derived from the “Unaudited Pro Forma Consolidated Financial Data” located elsewhere in this prospectus.

 

(2)

We adopted IFRS 15 at January 1, 2018 using the full retrospective approach. Under the transition method chosen, certain comparative information has been restated. Please refer to Note 4 of our consolidated financial statements for the year ended December 31, 2018 included elsewhere in this prospectus. The impact of the transition to IFRS 15 for the years ended December 31, 2015 and December 31, 2016 is immaterial, and therefore, the comparative information for any periods prior to January 1, 2017 has not been restated.

 

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Balance Sheet Data

 

     Successor  
     As of
December 31,
2016
     As of
December 31,

2017(3)
     As of
December 31,
2018
 
(in thousands of RUB)

Total non-current assets

     11,023,245        10,640,174        10,373,068  

Total current assets

     1,501,435        1,530,424        2,966,214  

Total assets

     12,524,680        12,170,598        13,339,282  

Total equity/(deficit)

     4,794,974        1,955,248        3,003,420  

Total non-current liabilities

     5,973,320        7,425,329        6,287,899  

Total current liabilities

     1,756,386        2,790,021        4,047,963  

Total liabilities

     7,726,706        10,215,350        10,335,862  

 

 

(3)

We adopted IFRS 15 at January 1, 2018 using the full retrospective approach. Under the transition method chosen, certain comparative information has been restated. Please refer to Note 4 of our consolidated financial statements for the year ended December 31, 2018 included elsewhere in this prospectus. The impact of the transition to IFRS 15 for the years ended December 31, 2015 and December 31, 2016 is immaterial, and therefore, the comparative information for any periods prior to January 1, 2017 has not been restated.

Non-IFRS Measures and Other Financial Information

 

    Predecessor           Predecessor     Successor  
(in thousands of RUB, except percentages)   For the year
ended
December 31,
2015
    Pro forma for
the year
ended
December 31,
2016(*)
    Period from
January 1,
2016 to
February 23,
2016
    Period from
February 24,
2016 to
December 31,
2016
    For the year
ended
December 31,
2017(4)
    For the year
ended
December 31,
2018
 

EBITDA(5)

    1,634,856       1,657,656       196,914       1,409,897       2,479,378       2,682,302  

EBITDA Margin(6)

    52.7%       44.3%       43.5%       42.9%       52.4%       43.8%  

Adjusted EBITDA(7)

    1,634,856       1,669,731       196,914       1,469,818       2,255,265       2,854,990  

Adjusted EBITDA Margin(8)

    52.7%       44.7%       43.5%       44.7%       47.7%       46.7%  

Adjusted Net Income(9)

    1,275,778       112,855       132,992       76,581       896,588       1,538,163  

Adjusted Net Income Margin(10)

    41.1%       3.0%       29.4%       2.3%       18.9%       25.1%  

 

(*)

Pro forma for the year ended December 31, 2016 has been derived from our “Unaudited Pro Forma Consolidated Financial Data” located elsewhere in this prospectus.

(4)

We adopted IFRS 15 at January 1, 2018 using the full retrospective approach. Under the transition method chosen, certain comparative information has been restated. Please refer to Note 4 of our consolidated financial statements for the year ended December 31, 2018 included elsewhere in this prospectus. The impact of the transition to IFRS 15 for the years ended December 31, 2015 and December 31, 2016 is immaterial, and therefore, the comparative information for any periods prior to January 1, 2017 has not been restated.

(5)

We define EBITDA as net income/(loss) plus: (i) income tax expense; (ii) interest expense/(income); and (iii) depreciation and amortization.

(6)

We define EBITDA Margin as EBITDA divided by revenue.

(7)

We define Adjusted EBITDA as net income/(loss): (i) income tax expense; (ii) interest expense/(income); (iii) depreciation and amortization; (iv) transaction costs related to the Acquistion; (v) gain on the disposal of subsidiary; (vi) expenses related to equity-settled awards and (vii) IPO-related costs.

(8)

We define Adjusted EBITDA Margin as Adjusted EBITDA divided by revenue.

(9)

We define Adjusted Net Income as net income/(loss) plus: (i) transaction costs related to the Acquisition; (ii) gain on the disposal of a subsidiary; (iii) transaction costs related to the disposal of a subsidiary; (iv) amortization of intangible assets recognized upon the Acquisition; (v) the tax effect of the adjustments described in (iv) and (vi) (gain)/loss related to the remeasurement and expiration of a tax indemnification asset.

(10)

We define Adjusted Net Income Margin as Adjusted Net Income divided by revenue.

 

     Successor  
    

As of
December 31,

2016

 
 

 

   

As of
December 31,
2017(11)
 
 
 
   

As of
December 31,
2018
 
 
 

(in thousands of RUB, except ratios)

Net Working Capital(12)

     (1,231,501     (1,956,267     (2,623,413

Net Debt(13)

     4,584,387       5,421,285       3,576,506  

Net Debt to Adjusted EBITDA Ratio(14)

     2.7x       2.4x       1.3x  

 

(11)

We adopted IFRS 15 at January 1, 2018 using the full retrospective approach. Under the transition method chosen, certain comparative information has been restated. Please refer to Note 4 of our consolidated financial statements for the year ended December 31, 2018 included elsewhere in this prospectus. The impact of the transition to IFRS 15 for the years ended December 31, 2015 and December 31, 2016 is immaterial, and therefore, the comparative information for any periods prior to January 1, 2017 has not been restated.

(12)

We define Net Working Capital as our trade and other receivables plus prepaid expenses and other current assets, less our contract liabilities and trade and other payables, in all cases, a current portion of a specific asset or liability.

 

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(13)

We define Net Debt as current portion of our loans and borrowings, plus our loans and borrowings, less our cash and cash equivalents.

(14)

We define Net Debt to Adjusted EBITDA Ratio as Net Debt divided by Adjusted EBITDA.

EBITDA, Adjusted EBITDA, Adjusted Net Income, EBITDA Margin, Adjusted EBITDA Margin and Adjusted Net Income Margin are used by our management to monitor the underlying performance of the business and the operations. EBITDA, Adjusted EBITDA, Adjusted Net Income, EBITDA Margin, Adjusted EBITDA Margin and Adjusted Net Income Margin are used by different companies for differing purposes and are often calculated in ways that reflect the circumstances of those companies. You should exercise caution in comparing EBITDA, Adjusted EBITDA, Adjusted Net Income, EBITDA Margin, Adjusted EBITDA Margin and Adjusted Net Income Margin as reported by us to EBITDA, Adjusted EBITDA, Adjusted Net Income, EBITDA Margin, Adjusted EBITDA Margin and Adjusted Net Income Margin as reported by other companies. EBITDA, Adjusted EBITDA, Adjusted Net Income, EBITDA Margin, Adjusted EBITDA Margin and Adjusted Net Income Margin are unaudited and have not been prepared in accordance with IFRS or any other generally accepted accounting principles.

EBITDA, Adjusted EBITDA, Adjusted Net Income, EBITDA Margin, Adjusted EBITDA Margin and Adjusted Net Income Margin are not measurements of performance under IFRS or any other generally accepted accounting principles, and you should not consider EBITDA, Adjusted EBITDA, Adjusted Net Income, EBITDA Margin, Adjusted EBITDA Margin or Adjusted Net Income Margin as alternatives to net income, operating profit or other financial measures determined in accordance with IFRS or other generally accepted accounting principles. EBITDA, Adjusted EBITDA, Adjusted Net Income, EBITDA Margin, Adjusted EBITDA Margin and Adjusted Net Income Margin have limitations as analytical tools, and you should not consider them in isolation. Some of these limitations are:

 

   

EBITDA, Adjusted EBITDA, Adjusted Net Income, EBITDA Margin, Adjusted EBITDA Margin and Adjusted Net Income Margin do not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments,

 

   

EBITDA, Adjusted EBITDA, Adjusted Net Income, EBITDA Margin, Adjusted EBITDA Margin and Adjusted Net Income Margin do not reflect changes in, or cash requirements for, our working capital needs, and

 

   

the fact that other companies in our industry may calculate EBITDA, Adjusted EBITDA, Adjusted Net Income, EBITDA Margin, Adjusted EBITDA Margin and Adjusted Net Income Margin differently than we do, which limits their usefulness as comparative measures.

We have provided a reconciliation below of EBITDA and Adjusted EBITDA to net income, the most directly comparable IFRS financial measure.

 

    Predecessor           Predecessor     Successor  

(in thousands of RUB)

  For the
year ended
December 31,

2015
    Pro forma
for the
year  ended
December 31,

2016(*)
    Period from
January 1,
2016 to
February 23,

2016
    Period from
February 24,
2016 to
December 31,

2016
    For the
year ended
December 31,
2017(i)
    For the
year ended
December 31,
2018
 

Net income/(loss)

    1,275,778       (29,352 )       132,992       (55,642     462,802       1,032,845  

Add the effect of:

             

Income tax expense

    393,817       442,493       59,176       397,774       820,503       509,602  

Net interest (income)/expense

    (123,396     703,764       (3,997     608,044       635,112       553,724  

Depreciation and amortization

    88,657       540,751       8,743       459,721       560,961       586,131  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

    1,634,856       1,657,656       196,914       1,409,897       2,479,378       2,682,302  

Add the effect of:

             

Transaction costs related to the Acquisition(a)

    —         9,465       —         57,311       —         —    

Gain on the disposal of a subsidiary(b)

    —         —         —         —         (439,115     (6,131

Transaction costs related to the disposal of a subsidiary(c)

    —         2,610       —         2,610       17,244       —    

Equity-settled awards(d)

    —         —         —         —         74,851      
68,776
 

IPO-related costs(e)

    —         —         —         —         122,907    

 

110,043

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

    1,634,856       1,669,731       196,914       1,469,818       2,255,265       2,854,990  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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(*)

Pro forma for the year ended December 31, 2016 has been derived from our “Unaudited Pro Forma Consolidated Financial Data” located elsewhere in this prospectus.

 

(i)

We adopted IFRS 15 at January 1, 2018 using the full retrospective approach. Under the transition method chosen, certain comparative information has been restated. Please refer to Note 4 of our consolidated financial statements for the year ended December 31, 2018 included elsewhere in this prospectus. The impact of the transition to IFRS 15 for the years ended December 31, 2015 and December 31, 2016 is immaterial, and therefore, the comparative information for any periods prior to January 1, 2017 has not been restated.

 

(a)

In connection with the Acquisition, the Company incurred one-time expenses related to professional fees, consulting, due diligence and legal services. The transaction costs in the pro forma year ended December 31, 2016 of P9,465 thousand represent the elimination of the transaction costs incurred in connection with the Acquisition, consisting substantially of professional fees related to due diligence and legal fees. If the Acquisition occurred on January 1, 2016, then these transaction costs would have been incurred before January 1, 2016 and would not be included in the results of the year and therefore have been removed from operating costs and expenses on a pro forma basis.

(b)

On March 29, 2017, the Company sold its 100% subsidiary, CV Keskus, to a third party and recognized a one-off gain on disposal.

(c)

Represents expenses related to tax consulting and audit services related to disposal of CV Keskus.

(d)

Represents non-cash expenses related to equity-settled awards issued in accordance with the Management Incentive Agreement, as disclosed in Note 20(a) to our consolidated financial statements for the year ended December 31, 2018.

(e)

In connection with this offering, we incurred expenses related to legal, accounting and other professional fees that are not indicative of our ongoing expenses.

We believe that Net Working Capital is a useful metric to assess our ability to service debt, fund new investment opportunities, distribute dividends to our shareholders and assess our working capital requirements.

