Filed Pursuant to Rule 424(b)(4)

PROSPECTUS Registration No. 333-248494

 

 

 

BETTERWARE DE MÉXICO, S.A.B. DE C.V.

 

7,226,025 Ordinary Shares

1,671,900 Warrants

250,000 Unit Purchase Option

 

This prospectus relates to the following securities of Betterware de Mexico, S.A.B. de C.V., a Mexican company, formerly Betterware de México, S.A.P.I. DE C.V., (“Betterware,” “we” or the “Company”): (i) ordinary shares that are issuable upon exercise of our outstanding warrants, and (ii) ordinary shares and warrants which may be offered for sale from time to time by the selling shareholders identified in this prospectus.

 

Accordingly, this prospectus covers the offering of:

 

5,804,125 ordinary shares, no par value per share, of the Registrant (“ordinary shares”), issuable upon the exercise of 5,804,125 warrants previously registered in connection with the Business Combination (as defined below), 4,230,237 of which are currently outstanding and held by third parties and 1,573,888 of which are currently held by the registrant and may be reissued from time to time after the date hereof. The offering of such warrants and the ordinary shares issuable upon exercise of such warrants was registered on our registration statement on Form F-4 with File No. 333-233982 (the “Prior Registration Statement”). Each warrant is currently exercisable for one ordinary share at a price of US$11.50 per share, which exercise price is payable to us;

 

1,421,900 ordinary shares issued in connection with the Business Combination registered for resale by the Selling Shareholders;

 

1,421,900 warrants issued in connection with the Business Combination registered for resale by the Selling Shareholders;

 

Unit purchase options exercisable for 250,000 ordinary shares and warrants to purchase an additional 250,000 ordinary shares registered for resale by the Selling Shareholders;

 

250,000 ordinary shares issuable upon exercise of the unit purchase options registered for resale by the Selling Shareholders;

 

Warrants to purchase an additional 250,000 ordinary shares issuable upon exercise of the unit purchase options registered for resale by the Selling Shareholders; and

 

250,000 ordinary shares issuable upon the exercise of the warrants underlying the unit purchase options registered for resale by the Selling Shareholders.

 

We do not know whether the holders of the warrants will exercise any of the warrants. If all of the warrants described in this prospectus are exercised in full, we will issue 5,804,125 ordinary shares and we will receive aggregate net proceeds of approximately US$66,747,438. The Company has recently repurchased 1,540,288 warrants. As of the date of this prospectus, the outstanding number of warrants is 4,263,837. Therefore, if all of the outstanding warrants are exercised in full, we will issue 4,263,837 ordinary shares and we will receive aggregate net proceeds of approximately US$49,034,125.

 

The selling shareholders may offer all or part of the shares for resale from time to time through public or private transactions, at either prevailing market prices or at privately negotiated prices. We will not receive any proceeding from the resale of the securities offered hereby by the selling shareholders.

 

Our ordinary shares, at nor par value, are currently listed on the NASDAQ (as defined below) under the symbol “BWMX” and our warrants, exercisable for one ordinary share, are currently listed on the OTCQX market under the symbol “BWXMF.” On September 3, 2020, the closing price for the ordinary shares on the NASDAQ was US$18.69 per ordinary share and on September 3, 2020, the closing price for the warrants on the OTCQX market was US$6.56 per warrant.

 

We may amend or supplement this prospectus from time to time by filing amendments or supplements as required. You should read this entire prospectus and any amendments or supplements carefully before you make your investment decision.

 

Investing in our ordinary shares involves risks. See “Risk Factors” beginning on page 13 of this prospectus.

 

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

 

Prospectus dated September 14, 2020.

 

 

 

Table of Contents

 

CONVENTIONS WHICH APPLY TO THIS PROSPECTUS 1
INDUSTRY AND MARKET DATA 2
PROSPECTUS SUMMARY 3
SUMMARY OF THE OFFERING 6
SELECTED HISTORICAL FINANCIAL DATA 8
EXCHANGE RATES 11
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS 12
RISK FACTORS 13
USE OF PROCEEDS 28
BUSINESS 29
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 34
MANAGEMENT 47
DESCRIPTION OF SHARE CAPITAL 53
MARKET PRICE AND DIVIDENDS 55
PRINCIPAL SHAREHOLDERS 56
SELLING SHAREHOLDER 57
PLAN OF DISTRIBUTION 58
SHARES ELIGIBLE FOR FUTURE SALE 60
U.S. FEDERAL INCOME TAX CONSIDERATIONS 62
EXPENSES RELATED TO THE OFFERING 67
ADDITIONAL INFORMATION 68
WHERE YOU CAN FIND MORE INFORMATION 69
INDEX TO FINANCIAL STATEMENTS F-1

 

You should rely only on the information contained in this prospectus and any free-writing prospectus we prepare or authorize. We have not authorized anyone to provide you with different information, and we take no responsibility for any other information others may give you. If anyone provides you with different or inconsistent information, you should not rely on it. We are not making an offer to sell securities in any jurisdiction where the offer or sale is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front of this prospectus.

 

For investors outside the United States: we have not done anything that would permit this offering or possession or distribution of this prospectus or any free writing prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus or any free writing prospectus must inform themselves about, and observe any restrictions relating to, the offering of the ordinary shares and the distribution of this prospectus and any free writing prospectus outside the United States.

 

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CONVENTIONS WHICH APPLY TO THIS PROSPECTUS

 

In this prospectus, unless otherwise specified or the context otherwise requires:

 

“$,” “US$” and “U.S. dollar” each refer to the United States dollar; and

 

“MX$,” “Ps.” and “peso” each refer to the Mexican peso.

 

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INDUSTRY AND MARKET DATA

 

In this prospectus, we rely on and refer to information and statistics regarding the direct selling industry and our competitors from market research reports and other publicly available sources. We have supplemented such information where necessary with our own internal estimates and information obtained from discussions with our customers, taking into account publicly available information about other industry participants and our management’s best view as to information that is not publicly available. In addition, while we believe that our internal company research is reliable and the definitions of our industry and market are appropriate, neither our research nor these definitions have been verified by any independent source. Further, while we believe the market opportunity information included in this prospectus is generally reliable, such information is inherently imprecise. Projections, assumptions and estimates of the future performance of the industry in which we operate and our future performance are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors.” These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us. See the section entitled “Cautionary Note Regarding Forward-Looking Statements.”

 

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PROSPECTUS SUMMARY

 

This summary highlights certain information appearing elsewhere in this prospectus. Because it is only a summary, it does not contain all of the information that you should consider before investing in our ordinary shares and it is qualified in its entirety by, and should be read in conjunction with, the more detailed information appearing elsewhere in this prospectus. Before you decide to invest in our ordinary shares, you should read the entire prospectus carefully, including “Risk Factors” and the financial statements and related notes included in this prospectus.

 

Overview

 

Company Overview

 

Betterware de México, S.A.B. de C.V., formerly Betterware de México, S.A.P.I. DE C.V., a Mexican company founded in 1995 (“Betterware,” “we” or the “Company”), is a leading direct-to-customer company in Mexico. Betterware is focused on the home organization segment, with a wide product portfolio including home solutions, kitchen and food preservation, technology and mobility, among other categories.

 

Betterware sells its products through nine catalogues published throughout the year (approximately six weeks outstanding each) with an offer of approximately 400 products per catalogue. Betterware constantly innovates introducing approximately 300 products every year, representing 10% – 15% of the products in a catalogue. All of the products are Betterware branded with unique characteristics and manufactured by +200 certified producers in Mexico and China, and then delivered to Betterware’s warehouses in Guadalajara, Jalisco where they process and pack the products.

 

Betterware sells its products through a unique two-tier sales model that is comprised of more than 438,000 Distributors and Associates across Mexico, that serve +3 million households every six weeks in +800 communities. The Distributors and Associates are monitored tightly through an in-house developed business intelligence platform that tracks weekly performance and has a detailed mapping system of the country to identify potential areas to penetrate and increase the network.

 

Betterware’s business model is tailored to Mexico’s unique geographic, demographic and economic dynamics, where communities are small and scattered across the country, with very low retail penetration and difficult to fulfill last mile logistics, middle-income consumers are emerging. Additionally, the business model is resilient to economic downturns given low average sales price to consumers and also because being a Distributor or Associate represents an additional source of income for households. As a result, Betterware’s operations are not subject to significant seasonal fluctuations.

 

Betterware has shown long term sustainable double-digit growth rates in revenue and EBITDA and has built a platform that can grow locally and in other regions.

 

The Business Combination

 

The Merger and Company Restructure

 

On October 16, 2018, DD3 Acquisition Corp., a British Virgin Islands company (“DD3”), consummated its initial public offering of 5,000,000 units and on October 23, 2018, the underwriters for DD3’s initial public offering purchased an additional 565,000 units pursuant to the partial exercise of their over-allotment option. The units in DD3’s initial public offering were sold at an offering price of US$10.00 per unit, generating total gross proceeds of US$55,650,000.

 

On August 2, 2019, DD3 entered into a Combination and Stock Purchase Agreement (as amended, the “Combination and Stock Purchase Agreement”) with Campalier, S.A. de C.V., a Mexican sociedad anónima de capital variable (“Campalier”), Promotora Forteza, S.A. de C.V., a Mexican sociedad anónima de capital variable (“Forteza”), Strevo, S.A. de C.V., a Mexican sociedad anónima de capital variable (“Strevo”, and together with Campalier and Forteza, “Sellers”), Betterware, BLSM Latino América Servicios, S.A. de C.V., a Mexican sociedad anónima de capital variable (“BLSM”), and, solely for the purposes of Article XI therein, DD3 Mex Acquisition Corp, S.A. de C.V., pursuant to which DD3 agreed to merge with and into Betterware (the “Merger”) in a Business Combination that resulted in Betterware surviving the Merger and BLSM becoming a wholly-owned subsidiary of Betterware.

 

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As part of the Combination and Stock Purchase Agreement, and prior to the closing of the Merger, DD3 was redomiciled out of the British Virgin Islands and continued as a Mexican corporation pursuant to Section 184 of the Companies Act and Article 2 of the General Corporations Law.

 

Following the execution of the Combination and Stock Purchase Agreement, on February 21, 2020, the Company’s shareholders approved, a corporate restructure of the Company (the “Company Restructure”) which resulted in, among other things (i) an amendment to the Company’s by-laws to allow for the issuance of Series C and Series D non-voting shares, and (ii) a redistribution of the Company’s capital stock as follows: (a) fixed portion of the Company’s capital stock represented by 3,075,946 Series A ordinary voting shares, and (b) the variable portion of the Company’s capital stock represented by (x) 1,961,993, Series B ordinary voting shares, (y) 897,261 Series C ordinary non-voting shares (“Series C Shares”), and (z) 168,734 Series D ordinary non-voting shares (“Series D Shares”). In addition, Strevo transferred one, Series A ordinary voting share of Betterware to Campalier (the “Campalier Share”), which remained subject to that certain Share Pledge Agreement, dated July 28, 2017, entered between Strevo, as pledgor, MCRF P, S.A. de C.V. SOFOM, E.N.R. (“CS”), as pledgee, and Betterware.

 

Immediately after the Company’s Restructure and the transfer of the Campalier Share to Campalier, Forteza indirectly owned, through Banco Invex, S.A., Invex Grupo Financiero (“Invex”), as trustee of the irrevocable management and security trust No. 2397 (the “Invex Security Trust”), executed on March 26, 2016, as amended, with CS, as beneficiary, approximately 38.94% of the outstanding common stock of Betterware, and Campalier indirectly owned, through the Invex Security Trust, approximately 61.06% of the outstanding common stock of Betterware.

 

On March 9, 2020, the Invex Security Trust released the Series C Shares and the Series D Shares to Campalier and Forteza, respectively, that were held under the Invex Security Trust.

 

On March 10, 2020, CS, as pledgee, entered into a Termination of the Share Pledge Agreement over the Campalier Share with Campalier, as pledgor, and Betterware. In addition, CS, as beneficiary, Invex, as trustee, and Campalier, as settlor, entered into a Transfer Agreement, where Campalier transferred the Campalier Share to the Invex Security Trust.

 

Upon such transfer to the Invex Security Trust, the Company’s shareholders approved (i) the sale of all or a portion of such Company’s Series C and Series D shares to DD3 Acquisition Corp., S.A. de C.V. (the “DD3 Acquisition”), (ii) the Merger, (iii) the amendment of the Company’s by-laws to become a sociedad anónima promotora de inversion de capital variable, (iv) the increase of the Company’s capital stock by MX$94,311,438.00, through the issuance of 2,211,075 ordinary shares, without nominal value, to be subscribed by the shareholders of DD3 Acquisition Corp., S.A. de C.V., and (v) the increase of the Company’s capital stock by MX$872,878,500.00 through the issuance of 4,500,000 ordinary treasury shares without nominal value, offered for subscription and payment under the Company’s initial public offering in the U.S. to be completed no later than December 31, 2020 and filed with the SEC under our Registration Statement on Form F-1, which became effective on January 22, 2020.

 

For purposes of this prospectus, the Merger, the Company Restructure and all related actions undertaken in connection thereto are referred to as the “Business Combination.”

 

Closing of the Business Combination

 

Upon satisfaction of certain conditions and covenants as set forth under the Combination and Stock Purchase Agreement, the Business Combination was consummated and closed on March 13, 2020 (the “Closing”). At Closing, the following actions occurred:

 

(i) DD3 issued to the Sellers as consideration for the purchase of a portion of the Series C and Series D shares and the BLSM shares outstanding as of December 31, 2019, a debt acknowledgement in an amount equal to $15,000,546.00;

 

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(ii) all of Betterware shares issued and outstanding immediately prior to the Closing were canceled and, Campalier and Forteza received, directly and indirectly (through the Invex Security Trust), 18,438,770 and 11,761,175, respectively, of Betterware’s shares; and

 

(iii) all of DD3’s ordinary shares issued and outstanding immediately prior to the Closing were canceled and exchanged for Betterware shares on a one-for-one basis.

 

Immediately after the Business Combination closed, 2,040,000 shares of the Company offered for subscription and payment under the Company’s initial public offering in the U.S. on the Nasdaq Capital Market (“Nasdaq”) were subscribed and paid for by different investors. The remaining 2,460,000 ordinary treasury shares were initially cancelled but recently re-issued and hold on the Company’s treasury account.

 

As a result of the Business Combination and the subscription and payment of 2,040,000 Betterware’s shares in Nasdaq, all of Betterware’s shares issued and outstanding were canceled and new shares were issued. As a result, of the Business Combination, Betterware has 34,451,020 issued and outstanding shares, distributed as follows:

 

(i) 25,669,956 shares, representing 74.5% of the total capital stock, are held by Invex Security Trust, as trustee and for the benefit of CS, as first place beneficiary thereunder;

 

(ii) 1,764,175 shares, representing 5.1% of the total capital stock, are owned by Forteza;

 

(iii) 2,765,814 shares, representing 8.0% of the total capital stock, are owned by Campalier;

 

(iv) 2,211,075 shares, representing 6.4% of the total capital stock, are owned by former DD3 Shareholders as a result of the cancellation of DD3’s ordinary shares and exchange for Betterware shares on a one-for-one basis; and

 

(v) 2,040,000 shares, representing 5.9% of the total capital stock, are owned by the F-1 Investors.

 

Upon consummation of the Merger, Betterware now presents consolidated financial statements, which include its wholly owned subsidiary BLSM.

 

The following diagram depicts the current organizational structure of Betterware after the consummation of the Business Combination:

 

 

Corporate Information

 

We are a Mexican entity incorporated as a corporation in 1995, and subsequently became a public company upon the consummation of the Business Combination on March 13, 2020. Our registered office is located at Luis Enrique Williams 549, Parque Industrial Belenes Norte, Zapopan, Jalisco, México, C.P. 45150.

 

Our principal executive office is located at Luis Enrique Williams 549, Parque Industrial Belenes Norte, Zapopan, Jalisco, México, C.P. 45150, Mexico, and our telephone number at this office is +52 (33) 3836-0500. Our principal website address is http://ri.betterware.com.mx/. We do not incorporate the information contained on, or accessible through, our websites into this prospectus, and you should not consider it a part of this prospectus. Our agent for service of process in the United States is Puglisi & Associates located at 850 Library Avenue, Suite 204, Newark, Delaware 19715.

 

As a result of the registration process of our ordinary shares before the Company in the National Securities Registry in Mexico and the listing of those shares with the Bolsa Institucional de Valores, S.A. de C.V. in Mexico (BIVA), on August 17, 2020, the Company changed its corporate name from Betterware de México, S.A.P.I. DE C.V. to Betterware de México, S.A.B. de C.V. As of the date of this prospectus, the registration and listing process in Mexico are still pending.

 

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SUMMARY OF THE OFFERING

 

The summary below describes the principal terms of this offering. The “Description of Share Capital” section of this prospectus contains a more detailed description of our ordinary shares

 

The offering of an aggregate of 7,226,025 ordinary shares, 1,671,900 warrants and 250,000 units purchase options are being offered hereby, comprising:

 

Ordinary Shares, no par value per share, underlying Warrants:    

The offering of 5,804,125 of our ordinary shares issuable upon exercise of our warrants.  The offering of such ordinary shares issuable upon exercise of such warrants was registered on our registration statement on Form F-4 with File No. 333-233982.  Upon exercise and issuance, such ordinary shares will be freely tradable under U.S. securities laws.  For the avoidance of doubt, this prospectus does not register the resale of the ordinary shares that are issuable upon the exercise of the warrants.

     
Ordinary Shares, no par value per share  

The resale of up 1,421,900 of our ordinary shares issued in connection with the Business Combination registered for resale by the Selling Shareholders.

     
Warrants to Purchase Ordinary Shares  

The resale of up 1,421,900 warrants issued in connection with the Business Combination registered for resale by the Selling Shareholders.

     
Unit Purchase Options(11)   Unit purchase options exercisable for 250,000 ordinary shares and warrants to purchase an additional 250,000 ordinary shares registered for resale by the Selling Shareholders
     
Ordinary Shares, no par value, underlying the Unit Purchase Option   250,000 ordinary shares issuable upon exercise of the unit purchase options registered for resale by the Selling Shareholders
     
Warrants to Purchase Ordinary Shares underlying the Unit Purchase Option   Warrants to purchase an additional 250,000 ordinary shares issuable upon exercise if the unit purchase options registered for resale by the Selling Shareholders
     
Ordinary Shares, no par value per share, underlying Warrants underlying Unit Purchase Option   250,000 ordinary shares issuable upon the exercise of the warrant underlying the unit purchase options registered for resale by the Selling Shareholders
     
Ordinary Shares Outstanding   As of the date of this prospectus, the Registrant’s issued share capital consisted of 34,451,020 ordinary shares issued and outstanding.
     
Warrants Outstanding   As of the date of this prospectus, there are 5,804,125 warrants outstanding, comprising (i) 4,230,237 public warrants, and (ii) 1,573,888 warrants issued in a private placement.

 

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    The public warrants are exercisable on a one-for-one basis for ordinary shares.  Each public warrant is currently exercisable for one ordinary share at a price of US$11.50 per ordinary share, which exercise price is payable to the Registrant.  The private warrants will be exercisable on a cashless basis and be non-redeemable so long as they are held by the initial purchasers or their permitted transferees.
     
Use of Proceeds  

We do not know whether the holders of the warrants will exercise any of the warrants. If all of the warrants described in this prospectus are exercised in full, we will issue 5,804,125 ordinary shares and we will receive aggregate net proceeds of approximately US$66,747,438. The Company has recently repurchased 1,540,288 warrants. As of the date of this prospectus, the outstanding number of warrants is 4,263,837. Therefore, if all of the outstanding warrants are exercised in full, we will issue 4,263,837 ordinary shares and we will receive aggregate net proceeds of approximately US$49,034,125. We intend to use a portion of the proceeds from any exercise of the warrants for general corporate purposes.

 

The selling shareholders will receive all of the proceeds from the sale of any ordinary shares sold by them pursuant to this prospectus. We will not receive any proceeds from these sales. See “Use of Proceeds” in this prospectus.

     
Voting Rights   Holders of our ordinary shares are entitled to one vote per ordinary share at all shareholder meetings.  See “Description of Share Capital.”
     
Dividend Policy   The declaration and payment of any dividends in the future will be determined by our board of directors in its discretion, and will depend on a number of factors, including our earnings, capital requirements, overall financial condition, applicable law and contractual restrictions.  See “Description of Share Capital-Dividends.”
     
Market for our Ordinary Shares and Warrants   Our ordinary shares are currently traded on the NASDAQ under the symbol “BWMX” and our warrants are currently listed on the OTCQX market under the symbol “BWXMF.”
     
Risk Factors   Investing in our ordinary shares involves substantial risks.  See “Risk Factors” for a description of certain of the risks you should consider before investing in our ordinary shares.

 

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SELECTED HISTORICAL FINANCIAL DATA

 

The selected consolidated statement of financial position data as of June 30, 2020 and the selected consolidated and combined statement of income and cash flow data for the six-month period ended June 30, 2020 and 2019 have been derived from our unaudited interim consolidated and combined financial statements included elsewhere in this prospectus and the selected combined statement of financial position data as of December 31, 2019 and 2018 and the selected combined statement of income and cash flow data for the years ended December 31, 2019, 2018 and 2017 have been derived from our audited combined financial statements included elsewhere in this prospectus.

 

The following selected consolidated and combined financial information and other data of the Company should be read in conjunction with, and are qualified by reference to, “Item 5. Operating and Financial Review and Prospects” and our unaudited interim consolidated and combined financial statements and audited combined financial statements and the notes thereto included elsewhere in this prospectus. Our financial information is presented in thousands of Mexican pesos unless otherwise instructed.

 

We prepare our interim consolidated and combined financial statements in accordance with IAS 34 – Interim Financial Reporting. We prepare our audited combined financial statements in accordance with IFRS as issued by the IASB.

 

Selected Statement of Financial Position Data as of June 30, 2020 and December 31, 2019 and 2018
(In thousands of Mexican pesos “Ps.”)

 

    June 30,     December 31,  
    2020     2019     2018  
Assets                  
Current Assets:                  
Cash and cash equivalents   Ps. 520,805       213,697     177,383  
Trade accounts receivable, net     515,299       247,087     198,776  
Inventories     520,214       345,554     302,206  
Derivative financial instruments     84,002       -     -  
Other current assets(1)     107,556       74,368     51,485  
Total current assets     1,747,876       880,706     729,851  
Property, plant and equipment, net     380,782       207,350     42,972  
Intangible assets, net     309,055       310,965     312,099  
Goodwill     348,441       348,441     348,441  
Other non-current assets(2)     25,208       42,264     24,235  
Total non-current assets     1,063,486       909,020     727,748  
    Ps. 2,811,362       1,789,726     1,457,598  

 

(1) Includes also prepaid expenses and due from related parties.
(2) Includes also right of use assets, net, and deferred income tax.

 

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Selected Statement of Financial Position as of June 30, 2020 and December 31, December 31, 2019 and 2018
(In thousands of Mexican pesos “Ps.”)

 

    June 30,     December 31,  
    2020     2019     2018  
Liabilities and Net Parent Investment                  
Current Liabilities:                  
Borrowings   Ps. 73,333       148,070       90,691  
Accounts payable to suppliers     1,220,456       529,348       445,241  
Other current liabilities(1)     419,880       200,940       198,512  
Total current liabilities     1,713,669       878,358       734,444  
Non-current Liabilities:                        
Deferred Income tax     81,315       78,501       70,627  
Borrowings     350,189       529,643       562,788  
Other non-current liabilities(2)     39,061       28,742       9,475  
Total non-current liabilities     470,565       636,886       642,890  
Total liabilities     2,184,234       1,515,244       1,377,334  
Net parent investment     627,128       274,482       80,264  
    Ps. 2,811,362       1,789,726       1,457,598  

 

(1) Includes accrued expenses, provisions, income tax and value added tax payable, dividends payable, statutory employee profit sharing, lease liability and derivative financial instruments.
(2) Includes employee benefits, lease liability, and derivative financial instruments.

 

Selected Statement of Profit or Loss Data for the six months ended June 30, 2020 and 2019 and the years ended December 31, 2019, 2018 and 2017
(In thousands of Mexican pesos “Ps.”)

 

    June 30,     December 31,  
    2020     2019     2019     2018     2017  
Net revenue   Ps. 2,388,403       1,535,622       3,084,662       2,316,716       1,449,705  
Cost of sales     1,112,572       638,648       1,280,829       958,469       558,105  
Gross profit     1,275,831       896,974       1,803,833       1,358,247       891,600  
Administrative expenses     231,651       169,856       319,133       249,148       204,555  
Selling expenses     317,780       272,930       551,300       454,016       291,834  
Distribution expenses     114,795       67,333       121,155       103,336       64,349  
Operating income     611,605       386,855       812,245       551,747       330,862  
Financing cost, net(1)     (10,147 )     (45,932 )     (107,411 )     (102,301       (26,237 )
Income before income taxes     601,458       340,923       704,834       449,446       304,625  
Total income taxes     187,605       106,057       232,692       150,179       95,951  
Net income for the period   Ps. 413,853       234,866       472,142       299,267       207,674  

 

(1) Includes interest expense, interest income, unrealized loss/gain in valuation of financial derivative instruments and foreign exchange loss/gain.

 

The following table shows the income and share data used in the calculation of basic earnings per share for the six month period ended June 30, 2020 and 2019 and for the years ended December 31, 2019, 2018 and 2017:

 

    June 30,     December 31,  
    2020     2019     2019     2018     2017  
Net income (in thousands of pesos)   Ps. 413,853       234,866       472,142       299,267       207,674  
Attributable to shareholders                                        
Shares (in thousands of shares)                                        
Weighted average of outstanding shares     32,680       30,200       30,200       30,200       30,200  
Basic and diluted earnings per share (pesos per share)(1)     12.66       7.78       15.63       9.91       6.88  

 

(1) Diluted earnings per share does not take into consideration the potential dilution impact of: (i) DD3 warrants that were automatically converted into warrant to purchase up to 5,084,125 shares of Betterware, (ii) the units purchase option to issue 250,000 shares of Betterware, and (iii) the warrants for 250,000 shares of Betterware. This is because the average price of the shares for the six-month period ended June 30, 2020 was below the exercise price under the agreements.

 

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IFRS requires that the calculation of basic and diluted earnings per share (“EPS”) for all periods presented be adjusted retrospectively when the number of ordinary or potential ordinary shares outstanding increases as a result of a capitalization, bonus issue, or share split, or decreases as a result of a reverse share split. If such changes occur after the statement of financial position date but before the financial statements are authorized, the EPS calculation for those and any prior period financial statements presented are based on the new number of shares.

 

As a result of the cancellation and issuance of new shares under the Business Combination, the EPS in the combined financial statements has been adjusted for all periods presented to reflect the amount of shares attributable to Betterware original shareholders resulting from the Business Combination. Such adjustment resulted in an EPS of 87.7% of the total outstanding shares, or 30,199,945 shares (without giving effect to the DD3 shareholders’ capital contribution and the proceeds from the Nasdaq listing). The effects of the DD3 transaction, including the related share issuance that resulted in DD3’s shareholders obtaining a 6.4% ownership interest and the capital contribution of $7,519 (Ps. 181,734), and the effects of the Nasdaq listing, have not been included in the calculation of EPS for the years ended 2019, 2018 and 2017 as presented as they are considered to be non-adjusting subsequent events that are reflected in Betterware’s interim consolidated financial statements as of June 30, 2020, which include BLSM as its wholly owned subsidiary.

