UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 6-K

 

 

REPORT OF FOREIGN PRIVATE ISSUER

PURSUANT TO RULE 13a-16 OR 15d-16

OF THE SECURITIES EXCHANGE ACT OF 1934

For the month of August, 2018

Commission File Number 001-38055

 

 

NETSHOES (CAYMAN) LIMITED

(Exact name of registrant as specified in its charter)

 

 

 

The Cayman Islands   98-1007784
(State of incorporation or organization)   (I.R.S. Employer Identification No.)

Rua Vergueiro 961, Liberdade

01504-001 São Paulo, São Paulo, Brazil

+55 11 3028-3528

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

 

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:

Form 20-F  ☒            Form 40-F  ☐

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):

Yes  ☐            No  ☒

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):

Yes  ☐            No  ☒

 

 

 


 

NETSHOES (CAYMAN) LIMITED

Unaudited condensed consolidated financial statements

as of and for the three and six months period ended June 30, 2017 and 2018

 

 

1


NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Financial Position

December 31, 2017 and June 30, 2018

(Reais and Dollars in thousands)

 

 

 

                   December 31,             June 30,  

Assets

   Note             2017             2018             2018  
                   BRL             BRL             USD  

Current assets:

                

 

           

 

            Note 2.2  

Cash and cash equivalents

     9      R$          395,962         R$ 75,281      US$          19,524  

Restricted cash

           19,397           21,636           5,611  

Trade accounts receivables, net

     10           113,168           102,699           26,635  

Inventories, net

     11           456,632           415,891           107,861  

Recoverable taxes

     12           80,047           69,894           18,127  

Prepaid expenses and other current assets

           48,352           50,078           12,988  
        

 

 

       

 

 

       

 

 

 

Total current assets

           1,113,558           735,479           190,746  
        

 

 

       

 

 

       

 

 

 

Non-current assets:

                    

Restricted cash

           15,048           13,752           3,567  

Judicial deposits

     24           106,914           112,932           29,289  

Recoverable taxes

     12           70,765           70,721           18,341  

Other assets

           1,950           1,950           506  

Due from related parties

     23           12           9           2  

Property and equipment, net

     13           73,039           81,344           21,097  

Intangible assets, net

     14           115,839           125,392           32,520  
        

 

 

       

 

 

       

 

 

 

Total non-current assets

           383,567           406,100           105,322  
        

 

 

       

 

 

       

 

 

 

Total assets

      R$          1,497,125      R$          1,141,579      US$          296,068  
        

 

 

       

 

 

       

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

2


NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Financial Position

December 31, 2017 and June 30, 2018

(Reais and Dollars in thousands)

 

 

 

 

                   December 31,            June 30,  

Liabilities and Shareholders’ Equity

   Note             2017            2018            2018  
                   BRL            BRL            USD  

Current liabilities:

                     Note 2.2  

Trade accounts payable

     15      R$          365,835     R$          230,567     US$          59,797  

Reverse factoring

     16           148,928          91,671          23,775  

Current portion of long-term debt

     18           106,577          110,428          28,639  

Taxes and contributions payable

           19,875          19,325          5,012  

Deferred revenue

     7           3,732          4,016          1,042  

Accrued expenses

     17           120,366          103,199          26,765  

Other current liabilities

           31,017          30,215          7,838  
        

 

 

      

 

 

      

 

 

 

Total current liabilities

           796,330          589,421          152,868  
        

 

 

      

 

 

      

 

 

 

Non-current liabilities:

                  

Long-term debt, net of current portion

     18           179,394          128,692          33,376  

Provision for labor, civil and tax risks

     24           12,523          14,769          3,830  

Deferred revenue

     7           25,502          24,101          6,251  

Other non-current liabilities

           27          40          10  
        

 

 

      

 

 

      

 

 

 

Total non-current liabilities

           217,446          167,602          43,467  
        

 

 

      

 

 

      

 

 

 

Total liabilities

           1,013,776          757,023          196,335  
        

 

 

      

 

 

      

 

 

 

Shareholders’ equity:

                  

Share capital

           244          244          63  

Additional-paid in capital

           1,345,507          1,348,201          349,655  

Treasury shares

           (1,533        (1,533        (398

Accumulated other comprehensive loss

           (13,664        (14,954        (3,878

Accumulated losses

           (847,125        (947,195        (245,655
        

 

 

      

 

 

      

 

 

 

Equity attributable to owners of the parent

           483,429          384,763          99,787  
        

 

 

      

 

 

      

 

 

 

Equity attributable to non-controlling interests

           (80        (207        (54
        

 

 

      

 

 

      

 

 

 

Total shareholders’ equity

           483,349          384,556          99,733  

Total liabilities and shareholders’ equity

      R$          1,497,125     R$          1,141,579     US$          296,068  
        

 

 

      

 

 

      

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

 

3


NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Profit or Loss

For the six and three months ended in June 30, 2017 and 2018

(Reais and Dollars in thousands, except loss per share)

 

 

 

 

                   For the six months ended in June 30,            For the three months ended in June 30,  
     Note             2017            2018            Note            2017            2018            2018  
                   BRL            BRL            USD            BRL            BRL            USD  
                                             Note 2.2                                      Note 2.2  

Net sales

     6      R$          857,559     R$          849,090          220,211     R$          461,331     R$          449,797     US$          116,655  

Cost of sales

     8a           (574,954        (590,712        (153,201        (308,492        (312,009        (80,919
        

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Gross profit

           282,605          258,378          67,010          152,839          137,788          35,736  
        

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Operating expenses:

                                 

Selling and marketing expenses

     8b           (222,526        (220,845        (57,277        (121,000        (110,247        (28,593

General and administrative expenses

     8c           (74,647        (98,204        (25,469        (43,020        (44,485        (11,536

Other operating expenses, net

           (2,116        (2,082        (541        (1,024        (965        (249
        

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total operating expenses

           (299,289        (321,131        (83,287        (165,044        (155,697        (40,378
        

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Operating loss

           (16,684        (62,753        (16,277        (12,205        (17,909        (4,642
        

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Financial income

     8d           15,195          7,519          1,951          10,166          2,935          761  

Financial expenses

     8d           (71,383        (43,213        (11,207        (33,116        (23,136        (6,000
        

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Loss before income tax

           (72,872        (98,447        (25,533        (35,155        (38,110        (9,881
        

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Income tax expense

           (2        –            —            (2        —            —    
        

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Net Loss

      R$          (72,874   R$          (98,447        (25,533   R$          (35,157   R$          (38,110   US$          (9,881
        

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Net loss attributable to:

                                 

Owners of the Parent

      R$          (72,499   R$          (98,216        (25,473   R$          (34,991   R$          (37,997   US$          (9,855

Non-controlling interests

           (375        (231        (60        (166        (113        (29

Loss per share attributable to owners of the Parent

                                 

Basic and diluted

     5      R$          (3.09   R$          (3.16   US$          (0.82   R$          (1.49   R$          (1.22   US$          (0.32
        

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

4


NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)

For the six and three months ended in June 30, 2017 and 2018

(Reais and Dollars in thousands)

 

 

 

 

            For the six months ended in June 30,            For the three months ended in June 30,  
            2017            2018            2018            2017            2018            2018  
                                      USD                                      USD  
            BRL            BRL            Note 2.2            BRL            BRL            Note 2.2  

Net Loss

   R$          (72,874   R$          (98,447   US$          (25,533   R$          (35,157   R$          (38,110   US$          (9,881
     

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Items that will subsequently be recorded to profit or loss

                              

Foreign currency translation

        7,588          (1,186        (308        9,276          (737        (191

Cash flow hedges – effective portion of changes in fair value

        348          —            —            775          —            —    

Cash flow hedges – reclassified to initial cost of inventories

        —            —            —            (214        —            —    

Cash flow hedges – reclassified to profit or loss

        197          —            —            (114        —            —    
     

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Other comprehensive income (loss)

        8,133          (1,186        (308        9,723          (737        (191
     

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total comprehensive income (loss)

        (64,741        (99,633        (25,841        (25,434        (38,847        (10,072
     

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total comprehensive income (loss) attributable to:

                              

Owners of the Parent

   R$          (64,398   R$          (99,506   US$          (25,808   R$          (25,346   R$          (38,852   US$          (10,075

Non-controlling interests

        (343        (127        (33        (88        5          1  

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

5


NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows

For the six months ended in June 30, 2017 and 2018

(Reais and Dollars in thousands)

 

 

 

 

            For the six months ended in June 30,  
            2017            2018            2018  
            BRL            BRL            USD  

Cash flows from operating activities:

                  Note 2.2  

Net loss

   R$          (72,874   R$          (98,447   US$          (25,533

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

               

Allowance for doubtful accounts

        6,262          3,852          999  

Depreciation and amortization

        15,663          34,009          8,820  

Loss on disposal of property and equipment, and intangible assets

        170          307          80  

Share-based payment

        (13,469        2,145          556  

Deferred taxes

        2          —            —    

Provision for labor, civil and tax risks

        4,595          4,067          1,055  

Interest expense, net

        61,892          32,393          8,401  

Provision for inventory losses

        464          8,710          2,259  

Other

        179          3          1  

Changes in operating assets and liabilities:

               

(Increase) decrease in:

               

Restricted cash

        3,089          (2,240        (581

Trade accounts receivable

        84,879          4,799          1,245  

Inventories

        (40,822        26,966          6,994  

Recoverable taxes

        (34,696        7,804          2,024  

Judicial deposits

        (23,615        (6,018        (1,561

Other assets

        (11,832        (1,562        (405

Increase (decrease) in:

               

Derivative financial instruments

        (186        —            —    

Trade accounts payable

        (52,674        (131,475        (34,098

Reverse factoring

        1,489          (57,258        (14,850

Taxes and contributions payable

        212          416          108  

Deferred revenue

        (1,449        (1,117        (290

Accrued expenses

        (31,354        (15,167        (3,934

Share-based payment

        (2,141        (431        (112

Other liabilities

        (568        (2,652        (688
     

 

 

      

 

 

      

 

 

 

Net cash provided by (used in) operating activities

        (106,784        (190,896        (49,510

Cash flows from investing activities:

               

Purchase of property and equipment

        (4,487        (14,313        (3,712

Purchase of intangible assets

        (22,770        (37,163        (9,638

Interest received on installment sales

        197          1,121          291  

Restricted cash

        631          1,296          336  
     

 

 

      

 

 

      

 

 

 

Net cash provided by (used in) investing activities

        (26,429        (49,059        (12,723

Cash flows from financing activities:

               

Proceeds from debt

        123,936          18,654          4,838  

Payments of debt

        (52,973        (66,886        (17,347

Payments of interest

        (60,960        (32,696        (8,480

Proceeds from issuance of common shares

        424,533          —            —    
     

 

 

      

 

 

      

 

 

 

Net cash provided by (used in) financing activities

        434,536          (80,928        (20,989

Effect of exchange rate changes on cash and cash equivalents

        7,322          202          52  
     

 

 

      

 

 

      

 

 

 

Change in cash and cash equivalents

        308,645          (320,681        (83,170

Cash and cash equivalents, beginning of period

        111,304          395,962          102,694  

Cash and cash equivalents, end of period

        419,949          75,281          19,524  
   R$          308,645     R$          (320,681   US$          (83,170

Supplemental disclosure

               

Non-cash investing and financing activities:

               

Acquisition of property and equipment and intangible assets (Note 17)

   R$          1,241     R$          1,001     US$          260  

Adjustment on initial application of IFRS 15 and IFRS 9

        —            1,854          481  

Deferred offering costs reclassified to equity

        6,808          —            —    

Convertible notes converted to common shares

        94,151          —            —    

Reclassification of share-based payment from Cash-settled arrangement to Equity-settled arrangement