Calculation of our Net Working Capital is presented in the table below:

 

     Successor  
    

As of
December 31,

2016

 
 

 

   

As of
December 31,
2017(i)
 
 
 
   

As of
December 31,
2018
 
 
 

(in thousands of RUB)

Calculation of Net Working Capital:

      

Trade and other receivables

     75,811       31,808       40,718  

Prepaid expenses and other current assets

     146,198       65,803       64,386  

Contract liabilities

     (1,103,233     (1,472,375     (2,072,640

Trade and other payables

     (350,277     (581,503     (655,877
  

 

 

   

 

 

   

 

 

 

Net Working Capital

     (1,231,501     (1,956,267     (2,623,413
  

 

 

   

 

 

   

 

 

 

 

(i)

We adopted IFRS 15 at January 1, 2018 using the full retrospective approach. Under the transition method chosen, certain comparative information has been restated. Please refer to Note 4 of our consolidated financial statements for the year ended December 31, 2018 included elsewhere in this prospectus. The impact of the transition to IFRS 15 for the years ended December 31, 2015 and December 31, 2016 is immaterial, and therefore, the comparative information for any periods prior to January 1, 2017 has not been restated.

We believe that Net Debt and Net Debt to Adjusted EBITDA Ratio are important measures that indicate our ability to repay outstanding debt.

Calculation of our Net Debt is presented in the table below:

 

     Successor  
    

As of
December 31,

2016

 
 

 

   

As of
December 31,
2017
 
 
 
   

As of
December 31,
2018
 
 
 

(in thousands of RUB)

Calculation of Net Debt:

      

Loans and borrowings

     4,726,243       6,162,980       5,203,692  

Loans and borrowings (current portion)

     182,856       674,313       1,233,924  

Cash and cash equivalents

     (324,712     (1,416,008     (2,861,110
  

 

 

   

 

 

   

 

 

 

Net Debt

     4,584,387       5,421,285       3,576,506  
  

 

 

   

 

 

   

 

 

 

 

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We have provided a reconciliation below of Adjusted Net Income to net income, the most directly comparable IFRS financial measure.

 

    Predecessor           Predecessor     Successor  

(in thousands of RUB)

  For the
year ended
December 31,
2015
    Pro forma
for the
year ended
December 31,
2016(*)
    Period from
January 1,

2016 to
February 23,
2016
    Period from
February 24,
2016 to
December 31,
2016
    For the
year ended
December 31,
2017
    For the
year ended
December 31,
2018
 

Net income/(loss)

    1,275,778       (29,352     132,992       (55,642     462,802       1,032,845  

Add the effect of:

             

Transaction costs related to the Acquisition(a)

    —         9,465       —         57,311       —         —    

Gain on the disposal of a subsidiary(b)

    —         —         —         —         (439,115     (6,131

Transaction costs related to disposal of a subsidiary(c)

    —         2,610       —         2,610       17,244       —    

Equity-settled awards(d)

    —         —         —         —         74,851       68,776  

IPO-related costs(e)

    —         —         —         —         122,907       110,043  

Amortization of intangible assets recognized upon the Acquisition(f)

    —         433,722       —         361,435       415,787       415,787  

Tax effect of adjustments(g)

    —         (86,744     —         (72,287     (83,157     (83,157

(Gain)/loss related to remeasurement and expiration of tax indemnification asset(h)

    —         (216,846     —         (216,846     325,269       —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Net Income

    1,275,778       112,855       132,992       76,581       896,588       1,538,163  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(*)

Pro forma for the year ended December 31, 2016 has been derived from our “Unaudited Pro Forma Consolidated Financial Data” located elsewhere in this prospectus.

 

(a)

One-off expense incurred in connection with the Acquisition.

(b)

On March 29, 2017, the Company sold its 100% subsidiary, CV Keskus, to a third party and recognized a one-off gain on disposal. CV Keskus, through which we operated our Estonia, Latvia and Lithuania operations, accounted for P229 million and P54 million for the pro forma year ended December 31, 2016 and the Successor 2017 Period, respectively, or 6.1% and 1.1% of total revenue for the same periods, respectively.

(c)

Represents expenses related to tax consulting and audit services related to disposal of CV Keskus.

(d)

Represents non-cash expenses related to equity-settled awards issued in accordance with the Management Incentive Agreement, as disclosed in Note 20(a) to our consolidated financial statements for the year ended December 31, 2018.

(e)

In connection with this offering, we incurred expenses related to legal, accounting and other professional fees that are not indicative of our ongoing expenses.

(f)

As a result of the Acquisition, we recognized intangible assets for the Successor 2016 Period for: (i) trademark and domain names in the amount of P1,634,306 thousand, (ii) non-contractual customer relationships in the amount of P2,064,035 thousand and (iii) CV database in the amount of P618,601 thousand, which have a useful life of 10 years, 5-10 years and 10 years, respectively. See Note 2 to the Unaudited Pro Forma Consolidated Statement of Operations Adjustments for an explanation of the calculation of the additional amortization expenses included in the pro forma year ended December 31, 2016.

(g)

Calculated by applying the statutory Russian tax rate of 20% to amortization of the assets recognized upon the Acquisition.

(h)

In connection with the Acquisition, Mail.Ru agreed to indemnify us against additional tax amounts that may be due in relation to distributions made from Russia to Cyprus prior to the Acquisition. As a result, we recognized an indemnification asset acquired in the amount of P108,423 thousand. Subsequent to the Acquisition, the indemnification asset was remeasured, and as a result, we recorded a gain in the amount of P216,846 thousand in our statement of income (loss) for the Successor 2016 Period. On August 24, 2017, the indemnity expired. As a result of the expiration, we recorded a loss of P325,269 thousand in our statement of income (loss) for the Successor 2017 Period. See Note 12(a) to our consolidated financial statements for the year ended December 31, 2018.

 

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Other Data

Revenue by customer type and region:

 

     Predecessor             Successor  

(in thousands of RUB)

   For the year
ended
December 31,
2015
     Pro forma
for the year
ended
December 31,
2016(1)
     For the year
ended
December 31,
2017(2)
     For the year
ended
December 31,

2018
 

Key Accounts in Russia

             

Russia segment

             

Moscow and St. Petersburg

     981,052        1,158,156        1,454,278        1,695,823  

Other regions of Russia

     241,581        305,449        426,384        547,710  
  

 

 

    

 

 

    

 

 

    

 

 

 

Sub-total

     1,222,634        1,463,605        1,880,662        2,243,533  

Small and Medium Accounts in Russia

             

Russia segment

             

Moscow and St. Petersburg

     1,014,049        1,229,835        1,641,225        2,150,685  

Other regions of Russia

     306,562        414,060        624,200        1,036,346  
  

 

 

    

 

 

    

 

 

    

 

 

 

Sub-total

     1,320,611        1,643,894        2,265,425        3,187,031  

Other customers in Russia

     135,276        154,034        192,050        238,353  

Foreign customers of Russia

     14,726        14,785        20,342        31,507  
  

 

 

    

 

 

    

 

 

    

 

 

 

Russia, total

     2,693,247        3,276,318        4,358,479        5,700,424  

Other segments, total(3)

     410,381        463,278        374,060        417,349  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Revenue

     3,103,628        3,739,596        4,732,539        6,117,773  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Pro forma for the year ended December 31, 2016 has been derived from our “Unaudited Pro Forma Consolidated Financial Data” located elsewhere in this prospectus.

(2)

We adopted IFRS 15 at January 1, 2018 using the full retrospective approach. Under the transition method chosen, certain comparative information has been restated. Please refer to Note 4 of our consolidated financial statements for the year ended December 31, 2018 included elsewhere in this prospectus. The impact of the transition to IFRS 15 for the years ended December 31, 2015 and December 31, 2016 is immaterial, and therefore, the comparative information for any periods prior to January 1, 2017 has not been restated.

(3)

We divested HeadHunter LLC (Ukraine) in April 2018. Our Ukraine operations accounted for P35 million, P39 million and P16 million for the pro forma year ended December 31, 2016, the Successor 2017 Period and the Successor 2018 Period, respectively.

As a percentage of revenue:

 

     Predecessor           Successor  
     For the year
ended
December 31,
2015
    Pro forma
for the year
ended
December 31,
2016(1)
    For the year
ended
December 31,
2017(2)
    For the year
ended
December 31,

2018
 

Key Accounts in Russia

          

Russia segment

          

Moscow and St. Petersburg

     31.6     31.0     30.7     27.7

Other regions of Russia

     7.8     8.2     9.0     9.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Sub-total

     39.4 %      39.2 %      39.7 %      36.7

Small and Medium Accounts in Russia

          

Russia segment

          

Moscow and St. Petersburg

     32.7     32.9     34.7     35.2

Other regions of Russia

     9.9     11.1     13.2     16.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Sub-total

     42.6 %      44.0 %      47.9 %      52.1

Other customers

     4.9     4.5     4.5     4.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Russia, total

     86.8 %      87.6 %      92.1 %      93.2

Other segments, total

     13.2     12.4     7.9     6.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100.0 %      100.0 %      100.0 %      100.0
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Pro forma data for the year ended December 31, 2016 has been derived from our “Unaudited Pro Forma Consolidated Financial Data” located elsewhere in this prospectus.

(2)

We adopted IFRS 15 at January 1, 2018 using the full retrospective approach. Under the transition method chosen, certain comparative information has been restated. Please refer to Note 4 of our consolidated financial statements for the year ended December 31, 2018 included elsewhere in this prospectus. The impact of the transition to IFRS 15 for the years ended December 31, 2015 and December 31, 2016 is immaterial, and therefore, the comparative information for any periods prior to January 1, 2017 has not been restated.

 

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Operating costs and expenses (exclusive of depreciation and amortization) as a percentage of revenue:  
     Predecessor           Successor  
     For the
year ended
December 31,
2015
    Pro forma
for the year
ended
December 31,
2016(1)
    For the
year ended
December 31,
2017(2)
    For the
year ended
December 31,

2018
 

Personnel expenses

     31.9     33.4     31.8     28.1

Marketing expenses

     7.2     11.3     14.6     15.4

Other general and administrative expenses

          

Subcontractor and other costs related to provision of services

     2.7     2.6     2.5     3.1

Office rent and maintenance

     5.1     4.5     4.0     3.9

Professional services

     1.2     1.7     4.4     4.2

Hosting and other website maintenance

     0.6     0.6     0.5     0.5

Other operating expenses

     1.1     1.1     1.1     0.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating costs and expenses (exclusive of depreciation and amortization)

     49.7     55.2     58.9     56.1
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Pro forma data for the year ended December 31, 2016 has been derived from our “Unaudited Pro Forma Consolidated Financial Data” located elsewhere in this prospectus.

(2)

We adopted IFRS 15 at January 1, 2018 using the full retrospective approach. Under the transition method chosen, certain comparative information has been restated. Please refer to Note 4 of our consolidated financial statements for the year ended December 31, 2018 included elsewhere in this prospectus. The impact of the transition to IFRS 15 for the years ended December 31, 2015 and December 31, 2016 is immaterial, and therefore, the comparative information for any periods prior to January 1, 2017 has not been restated.

 

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UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA

The unaudited pro forma consolidated financial statements set forth below should be read in conjunction with, and are qualified by reference to, “Selected Consolidated Historical Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto included elsewhere in this prospectus.

The unaudited pro forma consolidated statements of operations for the year ended December 31, 2016 have been derived from the historical audited statements of operations and represent the addition of the Predecessor 2016 Stub Period from January 1 to February 23, 2016 and the Successor 2016 Period from February 24 to December 31, 2016 and give effect to the Acquisition as if it had occurred on January 1, 2016.

The unaudited pro forma consolidated financial information presented is based on available information and assumptions we believe are reasonable. The unaudited pro forma consolidated statement of operations is presented for illustrative purposes and does not purport to represent what the results of operations would actually have been if the Acquisition, including the related incurrence and repayment of debt, had occurred as of the dates indicated or what the results of operations would be for any future periods.