 

Reconciliation of Non-IFRS Data

 

Non IFRS Financial Measures

 

We define “EBITDA” as profit for the year adding back the depreciation of property, plant and equipment and right of use assets, amortization of intangible assets, financing cost, net and total income taxes. Adjusted EBITDA also excludes the effects of gains or losses on sale of fixed assets and adds back other non-recurring expenses. EBITDA and Adjusted EBITDA are not measures required by, or presented in accordance with. IFRS. The use of EBITDA and Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation from, or as a substitute for analysis of, our results of operations or financial condition as reported under IFRS.

 

Betterware believes that these non-IFRS financial measures are useful to investors because (i) Betterware uses these measures to analyze its financial results internally and believes they represent a measure of operating profitability and (ii) these measures will serve investors to understand and evaluate Betterware’s EBITDA and provide more tools for their analysis as it makes Betterware’s results comparable to industry peers that also prepare these measures.

 

Betterware’s EBITDA and Adjusted EBITDA Reconciliation

  

    June 30,     December 31,  
    2020     2019     2019     2018     2017  
                               
Net Income for the year   Ps. 413,853       234,866       472,142       299,267       207,274  
Add:  Total Income Taxes     187,605       106,057       232,692       150,179       96,951  
Add:  Financing Cost, net     10,147       45,932       107,411       102,301       26,237  
Add:  Depreciation and Amortization     19,575       18,276       38,394       25,960       24,209  
EBITDA   Ps. 631,180       405,131       850,639       577,707       354,671  
Other Adjustments                                        
Less:  Gain on sale of Fixed Assets(1)     -       -       -       (11,820 )     -  
Add:  Non-recurring Expenses(2)     -       -       -       7,667       -  
Adjusted EBITDA   Ps. 631,180     Ps. 405,131     Ps. 850,639     Ps. 573,554     Ps. 354,671  

 

(1) Gain on sale of transportation equipment.
(2) Expenses incurred in the year including market penetration analysis, liquidation payment to former employees and licensing implementation of SAS software.

 

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EXCHANGE RATES

 

The following table sets out, for the periods indicated, high, low, average and period-end noon buying rates in the City of New York for cable transfers between the Mexican peso and the U.S. dollar, as determined for customs purposes by the Federal Reserve Bank of New York, expressed as pesos per US$1.00. The rates may differ from the actual rates used in the preparation of the combined Financial Statements and other financial information appearing in this prospectus. We make no representation that the peso or the U.S. dollar amounts referred to in this prospectus have been, could have been or could, in the future, be converted to U.S. dollars or pesos, as the case may be, at any particular rate, if at all. On August 21, 2020, the noon buying rate in the City of New York for cable transfers between peso and U.S. dollars as certified for customs purposes by the Federal Reserve Bank of New York was Ps. 22.04 per US$1.00.

 

 

Year Ended December 31,

  High     Low    

Average(1)

    Period
End
 
2017     21.8910       17.4775       18.8841       19.6395  
2018     20.6700       17.9705       19.2179       19.6350  
2019     20.2653       18.7425       19.2491       18.8727  

 

Month   High     Low    

Average(1)

    Period
End
 
January 2020     19.6095       18.9275       19.1704       19.0525  
February 2020     19.4050       19.0405       19.1953       19.2650  
March 2020     19.5795       18.8550       19.2442       19.3980  
April 2020     19.2245       18.7555       18.9641       18.9945  
May 2020     19.6520       18.8515       19.1110       19.6520  
June 2020     19.7680       18.9905       19.2728       19.2089  
July 2020     19.2270       18.8940       19.0452       18.9930  
August 2020     20.1185       19.1700       19.6828       20.0674  

 

(1) Represents the average of exchange rates on each day of each month during the periods indicated.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus contains a number of forward-looking statements, including statements about the financial conditions, results of operations, earnings outlook and prospects of Betterware and may include statements for the period following the date of this prospectus. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. Forward-looking statements are typically identified by words such as “plan,” “believe,” “expect,” “anticipate,” “intend,” “outlook,” “estimate,” “forecast,” “project,” “continue,” “could,” “may,” “might,” “possible,” “potential,” “predict,” “should,” “would” and other similar words and expressions, but the absence of these words does not mean that a statement is not forward-looking.

 

The forward-looking statements are based on the current expectations of the management of Betterware, as applicable, and are inherently subject to uncertainties and changes in circumstance and their potential effects and speak only as of the date of such statement. There can be no assurance that future developments will be those that have been anticipated. These forward-looking statements involve a number of risks, uncertainties or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors described in “Risk Factors,” those discussed and identified in public filings made with the SEC by Betterware and the following:

 

geopolitical risk and changes in applicable laws or regulations;

 

the inability to profitably expand into new markets;

 

the possibility that Betterware may be adversely affected by other economic, business and/ or competitive factors;

 

financial performance;

 

operational risk;

 

litigation and regulatory enforcement risks, including the diversion of management time and attention and the additional costs and demands on Betterware’s resources;

 

changes in our investment commitments or our ability to meet our obligations thereunder;

 

natural disaster-related losses which may not be fully insurable;

 

epidemics, pandemics and other public health crises, particularly the COVID-19 virus;

 

fluctuations in exchange rates between the Mexican peso and the United States dollar; and

 

changes in interest rates or foreign exchange rates.

 

Should one or more of these risks or uncertainties materialize, or should any of the assumptions made by the management of Betterware prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. All subsequent written and oral forward-looking statements addressed in this prospectus and attributable to Betterware or any person acting on its behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this prospectus. Except to the extent required by applicable law or regulation, Betterware undertakes no obligation to update these forward-looking statements to reflect events or circumstances after the date of this prospectus or to reflect the occurrence of unanticipated events.

 

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RISK FACTORS

 

An investment in our ordinary shares carries a significant degree of risk. You should carefully consider the following risk factors, together with all of the other information included in this prospectus, before making a decision to invest in our ordinary shares. The risks described below are those which Betterware believes are the material risks that they face. Some statements in this prospectus, including such statements in the following risk factors, constitute forward-looking statements. See the section entitled “Cautionary Note Regarding Forward-Looking Statements.” If any of the following events occur, our business, financial condition and operating results may be materially adversely affected. In that event, the trading price of our securities could decline, and you could lose all or part of your investment.

 

Risks Related to Betterware’s Business

 

If Betterware is unable to retain its existing independent distributors and recruit additional distributors, its results of operations could be negatively affected.

 

Betterware distributes almost all of its products through its independent distributors and it depends on them directly for the sale of its products. Betterware’s distributors can terminate their services at any time, and it experiences high turnover among distributors from year to year. As a result, it needs to continue to retain existing and recruit additional independent distributors. To increase at attractive rates its revenue, Betterware must increase the number and/or the productivity of its distributors. Betterware’s operations would be harmed if it fails to generate continued interest and enthusiasm among its distributors and fails to attract new distributors, or if Betterware’s distributors are unable to operate due to internal or external factors, such as restrictions that the Mexican government may adopt as a consequence of the COVID-19 virus. See “Risk Factors— Outbreaks of disease and health epidemics, such as the recent COVID-19 virus (nCoV), could have affect our distributors, customers and ultimately, our results of operation.”

 

Although in the recent past Betterware experienced an increase in active distributors, it could experience declines in active distributors, including senior distributors at the manager and district director levels. The number of its active distributors, including those at the manager and district director level, may not increase and could decline in the future. Betterware’s operating results could be harmed if its existing and new business opportunities and products do not generate sufficient interest to retain existing distributors and attract new distributors. The number and productivity of Betterware’s distributors also depends on several additional factors, including:

 

adverse publicity regarding Betterware, its products, its distribution channel or its competitors;

 

failure to motivate Betterware’s distributors with new products;

 

the public’s perception of Betterware’s products;

 

competition for distributors from other direct selling companies;

 

the public’s perception of Betterware’s distributors and direct selling businesses in general; and

 

general economic and business conditions.

 

Betterware’s distributors are independent contractors and not employees. If regulatory authorities were to determine, however, on a facts and circumstances basis, that its distributors are legally its employees, Betterware could have significant liability under social benefit laws.

 

Betterware’s distributors are self-employed and are not its employees. Periodically, the question of the legal status of its distributors has arisen, usually with regard to possible coverage under social benefit laws that would require Betterware, and in most instances its distributors, to make regular contributions to social benefit funds. Betterware is positioned to address these questions in a satisfactory manner; nevertheless there could be a final determination adverse to it that could be substantial and materially adversely affect its business and financial condition.

 

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Failure of new products to gain distributors and market acceptance could harm Betterware’s business.

 

An important component of Betterware’s business is its ability to develop new products that create enthusiasm among its customers. If it fails to introduce new products planned for the future, its distributors’ productivity could be harmed. In addition, if any new products fail to gain market acceptance, are restricted by regulatory requirements, or have quality problems, this would harm its results of operations. Factors that could affect its ability to continue to introduce new products include, among others, government regulations, proprietary protections of competitors that may limit its ability to offer comparable products and any failure to anticipate changes in consumer tastes and buying preferences.

 

The loss of key high-level distributors could negatively impact Betterware’s consultant growth and its revenue.

 

As of December 31, 2019, Betterware had approximately 417,000 active associates and approximately 21,000 distributors, district managers and district directors. The district directors, together with their extensive networks of downline distributors, account for an important part of its net revenue. As a result, the loss of a high-level consultant or a group of leading distributors in the consultant’s network of downline distributors, whether by their own choice or through disciplinary actions by Betterware for violations of its policies and procedures, could negatively impact its consultant growth and its net revenue.

 

Betterware depends on multiple contract manufacturers to provide it with products, and the loss of the services provided by any of its manufacturers could harm its business and results of operations.

 

Betterware has outsourced product manufacturing functions to third-party contractors located in China and Mexico. In 2019, products supplied by Chinese manufacturers accounted for approximately 89% of Betterware’s revenues.

 

If these suppliers have unscheduled downtime or are unable to fulfill their obligations under these manufacturing agreements because of equipment breakdowns, natural disasters, health diseases or health epidemics, such as the COVID-19 virus, power failures, or any other cause, this could adversely affect Betterware’s overall operations and financial condition.

 

Although Betterware provides all of the formulations used to manufacture its products, Betterware has limited control over the manufacturing process itself. As a result, any difficulties encountered by the third-party manufacturer that result in product defects, production delays, cost overruns, or the inability to fulfill orders on a timely basis could have a material adverse effect on its business, financial condition and operating results.

 

Betterware is committed to providing high-quality products to its customers. With this in mind, Betterware works with third-party manufacturers that it believes can better provide it with products that comply with its quality standards within its time requirements. Currently, Chinese manufacturers are the primary suppliers that best meet Betterware’s requirements, and Betterware currently expects this trend to continue in future financial periods.

 

Failure of Betterware’s internet and its other technology initiatives to create sustained consultant enthusiasm and incremental cost savings could negatively impact its business.

 

Betterware has been developing and implementing a strategy to use the internet to sign up distributors and take orders for its products. In certain demographic markets it has experienced some success using Betterware’s internet strategy to improve its operating efficiency. However, any cost savings from its internet strategy may not prove to be significant, or Betterware may not be successful in adapting and implementing its strategy to other markets in which Betterware operates. This could result in its inability to service its distributors in the manner they expect.

 

  14  

 

 

If Betterware’s industry, business or its products are subject to adverse publicity, its business may suffer.

 

Betterware is very dependent upon its distributors’ and the general public’s perception of the overall integrity of its business, as well as the safety and quality of its products and similar products distributed by other companies. The number and motivation of its distributors and the acceptance by the general public of our products may be negatively affected by adverse publicity regarding:

 

the legality of network-marketing systems in general or Betterware’s network-marketing system specifically;

 

the safety and quality of its products;

 

regulatory investigations of its products;

 

the actions of its distributors;

 

its management of its distributors; and

 

the direct selling industry.

 

Betterware’s markets are competitive, and market conditions and the strengths of competitors may harm its business.

 

The market for Betterware’s products is competitive. Its results of operations may be harmed by market conditions and competition in the future. Many competitors have much greater name recognition and financial resources than Betterware has, which may give them a competitive advantage. For example, Betterware’s products compete directly with branded, premium retail products. Betterware currently does not has significant patent or other proprietary protection, and competitors may introduce products with the same ingredients that Betterware uses in its products.

 

Betterware also competes with other companies for distributors. Some of these competitors have a longer operating history, better name recognition and greater financial resources than it does. Some of its competitors have also adopted and could continue to adopt some of Betterware’s successful business strategies. Consequently, to successfully compete in this market and attract and retain distributors, Betterware must ensure that its business opportunities and compensation plans are financially rewarding. Betterware may not be able to continue to successfully compete in this market for distributors.

 

Because of the costs and difficulties inherent in managing cross-border business operations, the Company’s results of operations may be negatively impacted.

 

Managing a business, operations, personnel or assets in another country is challenging and costly. Any management that the Company may have (whether based abroad or in the U.S.) may be inexperienced in cross-border business practices and unaware of significant differences in accounting rules, legal regimes and labor practices. Even with a seasoned and experienced management team, the costs and difficulties inherent in managing cross-border business operations, personnel and assets can be significant (and much higher than in a purely domestic business) and may negatively impact the Company’s financial and operational performance.

 

Goodwill and other intangible assets represent a significant portion of Betterware’s balance sheet and its operating results may suffer from possible impairments.

 

Goodwill and intangible assets in Betterware’s balance sheet derived from past business combinations carried out by Betterware, which are further explained in the notes to combined financial statements located elsewhere in this Registration Statement. Goodwill, intangible assets with indefinite useful lives, and intangible assets not yet available for use are tested for impairment at least annually, and whenever there is an indication that these assets may be impaired. In the case of an impairment, Betterware will take charges to its operating results based on these impairment assessment processes. In addition, future acquisitions may be made by Betterware and a portion of the purchase price of these acquisitions may be allocated to acquired goodwill and other intangible assets.

 

  15  

 

 

We are dependent on information and communication technologies, and our systems and infrastructures face certain risks, including cybersecurity risks.

 

The operation of complex infrastructures and the coordination of the many actors involved in our operation require the use of several highly specialized information systems, including both our own information technology systems and those of third-party service providers, such as systems that monitor our operations or the status of our facilities, communication systems to inform the public, access control systems and closed circuit television security systems, infrastructure monitoring systems and radio and voice communication systems used by our personnel. In addition, our accounting and fixed assets, payroll, budgeting, human resources, supplier and commercial, hiring, payments and billing systems and our websites are key to our functioning. The proper functioning of these systems is critical to our operations and business management. These systems may, from time to time, require modifications or improvements as a result of changes in technology, the growth of our business and the functioning of each of these systems.

 

The risk of cyber-crime has been increasing, especially as infiltrating technology is becoming increasingly sophisticated. If we are unable to prevent a significant cyber-attack, such attack could materially damage our reputation and lead to regulatory penalties and financial losses.

 

We have implemented, among others, contingency procedures, backup systems, information and communication redundant systems, testing procedures, information technology auditing systems and network protection systems. However, these information technology systems cannot be completely protected against certain events such as natural disasters, fraud, computer viruses, hacking, communication failures, equipment breakdown, software errors and other technical problems. The occurrence of any of these events could disrupt our operations, resulting in increased costs, a decline in revenue and damage to our business in general, including, but not limited to harm to our public image.

 

In addition, our business operations routine involves gathering personal information about vendors, distributors, customers and employees among others, through the use of information technologies. Breaches of our systems or those of our third-party contractors, or other failures to protect such information, could expose such people’s personal information to unauthorized use. Any such event could give rise to a significant potential liability and reputational harm. As part of its risk management process, the Company is mapping the security measures on data privacy risks.

 

During 2019, we encountered an increased number of non-material phishing attacks attempts which consisted on fake e-mails requesting minor payments and/or confidential information. As mentioned, none of these attack were material nor had any major consequences for our operations or our customers.

 

A decline in our customers’ purchasing power or consumer confidence or in customers’ financial condition and willingness to spend could materially and adversely affect our business.

 

The sale of home organization products correlates strongly to the level of consumer spending generally, and thus is significantly affected by the general state of the economy and the ability and willingness of consumers to spend on discretionary items. Reduced consumer confidence and spending generally may result in reduced demand for Betterware’s products and limitations on its ability to maintain or increase prices. A decline in economic conditions or general consumer spending in any of its major markets could have a material adverse effect on its business, financial condition and results of operations.

 

The recent COVID-19 virus (nCoV), as well as any other public health crises that may arise in the future, is having and will likely continue to have a negative impact on retail industry and in our results of operation.

 

In late December 2019, a notice of pneumonia of unknown cause originating from Wuhan, Hubei province of China was reported to the World Health Organization. A novel COVID-19 virus (nCoV) was identified, with cases soon confirmed in multiple provinces in China, as well as in several other countries. The Chinese government placed Wuhan and multiple other cities in Hubei province under quarantine, with approximately 60 million people affected. On March 11, 2020, the World Health Organization declared the coronavirus outbreak a pandemic. The ongoing COVID-19 has resulted in several cities be placed under quarantine, increased travel restrictions from and to several countries, such as the U.S., China, Italy and Spain which had forced airlines to cancel flights and extended shutdowns of certain businesses in certain regions.

 

  16  

 

 

The COVID-19 virus continues to impact worldwide economic activity and pose the risk that we or our employees, contractors, suppliers, customers and other business partners may be prevented from conducting certain business activities for an indefinite period of time, including due to shutdowns that may be requested or mandated by governmental authorities or otherwise elected by companies as a preventive measure. In addition, mandated government authority measures or other measures elected by companies as a preventive measures may lead to our consumers being unable to complete purchases or other activities. Furthermore, its impact on the global and local economies may also adversely impact consumer discretionary spending.

 

Given the uncertainty around the extent and timing of the potential future spread or mitigation and around the imposition or relaxation of protective measures, we cannot reasonably estimate the impact to our future results of operations, cash flows or financial condition. However, COVID-19 virus is having and will likely continue to have, for so long as the health crisis and the virus impact continue, a negative impact on retailers and in our results of operation.

 

The transition away from the London Interbank Offered Rate (LIBOR) could affect our ability to seek additional debt financing

 

In 2017, the United Kingdom’s Financial Conduct Authority announced that after 2021 it would no longer compel banks to submit the rates required to calculate the London Interbank Offered Rate (“LIBOR”). This announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. Consequently, at this time, it is not possible to predict whether and to what extent banks will continue to provide submissions for the calculation of LIBOR. Similarly, it is not possible to predict whether LIBOR will continue to be viewed as an acceptable market benchmark, what rate or rates may become accepted alternatives to LIBOR, or what the effect of any such changes in views or alternatives may be on the markets for LIBOR-indexed financial instruments.

 

If LIBOR ceases to exist or if the methods of calculating LIBOR change from their current form, interest rates on future indebtedness may be adversely affected. While we currently do not have financial instruments subject to LIBOR, there remains uncertainty regarding the future utilization of LIBOR and the nature of any replacement rate, and any potential effects of the transition away from LIBOR on certain instruments in to which we may enter in the future are not known.

 

Material weaknesses have been identified in Betterware’s internal control over financial reporting, and if we fail to establish and maintain proper and effective internal controls over financial reporting, our results of operations and our ability to operate our business may be harmed.

 

We are in the process of implementing Internal Control—Integrated Framework (2013 Framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and as of December 31, 2019 management has identified material weaknesses associated with the components of COSO.

 

We are implementing Internal Control—Integrated Framework (2013 Framework) issued by the COSO, particularly regarding the documentation required to evidence the existence and effectiveness of the associated controls, as follows: (i) our control environment, as we did not maintain evidence of an effective control environment to enable the identification and mitigation of risks of accounting errors, (ii) our risk assessment, as we did not design and implement an effective risk assessment to identify and communicate appropriate objectives and fraud, and identifying and assessing changes in the business that could affect our system of internal controls, (iii) our control activities, as we did not design and implement effective control activities to adequately select and develop control activities and objectives for information and related technologies (COBIT), (iv) our information and communication, as we did not have sufficient documentation to evidence the processes and controls in place to ensure the adequate review over financial reporting, including journal entries, as well as the identification and evaluation of the severity of internal control deficiencies, including material weaknesses and (v) our monitoring activities, as we did not have the evidence to support the effectiveness of monitoring controls to ascertain whether the components of internal control are present and functioning.

 

Our remediation activities are ongoing and we will continue our initiatives to hire and train competent personnel, effectively implement our internal controls over financial reporting and further document our policies, procedures, and internal controls. We will also test the ongoing operating effectiveness of the new and existing controls in future periods; however, the material weaknesses cannot be considered completely remediated until the applicable controls have operated for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

 

  17  

 

  

Betterware’s failure to timely and effectively implement controls and procedures required by Section 404(a) of the Sarbanes-Oxley Act could have a material adverse effect on its business.

 

As an emerging growth company, we are not required to obtain an attestation report of our registered public accounting firm due to a transition period established by rules of the SEC for newly public companies. For so long as we qualify as an “emerging growth company” as defined under the JOBS Act, our independent registered accounting firm is not required to issue an attestation report on our internal control over financial reporting. Betterware will be required to provide management’s assessment on internal controls as of December 31, 2020. The requirements for a public company under Section 404(a) of the Sarbanes-Oxley Act are significantly more stringent than those required of Betterware as a privately-held company. Management may not be able to effectively and timely implement controls and procedures that adequately respond to the increased regulatory compliance and reporting requirements. If the Company is not able to implement the additional requirements of Section 404(a) in a timely manner or with adequate compliance, it may not be able to assess whether its internal controls over financial reporting are effective, which may subject it to adverse regulatory consequences and could harm investor confidence and the market price of its securities.

 

Betterware’s management has limited experience in operating a public company. Any failure to comply or adequately comply with federal securities laws, rules or regulations could subject us to fines or regulatory actions, which may materially adversely affect our business, results of operations and financial condition.

 

Betterware’s executive officers have limited experience in the management of a publicly traded company. Betterware’s management team may not successfully or effectively manage the Business Combination that is subject to significant regulatory oversight and reporting obligations under federal securities laws. Their limited experience in dealing with the increasingly complex laws pertaining to public companies could be a significant disadvantage in that it is likely that an increasing amount of their time may be devoted to these activities which will result in less time being devoted to the management and growth of the Company. Betterware currently may not have a complement of personnel with the appropriate level of knowledge, experience, and training in the accounting policies, practices or internal controls over financial reporting required of public companies in the United States. The implementation of accounting standards and controls necessary for the Company to achieve the level of quality of financial reporting required of a public company in the United States may require costs greater than expected. It is possible that the Company will be required to expand its employee base and hire additional employees to support its operations as a public company which will increase its operating costs in future periods.

 

Our business and results of operations may be adversely affected by the increased strain on our resources from complying with the reporting, disclosure and other requirements applicable to public companies in the United States promulgated by the U.S. Government, Nasdaq or other relevant regulatory authorities.

 

Compliance with existing, new and changing corporate governance and public disclosure requirements adds uncertainty to our compliance policies and increases our costs of compliance. Changing laws, regulations and standards include those relating to accounting, corporate governance and public disclosure, including the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Sarbanes-Oxley Act of 2002, new U.S. Securities and Exchange Commission (“SEC”) regulations and the Nasdaq listing guidelines. These laws, regulations and guidelines may lack specificity and are subject to varying interpretations. Their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. In particular, compliance with Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”) and related regulations regarding required assessment of internal controls over financial reporting and our external auditor’s audit of that assessment, requires the commitment of significant financial and managerial resources. We also expect the regulations to increase our legal and financial compliance costs, making it more difficult to attract and retain qualified officers and members of our board of directors, particularly to serve on our audit committee, and make some activities more difficult, time-consuming and costly.

 

Existing, new and changing corporate governance and public disclosure requirements could result in continuing uncertainty regarding compliance matters and higher costs of compliance as a result of ongoing revisions to such governance standards. Our efforts to comply with evolving laws, regulations and standards have resulted in, and are likely to continue to result in, increased general and administrative expenses. In addition, new laws, regulations and standards regarding corporate governance may make it more difficult for our company to obtain director and officer liability insurance. Further, our board members and senior management could face an increased risk of personal liability in connection with their performance of duties. As a result, we may face difficulties attracting and retaining qualified board members and senior management, which could harm our business. If we fail to comply with new or changed laws or regulations and standards differ, our business and reputation may be harmed.

 

  18  

 

 

Betterware’s controlling shareholder may have interests that conflict with your interests.

 

As of December 31, 2019, Campalier and Forteza indirectly owned, through Invex Security Trust, approximately 99.99% of the outstanding common stock of Betterware. As of the Business Combination, Campalier and Forteza indirectly own approximately 74.5% of the outstanding common stock of Betterware. See “The Business Combination.”

 

Accordingly, Campalier and Forteza currently exercise, and for the foreseeable future will exercise, significant influence over its board of directors and business and operations. The interests of Campalier and Forteza could conflict with your interests as a holder of shares.

 

Risks Related to Mexico

 

Currency exchange rate fluctuations, particularly with respect to the US dollar/Mexican peso exchange rate, could lower margins.

 

The value of the Mexican peso has been subject to significant fluctuations with respect to the U.S. dollar in the past and may be subject to significant fluctuations in the future. Historically, Betterware has been able to raise their prices generally in line with local inflation, thereby helping to mitigate the effects of devaluations of the Mexican peso. However, Betterware may not be able to maintain this pricing policy in the future, or future exchange rate fluctuations may have a material adverse effect on its ability to pay its suppliers.

 

Given Betterware’s inability to predict the degree of exchange rate fluctuations, it cannot estimate the effect these fluctuations may have upon future reported results, product pricing or its overall financial condition. Although Betterware attempts to reduce its exposure to short-term exchange rate fluctuations by using foreign currency exchange contracts, it cannot be certain that these contracts or any other hedging activity will effectively reduce exchange rate exposure. In particular, BTW currently employs a hedging strategy comprised of forwards U.S. dollar–Mexican peso derivatives that are designed to protect it against devaluations of the Mexican peso. As of the date of this prospectus, the hedging contracts cover 100% of the product needs as of April 2021. In addition, Betterware generally purchases its hedging instruments on a rolling twelve-month basis; instruments protecting it to the same or a similar extent may not be available in the future on reasonable terms. Unprotected declines in the value of the Mexican peso against the U.S. dollar will adversely affect its ability to pay its dollar-denominated expenses, including its supplier obligations.

 

Any adverse changes in Betterware’s business operations in Mexico would adversely affect its revenue and profitability.

 

Betterware’s revenue is generated in Mexico. Various factors could harm Betterware’s business in Mexico. These factors include, among others:

 

worsening economic conditions, including a prolonged recession in Mexico;

 

fluctuations in currency exchange rates and inflation;

 

longer collection cycles;

 

potential adverse changes in tax laws;

 

changes in labor conditions;

 

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burdens and costs of compliance with a variety of laws;

 

political, social and economic instability;

 

increases in taxation; and

 

outbreaks of disease and health epidemics, such as the COVID-19 virus.