        13,706          —            —    

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

6


NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity

For the six months ended in June 30, 2017 and 2018

(Reais and Dollars in thousand)

 

 

 

            Equity Attributable to owners of the Parent                            
            Share
Capital
            Additional
Paid-in
Capital
            Treasury
Shares
           Accumulated
Losses
           Foreign
Currency
Translation
           Gain
(Loss) on

Hedge
Accounting
           Total            Non-controlling
Interest
           Total
Equity
 
   BRL             BRL             BRL            BRL            BRL            BRL            BRL            BRL            BRL  

Balance, January 1, 2017

   R$          141      R$          821,988      R$          (1,533   R$          (677,379   R$          (19,032   R$          (545   R$          123,640     R$          385     R$          124,025  

Comprehensive Income (Loss)

                                               

Net loss

        —             —             —            (72,499        —            —            (72,499        (375        (72,874

Other comprehensive income (loss)

        —             —             —            —            7,556          545          8,101          32          8,133  
     

 

 

       

 

 

       

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total comprehensive income (loss)

        —             —             —            (72,499        7,556          545          (64,398        (343        (64,741
     

 

 

       

 

 

       

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Issuance of common shares in initial public offering, net of offering costs

        84           417,140           —            —            —            —            417,224          —            417,224  

Conversion of convertible notes to common shares

        19           94,132           —            —            —            —            94,151          —            94,151  

Share-based payments

        —             15,089           —            —            —            —            15,089          —            15,089  
     

 

 

       

 

 

       

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Balance, June 30, 2017

   R$          244      R$          1,348,349      R$          (1,533   R$          (749,878   R$          (11,476   R$          —       R$          585,706     R$          42     R$          585,748  
     

 

 

       

 

 

       

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Balance, January 1, 2018

   R$          244      R$          1,345,507      R$          (1,533   R$          (847,125   R$          (13,664   R$          —       R$          483,429     R$          (80   R$          483,349  

Adjustment on initial adoption of IFRS 15

        —             —             —            (1,153        —            —            (1,153        —            (1,153

Adjustment on initial adoption of IFRS 9

                         (701                  (701        —            (701

Adjusted balance, January 1, 2018

        244           1,345,507           (1,533        (848,979        (13,664        —            481,575          (80        481,495  

Comprehensive Income (Loss)

                                               

Net loss

        —             —             —            (98,216        —            —            (98,216        (231        (98,447

Other comprehensive income (loss)

        —             —             —            —            (1,290        —            (1,290        104          (1,186
     

 

 

       

 

 

       

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total comprehensive income (loss)

        —             —             —            (98,216        (1,290        —            (99,506        (127        (99,633
     

 

 

       

 

 

       

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Share-based payments

        —             2,694           —            —            —            —            2,694          —            2,694  
     

 

 

       

 

 

       

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Balance, June 30, 2018

   R$          244      R$          1,348,201      R$          (1,533   R$          (947,195   R$          (14,954   R$          —       R$          384,763     R$          (207   R$          384,556  
     

 

 

       

 

 

       

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial

 

7


NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the three months ended March 31, 2018

(In thousands of reais and dollars, unless otherwise stated)

 

 

 

1.

Organization and background

 

1.1

Nature of operations

Netshoes (Cayman) Limited (“NSC” or the “Parent”) was incorporated in the Cayman Islands on April 12, 2011. NSC is a holding company and conducts its business primarily through its subsidiaries (together with NSC, the “Company”, “we” or “us”). The Company’s registered office is at Willow House, Cricket Square, George Town, KY 1-1104, Cayman Islands. Major shareholders of the Company include Tiger Global Private Investment Partners V, L.P. (“Tiger Global V”), Tiger Global Private Investment Partners VI, L.P. (“Tiger Global VI”), CDK Net Fund IC and HCFT Holdings.

The Company is a leading sports and lifestyle ecommerce destination in Latin America with operations in Brazil, Mexico and Argentina. The Company’s core business is to offer to its customers a reliable and convenient online shopping experience with a wide selection of products including athletic shoes, jerseys, apparel, accessories and sporting equipment from leading international, local and private brands as well as fashion. The Company conducts its business mainly through its ecommerce websites (www.netshoes.com and www.zattini.com).

The Company’s shares are offered, sold and registered under the Securities Act of 1933, as amended, pursuant to the Company’s Registration Statement on Form F-1 (Registration No.333-216727), which was declared effective by the Securities and Exchange Commission on April 12, 2017. The common stock began trading on the New York Stock Exchange on April 12, 2017 under the symbol “NETS” and its Initial Public Offering (IPO) was completed on April 18, 2017.

 

1.2

Split of shares

The Board of Directors approved a 1.0 for 3.0 share split of the Company’s outstanding common shares. The share split became effective on April 18, 2017. The Company has retrospectively adjusted loss per share data considering the split of shares (see note 5).

 

2.

Summary of significant accounting policies

 

2.1.

Statement of compliance

These interim financial statements have been prepared in accordance with International Accounting Standard 34, “Interim Financial Reporting” and should be read in conjunction with the Company’s last annual consolidated financial statements as at and for the year ended December 31, 2017 (“last annual financial statements”). These interim financial statements, which are unaudited, do not include all of the information required for a complete set of financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”). However, selected explanatory notes are included to explain events and transactions that are significant to an understanding of the changes in the Company’s financial position and performance since the last annual financial statements.

These condensed consolidated financial statements as of and for the six months period ended June 30, 2018 were authorized for issuance by the Board of Directors on August 7, 2018.

 

2.2.

Basis of presentation

The functional currency of the Company is US$ and the reporting currency is Brazilian Real (“R$”) as this currency better reflects the underlying operations of the consolidated entities. The Company’s subsidiaries with operations in Brazil, Argentina and Mexico use their respective currencies as their functional currencies.

Translations of balances in the condensed consolidated statement of financial positions, condensed consolidated statement of profit or loss, condensed consolidated statement of comprehensive income (loss) and condensed consolidated statement of cash flows from R$ into US$ are solely for the convenience of the readers and have been calculated at the rate of US$1.00 = R$3.8558, representing the exchange rate set forth by the Banco Central do Brasil (Central Bank of Brazil) on June 30, 2018. No representation is made that the R$ amounts could have been, or could be, converted, realized or settled into US$ at that rate on June 30, 2018, or at any other rate. All values have been rounded to the nearest thousands of R$ and US$, except where noted.

 

8


NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the three months ended March 31, 2018

(In thousands of reais and dollars, unless otherwise stated)

 

 

This interim information was prepared pursuant to the accounting principles, practices and criteria consistent with those adopted in financial statements for the year ended December 31, 2017 and must be analyzed jointly with the referred to financial statements.

The policy for recognizing and measuring income taxes in the interim period is described in Note 22.

 

2.3.

Use of judgments, estimates and assumptions

In preparing these condensed consolidated financial statements in conformity with IFRS, management has made judgments, estimates and assumptions that affect the application of the Company’s accounting policies and the reported amount of assets, liabilities, income and expenses. Actual results may differ from those estimates.

The significant judgments made by management in applying the Company’s accounting policies and the key sources of estimation uncertainty were the same as those applied to the consolidated financial statements as at and for the year ended December 31, 2017.

 

2.4.

Fair value measurements

Several accounting policies and disclosures require fair value measurement, for both financial and non-financial assets and liabilities.

When measuring the fair value of an asset or a liability, the Company uses observable market data as far as possible. Fair values are categorized into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows:

 

   

Level 1 — unadjusted quoted prices in active markets for identical assets or liabilities.

 

   

Level 2 — inputs other than quoted prices included in Level 1 that are observable for the assets or liability, either directly or indirectly

 

   

Level 3 — inputs for the assets or liability that are not based on observable market data.

If the inputs used to measure the fair value of an asset or a liability fall into different levels of the fair value hierarchy, then the fair value measurement is categorized in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement.

The Company recognizes transfers between levels of the fair value hierarchy at the end of the reporting period during which the change has occurred.

Note 20 includes accounting classification and fair value measurement of financial instruments.

 

2.5.

New accounting pronouncements

The Company applied as of January 1, 2018, IFRS 15 (Revenue from Contracts with Customers) and IFRS 9 (Financial Instruments). As required by IAS 34, the nature and effect of these changes are described below.

IFRS 15 Revenue from Contracts with Customers

IFRS 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognized. It replaces existing revenue recognition guidance, including IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfers of Assets from Customers, and SIC-31 Revenue-Barter Transactions Involving Advertising Services and it applies to all revenue arising from contracts with customers, unless those contracts are in the scope of other standards. The new standard establishes a five-step model to account for revenue arising from contracts with customers. Under IFRS 15, revenue is recognized at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer.

 

9


NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the six months ended June 30, 2018

(In thousands of reais and dollars, unless otherwise stated)

 

 

The standard requires entities to exercise judgement, taking into consideration all the relevant facts and circumstances when applying each step of the model to contracts with their customers.

The standard also specifies the accounting for the incremental costs of obtaining a contract and the costs directly related to fulfilling a contract.

The Company adopted IFRS 15 using the cumulative effect method of adoption. Accordingly, the effect of adoption has been recorded as an adjustment to equity.

The details of new significant accounting policies and the nature and effect of the changes to previous accounting policies are set out below.

 

(a)

Revenue from product sales

The Company’s contracts with customers for products sales generally includes a performance obligation. The Company has concluded that revenue from products sales should be recognized at the point in time when control of the asset is transferred to the customer, generally on delivery of the goods. Therefore, the adoption of IFRS 15 did not have any impact on the timing of revenue recognition, as sales were already recognized upon delivery of the goods to customers. However, the amount of revenue to be recognized was affected by the variable consideration, as stated below.

 

(i)

Variable consideration

Some contracts for product sales provide customers with a right of return. Prior to the adoption of IFRS 15, the Company recognized revenue from the sale of goods measured at the fair value of the consideration received or receivable, net of returns. If revenue could not be reliably measured, the Company deferred revenue recognition until the uncertainty was resolved.

Under IFRS 15, rights of return give rise to variable consideration. The variable consideration is estimated at contract inception and constrained until the associated uncertainty is subsequently resolved. The application of the constraint on variable consideration increases the amount of revenue that will be deferred.

Rights of return

For contracts that permit the customer to return an item, under IFRS 15 revenue is recognized to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. Therefore, the amount of revenue recognized is adjusted for expected returns, which are estimated based on historical data.

The effect of adoption in January 1, 2018 resulted in the recognition of right of return assets (increase in inventories) of R$1,592 and refund liabilities (increase in other liabilities) of R$2,745. The net effect of R$1,153 was recorded in Accumulated losses.

 

(b)

Freight-related services

The Company’s contracts with customers for freight-related services is recognized once the service is rendered. The shipping fees are linked to the revenue from products sales. Therefore, the adoption of IFRS 15 did not have any impact on the timing of revenue recognition, as services were already recognized upon delivery of the goods to customers. However, the amount of revenue to be recognized was affected by the variable consideration, as stated in topic (a).

 

(c)

Marketplace platform

The Company’s contracts with customers for Marketplace platform generates revenue in the form of a commission, when the third-party vendors sell the products on the Company’s platform. The Company recognizes revenue from the marketplace platform on a net basis because the Company acts as an agent and does not have primary responsibility for fulfilling the orders, bear inventory risk or have discretion in establishing prices. Therefore, the adoption of IFRS 15 did not have any impact in the Company’s accounting policies, once the Company already recognized these revenues as an agent.

 

10


NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the six months ended June 30, 2018

(In thousands of reais and dollars, unless otherwise stated)

 

 

 

(d)

NCard

The Company generates commission revenue from the customers’ activation of NCards. The revenue is recognized when the NCards are activated by the customers. Therefore, the adoption of IFRS 15 did not have any impact in the Company’s accounting policies, once the Company already recognized these revenues when the customers activate the NCards.