 

 

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HeadHunter Group PLC

Unaudited Pro Forma Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)

(in thousands of RUB, except per share amounts)

     Predecessor      Successor              
     Period from
January 1, 2016
to February 23,
2016
     Period from
February 24, 2016
to December 31,
2016
    Pro forma
adjustments
    Unaudited
pro forma
year ended
December 31,
2016
 

Revenue

     452,904        3,286,692       —         3,739,596  

Operating costs and expenses (exclusive of depreciation and amortization)(1)

     (265,959      (1,847,885     47,845       (2,065,999

Depreciation and amortization(2)

     (8,743      (459,721     (72,287     (540,751
  

 

 

    

 

 

   

 

 

   

 

 

 

Operating income

     178,202        979,086       (24,442     1,132,846  

Finance income

     4,246        24,264       —         28,510  

Finance costs(3)

     —          (635,308     (96,717     (732,025

Net foreign exchange gain/(loss)

     9,720        (25,910     —         (16,190
  

 

 

    

 

 

   

 

 

   

 

 

 

Profit before income tax

     192,168        342,132       (121,159     413,141  

Income tax expense(4)

     (59,176      (397,774     14,457       (442,493
  

 

 

    

 

 

   

 

 

   

 

 

 

Net income (loss) for the period

     132,992        (55,642     (106,702     (29,352
  

 

 

    

 

 

   

 

 

   

 

 

 

attributable to:

           

Owners of the Company

     127,215        (86,370 )      (106,702     (65,857

Non-controlling interest

     5,777        30,728       —         36,505  
 

Net income (loss) attributable to the owners of the Company, per share:

           

Basic and diluted

     127,215        (1.73       (1.32
 

Weighted average number of shares:

           

Basic and diluted(5)

     1,000        50,000,000         50,000,000  

Basis of preparation

On February 24, 2016, Zemenik Trading Limited acquired all of the outstanding equity interests of Headhunter FSU Limited from Mail.Ru for cash consideration of P10,129,072 thousand. We accounted for the Acquisition as a business combination under the acquisition method of accounting. Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of the Acquisition. The financial statements of the Successor reflect a new basis of accounting, which is based on the fair value of assets acquired and liabilities assumed as of the date of the Acquisition, whereas the financial statements of the Predecessor reflect a historical costs basis.

To finance the Acquisition, we entered into a series of subordinated loan agreements with entities affiliated with the Selling Shareholders. On February 24, 2016, we entered into loan agreements pursuant to which Highworld Investments Limited loaned us P600 million and ELQ Investors II Limited loaned us P400 million (together the “First Tranche Agreements”), and the loan agreement pursuant to which Highworld Investments Limited loaned us $27 million (the “Additional Loan Agreement”). On April 27, 2016, we entered into loan agreements pursuant to which Highworld Investments Limited loaned us $8.5 million and ELQ Investors II Limited loaned us P1,545.5 million (together the “Second Tranche Agreements,” and, together with the First Tranche Agreements, the “Subordinated Loan Agreements”). We collectively refer to the Subordinated Loan Agreements and Additional Loan Agreement as “shareholder bridge financing.”

 

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Upon completion of the Acquisition and to repay the Subordinated Loan Agreements and the Additional Loan Agreement, through our wholly owned subsidiary Zemenik LLC, we entered into a syndicated credit facility with VTB Bank (PJSC), dated May 16, 2016, borrowing P5 billion.

Regarding the First Tranche Agreements, we repaid Highworld Investments Limited and ELQ Investors II Limited in full on August 8, 2016. Regarding the Second Tranche Agreements, we repaid Highworld Investments Limited in full on June 30, 2016, and we repaid ELQ Investors II Limited in full on July 1, 2016. Finally, we repaid the Additional Loan Agreement in full on June 30, 2016.

We paid consideration to Mail.Ru in installments and incurred interest expense in relation to installments paid subsequent to the Acquisition Date. The incurred interest expense is included in finance costs in the consolidated statement of income (loss) and comprehensive income (loss) for the Successor 2016 Period.

As a result of the Acquisition, we recognized intangible assets for the Successor 2016 Period for: (i) trademark and domain names in the amount of P1,634,306 thousand, (ii) non-contractual customer relationships in the amount of P2,064,035 thousand and (iii) CV database in the amount of P618,601 thousand, which have a useful life of 10 years, 5-10 years and 10 years, respectively.

The table below summarizes allocations of consideration of P10,129,072 thousand to assets acquired and liabilities assumed based on their fair values.

 

(in thousands of Russian Roubles)

 

Net assets

      

Cash acquired

     295,472  

Other investments

     171,334  

Indemnification asset

     108,423  

Property and equipment

     39,520  

Prepaid expenses

     34,631  

Loans issued

     26,947  

Deferred tax assets

     28,204  

Trade and other receivables

     8,574  

Other current assets

     4,709  

Deferred tax liabilities

     (989,351

Contract liabilities

     (1,006,093

Trade and other payables

     (284,118

Income tax payable

     (81,213

Non-controlling interest acquired

     (21,943
  

 

 

 

Total net liabilities excluding intangible assets

     (1,664,904 ) 
  

 

 

 

Identifiable intangible assets

  

Trademarks and domains

     1,634,306  

Non-contractual customer relationships

     2,064,035  

CV database

     618,601  

Website software

     111,340  

Other intangible assets

     16,218  
  

 

 

 

Total identifiable intangible assets

     4,444,500  
  

 

 

 

Goodwill

     7,349,476  
  

 

 

 

Allocated purchase price

     10,129,072  

Less cash acquired

     (295,472
  

 

 

 

Net cash outflow on acquisition

     9,833,600  
  

 

 

 

 

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As a result, our results of operations were impacted by an increase in finance costs relating to interest expense on the Credit Facility, the Subordinated Loan Agreements and the Additional Loan Agreement, certain one-off professional fees and amortization of intangible assets incurred in connection with the Acquisition.

Pro forma adjustments

 

(1)

Represents the elimination of the transaction costs incurred in connection with the Acquisition, consisting substantially of professional fees related to due diligence and legal fees. If the Acquisition occurred on January 1, 2016, then these transaction costs would have been incurred before January 1, 2016 and would not be included in the results of the year and therefore have been removed from operating costs and expenses on a pro forma basis.

 

(2)

Represents the additional amortization expense related to intangible assets identified on the date of the Acquisition. If the Acquisition occurred on January 1, 2016, then the amortization charge for the full year would have been accrued.

 

(in thousands of RUB)

 

Intangible Asset

   Useful
Life
     Fair value at
Acquisition Date
     Expected
amortization
expense for the year
ended December 31,
2016
 

Trademarks and domain names

     10 years        1,634,306        163,431  

Non-contractual customer relationships

     5-10 years        2,064,035        208,431  

CV database

     10 years        618,601        61,860  
     

 

 

    

 

 

 

Total

        4,316,942        433,722  
     

 

 

    

 

 

 

Less: historical amotization

           (361,435
        

 

 

 

Additional amortization expense

           72,287  
        

 

 

 

 

(3)

In connection with the Acquisition, our shareholders provided us with bridge financing through the Subordinated Loan Agreements and the Additional Loan Agreement, each as described above, to fund a substantial portion of the purchase price. Subsequent to the Acquisition, we entered into the Credit Facility and used the proceeds to repay in full the Subordinated Loan Agreements and the Additional Loan Agreement. Had the Acquisition occurred on January 1, 2016, the Credit Facility would have been obtained before January 1, 2016, the shareholder bridge financing would not have been required, and we would have paid the consideration to Mail.Ru in full on January 1, 2016. The adjustments represent the: (i) removal of the interest expense on the shareholder bridge financing; (ii) removal of the interest expense incurred in relation to the installments paid to Mail.Ru subsequent to the Acquisition and (iii) addition of the interest expense on the Credit Facility for the full year as if it were obtained before January 1, 2016.

 

     Interest
expense for the
year ended
December 31,
2016
 

Annual pro forma interest expense:

  

Credit Facility interest expense(a)

     714,167  

Amortization of capitalized origination fees on the Credit Facility

     17,858  
  

 

 

 

Total interest expense

     732,025  
  

 

 

 

Less: historical interest expense

     (635,308
  

 

 

 

Additional interest expense

     96,717  
  

 

 

 

 

  (a)

Represents the annual interest expense on the P5 billion Credit Facility assuming an interest rate calculated as the Key Rate of Central Bank of Russia plus 3.7%. The Key Rate of Central Bank of Russia was 11.0% for the period from January 1, 2016 to June 13, 2016, 10.5% for the period from June 14, 2016 to September 18, 2016 and 10.0% for the period from September 19, 2016 to December 31, 2016.

 

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(4)

Represents the income tax effect of the above adjustments applying the estimated statutory Russian tax rate of 20%. A tax effect arises when the underlying item that is adjusted represents income or expense on which current or deferred income tax expense or recovery is recognized in the Group’s consolidated financial statements.

 

Adjustments

   Profit (loss) before
income tax arising
from adjustment
     Effect on income
tax for the year
ended December 31,
2016
 

Elimination of the transaction costs incurred in connection with the Acquisition. See Note (1)

     47,845        —    

Additional amortization expense related to intangible assets. See Note (2)

     (72,287      14,457  

Additional interest expense. See Note (3)

     (96,717      —    
  

 

 

    

 

 

 

Total

     (121,159      14,457  
  

 

 

    

 

 

 

 

(5)

Basic and diluted net income (loss) per share for the pro forma year ended December 31, 2016 are based on the Successor number of shares outstanding and the pro forma statement of income (loss) and comprehensive income (loss) for the year ended December 31, 2016. On March 1, 2018, the Registrar of Companies in Cyprus registered the subdivision of the existing Company’s share capital of 100,000 ordinary shares of EUR 1.00 each into 50,000,000 ordinary shares of EUR 0.002 each. In accordance with IAS 33.64, we have retrospectively applied the change in the number of ordinary shares to our measurement of earnings per share for the Successor periods. Earnings per share of all Predecessor periods have not been adjusted because they relate to periods before the Acquisition.

Pro Forma Non-IFRS Measures and Other Pro Forma Financial Information

For the purposes of our non-IFRS measures calculations, (a) pro forma operating costs and expenses (exclusive of depreciation and amortization) for the year ended December 31, 2016 include transaction costs of P9,465 thousand related to the Acquisition and transaction costs of P2,610 thousand related to the disposal of our subsidiary, CV Keskus; (b) pro forma depreciation and amortization for the year ended December 31, 2016 includes amortization of intangible assets recognized upon the Acquisition of P433,722 thousand; (c) pro forma net interest expense is P703,764 for the year ended December 31, 2016, and it includes pro forma finance income of P28,510 thousand less pro forma other finance income of P249 thousand and pro forma finance costs of P(732,025) thousand; (d) pro forma income tax expense for the year ended December 31, 2016 includes a tax effect of P(86,744) thousand related to the amortization of intangible assets recognized upon the Acquisition of P433,722 thousand, calculated as the amortization charge of P433,722 thousand multiplied by the 20% generally applicable rate of taxation in Russia and the P(216,846) thousand gain related to the remeasurement of a tax indemnification asset.

We have provided a reconciliation below of pro forma EBITDA and pro forma Adjusted EBITDA for the year ended December 31, 2016 to pro forma net income, the most directly comparable IFRS financial measure:

 

(in thousands of RUB)    For the pro
forma
year
ended
December
31, 2016
 

Pro forma net loss

     (29,352

Add the effect of:

  

Pro forma income tax expense

     442,493  

Pro forma net interest expense

     703,764  

Pro forma depreciation and amortization

     540,751  
  

 

 

 

Pro forma EBITDA

     1,657,656  

Add the effect of:

  

Transaction costs related to the Acquisition(a)

     9,465  

Transaction costs related to the disposal of a subsidiary(b)

     2,610  
  

 

 

 

Pro forma Adjusted EBITDA

     1,669,731  
  

 

 

 

 

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(a)

One-off expense incurred in connection with the Acquisition.

 

(b)

Represents expenses related to tax consulting and audit services related to disposal of our subsidiary, CV Keskus.