 

Economic and political developments in Mexico and the United States may adversely affect Mexican economic policy.

 

Economic conditions in Mexico are highly correlated with economic conditions in the United States due to the physical proximity and the high degree of economic activity between the two countries generally, including the trade facilitated by NAFTA and USMCA, the successor agreement to NAFTA. As a result, political developments in the United States, including changes in the administration and governmental policies, can also have an impact on the exchange rate between the U.S. dollar and the Mexican peso, economic conditions in Mexico and the global capital markets.

 

On November 30, 2018, the presidents of Mexico, the United States and Canada signed the USMCA, which has now been ratified by all members. NAFTA will remain in place until the USMCA is implemented by all three members. Any increase of import tariffs resulting from the implementation of the USMCA or the re-negotiation or termination of NAFTA could make it economically unsustainable for U.S. companies to import certain products if they are unable to transfer those additional costs onto consumers, which would increase the Company’s expenses and decrease its revenues, even if domestic and international prices for its products remain constant. Higher tariffs on products that the Company may export to the United States could also require the Company to renegotiate its contracts or lose business, resulting in a material adverse impact on the Company’s business and results of operations. In addition, because the Mexican economy is heavily influenced by the U.S. economy, policies that may be adopted by the U.S. government may adversely affect economic conditions in Mexico. These developments could in turn have an adverse effect on the Company’s financial condition, results of operations and ability to repay its debt.

 

Mexico is an emerging market economy, with attendant risks to Betterware’s results of operations and financial condition.

 

The Mexican government has exercised, and continues to exercise, significant influence over the Mexican economy. Accordingly, Mexican governmental actions concerning the economy and state-owned enterprises could have a significant impact on Mexican private sector entities in general, as well as on market conditions, prices and returns on Mexican securities. The national elections held on July 2, 2018 ended six years of rule by the Institutional Revolutionary Party or PRI with the election of President Andres Manuel Lopez Obrador, a member of the Morena Party, and resulted in the increased representation of opposition parties in the Mexican Congress and in mayoral and gubernatorial positions. Although there have not yet been any material adverse repercussions resulting from this political change, multiparty rule is still relatively new in Mexico and could result in economic or political conditions that could materially and adversely affect Betterware’s operations. Betterware cannot predict the impact that this new political landscape will have on the Mexican economy. Furthermore, Betterware’s financial condition, results of operations and prospects and, consequently, the market price for its share, may be affected by currency fluctuations, inflation, interest rates, regulation, taxation, social instability and other political, social and economic developments in or affecting Mexico.

 

The Mexican economy in the past has suffered balance of payment deficits and shortages in foreign exchange reserves. There are currently no exchange controls in Mexico; however, Mexico has imposed foreign exchange controls in the past. Pursuant to the provisions of the United States-Mexico-Canada Agreement, if Mexico experiences serious balance of payment difficulties or the threat thereof in the future, Mexico would have the right to impose foreign exchange controls on investments made in Mexico, including those made by U.S. and Canadian investors.

 

Securities of companies in emerging market countries tend to be influenced by economic and market conditions in other emerging market countries. Emerging market countries, including Argentina and Venezuela, have recently been experiencing significant economic downturns and market volatility. These events could have adverse effects on the economic conditions and securities markets of other emerging market countries, including Mexico.

 

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Mexico may experience high levels of inflation in the future, which could affect Betterware’s results of operations.

 

During most of the 1980s and during the mid- and late-1990s, Mexico experienced periods of high levels of inflation, although the country has had stable inflation during the last five years. The annual rates of inflation for the last five years as measured by changes in the National Consumer Price Index, as provided by Banco de Mexico, were:

 

2019     2.8 %
2018     4.8 %
2017     6.8 %
2016     3.4 %
2015     2.1 %
2014     4.1 %

 

A substantial increase in the Mexican inflation rate would have the effect of increasing some of Betterware’s costs, which could adversely affect its results of operations and financial condition.

 

Mexico has experienced a period of increasing criminal activity, which could affect the Company’s operations.

 

In recent years, Mexico has experienced a period of increasing criminal activity, primarily due to the activities of drug cartels and related criminal organizations. In response, the Mexican Government has implemented various security measures and has strengthened its military and police forces aimed at decreasing incidents of theft and other criminal activity. Despite these efforts, criminal activity continues to exist in Mexico. These activities, their possible escalation and the violence associated with them, in an extreme case, may have a negative impact on the Company’s financial condition and results of operations.

 

The regulatory environment in which Betterware operates is evolving, and its operations may be modified or otherwise harmed by regulatory changes, subjective interpretations of laws or an inability to work effectively with national and local government agencies.

 

Although Betterware reviews applicable local laws in developing its plans, its efforts to comply with them may be harmed by an evolving regulatory climate and subjective interpretation of laws by the authorities. Any determination that Betterware’s operations or activities are not in compliance with applicable regulations could negatively impact its business and its reputation with regulators in the markets in which Betterware operates.

 

Laws and regulations may restrict Betterware’s direct sales efforts and harm its revenue and profitability.

 

Various government agencies throughout the world regulate direct sales practices. These laws and regulations are generally intended to prevent fraudulent or deceptive schemes, often referred to as “pyramid” schemes, that compensate participants for recruiting additional participants irrespective of product sales and/or which do not involve legitimate products. The laws and regulations in Betterware’s current markets often:

 

impose on it order cancellations, product returns, inventory buy-backs and cooling-off rights for consumers and distributors;

 

require it or its distributors to register with governmental agencies;

 

impose on it reporting requirements to regulatory agencies; and/or

 

require it to ensure that distributors are not being compensated solely based upon the recruitment of new distributors.

 

Complying with these sometimes inconsistent rules and regulations can be difficult and requires the devotion of significant resources on Betterware’s part.

 

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In addition, Mexico could change its laws or regulations to negatively affect or prohibit completely network or direct sales efforts. Government agencies and courts in Mexico may also use their powers and discretion in interpreting and applying laws in a manner that limits Betterware’s ability to operate or otherwise harms its business. If any governmental authority were to bring a regulatory enforcement action against Betterware that interrupts Betterware’s business, its revenue and earnings would likely suffer.

 

You may have difficulty enforcing your rights against Betterware and its directors and executive officers.

 

Betterware is a company incorporated in Mexico. Most of its directors and executive officers are non-residents of the U.S. You may be unable to effect service of process within the U.S. on Betterware, its directors and executive officers. In addition, as all of its assets and substantially all of the assets of its directors and executive officers are located outside of the U.S., you may be unable to enforce against BTW and its directors and executive officers judgments obtained in the U.S. courts, including judgments predicated upon civil liability provisions of the U.S. federal securities laws or state securities laws. There is also doubt as to the enforceability, in original actions in Mexican courts, of liabilities including those predicated solely on U.S. federal securities laws and as to the enforceability in Mexican courts of judgments of U.S. courts obtained in actions, including those predicated upon the civil liability provisions of U.S. federal securities laws. There is no bilateral treaty currently in effect between the United States and Mexico that covers the reciprocal enforcement of civil foreign judgments. In the past, Mexican courts have enforced judgments rendered in the United States by virtue of the legal principles of reciprocity and comity, consisting of the review in Mexico of the United States judgment, in order to ascertain, among other matters, whether Mexican legal principles of due process and public policy (orden público) have been complied with, without reviewing the merits of the subject matter of the case.

 

Risks Related to the Business Combination

 

If the Business Combination’s benefits do not meet the expectations of investors or securities analysts, the market price of Betterware’s securities may decline.

 

If the benefits of the Business Combination do not meet the expectations of investors or securities analysts, the market price of the Company’s securities may decline.

 

Fluctuations in the price of the Company’s securities could contribute to the loss of all or part of your investment. If an active market for the Company’s securities develops and continues, the trading price of the Company’s securities could be volatile and subject to wide fluctuations in response to various factors, some of which will be beyond the company’s control. Any of the factors listed below could have a material adverse effect on your investment in the Betterware’s securities and such securities may trade at prices significantly below the price you paid for them. In such circumstances, the trading price of the Company’s securities may not recover and may experience a further decline.

 

Factors affecting the trading price of the Company’s securities may include:

 

actual or anticipated fluctuations in the Company’s quarterly financial results or the quarterly financial results of companies perceived to be similar to it;

 

changes in the market’s expectations about the Company’s operating results;

 

success of competitors;

 

the Company’s operating results failing to meet the expectation of securities analysts or investors in a particular period;

 

changes in financial estimates and recommendations by securities analysts concerning the Company;

 

operating and share price performance of other companies that investors deem comparable to the Company;

 

the Company’s ability to market new and enhanced products on a timely basis;

 

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changes in laws and regulations affecting the Company’s business;

 

the Company’s ability to meet compliance requirements;

 

commencement of, or involvement in, litigation involving the Company;

 

changes in the Company’s capital structure, such as future issuances of securities or the incurrence of additional debt;

 

the volume of the Company shares available for public sale;

 

any major change in the Company’s board of directors or management;

 

sales of substantial amounts of the Company shares by the Company’s directors, executive officers or significant shareholders or the perception that such sales could occur; and

 

general economic and political conditions such as recessions, interest rates, fuel prices, international currency fluctuations and acts of war or terrorism.

 

Broad market and industry factors may materially harm the market price of the Company’s securities irrespective of the Company’s operating performance. The stock market in general, and Nasdaq in particular, have experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the particular companies affected. The trading prices and valuations of these stocks, and of the Company’s securities, may not be predictable. A loss of investor confidence in the market for retail stocks or the stocks of other companies which investors perceive to be similar to the Company could depress the Company’s share price regardless of the Company’s business, prospects, financial conditions or results of operations. A decline in the market price of the Company’s securities also could adversely affect the Company’s ability to issue additional securities and the Company’s ability to obtain additional financing in the future.

 

The warrants and the unit purchase option are exercisable for securities of the Company, which would increase the number of shares eligible for future resale in the public market and result in dilution to the Company’s shareholders.

 

At Closing, DD3’s outstanding warrants automatically converted into warrants to purchase an aggregate of 5,804,125 Company shares and are exercisable in accordance with the terms of the warrant agreement governing those securities, and the unit purchase option automatically converted into an option to purchase the same number of Company securities underlying such units and is expected to become exercisable in accordance with its terms which, if exercised, will result in the issuance of 250,000 Company shares and warrants to purchase an additional 250,000 Company shares. The warrants became exercisable on April 12, 2020 and will expire on March 25, 2025 at 5:00 p.m., New York City time, or earlier upon redemption or liquidation. The unit purchase option was exercisable as of Closing and will expire at 5:00 p.m., Eastern time, on October 11, 2023. The exercise price of the warrants is $11.50 per share, or US$66,747,438, in the aggregate for all shares underlying these warrants, and the exercise price of the unit purchase option is $10.00 per unit, or $2,500,000 in the aggregate, in each case assuming none of the securities are exercised through “cashless” exercise.

 

To the extent the warrants and the unit purchase option (and the underlying securities) are exercised, additional Company shares will be issued, which will result in dilution to the shareholders of the Company and increase the number of Company shares eligible for resale in the public market. Sales of substantial numbers of such shares in the public market or the fact that such securities may be exercised could adversely affect the market price of the Company shares.

 

The exercise of registration rights may adversely affect the market price of the Company shares.

 

In connection with the Business Combination, the Company, DD3 and certain security holders of the Company (the “Holders”) entered into the Registration Rights Agreement, dated as of March 11, 2020 (the “Registration Rights Agreement”). Pursuant to the Registration Rights Agreement, such holders can demand that the Company register certain of the Company’s securities they received in connection with the Business Combination, to include Company shares and warrants and the Company shares issuable upon exercise of such warrants. The Company will bear the cost of registering these securities. The registration and availability of such a significant number of securities for trading in the public market may have an adverse effect on the market price of the Company shares and the Company warrants.

 

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Mexican law will likely govern many of the Company’s material agreements and the Company may not be able to enforce its legal rights.

 

In connection with the Business Combination, DD3 re-domiciled out of the British Virgin Islands and continued as a company incorporated under the laws of Mexico. As a consequence of such re-domiciliation, Mexican law will likely govern many of the Company’s material agreements. The system of laws and the enforcement of existing laws in Mexico may not be as certain in implementation and interpretation as in the United States or the British Virgin Islands. The inability to enforce or obtain a remedy under any of the Company’s future agreements could result in a significant loss of business, business opportunities or capital. Any such reincorporation may subject the Company to foreign regulations that could materially and adversely affect the Company’s business.

 

Our shareholders may sell a substantial amount of Betterware’s shares, and these sales could cause the price of the securities to fall.

 

As of the Business Combination, there are 34,451,020 Company shares outstanding. All of the Company’s shares held by former DD3 shareholders will be freely transferable, except for any shares held by Betterware’s “affiliates,” as that term is defined in Rule 144 under the Securities Act, and those shares that remain subject to escrow restrictions pursuant to the escrow agreement entered into by former DD3 shareholders in connection with DD3’s initial public offering. Following completion of the Business Combination, approximately 87.7% of the outstanding Company shares are held by entities affiliated with Betterware and its executive officers and directors.

 

Sales of substantial amounts of the Company shares in the public market after the Business Combination, or the perception that such sales will occur, could adversely affect the market price of the Company shares and make it difficult for the Company to raise funds through securities offerings in the future.

 

Betterware may be required to take write-downs or write-offs, restructuring and impairment or other charges that could have a significant negative effect on its financial condition, results of operations and share price, which could cause you to lose some or all of your investment.

 

Betterware may be forced to later write-down or write-off assets, restructure its operations, or incur impairment or other charges that could result in the Company reporting losses. Even though these charges may be non-cash items and not have an immediate impact on the Company’s liquidity, the fact that the Company reports charges of this nature could contribute to negative market perceptions about the Company or its securities. In addition, charges of this nature may cause the Company to violate net worth or other covenants to which it may be subject or to be unable to obtain future financing on favorable terms or at all.

 

Risks Related to Ownership of our Ordinary Shares

 

As a “foreign private issuer” under the rules and regulations of the SEC, Betterware is permitted to, and is expected to, file less or different information with the SEC than a company incorporated in the United States or otherwise subject to these rules and is expected to follow certain home country corporate governance practices in lieu of certain Nasdaq requirements applicable to U.S. issuers.

 

Betterware is considered a “foreign private issuer” under the Exchange Act and therefore exempt from certain rules under the Exchange Act, including the proxy rules, which impose certain disclosure and procedural requirements for proxy solicitations for U.S. and other issuers. Moreover, the Company is not required to file periodic reports and financial statements with the SEC as frequently or within the same time frames as U.S. companies with securities registered under the Exchange Act. Betterware currently prepares its financial statements in accordance with IFRS. The Company is not required to file financial statements prepared in accordance with or reconciled to U.S. GAAP so long as its financial statements are prepared in accordance with IFRS. The Company is not required to comply with Regulation FD, which imposes restrictions on the selective disclosure of material information to shareholders. In addition, the Company’s officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions of Section 16 of the Exchange Act and the rules under the Exchange Act with respect to their purchases and sales of Company securities.

 

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In addition, as a “foreign private issuer” whose shares are listed on Nasdaq, the Company is permitted to, and is expected to, follow certain home country corporate governance practices in lieu of certain Nasdaq requirements. A foreign private issuer must disclose in its annual reports filed with the SEC each Nasdaq requirement with which it does not comply followed by a description of its applicable home country practice. As a Mexican corporation listed on Nasdaq, the Company is expected to follow its home country practice with respect to the composition of its board of directors and nominations committee and executive sessions. Unlike the requirements of Nasdaq, the corporate governance practices and requirements in Mexico do not require the Company to have a majority of its board of directors to be independent; do not require the Company to establish a nominations committee; and do not require the Company to hold regular executive sessions where only independent directors shall be present. Such home country practices of Mexico may afford less protection to holders of Company shares.

 

The Company could lose its status as a “foreign private issuer” under current SEC rules and regulations if more than 50% of the Company’s outstanding voting securities become directly or indirectly held of record by U.S. holders and one of the following is true: (i) the majority of the Company’s directors or executive officers are U.S. citizens or residents; (ii) more than 50% of the Company’s assets are located in the United States; or (iii) the Company’s business is administered principally in the United States. If the Company loses its status as a foreign private issuer in the future, it will no longer be exempt from the rules described above and, among other things, will be required to file periodic reports and annual and quarterly financial statements as if it were a company incorporated in the United States. If this were to happen, the Company would likely incur substantial costs in fulfilling these additional regulatory requirements and members of the Company’s management would likely have to divert time and resources from other responsibilities to ensuring these additional regulatory requirements are fulfilled.

 

Betterware qualifies as an emerging growth company within the meaning of the Securities Act, and if it takes advantage of certain exemptions from disclosure requirements available to emerging growth companies, which could make the Company’s securities less attractive to investors and may make it more difficult to compare the Company’s performance to the performance of other public companies.

 

Betterware qualifies as an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act, as modified by the JOBS Act. As such, the Company is eligible for and intends to take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies for as long as it continues to be an emerging growth company, including (i) the exemption from the auditor attestation requirements with respect to internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act, (ii) the exemptions from say-on-pay, say-on-frequency and say-on-golden parachute voting requirements and (iii) reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements. The Company will remain an emerging growth company until the earliest of (i) the last day of the fiscal year in which the market value of its ordinary shares that are held by non-affiliates exceeds $700 million as of June 30 of that fiscal year, (ii) the last day of the fiscal year in which it has total annual gross revenue of $1.07 billion or more during such fiscal year (as indexed for inflation), (iii) the date on which it has issued more than $1 billion in non-convertible debt in the prior three-year period or (iv) the last day of the fiscal year following the fifth anniversary of the date of the first sale of DD3’s ordinary shares in its initial public offering. In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the exemption from complying with new or revised accounting standards provided in Section 7(a)(2)(B) of the Securities Act as long as the Company is an emerging growth company. An emerging growth company can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. DD3 has elected not to opt out of such extended transition period and, therefore, the Company may not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. Investors may find the Company shares less attractive because the Company will rely on these exemptions, which may result in a less active trading market for the Company shares and their price may be more volatile.

 

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If securities or industry analysts do not publish or cease publishing research or reports about Betterware, its business, or its market, or if they change their recommendations regarding the Company shares adversely, the price and trading volume of the Company shares could decline.

 

The trading market for the Company shares is influenced by the research and reports that industry or securities analysts may publish about the Company, its business, market or competitors. Securities and industry analysts do not currently, and may never, publish research on the Company. If no securities or industry analysts commence coverage of the Company, the price and trading volume of the Company shares would likely be negatively impacted. If any of the analysts who may cover the Company change their recommendation regarding the Company shares adversely, or provide more favorable relative recommendations about the Company’s competitors, the price of the Company shares would likely decline. If any analyst who may cover the Company were to cease coverage of the Company or fail to regularly publish reports on it, the Company could lose visibility in the financial markets, which in turn could cause its share price or trading volume to decline.

 

There can be no assurance that Betterware will be able to comply with the continued listing standards of Nasdaq.

 

Betterware’s shares are listed on Nasdaq under the symbol “BWMX.” If Nasdaq delists the Company’s securities from trading on its exchange for failure to meet the listing standards, the Company and its shareholders could face significant material adverse consequences including:

 

a limited availability of market quotations for the Company’s securities;

 

a determination that the Company shares are “penny stock” which will require brokers trading in the Company shares to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for the Company shares;

 

a limited amount of analyst coverage; and

 

a decreased ability to issue additional securities or obtain additional financing in the future.

 

If Betterware is characterized as a passive foreign investment company, or a PFIC, adverse U.S. federal income tax consequences may result for U.S. holders of Company shares.

 

Based on the projected composition of its income and assets, including goodwill, it is not expected that the Company will be a PFIC for its taxable year that includes the date of the Merger or in the foreseeable future. However, the tests for determining PFIC status are applied annually after the close of the taxable year, and it is difficult to predict accurately future income and assets relevant to this determination. Accordingly, there can be no assurance that the Company will not be considered a PFIC for any taxable year.

 

If the Company is a PFIC for any year during which a U.S. holder holds Company shares, a U.S. holder generally would be subject to additional taxes (including taxation at ordinary income rates and an interest charge) on any gain realized from a sale or other disposition of the Company shares and on any “excess distributions” received from the Company. Certain elections may be available that would result in alternative treatments of the Company shares.

 

We urge U.S. holders to consult their own tax advisors regarding the possible application of the PFIC rules to the ownership of Company shares.

 

An investor may be subject to adverse U.S. federal income tax consequences in the event the IRS were to disagree with the U.S. federal income tax consequences described herein.

 

The Tax Cuts and Jobs Act of 2017, or the TCJA, and was signed into law on December 22, 2017. The TCJA changes many of the U.S. corporate and international tax provisions, and certain of the provisions are unclear. No ruling has been or will be requested from the IRS as to any U.S. federal income tax consequences described herein. The IRS may disagree with the descriptions of U.S. federal income tax consequences contained herein, and its determination may be upheld by a court. Any such determination could subject an investor or the Company to adverse U.S. federal income tax consequences that would be different than those described herein. Accordingly, each prospective investor is urged to consult a tax advisor with respect to the specific tax consequences of the acquisition, ownership and disposition of DD3’s or the Company’s securities, including the applicability and effect of state, local or non-U.S. tax laws, as well as U.S. federal tax laws.

 

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The Amended and Restated Charter of Betterware provides for the exclusive jurisdiction of the federal courts in Mexico City, Mexico for substantially all disputes between the Company and its shareholders, which could limit Company shareholders’ ability to obtain a favorable judicial forum for disputes with the Company or its directors, officers, other employees or shareholders.

 

The Amended and Restated Charter of the Company provides for the exclusive jurisdiction of the federal courts located in Mexico City, Mexico for the following civil actions:

 

any action between the Company and its shareholders; and

 

any action between two or more shareholders or groups of shareholders of the Company regarding any matters relating to the Company.

 

This exclusive jurisdiction provision may limit a shareholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with the Company or any of its directors, officers, other employees or shareholders, which may discourage lawsuits with respect to such claims, although the Company’s shareholders will not be deemed to have waived the Company’s compliance with U.S. federal securities laws and the rules and regulations thereunder applicable to foreign private issuers. Alternatively, if a court were to find the exclusive jurisdiction provision contained in the Amended and Restated Charter to be inapplicable or unenforceable in an action, the Company may incur additional costs associated with resolving such action in other jurisdictions, which could harm the Company’s business, operating results and financial condition. The exclusive jurisdiction provision would not prevent derivative shareholder actions based on claims arising under U.S. federal securities laws from being raised in a U.S. court and would not prevent a U.S. court from asserting jurisdiction over such claims. However, there is uncertainty whether a U.S. court would enforce the exclusive jurisdiction provision for actions for breach of fiduciary duty and other claims.

 

The anti-takeover protections included in our Bylaws and others provided under Mexican Law may deter potential acquirors

 

Our bylaws provide that, subject to certain exceptions as explained below, prior written approval from the board of directors shall be required for any person, or group of persons to acquire, directly or indirectly, any of our common shares or rights to our common shares, by any means or under any title whether in a single event or in a set of consecutive events, such that its total shares or rights to shares would represent 20% or more of our outstanding shares.

 

These provisions could make it substantially more difficult for a third party to acquire control of us. These provisions in our bylaws may discourage certain types of transactions involving the acquisition of our securities. These provisions could discourage transactions in which our shareholders might otherwise receive a premium for their shares over the then current market price. Holders of our securities who acquire shares in violation of these provisions will not be able to vote, or receive dividends, distributions or other rights in respect of, these securities and would be obligated to pay us a penalty. For a description of these provisions, see “Item 10. Additional Information—Bylaws——Anti-takeover Protections.”

 

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USE OF PROCEEDS

 

We do not know whether the holders of the warrants will exercise any of the warrants. If all of the warrants described in this prospectus are exercised in full, we will issue 5,804,125 ordinary shares and we will receive aggregate net proceeds of approximately US$66,747,438. The Company has recently repurchased 1,540,288 warrants. As of the date of this prospectus, the outstanding number of warrants is 4,263,837. Therefore, if all of the outstanding warrants are exercised in full, we will issue 4,263,837 ordinary shares and we will receive aggregate net proceeds of approximately US$49,034,125. We intend to use the proceeds from any exercise of the warrants for general corporate purposes.

 

The selling shareholders will receive all of the proceeds from the sale of any ordinary shares sold by them pursuant to this prospectus. We will not receive any proceeds from these sales.

 

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BUSINESS

 

This section sets forth certain information on our business and certain of our financial and operating information appearing elsewhere in this prospectus. It may not contain all the information about us that may be important to you, and we urge you to read the entire prospectus carefully, including the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated and combined financial statements included elsewhere in this prospectus.

 

Company Overview

 

Founded in 1995, Betterware is a leading direct-to-customer company in Mexico. Betterware is focused on the home organization segment, with a wide product portfolio including home solutions, kitchen and food preservation, technology and mobility, among other categories.

 

Betterware sells its products through nine catalogues published throughout the year (approximately six weeks outstanding each) with an offer of approximately 400 products per catalogue. Betterware constantly innovates introducing approximately 300 products every year, representing 10% – 15% of the products in a catalogue. All of the products are Betterware branded with unique characteristics and manufactured by +200 certified producers in Mexico and China, and then delivered to Betterware’s warehouses in Guadalajara, Jalisco where they process and pack the products.

 

Betterware sells its products through a unique two-tier sales model that is comprised of more than 438,000 Distributors and Associates across Mexico, that serve +3 million households every six weeks in +800 communities. The Distributors and Associates are monitored tightly through an in-house developed business intelligence platform that tracks weekly performance and has a detailed mapping system of the country to identify potential areas to penetrate and increase the network.

 

Betterware’s business model is tailored to Mexico’s unique geographic, demographic and economic dynamics, where communities are small and scattered across the country, with very low retail penetration and difficult to fulfill last mile logistics, middle-income consumers are emerging. Additionally, the business model is resilient to economic downturns given low average sales price to consumers and also because being a Distributor or Associate represents an additional source of income for households. As a result, Betterware’s operations are not subject to significant seasonal fluctuations.

 

Betterware has a zero last mile cost, with its Distributors and Associates delivering the products to the final consumers.

 

Betterware has shown long term sustainable double-digit growth rates in revenue and EBITDA and has built a platform that can grow locally and in other regions.

 

Industry Overview

 

Direct selling is a retail channel used by top global brands, the market serves all types of goods and services, including healthcare, jewelry, cookware, nutritionals, cosmetics, housewares, energy and insurance, among others.

 

The direct selling channel differs from broader retail in an important way mainly due to the avenue where entrepreneurial-minded individuals can work independently to build a business with low start-up and overhead costs.

 

Direct selling representatives work on their own but are affiliated with a company that uses the channel, retaining the freedom to run a business and have other sources of income.

 

An important number of representatives join direct selling companies because they enjoy their products or services and want to purchase them at a discount. Some others decide to market these offerings to friends, family and others and earn discounts from their sales.