 

(e)

Presentation and disclosure requirements

As required for the condensed consolidated financial statements, the Company disaggregated revenue recognized from contracts with customers into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. The Company also disclosed information about the relationship between the disclosure of disaggregated revenue and revenue information disclosed for each reportable segment. Refer to Notes 4 and 6 for the disclosure on disaggregated revenue.

IFRS 9 Financial Instruments

IFRS 9 sets out requirements for recognizing measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items. This standard replaces IAS 39 Financial Instruments: Recognition and Measurement.

The Company has applied IFRS 9 with the initial adoption date of January 1, 2018 and has taken an exemption not to restate comparative information for prior periods with respect to classification and measurement (including impairment) requirements. Differences in the carrying amounts of financial assets and financial liabilities resulting from the adoption of IFRS 9 were recognized in Accumulated losses as at January 1, 2018. Accordingly, the information presented for 2017 does not generally reflect the requirements of IFRS 9 but rather those of IAS 39.

The details of new significant accounting policies and the nature and effect of the changes to previous accounting policies are set out below.

 

(a)

Classification and measurement of financial assets and liabilities

IFRS 9 contains a new classification and measurement approach for financial assets that reflects the business model in which assets are managed and their cash flow characteristics.

IFRS 9 contains three principal classification categories for financial assets: measured at amortized cost, fair value through other comprehensive income (FVOCI) and fair value through profit or loss (FVTPL). The standard eliminates the existing IAS 39 categories of held to maturity, loans and receivables and available for sale.

IFRS 9 largely retains the existing requirements in IAS 39 for the classification of financial liabilities. Therefore, the adoption of IFRS 9 has not had a significant effect on the Company’s accounting policies related to classification and measurement of financial assets.

The following table compares the measurement and classification under IAS 39 and IFRS 9 for each class of financial assets.

 

Financial instrument

  

Classification under IAS 39

  

Classification under IFRS 9

Cash and cash equivalents

   Loans and receivables    Amortized cost

Restricted cash, current and non-current portion

   Loans and receivables    Amortized cost

Trade accounts receivables

   Loans and receivables    Amortized cost

Due from related parties

   Loans and receivables    Amortized cost

Judicial deposits

   Loans and receivables    Amortized cost

Other assets, current and non-current portion

   Loans and receivables    Amortized cost

 

11


NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the six months ended June 30, 2018

(In thousands of reais and dollars, unless otherwise stated)

 

 

The effect of adopting IFRS 9 on the carrying amounts of financial assets at January 1, 2018 relates solely to the new impairment requirements.

 

(i)

Impairment

IFRS 9 replaces the “incurred loss” model in IAS 39 with a forward-looking “expected credit loss” (ECL) model. This new model requires the Company to record expected credit losses on trade accounts receivables, either on 12-month or lifetime basis.

The Company has assessed the application of IFRS 9 impairment model requirements and its assessment did not have a material impact on its opening balance at January 1, 2018 (except for trade receivables, described below).

Trade accounts receivables

The estimated ECLs were calculated based on actual credit loss experience over the past two years, with ECL rates calculated separately for B2C (business to consumer) and B2B (business to business) trade accounts receivable. The Company already considered the exposure to credit risk over the impairment recognized under IAS 39.

Factors considered were:

 

   

Significant financial difficulty of the customer;

 

   

Payment default;

 

   

Exposure to expected losses;

 

   

High probability of customer bankruptcy;

 

   

Breach of contract, such as default or delinquency in interest or principal; and

 

   

Adverse change in a factor (for example, unemployment rates, external credit ratings).

Exposures within each group are based on credit risk characteristics and aging status.

The application of IFRS 9’s impairment requirements at January 1, 2018 resulted in an additional allowance for doubtful accounts as follows.

 

            As at January 1, 2018  
            Allowance for doubtful accounts
(as previously disclosed)
           Restated allowance for
expected losses
 
            BRL            BRL  

Not past due

   R$          (8,199   R$          (11,222

Past due 1-30 days

        (2,134        (2,134

Past due 31-90 days

        (3,686        (3,686

Past due 91-120 days

        (1,845        (1,845

Past due 120-180 days

        (3,108        (3,108

Past due over 180 days

        (1,899        (1,899
     

 

 

      

 

 

 

Total

   R$          (20,871 )     R$          (23,894 )  
     

 

 

      

 

 

 

Note 10 includes a table to summarize the effect of adoption of IFRS 9 on new allowance for doubtful accounts.

 

(b)

Hedge accounting

The Company´s assessment did not indicate any impact on the application of IFRS 9 for hedge accounting, because no hedge transactions existed as of December 31, 2017 and no hedge transactions were entered into in the first semester of 2018.

 

 

12


NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the six months ended June 30, 2018

(In thousands of reais and dollars, unless otherwise stated)

 

 

Other Clarifications, amendments and interpretations

Several other amendments and interpretations apply for the first time in 2018, but do not have an impact on the condensed consolidated financial statements of the Company. Also, the Company has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective, including the IFRS 16 – Leases, which the Company is currently evaluating the effect of adopting the standard and the impact it may have on its consolidated financial statements.

 

3.

Seasonality

Like most retail businesses, the Company experiences seasonal fluctuations in its net sales and operating results. Historically, the Company has generated higher net sales in the fourth quarter, which includes Black November period (commercial holiday introduced in 2010 by Brazilian e-commerce websites which is a month-long equivalent to the Black Friday in the United States) and the Christmas season in Brazil, Argentina and Mexico while the first quarter of the year is our slowest period, as the months of January and February correspond to vacation time in Brazil and Argentina.

The amount of cash flows and working capital we require to support our operations fluctuate throughout the year, primarily driven by the seasonality of our business. Typically, we have higher generation of cash flows during the fourth quarter, given the increase in the volume of sales we generally experience in this period, which includes the Black November period and the holiday season. Conversely, our cash flow requirements increase during the first quarter of the year, as a result of (1) the maturity of the payment terms with our suppliers for inventory acquired in advance of our peak selling season and (2) a decrease in sales volumes that typically follows such season.

 

4.

Segment information

The Company uses the “management approach” to determine its reportable segments. The management approach identifies operating segments based on how the entity is organized and based on how financial information is presented to the chief operating decision maker (“CODM”). The Company concluded that the CODM is the Chief Executive Officer.

The Company is organized around geographical divisions and discloses the following reportable segments: Brazil and International.

 

 

Brazil: consists of retail sales of consumer products from all of our verticals (which includes sales of sporting goods and related garments as well as fashion and more recently, beauty goods) carried out through our sites Netshoes.com.br and Zattini.com.br and third-party sites that we manage as well as our business to business offline operation.

 

 

International: consists of retail sales of consumer products (mainly sporting goods and related garments) from our sites Netshoes.com.ar and Netshoes.com.mx in Argentina and Mexico.

The items not allocated directly to the reportable segments are disclosed as corporate and others. Corporate and others comprises operating expenses, financial income and financial expenses recorded in Netshoes (Cayman) Limited and Netshoes Holding, LLC.

The CODM receives individual financial information based on the nature of revenues and expenses incurred. There is no regular reporting of individual financial information for products, services, or major customers, and therefore the Company concluded that Brazil and International were each independent reportable segments.

The Company has aggregated Mexico and Argentina geographic divisions into one reportable segment, International. Mexico and Argentina share similar characteristics as an operating segment, including, but not limited to the same degree of risk, same opportunities for growth and similar products and service offerings to local customers.

No information on segment assets or liabilities is relevant for decision-making. There are no inter segment transactions in the internal reporting structure.    

 

 

13


NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the six months ended June 30, 2018

(In thousands of reais and dollars, unless otherwise stated)

 

 

The Company evaluates the performance of its reportable segments using “segment net income (loss)”. A reconciliation of reportable segments is as follows:

 

            Brazil            International            Corporate and others            Total  
            Three months ended in June 30,            Three months ended in June 30,            Three months ended in June 30,            Three months ended in June 30,  
            2017            2018            2018            2017            2018            2018            2017            2018            2018            2017             2018             2018  
            BRL            BRL            USD            BRL            BRL            USD            BRL            BRL            USD            BRL             BRL             USD  

Net Sales

   R$          407,522     R$          400,449     US$          103,857     R$          53,809     R$          49,348     US$          12,798     R$          —       R$          —       US$          —       R$          461,331      R$          449,797      US$          116,655  

Cost of sales

        (264,687        (274,003        (71,062        (43,805        (38,006        (9,857        —            —            —            (308,492         (312,009         (80,919
     

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

       

 

 

       

 

 

 

Segment gross profit

        142,835          126,446          32,795          10,004          11,342          2,941          —            —            —            152,839           137,788           35,736  

Salaries and employees’ benefits

        (39,964        (42,323        (10,976        (7,570        (6,415        (1,664        (406        (248        (65        (47,940         (48,986         (12,705

Marketing expenses

        (47,307        (44,407        (11,517        (8,014        (6,105        (1,583        (78        (269        (70        (55,399         (50,781         (13,170

Operating lease

        (6,340        (6,671        (1,730        (1,062        (1,109        (287        —            —            —            (7,402         (7,780         (2,017

Credit card fees

        (7,395        (7,196        (1,866        (1,679        (1,425        (371        —            —            —            (9,074         (8,621         (2,237

Information technology services

        (8,017        (4,752        (1,232        (275        (230        (60        (1,297        —            —            (9,589         (4,982         (1,292

Amortization and depreciation

        (6,448        (10,006        (2,595        (258        (188        (49        (866        (7,927        (2,056        (7,572         (18,121         (4,700

Consulting

        (2,588        (2,468        (640        (357        (317        (82        (1,103        (541        (139        (4,048         (3,326         (861

Allowance for doubtful accounts

        (1,701        984          255          —            (155        (40        —            —            —            (1,701         829           215  

Sales commissions and royalties

        (3,243        (4,150        (1,076        (251        (347        (90        —            —            —            (3,494         (4,497         (1,166

Facilities expenses

        (4,047        (3,597        (933        (347        (306        (79        (277        —            —            (4,671         (3,903         (1,012

Other selling, general and administrative expenses

 

     (11,411        (2,911        (755        (1,718        (1,286        (334        (1        (367        (95        (13,130         (4,564         (1,184

Other operating (expense) income, net

        (1,014        (966        (249        (4        1          —            (6        —            —            (1,024         (965         (249
     

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

       

 

 

       

 

 

 

Total operating expenses

        (139,475        (128,463        (33,314        (21,535        (17,882        (4,639        (4,034        (9,352        (2,425        (165,044         (155,697         (40,378

Financial income

        9,812          2,622          680          296          261          68          58          52          13          10,166           2,935           761  

Financial expenses

        (29,280        (18,900        (4,902        (3,317        (4,231        (1,097        (519        (5        (1        (33,116         (23,136         (6,000
     

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

       

 

 

       

 

 

 

Loss before income tax

        (16,108        (18,295        (4,741        (14,552        (10,510        (2,727        (4,495        (9,305        (2,413        (35,155         (38,110         (9,881

Income tax expense

        —            —            —            (2        —            —            —            —            —            (2         —             —    
     

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

       

 

 

       

 

 

 

Net loss

   R$          (16,108   R$          (18,295   US$          (4,741   R$          (14,554   R$          (10,510   US$          (2,727   R$          (4,495   R$          (9,305   US$          (2,413   R$          (35,157    R$          (38,110    US$          (9,881
     

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

       

 

 

       

 

 

 

 

14


NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the six months ended June 30, 2018

(In thousands of reais and dollars, unless otherwise stated)

 

 

 