We have provided a reconciliation below of pro forma Adjusted Net Income for the year ended December 31, 2016 to pro forma net income, the most directly comparable IFRS financial measure:

 

(in thousands of RUB)    For the pro
forma
year
ended
December
31, 2016
 

Pro forma net loss

     (29,352

Add the effect of:

  

Transaction costs related to the Acquisition(a)

     9,465  

Transaction costs related to the disposal of a subsidiary(b)

     2,610  

Amortization of intangible assets recognized upon the Acquisition

     433,722  

Tax effect of adjustments(c)

     (86,744

(Gain)/loss related to remeasurement and expiration of tax indemnification asset(d)

     (216,846
  

 

 

 

Pro forma Adjusted Net Income

     112,855  
  

 

 

 

 

(a)

One-off expense incurred in connection with the Acquisition.

 

(b)

Represents expenses related to tax consulting and audit services related to disposal of our subsidiary, CV Keskus.

 

(c)

Calculated by applying the statutory Russian tax rate of 20% to the amortization of the intangible assets recognized upon the Acquisition.

 

(d)

In connection with the Acquisition, Mail.Ru agreed to indemnify us against additional tax amounts that may be due in relation to distributions made from Russia to Cyprus prior to the Acquisition. As a result, we recognized an indemnification asset acquired in the amount of P108,423 thousand. Subsequent to the Acquisition, the indemnification asset was remeasured, and as a result, we recorded a gain in the amount of P216,846 thousand on our statement of income (loss) for the Successor 2016 Period. On August 24, 2017, the indemnity expired. As a result of the expiration, we recorded a loss of P325,269 thousand in our statement of income (loss) for the Successor 2017 Period. See Note 12(a) to our consolidated financial statements for the year ended December 31, 2018.

We define pro forma EBITDA Margin as pro forma EBITDA divided by pro forma revenue, pro forma Adjusted EBITDA Margin as pro forma Adjusted EBITDA divided by pro forma revenue and pro forma Adjusted Net Income Margin as pro forma Adjusted Net Income divided by pro forma revenue. Our pro forma EBITDA Margin, pro forma Adjusted EBITDA margin and pro forma Adjusted Net Income Margin for the year ended December 31, 2016 are presented below:

 

     For the pro
forma
year
ended
December
31, 2016
 

Pro forma revenue

     3,739,596  

Pro forma EBITDA

     1,657,656  

Pro forma EBITDA Margin

     44.3

Pro forma Adjusted EBITDA

     1,669,731  

Pro forma Adjusted EBITDA Margin

     44.7

Pro forma Adjusted Net Income

     112,855  

Pro forma Adjusted Net Income Margin

     3.0

 

 

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Pro forma revenue for the year ended December 31, 2016 includes:

 

(i)

Pro forma revenue by product type:

     For the pro forma year
ended December 31, 2016
 
    

In
thousands
of RUB
 
 
 
    



As
percentage
of total
pro forma
revenue
 
 
 
 
 

Bundled Subscriptions

     1,329,354        35.5

Job Postings

     1,202,034        32.1

CV Database Access

     786,575        21.0

Other VAS

     421,633        11.3
  

 

 

    

 

 

 

Total pro forma revenue

     3,739,596        100.0 % 
  

 

 

    

 

 

 

 

(ii)

Pro forma revenue by customer type and region:

 

     For the pro forma year
ended December 31, 2016
 
    

In
thousands
of RUB
 
 
 
    



As
percentage
of total
pro forma
revenue
 
 
 
 
 

Key Accounts in Russia

     

Russia segment

     

Moscow and St. Petersburg

     1,158,156        31.0

Other regions of Russia

     305,449        8.2
  

 

 

    

 

 

 

Sub total

     1,463,605        39.1 % 

Small and Medium Accounts in Russia

     

Russia segment

     

Moscow and St. Petersburg

     1,229,835        32.9

Other regions of Russia

     414,060        11.1
  

 

 

    

 

 

 

Sub total

     1,643,894        44.0 % 

Other customers in Russia

     154,034        4.1

Foreign customers of Russia segment

     14,785        0.4
  

 

 

    

 

 

 

Russia segment, total

     3,276,318        87.6 % 

Other segments, total

     463,278        12.4
  

 

 

    

 

 

 

Total pro forma revenue

     3,739,596        100.0 % 
  

 

 

    

 

 

 

Pro forma operating costs and expenses (exclusive of depreciation and amortization) for the year ended December 31, 2016 consist of the following items, which represent the following percentage of the pro forma revenue for the year ended December 31, 2016 of P3,739,596 thousand:

 

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(in thousands of RUB)    For the pro
forma
year
ended
December
31, 2016
     As
percentage
of total
pro
forma

revenue
 

Personnel expenses

     1,249,843        33.4

Marketing expenses

     423,821        11.3
     

Other general and administrative expenses:

     

Subcontractor and other costs related to provision of services

     95,407        2.6

Office rent and maintenance

     167,988        4.5

Professional services

     63,848        1.7

Hosting and other website maintenance

     22,285        0.6

Other operating expenses

     42,807        1.1
  

 

 

    

 

 

 

Pro forma operating costs and expenses (exclusive of depreciation and amortization)

     2,065,999        55.2 % 
  

 

 

    

 

 

 

 

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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 our financial condition and results of operations in conjunction with the section entitled “Selected Consolidated Historical Financial and Other Data,” and our consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in the “Risk Factors” section of this prospectus. Actual results could differ materially from those contained in any forward-looking statements.

We define the Successor period year ended December 31, 2018 as the “Successor 2018 Period” and the Successor period year ended December 31, 2017 as the “Successor 2017 Period.”

Overview

We are the leading online recruitment platform in Russia and the CIS region and focus on connecting job seekers with employers. We offer potential employers and recruiters paid access to our extensive CV database and job postings platform. We also provide job seekers and employers with a value added services portfolio centered around their recruitment needs. Our brand and the strength of our platform allow us to generate significant traffic, over 86% of which was free for us as of November 2018 according to our internal data, and we were the third most visited job and employment website globally as of January 1, 2019, according to the latest available data from SimilarWeb. Our CV database contained 22.1 million, 26.4 million and 36.2 million total CVs (excluding Ukraine) as of December 31, 2016, 2017 and 2018, respectively, the growth partially due to our acquisition of Job.ru in January 2018, and our platform hosted a daily average of more than 344,000, 398,000 and 559,000 job postings (excluding Ukraine) in the years ended December 31, 2016, 2017 and 2018, respectively. For the years ended December 31, 2016, 2017 and 2018, our platform averaged 16.7 million, 17.5 million and 20.0 million unique visitors per month, respectively, according to LiveInternet.

Our user base consists primarily of job seekers who use our products and services to discover new career opportunities. The majority of the services we provide to job seekers are free. Our customer base consists primarily of businesses using our CV database and job posting service to fill vacancies inside their organizations.

We were founded in 2000 and have successfully established a strong, trusted brand and the leading market position, which have enabled us to achieve significant growth in recent years. We had approximately 253,000 paying customers on our platform for the year ended December 31, 2018. We have a highly diversified customer base, representing the majority of the industries active in the Russian economy.

Our total revenue was P4,733 million and P6,118 million in the Successor 2017 Period and the Successor 2018 Period, respectively. During the same periods, our net income was P463 million and P1,033 million, respectively. In addition to our growth, we have consistently maintained strong profitability.

Segments

For management purposes, we are organized into operating segments based on the geography of our operations. Our operating segments are “Russia,” “Belarus,” “Kazakhstan,” “Estonia, Latvia and Lithuania,” “Ukraine” and “Azerbaijan.” We divested the business through which we historically conducted operations in Estonia, Latvia and Lithuania in March 2017, and we divested the business through which we conducted operations in Ukraine in April 2018. As each operating segment, other than Russia, individually comprises less than 10% of revenue, we combine all segments other than Russia into “Other segments” in our financial statements and elsewhere in this prospectus. In addition, when reviewing our Russia segment, we disaggregate the revenue in this segment by customer location (including large cities, Moscow and St. Petersburg, and other regions in Russia) and type of customer account (Key Accounts and Small and Medium Accounts) to review trends within each group.

 

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Key Indicators of Operating and Financial Performance

Our management monitors and analyzes certain operating and financial performance indicators. This process ensures timely evaluation of the performance of our business and the effectiveness of our strategies, enabling our management to react promptly to the changing requirements of job seekers and customers and evolving market conditions. We believe that many online businesses monitor similar indicators, however, there are inherent challenges with respect to gathering and assessing the data underlying our performance indicators. See “Risk Factors—Risks Relating to Our Business and Industry—Real or perceived inaccuracies of our internally calculated or third-party sourced user metrics may harm our reputation and adversely affect our business and operating results.”

Key Operating Performance Indicators

We use the following key operating performance indicators to assess the performance of our online recruitment services, from which we generate substantially all of our revenue. These measures include the number of paying customers, the number of job postings on our websites, ARPC, the average number of UMVs to our website, and the number of CVs and visible CVs in our database.

The following table sets forth our key operating performance indicators as of the dates (number of CVs and number of visible CVs) or for the periods indicated (number of paying customers, ARPC, number of job postings and average UMVs):

 

     As of and for the year ended
December 31,
 
     2015      2016      2017      2018  

Number of paying customers

           

Russia segment

           

Key Accounts, total

     7,493        8,365        9,482        10,736  

Moscow and St. Petersburg

     4,650        4,908        5,224        5,538  

Other regions of Russia

     2,843        3,457        4,258        5,198  

Small and Medium Accounts, total

     80,417        107,261        158,993        222,843  

Moscow and St. Petersburg

     54,253        66,836        87,666        109,498  

Other regions of Russia

     26,164        40,425        71,327        113,345  

Foreign customers of Russia segment

     422        747        1,229        1,937  
  

 

 

    

 

 

    

 

 

    

 

 

 

Russia segment, total

     88,332        116,373        169,704        235,516  

Other segments, total

     18,977        22,815        20,105        17,437  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total number of paying customers

     107,309        139,188        189,809        252,953  
  

 

 

    

 

 

    

 

 

    

 

 

 

ARPC (in RUB)(1)

           

Russia segment

           

Key Accounts, total

     163,170        174,968        198,340        208,973  

Moscow and St. Petersburg

     210,979        235,973        278,384        306,216  

Other regions of Russia

     84,974        88,357        100,137        105,369  

Small and Medium Accounts, total

     16,422        15,326        14,249        14,302  

Moscow and St. Petersburg

     18,691        18,401        18,721        19,641  

Other regions of Russia

     11,717        10,243        8,751        9,143  

Other segments, total

     21,625        20,306        18,605        23,935  

Job postings (in thousands)(2)

     290        344        398        559  

Average UMVs (in millions)

     16.3        16.7        17.5        20.0  

Number of CVs (in millions)

     18.4        22.1        26.4        36.2  

Number of visible CVs (in millions)(3)

     13.4        16.0        19.1        27.2  

 

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(1)

ARPC is calculated by dividing revenue by the number of paying customers, respectively, for the period. Total revenue for the year ended December 31, 2016 has been derived from our “Unaudited Pro Forma Consolidated Financial Data” located elsewhere in this prospectus.

(2)

Excludes job postings from our Ukrainian entity, Headhunter LLC (Ukraine), which we divested in April 2018.

(3)

Excludes the CVs from our Ukrainian entity, HeadHunter LLC (Ukraine), which we divested in April 2018.

We sell our services predominantly to businesses that are looking for job seekers to fill vacancies inside their organizations. We refer to such businesses as “customers.” In Russia, we divide our customers into (i) Key Accounts and (ii) Small and Medium Accounts, based on their annual revenue and employee headcount. We define “Key Accounts” as customers who, according to the Spark-Interfax database, have an annual revenue of P2 billion or more or a headcount of 250 or more employees and have not marked themselves as recruiting agencies on their page on our website, and we define “Small and Medium Accounts” as customers who, according to the Spark-Interfax database, have both an annual revenue of less than P2 billion and a headcount of less than 250 employees and have not marked themselves as recruiting agencies on their page on our website. Our website allows several legal entities and/or natural persons to be registered, each with a unique identification number, under a single account page (e.g., a group of companies). Each legal entity registered under a single account is defined as a separate customer and is included in the number of paying customers metric. Natural persons registered under a single account are assumed to be employees of the legal entities of that account and thus, are not considered separate customers and are not included in the number of paying customers metric. However, in a specific reporting period, if only natural persons used our services under such account, they are collectively included in the number of paying customers as one customer.