 

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Competitive Strengths

 

Unique Business Intelligence and Data Analytics Unit

 

Betterware’s in-house business intelligence unit plays a crucial role within the operations and strategy of the company. The unit’s team is comprised of geographers, anthropologists, actuaries, and more, in order to diversify the way of thinking and create the best analyses and business strategies.

 

The main functions of the business intelligence unit are:

 

1. Clear strategy development

 

2. Tight Monitoring

 

3. Product Intelligence

 

Product Development and Innovation Program

 

The Company offers a product portfolio with great depth in the home organization segment through six different categories; kitchen and food preservation, home solutions, bathroom, laundry & cleaning, tech and mobility and bedroom

 

Constant product innovation is engaged by Betterware through refreshing its catalogue content and attracting clients’ repeated purchases

 

The Company has a team focused solely in performing industry analyses and product development and monitoring backed by the data analytics unit’s commercial strategy

 

Distributors and Associates Network & Loyalty and Reward Programs

 

Betterware has a unique two-tier sales model and one of the most robust networks with more than 21,000 Distributors and 417,000 Associates as of December 31, 2019

 

The Company’s Distributors and Associates serve around 3 million households every six weeks in 800 communities across Mexico

 

The Company has a remarkable rewards program that attracts, retains, and motivates Distributors and Associates through product discounts, Betterware Points, trips, gifts and more.

 

Unparalleled Logistics and Supply Chain Platform

 

All of Betterware’s products are manufactured by more than 200 third party factories certified under the Company’s quality standards.

 

The Company’s warehousing practices includes a 80-day service level inventory.

 

Betterware distributes all products from its distribution center in Guadalajara, Mexico.

 

Distributors personally deliver orders to each of its associates, thus eliminating last mile costs for the Company

 

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Experienced Management& Meritocratic Culture

 

Betterware’s president has more than 25 years of experience in the direct-to-consumer selling sector across the Americas and a strong track record of delivering value to its shareholders with commitment to excellence

 

Top management has been with the Company 6 years on average

 

The company’s culture is based on the following principles

 

1. Result driven management:

 

o Incentives based on results

 

o Highly professional operation and no bureaucracy

 

2. Meritocratic culture:

 

o Culture focused on solutions, delivery, discipline and commitment

 

3. Closeness to salesforce:

 

o Management are close and visible to Distributors and Associates

 

o Open office spaces for efficient flow of information and data allows fast decision making

 

As of December 31, 2019, the operating team had a 674-headcount.

 

Growth Strategies

 

The company has a clear and executable plan for growth, which includes organic and inorganic initiatives. The main strategies divided by timeline are the following:

 

Short Term

 

1. Web marketing/E-commerce

 

2. Increase Service Capacity

 

o A new headquarters campus is under construction.

 

Medium Term

 

1. New Product Line

 

2. International Expansion to Latin America

 

3. Strategic Acquisitions

 

Offerings

 

The living spaces in our target communities are on a decreasing size trend. Hence it is becoming more and more important to optimize the organization within our living spaces and hectic lifestyles. The Company offers a unique and innovative product portfolio with great depth in the home organization segment focused on providing everyday solutions for modern spaces.

 

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The company offers its products through 8 different categories; including kitchen and food preservation, home solutions, bathroom, laundry and cleaning, tech and mobility and bedroom

 

Products are sold through catalogues that offer approximately 400 products. Each catalogue has extensive consumer reading behavior analysis to ensure that the content is distributed in the most efficient way and purchase potential is maximized

 

Constant product innovation introducing approximately 300 new products every year and development is conducted where the focus is on refreshing catalogue content and attracting repeated purchases from clients

 

The Company employs an efficient pricing strategy focused in maximizing revenue and margins and minimizing inventory losses

 

The Company has a team focused solely on performing industry analyses and monitoring backed by the data analytics unit commercial market strategy

 

Logistics Infrastructure and Supply Chain

 

Customers

 

Betterware is 100% committed to providing products to its customers that serve as everyday solutions for modern space organization. Betterware also has the objective of providing products that are accessible to anyone. With these objectives in mind, the Company’s target market is all households in Mexico, with a focus on the C and D socioeconomic segments

 

Most of the Company’s end customers are adult men and women with the desire of optimizing their homes organization

 

Sales & Marketing

 

Betterware does not rely on significant traditional advertising expenditures to drive net sales since Distributors and Associates distribute its catalogues directly to customers, thus making the sales catalog design and printing an important selling expense representing 4% of net revenue. Some of the main advertising costs incurred by the Company include social media and transit advertising in bus lines and subways that represent 0.3% of net revenue.

 

Betterware establishes and maintains credibility primarily through the quality of their products, their customer service and the attractiveness of their pricing.

 

Research & Development

 

The Company performs constant product innovation with the objectives of refreshing its catalogue content and attracting clients’ repeated purchases

 

The Company has a team focused solely on performing industry analyses, product development and monitoring of products

 

Product development is backed by the data analytics unit’s commercial strategy

 

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Organizational Structure

 

The following diagram depicts the current organizational structure of Betterware:

 

 

  33  

 

 

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

 

Stockholders of the Company should read the following discussion and analysis of Betterware financial condition and results of operations together with the financial statements and related notes of Betterware that are included elsewhere in this prospectus. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Betterware actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under the section entitled “Risk Factors” or in other parts of this prospectus. Please also see the section entitled “Cautionary Note Regarding Forward-Looking Statements.”

 

The following discussion refers to the financial results of Betterware for the six months ended June 30, 2020 and June 30, 2019, and the years ended December 31, 2019, 2018 and 2017.

 

COVID-19 virus Impact

 

As of the date of this prospectus, our operations have not been interrupted as a result of the COVID-19 pandemic as our product lines include hygiene and cleaning solutions, which qualify as an essential activity in Mexico. Our supply chain has not been affected either, as we maintain sufficient inventory levels to supply sales for the subsequent 13 weeks, and our foreign suppliers restarted normal activities on March 1, 2020. Net sales in 2020 from week one to twenty-six increased with respect to the same period of the previous year. Our gross margin has been negatively affected by promotions aimed at gaining market share and the appreciation of the U.S. dollar compared to the Mexican peso’s impact on inventory costs as we purchase most of our products in U.S. dollars, which may continue during 2020. In order to mitigate this risk, the Company enters into forward contracts to fix the exchange rate for future purchases in U.S. dollars, which has allowed us to partially reduce the exchange rate effects of the COVID-19 pandemic. In addition, management is working on plans to increase the introduction of products with higher profit margins and therefore reduce the negative effects that impact our profit margin. We maintain sufficient liquidity to meet our contractual obligations as a result of available sources of financing, in addition our customer’s payment terms are maintained between 14 and 28 days, while our payment terms to our suppliers are 120 days. For further information, see “Risk Factors—Risks Related to Our Business and Industry— The recent COVID-19 virus (nCoV), as well as any other public health crises that may arise in the future, is having and will likely continue to have a negative impact on the retail industry and in our results of operation.”

 

Components of Operating Results

 

A number of factors have a significant impact on our business and results of operations, the most important of which are regulations, fluctuations in exchange rates in the currencies in which we operate, external factors, such as the COVID-19 pandemic, see “—Operating and Financial Review and Prospects—Liquidity and Capital Resources—The COVID-19 Impact,” and our capital investment plans.

 

Distributors and Associates

 

Betterware sells its products through a unique two-tier sales model that is comprised of Distributors and Associates. Distributors are the link between the Company and the Associates. The Company distributes products in a weekly basis to the Distributors domicile, who in turn delivers to each Associate. To cover for the associated payment cycle, the Company provides to Distributors a two week credit line for them to make the payment back to the Company.

 

Net Revenue

 

Betterware primarily generates its revenue through selling products focused on the home organization segment under the Betterware® brand. Some of the categories through which the Company offers its product line include Kitchen and Food Preservation, Bathroom, Bedroom, Home Solutions, among others. Betterware’s products are sold through catalogues and are distributed to the end customer by its network of Distributors and Associates. Betterware sells its products to a wide array of customers but focuses on the C and D segments of the socioeconomic pyramid in Mexico.

 

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Betterware’s revenues are driven by the increase in volume of products sold, the price of its products and by the increase in its network of Distributors and Associates. Factors that impact unit pricing and sales volume include promotional campaigns, marketing campaigns, the Company’s business intelligence unit, increase in variable costs, and macroeconomic factors.

 

Betterware reports net revenue, which represents its gross revenue less sales discounts, adjustments and allowances, also the Company has a deferred revenue due to undelivered performance obligations related to the promotional points, so the revenue is determined in a five-step model:

 

Identify the contract with client (verbal or written).

 

Identify the performance obligations committed in the contract.

 

Consider the contractual terms and the business model of the Company in order to determine the transaction price. The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer, excluding amounts collected on behalf of third parties. In determining the transaction price, the Company considers the variable considerations.

 

Allocate the transaction price to the performance obligations identified in the contract (generally each distinct good or service), to depict the amount of consideration to which an entity expects to be entitled in exchange for transferring the promised goods or services to the customer.

 

Recognition of revenue when or as it satisfies a performance obligation by transferring a good or service to a customer, either at a point in time (when) or over time (as).

 

Cost of Sales

 

Cost of goods sold consists of the purchase of finished goods, maritime freight costs, land freight costs, customs costs, provisions for defective inventory, packing material, among others. The cost of finished goods and maritime and land freight costs represent the majority of Betterware total costs of goods sold.

 

Distribution Expenses

 

Betterware’s distribution expenses are highly correlated with its sales volume, meaning that if sales volume increases, distribution costs increase, and vice versa. Distribution costs refer to the logistics services paid to third party logistics companies that distribute the products from the Company’s distribution center to the Distributors’ domiciles. The delivery to the final client is responsibility of the Distributors and Associates, thus Betterware has zero last mile costs.

 

Selling Expenses

 

Selling expenses include all costs related to the sale of products, such as printing and design of sales catalog, packing material costs, events, marketing and advertising, travel expenses, a part of promotional points products expenses, among others. Costs related to sales catalog and rewards program products account for most of the weight of total selling expenses.

 

Administrative Expenses

 

Administrative expenses primarily include employee salaries and related expenses of all departments of the company’s operations such as accounting, planning, customer service, legal, and human resources. Also included are corporate operations, research and development, leases, professional services relating to Betterware’s statutory corporate audit and tax advisory fees, legal fees, outsourcing fees relating to information technology, transportation planning, and corporate site and insurance costs.

 

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Financing Income/Cost

 

Financing income/costs consists primarily of: (i) interest expense and charges in connection with financings, (ii) income derived from investments of excess cash, (iii) loss/gains from foreign exchange changes, and (iv) loss /gains in valuation of financial derivatives.

 

Income Taxes

 

The Company is subject to a 30% Corporate Income Tax rate provided by the Mexican Income Tax Law.

 

Fluctuations in Exchange Rates in the Currencies in which We Operate

 

Our primary foreign currency exposure gives rise to market risks associated with exchange rate movements of the, Mexican Peso against the U.S. dollar See “—Quantitative and Qualitative Disclosure about Market Risk—Exchange Rate Risk.”

 

Results of Operations — Six Months Ended June 30, 2019 Compared with Six Months Ended June 30, 2020

 

Net Revenue

 

    June 30,
2020
    June 30,
2019
 
Net Revenue   Ps. 2,388,403       1,535,622  

 

Net revenue increased by 55.5%, or MX$852,781, to MX$2,388,403 for the six months period ended June 30, 2020 compared to MX$1,535,622 for the six month period ended June 30, 2019, primarily due to the increase in the distribution network, including distributors and associates, volume of units sold, and average unit price. For the six months ended June 30, 2020, the Company had a Distributors and Associates network of 785,170, compared to a network of 400,482 for the six months period ended June 30, 2019.

 

Cost of Goods Sold

 

    June 30,
2020
    June 30,
2019
 
Cost of Sales   Ps. 1,112,572       638,648  

 

Cost of goods sold increased 74.2%, or MX$473,924, to MX$1,112,572 for the six months period ended June 30, 2020 compared to MX$638,648 for the six months period ended June 30, 2019 as a result of increased revenue, resulting in a gross profit of MX$1,275,831 for the six months period ended June 30, 2020 compared to MX$896,974 for the six months period ended June 30, 2019. As a percentage of net revenues, cost of goods sold was 47.0% for the six months period ended June 30, 2020 and 42.0% for the six months period ended June 30, 2019. The increase of cost of goods sold as a percentage of net revenues was primarily because of the impact of the increase in the US dollar exchange rate in 2020 compared to 2019. This was mainly due to the volume of purchases denominated in US dollars, as approximately 90% of our purchases are imported from China in US dollars, and sold in Mexican Pesos.

 

Administrative Expenses

 

    June 30,
2020
    June 30,
2019
 
Administrative Expenses   Ps. 231,651       169,856  

 

Administrative expenses increased 36.4%, or MX$61,795, to MX$231,651 for the six months period ended June 30, 2020 compared to MX$169,856 for the six months period ended June 30, 2019, primarily due to increases in Betterware’s wages and benefits to employees. As a percentage of net revenues, these expenses represented 9.7% and 11.0% for the six months period ended June 30, 2020 and 2019, respectively. This percentage decrease was a result of maintaining fixed administrative expenses, such as salaries and wages, leases and fees.

 

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Administrative expenses by department are as follows:

 

    June 30,
2020
    June 30,
2019
    Var. $     Var. %  
Operations     108,228       108,228       29,718       38 %
Finance     37,421       37,421       12,903       53 %
IT     17,44       17,44       5,046       41 %
Marketing     9,712       9,712       1,134       13 %
Quality     11,714       11,714       3,531       43 %
Depreciation     19,575       19,575       2,099       12 %
Others     27,560       17,476       7,364       36 %
Total     231,651       169,856       61,795       73.3 %

 

Selling Expenses

 

    June 30,
2020
    June 30,
2019
 
Selling Expenses   Ps. 317,780       272,930  

 

Selling expenses increased 16.4%, or MX$44,850, to MX$317,780 for the six months period ended June 30, 2020 compared to MX$272,930 for the six months period ended June 30, 2019, primarily due to an increase in sales bonuses and wages, and an increase of expenses incurred in connection with the higher number of sales catalogues printed in order to have enough copies to provide for the increased number of Distributors and Associates. The Company’s selling expenses were 13.0% of net revenue for the six months period ended June 30, 2020 compared to 18.0% of net revenue for the six months period ended June 30, 2019. This decrease was mainly a combination of maintaining the same expenses related to employees during 2020 and 2019 and an increase in sales during 2020. The selling expenses major line items include:

 

    June 30,
2020
     June 30,
2019
    Var. $     Var. %  
Sales bonuses and wages     140,015       96,411       43,604       45 %
Sales Catalogue     81,523       61,577       19,946       32 %
Events and Conventions     10,343       20,219       (9,876 )     (49 )%
Rewards Program     33,651       53,325       (19,674 )     (37 )%
Others     52,248       41,398       10,850       26 %
Total     317,780       272,930       44,850       16 %

 

Distribution Expenses

 

    June 30,
2020
    June 30,
2019
 
Distribution Expenses   Ps. 114,795       67,333  

 

Distribution expenses increased 70.5%, or MX$47,462, to MX$114,795 for the six months period ended June 30, 2020 compared to MX$67,333 for the six months period ended June 30, 2019. Distribution expenses are driven primarily by sales volume, which increased 55.5% for the six months period ended June 30, 2020, compared to the six months period ended June 30, 2019.

 

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Financing Income/Costs

 

    June 30,
2020
    June 30,
2019
 
Financing Income (Cost)            
Interest Expense(1)   Ps. (72,371 )     (44,730 )
Interest Income     5,487       3,831  
Unrealized Loss in Valuation of Financial Derivative Instruments     75,336       880  
Foreign Exchange (Loss), Net(2)     (18,599 )     (5,913 )
Financing Cost, Net     (10,147 )     (45,932 )

 

(1) Financing net cost decreased 77.9% or MX$35,785, to MX$10,147 for the six months period ended June 30, 2020 compared to MX$45,932 for the six months period ended June 30, 2019. Interest expenses increased as a result of the commission payment made to Credit Suisse in the amount of MX$27,641.
(2) The Company’s exposure to currency exchange rate fluctuations and how it mitigates this risk can be found in the section entitled “Risk Factors — Risks Related to Mexico” located elsewhere in this prospectus.

 

Income Tax Expense

 

Income taxes increased 76.9% or MX$81,548 to MX$187,605 for the six months period ended June 30, 2020 compared to MX$106,057 for the six months period ended June 30, 2019 due to an increase in income before income taxes.

 

Capital Expenditures

 

Our capital expenditures for the six months period ended June 30, 2020, were mainly related to the construction of our new headquarters and distribution center in Guadalajara, Mexico. Our capital expenditures for the six months period ended June 30, 2020 and 2019 amounted to MX$5,560 and MX$4,439, respectively.

 

Results of Operations — Year Ended December 31, 2018 Compared with Year Ended December 31, 2019

 

All amounts discussed are in thousands of Mexican pesos unless otherwise noted

 

Net Revenue

 

    December 31,
2019
    December 31,
2018
 
Net Revenue   Ps. 3,084,662       2,316,716  

 

Net revenue increased by 33.1%, or MX$767,946, to MX$3,084,662 for the year ended December 31, 2019 compared to MX$2,316,716 for the year ended December 31, 2018, primarily due to the increase in the distribution network, including distributors and associates, volume of units sold, and average unit price. For the year ended December 31, 2019, the Company had a Distributors and Associates network of 437,872, compared to 42.3 million units and a 342,867 Distributors and Associates network for the year ended December 31, 2018.

 

Cost of Goods Sold

 

    December 31,
2019
    December 31,
2018
 
Cost of Sales   Ps. 1,280,829       958,469  

 

Cost of goods sold increased 33.6%, or MX$322,360, to MX$1,280,829 for the year ended December 31, 2019 compared to MX$958,469 for the year ended December 31, 2018 as a result of increased revenue, resulting in a gross profit of MX$1,803,833 for the year ended December 31, 2019 compared to MX$1,358,247 for the year ended December 31, 2018. As a percentage of net revenues, cost of goods sold was 41.5% for the year ended December 31, 2019 and 41.4% for the year ended December 31, 2018. The increase of cost of goods sold as a percentage of net revenues was primarily because of the impact of the increase in the US dollar exchange rate in 2019 compared to 2018. This was mainly due to the volume of purchases denominated in US dollars, as approximately 90% of our purchases are imported from China, and sold in Mexican Pesos.

 

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Administrative Expenses

 

    December 31,
2019
    December 31,
2018
 
Administrative Expenses   Ps. 319,133       249,148  

 

Administrative expenses increased 28.1%, or MX$69,985, to MX$319,133 for the year ended December 31, 2019 compared to MX$249,148 for the year ended December 31, 2018, primarily due to increases in Betterware’s wages and benefits to employees. As a percentage of net revenues, these expenses represented 10.4% and 10.8% for the years ended December 31, 2019 and 2018, respectively. This percentage decrease was a result of maintaining fixed administrative expenses, such as salaries and wages, leases and fees.

 

Administrative expenses by department are as follows:

 

    December 31,
2019
    December 31,
2018
    Var. $     Var. %  
Operations     164,336       128,918       35,418       27.5 %
Finance     51,374       41,037       10,337       25.2 %
IT     27,765       20,172       7,593       37.6 %
Marketing     19,085       16,461       2,624       15.9 %
Quality     15,909       14,615       1,294       8.9 %
Depreciation     38,394       25,260       13,134       52.0 %
Others     2,270       2,685       (415 )     (15.5 )%
Total     319,133       249,148       69,985       28.1 %

 

Selling Expenses

 

    December 31,
2019
    December 31,
2018
 
Selling Expenses   Ps. 551,300       454,016  

 

Selling expenses increased 21.4%, or MX$97,284, to MX$551,300 for the year ended December 31, 2019 compared to MX$454,016 for the year ended December 31, 2018, primarily due to an increase in sales bonuses and wages, and an increase of expenses incurred in connection with the higher number of sales catalogues printed in order to have enough copies to provide for the increased number of Distributors and Associates. The Company’s selling expenses were 17.9% of net revenue for the year ended December 31, 2019 compared to 19.6% of net revenue for the year ended December 31, 2018. This decrease was mainly a combination of maintaining the same expenses related to employees during 2019 and 2018 and an increase in sales during 2019. The selling expenses major line items include:

 

    December 31,
2019
    December 31,
2018
    Var. $     Var. %  
Sales bonuses and wages     281,259       217,978       63,281       29.0 %
Sales Catalogue     128,687       92,931       35,756       38.5 %
Events and Conventions     37,848       35,253       2,595       7.4 %
Rewards Program     26,311       24,492       1,819       7.4 %
Others     77,195       83,362       (6,167 )     (7.4 )%
Total     551,300       454,016       97,284       21.4 %

 

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Distribution Expenses

 

    December 31,
2019
    December 31,
2018
 
Distribution Expenses   Ps. 121,155       103,336  

 

Distribution expenses increased 17.2%, or MX$17,819, to MX$121,155 for the year ended December 31, 2019 compared to MX$103,336 for the year ended December 31, 2018. Distribution expenses are driven primarily by sales volume, which increased 33.1% for the year ended December 31, 2019, compared to the year ended December 31, 2018.

 

Financing Income/Costs

 

    December 31,
2019
    December 31,
2018
 
Financing Income (Cost)            
Interest Expense(1)   Ps. (85,429 )     (86,343 )
Interest Income     7,028       6,707  
Unrealized Loss in Valuation of Financial Derivative Instruments     (15,680 )     (16,629 )
Foreign Exchange (Loss), Net(2)     (13,330 )     (6,036 )
Financing Cost, Net     (107,411 )     (102,301 )

 

(1) Interest expenses decreased 1.1% or MX$914, to MX$85,429 for the year ended December 31, 2019 compared to MX$86,343 for the year ended December 31, 2018. Interest expenses decreased as a result of a lower outstanding debt balances in 2019, as compared to 2018, due to repayment of principal amounts in certain financing agreements.
(2) The Company’s exposure to currency exchange rate fluctuations and how it mitigates this risk can be found in the section entitled “Risk Factors — Risks Related to Mexico” located elsewhere in this prospectus.

 

Income Tax Expense

 

    December 31,
2019
    December 31,
2018
 
Current   Ps. 229,900       158,545  
Deferred     2,792       (8,366 )
Total Income Tax Expense     232,692       150,179  

 

Income taxes increased 54.9% or MX$82,513 to MX$232,692 for the year ended December 31, 2019 compared to MX$150,179 for the year ended December 31, 2018 due to an increase in income before income taxes. Effective income tax rate increased as a result of an increase in, mainly, the tax effect of inflation and non-deductible expenses.

 

Capital Expenditures

 

Our capital expenditures for the year ended December 31, 2019, were mainly related to the construction of our new headquarters and distribution center in Guadalajara, Mexico. Our capital expenditures for the year ended December 31, 2019 and 2018 amounted to MX$182.6 million and MX$21.3 million, respectively.

 

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Results of Operations — Year Ended December 31, 2017 Compared with Year Ended December 31, 2018

 

A result of operations comparison of the years ended December 31, 2018 and 2017 has been omitted from this prospectus, but may be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Registrant’s Registration Statement on Form F-1 filed with the SEC and effective on January 22, 2020.

 

Liquidity and Capital Resources

 

Betterware’s primary source of liquidity is from cash flow generated from operations. Betterware has an efficient working capital structure where its seller supplier financing matches the Company requirements to serve their clients and inventory supplemented by lines of credit. Additionally, the Company capex requirements to sustain its growth is levered on the existing platform with minimum increased investment in technology. Due to these low capital requirements and closed working capital cycle, the Company has high cash conversion rate enabling it to annually serve their shareholders through dividends.

 

In order to maintain sufficient liquidity, the Company establishes maintaining a minimum cash and cash equivalent monthly balance to equal approximately MX$100,000 in order to cover its Selling, General and Administrative expenses. As of June 30, 2020 and December 31, 2019, cash and cash equivalents of the Company was MX$520,805 and MX$213,697, respectively, above its minimum internal policy.

 

Six Months ended June 30, 2020 and June 30, 2019

 

Cash Flows from Operating Activities

 

Cash flow provided by operating activities was MX$825,716 and MX$170,100 during the six months ended June 30, 2020 and 2019, respectively. The cash flow from operations increased primarily due to the cash received from increased sales and an increase in accounts payable versus a reduction in accounts receivable. Inventory management decreased from 88 to 77 days as of June 30, 2019 and June 30, 2020 respectively, Accounts payable days increased from 135 to 180 as of June 30, 2019 and June 30, 2020 respectively. Accounts receivable days increased from 24 to 27 as of June 30, 2019 and June 30, 2020.

 

Cash Flows from Investing Activities

 

Cash flows (used in) provided by investing activities were MX$178,102 and MX$79,845 during the six months ended June 30, 2020 and 2019, respectively. Cash outflows from investing activities include purchases of molds for products, investment in technological platform, product innovation, equipment, and property. The increase in cash flows used in investing activities was mainly related to the construction of a distribution center in Guadalajara.

 

Cash Flows from Financing Activities

 

Cash flows used in financing activities were MX$340,506 and MX$170,718 during the six months ended June 30, 2020 and 2019, respectively. During the six months ended June 30, 2020, the Company made repayments in the amount of MX$1,106,806 under its long-term financing agreements, of which MX$516,598 were repaid to Credit Suisse, MX$310,208 were paid to Banamex and MX$280,000 were paid to HSBC. During the six months ended June 30, 2020 and June 30, 2019, the Company paid dividends of MX$170,000 and MX$192,955, respectively, to shareholders. Also, there was a $164,603 equity increase for the six month ended June 30, 2020. Interests paid for the six months ended June 30, 2020 were MX$79,756, a 90.1% and increase compared to MX$41,954 for the six months ended June 30, 2019 primarily due to repayment of the Credit Suisse loan.

 

Years ended December 31, 2019 and 2018

 

Cash Flows from Operating Activities

 

Cash flow provided by operating activities was MX$605,446 and MX$338,214 during the year ended December 31, 2019 and 2018, respectively. The cash flow from operations increased primarily due to an increase in cash received from sales. Inventory management decreased from 104 days as of December 31, 2018, to 88 as of December 31, 2019, Days of Payables increased from 95 as of December 31, 2018 to 135 as of December 31, 2019, and Days of Receivables decreased from 22 as of December 31, 2018 to 20 as of December 31, 2019.

 

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Cash Flows from Investing Activities

 

Cash flows used in by investing activities were MX$(175,597) and MX$13,549 during the year ended December 31, 2019 and 2018, respectively. Cash outflows from investing activities include purchases of molds for products, investment in technological platform, product innovation, equipment, and property. The increase in investing activities was mainly due to the construction of a distribution center in Guadalajara.

 

Cash Flows from Financing Activities

 

Cash flows used in financing activities were MX$393,535 and MX$405,235 during the year ended December 31, 2019 and 2018, respectively. During the year ended December 31, 2019, the Company made repayments in the amount of MX$83,041 under its long-term financing agreements, of which MX$78,750 were repaid to Credit Suisse and MX$4,291 to Banamex, and received two additional disbursements under the existing such long-term financing agreements for the total amount of MX$104,500. During the year ended December 31, 2019 and December 31, 2018, the Company paid dividends of MX$342,955 and MX$235,124, respectively, to shareholders. Interests paid for the year ended December 31, 2019 were MX$82,654, a 2.9% decrease compared to MX$85,189 for the year ended December 31, 2018 mainly due to a lower outstanding balance of credits resulting from principal repayments made during 2019.