            Brazil            International            Corporate and others            Total  
            Six months ended in June 30,            Six months ended in June 30,            Six months ended in June 30,            Six months ended in June 30,  
            2017            2018            2018            2017            2018            2018            2017            2018            2018            2017             2018             2018  
            BRL            BRL            USD            BRL            BRL            USD            BRL            BRL            USD            BRL             BRL             USD  

Net Sales

   R$          763,034     R$          760,801     US$          197,313     R$          94,525     R$          88,289     US$          22,898     R$          —       R$          —       US$          —       R$          857,559      R$          849,090      US$          220,211  

Cost of sales

        (498,445        (522,807        (135,590        (76,509        (67,905        (17,611        —            —            —            (574,954         (590,712         (153,201
     

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

       

 

 

       

 

 

 

Segment gross profit

        264,589          237,994          61,723          18,016          20,384          5,287          —            —            —            282,605           258,378           67,010  

Salaries and employees’ benefits

        (75,047        (91,947        (23,846        (13,635        (12,593        (3,266        (685        (689        (179        (89,367         (105,229         (27,291

Marketing expenses

        (76,523        (82,439        (21,381        (14,006        (11,450        (2,970        (157        (487        (126        (90,686         (94,376         (24,477

Operating lease

        (12,434        (13,534        (3,510        (1,961        (2,251        (583        —            —            —            (14,395         (15,785         (4,093

Credit card fees

        (13,745        (13,663        (3,543        (3,028        (2,557        (663        —            —            —            (16,773         (16,220         (4,206

Information technology services

        (16,581        (13,377        (3,469        (558        (473        (124        (2,520        (1,836        (476        (19,659         (15,686         (4,069

Amortization and depreciation

        (13,692        (19,025        (4,934        (510        (401        (104        (1,461        (14,583        (3,782        (15,663         (34,009         (8,820

Consulting

        (4,855        (4,331        (1,123        (675        (612        (159        (1,294        (1,326        (344        (6,824         (6,269         (1,626

Allowance for doubtful accounts

        (6,262        (3,697        (959        —            (155        (40        —            —            —            (6,262         (3,852         (999

Sales commissions and royalties

        (5,783        (8,062        (2,091        (417        (622        (161        —            —            —            (6,200         (8,684         (2,252

Facilities expenses

        (7,275        (7,056        (1,830        (698        (600        (156        (277        —            —            (8,250         (7,656         (1,986

Other selling, general and administrative expenses

        (20,181        (8,080        (2,096        (2,912        (2,527        (655        (1        (676        (176        (23,094         (11,283         (2,927

Other operating (expense) income, net

        (2,058        (2,073        (538        (8        (2        (1        (50        (7        (2        (2,116         (2,082         (541
     

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

       

 

 

       

 

 

 

Total operating expenses

        (254,436        (267,284        (69,320        (38,408        (34,243        (8,882        (6,445        (19,604        (5,085        (299,289         (321,131         (83,287

Financial income

        13,768          6,738          1,747          639          721          188          788          60          16          15,195           7,519           1,951  

Financial expenses

        (63,499        (36,205        (9,390        (5,814        (6,995        (1,814        (2,070        (13        (3        (71,383         (43,213         (11,207
     

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

       

 

 

       

 

 

 

Loss before income tax

        (39,578        (58,757        (15,240        (25,567        (20,133        (5,221        (7,727        (19,557        (5,072        (72,872         (98,447         (25,533
     

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

       

 

 

       

 

 

 

Income tax expense

        —            —            —            (2        —            —            —            —            —            (2         —             —    
     

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

       

 

 

       

 

 

 

Net loss

   R$          (39,578   R$          (58,757   US$          (15,240   R$          (25,569   R$          (20,133   US$          (5,221   R$          (7,727   R$          (19,557   US$          (5,072   R$          (72,874    R$          (98,447    US$          (25,533
     

 

 

   

 

 

    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

       

 

 

       

 

 

 

 

15


NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the six months ended June 30, 2018

(In thousands of reais and dollars, unless otherwise stated)

 

 

The Company has aggregated its products and services into groups of similar products and provided the supplemental disclosure of net sales below. The Company evaluates whether additional disclosure is appropriate when a product or service category begins to approach a significant level of net sales.

 

            Six months ended in June 30,             Three months ended in June 30,  
            2017             2018             2018             2017             2018             2018  
            BRL             BRL             USD             BRL             BRL             USD  

Sports (1)

   R$          735,260      R$          689,466      US$          178,813      R$          384,488      R$          354,617      US$          91,970  

Fashion (1)

        110,030           136,095           35,296           69,170           83,187           21,575  

Market Place

        12,269           23,529           6,102           7,673           11,993           3,110  
     

 

 

       

 

 

       

 

 

       

 

 

       

 

 

       

 

 

 

Total net sales

   R$          857,559      R$          849,090      US$          220,211      R$          461,331      R$          449,797      US$          116,655  
     

 

 

       

 

 

       

 

 

       

 

 

       

 

 

       

 

 

 

 

(1)

Freight services were allocated to the product revenues that they are related to.

Net sales generated from our international segment are denominated in local functional currencies. Revenues are translated at average rates prevailing throughout the period.

Net sales attributable to geographical areas are as follows:

 

            Six months ended in June 30,             Three months ended in June 30,  
            2017             2018             2018             2017             2018             2018  
            BRL             BRL             USD             BRL             BRL             USD  

Brazil

   R$          763,034      R$          760,801      US$          197,313      R$          407,522      R$          400,449      US$          103,857  

Argentina

        68,442           59,657           15,472           38,407           32,946           8,544  

Mexico

        26,083           28,632           7,426           15,402           16,402           4,254  
     

 

 

       

 

 

       

 

 

       

 

 

       

 

 

       

 

 

 

Total net sales

   R$          857,559      R$          849,090      US$          220,211      R$          461,331      R$          449,797      US$          116,655  
     

 

 

       

 

 

       

 

 

       

 

 

       

 

 

       

 

 

 

Property and equipment, and intangible assets by geography are as follows:

 

            December 31,
2017
            June 30, 2018  
            BRL             BRL             USD  

Property and equipment, net

                 

Brazil

   R$          69,350      R$          78,184      US$          20,277  

Argentina

        2,574           1,988           516  

Mexico

        1,115           1,172           304  
     

 

 

       

 

 

       

 

 

 

Total property and equipment, net

   R$          73,039      R$          81,344      US$          21,097  

Intangible assets, net

                 

Brazil

   R$          95,684      R$          114,365      US$          29,660  

Argentina

        11           33           9  

Mexico

        41           41           11  

Cayman

        20,103           10,953           2,840  
     

 

 

       

 

 

       

 

 

 

Total intangible assets, net

        115,839           125,392           32,520  
     

 

 

       

 

 

       

 

 

 

Total

   R$          188,878      R$          206,736      US$          53,617  
     

 

 

       

 

 

       

 

 

 

 

16


NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the six months ended June 30, 2018

(In thousands of reais and dollars, unless otherwise stated)

 

 

 

5.

Earnings (Loss) per share (“EPS”)

The Company computes basic loss per share by dividing net loss attributable to the owners of the Parent by the weighted average number of common shares outstanding for the period. Diluted loss per share reflects the potential dilution of share options that could be exercised or converted into common shares, and is computed by dividing net loss attributable to the owner of the Parent by the weighted average number of common shares outstanding plus the potentially dilutive effect of share options.

Earnings per share data for both periods presented has been calculated giving effect to the stock split of 1.0 for 3.0 which occurred immediately prior to the completion of the Initial Public Offering on April 18, 2017 (see note 1.2).

The following table sets forth the computation of the Company’s basic and diluted loss per share attributable to the owners of the Parent for the three and six months ended June 30, 2017 and 2018:

 

            Six months ended in June 30,            Three months ended in June 30,  
            2017            2018            2018            2017            2018            2018  
            BRL            BRL            USD            BRL            BRL            USD  

Numerator

                              

Net loss for the period attributable to the owners of the Parent

   R$          (72,499   R$          (98,216   US$          (25,473   R$          (34,991   R$          (37,997   US$          (9,855
     

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Denominator

                              

Weighted average number of outstanding shares of common stock

        23,435,524          31,053,166          31,053,166          23,435,524          31,053,166          31,053,166  

Loss per share attributable to the owners of the Parent (1)

                              

Basic and diluted

   R$          (3.09   R$          (3.16   US$          (0.82   R$          (1.49   R$          (1.22   US$          (0.32

 

(1)

When the Company reports net loss attributable to the owners of the Parent, the diluted loss per common share is equal to the basic losses per common share due to the anti-dilutive effect of the outstanding share options and convertible notes.

 

6.

Net sales

Details of net sales for the three and six months ended June 30, 2017 and 2018 were as follows:

 

            Six months ended in June 30,             Three months ended in June 30,  
            2017             2018             2018             2017             2018             2018  
            BRL             BRL             USD             BRL             BRL             USD  

Product sales—B2C

   R$          796,718      R$          791,089      US$          205,169      R$          429,964      R$          422,968      US$          109,698  

Product sales—B2B

        24,960           7,366           1,910           9,295           1,138           295  

Other revenues—Freight related services

 

     23,571           25,985           6,739           14,357           12,952           3,359  

Other revenues—Marketplace

        12,269           23,529           6,102           7,674           11,993           3,110  

Other revenues—Ncard

        41           1,121           291           41           746           193  
     

 

 

       

 

 

       

 

 

       

 

 

       

 

 

       

 

 

 

Total net sales

   R$          857,559      R$          849,090      US$          220,211      R$          461,331      R$          449,797      US$          116,655  
     

 

 

       

 

 

       

 

 

       

 

 

       

 

 

       

 

 

 

The Company has established distribution centers in the Brazilian states of Pernambuco and Minas Gerais, where it has been granted tax incentives by local government which reduce the amount of sales taxes paid.

As a result of such tax incentives, sales to purchasers outside of the State of Pernambuco originated from our distribution center located in the city of Recife (State of Pernambuco, Brazil), enjoyed Pernambuco State ICMS tax rates of a range from 0.5% to 1.0% during the three and six months ended June 30, 2017 and 2018, depending on the type of product offered. Also, sales to purchasers outside of the State of Minas Gerais originated from our distribution center located in the city of Extrema (State of Minas Gerais, Brazil) enjoyed a Minas Gerais State ICMS tax rate of 1.0% during the three and six months ended June 30, 2017 and 2018.

The incentive also determines that the Company is not allowed to take any credit for taxes paid on the purchase of products subsequently sold outside of those states such that these amounts become non-recoverable taxes and increase the Cost of Sales. Note 8 (a) of these financial statements presents the impact on cost of sales.

 

 

17


NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the six months ended June 30, 2018

(In thousands of reais and dollars, unless otherwise stated)

 

 

For the three and six months ended June 30, 2017 and 2018, the total amounts of tax incentives recorded in net sales are as follows:

 

            Six months ended in June 30,             Three months ended in June 30,  
            2017             2018             2018             2017             2018             2018  
            BRL             BRL             USD             BRL             BRL             USD  

State of Pernambuco

   R$          32,259      R$          22,007      US$          5,708      R$          15,058      R$          11,132      US$          2,887  

State of Minas Gerais

        64,058           62,114           16,109           35,310           33,579           8,709  
     

 

 

       

 

 

       

 

 

       

 

 

       

 

 

       

 

 

 

Total tax incentives—Net sale

   R$          96,317      R$          84,121      US$          21,817      R$          50,368      R$          44,711      US$          11,596  
     

 

 

       

 

 

       

 

 

       

 

 

       

 

 

       

 

 

 

 

7.

Deferred revenue

Deferred revenue from exclusive use of the Company’s customer database is recognized as Other operating (expense) income, net in the consolidated statements of profit or loss using the straight-line method, over the period of the contract (10 years). In the three months ended June 30, 2017 and 2018 the amount of R$375 and R$375 (US$97), respectively, and in the six months ended June 30, 2017 and 2018 the amount of R$750 and R$750 (US$195), respectively, were recorded in Other operating income.