On rare occasions when information from the Spark-Interfax database is not available, we define Key Accounts as customers who have ever had 10 or more job postings open on our website simultaneously or have subscribed to our CV database for 180 or more consecutive days at any point since their initial registration and Small and Medium Accounts as customers who do not match these criteria.

Information from the Spark-Interfax database may change from time to time as companies file their new financial and other reports every year. As a result, a customer may be included in a different customer group in a subsequent accounting period.

We also derive a small portion of our revenue from the provision of our services to: (i) recruiting agencies looking for job seekers on behalf of their clients, (ii) job seekers who are willing to pay for premium services, such as promoting their CV in the search results and (iii) online advertising agencies, all of which we refer to collectively as “other customers.” Each customer is assigned a unique identification number on our platform.

Our revenue is driven primarily by the number of database subscriptions active in a period and the number of jobs postings on our website. In addition, our revenue is impacted by the frequency with which customers pay to refresh their job postings (where a customer pays for the same job posting again so that it appears at the top of the job posting list), pay for premium placement of their job posting (where a customer pays for their job posting to appear at the top of search results) or purchase other value added services, such as display advertisements.

We calculate average revenue per customer (“ARPC”) by dividing revenue from customers during a specific period by the number of customers who received paid services during the same period. In Russia, we calculate ARPC separately for Key Accounts and for Small and Medium Accounts. ARPC is impacted by the type of customer and the duration of our relationship with our paying customers. Key Accounts use our services more and typically purchase longer subscriptions. Small and Medium Accounts purchase less usage or purchase shorter or one-off subscriptions. As a result, an increase in Key Accounts typically results in a higher ARPC, while an increase in Small and Medium Accounts typically results in a lower ARPC. In addition, newer customers tend to purchase less usage and therefore, lower priced services, resulting in a lower ARPC, whereas more established customers typically purchase more usage, and therefore, higher priced services, resulting in a higher ARPC. In addition to the factors described above, ARPC in our other segments is also impacted by foreign exchange fluctuations as we translate local currency amounts into our reporting currency, the ruble.

 

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The number of “job postings” refers to the total daily average number of jobs advertised by our customers on our website during a specified period. The number of job postings shows the volume of job postings available to job seekers on our website on average during a period. It does not reflect the total number of actual vacancies filled or offered through our website during a period. Historically, customers were charged either on a per posting basis or a flat fee subscription basis for posting an unlimited number of postings over a specific period of time. Since September 1, 2015, customers are primarily charged on a per posting basis or a flat fee subscription basis for a capped number of postings over a specific period of time. Customers may refresh job postings before the expiration of the 30 day standard display period for the same fee as the initial posting to generate more job seeker applications. An increase in the number of customers and number of job postings by these customers increases our ability to attract and retain job seekers.

Our “average unique monthly visitors” (“UMVs”) refers to the average number of unique visitors to our website during a calendar month. The “number of CVs” refers to the number of CVs completed by job seekers and uploaded to our website following the completion of an automated or human-assisted pre-moderation process. Once a job seeker’s CV has been uploaded to the website, he or she may choose to hide their CV while, for example, he or she is not actively searching for a job. A CV may be made visible again by a job seeker at any time. When a job seeker hides his or her CV, although it remains in our database and we may reach the job seeker with direct marketing efforts, it is not discoverable by our customers who have purchased a subscription to use our CV database. The “number of visible CVs” represents the number of CVs discoverable by our customers who have purchased a subscription to use our CV database. The number of CVs represents the total volume of data related to job seekers available to us, and the number of visible CVs represents the value of our services to our customers.

We view average UMVs and the number of CVs as key indicators of growth in our brand awareness among job seekers and as measures of our ability to attract job seekers to register on our website. Historically, an increase in the average UMVs has resulted in an increase in the number of new registered job seekers, which in turn, has resulted in an increase in the number of CVs added to our database. Although we do not directly generate revenue from job seekers uploading their CVs to our database or replying to job postings, the size of our database is a key indicator of the scale of our platform, which enables us to attract new customers and encourages our existing customers to purchase additional services.

The size and growth of the number of UMVs, the number of CVs and the number of jobs advertised increase the value we deliver to customers looking to fill their vacancies through our platform, resulting in an increase in the number of paying customers, ARPC and the growth of revenue from our online recruitment services. This growth is also driven by an overall expansion of the online recruitment market in Russia and the other countries in which we operate, our ability to retain customers and up-sell our services, and our efforts to attract new customers and job seekers. These efforts include continuously improving our website and other platforms to enhance the job seeker experience, tracking the effectiveness of our marketing and brand promotion activities and expanding into new market segments. In addition, even during times of economic slowdown, such as during 2014 and 2015, we have been able to grow the size of our CV database, which becomes even more attractive to our customers as the economy improves, enabling us to encourage our existing customers to purchase additional services as well as attract new customers due to the scale of our database.

 

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Key Financial Performance Indicators

Revenue by customer type

The following table sets forth the revenue from our customers broken down by region for the periods indicated.

 

     Successor  

(in thousands of RUB)

   For the year
ended
December 31,
2017(1)
     For the year
ended
December 31,

2018
 

Key Accounts in Russia

     

Russia segment

     

Moscow and St. Petersburg

     1,454,278        1,695,823  

Other regions of Russia

     426,384        547,710  
  

 

 

    

 

 

 

Sub-total

     1,880,662        2,243,533  

Small and Medium Accounts in Russia

     

Russia segment

     

Moscow and St. Petersburg

     1,641,225        2,150,685  

Other regions of Russia

     624,200        1,036,346  
  

 

 

    

 

 

 

Sub-total

     2,265,425        3,187,031  

Other customers in Russia

     192,050        238,353  

Foreign customers of Russia

     20,342        31,507  
  

 

 

    

 

 

 

Russia, total

     4,358,479        5,700,424  

Other segments, total

     374,060        417,349  
  

 

 

    

 

 

 

Total Revenue

     4,732,539        6,117,773  
  

 

 

    

 

 

 

 

(1)

We adopted IFRS 15 at January 1, 2018 using the full retrospective approach. Under the transition method chosen, certain comparative information has been restated. Please refer to Note 4 of our consolidated financial statements for the year ended December 31, 2018 included elsewhere in this prospectus. The impact of the transition to IFRS 15 for the years ended December 31, 2015 and December 31, 2016 is immaterial, and therefore, the comparative information for any periods prior to January 1, 2017 has not been restated.

We generated 93.2% of our total revenue from our Russia segment for the Successor 2018 Period. In this segment, we generated 39.4% of our total Russia segment revenue for the Successor 2018 Period from Key Accounts, 55.9% of our total Russia segment revenue for the Successor 2018 Period from Small and Medium Accounts and 4.7% of our total Russia segment revenue for the Successor 2018 Period from other domestic and foreign customers. Our Key Accounts are characterized by high customer retention rates, with 88% of customers who purchased our services in the year ended December 31, 2017 also purchasing our services in the year ended December 31, 2018. Our Small and Medium Accounts have historically grown faster than the number of our Key Accounts, as smaller businesses are increasingly discovering the efficiency and cost advantages of online recruiting and moving from offline forms of advertisements to online advertisements, assisted by our brand awareness campaigns. In addition, due to the nature of our business, a substantial portion of our customers pay upfront for subscriptions, resulting in deferred revenue on our balance sheet.

We believe that our revenue will continue to be driven by broad macroeconomic factors in Russia, such as the rate of general economic growth, the state of the Russian job market reflected in such metrics as the unemployment rate, and employee turnover. In addition, we expect our revenue to continue to be positively impacted by the ongoing structural shift from an “offline” to “online” HR environment and the increasing number of businesses using online advertisements. Although our revenue growth may slow down in a weakened economy, such as in 2014 and 2015, the growth in the number of UMVs on our website and the increase in the number of CVs in our database during a downturn positions us to grow when economic conditions improve, as we believe our leading platform has attracted and will continue to attract customers to post their job postings when they are searching for candidates.

We set the prices for access to our CV database based on the length and breadth of access to our database and for job postings based on the volume of job postings our customers post on our website. The price of a subscription to our CV database is defined by the geographical and professional segment of the database to which a customer wishes to purchase access (for example, access to CVs of job seekers residing in Moscow and looking for a job in

 

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the professional area of marketing) and the duration of the subscription, which can be one day, one week, two weeks, one month, three months, six months or one year. The price of the specific geographic and professional segments of the CV database is set according to the relative size of the database measured by the number of visible CVs (however, not always pro rata). The longer the duration of the subscription, the lower the price is per day.

The following table sets forth the revenue we generate per customer type, broken down by region as a percentage of our total revenue for the periods indicated.

 

     Successor  
     For the year
ended
December 31,
2017(1)
    For the year
ended
December 31,

2018
 

Key Accounts in Russia

    

Russia segment

    

Moscow and St. Petersburg

     30.7     27.7

Other regions of Russia

     9.0     9.0
  

 

 

   

 

 

 

Sub-total

     39.7 %      36.7

Small and Medium Accounts in Russia

    

Russia segment

    

Moscow and St. Petersburg

     34.7     35.2

Other regions of Russia

     13.2     16.9
  

 

 

   

 

 

 

Sub-total

     47.9 %      52.1

Other customers

     4.5     4.4
  

 

 

   

 

 

 

Russia, total

     92.1 %      93.2

Other segments, total

     7.9     6.8
  

 

 

   

 

 

 

Total

     100.0 %      100.0
  

 

 

   

 

 

 

 

(1)

We adopted IFRS 15 at January 1, 2018 using the full retrospective approach. Under the transition method chosen, certain comparative information has been restated. Please refer to Note 4 of our consolidated financial statements for the year ended December 31, 2018 included elsewhere in this prospectus.

Russia Segment

Key Accounts Revenue. Key Accounts in Russia accounted for 36.7% of our total revenue for the Successor 2018 Period. Key Accounts tend to purchase higher volumes of services and more frequently use our additional value added services, such as ad displays and company-style branded pages than Small and Medium Accounts. Although the number of our Key Accounts has grown at a slower pace than Small and Medium Accounts over the last two years, we have increased our ARPC in this group by offering value added services and adjusting our product pricing strategy. For example, we introduced a cap on our flat fee subscription service, which previously allowed customers to post an unlimited number of job postings over a specific period of time. This allowed us to generate additional revenue from Key Accounts. Within Key Accounts, we derived 27.7% and 9.0% of the revenue of our Russia segment from Moscow and St. Petersburg and other regions of Russia, respectively, for the Successor 2018 Period. We believe that we will be able to grow our revenue from our Key Accounts by enhancing monetization of existing customers as well as by increasing the number of customers in this segment, particularly in the other regions of Russia, coupled with increasing the number of Key Accounts who purchase our value added services, such as display advertisements and branded websites. See “Business—Our Services—Human Resource Value Added Services” for additional information on our value added services.

Small and Medium Accounts Revenue. Small and Medium Accounts in Russia accounted for 52.1% of our total revenue for the Successor 2018 Period. The number of customers in the Small and Medium Accounts segment grew by 40% in the year ended December 31, 2018 compared to the year ended December 31, 2017. Within Small and Medium Accounts, we derived 35.2% and 16.9% of the revenue of our Russia segment from Moscow and St. Petersburg and other regions of Russia, respectively, for the Successor 2018 Period. We believe that we will be able to grow our revenue from Small and Medium Accounts by further promoting our brand with wide-scale TV, online and outdoor campaigns, offering competitive pricing on our products and retaining and

 

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migrating our Small and Medium Accounts customers to higher priced products over time. In addition, we are working to grow the number of our Small and Medium Accounts customers by increasing the number of CVs from blue collar job seekers in our database.