 

Years ended December 31, 2018 and 2017

 

A cash flow comparison of the years ended December 31, 2018 and 2017 has been omitted from this annual report, but may be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Registration Statement on Form F-1 filed with the SEC and effective as of January 22, 2020.

 

Debt

 

MCRF P, S.A. de C.V., S.O.F.O.M., E.N.R. Term Loan

 

On May 10, 2017, Betterware, as borrower, and BLSM, as guarantor (obligado solidario), entered into a secured credit facility agreement with MCRF P, S.A. de C.V., S.O.F.O.M., E.N.R. for an aggregate principal amount of MX$600 million. The loan was secured by (i) the Invex Security Trust with approximately 61.06% of the outstanding common stock of Betterware prior to the Business Combination, and (ii) a non-possessory pledge over all assets, inventory and intellectual property of Betterware and BLSM. MCRF P, S.A. de C.V. SOFOM, E.N.R. Term Loan bore a fixed interest rate of 13.10%. Principal and interests are paid in quarterly installments, with final maturity on May 15, 2023. This loan was partially repaid on March 27, 2020 in the amount of MX$258,750 and repaid in full on April 27, 2020.

 

Banamex Term Loan

 

On December 18, 2018, Betterware, as borrower, and BLSM, as guarantor (fiador), entered into a secured credit facility agreement with Banco Nacional de México, S.A., Integrante de Grupo Financiero Banamex for an aggregate principal amount of MX$400 million. The loan is secured by (i) a first priority mortgage over a 49,756.47 square meters property located in Jalisco, Mexico property of BLSM and (ii) a bond (fianza) granted by BLSM.

 

This Banamex credit line bared TIIE rate plus 317 basis points as of December 31, 2019 and bears a TIIE rate plus 260 basis points starting January 30, 2020. Withdrawals from this credit line can be made no later than August 2020, and are payable on a quarterly basis from September 2020 until December 18, 2025.

 

Under this facility, Betterware and BLSM must observe certain restrictive covenants, which require the Betterware and BLSM (i) to continue to perform the same type of activities and businesses, maintaining their legal existence, (ii) complying with all applicable laws, (ii) having audited its combined financial statements by internationally recognized auditors authorized by the financial institution, (iii) paying all applicable taxes, (iv) obtaining all licenses and permits required by government to operate, (v) keeping assets and businesses insured against loss or damage, (vi) not to incur liens on Betterware and BLSM’s assets, and (vii) not to give or sell any rights of financial documents.

 

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The line of credit agreement with Banamex contains the following financial covenants:

 

a) To maintain a short-term debt coverage ratio not lower than 1.5.

 

b) To maintain a total debt coverage ratio not greater than 3.0.

 

c) To maintain a leverage ratio not greater than 7.0.

 

d) To maintain a minimum cash and cash equivalents balance of MX$40,000.

 

As of the date of this prospectus, the Company is in compliance with all covenants under this facility. In connection with the Merger, Banamex granted the Company the required permission from Banamex to consummate the transaction under the Business Combination.

 

On March 25, 2020 and April 13, 2020 and June 30, 2020, the Company withdrew from the line of credit Ps. 74 million, Ps. 100 million, and Ps. 90.8 million, respectively. As of December 31, 2018, December 31, 2019 and June 30, 2020, the principal amount outstanding under this line was Ps.50 million, Ps.135.2 million and Ps.400 million, respectively.

 

Banamex Revolving Facility

 

On April 30, 2019, Betterware, as borrower, and BLSM, as guarantor (fiador), entered into a revolving facility agreement with Banco Nacional de México, S.A., Integrante de Grupo Financiero Banamex for an aggregate principal amount of MX$80 million.

 

This Banamex credit line bears a TIIE rate plus 285 basis points. This credit line is renewable annually.

 

Under this facility, Betterware and BLSM must observe certain restrictive covenants, which require the Betterware and BLSM (i) to continue to perform the same type of activities and businesses, maintaining their legal existence, (ii) complying with all applicable laws, (ii) having audited its combined financial statements by internationally recognized auditors authorized by the financial institution, (iii) paying all applicable taxes, (iv) obtaining all licenses and permits required by government to operate, (v) keeping assets and businesses insured against loss or damage, (vi) not to incur liens on Betterware and BLSM’s assets, and (vii) not to give or sell any rights of financial documents.

 

Under this facility, Betterware and BLSM shall maintain a short-term debt coverage ratio not lower than 1.0.

 

Credit Opening Agreement with Banco Nacional de México, S.A. Member of Grupo Financiero Banamex.

 

On June 3, 2020, Betterware, as debtor, and BLSM, as guarantor, entered into a credit agreement with Banco Nacional de México, S.A., a member of Grupo Financiero Banamex for a total amount of Ps. 195 million. The loan is guaranteed by (i) a first degree mortgage on a 49,756.47 m2 property located in Jalisco, Mexico owned by BLSM and (ii) a bond granted by BLSM.

 

This credit with Banamex bears interest at a TIIE rate plus 295 basis points. The maturity of this line of credit is December 30, 2025. On July 30, 2020, the Company disposed all the loan.

 

In accordance with this credit, Betterware and BLSM must comply with certain obligations that require that Betterware and BLSM (i) continue to carry out the same type of activities and businesses, maintaining their legal existence, (ii) comply with all applicable laws, (ii) have audited their combined financial statements by internationally recognized auditors authorized by the financial institution, (iii) pay all applicable taxes, (iv) obtain all government licenses and permits required to operate, (v) keep assets and businesses insured against loss or damage, (vi) do not incur liens on the assets of Betterware and BLSM, and (vii) do not give or sell any rights to financial documents.

 

Revolving Credit Opening Agreement with HSBC, S.A. HSBC.

 

On March 10, 2020, Betterware as debtor, and BLSM as joint obligor, entered into a current account credit agreement with HSBC México, S.A., a member of Grupo Financiero HSBC for an amount of Ps. 50 million with provisions through promissory notes where payment of principal and interest are specified and bearing interest at a TIIE rate plus 350 basis points. On May 4, 2020, the first modifying agreement was signed where the amount of the loan was increased to Ps. 150 million. The maturity of this line is March 10, 2022.

 

In accordance with this credit, Betterware and BLSM must comply with certain obligations that require that Betterware and BLSM (i) continue to carry out the same type of activities and businesses, maintaining their legal existence, (ii) comply with all applicable laws, (ii) have audited their combined financial statements by internationally recognized auditors authorized by the financial institution, (iii) pay all applicable taxes, (iv) obtain all government licenses and permits required to operate, (v) keep assets and businesses insured against loss or damage, (vi) do not incur liens on the assets of Betterware and BLSM, and (vii) do not give or sell any rights to financial documents.

 

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This credit with HSBC contains the following financial obligations:

 

a) To maintain a debt leverage ratio less than or equal to 3.0.

 

b) To maintain a leverage ratio no higher than 7.0.

 

c) Maintain a minimum balance of cash and cash equivalents of Ps. 100,000.

 

The Company paid in full this loan on June 30, 2020.

 

Impact of Inflation

 

Inflationary factors, such as increases in the cost of goods sold and administrative, selling, and distribution expenses, may adversely affect Betterware’s operating results. Although it does not believe that inflation has had a material impact on its financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on Betterware’s ability to maintain current levels of gross profit margin and administrative, selling, and distribution expenses as a percentage of net revenues if the selling prices of its products do not increase to cover these increased costs.

 

Seasonality

 

Betterware’s business model is tailored to Mexico’s unique geographic, demographic and economic dynamics, where communities are small and scattered across the country, with very low retail penetration and difficult to fulfill last mile logistics, middle-income consumers are emerging. Additionally, the business model is resilient to economic downturns given low average sales price to consumers and also because being a Distributor or Associate represents an additional source of income for households. As a result, Betterware’s operations are not subject to significant seasonal fluctuations.

 

Off-Balance Sheet Arrangements

 

Betterware does not engage in any off-balance sheet financing activities, nor does it have any interest in entities referred to as variable interest entities.

 

Critical Accounting Policies and Estimates

 

Betterware’s combined financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). In addition, Betterware’s interim consolidated financial statements are prepared in accordance with IAS 34 “Interim Financial Reporting”. In connection with the preparation of its combined financial statements, Betterware is required to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses, and the related disclosures. Betterware bases its assumptions, estimates, and judgments on historical experience, current trends and other factors that management believes to be relevant at the time its combined financial statements are prepared. On a regular basis, Betterware reviews the accounting policies, assumptions, estimates, and judgments to ensure that its financial statements are presented fairly and in accordance with IFRS. However, because future events and their effects cannot be determined with certainty, actual results could differ from its assumptions and estimates, and such differences could be material. Betterware has identified several policies as being critical because they require management to make particularly difficult, subjective and complex judgments about matters that are inherently uncertain, and there is a likelihood that materially different amounts would be reported under different conditions or using different assumptions.

 

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All of Betterware’s significant accounting policies are discussed in Note 2 to its combined financial statements included elsewhere in this prospectus.

 

Revenue Recognition

 

Betterware invoices at the time of shipment of its product, but it recognizes revenue only upon delivery to its customers, as it arranges freight and is generally responsible, along with its common carriers, for any damage that occurs during transportation. Betterware allows customers to return product that is damaged or defective at the time of delivery. Betterware’s products are sold on credit terms established in accordance with industry practice, which typically require payment within 15 days of invoice date. Betterware’s policy is to provide customers with product when needed.

 

Revenue is reported net of the estimates for the costs of various trade and promotional allowances including, but not limited to, discounts to sales representatives. Also, Betterware includes an estimate for returns of damaged or defective products. In lieu of accepting returns for damaged products, Betterware provides an allowance to certain customers.

 

Betterware’s promotional activities are conducted either through the retail trade or directly with consumers and include activities such as feature price discounts and loyalty programs. The costs of these activities are generally recognized at the time the related revenue is recorded, which precedes the actual cash expenditure. The recognition of these costs therefore requires management judgment regarding the volume of promotional offers that will be redeemed by either the retail trade or consumer. These estimates are made using various techniques including historical data on performance of similar promotional programs. Differences between estimated expense and actual redemptions are normally insignificant and recognized as a change in management estimate in a subsequent period. These expenditures are recorded as reductions to net revenue and based on their significance, could fluctuate materially if different assumptions or conditions were to prevail.

 

Valuation of Goodwill, Intangible Assets, and Long-Lived Assets

 

Betterware evaluates goodwill, intangible and long-lived assets for impairment at the end of each year and at any time an event occurs or circumstances change that would more likely than not indicate fair value is less than the carrying amount of the related asset group and may not be fully recoverable.

 

Valuation of Goodwill

 

Betterware’s recorded goodwill was MX$348,441 for the six months ended June 30, 2020 and for the years ended December 31, 2019, and December 31, 2018. Betterware’s goodwill is allocated to the Cash Generating Unit (“CGU”) or groups of CGUs that receive a benefit from the synergies of the combination. An impairment loss is recognized if the carrying amount of an asset or CGU exceeds its recoverable amount. Impairment losses are recognized in profit or loss. They are allocated first to reduce the carrying amount of any goodwill allocated to the CGU, and then to reduce the carrying amounts of the other assets in the CGU on a pro rata basis. An impairment loss in respect of goodwill is not reversed.

 

Valuation of Intangible Assets

 

Betterware evaluates indefinite lived intangible assets for impairment annually or more frequently if there are indicators of triggering events or circumstances that indicate potential impairment. Betterware evaluates finite lived intangible assets for impairment whenever events or changes in circumstances indicate that these assets may not be fully recoverable.

 

As of June 30, 2020, December 31, 2019 and December 31, 2018, Betterware’s recorded indefinite-lived trademarks were MX$317,000 and its customer relationships net of accumulated amortization were MX$38,395, MX$34,873, and MX$28,245, respectively.

 

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Valuation of Long-Lived Assets.

 

Betterware reviews internal management reports on a quarterly basis as well as monitors current and potential future competition in the markets where it operates for indicators of triggering events or circumstances that indicate potential impairment. Upon an indicator of a triggering event, if the sum of the estimated future cash flows, undiscounted and without interest charges, are less than the carrying amount of the asset group, an impairment loss is recognized in the amount by which the carrying value of the asset exceeds its estimated fair value. Assets are evaluated for impairment on an individual production line basis, which management believes is the lowest level for which there are identifiable cash flows. The impairment evaluation is based on the estimated cash flows from continuing use until the expected disposal date or end of the useful life.

 

There are a number of estimates and significant judgments that are made by management in performing these impairment evaluations. Such judgments and estimates include estimates of future revenues, cash flows, and expenses, among others. Betterware believes it has used reasonable and appropriate business judgments. There is considerable management judgment with respect to cash flow estimates to be used in determining fair value, and, accordingly, actual results could vary significantly from such estimates. These estimates determine whether impairments have been incurred and quantify the amount of any related impairment charge. Given the nature of Betterware’S business, future impairments are possible, and they may be material, based upon business conditions that are constantly changing and the competitive business environment in which Betterware operates.

 

Contractual Obligations

 

As of June 30, 2020, Betterware is subject to the following contractual obligations:

 

i. Secured Term Loan Agreement dated December 18, 2018, entered by and among Banco Nacional de México, Sociedad Anónima, Integrante de Grupo Financiero Banamex, as lender; Betterware as borrower; and BLSM as guarantor;

 

ii. Revolving Unsecured Term Loan Agreement dated April 30, 2018, entered by and among Banco Nacional de México, Sociedad Anónima, Integrante de Grupo Financiero Banamex, as lender; Betterware as borrower; and BLSM as guarantor. This loan is renewable annually;

 

iii. Credit Opening Agreement with Banco Nacional de México, S.A. Member of Grupo Financiero Banamex, dated June 3, 2020, Betterware, as debtor, and BLSM, as guarantor. The maturity of this line of credit is December 30, 2025.

 

iv. Facilities Lease Agreement dated January 1, 2017, by and between Mrs. María Cecila Estela de Asunción Díaz Romo as lessor and Betterware as lessee. Termination date is December 31, 2020;

  

v. Warehouse Lease Agreement dated December 1, 2018 by and between Urbanizadora Gutor, S.A. de C.V. as lessor and Betterware as lessee. Termination date is November 30, 2020; and

  

vi. Warehouse Lease Agreement dated April 16, 2018 by and between Mrs. Adriana Hermosillo Hernández as lessor and Betterware as lessee.

 

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MANAGEMENT

 

Executive Officers and Directors

 

Set forth below is information concerning our officers and directors. Our executive officers are appointed by the board of directors to serve in their roles. Each executive officer is appointed for such term as may be prescribed by the board of directors or until a successor has been chosen and qualified or until such officer’s death, resignation or removal. Unless otherwise indicated, the business address of all of our executive officers and directors is Luis Enrique Williams, 549 Colonia Belenes Norte, Zapopan, Jalisco, 45145, México.

 

Name

  Age   Position Held
Luis Campos   67   Chairman of the Board
Andres Campos   37   Chief Executive Officer and Board Member
Diana Karina Jones Villalpando   38   Chief Financial Officer
Fabian Rivera   39   Chief of Operations
Santiago Campos   28   Board Member
Jose de Jesus Valdez   67   Independent Board Member
Federico Clariond   46   Independent Board Member
Mauricio Morales   59   Independent Board Member
Joaquin Gandara   49   Independent Board Member
Dr. Martín M. Werner   57   Independent Board Member
Dr. Guillermo Ortiz Martinez   71   Independent Board Member
Reynaldo Vizcarra   54   Secretary

 

Background of Our Officers and Directors

 

Betterware’s board of directors is composed of the following members and a non-member Secretary:

 

Luis Campos has been in the direct to consumer business for almost 25 years. He has been chairman of Betterware de México since he bought the Company in 2001. Prior to Betterware, Mr. Campos served as Chairman of Tupperware Americas (1994 – 1999), Chairman of Sara Lee — House of Fuller Mexico (1991 – 1993), and Chairman of Hasbro Mexico (1984 – 1990). Mr. Luis Campos is an active member of the “Consejo Consultivo” of Banamex and he was an active member of the Direct Selling Association, The Latin America Regional Managers’ Club, The Conference Board, and a board member of the Economic Development Commission of Mid Florida, Casa Alianza-Covenant House, The Metro Orlando International Affairs Commission, SunTrust Bank and Casa de Mexico de la Florida Central, Inc. Mr. Campos was selected to serve on Betterware’s board of directors due to his extensive experience in consumer product companies, especially in the direct sales, as well as his relevant top-level experience in American public multinational companies. Luis Campos is the father of Andres and Santiago Campos.

 

Andres Campos has been CEO of Betterware de México since 2018. Prior to becoming CEO, within the Company, Andres Campos served as Commercial Director (2014 – 2018) and Strategy and New Businesses Director (2012 – 2014). Prior to Betterware, Mr. Campos worked in Banamex Corporate Banking area (2012 – 2014) and in KPMG as an Auditor (2004 – 2005). Andres holds a bachelor’s degree in Business Administration from Instituto Tecnológico y de Estudios Superiores de Monterrey and an MBA from Cornell University. Andres Campos is son of Luis Campos and brother of Santiago Campos.

 

Diana Karina Jones Villalpando Diana Karina Jones Villalpando has served as Chief Financial Officer since 2020. Previously, she was Director of Controllership (2018-2019) and Director of Financial Planning (2019-2020) at Betterware. Before joining the Company, she served as Director of External Audit at KPMG Cárdenas Dosal, S.C. (2003-2018), with an international secondment in New York City from 2008 to 2010. Diana has a degree in Public Accounting and Finance from the Instituto Tecnológico y de Estudios Superiores de Monterrey, is a Certified Public Accountant by the Mexican Institute of Public Accountants and has a master’s degree in Administration and Finance from Universidad Tecmilenio.

 

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Fabian Rivera has served as CO of Betterware de México since 2016. Prior to Betterware, Mr. Rivera served as IT Director of Finamex (2012 – 2016), Consultant at Deloitte (2009 – 2012), and Software Products Coordinator and Developer at IBM (2005 – 2007). Fabian holds a B.S. in Computer Systems Engineering from Instituto Tecnológico y de Estudios Superiores de Monterrey and an MBA from Tuck School of Business at Dartmouth.

 

Santiago Campos has served as Director of Innovation and Communication at Betterware since 2018. Prior to joining Betterware, Santiago Campos served as Commercial Director at EPI Desarrollos, a Real Estate Development company, coordinating efforts between marketing, sales, finance and also taking care of administration, he was involved in achieving successful projects in a span of 2.5 years where 100% sales were accomplished before finishing construction. Santiago holds a bachelor’s degree in public accounting and finance from Instituto Tecnológico y de Estudios Superiores de Monterrey. Mr. Campos was selected to serve on Betterware’s board of directors due to his natural instinct in product innovation and household needs in Betterware market target group. Santiago Campos is son of Luis Campos and brother of Andres Campos.

 

Jose de Jesus Valdez serves as CEO of Alpek since 1988. Mr. Valdez joined Alpek in 1976 and has held several senior management positions such as CEO of Petrocel, Indelpro and Polioles. He was also president of the “Asociación Nacional de la Industria Química” (ANIQ), of the “Comisión Energética de la Confederación de Cámaras Industriales de los Estados Unidos Mexicanos” (CONCAMIN) and of the “Cámara de la Industria de Transformación de Nuevo León” (CANAINTRA). Mr. Valdez is a mechanical engineer and has an MBA from Tecnológico de Monterrey (ITESM) and a master’s degree in industrial engineering from Stanford University. Mr. Valdez was selected to serve on the Company’s board of directors due to his vast experience in Mexican, US and Latin American business and market economy.

 

Federico Clariond has served as CEO of Valores Aldabra, a single-family office with investments in financial services, aluminum, packaging and consumer goods companies, since 2011, and as CEO of Buro Inmobiliario Nacional, a Real Estate investment vehicle with holdings in the hospitality, industrial, office, and commercial spaces throughout Mexico, since 2015. Prior to Valores Aldabra and Buro Inmobiliario Nacional, from 2007 to 2011, Mr. Clariond served as CEO of Stabilit Mexico, a manufacturer of fiber glass reinforced plastics with operations in Mexico, the United States and Europe, and from 2004 to 2007, as Commercial VP of IMSA Acero. Additionally, he is board member of several companies ranging from the financial services, aluminum, packaging and consumer goods industries. Mr. Clariond is a mechanical engineer and has an MBA from Stanford University. Mr. Clariond was selected to serve on Betterware’s board of directors due to his vast business experience in Mexico’s private investment matters.

 

Mauricio Morales is a founding partner at MG Capital. Before his 21-year tenure at the firm, he worked at different financial institutions in Mexico, specializing in wealth management, with a focus on exchange-traded instruments. Mauricio hold a B.S. in Mechanical Engineering, from the Instituto Tecnológico y de Estudios Superiores de Monterrey. Mauricio participates as a board member at one private firm, and one private charity group. Mr. Morales was selected to serve on Betterware’s board of directors due to his vast experience in Mexico and USA capital markets.

 

Joaquin Gandara serves as CEO of Stone Financial Awareness since 2017. Prior to Stone Financial Awareness, he worked at Scotiabank for 24 years where he held several positions in different departments such as Credit, Consumer Banking, Branch Operations and Corporate Banking. Mr. Gandara was selected to serve on the Company’s board of directors due to his extensive knowledge in the financial and banking field.

 

Dr. Martín M. Werner, who has served as DD3’s Chief Executive Officer and Chairman of the Board since inception, is a founding partner of DD3 Capital. Prior to founding DD3 Capital in 2016, Dr. Werner worked at Goldman Sachs for 16 years (2000 – 2016) becoming a Managing Director in 2000 and a Partner in 2006. He was co-head of the Investment Banking Division for Latin America and the country head of the Mexico office. Dr. Werner continues to serve as the Chairman of the board of directors of Red de Carreteras de Occidente (RCO), which is one of Mexico’s largest private concessionaires and operates more than 760 kilometers of toll roads and is owned by Goldman Sachs Infrastructure Partners. Prior to his time with Goldman Sachs, Dr. Werner served in the Mexican Treasury Department as the General Director of Public Credit from 1995 to 1997, and as Deputy Minister from 1997 to 1999. Among his numerous activities, he was in charge of restructuring Mexico’s Public debt after the financial crisis of 1994 and 1995. Dr. Werner is the second largest investor of Banca Mifel, a leading mid-market Mexican bank with $3.3 billion in assets and a credit portfolio of $2.0 billion; he is also member of the Board of Directors of Grupo Comercial Chedraui, a leading supermarket chain in Mexico and the United States; the Board of Directors of Grupo Aeroportuario Centro Norte, one of Mexico’s largest airport operators; and he is a member of Yale University’s School of Management Advisory Board. Dr. Werner holds a bachelor degree in economics from Instituto Tecnológico Autónomo de Mexico (ITAM) and a Ph.D. in economics from Yale University.

 

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Dr. Guillermo Ortiz has served as Chairman of BTG Pactual Latin America ex-Brazil, a leading Brazilian financial services company with operations throughout Latin America, the U.S. and Europe, since 2015. Prior to joining BTG, from 2010 to 2015, he was Chairman of the Board of Grupo Financiero Banorte-Ixe, the largest independent Mexican financial institution. Dr. Ortiz also served two consecutive six-year terms as Governor of Mexico’s Central Bank from 1998 to 2009. From 1994 to 1997, Dr. Ortiz served as Secretary of Finance and Public Credit in the Mexican Federal Government where he guided Mexico through the “Tequila” crisis and contributed to the stabilization of the Mexican economy, helping return the nation to growth in 1996. He has served on the Board of Directors of the International Monetary Fund, the World Bank and the Interamerican Development Bank. Dr. Ortiz is Chairman of the Pe Jacobsson Foundation, a member of Group of Thirty, Board of Directors of the Center for Financial Stability, Board of Directors of the Globalization and Monetary Policy Institute, Board of Directors in the Federal Reserve Bank of Dallas and Board of Directors of the China’s International Finance Forum. He is also an Officer of Zurich Insurance Group Ltd. and a Member of the Board of Directors of Wetherford International, a leading company in the oil and equipment industry, as well as of a number of Mexican companies, including Aeropuertos del Sureste, one of Mexico’s largest airport operators, Mexichem, a global leading petrochemical group, and Vitro, a leading glass manufacturer company in Mexico. Dr. Ortiz is also a member of the Quality of Life Advisory board of the Government of Mexico City. Dr. Ortiz holds a bachelor’s degree in economics from Universidad Nacional Autónoma de México (UNAM), a master’s degree and a Ph.D. in economics from Stanford University. Dr. Ortiz was selected to serve on our board of directors due to his significant government service and finance experience.

 

Reynaldo Vizcarra (non-member Secretary) is a member of Baker & McKenzie’s Corporate and Transactional Practice Group. He is a professor at the University Anáhuac del Norte where he teaches foreign investment as part of the master of laws program, and an instructor at Universidad Panamericana’s Baker McKenzie Seminar. He joined Baker & McKenzie’s Mexico City office in 1986, handling foreign investments, banking and finance matters and international agreements. He also worked in the Chicago office’s Latin America Practice Group, advising on investments and acquisitions in Latin America (1996 – 1997). In 2000, Mr. Vizcarra co-founded Baker & McKenzie’s Guadalajara office, where he led the Banking & Finance Practice Group. In August 2005, he transferred to Baker McKenzie’s Cancun office as a founding member and director mainly handling tourism and real estate projects. In 2009, he transferred back to the Mexico City office, where he was local managing partner for four years and thereafter became National Managing Partner of the Firm in Mexico until August 2018.

 

Committees of the Board of Directors

 

Board Committees

 

The Company’s Audit and Corporate Practices Committee has the following specifications:

 

Integration

 

The Audit and Corporate Practices Committee of the Company consists of 3 (three) members appointed by the board itself, in accordance with the provisions of the Securities Market Law (Ley del Mercado de Valores) and the provisions applicable in the stock exchange in which the Shares are listed, these corporate bylaws and other legal provisions, in the understanding, however, that the chairman of the Audit and Corporate Practices Committee will be elected by the General Assembly of Shareholders of the Company.

 

The members of the Audit and Corporate Practices Committee are independent as under Nasdaq requirements are subject to the duties and responsibilities provided in the Securities Market Law (Ley del Mercado de Valores) and by the provisions applicable in the stock exchange in which the Shares are listed, as well as to the corresponding exclusion of liability.

 

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The Audit and Corporate Practices Committee may create one or more Sub-Committees, to receive support in the performance of its functions. The Audit and Corporate Practices Committee shall be empowered to designate and remove the members of said Sub-Committees and to determine their powers.

 

The members of the Audit and Corporate Practices Committee are:

 

i. Joaquin Gandara Ruiz Esparza — Chairman

 

ii. Mr. Gandara serves as CEO of Stone Financial Awareness since 2017. Prior to Stone Financial Awareness, he worked at Scotiabank for 24 years where he held several positions in different departments such as Credit, Consumer Banking, Branch Operations and Corporate Banking.