Deferred revenue from credit card activation is recognized as Other revenues – NCard within Net sales (see note 6), in the consolidated statements of profit or loss, when the credit cards are activated with the bank by the Company’s customers.

 

8.

Expenses

 

(a)

Costs of sales

The following is the breakdown of cost of sales for the six and three months ended June 30, 2017 and 2018, respectively:

 

            Six months ended in June 30,             Three months ended in June 30,  
            2017             2018             2018             2017             2018             2018  
            BRL             BRL             USD             BRL             BRL             USD  

Cost of product sales

   R$          504,983      R$          519,570      US$          134,751      R$          271,768      R$          274,916      US$          71,300  

Shipping costs

        67,830           69,131           17,929           36,294           35,421           9,186  

Others

        2,141           2,011           521           430           1,673           434  
     

 

 

       

 

 

       

 

 

       

 

 

       

 

 

       

 

 

 

Total cost of sales

   R$          574,954      R$          590,712      US$          153,201      R$          308,492      R$          312,010      US$          80,920  
     

 

 

       

 

 

       

 

 

       

 

 

       

 

 

       

 

 

 

Cost of product sales include the non-recoverable ICMS taxes resulting from the tax incentives disclosed in note 6 granted by the States of Minas Gerais and Pernambuco. For the three and six months ended June 30, 2017 and 2018, the total amounts of non-recoverable ICMS are as follows:

 

            Six months ended in June 30,             Three months ended in June 30,  
            2017             2018             2018             2017             2018             2018  
            BRL             BRL             USD             BRL             BRL             USD  

State of Pernambuco

   R$          10,626      R$          9,021      US$          2,340      R$          5,900      R$          5,220      US$          1,354  

State of Minas Gerais

        32,555           36,634           9,501           16,736           19,358           5,020  
     

 

 

       

 

 

       

 

 

       

 

 

       

 

 

       

 

 

 

Non-recoverable ICMS

   R$          43,181      R$          45,655      US$          11,841      R$          22,636      R$          24,578      US$          6,374  
     

 

 

       

 

 

       

 

 

       

 

 

       

 

 

       

 

 

 

The impact of tax incentives net of non-recoverable ICMS for the three months ended June 30, 2017 and 2018 is R$27,732 and R$20,133 (US$5,222), respectively, and for the six months ended June 30, 2017 and 2018 is R$53,136 and R$38,466 (US$9,976), respectively.

 

 

18


NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the six months ended June 30, 2018

(In thousands of reais and dollars, unless otherwise stated)

 

 

During the first semester of 2017, the Company reviewed and changed ICMS tax positions taken on past transactions and recorded ICMS tax credits amounting to R$10,118 (US$2,624), as a reduction of the cost of product sales.

 

(b)

Selling and marketing expenses

The following is the breakdown of selling and marketing expenses for the three and six months ended June 30, 2017 and 2018, respectively:

 

            Six months ended in June 30,             Three months ended in June 30,  
            2017             2018             2018             2017             2018            2018  
            BRL             BRL             USD             BRL             BRL            USD  

Salaries and employees’ benefits

   R$          66,609      R$          68,482      US$          17,761      R$          32,470      R$          33,182     US$          8,606  

Marketing expenses

        90,686           94,376           24,476           55,399           50,781          13,170  

Operating lease

        10,102           11,114           2,882           5,196           5,569          1,444  

Credit card fees

        16,773           16,220           4,206           9,074           8,621          2,237  

Information technology services

        716           592           155           356           297          77  

Amortization and depreciation

        1,987           3,453           895           1,162           1,745          453  

Consulting

        608           214           55           263           112          29  

Allowance for doubtful accounts

        6,262           3,852           999           1,701           (829        (215

Sales commissions and royalties

        6,200           8,684           2,252           3,494           4,497          1,166  

Facilities expenses

        6,475           5,855           1,519           3,625           2,872          745  

Others

        16,108           8,003           2,077           8,260           3,400          881  
     

 

 

       

 

 

       

 

 

       

 

 

       

 

 

      

 

 

 

Total selling and marketing expenses

   R$          222,526      R$          220,845      US$          57,277      R$          121,000      R$          110,247     US$          28,593  
     

 

 

       

 

 

       

 

 

       

 

 

       

 

 

      

 

 

 

 

(c)

General and administrative expenses

The following is the breakdown of general and administrative expenses for the three and six months ended June 30, 2017 and 2018, respectively:

 

            Six months ended in June 30,             Three months ended in June 30,  
            2017             2018             2018             2017             2018             2018  
            BRL             BRL             USD             BRL             BRL             USD  

Salaries and employees’ benefits

   R$          22,758      R$          36,747      US$          9,530      R$          15,470      R$          15,804      US$          4,099  

Operating lease

        4,293           4,671           1,211           2,206           2,211           573  

Information technology services

        18,943           15,094           3,915           9,233           4,685           1,215  

Amortization and depreciation

        13,676           30,556           7,925           6,410           16,376           4,247  

Consulting

        6,216           6,055           1,570           3,785           3,214           834  

Facilities expenses

        1,775           1,801           467           1,046           1,031           267  

Others

        6,986           3,280           851           4,870           1,165           301  
     

 

 

       

 

 

       

 

 

       

 

 

       

 

 

       

 

 

 

Total general and administrative expenses

   R$          74,647      R$          98,204      US$          25,469      R$          43,020      R$          44,486      US$          11,536  
     

 

 

       

 

 

       

 

 

       

 

 

       

 

 

       

 

 

 

 

19


NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the six months ended June 30, 2018

(In thousands of reais and dollars, unless otherwise stated)

 

 

 

(d)

Financial income (expenses)

The following is the breakdown of financial income and expenses of the Company for three and six months ended June 30, 2017 and 2018, respectively:

 

            Six months ended in June 30,             Three months ended in June 30,  
            2017             2018             2018             2017             2018             2018  
            BRL             BRL             USD             BRL             BRL             USD  

Interest income

   R$          13,285      R$          5,074      US$          1,316      R$          9,482      R$          2,070      US$          537  

Foreign exchange gain

        727           1,034           268           290           463           120  

Imputed interest on installment sales

        380           1,232           320           334           271           70  

Derivative financial instruments gain

        764           —             —             33           —             —    

Other

        39           179           47           27           131           34  
     

 

 

       

 

 

       

 

 

       

 

 

       

 

 

       

 

 

 

Total financial income

   R$          15,195      R$          7,519      US$          1,951      R$          10,166      R$          2,935      US$          761  
     

 

 

       

 

 

       

 

 

       

 

 

       

 

 

       

 

 

 

 

            Six months ended in June 30,             Three months ended in June 30,  
            2017             2018             2018             2017             2018             2018  
            BRL             BRL             USD             BRL             BRL             USD  

Interest expense

   R$          37,958      R$          17,391      US$          4,510      R$          18,224      R$          9,422      US$          2,444  

Imputed interest on credit purchases

        25,639           15,379           3,989           9,576           6,710           1,740  

Bank charges

        4,034           2,274           590           2,463           1,080           280  

Foreign exchange loss

        1,839           4,986           1,293           1,839           4,555           1,181  

Debt issuance costs

        1,462           1,123           291           698           597           155  

Other

        451           2,060           534           316           772           200  
     

 

 

       

 

 

       

 

 

       

 

 

       

 

 

       

 

 

 

Total financial expense

   R$          71,383      R$          43,213      US$          11,207      R$          33,116      R$          23,136      US$          6,000  
     

 

 

       

 

 

       

 

 

       

 

 

       

 

 

       

 

 

 

 

9.

Cash and cash equivalents

 

            December 31,
2017
            June 30, 2018  
            BRL             BRL             USD  

Cash and bank balances

   R$          17,801      R$          16,452      US$          4,267  

Cash equivalents

        378,161           58,829           15,257  
     

 

 

       

 

 

       

 

 

 

Total cash and cash equivalents

   R$          395,962      R$          75,281      US$          19,524  
     

 

 

       

 

 

       

 

 

 

Cash equivalents are investments in Bank Deposit Certificates (“CDB”) and investment funds, issued by Brazilian financial institutions, with original maturities of 90 days or less that accrue at an average interest rate of 87.24% of CDI (Interbank Deposit Certificate rate).

 

20


NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the six months ended June 30, 2018

(In thousands of reais and dollars, unless otherwise stated)

 

 

 

10.

Trade accounts receivable, net

 

            December 31,
2017
           June 30, 2018  
            BRL            BRL            USD  

Trade accounts receivables

   R$          134,039     R$          118,232     US$          30,663  

Allowance for doubtful accounts

        (20,871        (15,533        (4,028
     

 

 

      

 

 

      

 

 

 

Total trade accounts receivables, net

   R$          113,168     R$          102,699     US$          26,635  
     

 

 

      

 

 

      

 

 

 

The changes in the allowance for doubtful accounts receivable for the six months period ended June 30, 2017 and 2018 are as follows:

 

     June 30,  
            2017            2018            2018  
            BRL            BRL            USD  

Balance at January 1

   R$          (1,722   R$          (20,871   US$          (5,413

Additions

        (6,262        (3,852        (999

Adjustment from adoption of IFRS 9 (a)

        —            (2,322        (602

Adjustment from adoption of IFRS 9 (b)

        —            (701        (182

Write-offs

        7          12,213          3,168  
     

 

 

      

 

 

      

 

 

 

Balance at June 30

   R$          (7,977   R$          (15,533   US$          (4,028
     

 

 

      

 

 

      

 

 

 

 

a)

Impact of adopting IFRS9 on opening balance, related to reclassification from accounts receivables (“gross”) to allowance for doubtful accounts at January 1, 2018 as disclosed in Note 2.5.

b)

Impact of adopting IFRS9 on opening balance, recognized in Accumulated losses as at January 1, 2018 as disclosed in Note 2.5.

Information about the Company’s exposure to credit and other market risks is included in Note 20.

 

21


NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the six months ended June 30, 2018

(In thousands of reais and dollars, unless otherwise stated)

 

 

 

11.

Inventories, net

 

            December 31,
2017
           June 30, 2018  
            BRL            BRL            USD  

Finished goods for resale

   R$          466,486     R$          432,932     US$          112,280  

Right to recover returned goods

        —            1,591          413  

Allowance for slow moving and others

        (9,854        (18,632        (4,832
     

 

 

      

 

 

      

 

 

 

Total inventories, net

   R$          456,632     R$          415,891     US$          107,861  
     

 

 

      

 

 

      

 

 

 

Due to obsolescence, damaged and slow-moving items, the Company recognized losses on the related inventories to their net realizable value, which resulted in a (reversal)/loss of R$(227) and R$4,547 (US$1,179) for three months ended June 30, 2017 and 2018, respectively, and a loss of R$495 and R$8,778 (US$2,277) for the six months ended June 30, 2017 and 2018, respectively.

 

12.

Recoverable taxes

 

            December 31,
2017
            June 30, 2018     

 

 
            BRL             BRL             USD  

VAT Taxes Brazil (ICMS)

   R$          107,965      R$          109,223      US$          28,327  

VAT Taxes International

        16,261           15,973           4,143  

Taxes other than income tax (PIS and COFINS)

        14,829           6,785           1,760  

Withholding income taxes

        4,467           4,805           1,246  

Others

        7,290           3,829           992  
     

 

 

       

 

 

       

 

 

 

Total recoverable taxes

   R$          150,812      R$          140,615      US$          36,468  
     

 

 

       

 

 

       

 

 

 

Current

        80,047           69,894           18,127  

Non-Current

        70,765           70,721           18,341  

 

13.