Other Customers Revenue. Other customers revenue is comprised of revenue from recruiters and ad agencies who purchase access to our CV database and advertising products, and job seekers who purchase a premium service such as CV highlight, which places their CV at the top of a search in our CV database. Other customers revenue accounted for 4.4% of our total revenue for the Successor 2018 Period.

Other Segments

We generated 6.8% of our total revenue from our other segments for the Successor 2018 Period.

Operating costs and expenses (exclusive of depreciation and amortization)

Our operating costs and expenses (exclusive of depreciation and amortization) consist primarily of personnel and marketing expenses. The following table sets forth our operating expenses as a percentage of our revenue for the periods indicated.

 

     Successor  
     For the
year ended
December 31,
2017
    For the
year ended
December 31,

2018
 

Personnel expenses

     31.8     28.1

Marketing expenses

     14.6  

 

15.4

Other general and administrative expenses

    

Subcontractor and other costs related to provision of services

     2.5     3.1

Office rent and maintenance

     4.0     3.9

Professional services

     4.4  

 

4.2

Hosting and other website maintenance

     0.5  

 

0.5

Other operating expenses

     1.1  

 

0.9

  

 

 

   

 

 

 

Operating costs and expenses (exclusive of depreciation and amortization)

     58.9  

 

56.1

  

 

 

   

 

 

 

Personnel Expenses

Our personnel expenses consist primarily of salaries and benefits to our sales staff, who represent 29% of our total number of employees, and salaries and benefits of our development team, who represent 19% of our total employee headcount, for the Successor 2018 Period. In addition to a fixed base salary, which the majority of our staff receive, our sales staff derive a substantial portion of their salary from commissions based on performance. For all periods presented, the majority of compensation paid to our sales personnel was performance based.

 

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We anticipate that our personnel expenses will continue to increase in absolute terms as we hire additional personnel and incur additional costs in connection with the expansion of our business operations in other regions of Russia, enhancing our product and services development and becoming a publicly traded company.

 

Personnel expenses*

 
(in thousands of RUB)      2017       2018  

Sales

     (387,079     (379,790

Marketing

     (78,479     (96,396

Production

     (86,828     (101,120

Development

     (229,310     (305,440

Product

     (98,715     (114,030

Administrative

     (133,425     (187,887

Senior management

     (95,558     (116,928

Subtotal

     (1,109,394 )      (1,301,591 ) 
  

 

 

   

 

 

 

Tax and social

     (311,491     (372,087

Capitalized R&D

     47,248       48,072  

Total

     (1,373,637 )      (1,625,606 ) 
  

 

 

   

 

 

 

 

*

Adjusted for Disposal of CV Keskus OU and HeadHunter LLC (Ukraine), share-based payments and unused vacation provision.

Marketing Expenses

Our marketing expenses historically consisted primarily of online advertising and customer relations expenses. Our total marketing expenses for the years ended December 31, 2017 and 2018 were P693 million and P940 million, respectively. Our online marketing expenses were P269 million and P328 million for the years ended December 31, 2017 and 2018, respectively. In March 2016, we made a significant investment in brand awareness in Russia and launched robust TV and online advertising campaigns. Advertising and promotional expenses generally represent the cost of marketing campaigns to expand our brand awareness among customers and job seekers. Our TV marketing expenses were P209 million and P358 million for the years ended December 31, 2017 and 2018, respectively.

Marketing expenses vary from city to city, depending on local competition, our strategic objectives in each market and the marketing channels we use to support our growth and promote our brand. We plan to continue investing in marketing activities, including offline channels, in order to strengthen our brand recognition and grow our job seeker and customer base. Our offline marketing expenses (excluding TV campaigns) were P75 million and P91 million for the years ended December 31, 2017 and 2018, respectively. Our other marketing expenses were P140 million and P163 million for the years ended December 31, 2017 and 2018, respectively.

As a result of our strategy to expand our business operations and create greater brand awareness, we expect that our marketing expenses will continue to increase in absolute terms as we invest in marketing in new and existing geographic areas. If we can leverage our strong brand and utilize the scalability of our business model, our marketing expenses may decrease as a percentage of our net revenue.

Key Factors Affecting Comparability

Our historical results of operations for the periods presented may not be comparable with prior periods or to our results of operations in the future for the reasons discussed below.

Acquisitions

As part of our growth strategy, we may decide to expand, in part, by acquiring certain complementary businesses in the future. In line with this strategy, on January 25, 2018, we acquired the assets of Job.ru, including its CV

 

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database, domain name, trademarks and customer list, and recently we acquired a 25.01% ownership interest in Skillaz, a Russian staff selection platform (pending state registration). We also entered into option contracts to purchase the additional 40.01% ownership interest in Skillaz, which are exercisable through the period from January 1, 2020 until June 30, 2021. The investment agreement under which we acquired the equity interest in Skillaz prohibits us from developing competing ATS platforms for large corporate clients with sophisticated HR functions and complex HR processes throughout the period of validity of the investment agreement. We do not believe this limitation affects our growth strategy for Talantix.

Divestments

On March 29, 2017, we completed the sale of our wholly owned subsidiary CV Keskus OU, through which we conducted operations in our Estonia, Latvia and Lithuania segment (our “Estonia, Latvia and Lithuania operations”), to Ringier Axel Springer Media AG as part of our strategy to focus on our core markets. In the agreement relating to the sale of CV Keskus OU, we agreed to indemnify the purchaser for an amount equal to up to 40% of the total consideration paid in respect of certain potential regulatory liabilities and other potential claims against CV Keskus OU. As of the date hereof, no claims have been raised. The divestment resulted in a gain on disposal of P439 million, which is reflected in our results of operations for the Successor 2017 Period. Our Estonia, Latvia and Lithuania operations accounted for P54 million for the Successor 2017 Period, or 1.1% of total revenue for the same period. As a result of the sale, our historical financial information for the Successor 2017 Period includes the results of our Estonia, Latvia and Lithuania operations only for the period prior to completion of the sale and, therefore, is not directly comparable with the subsequent period.

On April 26, 2018, we completed the sale of our 51% share in our subsidiary HeadHunter LLC (Ukraine), through which we conducted operations in our Ukraine segment (our “Ukraine operations”), to the minority shareholders for a consideration of P2.6 million. In the agreement relating to the sale of HeadHunter LLC (Ukraine), we agreed (i) the purchase price would be paid in installments on a payment schedule beginning on October 1, 2020 and ending on March 31, 2023; (ii) the acquired participatory interests shall be pledged to us as security of payment obligations of the purchasers; (iii) HeadHunter LLC (Ukraine) will assign all exclusive rights to the Ukrainian trademarks and domain names to us; and (iv) we shall grant Headhunter LLC (Ukraine) a non-exclusive license to use these trademarks and domain names until May 2020. The divestment resulted in a gain on disposal of P6.1 million, which is reflected in our results of operations for the Successor 2018 Period. Our Ukraine operations accounted for P39 million and P16 million for the Successor 2017 Period and the Successor 2018 Period, respectively, or 0.8% and 0.3% of total revenue for the same periods, respectively. As a result of the sale, our historical financial information for the Successor 2018 Period includes the results of our Ukraine operations only for the period prior to completion of the sale and, therefore, is not directly comparable with the prior period.

Withholding Tax on Dividends

We generate most of our income in Russia. Dividends paid from Russia to a foreign legal entity are subject to 15% withholding tax. If a double taxation treaty (“DTT”) between Russia and the country of residence of the ultimate beneficiary of a dividend payment exists, such DTT may allow for a lower rate. See also “Risks Relating to Russian Taxation—We may encounter difficulties in obtaining lower rates of Russian withholding tax for dividends distributed from our Russian subsidiaries.” During the Predecessor period, our Predecessor relied on a DTT between Russia and Cyprus and applied a 5% rate of taxation provided by that DTT to calculate and withhold tax on dividends paid and to estimate deferred tax liabilities on any unremitted earnings. Following the Acquisition and the corresponding change in the organizational structure of the Group, due to the uncertainty of the rate of taxation applicable to the new organizational structure of the Group, we decided to apply the generally applicable 15% rate of taxation in the Successor period.

In addition, beginning from the Successor 2018 Period, we have applied a 0% rate of taxation as we are considering changing the place of management of HeadHunter Group PLC from Cyprus to Russia, which would result in a change of its tax residency from Cyprus to Russia. See “Material Tax Considerations—Material Cyprus Tax Considerations—Taxation of Dividends and Distributions.

 

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As a result, our withholding tax liability and expense is not directly comparable between Predecessor and Successor periods, and between the Successor 2018 Period and prior Successor periods. Our assessment of the applicable withholding tax rate on dividends paid from our Russian operating company to our Cyprus holding companies may change in the future if circumstances related to the applicability of DTT to payments of dividends out of Russia have changed or if we decide not to change the place of management of HeadHunter Group PLC from Cyprus to Russia, or related matters.

Effective Tax Rate

Our effective tax rates for the Successor 2017 Period and the Successor 2018 Period were 63.9% and 33%, respectively. Our effective tax rate for the Successor 2018 Period is affected by the change in the applicable rate of taxation of profits earned in Russia and distributed to our Cypriot holding entity to 0%, as we are considering changing the place of management of our Cyprus holding entity from Cyprus to Russia. See“—Key Factors Affecting Comparability—Withholding Tax on Dividends.” Our effective tax rate for the Successor 2017 Period has been impacted significantly by a one-off non-taxable gain from the divestment of a subsidiary in March 2017 and by the one-off income tax expense of P325 million arising from the write-off of the expired tax indemnity provided by Mail.Ru on the Acquisition. Our effective tax rate for the Successor periods has been impacted significantly by the non-deductible interest expense and an unrecognized deferred tax asset on the interest expense relating to the Credit Facility and the shareholder bridge loans provided at the time of the Acquisition. See “Related Party Transactions—Relationship with Elbrus Capital and The Goldman Sachs Group, Inc.—Acquisition Financing and “—Contractual obligations and commitments—Credit Facility.” Additionally, amortization of intangible assets recognized at the time of the Acquisition significantly decreased profit before tax and thus, increased the effective tax rate in the periods subsequent to the Acquisition.

Seasonality

We generally do not experience seasonal fluctuations in demand for our services. Our revenue remains relatively stable throughout each quarter, however, our first quarter revenue is typically slightly lower than the other quarters due to a winter holiday period in Russia, which results in lower business activity in this quarter.

Results of Operations

Comparison of the Successor 2018 Period to the Successor 2017 Period

 

    Successor  
(in thousands of RUB)   For the
year ended
December 31,
2017(1)
    For the
year ended
December 31,
2018
 

Revenue

    4,732,539       6,117,773  

Operating costs and expenses (exclusive of depreciation and amortization)

    (2,788,576     (3,432,860

Depreciation and amortization

    (560,961     (586,131
 

 

 

   

 

 

 

Operating income

    1,383,002       2,098,782  

Finance income

    70,924       90,602  

Finance costs

    (706,036     (644,326

Gain on disposal of subsidiary

    439,115       6,131  

Net foreign exchange gain/(loss)

    96,300       (8,742
 

 

 

   

 

 

 

Profit before income tax

    1,283,305       1,542,447  

Income tax expense

    (820,503     (509,602
 

 

 

   

 

 

 

Net income

    462,802       1,032,845  
 

 

 

   

 

 

 

 

(1)

We adopted IFRS 15 at January 1, 2018 using the full retrospective approach. Under the transition method chosen, certain comparative information has been restated. Please refer to Note 4 of our consolidated financial statements for the year ended December 31, 2018 included elsewhere in this prospectus.