 

iii. Dr. Martín M. Werner

 

iv. Federico Clariond

 

Sessions Periodicity

 

The Audit and Corporate Practices Committee and its Sub-Committees shall meet with the necessary periodicity for the performance of their duties, at the request of any of its members, the Board of Directors or its Executive President or the General Assembly of Shareholders; in the understanding that it must meet at least 4 (four) times during the same calendar year, to resolve matters that concern it in terms of the Securities Market Law (Ley del Mercado de Valores), these bylaws and other applicable legal provisions.

 

The sessions of the Audit and Corporate Practices Committee and its Sub-Committees may be held by telephone or videoconference, with the understanding that the Secretary of the respective session must take the corresponding minutes, which must in any case be signed by the Executive President and the respective Secretary, and collect the signatures of the members who participated in the session.

 

Functions

 

Regarding Corporate Practices, the Audit and Corporate Practices Committee will have the functions referred to in the Securities Market Law (Ley del Mercado de Valores), especially the provisions of section I (first) of its Article 42 (forty-two), and other applicable legal provisions, as well as those determined by the General Assembly of Shareholders. They will also perform all those functions of which they must render a report in accordance with the provisions of the Securities Market Law (Ley del Mercado de Valores). In an enunciative way, but not limited to, it will have the following functions:

 

o Provide opinions regarding transactions between related parties to the General Assembly of Shareholders and the Board of Directors.

 

o Develop, recommend and review corporate governance guidelines and guidelines of the Company and its subsidiary.

 

o Recommend modifications to the bylaws of the Company and its subsidiary.

 

o Analyze and review all legislative, regulatory and corporate governance developments that may affect the operations of the Company, and make recommendations in this regard to the Board of Directors.

 

o Prepare and propose the different manuals necessary for the corporate governance of the Company or for compliance with the applicable provisions.

 

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o Define the compensation and performance evaluation policies of the senior executives of the Company.

 

o Use the best compensation practices to align the interests of the Shareholders and the senior executives of the Company, being able to hire any independent expert necessary for the development of this function.

 

o Ensure access to market data and best corporate practices through external consultants specialized in the field.

 

o Develop a plan for the succession of senior executives of the Company.

 

In matters of Audit, the Audit and Corporate Practices Committee will have the functions referred to in the Securities Market Law (Ley del Mercado de Valores), especially the provisions of section II of its Article 42 (forty-two), and other applicable legal provisions, as well as those determined by the General Assembly of Shareholders. They will also perform all those functions of which they must render a report in accordance with the provisions of the Securities Market Law (Ley del Mercado de Valores). In an enunciative way, but not limited to, it will have the following functions:

 

o Determine the need and viability of the fiscal and financial structures of the Company.

 

o Comment on the financial and fiscal structure of the international expansion of the Company.

 

o Comment on the financial reports, accounting policies, control and information technology systems of the Company.

 

o Evaluate and recommend the external auditor of the Company.

 

o Ensure the independence and efficiency of the internal and external audits of the Company.

 

o Evaluate the transactions between related parties of the Company, as well as identify possible conflicts of interest derived from them.

 

o Analyze the financial structure of the Company, in the short, medium and long term, including any financing and refinancing transactions.

 

o Review and comment on the management of the Company’s treasury, risk and exposure to fluctuations in exchange rates and hedging instruments of the Company, whatever their nature or denomination.

 

o Evaluate the processes and selection of insurance brokers, as well as the coverage and premiums of the Company’s insurance policies.

 

Compensation

 

For the year ended December 31, 2019, we paid our top management for services in all capacities an aggregate compensation of approximately MX$27,860,000 of fixed compensation, also the executive herein mentioned are entitled to receive performance bonuses. The amount and rules applicable vary among the different divisions and/or officers. The variable aggregate compensation for bonuses was MX$6,660,000 during 2019, and the amounts payable under the performance bonus depend on the results achieved and include certain qualitative and/or quantitative objectives that can be operative and financial. Hence the total executive compensation for the year ended December 31, 2019 was MX$34,450,000.

 

During 2019, the Board of Directors did not receive any compensation and going forward the Company does not expect have a compensation plan for the Board of Directors

 

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Stock Compensation Plans

 

In July and August 2020, Betterware granted a share-based long term incentive plan to certain officers and directors. The purpose of this incentive plan is to provide to executives and directors the opportunity to receive share-based incentives to encourage them to contribute significantly to the growth of the Company and to align the economic interests of those individuals with those of the shareholders. The delivery of certain shares to the executives and directors was agreed and approved by the Board of Directors. The incentive plan is aligned with the interest of the shareholders regarding the management’s ability to obtain operating results that potentially benefit the share price; if the established results are achieved, it will cause a gradual delivery of shares over a period of four to five years.

 

Employees

 

The following table provides information regarding the number of our employees as of June 30, 2020 December 31, 2019, 2018 and 2017:

 

    Number of Employees  
    As of June 30,     As of December 31,  
    2020     2019     2018     2017  
Operations     570       296       283       164  
Sales and marketing     172       263       289       347  
Finance, administration, human resources, IT     265       115       108       95  
Total     1,007       674       680       606  

 

Foreign Private Issuer Exemptions

 

The company is considered a “foreign private issuer” under the securities laws of the United States and the rules of Nasdaq. Under the applicable securities laws of the United States, “foreign private issuers” are subject to different disclosure requirements than U.S. domiciled issuers. The Company takes all necessary measures to comply with the requirements of a foreign private issuer under the applicable corporate governance requirements of the Sarbanes-Oxley Act, the rules of which were adopted by the SEC and Nasdaq as listing standards and requirements. Under Nasdaq’s rules, a “foreign private issuer” is subject to less stringent corporate governance and compliance requirements and subject to certain exceptions, Nasdaq permits a “foreign private issuer” to follow its home country’s practice in lieu of the listing requirements of Nasdaq. Accordingly, the Company’s shareholders may not receive the same protections afforded to shareholders of companies that are subject to all of Nasdaq’s corporate governance requirements.

 

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DESCRIPTION OF SHARE CAPITAL

 

Shares

 

Betterware is a company incorporated under the General Corporations Law. As Betterware is a Mexican corporation, the rights of holders of company shares will be governed directly by Mexican law and the Amended and Restated Charter.

 

The Amended and Restated Charter provide that the company is authorized to issue an unlimited number of ordinary shares, no par value. As of the date of this prospectus, the Company has 34,451,020 authorized and issued shares.

 

Warrants

 

Betterware’s warrants are quoted on the OTCQX market under the symbol “BWXMF.” Each warrant entitles the registered holder to purchase one Betterware share at a price of $11.50 per share, subject to adjustment as discussed below, and became exercisable on April 12, 2020. However, no warrants will be exercisable for cash unless Betterware has an effective and current registration statement covering the Betterware shares issuable upon exercise of the warrants and a current prospectus relating to such shares. During any period when Betterware shall have failed to maintain an effective registration statement, warrant holders may exercise warrants on a cashless basis pursuant to the exemption provided by Section 3(a)(9) of the Securities Act, provided that such exemption is available. If that exemption, or another exemption, is not available, holders will not be able to exercise their warrants on a cashless basis. In such event, each holder would pay the exercise price by surrendering the warrants for that number of Betterware shares equal to the quotient obtained by dividing (x) the product of the number of Betterware shares underlying the warrants, multiplied by the difference between the exercise price of the warrants and the “fair market value” (defined below) by (y) the fair market value. The “fair market value” for this purpose will mean the average reported last sale price of the Betterware shares for the five trading days ending on the trading day prior to the date of exercise. The warrants will expire on March 13, 2025, at 5:00 p.m., New York City time, or earlier upon redemption or liquidation.

 

Betterware assumed an obligation that allows warrant holders to purchase a total of 5,804,125 Betterware shares subject to exercise as of April 12, 2020 and that will expire on or before March 25, 2025 at the time of redemption or settlement. The unit purchase option is executable as of closing and will expire on October 11, 2023. The exercise price of the warrants is US$11.50 per share, or US$66,747,438. The Company has recently repurchased 1,540,288 warrants. As of the date of this prospectus, the outstanding number of warrants is 4,263,837. Therefore, if all of the outstanding warrants are exercised in full, we will issue 4,263,837 ordinary shares and we will receive aggregate net proceeds of approximately US$49,034,125. Warrants are traded on OTC Markets and have an observable fair value. Betterware recognized a liability as part of the transaction at the fair value of the warrants (unit value of US$ 0.40) equivalent to Ps.55,810. As of June 30, 2020, the current liability of the warrants recognized at fair value (unit value of US$0.45) is equivalent to Ps.59,541. The difference with respect to its initial recognition is recognized in profit and loss under the heading “Unrealized Gain in Valuation of Derivatives Financial Instruments”. The potential dilutive effect of the warrants and the unit purchase option subject to the warrant contract were not included in the diluted earnings per share for the six month period ended June 30, 2020 as the average fair value of the shares in such period was less than the contractual exercise price.

 

Betterware may call the warrants for redemption, in whole and not in part, at a price of $0.01 per warrant:

 

at any time after the warrants became exercisable;

 

upon not less than 30 days’ prior written notice of redemption to each warrant holder;

 

if, and only if, the reported last sale price of Betterware shares equals or exceeds $18.00 per share (as adjusted for share splits, share dividends, reorganizations and recapitalizations), for any 20 trading days within a 30-trading day period ending on the third business day prior to the notice of redemption to warrant holders; and

 

if, and only if, there is a current registration statement in effect with respect to Betterware shares underlying such warrants.

 

 

2 NTD: Company please provide information

 

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The right to exercise will be forfeited unless the warrants are exercised prior to the date specified in the notice of redemption. On and after the redemption date, a record holder of a warrant will have no further rights except to receive the redemption price for such holder’s warrant upon surrender of such warrant.

 

The redemption criteria for the warrants have been established at a price which is intended to provide warrant holders a reasonable premium to the initial exercise price and provide a sufficient differential between the then-prevailing share price and the warrant exercise price so that if the share price declines as a result of Betterware’s redemption call, the redemption will not cause the share price to drop below the exercise price of the warrants.

 

If Betterware calls the warrants for redemption as described above, Betterware’s management will have the option to require all holders that wish to exercise warrants to do so on a “cashless basis.” In such event, each holder would pay the exercise price by surrendering the warrants for that number of Betterware shares equal to the quotient obtained by dividing (x) the product of the number of Betterware shares underlying the warrants, multiplied by the difference between the exercise price of the warrants and the “fair market value” (defined below) by (y) the fair market value. The “fair market value” shall mean the average reported last sale price of Betterware shares for the five trading days ending on the third trading day prior to the date on which the notice of redemption is sent to the holders of warrants.

 

The warrants were issued in registered form under the Warrant Agreement between Continental Stock Transfer & Trust Company, as warrant agent, and Betterware as successor to DD3. The Warrant Agreement provides that the terms of the warrants may be amended without the consent of any holder to cure any ambiguity or correct any defective provision, but requires the approval, by written consent or vote, of the holders of at least 50% of the then outstanding warrants in order to make any change that adversely affects the interests of the registered holders.

 

The exercise price and number of Betterware shares issuable on exercise of the warrants may be adjusted in certain circumstances including in the event of a share dividend, extraordinary dividend or Betterware’s recapitalization, reorganization, merger or consolidation. However, the warrants will not be adjusted for issuances of Betterware shares at a price below their respective exercise prices.

 

The warrants may be exercised upon surrender of the warrant certificate on or prior to the expiration date at the offices of the warrant agent, with the exercise form on the reverse side of the warrant certificate completed and executed as indicated, accompanied by full payment of the exercise price, by certified or official bank check payable to Betterware, for the number of warrants being exercised. The warrant holders do not have the rights or privileges of holders of Betterware shares and any voting rights until they exercise their warrants and receive Betterware shares. After the issuance of Betterware shares upon exercise of the warrants, each holder will be entitled to one vote for each share held of record on all matters to be voted on by shareholders.

 

Under the terms of the Warrant Agreement, Betterware is required to use its best efforts to keep a prospectus relating to Betterware shares issuable upon exercise of the warrants current until the expiration of the warrants. However, we cannot assure you that Betterware will be able to do so and, if Betterware does not maintain a current prospectus relating to the Betterware shares issuable upon exercise of the warrants, holders will be unable to exercise their warrants for cash and Betterware will not be required to net cash settle or cash settle the warrant exercise.

 

Warrant holders may elect to be subject to a restriction on the exercise of their warrants such that an electing warrant holder would not be able to exercise their warrants to the extent that, after giving effect to such exercise, such holder would beneficially own in excess of 9.8% of Betterware shares outstanding.

 

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MARKET PRICE AND DIVIDENDS

 

Market Information

 

Following consummation of the Business Combination, our ordinary shares and warrants began trading on NASDAQ under the symbols “BWMX” and “BWXMF,” respectively. The following table shows, for the periods indicated, after the consummation of the Business Combination on March 13, 2020, the high and low sales prices per share of our ordinary shares and our warrants as reported by NASDAQ.

 

    Ordinary Shares     Warrants  
Quarter Ended   High     Low     High     Low  
March 2020     9.34       5.80       -       -  
June 2020     10.09       5.67       0.51       0.19  

 

Dividends

 

The following table provides a summary of the dividends payments during recent years:

 

Year   Declared date   Amount     Dividend per Share(1)  
2020   May 8, 2020   Ps. 100,000,000     Ps. 2.90  
    January 10, 2020   Ps. 70,000,000     Ps. 8.05  
2019   May 29, 2019   Ps. 128,000,000     Ps. 14.72  
    October 8, 2019   Ps. 150,000,000     Ps. 17.25  
2018   February 13, 2018   Ps. 79,080,000     Ps. 9.09  
    November 28th, 2018   Ps. 111,000,000     Ps. 12.76  
    December 4th, 2018   Ps. 110,000,000     Ps. 12.65  

 

(1) Dividend per share considers combined shares of Betterware and BLSM for dividends declared prior to the Business Combination and consolidated shares of Betterware for dividends declared after the Business Combination.

 

Dividends shall be declared by the General Ordinary Stockholders’ Meeting and its payments shall be made on the terms, days and place determined by such Meeting, taking into consideration the policies established by the Board of Directors or its Executive Chairman, which shall be made known through the publication of a notice in at least one newspaper with wide circulation.

 

The dividends not collected within 5 (five) years, from the date on which they were due and payable, shall be deemed to have been waived in favor of the Company.

 

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PRINCIPAL SHAREHOLDERS

 

The following table sets forth information with respect to the beneficial ownership of our shares as of June 30, 2020:

 

each shareholder, or group of affiliated shareholders, who we know beneficially owns more than 5% of our outstanding shares;

 

each of our directors and executive officers individually; and

 

all directors and executive officers as a group.

 

As of June 30, 2020, we had 34,451,020 issued and outstanding ordinary shares. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes any shares over which a person exercises sole or shared voting and/or investment power. Shares subject to options and warrants currently exercisable or exercisable within 60 days are deemed outstanding for computing the percentage ownership of the person holding the options but are not deemed outstanding for computing the percentage ownership of any other person. Except as otherwise indicated, we believe the beneficial owners of the shares listed below, based on information furnished by them, have sole voting and investment power with respect to the number of shares listed opposite their names. The address for Campalier is Luis Enrique Williams 549, Colonia Belenes Norte, Zapopan, Jalisco, 45145, Mexico and for Forteza is Pedro Ramírez Vázquez 200-12, Piso 4, Colonia Valle Oriente, San Pedro Garza García, Nuevo León, Parque Corporativo Valle Oriente 66269, Mexico

 

    Ordinary shares
Beneficially Owned as of
June 30, 2020
 
    Ordinary Shares  
    Number     %  
Five Percent or More Holders            
Campalier, S.A. de C.V     18,438,770       53.5 %
Promotora Forteza, S.A. de C.V. (1)     11,761,175       34.1 %
                 
Our executive officers and directors:                
Luis Campos            
Andres Campos            
Santiago Campos            
Jose de Jesus Valdez            
Federico Clariond            
Mauricio Morales            
Joaquin Gandara            
Dr. Martín M. Werner     404,584       1.2 %
Dr. Guillermo Ortiz     300,690       (2)
Reynaldo Vizcarra            
Diana Karina Jones Villalpando            
Fabian Rivera            
All directors and executive officers as a group (twelve individuals)     705,274       2.04 %

 

(1) Includes shares held by Invex Security Trust 2397 in trust to secure debt obligations of the Company.
(2) Less than 1%.

 

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SELLING SHAREHOLDERS

 

This prospectus covers the public resale of our ordinary shares owned by the selling shareholders referred to below. Such selling shareholders may from time to time offer and sell pursuant to this prospectus any or all of the ordinary shares owned by them. The selling shareholders, however, make no representations that the ordinary shares will be offered for sale. The table below presents information regarding the selling shareholders and the ordinary shares that each may offer and sell from time to time under this prospectus.

 

The following table sets forth:

 

the name of each selling shareholder;

 

the number of ordinary shares beneficially owned by each selling shareholder prior to the sale of the ordinary shares covered by this prospectus;

 

the number of ordinary shares that may be offered by each selling shareholder pursuant to this prospectus;

 

the number of ordinary shares to be beneficially owned by each selling shareholder following the sale of any ordinary shares covered by this prospectus; and

 

the percentage of our issued and outstanding ordinary shares to be owned by each selling shareholder before and after the sale of the ordinary shares covered by this prospectus.

 

The ordinary shares offered hereunder comprise:

 

the offering of 5,804,125 of our ordinary shares issuable upon exercise of the warrants (each warrant is currently exercisable for one ordinary share at a price of US$11.50 per ordinary share, and upon exercise and issuance, such ordinary shares will be freely tradeable under U.S. securities laws); and

 

the resale of 1,421,900 ordinary shares held by selling shareholders named in this Combined Prospectus.

 

All information with respect to ownership of our ordinary shares of the selling shareholders has been furnished by or on behalf of the selling shareholders and, unless otherwise indicated, is as of June 30, 2020. Based on information supplied by the selling shareholders, we believe that, except as may otherwise be indicated in the footnotes to the table below, the selling shareholders have sole voting and dispositive power with respect to the ordinary shares reported as beneficially owned by them. Unless otherwise indicated in the footnotes, shares in the table refer to our ordinary shares.

 

Because the selling shareholders may sell, transfer or otherwise dispose of all, some or none of the ordinary shares covered by this prospectus, we cannot determine the number of such ordinary shares that will be sold, transferred or otherwise disposed of by the selling shareholders, or the amount or percentage of ordinary shares that will be held by the selling shareholders upon termination of any particular offering or sale, if any. The selling shareholders make no representations, however, that they will sell, transfer or otherwise dispose of any ordinary shares in any particular offering or sale. In addition, the selling shareholders may have sold, transferred or otherwise disposed of, or may sell, transfer or otherwise dispose of, at any time and from time to time, the ordinary shares they hold in transactions exempt from the registration requirements of the Securities Act after the date on which they provided the information set forth on the table below. Solely for purposes of the requirements applicable to the registration statement of which this prospectus forms a part, the following table assumes that the selling shareholders will sell all of the ordinary shares owned beneficially by them that are covered by this prospectus but will not sell any other ordinary shares that they presently own.

 

Beneficial ownership for the purposes of this table is determined in accordance with the rules and regulations of the SEC. These rules generally provide that a person is the beneficial owner of securities if such person has or shares the power to vote or direct the voting thereof, or to dispose or direct the disposition thereof or has the right to acquire such powers within 60 days.

 

The following table presents information regarding each selling shareholder and the ordinary shares that it may offer and sell from time to time under this prospectus. The table is prepared based on information supplied to us by the selling shareholders and reflects their holdings as of August 28, 2020.

 

Selling Shareholder   Number of Ordinary Shares Owned Prior to Offering     Maximum Number of Ordinary Shares to be Sold Pursuant to this Prospectus     Number of Ordinary Shares Owned After the Offering     Percentage of Ordinary Shares Owned After the Offering  
Ordinary Shares registered for resale                        
JORGE COMBE HUBBE     404,584       -       404,584       1.2 %
I-BANKERS SECURITIES INC     2,825       -       2,825        *  
PEDRO SOLIS CAMARA     2,500       -       2,500        *  
LARRAIN VIAL SPA     127,444       -       127,444        *  
GUILLERMO ORTIZ MARTINEZ     300,690       -       300,690        *  
RENTAS PATIO XI SPA     74,848       -       74,848        *  
ALAN DOUGLAS SMITHERS HOGG     2,500       -       2,500        *  
JUAN ANDRES ALVAREZ VEGA     7,196       -       7,196        *  
DANIEL SALIM VILCHES     23,479       -       23,479        *  
MARTIN MAXIMO WERNER WAINFELD     404,584       -       404,584       1.2 %
Others     91,250       -       91,250       *  
Early Bird Capital Inc.     27,825       -       27,825       *  
Unit Purchase Options                                
I-Bankers     25,000       -       25,000       -  
EBC Holdings, Inc.     125,000       -       125,000       -  
David Nussbaum     50,000       -       50,000       -  
Steven Levine     50,000       -       50,000       -  

 

* Less than 1%

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PLAN OF DISTRIBUTION

 

Ordinary Shares Issuable upon Exercise of Outstanding Warrants

 

This prospectus covers the offering of 5,804,125 ordinary shares that are issuable upon exercise of our outstanding warrants. The offering of such warrants and the ordinary shares issuable upon exercise of such warrants was registered on our registration statement on Form F-4 with File No. 333-233982). Each warrant is currently exercisable for one ordinary share at a price of US$11.50 per share, which exercise price is payable to us.

 

The ordinary shares underlying the warrants will be issued directly to the holders of the warrants upon payment of the exercise price to us. The exercise of the warrants is subject to the terms of the Warrant Agreement.

 

No fractional shares will be issued upon the exercise of the warrants. If, upon the exercise of the warrants, a holder would be entitled to receive a fractional interest in an ordinary share, we will, upon the exercise, round down to the nearest whole number the number of ordinary shares to be issued to such holder, pursuant to the Warrant Agreement.

 

If all of the warrants described in this prospectus are exercised in full, we will issue 5,804,125 ordinary shares and we will receive aggregate net proceeds of approximately US$66,747,438. The Company has recently repurchased 1,540,288 warrants. As of the date of this prospectus, the outstanding number of warrants is 4,263,837. Therefore, if all of the outstanding warrants are exercised in full, we will issue 4,263,837 ordinary shares and we will receive aggregate net proceeds of approximately US$49,034,125. We intend to use the proceeds from any exercise of the warrants for general corporate purposes. See “Use of Proceeds.”

 

Ordinary Shares Offered by the Selling Shareholders

 

The resale of up to 1,421,900 Warrants and 1,421,900 Ordinary Shares currently issued in connection with the consummation of the Business Combination (as defined below) to satisfy our obligation to register such shares for resale pursuant to the Registration Rights Agreement, as well as 5,804,125 Ordinary Shares issuable upon exercise of the Warrants. We will not receive any proceeds from the sale of our ordinary shares by the selling shareholders.

 

We are registering the ordinary shares covered by this prospectus to permit the selling shareholders to conduct public secondary trading of such ordinary shares from time to time after the date of this prospectus. We will not receive any of the proceeds of the sale of the ordinary shares offered by this prospectus. The aggregate proceeds to the selling shareholders from the sale of the ordinary shares will be the purchase price of the ordinary shares less any discounts and commissions. We will not pay any brokers’ or underwriters’ discounts and commissions in connection with the registration and sale of the ordinary shares covered by this prospectus. The selling shareholders reserve the right to accept and, together with their respective agents, to reject, any proposed purchases of ordinary shares to be made directly or through agents.

 

The ordinary shares offered by this prospectus may be sold from time to time to purchasers:

 

directly by the selling shareholders, or

 

through underwriters, broker-dealers or agents, who may receive compensation in the form of discounts, commissions or agent’s commissions from the selling shareholders for the purchasers of the ordinary shares.

 

Any underwriters, broker-dealers or agents who participate in the sale or distribution of the ordinary shares may be deemed to be “underwriters” within the meaning of the Securities Act. As a result, any discounts, commissions or concessions received by any such broker-dealers or agents who are deemed to be “underwriters” within the meaning of the Securities Act will be deemed to be underwriting discounts and commissions under the Securities Act. Underwriters are subject to the prospectus delivery requirements of the Securities Act and may be subject to certain statutory liabilities under the Securities Act and the Exchange Act.

 

We will make copies of this prospectus available to the selling shareholders for the purpose of satisfying the prospectus delivery requirements of the Securities Act. To our knowledge, there are currently no plans, arrangements or understandings between the selling shareholders and any underwriter, broker-dealer or agent regarding the sale of the ordinary shares by the selling shareholders. To our knowledge, except as indicated in the notes to the table under the heading “Selling Shareholders,” no selling shareholder is a broker-dealer or an affiliate of a broker-dealer.

 

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The ordinary shares may be sold in one or more transactions at:

 

fixed prices;

 

prevailing market prices at the time of sale;

 

prices related to such prevailing market prices;

 

varying prices determined at the time of sale; or

 

negotiated prices.

 

These sales may be effected in one or more transactions:

 

on any national securities exchange or quotation service on which the ordinary shares may be listed or quoted at the time of sale, including NASDAQ;

 

in the over-the-counter market;

 

in transactions otherwise than on such exchanges or services or in the over-the-counter market;

 

any other method permitted by applicable law; or

 

through any combination of the foregoing.

 

These transactions may include block transactions or crosses. Crosses are transactions in which the same broker acts as an agent on both sides of the trade.

 

At the time a particular offering of the ordinary shares is made, a prospectus supplement, if required, will be distributed, which will set forth the name of the selling shareholder, the aggregate amount of ordinary shares being offered and the terms of the offering, including, to the extent required, (1) the name or names of any underwriters, broker-dealers or agents, (2) any discounts, commissions and other terms constituting compensation from the selling shareholders and (3) any discounts, commissions or concessions allowed or reallowed to be paid to broker-dealers.

 

We may suspend the sale of ordinary shares by the selling shareholders pursuant to this prospectus for certain periods of time for certain reasons, including if the prospectus is required to be supplemented or amended to include additional material information. The selling shareholders will act independently of us in making decisions with respect to the timing, manner, and size of each resale or other transfer. There can be no assurance that the selling shareholders will sell any or all of the ordinary shares under this prospectus. Further, we cannot assure you that the selling shareholders will not transfer, distribute, devise or gift the ordinary shares by other means not described in this prospectus. In addition, any ordinary shares covered by this prospectus that qualify for sale under Rule 144 of the Securities Act may be sold under Rule 144 rather than under this prospectus. The ordinary shares may be sold in some states or jurisdictions only through registered or licensed brokers or dealers. In addition, in some states or jurisdictions the ordinary shares may not be sold unless they have been registered or qualified for sale or an exemption from registration or qualification is available and complied with.