Property and equipment, net

The gross amount of property and equipment was R$122,382 at December 31, 2017 and increased to R$136,094 (US$35,296) at June 30, 2018. During the six months ended June 30, 2017 and 2018, the Company acquired property and equipment with a cost of R$4,487 and R$15,187 (US$3,939), respectively. During the six months ended June 30, 2017 and 2018, the Company disposed of property and equipment with a carrying amount of R$209 and R$829 (US$215), respectively.

During the three months ended June 30, 2017 and 2018 a loss on disposal of R$149 and R$31 (US$8) has occurred, respectively, and during the six months ended June 30, 2017 and 2018 R$170 and R$290 (US$75), respectively, which was included in Other operating expense in the condensed consolidated statements of profit or loss.

 

14.

Intangible assets, net

The gross amount of intangible assets was R$188,254 at December 31, 2017 and increased to R$208,270 (US$54,015) at June 30, 2018. During the six months ended June 30, 2017 and 2018, the Company acquired and developed intangible assets with a cost of R$23,269 and R$35,463 (US$9,197), respectively. The increase is mainly in connection with software acquired and software in development related to website platform and license software.

 

22


NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the six months ended June 30, 2018

(In thousands of reais and dollars, unless otherwise stated)

 

 

 

15.

Trade accounts payable

 

            December 31,
2017
            June 30, 2018  
            BRL             BRL             USD  

Trade accounts payable—domestic

   R$          339,634      R$          212,962      US$          55,231  

Trade accounts payable—foreign

        26,201           17,605           4,566  
     

 

 

       

 

 

       

 

 

 

Total trade accounts payable

   R$          365,835      R$          230,567      US$          59,797  
     

 

 

       

 

 

       

 

 

 

Information about the Company’s exposure to currency and liquidity risks is included in Note 20.

 

16.

Reverse factoring

 

            December 31,
2017
            June 30, 2018  
            BRL             BRL             USD  

Trade accounts payable

   R$          126,755      R$          83,668      US$          21,700  

Other liabilities

        22,173           8,003           2,075  
     

 

 

       

 

 

       

 

 

 

Total reverse factoring

   R$          148,928      R$          91,671      US$          23,775  
     

 

 

       

 

 

       

 

 

 

The Company has entered into supply chain finance transactions with financial institutions in order to allow suppliers to advance receivables related to the Company’s purchases of inventories and services.

 

17.

Accrued expenses

 

            December 31,
2017
            June 30, 2018  
            BRL             BRL             USD  

Selling and marketing services

   R$          76,228      R$          64,409      US$          16,704  

Provision for sales with a right of return

        —             2,267           588  

Freight

        11,087           10,020           2,599  

Gift card

        7,191           6,667           1,729  

Information technology

        3,460           4,265           1,106  

Acquisition of fixed assets and intangible

        1,710           1,001           260  

Rentals

        2,987           2,478           643  

Services

        4,047           3,170           822  

Employees benefits

        3,566           1,237           321  

Other

        10,090           7,685           1,993  
     

 

 

       

 

 

       

 

 

 

Total accrued expenses

   R$          120,366      R$          103,199      US$          26,765  
     

 

 

       

 

 

       

 

 

 

 

23


NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the six months ended June 30, 2018

(In thousands of reais and dollars, unless otherwise stated)

 

 

 

18.

Debt

During the six months ended June 30, 2017 and 2018, the Company repaid R$52,973 and R$66,886 (US$17,347) of secured borrowings, nonconvertible loans and bank loans, respectively. The weighted average interest rate for debt was 14.27% and 9.53% for the six months ended June 30, 2017 and 2018, respectively.

As a consequence of obtaining secured borrowings for working capital purposes the subsidiary NS2.Com Internet S.A. assumed the covenant of maintaining the ratio between financial debt and accounts receivable from credit card operators lower or equal to 3 (three).

The Company was in compliance as of June 30, 2018, with the financial covenant described above, as demonstrated below:

 

     December 31,
2017
     June 30,
2018
 
     BRL      BRL  

Credit card operations—Gross (a)

     114,218        104,579  

Long-term debt

     285,971        239,120  

Coefficient ratio (lower or equal to 3)

     2.50        2.29  

 

(a)

For covenants calculation purposes, the numerator used to calculate the ratio (credit card gross) represents the balance receivable from credit card operators considering the face value of the corresponding sales invoices (i.e. including interest over installment sales).

The secured borrowings and debentures contain certain affirmative financial covenants for which the Company was in compliance as of June 30, 2018.

The carrying value of the Company’s outstanding debt consists of the following:

 

            December 31,
2017
            June 30, 2018  
            BRL             BRL             USD  

Secured borrowings

   R$          199,320      R$          164,448      US$          42,650  

Nonconvertible notes—Debentures

        84,202           65,492           16,984  

Bank loans

        2,449           9,180           2,381  
     

 

 

       

 

 

       

 

 

 

Total long-term debt

        285,971           239,120           62,015  

Current portion of long-term debt

        106,577           110,428           28,639  
     

 

 

       

 

 

       

 

 

 

Long-term debt, net of current portion

   R$          179,394      R$          128,692      US$          33,376  
     

 

 

       

 

 

       

 

 

 

 

19.

Derivative financial instruments

The Company recognized a derivative, not designated as hedge accounting, gain of R$33 and R$0 (US$0) as financial income for the three months ended June 30, 2017 and 2018, respectively, and a derivative gain of R$ 764 and R$0 (US$0) as financial income for the six months ended June 30, 2017 and 2018, respectively, in the condensed consolidated statements of profit or loss. The objective of these derivatives was to manage foreign exchange risks.

 

24


NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the six months ended June 30, 2018

(In thousands of reais and dollars, unless otherwise stated)

 

 

 

20.

Financial instruments—Fair value and risk management

 

(a)

Accounting classifications and fair values

The following table shows the carrying amounts and fair values of financial assets and financial liabilities, including their levels in the fair value hierarchy. It does not include fair value information for financial assets and financial liabilities if the carrying amount is a reasonable approximation of fair value.

 

                   As at December 31, 2017  
                   Carrying amount  

Financial assets or liabilities, not measured at fair value

   Note             Fair value      Financial assets
measured at
amortized cost
     Financial liabilities
measured at
amortized cost
    Total  
                   BRL      BRL      BRL     BRL  

Cash and cash equivalents

     9           —          395,962        —         395,962  

Restricted cash, current and non-current portion

           —          34,445        —         34,445  

Trade accounts receivables

     10           —          113,168        —         113,168  

Due from related parties

     23           —          12        —         12  

Judicial deposits

     24           —          106,914        —         106,914  

Other assets, current and non-current portion

              22,246        —         22,246  

Trade accounts payable

     15           —          —          (365,835     (365,835

Reverse factoring

     16           —          —          (148,928     (148,928

Long-term debt

     18           —          —          (285,971     (285,971

Accrued expenses

     17           —          —          (120,366     (120,366

Other current liabilities

           —          —          (31,044     (31,044
        

 

 

    

 

 

    

 

 

   

 

 

 

Total

      R$          —          672,747        (952,144     (279,397
        

 

 

    

 

 

    

 

 

   

 

 

 

 

                   As at June 30, 2018  
                   Carrying amount  

Financial assets or liabilities, not measured at fair value

   Note             Fair value      Financial assets
measured at
amortized cost
     Financial liabilities
measured at
amortized cost
    Total            Total  
                   BRL      BRL      BRL     BRL            USD  

Cash and cash equivalents

     9      R$          —          75,281        —         75,281     US$          19,524  

Restricted cash, current and non-current portion

           —          35,388        —         35,388          9,178  

Trade accounts receivables

     10           —          102,699        —         102,699          26,635  

Due from related parties

     23           —          9        —         9          2  

Judicial deposits

     24           —          112,932        —         112,932          29,289  

Other assets, current and non-current portion

              26,328          26,328          6,828  

Trade accounts payable

     15           —          —          (230,567     (230,567        (59,797

Reverse factoring

     16           —          —          (91,671     (91,671        (23,775

Long-term debt

     18           —          —          (239,120     (239,120        (62,015

Accrued expenses

     17           —          —          (103,199     (103,199        (26,765

Other current liabilities

           —          —          (30,215     (30,215        (7,836
        

 

 

    

 

 

    

 

 

   

 

 

      

 

 

 

Total

      R$          —          352,637        (694,772     (342,135   US$          (88,732
        

 

 

    

 

 

    

 

 

   

 

 

      

 

 

 

 

25


NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the six months ended June 30, 2018

(In thousands of reais and dollars, unless otherwise stated)

 

 

 

(b)

Measurement of fair values

The Company’s financial instruments, including cash and cash equivalents, trade accounts receivable, trade accounts payable and other liabilities, are carried at cost, which approximates fair value due to the short-term maturity of these instruments. The fair value estimate of debentures is based on the current rates offered to the Company for debentures of the same remaining maturities, which is categorized as a Level 2 measurement in the fair value hierarchy. As a substantial portion of the debentures has been contracted at floating rates of interest, which are reset at short intervals, the carrying value of the debentures at December 31, 2017 and June 30, 2018 closely approximated the fair value at December 31, 2017 and June 30, 2018, respectively.

During the year ended December 31, 2017 and six month ended June 30, 2018, there were no transfers between Level 1, 2 and 3 of fair value measurements.

 

(c)

Financial risk management

In the regular course of its business, the Company is exposed to market risks mainly related to the fluctuation of interest rates, exchange rate variation, credit risk on credit sales and liquidity risk.

The Company adopts certain instruments to minimize its exposure to such risks, based on monitoring, under the supervision of the Company’s executive officers, which in turn is under the oversight of the Company’s board of directors.

The Company has exposure to the following risks arising from financial instruments:

 

   

credit risk (see (i));

 

   

liquidity risk (see (ii)); and

 

   

market risk (see (iii)).

 

i.

Credit risk

Credit risk is the Company´s risk of financial loss if a customer or counterparty to a financial instrument fails to meet its contractual obligations. This risk principally comes from the outstanding receivables due by customers, derivatives and cash and cash equivalents.

Trade Accounts Receivable

The Company’s exposure to credit risk is influenced mainly by the individual characteristics of each customer.

The Company regularly monitors trade accounts receivable and considers the risk of not collecting from customers as limited because of the intrinsic nature of the payments of credit card operations methods.

For Business-to-business customers, the credit risk exposure and the carrying values reflect management’s assessment of the associated maximum exposure to such credit risk. The maximum exposure to credit risk is equal to the carrying value of the financial assets. The objective of managing counterparty credit risk is to prevent losses in financial assets. The Company assesses the credit quality of the counterparties, taking into account their financial position, past experience and other factors (e.g. credit rating).

No customer had balances representing more than 10% of the Company´s consolidated trade accounts receivable as of December 31, 2017 and June 30, 2018, respectively.