 

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Revenue

Our revenue was P6,118 million for the Successor 2018 Period compared to P4,733 million for the Successor 2017 Period. Revenue for the Successor 2018 Period increased by P1,385 million, or 29.3%, compared to the Successor 2017 Period. In March 2017, we completed the sale of our Estonia, Latvia and Lithuania operations. The revenue from our Estonia, Latvia and Lithuania operations for the Successor 2017 Period was P54 million. In April 2018, we completed the sale of our Ukraine operations. The revenue from our Ukraine operating segment was P16 million for the Successor 2018 Period and P39 million for the Successor 2017 Period. Excluding the effect of the disposal of our Latvia, Estonia and Lithuania and Ukraine operations, revenue for the Successor 2018 Period increased by P1,462 million, or 31.5%, compared to the Successor 2017 Period, primarily due to an increase in revenue in our Russia segment.

Russia revenue. Our revenue in our Russia segment was P5,700 million for the Successor 2018 Period compared to P4,358 million for the Successor 2017 Period. Revenue in our Russia segment increased by P1,342 million, or 30.8%, for the Successor 2018 Period compared to the Successor 2017 Period, primarily due to the growth in the number of paying customers in our Small and Medium Accounts segment (by 24.9% in Moscow and St. Petersburg and 58.9% in the other regions of Russia), as we continued investing nation-wide in our brand awareness throughout the Successor 2018 Period. This was also due to (i) an increase in ARPC in all customer segments driven mostly by an increase in effective prices for our services as a result of list price increases and monetization improvements, partly offset by a decrease in the average number of job postings used per customer in our Key Accounts segment in Moscow and St. Petersburg and (ii) an increase in the number of paying customers in our Key Accounts segment (by 6.0% in Moscow and St. Petersburg and 22.1% in the other regions of Russia) due to a general trend in the increased use of paid online services.

Other segments revenue. Our revenue in our other segments was P417 million for the Successor 2018 Period compared to P374 million for the Successor 2017 Period. Revenue increased by P43 million, or 11.6%, compared to the Successor 2017 Period. Excluding the effect of the disposal of our Latvia, Estonia and Lithuania and Ukraine operations, revenue from other segments for the Successor 2018 Period increased by P120 million, or 42.9%, compared to the Successor 2017 Period, primarily due to an increase in the number of paying customers in our Belarus and Kazakhstan operating segments, partly offset by a decrease in the ARPC in our Kazakhstan operating segment.

Operating costs and expenses (exclusive of depreciation and amortization)

Operating costs and expenses (exclusive of depreciation and amortization) were P3,433 million for the Successor 2018 Period compared to P2,789 million for the Successor 2017 Period. Operating costs and expenses (exclusive of depreciation and amortization) increased by P644 million, or 23.1%, compared with the Successor 2017 Period. The main factors that contributed to such increases were an increase in marketing expenses of P246 million driven by an increase in volumes and coverage of our TV campaign and an increase in personnel expenses of P212 million as a result of: (i) hiring 95 people primarily in our development, sales and marketing teams in our Russia segment and thus, increasing the headcount in our Russia segment from 523 as of December 31, 2017 to 618 as of December 31, 2018; (ii) the indexation of wages and (iii) the usual bonus payouts to our sales team as compared to increased payouts reflecting actual performance in excess of the budget in the Successor 2017 Period.

Depreciation and amortization

Depreciation and amortization was P586 million for the Successor 2018 Period compared to P561 million for the Successor 2017 Period. Depreciation and amortization increased by P25 million, or 4.5%, compared with the Successor 2017 Period.

 

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Finance income and costs

Finance income was P91 million for the Successor 2018 Period compared to P71 million for the Successor 2017 Period. Finance income increased by P20 million, or 27.7%, compared to the Successor 2017 Period, primarily due to an increase in available cash balances throughout the Successor 2018 Period as compared to the Successor 2017 Period that were deposited and thus, increased the interest income on the term deposits from P60 million in the Successor 2017 Period to P90 million in the Successor 2018 Period.

Finance costs were P644 million for the Successor 2018 Period compared to P706 million for the Successor 2017 Period. Finance costs decreased by P62 million, or 8.7%, compared with the Successor 2017 Period, primarily due to a decrease in interest expense per our Credit Facility with the VTB Bank (PJSC). As of October 2017, we have agreed with VTB Bank (PJSC) to decrease the interest rate from 3.7% to 2.0% above the Key Rate of the Central Bank of Russia, which was almost entirely offset by an increase in interest expense as we borrowed an additional P2 billion. See “–Contractual obligations and commitments–Credit Facility.”

Gain on disposal of subsidiary

Gain on disposal of subsidiary was P6 million for the Successor 2018 Period compared to P439 million for the Successor 2017 Period. The gain for the Successor 2018 Period was due to our divestment of our Ukraine operations in April 2018, and the gain for the Successor 2017 Period was due to our divestment of our Estonia, Latvia and Lithuania operations in March 2017.

Net foreign exchange gain/(loss)

Net foreign exchange loss was P9 million for the Successor 2018 Period compared to a gain of P96 million for the Successor 2017 Period. Net foreign exchange loss increased by P105 million compared to the Successor 2017 Period, primarily due to a foreign exchange gain on cash balances in foreign currency received in the Successor 2017 Period from the disposal of our Estonia, Latvia and Lithuania operations in March 2017.

Income tax expense

Income tax expense was P510 million for the Successor 2018 Period compared to P821 million for the Successor 2017 Period. The decrease of P311 million in income tax expense was primarily due to: (i) a one-off income tax expense of P325 million in the Successor 2017 Period arising from the write-off of the expired tax indemnity provided by Mail.Ru on the Acquisition; (ii) a decrease in the withholding tax on intra-group dividends and unremitted earnings in the Successor 2018 Period by P146 million as compared to the Successor 2017 Period, resulting from (a) a change in the applicable rate of taxation of profits earned in Russia and distributed to our Cypriot holding entity from 15% in the Successor 2017 Period to 0% in the Successor 2018 Period, as we are considering changing the place of management of our Cyprus holding entity from Cyprus to Russia, resulting in a change of its tax residency from Cyprus to Russia; (b) a deferred tax liability in the amount of P64 million accrued in the Successor 2017 Period on distributable profits has been reversed in the Successor 2018 Period, as the deadline for payment of such profits as allowed by the Credit Facility covenants expired in May 2018, and the payment has not been made; and (c) the decrease in the outstanding intra-group loan balances in the Successor 2018 Period, which resulted in a lower accrued interest expense and thus, a lower withholding tax accrued on such interest; and (iii) expansion of our profit before income tax from P1,283 million in the Successor 2017 Period to P1,542 million in the Successor 2018 Period.

The effective tax rate for the Successor 2018 Period was 33.0%, and it differed from the statutory tax rate in the Russian Federation of 20% primarily due to the non-deductible interest expense on our bank loan. We consider this factor to be mid-term, as we expect our interest expense to decline relative to our net income due to deleveraging.

 

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Net Income

Net income was P1,033 million for the Successor 2018 Period compared to P463 million for the Successor 2017 Period. Net Income increased by P570 million compared with the Successor 2017 Period, primarily due to the reasons described above.

Liquidity and Capital Resources

Our principal financial instruments are comprised of cash and cash equivalents and our Credit Facility (as described further below under the heading “—Contractual obligations and commitments—Credit Facility”). Other financial assets and liabilities include trade and other receivables, deposits with financial institutions and trade and other payables. Substantially all of our financial assets are neither past due nor impaired.

As of December 31, 2018, our current liabilities exceeded current assets by P1,082 million. Our current liabilities were mainly represented by deferred revenue. Due to the nature of our business, a substantial portion of our customers pay upfront for subscriptions, thus deferred revenue arises. We expect that deferred revenue will continue to exceed the amount of inventories and trade receivables on our balance sheet, resulting in negative working capital in future periods.

Cash flows

 

     Successor  
(in thousands of RUB)    For the year
ended
December 31,
2017(1)
    For the year
ended
December 31,
2018
 

Net cash generated from operating activities

     1,592,282       2,096,688  

Net cash (used in)/generated from investing activities

     680,256       (174,548

Net cash (used in) financing activities

     (1,273,847     (497,629
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     998,691       1,424,511  
  

 

 

   

 

 

 

 

(1)

We adopted IFRS 15 at January 1, 2018 using the full retrospective approach. Under the transition method chosen, certain comparative information has been restated, Please refer to Note 4 of our consolidated financial statements for the year ended December 31, 2018 included elsewhere in this prospectus. The impact of the transition to IFRS 15 for the years ended December 31, 2015 and December 31, 2016 is immaterial, and therefore, the comparative information for any periods prior to January 1, 2017 has not been restated. The adoption of IFRS 15 did not have a material impact on our cash flows for any periods presented.

Net cash generated from operating activities

For the Successor 2018 Period, net cash generated from operating activities was P2,097 million compared to P1,592 million for the Successor 2017 Period. The change between the periods of P505 million was primarily driven by an increase in sales, which resulted in the increase in net income (adjusted for non-cash items and items not affecting cash flow from operating activities) and the increase in contract liabilities (due to customer prepayments). These changes were partially offset by (i) the increase in income taxes paid due to increased tax base, (ii) the partial settlement in the Successor 2018 Period of our IPO-related expenses accrued in the Successor 2017 Period and (iii) the advance payment for a TV campaign made in the Successor 2018 Period not occurring in the Successor 2017 Period, since this was paid in the end of the Successor 2016 Period.

Net cash generated by/(used in) investing activities

For the Successor 2018 Period, net cash used in investing activities was P(175) million compared to P680 million generated in the Successor 2017 Period. The change between these periods was primarily due to the net cash inflow received in the Successor 2017 Period for the sale of our operations in the Estonia, Latvia and Lithuania segment in the amount of P765 million.

 

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Net cash used in financing activities

For the Successor 2018 Period, net cash used in financing activities was P(498) million compared to P(1,274) million for the Successor 2017 Period. The change between these periods was primarily due to the distributions to our shareholders in the Successor 2018 Period of P0 million as compared to P3,110 million in the Successor 2017 Period, which was partially financed by obtaining a loan of P2,000 million in the same period. This change was partially offset by an increase in the bank loan repayments from P100 million in the Successor 2017 Period to P690 million in the Successor 2018 Period, as the period during which no mandatory repayments were assumed in the repayment schedule in the initial period after the loan acquisition has expired.

Contractual obligations and commitments

The following table summarizes our on balance sheet minimum contractual obligations as at December 31, 2018:

 

     Payments due by period  
(in thousands of RUB)    Carrying
value
     Total
contractual
cash flows
     Less than
1 year
     Between 1
and 2 years
     Between 2
and 5 years
     Over
5 years
 

Credit Facility

     6,166,054        7,538,193        1,544,807        1,544,650        4,448,736        —    

Other loan

     271,562        279,551        279,551        —          —          —    

Trade and other payables

     307,080        307,080        307,080        —          —          —    

Total

     6,744,696        8,124,824       
2,131,438
 
     1,544,650        4,448,736        —    

Lease and capital expenditure commitments

In November through December 2018, we entered into several long-term lease contracts for office premises. At December 31, 2018, the future minimum lease payments under non-cancellable leases were payable as follows:

(in thousands of RUB)    2018  

Less than one year

     85,799  

Between one and five years

     357,493  

More than five years

     —    
  

 

 

 
     443,292  
  

 

 

 

At December 31, 2018, we committed to incur capital expenditure related to renovation of our office premises of P40,653 thousand. These commitments are expected to be settled in 2019.

Credit Facility

In connection with the financing of the Acquisition, through our wholly owned subsidiary Zemenik LLC, we entered into a syndicated credit facility with VTB Bank (PJSC), dated May 16, 2016, borrowing P5 billion. On October 5, 2017, we entered into an amendment to the Credit Facility pursuant to which we increased the maximum principal amount to P7 billion by borrowing an additional P2 billion. The applicable interest rate on the P7 billion principal amount was decreased from 3.7% to 2.0% above the Key Rate of the Central Bank of Russia, and certain key financial covenants were amended. As of December 31, 2018, the Group complied with all financial and other covenants in the Credit Facility agreement. This additional P2 billion was then distributed to our shareholders pursuant initially to various loan agreements. See “Related Party Transactions—Relationship with Elbrus Capital and The Goldman Sachs Group, Inc.—Loans to Shareholders.”