 

The selling shareholders and any other person participating in the sale of the ordinary shares will be subject to the Exchange Act. The Exchange Act rules may limit the timing of purchases and sales of any of the ordinary shares by the selling shareholders and any other person. In addition, applicable rules may restrict the ability of any person engaged in the distribution of the ordinary shares to engage in market-making activities with respect to the particular ordinary shares being distributed. This may affect the marketability of the ordinary shares and the ability of any person or entity to engage in market-making activities with respect to the ordinary shares.

 

With respect to those ordinary shares being registered pursuant to the Registration Rights Agreement, we have agreed to indemnify such selling shareholders against certain liabilities, including liabilities under the Securities Act. The selling shareholders have agreed to indemnify us in certain circumstances against certain liabilities, including certain liabilities under the Securities Act. The selling shareholders may indemnify any broker or underwriter that participates in transactions involving the sale of the ordinary shares against certain liabilities, including liabilities arising under the Securities Act.

 

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SHARES ELIGIBLE FOR FUTURE SALE

 

As of the date of this prospectus:

 

our authorized share capital was Ps.164,730,924 represented by 34,451,020 ordinary shares; and

 

there are 5,804,125 warrants outstanding, comprising (i) 4,230,237 public warrants, and (ii) 1,573,888 private placement warrants. The warrants are exercisable on a one-for-one basis for ordinary shares. Each warrant is currently exercisable for one ordinary share at a price of US$11.50 per ordinary share, which exercise price is payable to the Registrant.

 

The number of our outstanding ordinary shares will not change as a result of sales of our ordinary shares pursuant to this prospectus.

 

Sales of substantial amounts of the ordinary shares in the public market could adversely affect prevailing market prices of the ordinary shares.

 

Lock-Up Agreement

 

In connection with the Business Combination, (i) the Company, DD3 and certain security holders of the Company (the “Members”) entered into the Member Lock-Up Agreement, dated as of March 11, 2020, and (ii) the Company, DD3 and certain members of the Company’s management team (“Management”), entered into the Management Lock-Up Agreement, dated as of March 11, 2020, pursuant to which the Members and Management agreed not to transfer any of the Company’s shares held by them for a period of six or twelve months, as applicable, after the closing of the Business Combination, subject to certain limited exceptions.

 

Merger Agreement

 

In connection with the Business Combination, the Company and DD3 entered into the Merger Agreement, dated as of March 10, 2020 (the “Merger Agreement”). Pursuant to the terms of the Merger Agreement, DD3 merged with and into the Company with the Company surviving the Merger, the separate corporate existence of DD3 ceased and BLSM became a wholly-owned subsidiary of the Company. At Closing, pursuant to the Merger Agreement, (i) all of the Betterware shares issued and outstanding immediately prior to the Closing were canceled, and Campalier and Forteza received, directly and indirectly (through the Invex Security Trust), 18,438,770 and 11,761,175, respectively, of Betterware’s shares and (ii) all of DD3’s ordinary shares issued and outstanding immediately prior to the Closing were canceled and exchanged for Betterware shares on a one-for-one basis. See “The Business Combination.”

 

Warrant Amendment

 

In connection with the Business Combination, the Company, DD3 and Continental Stock Transfer & Trust Company (“Continental”) entered into the Assignment, Assumption and Amendment Agreement, dated as of March 13, 2020 (the “Warrant Amendment”), pursuant to which DD3 assigned to the Company, and the Company assumed, all of DD3’s right, title and interest in and to the Warrant Agreement, dated as of October 11, 2018, by and between DD3 and Continental (as amended pursuant to the Warrant Amendment, the “Warrant Agreement”), and the parties thereto agreed to certain amendments to reflect the fact that DD3’s warrants that were outstanding immediately prior to the Closing are, as a result of the Merger, exercisable for Betterware shares.

 

Regulation S

 

Regulation S under the Securities Act provides an exemption from registration requirements in the United States for offers and sales of securities that occur outside the United States. Rule 903 of Regulation S provides the conditions to the exemption for a sale by an issuer, a distributor, their respective affiliates or anyone acting on their behalf, while Rule 904 of Regulation S provides the conditions to the exemption for a resale by persons other than those covered by Rule 903. In each case, any sale must be completed in an offshore transaction, as that term is defined in Regulation S, and no directed selling efforts, as that term is defined in Regulation S, may be made in the United States.

 

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Betterware is a foreign issuer as defined in Regulation S. As a foreign issuer, securities that Betterware sells outside the United States pursuant to Regulation S are not considered to be restricted securities under the Securities Act, and, subject to the offering restrictions imposed by Rule 903, are freely tradable without registration or restrictions under the Securities Act, unless the securities are held by Betterware’s affiliates. Generally, subject to certain limitations, holders of Betterware’s restricted shares who are not affiliates of Betterware or who are affiliates of Betterware by virtue of their status as an officer or director of Betterware may, under Regulation S, resell their restricted shares in an “offshore transaction” if none of the seller, its affiliate nor any person acting on their behalf engages in directed selling efforts in the United States and, in the case of a sale of Betterware restricted shares by an officer or director who is an affiliate of Betterware solely by virtue of holding such position, no selling commission, fee or other remuneration is paid in connection with the offer or sale other than the usual and customary broker’s commission that would be received by a person executing such transaction as agent. Additional restrictions are applicable to a holder of Betterware restricted shares who will be an affiliate of Betterware other than by virtue of his or her status as an officer or director of Betterware.

 

Betterware is not claiming the potential exemption offered by Regulation S in connection with the offering of newly issued shares outside the United States and will register all of the newly issued shares under the Securities Act.

 

Rule 144

 

All of the Company’s equity shares outstanding, other than those equity shares sold in connection with the Business Combination, are “restricted securities” as that term is defined in Rule 144 under the Securities Act and may be sold publicly in the United States only if they are subject to an effective registration statement under the Securities Act or pursuant to an exemption from the registration requirement such as those provided by Rule 144 and Rule 701 promulgated under the Securities Act. In general, beginning 90 days after the date of this prospectus, a person (or persons whose shares are aggregated) who, at the time of a sale, is not, and has not been during the three months preceding the sale, an affiliate of the Company and has beneficially owned the Company’s restricted securities for at least six months will be entitled to sell the restricted securities without registration under the Securities Act, subject only to the availability of current public information about the Company. Persons who are affiliates of the Company and have beneficially owned the Company’s restricted securities for at least six months may sell a number of restricted securities within any three-month period that does not exceed the greater of the following:

 

1% of the then outstanding equity shares of the same class which equal to approximately 344,510 Company shares; or

 

the average weekly trading volume of Company shares of the same class during the four calendar weeks preceding the date on which notice of the sale is filed with the SEC.

 

Sales by affiliates of the Company under Rule 144 are also subject to certain requirements relating to manner of sale, notice and the availability of current public information about the Company.

 

Rule 701

 

In general, under Rule 701 of the Securities Act as currently in effect, each of Betterware’s employees, consultants or advisors who purchases equity shares from the Company in connection with a compensatory stock plan or other written agreement executed prior to the completion of the Business Combination is eligible to resell those equity shares in reliance on Rule 144, but without compliance with some of the restrictions, including the holding period, contained in Rule 144. However, the Rule 701 shares would remain subject to lock-up arrangements and would only become eligible for sale when the lock-up period expires.

 

Registration Rights

 

In connection with the Business Combination, the Company, DD3 and the Holders entered into the Registration Rights Agreement on March 11, 2020. Pursuant to the terms of the Registration Rights Agreement, the Company is obligated to file a shelf registration statement to register the resale of certain Company securities held by the Holders. The Registration Rights Agreement also provides the Holders with demand, “piggy-back” and Form F-3 registration rights, subject to certain minimum requirements and customary conditions.

 

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U.S. FEDERAL INCOME TAX CONSIDERATIONS

 

The following is a general discussion of the material U.S. federal income tax consequences of the ownership and disposition of our ordinary shares to U.S. holders and non-U.S. holders. This discussion is based on provisions of the Code, the Treasury regulations promulgated thereunder (whether final, temporary or proposed), administrative rulings of the IRS, and judicial decisions, all as in effect on the date hereof, and all of which are subject to differing interpretations or change, possibly with retroactive effect. Any such change or differing interpretation could affect the accuracy of the statements and conclusions set forth herein. This discussion is for general purposes only and does not purport to be a complete analysis or listing of all potential U.S. federal income tax considerations that may apply to holders as a result of the ownership and disposition of our ordinary shares. In addition, this discussion does not address all aspects of U.S. federal income taxation that may be relevant to particular holders, nor does it take into account the individual facts and circumstances of any particular holder that may affect the U.S. federal income tax consequences to such holder. Accordingly, it is not intended to be, and should not be construed as, tax advice. This discussion does not address any withholding required pursuant to the Foreign Account Tax Compliance Act of 2010 (including the Treasury regulations promulgated thereunder and intergovernmental agreements entered into in connection therewith) or any aspects of U.S. federal taxation other than those pertaining to income taxation, nor does it address any tax consequences arising under any U.S. state and local, or non-U.S., tax laws. Holders should consult their tax advisors regarding such tax consequences in light of their particular circumstances. No ruling has been requested or will be obtained from the IRS regarding the U.S. federal income tax consequences described herein; thus, there can be no assurance that the IRS will not challenge the U.S. federal income tax treatment described below or that, if challenged, such treatment will be sustained by a court.

 

This discussion is limited to U.S. federal income tax considerations relevant to U.S. holders and non-U.S. holders that hold our ordinary shares as “capital assets” within the meaning of Section 1221 of the Code (generally, property held for investment). This discussion does not address all aspects of U.S. federal income taxation that may be important to particular holders in light of their individual circumstances, including holders subject to special treatment under the U.S. tax laws, such as, for example:

 

banks, thrifts, mutual funds or other financial institutions, underwriters, or insurance companies;

 

traders in securities who elect to apply a mark-to-market method of accounting;

 

real estate investment trusts and regulated investment companies;

 

tax-exempt organizations, qualified retirement plans, individual retirement accounts, or other tax-deferred accounts;

 

expatriates or former long-term residents of the United States;

 

partnerships or other pass-through entities (or arrangements treated as such) or investors therein;

 

dealers or traders in securities, commodities or currencies;

 

grantor trusts;

 

persons subject to the alternative minimum tax;

 

U.S. persons whose “functional currency” is not the U.S. dollar;

 

persons who received our ordinary shares through the exercise of incentive stock options or through the issuance of restricted stock under an equity incentive plan or through a tax-qualified retirement plan or otherwise as compensation;

 

persons who own (directly or through attribution) 5% or more (by vote or value) of our ordinary shares;

 

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persons who are required to accelerate the recognition of any item of gross income with respect to our ordinary shares as a result of such income being recognized on an applicable financial statement;

 

the initial shareholders and their affiliates; or

 

holders holding our ordinary shares as a position in a “straddle,” as part of a “synthetic security” or “hedge,” as part of a “conversion transaction,” or other integrated investment or risk reduction transaction.

 

For the purposes of this discussion, the term “U.S. holder” means a beneficial owner of our ordinary shares that is, for U.S. federal income tax purposes:

 

an individual who is a citizen or resident of the United States;

 

a corporation (or other entity that is classified as a corporation for U.S. federal income tax purposes) that is created or organized in or under the laws of the United States, any State thereof or the District of Columbia;

 

an estate the income of which is subject to U.S. federal income tax regardless of its source; or

 

a trust (i) if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust, or (ii) that has a valid election in effect under applicable Treasury regulations to be treated as a U.S. person for U.S. federal income tax purposes.

 

For purposes of this discussion, a “non-U.S. holder” means a beneficial owner of our ordinary shares that is neither a U.S. holder nor a partnership (or an entity or arrangement treated as a partnership) for U.S. federal income tax purposes.

 

If a partnership, including for this purpose any entity or arrangement that is treated as a partnership for U.S. federal income tax purposes, holds our ordinary shares, the U.S. federal income tax treatment of a partner in such partnership generally will depend on the status of the partner and the activities of the partnership. A holder that is a partnership and the partners in such partnership should consult their tax advisors with regard to the U.S. federal income tax consequences of the ownership and disposition of our ordinary shares.

 

THIS SUMMARY DOES NOT PURPORT TO BE A COMPREHENSIVE ANALYSIS OR DESCRIPTION OF ALL POTENTIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION OF our ordinary shares. HOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS REGARDING THE PARTICULAR TAX CONSEQUENCES TO THEM OF THE OWNERSHIP AND DISPOSITION OF Our ordinary shares, INCLUDING THE APPLICABILITY AND EFFECTS OF U.S. FEDERAL, STATE, LOCAL AND OTHER TAX LAWS.

 

U.S. Federal Income Tax Consequences of the Ownership and Disposition of Ordinary Shares

 

U.S. Holders

 

Distributions on Ordinary Shares

 

Subject to the discussion below under “—Passive Foreign Investment Company Status,” the gross amount of any distribution on our ordinary shares, including any Mexican taxes withheld, that is made out of our current or accumulated earnings and profits (as determined for U.S. federal income tax purposes) generally will be taxable to a U.S. holder as ordinary dividend income on the date such distribution is actually or constructively received. Any such dividends will not be eligible for the dividends received deduction allowed to corporations in respect of dividends received from other U.S. corporations. To the extent that the amount of the distribution exceeds our current and accumulated earnings and profits (as determined under U.S. federal income tax principles), such excess amount will be treated first as a non-taxable return of capital to the extent of the U.S. holder’s tax basis in its ordinary shares, and thereafter as capital gain recognized on a sale or exchange. Because the Company does not maintain calculations of its earnings and profits under U.S. federal income tax principles, it is expected that distributions on our ordinary shares (including any Mexican taxes withheld) will be reported to U.S. holders as dividends. U.S. holders should consult their own tax advisers with respect to the appropriate U.S. federal income tax treatment of any distribution received from the Company.

 

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Dividends received by non-corporate U.S. holders (including individuals) from a “qualified foreign corporation” may be eligible for reduced rates of taxation, provided that certain holding period requirements and other conditions are satisfied. A non-U.S. corporation is treated as a qualified foreign corporation with respect to dividends it pays if  (i) such foreign corporation is eligible for the benefits of a comprehensive income tax treaty with the United States that the Secretary of the Treasury determines is satisfactory for purposes of these rules and that includes an exchange of information program or (ii) the shares with respect to which such dividends are paid are readily tradable on an established securities market in the United States, provided, in each case, that the combined company was not a PFIC (as defined below) for the taxable year in which it pays a dividend or for the preceding taxable year. The ordinary shares are listed on Nasdaq, and should be considered readily tradable on an established securities market in the United States as long as they are so listed. There can be no assurance that our ordinary shares will be considered readily tradable on an established securities market in future years. In any event, there is a comprehensive income tax treaty between the United States and Mexico that the Secretary of the Treasury has determined is satisfactory for purposes of the above rules and the Company will be a resident of Mexico that should be eligible for the benefits of such treaty. Non-corporate U.S. holders that do not meet a minimum holding period requirement during which they are not protected from the risk of loss or that elect to treat the dividend income as “investment income” pursuant to Section 163(d)(4) of the Code (dealing with the deduction for investment interest expense) will not be eligible for the reduced rates of taxation regardless of the Company’s status as a qualified foreign corporation. In addition, the rate reduction will not apply to dividends if the recipient of a dividend is obligated to make related payments with respect to the positions in substantially similar or related property. This disallowance applies even if the minimum holding period has been met. The Company will not constitute a qualified foreign corporation for purposes of these rules if it is a PFIC for the taxable year in which it pays a dividend or for the preceding taxable year. See “—Passive Foreign Investment Company Status.

 

Subject to certain conditions and limitations, withholding taxes, if any, on dividends paid by the Company may be treated as foreign taxes eligible for credit against a U.S. holder’s U.S. federal income tax liability under the U.S. foreign tax credit rules. For purposes of calculating the U.S. foreign tax credit, dividends paid on our ordinary shares will generally be treated as income from sources outside the United States and will generally constitute passive category income. The rules governing the U.S. foreign tax credit are complex. U.S. holders should consult their tax advisors regarding the availability of the U.S. foreign tax credit under particular circumstances.

 

Sale, Exchange, Redemption or Other Taxable Disposition of Ordinary Shares

 

Subject to the discussion below under “—Passive Foreign Investment Company Status,” a U.S. holder generally will recognize gain or loss on any sale, exchange, redemption or other taxable disposition of our ordinary shares in an amount equal to the difference between (i) the amount realized on the disposition and (ii) such U.S. holder’s adjusted tax basis in such shares. Any gain or loss recognized by a U.S. holder on a taxable disposition of our ordinary shares generally will be capital gain or loss and will be long-term capital gain or loss if the holder’s holding period in such shares exceeds one year at the time of the disposition. Preferential tax rates may apply to long-term capital gains of non-corporate U.S. holders (including individuals). The deductibility of capital losses is subject to limitations. Any gain or loss recognized by a U.S. holder on the sale or exchange of our ordinary shares generally will be treated as U.S. source gain or loss.

 

It is possible that Mexico may impose an income tax upon sale of our ordinary shares. Because gains generally will be treated as U.S. source gain, as a result of the U.S. foreign tax credit limitation, any Mexican income tax imposed upon capital gains in respect of our ordinary shares may not be currently creditable. U.S. holders should consult their tax advisors regarding the application of Mexican taxes to a disposition of our ordinary shares and their ability to credit a Mexican tax against their U.S. federal income tax liability.

 

Passive Foreign Investment Company Status

 

The treatment of U.S. holders of our ordinary shares could be materially different from that described above, if the Company is treated as a passive foreign investment company, or a PFIC, for U.S. federal income tax purposes.

 

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A non-U.S. corporation, such as the Company, will be a PFIC for U.S. federal income tax purposes for any taxable year in which, after the application of certain look-through rules either: (i) 75% or more of its gross income for such taxable year is passive income, or (ii) 50% or more of the total value of its assets (based on an average of the quarterly values of the assets during such year) is attributable to assets, including cash, that produce passive income or are held for the production of passive income. Passive income generally includes dividends, interest, rents and royalties (other than certain rents and royalties that are derived in the active conduct of a trade or business), annuities, net gains from the sale or exchange of property producing such income and net foreign currency gains. The determination of whether the Company is a PFIC is based upon the composition of the Company’s income and assets (including, among others, corporations in which the Company owns at least a 25% interest), and the nature of the Company’s activities.

 

Based on the projected composition of its income and assets, including goodwill, it is not expected that the Company will be a PFIC for its current taxable year or in the foreseeable future. The tests for determining PFIC status are applied annually after the close of the taxable year, and it is difficult to predict accurately future income and assets relevant to this determination. Our PFIC status is expected to depend, in part, upon (a) the market value of our ordinary shares, and (b) the composition of the assets and income of the Company. A decrease in the market value of our ordinary shares, and/or an increase in cash or other passive assets would increase the relative percentage of the Company’s passive assets. The application of the PFIC rules is subject to uncertainty in several respects and, therefore, the IRS may assert that, contrary to expectations, the Company is a PFIC for its current taxable year or in a future taxable year. Accordingly, there can no assurance that the Company will not be a PFIC for its current taxable year or in any future taxable year.

 

If the Company is a PFIC during any year in which a U.S. holder holds our ordinary shares, unless the U.S. holder makes a qualified electing fund, or QEF, election or mark-to-market election with respect to the shares, as described below, a U.S. holder generally would be subject to additional taxes (including taxation at ordinary income rates and an interest charge) on any gain realized from a sale or other disposition of our ordinary shares and on any “excess distributions” received from the Company, regardless of whether the Company qualifies as a PFIC in the year in which such distribution is received or gain is realized. For this purpose, a pledge of our ordinary shares as security for a loan may be treated as a disposition. The U.S. holder would be treated as receiving an excess distribution in a taxable year to the extent that distributions on the shares during that year exceed 125% of the average amount of distributions received on such shares during the three preceding taxable years (or, if shorter, the U.S. holder’s holding period). To compute the tax on excess distributions or on any gain, (i) the excess distribution or gain would be allocated ratably over the U.S. holder’s holding period, (ii) the amount allocated to the current taxable year and any year before the first taxable year for which the Company was a PFIC would be taxed as ordinary income in the current year, and (iii) the amount allocated to other taxable years would be taxed at the highest applicable marginal rate in effect for each such year (i.e. at ordinary income tax rates) and an interest charge would be imposed to recover the deemed benefit from the deferred payment of the tax attributable to each such prior year.

 

If the Company were to be treated as a PFIC, a U.S. holder may avoid the rules relating to excess distributions and gains described above by electing to treat the Company (for the first taxable year in which the U.S. holder owns any shares) and any lower-tier PFIC (for the first taxable year in which the U.S. holder is treated as owning an equity interest in such lower-tier PFIC) as a QEF. If a U.S. holder makes an effective QEF election with respect to the Company (and any lower-tier PFIC), the U.S. holder will be required to include in gross income each year, whether or not the Company makes distributions, as capital gains, its pro rata share of the Company’s (and such lower-tier PFIC’s) net capital gains and, as ordinary income, its pro rata share of the Company’s (and such lower-tier PFIC’s) net earnings in excess of its net capital gains. U.S. holders can make a QEF election only if the Company (and each lower-tier PFIC) provides certain information, including the amount of its ordinary earnings and net capital gains determined under U.S. tax principles. The Company will make commercially reasonable efforts to provide U.S. holders with this information if it determines that it is a PFIC, but there is no assurance that we will timely provide such information. There is also no assurance that we will have timely knowledge of our status as a PFIC in the future or of the information to be provided.

 

As an alternative to making a QEF election, a U.S. holder may also be able to avoid some of the adverse U.S. tax consequences of PFIC status by making an election to mark our ordinary shares to market annually. A U.S. holder may elect to mark-to-market our ordinary shares only if they are “marketable stock.” Our ordinary shares will be treated as “marketable stock” if they are regularly traded on a “qualified exchange.” Our ordinary shares are listed on Nasdaq, which should be a qualified exchange for this purpose. Our ordinary shares will be treated as regularly traded in any calendar year in which more than a de minimis quantity of our ordinary shares are traded on at least 15 days during each calendar quarter. There can be no certainty that our ordinary shares will be sufficiently traded such as to be treated as regularly traded.

 

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U.S. holders should consult their tax advisors regarding the U.S. federal income tax consequences of the PFIC rules. If the Company is treated as a PFIC, each U.S. holder generally will be required to file a separate annual information return (Form 8621) with the IRS with respect to the Company and any lower-tier PFICs.

 

Medicare Surtax on Net Investment Income

 

Non-corporate U.S. holders whose income exceeds certain thresholds generally will be subject to 3.8% surtax on their “net investment income” (which generally includes, among other things, dividends on, and capital gain from the sale or other taxable disposition of, our ordinary shares). Non-corporate U.S. holders should consult their own tax advisors regarding the possible effect of such tax on their ownership and disposition of our ordinary shares.

 

Additional Reporting Requirements

 

Certain U.S. holders holding specified foreign financial assets with an aggregate value in excess of the applicable dollar thresholds are required to report information to the IRS relating to our ordinary shares, subject to certain exceptions (including an exception for our ordinary shares held in accounts maintained by U.S. financial institutions), by attaching a complete IRS Form 8938, Statement of Specified Foreign Financial Assets, with their tax return, for each year in which they hold our ordinary shares. Substantial penalties apply to any failure to file IRS Form 8938, unless the failure is shown to be due to reasonable cause and not willful neglect. Also, in the event a U.S. holder does not file IRS Form 8938 or fails to report a specified foreign financial asset that is required to be reported, the statute of limitations on the assessment and collection of U.S. federal income taxes of such U.S. holder for the related taxable year may not close before the date which is three years after the date on which the required information is filed. U.S. holders should consult their tax advisors regarding the effect, if any, of these rules on the ownership and disposition of our ordinary shares.

 

Non-U.S. Holders

 

In general, a non-U.S. holder of our ordinary shares will not be subject to U.S. federal income tax or, subject to the discussion below under “—Information Reporting and Backup Withholding,” U.S. federal withholding tax on any dividends received on our ordinary shares or any gain recognized on a sale or other disposition of our ordinary shares (including any distribution to the extent it exceeds the adjusted basis in the non-U.S. holder’s ordinary shares) unless:

 

the dividend or gain is effectively connected with the non-U.S. holder’s conduct of a trade or business in the United States, and if required by an applicable tax treaty, is attributable to a permanent establishment maintained by the non-U.S. holder in the United States; or

 

in the case of gain only, the non-U.S. holder is a nonresident alien individual present in the United States for 183 days or more during the taxable year of the sale or disposition, and certain other requirements are met.

 

A non-U.S. holder that is a corporation also may be subject to a branch profits tax at a rate of 30% (or such lower rate specified by an applicable tax treaty) on its effectively connected earnings and profits for the taxable year, as adjusted for certain items. Non-U.S. holders should consult their tax advisors regarding any applicable tax treaties that may provide for different rules.

 

Information Reporting and Backup Withholding

 

Dividends paid on, and proceeds from the sale, redemption or other disposition of our ordinary shares realized by a U.S. holder generally may be subject to information reporting requirements and may be subject to backup withholding unless the U.S. holder provides an accurate taxpayer identification number or otherwise establishes an exemption. The amount of any backup withholding collected from a payment to a U.S. holder will be allowed as a credit against the U.S. holder’s U.S. federal income tax liability and may entitle the U.S. holder to a refund, provided certain required information is furnished to the IRS.

 

A non-U.S. holder generally will be exempt from these information reporting requirements and backup withholding tax but may be required to comply with certain certification and identification procedures in order to establish its eligibility for exemption, such as by providing a valid IRS Form W-8BEN, IRS Form W-8BEN-E or IRS Form W-8ECI, as applicable, or the non-U.S. holder otherwise establishes an exemption. Dividends paid with respect to our ordinary shares and proceeds from the sale of other disposition of our ordinary shares received in the United States by a non-U.S. holder through certain U.S.-related financial intermediaries may be subject to information reporting and backup withholding unless such non-U.S. holder provides proof of an applicable exemption or complies with the certification procedures described above, and otherwise complies with the applicable requirements of the backup withholding rules.

 

The preceding discussion is not tax advice. Each prospective investor should consult the prospective investor’s own tax advisor regarding the particular U.S. federal, state, and local and non-U.S. tax consequences of the ownership and disposition of our ordinary shares, including the consequences of any proposed change in applicable laws.

 

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EXPENSES RELATED TO THE OFFERING

 

The estimated expenses payable by us in connection with the offering described in this registration statement will be as follows:

 

    US$     Ps.*  
SEC Registration Fee     21,303       462,499  
Accounting fees and expenses     47,000       1,020,393  
Printing and engraving expenses     2,360       51,236  
Legal fees and expenses     27,000       586,183  
Miscellaneous     -       -  
Total     73,363       2,120,311  

 

 

* Conversion of USD into Ps. was made using an exchange rate of August 21, 2020.

 

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ADDITIONAL INFORMATION

 

Legal Matters

 

The validity of the ordinary shares to be offered by this prospectus will be passed upon by Baker & McKenzie Abogados, S.C. counsel to Betterware.