 

26


NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the six months ended June 30, 2018

(In thousands of reais and dollars, unless otherwise stated)

 

 

At December 31, 2017 and June 30, 2018, respectively, the maximum exposure to credit risk for trade accounts receivable by type of counterparty was as follows:

 

            December 31,
2017
           June 30, 2018  
            BRL            BRL            USD  

Credit card operations

   R$          87,983     R$          79,247     US$          20,552  

B2B customers

        46,056          38,985          10,111  
     

 

 

      

 

 

      

 

 

 

Total trade accounts receivable

   R$          134,039     R$          118,232     US$          30,663  

Allowance for doubtful accounts

        (20,871        (15,533        (4,028
     

 

 

      

 

 

      

 

 

 

Trade accounts receivable, net

   R$          113,168     R$          102,699     US$          26,635  
     

 

 

      

 

 

      

 

 

 

At December 31, 2017 and June 30, 2018, respectively, the aging of trade accounts receivable was as follows:

 

            December 31, 2017  
            Gross
amount
            Allowance
for
doubtful
accounts
           Trade
accounts

receivable,
net
 
            BRL             BRL            BRL  

Not past due

   R$          109,135      R$          (8,199   R$          100,936  

Past due 1-30 days

        5,449           (2,134        3,315  

Past due 31-90 days

        5,304           (3,686        1,618  

Past due 91-120 days

        3,551           (1,845        1,706  

Past due 120-180 days

        4,278           (3,108        1,170  

Past due over 180 days

        6,322           (1,899        4,423  
     

 

 

       

 

 

      

 

 

 

Total

   R$          134,039      R$          (20,871   R$          113,168  
     

 

 

       

 

 

      

 

 

 

 

            June 30, 2018  
            Gross
amount
            Allowance
for

doubtful
accounts
           Trade
accounts
receivable,
net
            Trade
accounts
receivable,
net
 
            BRL             BRL            BRL             USD  

Not past due

   R$          95,033      R$          (1,782   R$          93,251      US$          24,185  

Past due 1-30 days

        5,565           (1,627        3,938           1,021  

Past due 31-90 days

        6,181           (2,520        3,661           949  

Past due 91-120 days

        2,588           (1,094        1,494           387  

Past due 120-180 days

        3,469           (3,219        250           65  

Past due over 180 days

        5,396           (5,292        104           27  
     

 

 

       

 

 

      

 

 

       

 

 

 

Total

   R$          118,232      R$          (15,534   R$          102,698      US$          26,634  
     

 

 

       

 

 

      

 

 

       

 

 

 

 

27


NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the six months ended June 30, 2018

(In thousands of reais and dollars, unless otherwise stated)

 

 

Cash and cash equivalents

The Company held cash and cash equivalents of R$395,962 and R$75,281 (US$19,524) at December 31, 2017 and June 30, 2018, respectively. Cash and cash equivalents are held with bank and financial institution counterparties, which are rated BB-, based on Standard & Poor’s credit rating for local currency credit issuers.

 

ii.

Liquidity risk

Liquidity risk is the risk that the Company will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. The Company’s approach to managing liquidity is to ensure, as far as possible, that it will have sufficient liquidity to meet its liabilities when they are due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Company’s reputation.

The following are the remaining contractual maturities of financial liabilities as of June 30, 2018. The amounts are gross and undiscounted and include contractual interest payments. Estimated interest payments were calculated based on the interest rate indexes of the Company’s floating interest rate indebtedness, in effect as of June 30, 2018.

 

          As at June 30, 2018  
          Carrying
amount
          Carrying
amount
          Contractuall cash flows  
         

 

         

 

          Within
1 year
            1—3
years
     3—5
years
          More than 5
years
 
          BRL           USD           BRL             BRL      BRL           BRL  

Financial liabilities:

                                

Long-term debt

   R$      239,120      US$      62,016      R$      158,795        R$        140,159        7,120      R$      7,806  

Trade accounts payable

        230,567           59,797           232,712                  —             —    

Reverse factoring

        91,671           23,775           92,645                  —             —    

Taxes and contributions payable

        19,325           5,012           19,325                  —             —    

Accrued expenses

        103,199           26,765           103,199                  —             —    

Other current liabilities

        30,215           7,836           30,215                  —             —    

Provision for labor, civil and tax risks

        14,769           3,830           —                    —             14,769  

Other non-current liabilities

        40           10           —                    —             40  
     

 

 

       

 

 

       

 

 

       

 

 

    

 

 

       

 

 

 
   R$      728,906     

US$

     189,041      R$      636,891        R$        140,159        7,120      R$      22,615  
     

 

 

       

 

 

       

 

 

       

 

 

    

 

 

       

 

 

 

The following are the Company’s unrestricted cash and cash equivalents and unused portion of the credit facility at December 31, 2017 and June 30, 2018:

 

            December 31, 2017             June 30, 2018  
            BRL             BRL             USD  

Unrestricted cash and cash equivalents

   R$          395,962      R$          75,281      US$          19,524  

Undrawn credit facility

        347           355           92  

Available liquidity

   R$          396,309      R$          75,636      US$          19,616  

 

28


NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the six months ended June 30, 2018

(In thousands of reais and dollars, unless otherwise stated)

 

 

In recent years, the Company has financed its operations in large part with cash flows from operating activities, bank financing and cash proceeds from issuances of common shares. The Company has taken a number of measures designed to improve liquidity, including: (i) reducing the number of monthly credit card installments from customers, (ii) renegotiating payment terms with suppliers, (iii) entering into sales of receivables with financial institutions, whereby the Company transfers its rights to receive cash flows from a portion of trade accounts receivable, limited to the amount given as securities for borrowing and debentures, (iv) entering into reverse factoring of trade accounts payable with financial institutions, whereby they commit to pay suppliers at an accelerated rate in exchange for a trade discount, (v) raise capital from financial investors by issuing notes convertible into our common shares with total proceeds amounting to US$30.0 million. These measures are enabling the Company to secure liquidity to maintain its operations.

 

iii.

Market risk

 

(a)

Foreign currency exchange risk

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

In the ordinary course of business, the Company’s subsidiaries purchase goods from vendors in both local functional currency and foreign currencies (mainly U.S. dollars).

The summary of quantitative data about the Company’s exposure to currency risk as reported to management of the Company is as follows:

 

     June 30, 2018  
     USD  

Trade accounts payable

     4,566  

Accrued expenses

     1,144  
  

 

 

 

Net statement of financial position exposure

     5,710  
  

 

 

 

The following table indicates the changes in the Company’s income or (loss) before tax that would arise if foreign exchange rates to which the Company has exposure at the reporting date had changed by 10% at that date, assuming all other risk variables remained constant.

 

     Profit or loss  

As at June 30, 2018

   Strenghthening      Weakening  
     BRL      BRL  

Net exposure in USD

   $ 2,202        (2,202

This sensitivity analysis assumes that the change in foreign exchange rates had been applied to re-measure those financial instruments held by the Company which expose it to foreign currency exchange risk at the reporting date. This analysis excludes differences that would result from the translation of the consolidated financial statements of foreign operations into the Company’s reporting currency, which is Brazilian Real. The sensitivity analysis above is conducted for monetary assets and liabilities denominated in foreign currencies other than functional currency as of June 30, 2018.

 

29


NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the six months ended June 30, 2018

(In thousands of reais and dollars, unless otherwise stated)

 

 

 

(b)

Interest rate risk

Interest rates are highly sensitive to many factors, including fiscal and monetary policies and domestic and international economic and political considerations, as well as other factors beyond the Company’s control. Interest rate risk is the exposure to loss resulting from changes in the level of interest rates and the spread between different interest rates. The Company’s debt has floating interest rates. As a result, the Company is exposed to changes in the level of interest rates and to changes in the relationship or spread between interest rates for its floating rate debt. The Company’s floating rate debt requires payments based on variable interest rate indexes such as CDI. Therefore, increases in interest rates may increase the Company’s loss before taxes by increasing its financial expense. If interest rates were to increase or decrease by 50 basis points, the Company´s financial expense on borrowings subject to variable interest rates would increase or decrease by R$648 (US$168) for the six months ended June 30, 2018. This analysis assumes that all other variables, in particular foreign currency exchange rate, remain constant.

To reduce the exposure of variable interest rate (CDI), the Company invests its excess cash and cash equivalents in short-term investments. If interest rates were to increase or decrease by 50 basis points, the Company’s financial income on short-term investments subject to variable interest rates would increase or decrease by R$180 (US$47) for the six months ended June 30, 2018.

 

(c)

Inflation risk

Brazil and other countries in Latin America, in general, have historically experienced high rates of inflation. Inflationary pressures persist, and actions taken in an effort to curb inflation, coupled with public speculation about possible future governmental actions, have in the past contributed to economic uncertainty in Brazil and other Latin American countries and heightened volatility in the Latin American securities market.

The inflation rate in Argentina has exceeded projections over the past quarters. As a result, the consumer price index (CPI) currently being used to monitor inflation in Argentina indicate three-year cumulative inflation rates that have increased significantly, also related to the depreciation of the Argentinian Peso. The Company expects, unless current trends reverse significantly, to apply IAS 29 – Financial Reporting in Hyperinflationary Economies for the Argentinian operations in financial statements for reporting periods as from July 1, 2018.

The Company continues to monitor the impact of inflation in order to minimize its effects through pricing strategies and productivity improvements.

 

21.

Share-based payments

The number of share options has been disclosed giving effect to the stock split of 1.0 for 3.0 occurred immediately prior to the completion of Initial Public Offering on April 18, 2017 (see note 1.2).

Under the Share Plan (the “Plan”) established by the Company, its Board of Directors (the “Board”) may grant up to 956,470 share options to key employees, directors and independent contractors. The options under the Plan were granted at the discretion of the Board; as such, the Board has full authority to establish terms and conditions of any award consistent with the provisions of the Plan and to waive any such terms and conditions at any time. The Plan was set up for the following purposes: (i) attracting, retaining and motivating its beneficiaries; (ii) adding value to quote-holders; and (iii) encouraging the view of entrepreneurs of the business.

 

(a)

Arrangements previously classified as cash-settled

Each share option granted under the Plan contains a vesting period, during which the participant cannot exercise the option, and are generally subject to the following vesting schedule: over a four-year period, 25% of the total common shares subject to the award will vest at the first anniversary of the vesting commencement date and the remaining common shares subject to the award will vest in equal monthly installments over the 36 months of continuous service thereafter.

The Company held a right of first refusal to repurchase the shares exercised according to the Plan. The Company only had this right of first refusal until it has become public and, after that date, holders of the common shares can trade them in the market.

 

 

30


NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the six months ended June 30, 2018

(In thousands of reais and dollars, unless otherwise stated)

 

 

In addition, the Company had a non-contractual practice of (i) providing its employees whose employment relationship was terminated (whether voluntarily or involuntarily) with a repurchase proposal to buy back its common shares held by such persons at a discount of their fair value and (ii) to provide holders of vested awards that terminate their relationship with the Company (whether voluntarily or involuntarily) with a bonus equivalent to the exercise price of their exercisable option.

Due to the characteristics of the transaction, these awards had been regarded as a cash-settled plan and the liability was remeasured at each reporting date. The liability previously recognized in these consolidated financial statements took into account the fair value of Company´s shares, expected forfeitures and the discount the Company has obtained when repurchasing such shares.

Following the completion of Initial Public Offering, the condition of the right of first refusal by the Company of repurchasing the shares exercised is no longer applicable, as prescribed in the Plan.

Therefore, upon completion of Initial Public Offering, the Company reclassified the share-based plan from cash-settled to equity-settled, and the impact was a reduction in Non-current liabilities and an increase in Equity (Capital Reserves) of R$13,706.

For purposes of the statement of cash flows, share based payment transactions are fully reported under operating activities.

The Company did not repurchase shares during the six months period ended June 30, 2017 and 2018.

As the Company will provide holders of vested awards with a bonus equivalent to the exercise price of the options if they decide to exercise the options, the fair value of the awards was estimated based on the fair value of the Company´s shares.

A summary of option activities under the Plan and changes during the period ended June 30, 2017 is set forth in the following table:

 

     Number of
Units
           Weighted
Average Exercise
Price Per Unit
    Weighted Average
Remaining
Contractual Term
(in years)
 
                  USD        

Cash-settled arrangements

         
                           

Oustanding at December 31, 2016

     346,767     US$          16.76       1.3 year  

Granted

     —            —      

Exercised

     —            —      

Forfeited/Cancelled

     (73,710        43,31    

Transfer from cash-settled arragements on April 12nd

     (273,057        (9.59  
  

 

 

      

 

 

   

 

 

 

Oustanding at June 30, 2017

     —       US$          —         0 year  

As mentioned before, the Company reclassified the share-based plan from cash-settled to equity-settled after conclusion of the IPO.