On April 22, 2019, we signed Amendment No. 5, which provides, among other things, that HeadHunter Group PLC can withdraw the additional Tranche E, within 120 days from the date of Amendment No.5, the interest rate on which amounts to 2.4% (and in certain circumstances, 2.9%) above the Key Rate of the Central Bank of Russia. As of the date of this prospectus, we have not requested to utilize Tranche E or any portion

 

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thereof. In order to simplify our intra-group arrangements, in accordance with Amendment No. 5, the outstanding debt related to Tranches C and D in the total principal amount of P1.9 billion as well as any interest accrued thereon and outstanding as of the date of Amendment No. 5, were assigned to HeadHunter Group PLC. Amendment No. 5 provides that if we decide to withdraw Tranche E or any portion thereof, the immediate borrower of Tranche E will be HeadHunter Group PLC and after the completion of this offering, we do not intend to draw upon Tranche E. Matching amendment agreements were also signed to the security documentation. Capitalized terms in this paragraph have the definitions provided in the Credit Facility.

The Credit Facility may be terminated at any time in the event of a default, or likely default, by the lender and matures pursuant to a quarterly schedule with final maturity in April 2024. Headhunter FSU Limited, Zemenik Trading Limited and Headhunter LLC also provided guarantees in favor of VTB Bank (PJSC) in connection with the Credit Facility. The Credit Facility includes various legal restrictions including change of control provisions, restrictions and limitations on shareholder distributions, a prepayment penalty, as well as financial covenants. The Credit Facility is collateralized with the shares of Headhunter FSU Limited, Zemenik Trading Limited (now HeadHunter Group plc), and participation interests in Headhunter LLC and Zemenik LLC. The Credit Facility was amended on December 29, 2017 simultaneously with the guarantee agreement to which we are a party, to allow us for a definite period, subject to customary conditions, to proceed with offering-related matters including, inter alia, the change of corporate name and conversion to a public company, the split of shares, the issue of additional shares, to provide indemnities in connection with this offering, the decrease of additional capital, changes to the charter documents and others. Simultaneously with Amendment No. 4, we executed the release of the security over the shares of Zemenik Trading Limited. Under Amendment No. 5, we are allowed to proceed with matters relating to the offering until December 31, 2019.

The Credit Facility contains certain restrictions on our ability to declare and pay dividends, including that we cannot declare and pay dividends without the prior written consent of VTB Bank (PJSC) except in the following cases: (i) dividends distributions within our Group; (ii) payments of dividends to minority shareholders provided that similar payments are effected in favor of controlling shareholders; (iii) semi-annual dividends in the maximum principal amount equal to 100% of the Adjusted Consolidated Net Profit of the Group for the last 12 months or less, so that the Net Debt to EBITDA ratio calculated under terms of the Credit Facility does not exceed 2.75:1; (iv) payment (on or before June 30, 2019) of a special dividend in such lump sum that, upon such payment, (a) pro forma Net Debt to EBITDA ratio as of December 31, 2018 calculated under terms of the Credit Facility does not exceed 3.5:1 and (b) total cash balance of HeadHunter Group PLC, Zemenik LLC, Headhunter FSU Limited and Headhunter LLC is not less than P500 million; and (v) dividends distributions to our shareholders from the Tranche E proceeds. In addition, (a) we may not pay out the special dividend referred to in paragraph (iv) above if we have paid any dividends out of the profits for the year 2018 in accordance with paragraph (iii) above and (b) we are not allowed to pay dividends out of the profits for the year 2018 in accordance to paragraph (iii) above if we have paid the special dividend referred to in paragraph (iv) above. Capitalized terms in this paragraph have the definitions provided in the Credit Facility.

Internal Control over Financial Reporting

Prior to this offering, we have been a private company with limited accounting personnel and other resources with which to address our internal controls and procedures. Our Independent Registered Public Accounting Firm has not conducted an audit of our internal control over financial reporting.

However, in the course of reviewing our financial statements in preparation for this offering, our management and our Independent Registered Public Accounting Firm identified deficiencies that we concluded represented material weaknesses in our internal control over financial reporting attributable to our lack of an effective control structure and sufficient financial reporting and accounting personnel. SEC guidance defines a material weakness as a deficiency or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

Our findings related to our financial reporting as of the years ended December 31, 2015 and 2016 include material weaknesses where: (i) we did not design, implement and maintain an effective control environment with

 

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the appropriate functions, bodies (including an audit committee or equivalent body at the board level and internal audit control function) and formalized processes and procedures in order to independently review and challenge the financial statements prepared by the financial reporting group; (ii) we did not have a sufficient number of accounting personnel with appropriate expertise required for the timely preparation and review of accounting schedules and financial statements in order to adequately meet the reporting and compliance requirements as an SEC registrant; (iii) we did not maintain effective allocation and segregation of duties in our financial reporting process (specifically for identifying, accumulating and reviewing all required supporting information) to ensure the completeness and accuracy of the preparation and review of consolidated financial statements and disclosures; (iv) we did not retain the evidence of review of significant contracts and non-routine transactions that could lead to potential misstatements in the financial statements as well as other adverse effects; and (v) our information systems access, the segregation of duties and user access rights within information systems and change management controls were not operating effectively.

Our findings related to our financial reporting as of the year ended December 31, 2017 include material weaknesses where: (i) we did not design, implement and maintain an effective control environment with the appropriate functions, bodies (including an audit committee or equivalent body at the board level and internal audit control function) and formalized processes and procedures in order to independently review and challenge the financial statements prepared by the financial reporting group; (ii) we did not have a sufficient number of accounting personnel with appropriate expertise required for the timely preparation and review of accounting schedules and financial statements in order to adequately meet the reporting and compliance requirements as an SEC registrant; and (iii) our information systems access, the segregation of duties and user access rights within information systems and change management controls were not operating effectively.

In the year ended December 31, 2018, we undertook substantial measures to address the material weaknesses and significant deficiencies in our internal controls. In particular, we (i) engaged a Big Four advisory and accounting firm to assist us in designing and implementing improved internal processes and controls; (ii) hired additional finance and accounting personnel with expertise in preparation of financial statements in accordance with IFRS; (iii) established an audit committee and an internal audit function in order to independently review and challenge the financial statements prepared by the financial reporting group; (iv) further developed and documented our accounting policies and financial reporting procedures, improved existing control processes and implemented new control processes; (v) established an access policy for our accounting system; and (vi) improved access rights and change management control procedures for our information systems.

Notwithstanding these efforts, in the course of preparing our financial reporting for the year ended December 31, 2018, we identified a continuing material weakness relating to our information systems, whereby our information systems access, the segregation of duties and user access rights within information systems and change management controls were not operating effectively. We are committed to taking measures to remediate the material weakness related to our financial reporting as of the year ended December 31, 2018 by further improving our user access policies and change management control procedures for our information systems. There can be no assurance that we will be successful in pursuing these measures or that these measures will significantly improve or remediate the material weaknesses described above. There is also no assurance that we have identified all of our material weaknesses or that we will not in the future have additional material weaknesses. See “Risk Factors—Risks Relating to our Initial Public Offering and Ownership of our ADSs—We have identified material weaknesses and significant deficiencies in our internal control over financial reporting. These material weaknesses in our internal control over financial reporting could result in material misstatements in our historical financial reports and, if not remediated, can adversely affect the accuracy and timing of our financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports, and the market price of our ADSs may be materially and adversely affected.”

 

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Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.

Quantitative and Qualitative Disclosures about Market Risk

Credit risk

Credit risk is the risk that a counterparty of ours fails to meet its obligations. The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was:

 

    Carrying amount  
    Successor  
(in thousands of RUB)   December 31,
2017
    December 31,
2018
 

Trade receivables

    25,264       32,858  

Cash and cash equivalents

    1,416,008       2,861,110  
 

 

 

   

 

 

 

Total

    1,441,272       2,893,968  
 

 

 

   

 

 

 

Trade receivables represent amounts owed by customers to us for the services provided. Our customers come from various industries, and no customer is accountable for more than 10% of our revenue.

Cash and cash equivalents and our short term investments are primarily kept with Russian banks ALFA-BANK (JSC) (credit ratings: Moody’s – Ba2, S&P – BB+) and VTB Bank (PJSC) (credit ratings: Moody’s – Ba1, S&P –A3).

Currency risk

Our exposure to the risk of changes in foreign exchange rates related primarily to the net assets of our subsidiaries denominated in a currency that is different from their functional currency. The functional currencies of our companies are primarily the Russian Rouble (RUB), Belarus Rouble (BYN) and Kazakh Tenge (KZT). As of December 31, 2017 and 2018, net assets denominated in foreign currency mainly relate to trade and other payables arising from USD-denominated costs related to this offering.

Our exposure to foreign currency risk was as follows:

 

    

 

     December 31, 2017      December 31, 2018  
(in thousands of RUB)   

 

     USD-
denominated
    EUR-
denominated
     KZT-
denominated
     USD-
denominated
    EUR-
denominated
    KZT-
denominated
 

Cash and cash equivalents

        64,375       —          —          27,192       4,361       —    

Trade and other payables

        (101,678     —          —          (34,358     (10,006     (1,512

Net assets/(liabilities) related to intra-group loans

        —         —          —          —         —         (100,143

Net exposure

        (37,303 )      —          —          (7,166 )      (5,645 )      (101,655 ) 
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Sensitivity analysis

We estimate that an appreciation of KZT relative to the RUB by 10% would result in P10,166 thousand loss before tax and decrease of equity as at December 31, 2018. We had no exposure to the KZT as at December 31, 2017.

 

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We estimate that an appreciation of other currencies would not result in material loss before tax and decrease of equity as at December 31, 2018 and December 31, 2017.

We limit our exposure to currency risk by denominating substantial monetary assets and liabilities in currencies that match the cash flows generated by our underlying operations. In respect of monetary assets and liabilities denominated in foreign currencies, our policy is to ensure that our net exposure is kept to an acceptable level.

Liquidity risk

Liquidity risk is the risk that we will encounter difficulty in meeting commitments associated with financial liabilities, which arises because of the possibility that we could be required to pay our liabilities earlier than expected. Our liabilities exposed to liquidity risk are mainly our bank and shareholder loans payable and trade and other payables repayable in the period less than one year (see Note 23 to our consolidated financial statements for the years ended December 31, 2017 and December 31, 2018).

We manage liquidity risk by constantly reviewing forecasted cash flows to ensure that we have sufficient liquidity to maintain necessary capital expenditures and service our debt without incurring temporary cash shortfalls.

As at December 31, 2018, our current liabilities exceeded current assets by P1,082 million. Our current liabilities were mainly represented by contract liabilities of P2,073 million. Due to the nature of our business, a substantial portion of customers pay upfront for subscriptions, thus contract liabilities arise. We expect that contract liabilities will continue to be significant and thus negative working capital will be maintained in the future periods. Management considers such structure of the working capital acceptable to our business model.

The following are the remaining contractual maturities of financial liabilities at the reporting date. The amounts are gross and undiscounted, and include estimated interest payments and exclude the impact of netting agreements.

Successor

 

At December 31, 2017           Contractual cash flows  
(in thousands of RUB)    Carrying
amount
     Total      Less
than
2 mths
     2-12
mths
     1-2 yrs      2-5 yrs  

Non-derivative financial liabilities

                 

Bank loan

     6,837,293        8,872,295        100,000        1,236,187        1,544,807        5,991,301  

Trade and other payables

     336,720        336,720        336,720                       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     7,174,013        9,209,015        436,720        1,236,187        1,544,807        5,991,301