 

(b)

Equity-settled arrangements

During the first semesters of 2017 and 2018, the Company granted 127,500 and 108,000 share options, respectively, under the Plan with a non-market performance condition.

The share option expense has been recognized since the grant date and was fully recognized by October 2017. The Company only had a right of first refusal under the Plan until April 18, 2017 (IPO date), after that date, holders of the common shares can trade them in the market. Therefore, this arrangement has been regarded as equity-settled.

As the Company provides holders of vested awards with a bonus equivalent to the exercise price of the options, the fair value of the awards was estimated based on the fair value of the Company´s shares.

 

31


NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the six months ended June 30, 2018

(In thousands of reais and dollars, unless otherwise stated)

 

 

A summary of option activities under the Plan and changes during the period ended June 30, 2017 and 2018 is set forth in the following table:

 

Equity-settled arrangements

   Number of
Units
           Weighted
Average Exercise
Price Per Unit
     Weighted Average
Remaining
Contractual Term
(in years)
 
                  USD         

Oustanding at December 31, 2016

     23,250          8.10        0.8 year  

Granted

     127,500          8.10     

Exercised

     —            —       

Forfeited/Cancelled

     (22,302        8.10     

Transfer from cash-settled arragements on April 12nd

     273,057          9.59     
  

 

 

      

 

 

    

 

 

 

Oustanding at June 30, 2017

     401,505     US$          9.11        0.9 year  
  

 

 

      

 

 

    

 

 

 

Oustanding at December 31, 2017

     369,620          9.20        0.7 year  

Granted

     108,000          8.10     

Exercised

     —            —       

Forfeited/Cancelled

     (33,912        8.10     
  

 

 

      

 

 

    

 

 

 

Oustanding at June 30, 2018

     443,708     US$          9.02        2.1 years  
  

 

 

      

 

 

    

 

 

 

Vested at June 30, 2017

     164,733          

Vested at June 30, 2018

     405,262          

As of June 30, 2018, the Company had remaining unrecognized compensation cost of R$3,103 (US$805), which is expected to be recognized over a weighted average period of 2.1 years.

The Company recognized compensation expenses (income) for both cash and equity-settled arrangements of R$412 (US$107) and R$1,640 (US$425) for the three months ended June 30, 2017 and 2018, respectively.

The Company recognized compensation expense (income) for cash and equity-settled arrangements of R$(13,469) and R$2,145 (US$556) for the six months ended June 30, 2017 and 2018, respectively.

Upon completion of the initial public offering in April 2017, when the Company reclassified the share-based plan from cash-settled to equity-settled, the fair value per common share underlying the Company share options was re-measured to US$18.00 per common share, which was the price of the common shares on the date of its initial public offering. Subsequent to the initial public offering, the cost of equity-settled transactions is determined by the fair value at the grant date (and the Company uses the market price of the publicly traded common shares as an indicator of fair value).

The weighted average fair value of granted options were estimated at US$18.00 and US$16.12 per share at December 31, 2017 and June 30, 2018, respectively.

 

22.

Income taxes

Income tax expenses for the periods presented are based on the best estimate of the weighted average annual income tax rate expected for the full years.

The Company’s effective tax rate for the three and six months ended June 30, 2018 was 0% (three and six months ended June 30, 2017: 0%).

 

 

32


NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the six months ended June 30, 2018

(In thousands of reais and dollars, unless otherwise stated)

 

 

23.

Related party transactions

The consolidated subsidiaries of the Company as of December 31, 2017 and June 30, 2018 are listed below:

 

          Percentage Ownership
and Voting Interest
 

Company

   Country of
Incorporation
   December 31,
2017
    June 30,
2018
 

Netshoes Holding, LLC

   United States of America      100.00     100.00

NS2 Com Internet S.A.

   Brazil      100.00     100.00

NS3 Internet S.A.

   Argentina      98.17     98.17

NS4 Com Internet S.A.

   Mexico      100.00     100.00

NS4 Servicios de México S.A. C.V.

   Mexico      100.00     100.00

NS5 Participações Ltda.

   Brazil      99.99     99.99

NS6 Serviços Esportivos Ltda.

   Brazil      100.00     100.00

The Company has the following related party transactions:

 

            December 31, 2017             June 30, 2018  
            BRL             BRL           USD  

Balances from non-controlling owners

                 

Receivables

   R$          12      R$          9      US$      2  

 

            Six months ended in June 30,             Three months ended in June 30,  
            2017                    2018             2018             2017            2018             USD Total  
            BRL                    BRL             USD             BRL            BRL             USD  

Income statement amounts

                                     

Key management personnel compensation

                                     

Compensation and short-term benefits

   R$             8,251      R$          6,225      US$          1,614      R$          6,290     R$          2,429      US$          630  

Share-based payments

           393           287           74           (55        61           16  
        

 

 

       

 

 

       

 

 

       

 

 

      

 

 

       

 

 

 

Total

   R$             8,644      R$          6,512      US$          1,688      R$          6,235     R$          2,490      US$          646  
        

 

 

       

 

 

       

 

 

       

 

 

      

 

 

       

 

 

 

Financial expenses

                                     

Convertible notes interest

           2,069           —             —             503          —             —    

 

24.

Commitments and contingencies

 

(a)

Litigation

The Company is a party to legal proceedings and claims which arise during the ordinary course of business. It reviews its legal proceedings and claims, conducts regulatory reviews and inspections, and reviews other legal matters on an ongoing basis and follows appropriate accounting guidance when making accrual and disclosure decisions. The Company establishes provisions for those contingencies when the incurrence of a loss is probable and can be reasonably estimated, and the Company discloses the amount provided for and the amount of a reasonably possible loss in excess of the amount provided for, if such disclosure is necessary for its financial statements not to be misleading. The Company does not record a provision when the likelihood of loss being incurred is probable, but the amount cannot be reasonably estimated, or when the loss is believed to be only reasonably possible or remote. The Company´s assessment of whether a loss is reasonably possible, or probable is based on its assessment and consultation with legal counsel regarding the ultimate outcome of the matter following all appeals. After taking into consideration legal counsel’s evaluation of such actions, management is of the opinion that their outcome will not have a significant effect on the Company’s consolidated financial statements, other than the amount already provided for.

 

 

33


NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the six months ended June 30, 2018

(In thousands of reais and dollars, unless otherwise stated)

 

 

Breakdown of and changes in provisions whose unfavorable outcome is probable are as follows:

 

            Labor            Civil            Tax             Total            Total  
            BRL            BRL            BRL             BRL            USD  

As of December 31, 2017

   R$          823     R$          1,023     R$          10,677      R$          12,523     U$          3,248  

Additions, net of reversal

        (37        2,411          2,000           4,374          1,134  

Payments

        (77        (2,051        —             (2,128        (552
     

 

 

      

 

 

      

 

 

       

 

 

      

 

 

 

As of June 30, 2018

   R$          709     R$          1,383     R$          12,677      R$          14,769     U$          3,830  
     

 

 

      

 

 

      

 

 

       

 

 

      

 

 

 

Labor claims presented above are related to different matters, such as overtime and salary equalization. Labor lawsuits are not individually significant.

Civil claims are related to the Company´s ordinary course of operations, and generally relate to consumer claims. None of these lawsuits are individually significant.

The Company has a tax claim related to challenging Brazilian tax authorities’ interpretation that retailers of imported goods are subject to paying additional sales taxes on manufactured products (“IPI”) and PIS and COFINS on financial income.

In September 2017, the Company received a tax assessment amounting to R$89,013 (US$23,085) from the Brazilian tax authorities, asserting that the Company had unduly considered PIS and COFINS tax credits related to marketing and information technology services, effectively reducing the PIS and COFINS payable calculation basis. The Company´s assessment, supported by external lawyers, is that the risk of loss of this case is possible and therefore, no provision has been recognized in relation to this claim.

 

(b)

Judicial deposits

In some situations, in connection with a legal requirement or presentation of guarantees, judicial deposits are made to secure the continuance of the claims under discussion. These judicial deposits may be required for claims whose likelihood of loss was analyzed by the Company, grounded on the opinion of its legal advisors as a probable, possible or remote loss.

Until the case is settled, the judicial deposits amounts accrues interest at Brazil’s official short-term interest rate (SELIC).

 

            December 31, 2017             June 30, 2018  
            BRL             BRL             USD  

VAT taxes Brazil (PIS and COFINS) (a)

   R$          94,909      R$          98,167      US$          25,460  

PIS and COFINS on financial income (a)

        2,558           2,924           758  

Tax on manufactured products (IPI) (b)

        7,489           9,606           2,491  

Other

        1,958           2,235           580  
     

 

 

       

 

 

       

 

 

 

Total judicial deposits

        106,914           112,932           29,289  
     

 

 

       

 

 

       

 

 

 

 

a)

Contribution tax on gross revenue for social integration program (PIS) and social security financing (COFINS):

The Company is involved in disputes related to:

 

  i)

Exclusion of VAT tax (ICMS) from PIS and COFINS calculation basis, which started in November 2014. On March 15, 2017, the Brazilian Federal Supreme Court decided for the unconstitutionality of considering the inclusion of the VAT tax (ICMS) from PIS and COFINS calculations basis. Based on this decision, the Company’s lawyers estimated chance of losing of this legal dispute remote as of December 31, 2017 and June 30, 2018. Since August of 2017, the Brazilian tax authority has ceased the obligation to make the judicial deposit. The Company is currently waiting the court to define which procedures are necessary to refund the judicial deposit.

 

  ii)

A constitutional challenge on the imposition of PIS and COFINS on financial income.

 

b)

Tax on manufactured products (IPI)

The Company is involved in disputes related to the levy of taxes on manufactured products (IPI) over products it sells and obtained a preliminary injunction allowing it not to pay IPI on imports and sales of goods since it is a trading company.

 

 

34


NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the six months ended June 30, 2018

(In thousands of reais and dollars, unless otherwise stated)

 

 

25.

Subsequent events

Debt restructuring

In July 2018, the subsidiary NS2.Com Internet S.A. renegotiated a secured borrowing facility agreement with Banco do Brasil S.A. for an aggregate principal amount of R$96.2 million (US$24.9 million). Principal and interest on the loan are payable on a monthly basis, and the maturity, after renegotiation, changed from August 2020 to July 2021, with a 12-month grace-period (only principal), and the Company paid a debt renegotiation fee of 1.2% over the renegotiated value.

In July 2018, the subsidiary NS2.Com Internet S.A. renegotiated a secured borrowing facility agreement with Banco do Bradesco S.A. for an aggregate principal amount of R$46.1 million (US$11.96 million). Principal and interest on the loan are payable on a monthly basis, and the maturity, after renegotiation, changed from September 2020 to July 2021, with a 12-month grace-period (only principal).

In August 2018, the subsidiary NS2.Com Internet S.A. renegotiated a nonconvertible notes (Debentures) agreement for an aggregate principal amount of R$66.1 million (US$17.14 million). Principal and interest on the loan are payable on a quarterly basis, and the maturity, after renegotiation, changed from March 2020 to September 2021, with a 12-month grace-period (only principal).

Mexico operation deal

The subsidiaries (NS2.Com Internet S.A. and NS5 Participações Ltda.) have signed an agreement with Grupo Sierra Capital, to sell the entirety of its Mexico operations (NS4.Com Internet S.A. and NS4 Servicios de Mexico S.A. de C.V.), which belongs to the reportable International segment, through the sale of all Shares which they represent. This transaction is expected to close in the third quarter of 2018 and is subject to customary (a) closing conditions, and (b) purchase price adjustment mechanisms.

***********

 

35


SIGNATURE

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereto duly authorized.

 

Netshoes (Cayman) Limited
By:   /s/ Marcio Kumruian
Name:   Marcio Kumruian
Title:  

Chief Executive Officer

Date: August 9, 2018

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