 

Experts

 

The combined financial statements of Betterware de Mexico, S.A.P.I. de C.V. and BLSM Latino America Servicios, S.A. de C.V. as of December 31, 2018, and for each of the years in the two-year period ended December 31, 2018, included herein, include the effects of the adjustment to retrospectively apply the issuance of shares as described in Note 22 to such combined financial statements. KPMG Cardenas Dosal S.C., an independent registered public accounting firm, audited the combined financial statements as of December 31, 2018, and for each of the years in the two-year period ended December 31, 2018, before the effects of the retrospective adjustment, which financial statements are not included herein. Galaz, Yamazaki, Ruiz Urquiza, S.C. member of Deloitte Touche Tohmatsu Limited, an independent registered public accounting firm, audited the retrospective adjustment. The combined financial statements of Betterware de Mexico, S.A.P.I. de C.V. and BLSM Latino America Servicios, S.A. de C.V. as of December 31, 2018, and for each of the years in the two-year period ended December 31, 2018, have been included herein in reliance upon the reports of (1) KPMG Cardenas Dosal S.C., solely with respect to the financial statements before the effects of the retrospective adjustment, and (2) Galaz, Yamazaki, Ruiz Urquiza, S.C. member of Deloitte Touche Tohmatsu Limited, solely with respective to the retrospective adjustment, included herein, and upon the authority of said firms as experts in accounting and auditing.

 

The audit report covering the December 31, 2018 combined financial statements refers to the basis of preparation of the combined financial statements.

 

The Audited Combined Financial Statements for the year ended December 31, 2019, have been included herein in reliance upon the report of Galaz, Yamazaki, Ruiz Urquiza, S.C. member of Deloitte Touche Tohmatsu Limited, (which report included explanatory paragraphs relating to the basis of presentation for the combined financial statements and for the effects of the new outbreak of the coronavirus disease (“COVID-19”) after the reporting period), an independent registered public accounting firm, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing.

 

Enforcement of Civil Liabilities

 

We exist under the laws of Mexico. Certain of our directors and officers, and some of the experts named in this prospectus reside outside of the United States, and all or a substantial portion of their assets, and all or a substantial portion of our assets, are located outside of the United States. We have appointed an agent for service of process in the United States, but it may be difficult for shareholders who reside in the United States to effect service within the United States upon those directors, officers and experts who are not residents of the United States. It may also be difficult for shareholders who reside in the United States to realize in the United States upon judgements of courts of the United States predicated upon our civil liability and the civil liability of our directors, officers and experts under the United States federal securities laws. U.S. investors may not be able to enforce against us, members of our board of directors, officers or certain experts named herein who are residents of Mexico or other countries outside the United States, any judgements in civil and commercial matters, including judgements under the federal securities laws.

 

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WHERE YOU CAN FIND MORE INFORMATION

 

We have filed with the SEC a registration statement on Form F-1 under the Securities Act with respect to the ordinary shares offered under this prospectus. For purposes of this section, the term registration statement means the original registration statement and any and all amendments including the schedules and exhibits to the original registration statement or any amendment. This prospectus, which constitutes a part of the registration statement, does not contain all of the information included in the registration statement. For further information about us and the ordinary shares offered in this prospectus, you should refer to the registration statement and the exhibits and schedules filed with the registration statement. Whenever we make reference in this prospectus to any of our contracts, agreements or other documents, the references are materially complete but may not include a description of all aspects of such contracts, agreements or other documents, and you should refer to the exhibits attached to the registration statement for copies of the actual contract, agreement or other document.

 

We are subject to periodic reporting and other informational requirements of the Exchange Act as applicable to foreign private issuers. Accordingly, we are required to file reports, including annual reports on Form 20-F, and other information with the SEC. The SEC maintains an internet website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. You can read our SEC filings, including the registration statement and its exhibits, at the SEC’s internet website at www.sec.gov.

 

As a foreign private issuer, we are exempt from the rules of the Exchange Act prescribing the furnishing and content of proxy statements to shareholders, and Section 16 short-swing profit reporting for our officers and directors and for holders of more than 10% of our ordinary shares.

 

We have not authorized anyone to give any information or make any representation about their companies that is different from, or in addition to, that contained in this prospectus or in any of the materials that have been incorporated in this prospectus. Therefore, if anyone does give you information of this sort, you should not rely on it. If you are in a jurisdiction where offers to exchange or sell, or solicitations of offers to exchange or purchase, the securities offered by this prospectus or the solicitation of proxies is unlawful, or if you are a person to whom it is unlawful to direct these types of activities, then the offer presented in this prospectus does not extend to you. The information contained in this prospectus speaks only as of the date of this prospectus unless the information specifically indicates that another date applies.

 

  69  

 

 

INDEX TO FINANCIAL STATEMENTS

 

Financial Statements

 

Betterware de Mexico, S.A.P.I. de C.V. (formerly Betterware de Mexico, S.A. de C.V.)

 

Unaudited Condensed Combined and Consolidated Interim Financial Statements

 

Unaudited Condensed Combined and Consolidated Statement of Financial Position as of June 30, 2020 F-2
Unaudited Condensed Combined and Consolidated Statements of Profit and Loss and Other Comprehensive Income for the three- and six-month Periods Ending on June 30, 2020 and 2019 F-4
Unaudited Condensed Combined and Consolidated Statements Reflecting Changes in Stockholders’ Equity and Net Investment for the six-month Periods Ending on June 30, 2020 and 2019 F-5
Unaudited Condensed Combined and Consolidated Statements of Cash Flows for the six-month Periods Ending on June 30, 2020 and 2019 F-6
Notes to the Unaudited Condensed Combined and Consolidated Interim Financial Statements F-8
   
Audited Combined Financial Statements  
Report of Independent Registered Public Accounting Firm F-25
Report of Independent Registered Public Accounting Firm F-27
Combined Statements of Financial Position as of December 31, 2019 and 2018 F-28
Combined Statements of Profit or Loss and Other Comprehensive Income for the years ended December 31, 2019, 2018 and 2017 F-30
Combined Statements of Changes in Net Parent Investment for the years ended December 31, 2019, 2018 and 2017 F-31
Combined Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017 F-32
Notes to Combined Financial Statements F-34

  

F-1

 

 

Betterware de México, S.A.P.I. de C.V. (formerly Betterware de México, S.A. de C.V., a subsidiary of Campalier, S.A. de C.V.) and subsidiary

Condensed Combined and Consolidated Interim Statements of Financial Position

As of June 30, 2020 and December 31, 2019

(In thousands of Mexican pesos)

 

  Note    

June 30,

2020

    December 31, 2019  
Assets                  
Current assets:                  
Cash and cash equivalents     4    

$

520,805    

$

213,697  
Trade accounts receivable, net     5       515,299       247,087  
Accounts receivable from related parties     17       1,110       610  
Inventories     6       520,214       345,554  
Prepaid expenses             39,623       53,184  
Derivative financial instruments     13       84,002       -  
Other assets             66,823       20,574  
Total current assets             1,747,876       880,706  
Non-current assets:                        
Property, plant, and equipment, net     7       380,782       207,350  
Right-of use assets, net             15,467       23,811  
Deferred income tax     11       6,020       5,082  
Intangible assets, net     9       309,055       310,965  
Goodwill     8       348,441       348,441  
Other assets             3,721       13,371  
Total non-current assets             1,063,486       909,020  
Total assets          

$

2,811,362    

$

1,789,726  

 

(Continued)

 

F-2

 

 

Betterware de México, S.A.P.I. de C.V. (formerly Betterware de México, S.A. de C.V., a subsidiary of Campalier, S.A. de C.V.) and subsidiary

Condensed Combined and Consolidated Interim Statements of Financial Position

As of June 30, 2020 and December 31, 2019

(Thousands of Mexican pesos)

 

   

 

Note

   

June 30,

2020

   

December 31,

2019

 
Liabilities and Stockholders’ Equity                  
Current liabilities:                  
Borrowings     10     $ 73,333     $ 148,070  
Accounts payable to suppliers             1,220,456       529,348  
Accrued expenses             128,875       54,456  
Provisions     12       101,608       46,689  
Income tax payable     11       52,545       34,709  
Value added tax payable             57,743       30,299  
Statutory employee profit sharing             4,187       5,006  
Lease liability             10,912       14,226  
Derivative financial instruments     13       64,010       15,555  
Total current liabilities           $ 1,713,669     $ 878,358  
Non-current liabilities:                        
Employee benefits           $ 1,161     $ 1,630  
Derivative financial instruments     13       32,775       16,754  
Deferred income tax     11       81,315       78,501  
Lease liability             5,125       10,358  
Borrowings     10       350,189       529,643  
Total non-current liabilities             470,565       636,886  
Total liabilities             2,184,234       1,515,244  
Stockholders’ equity     15       627,128       274,482  
Contingencies     19                  
Total liabilities and Stockholders’ equity           $ 2,811,362     $ 1,789,726  

 

See accompanying notes to the condensed combined and consolidated interim financial statements.

(Concluded)

 

F-3

 

Betterware de México, S.A.P.I. de C.V. (formerly Betterware de México, S.A. de C.V., a subsidiary of Campalier, S.A. de C.V.) and subsidiary

Condensed Combined and Consolidated Interim Statements of Profit or Loss and Other Comprehensive Income

For the three- and six-month periods ended on June 30, 2020 and 2019

(Thousands of Mexican pesos)

 

          For the six-month
periods ended on
    For the three-month
periods ended on
 
    Note    

June 30,

2020

   

June 30,

2019

   

June 30,

2020

   

June 30,

2019

 
Net revenue     18     $ 2,388,403     $ 1,535,622     $ 1,435,718     $ 788,447  
Cost of sales     6       1,112,572       638,648       694,503       334,747  
Gross profit             1,275,831       896,974       741,215       453,700  
Administrative expenses     18       231,651       169,856       103,588       88,909  
Selling expenses     18       317,780       272,930       182,685       136,677  
Distribution expenses     18       114,795       67,333       75,043       35,953  
              664,226       510,119       361,316       261,539  
Operating income             611,605       386,855       379,899       192,161  
Financing income (cost):                                        
Interest expense             (72,371 )     (44,730 )     (30,428 )     (22,400 )
Interest income             5,487       3,831       2,777       2,121  
Unrealized gain in valuation of derivative financial instruments             75,336       880       6,572       32  
Foreign exchange (loss) gain, net             (18,599 )     (5,913 )     31,760       (4,314 )
              (10,147 )     (45,932 )     10,681       (24,561 )
Income before income taxes             601,458       340,923       390,580       167,600  
Income taxes     11       187,605       106,057       122,235       52,371  
Net income for the period             413,853       234,866       268,345       115,229  
Other comprehensive income items:                                        
Remeasurement of defined benefit obligations, net of taxes             47       45       (5 )     (4 )
Total comprehensive income for the period           $ 413,900     $ 234,911     $ 268,340     $ 115,225  
Earnings per share     16                                  
Basic earnings per common share (Mexican pesos)           $ 12.66     $ 7.78     $ 7.79     $ 3.82  
Diluted earnings per common share (Mexican pesos)           $ 12.66     $ 7.78     $ 7.79     $ 3.82  

 

See accompanying notes to the condensed combined and consolidated interim financial statements.

 

F-4

 

Betterware de México, S.A.P.I. de C.V. (formerly Betterware de México, S.A. de C.V., a subsidiary of Campalier, S.A. de C.V.) and subsidiary

Condensed Combined and Consolidated Interim Statements of Changes in Stockholders’ Equity

For the six-month periods ended on June 30, 2020 and 2019

(Thousands of Mexican pesos)

 

    Note     Stockholders’ equity  
             
Balance as of January 1, 2019          

$

80,264  
Declared dividends     15       (128,000 )
Comprehensive income for the period             234,911  
Balance as of June 30, 2019          

$

187,175  

 

    Note     Stockholders’ equity  
Balance as of January 1, 2020          

$

274,482  
Capital increase, net     15       108,743  
Declared dividends     15       (170,000 )
Minority interest             3  
Comprehensive income for the period             413,900  
Balance as of June 30, 2020          

$

627,128  

 

See accompanying notes to the condensed combined and consolidated interim financial statements.

 

F-5

 

Betterware de México, S.A.P.I. de C.V. (formerly Betterware de México, S.A. de C.V., a subsidiary of Campalier, S.A. de C.V.) and subsidiary

Condensed Combined and Consolidated Interim Statements of Cash Flows

For the six-month periods ended on June 30, 2020 and 2019

(Thousands of Mexican pesos)

 

    June 30,
2020
    June 30,
2019
 
Operating activities:            
Net income for the period   $ 413,853     $ 234,866  
Adjustments for:                
Income tax expense     187,605       106,057  
Depreciation and amortization of non-current assets and right of use assets     19,575       18,276  
Interest expense recognized in profit or loss     72,371       44,730  
Interest income recognized in profit or loss     (5,487 )     (3,831 )
Loss on disposal of property, plant, and equipment     -       2,349  
Unrealized gain in valuation of derivative financial instruments     (75,336 )     (880 )
      612,581       401,567  
(Increase) decrease in:                
Trade accounts receivable     (268,212 )     (97,570 )
Accounts receivable from related parties     (500 )     (604 )
Inventory     (174,660 )     (49,426 )
Prepaid expenses and other assets     (22,002 )     (22,596 )
Increase (decrease) in:                
Accounts payable to suppliers and accrued expenses     764,589       25,031  
Provisions     54,919       12,673  
Value-added tax payable     27,444       17,072  
Statutory employee profit sharing     (819 )     (268 )
Employee benefits     (469 )     (280 )
Income taxes paid     (166,955 )     (115,499 )
Net cash flows provided by operating activities     825,716       170,100  
Investing activities:                
Payments for property, plant, and equipment     (191,250 )     (79,845 )
Proceeds from sale of property, plant, and equipment     7,661       -  
 Interest received     5,487       -  
Net cash flows (used in) provided by investing activities     (178,102 )     (79,845 )

  

(Continued)

F-6

 

Betterware de México, S.A.P.I. de C.V. (formerly Betterware de México, S.A. de C.V., a subsidiary of Campalier, S.A. de C.V.) and subsidiary

Condensed Combined and Consolidated Interim Statements of Cash Flows

For the six-month periods ended on June 30, 2020 and 2019

(Thousands of Mexican pesos)

 

   

June 30,

2020

   

June 30,

2019

 
Financing activities:            
Proceeds from long-term borrowings  

$

860,000    

$

155,743  
Payments on borrowings     (1,106,806 )     (90,980 )
Interest paid     (79,756 )     (41,954 )
Restricted cash     -       (572 )
Cash flows from issuance of capital stock     164,603       -  
Payments of leases     (8,547 )     -  
Dividends paid     (170,000 )     (192,955 )
Net cash flows used in financing activities     (340,506 )     (170,718 )
Increase (decrease) in cash and cash equivalents     307,108       (80,463 )
                 
Cash and cash equivalents at the beginning of the period     213,697       177,383  
                 
Cash and cash equivalents at the end of the period   $ 520,805    

$

96,920  

 

(Concluded)

 

See accompanying notes to the condensed combined and consolidated interim financial statements.

 

F-7

 

Betterware de México, S.A.P.I. de C.V. (formerly Betterware de México, S.A. de C.V., a subsidiary of Campalier, S.A. de C.V.) and subsidiary

Notes on the Condensed Combined and Consolidated Interim Financial Statements

As of June 30, 2020 and December 31, 2019, and for the three- and six-month periods ended on June 30, 2020 and 2019

(In thousands of Mexican pesos, except the number of shares and earnings per share expressed in Mexican pesos)

 

1. Significant activity and events during the six-month period ended June 30, 2020

 

Betterware de México, S.A.P.I. de C.V. (formerly Betterware de México, SA de CV) (“Betterware”) is a direct-to-consumer selling company, focused on the home organization segment whose product portfolio includes home organization, kitchen preparation, food containers, among other categories (“Home Organization Products”). Betterware purchases these Home Organization Products and sells them through 9 (nine) catalogs published throughout the year. The holding company is Campalier, S.A. de C.V. (“Campalier”).

 

BLSM Latino América Servicios, S.A. de C.V. (“BLSM”) is a related party that provides administrative, technical, and operating services to Betterware, and as of March 10, 2020, a subsidiary of Betterware.

 

Betterware and BLSM (together hereinafter the“Group”) are companies incorporated in Mexico and carry out their operations in Mexico. The Group’s address, both its registered office and primary place of business, is Luis Enrique Williams 549, Parque Industrial Belenes Norte, Zapopan, Jalisco, Mexico, Zip Code 45150.

 

Due to the nature of the Group’s business, operating results are not subject to significant seasonal fluctuations.

 

Significant events –

 

As a result of the coronavirus (COVID-19) outbreak and its recent global spread to a large number of countries, the World Health Organization classified the viral outbreak as a pandemic on March 11, 2020. Public health measures have been taken in Mexico to limit the spread of this virus, including but not limited to, social isolation and the closure of educational centers (schools and universities), commercial establishments and certain non-essential businesses. There is great deal of uncertainty around how this virus will evolve in Mexico, the time it will take for precautionary and / or containment measures to take effect, and the result it will have on the national economy; therefore, the economic impacts and the consequences on the Group’s operations are uncertain and will largely depend on the evolution and spread of the pandemic in the coming months, as well as on all of the affected economic agents’ ability to react and adapt.

 

The Group’s operations have not been interrupted as a result of the COVID-19 pandemic, as its product lines include hygiene and cleaning solutions, which qualify as essential businesses in Mexico. The supply chain has not been affected either, as the Group maintains inventory levels sufficient for supplying sales for 13 weeks out, and its foreign suppliers resumed their normal activities on March 1, 2020. Net sales in 2020 from weeks one to twenty-six increased in comparison with the same period in the previous year, mainly due to an increase in the sales force (distributors and associates). The Group’s gross margin has been negatively affected by promotions aimed at gaining market share and by the appreciation of the US dollar with respect to the impact on the Mexican peso for inventory costs, as the Group purchases most of its products in US dollars. To mitigate this risk, the Group initiated forwards contracts to fix the exchange rate on future purchases in dollars, which has allowed it to partially reduce the effects of the exchange rate due to the COVID-19 pandemic. In addition, management is working on plans to introduce more products with higher profit margins and, therefore, reduce the negative effects on profit margins. The Group maintains sufficient liquidity to comply with its contractual obligations as a result of having financing sources; in addition, the conditions for its customers require payment within 14 and 28 days, while the conditions with its suppliers require payment within 120 days.

 

F-8

 

 

As of March 10, 2020, Betterware’s legal designation changed from Betterware de México, S.A. de C.V. to Betterware de México, S.A.P.I. de C.V. In addition, the transaction with DD3 closed on March 13, 2020. All Betterware shares that were issued and outstanding immediately prior to the closing date were cancelled and new shares were issued. This transaction was accounted as an acquisition by Betterware of DD3, in accordance with IFRS 3 – Business Combinations, whereby Betterware issued shares to the DD3 shareholders and obtained US $ 22,767 (Ps. 498,445) in cash through the acquisition of DD3 and, simultaneously settled liabilities and related transaction costs on that date, for net cash earnings of US$ 7,519 (Ps. 181,734) on such date. In addition, Betterware assumed the obligation of the warrants issued by DD3 (see description below), recognizing a liability inherent to the transaction, equivalent to the fair value of Ps. 55,810 of the warrants. No other assets or liabilities were transferred as part of the transaction that required adjustment to fair value as a result of the acquisition. On the same date, 2,040,000 Betterware shares, that were offered for subscription and payment under its initial public offering on Nasdaq, were subscribed and paid for by different investors. As of the closing date, BLSM is a fully-owned subsidiary of Betterware. The acquisition by Betterware of BLSM was considered a common control transaction and accounted for as a pooling of interests, whereby the historical values of BLSM’s assets and liabilities where the same before and after. As a result of the transaction, Betterware’s original shareholders hold 87.7% of the total outstanding shares, DD3 shareholders obtained a 6.4% stake, and investors under the Nasdaq listing, a 5.9% shake. After the closing date, Betterware has 34,451,020 issued and outstanding shares.

 

As of March 10, 2020, and as a result of the aforementioned transaction, the warrants that DD3 had issued were automatically converted into warrants for the purchase of a total of 5,804,125 Betterware shares. Such warrants may be exercised in accordance with the terms of the warrant agreement governing those securities, and the option to purchase units automatically became an option to purchase the same number of Betterware securities underlying those units and is expected to be enforceable pursuant to its terms which, if exercised, will result in the issuance of 250,000 Betterware shares and warrants for the purchase of an additional 250,000 Betterware shares. Warrants can be exercised starting on April 12, 2020 and will expire on March 25, 2025, or prior to redemption or settlement. The securities purchase option is executable as of closing and will expire on October 11, 2023. The exercise price of the warrants is US $11.50 per share, or US $66,747,438 in total for all of the shares underlying these warrants, and the exercise price of the securities purchase option is US $10 per security, or US $2,500,000 in total, in each case assuming that none of the securities is exercised through a “cashless” exercise.

 

As warrants and securities purchase options (and underlying securities) are exercised, additional Betterware shares will be issued, resulting in dilution for Betterware shareholders and increasing the number of Betterware shares eligible for resale in the public market. The sale of a significant number of such shares on the public market, or the fact that such securities may be exercised, could negatively affect the market price of Betterware shares and dilute current shareholders (see diluted earnings per share disclosure).

 

On May 7, 2020, at the General Meeting of the Board of Directors, it was discussed the intention to register and list the shares representative of Betterware’s capital stock, without a public offering on the Institutional Stock Exchange of Mexico (“BIVA”). At the Extraordinary Shareholders’ Meeting that took place on June 30, 2020, the proposal and approval of the listing of shares representative of the capital stock on the Institutional Stock Exchange was carried out as well as the change in Betterware’s legal designation in order to be designated a publicly held company with variable capital (S.A.B. de C.V.). The change is subject to the resolution of the Mexican Security Exchange Commission to authorize the registration of the shares in BIVA.

 

F-9

 

 

2. Basis of preparation and measurement

 

a. Basis of preparation

 

The unaudited condensed combined and consolidated interim financial statements include Betterware’s and BLSM’s financial statements (the “interim financial statements”). Prior to the transaction mentioned in Note 1, Betterware and BLSM were subsidiaries under the common control of Campalier; therefore, combined financial statements of these entities were prepared. As of March 10, 2020, BLSM became a subsidiary of Betterware and consolidated financial statements are prepared.

 

The intercompany transactions between the consolidated companies and the balances and unrealized profits or losses arising from the transactions within the Group have been excluded in the preparation of the interim financial statements.

 

b. Basis of accounting

 

The Group’s interim financial statements have been prepared in accordance with IAS 34, Interim Financial Reporting, issued by the International Accounting Standards Board (“IASB”).

 

c. Basis of measurement

 

The interim financial statements have been prepared on a historical cost basis, except for certain financial instruments measured at fair value.

 

The aforementioned interim financial statements as of June 30, 2020 and for the three- and six- month periods ended on June 30, 2020 and 2019 have not been audited. In the opinion of the Group’s management, all the adjustments necessary for a fair presentation of the accompanying interim financial statements are included. Earnings for interim periods are not necessarily indicative of projected earnings for the entire year.

 

These interim financial statements must be read in conjunction with the Group’s audited combined financial statements and their respective notes on and for the year ended on December 31, 2019.

 

Functional and reporting currency

 

The interim financial statements are presented in thousands of Mexican pesos (“Ps”), which is the Group’s functional currency. All financial information presented in Mexican pesos has been rounded to the nearest thousand (except where otherwise specified). When referring to US dollars, “US $” means thousands of United States dollars.

 

3. Accounting policies, critical accounting judgments and key sources of estimation uncertainty

 

The accounting policies, critical judgments and key sources of estimation uncertainty applied in the recognition and measurement of assets, liabilities, income, and expenses in the accompanying interim financial statements are consistent with those used in the audited combined financial statements for the year ended December 31, 2019, except for the new accounting policies derived from the issuance of the following amendments to IFRS, effective and mandatory as of January 1, 2020:

 

Amendments to IFRS 3, Definition of a Business
     
Amendments to IAS 1 and IAS 8, Definition of Material
     
Amendments to the conceptual framework of IFRS
     
Amendments to IFRS 9, IAS 39 and IFRS 7, Interest Rate Benchmark Reform
     
Amendments to IFRS 16, Leases in relation to rent concessions related to COVID-19

 

The Group’s interim financial statements were not impacted by the adoption of these amendments and modifications.

 

F-10

 

 

4. Cash and cash equivalents

 

     

June 30,

2020

    December 31, 2019  
Cash on hand in banks     Ps. 511,546       96,008  
Time deposits       9,259       117,689  
      Ps. 520,805       213,697  

 

As of June 30 2020, the balance of cash on hand in banks increased, primarily due to the merger described in Note 1.

 

5. Trade accounts receivable

 

   

June 30,

2020

    December 31, 2019  
Trade accounts receivable   Ps. 523,303       260,727  
Expected credit loss     (8,004 )     (13,640 )
    Ps. 515,299       247,087  

 

The clients’ trade accounts receivable detailed above are measured at their amortized cost. The average, with respect to the turnover of accounts receivable, is from 14 to 28 days as of June 30, 2020, and 30 days as of December 31, 2019. No interest is charged on pending accounts receivable.

 

The Group measures the loss allowance for trade receivables in an amount equal to lifetime expected credit loss. Expected credit losses on trade receivables are estimated using a provision matrix by reference to past default experience of the debtor and an analysis of the debtor’s current financial position, adjusted for factors that are specific to the debtors, general economic conditions of the industry in which the debtors operate, and an assessment of both the current as well as the forecast direction of conditions at the reporting date. There have been no changes to the estimation techniques used or significant assumptions made during the current reporting period.

 

The Group writes off a trade receivable when there is information indicating that the debtor is in severe financial difficulty and there is no realistic prospect of recovery, e.g. when the debtor has been placed in liquidation or has entered bankruptcy proceedings, or when the trade receivables are over one year past due, whichever occurs earlier. None of the trade receivables that have been written off is subject to enforcement activities.

 

F-11

 

 

The following table shows the expected lifetime credit loss recognized for trade accounts receivable in accordance with the simplified approach established in IFRS 9.

 

    Total  
       
Balance as of December 31, 2018   Ps. (9,340 )
Expected credit loss     (22,515 )
Amounts written off     18,215  
Balance as of December 31, 2019   Ps. (13,640 )
Expected credit loss     (18,170 )
Amounts written off     23,806  
Balance as of June 30, 2020   Ps. (8,004 )

 

6. Inventories and cost of sales

 

   

June 30,

2020

   

December 31,

2019

 
             
Finished goods   Ps. 255,360       224,025  
Packing material     7,250       4,577  
      262,610       228,602  
Merchandise- in- transit     257,604       116,952  
    Ps. 520,214       345,554  

 

The cost of inventories recognized as cost of sales during the period, in respect to continuing operations was Ps. 1,112,572 and Ps. 638,648, for the periods ended on June 30, 2020 and 2019, respectively.

 

The cost of inventories recognized as an expense includes Ps. 7,331 and Ps. 4,348 during June 2020 and 2019, respectively, with respect to write-downs on inventory to net realizable value. Such write-downs have been recognized to account for obsolete inventories.

 

7. Property, plant, and equipment, net

 

   

June 30,
2020

   

December 31,
2019

 
Acquisition cost  

Ps.

488,815       305,874  
Accumulated depreciation     (108,033 )     (98,524 )
                 
    Ps. 380,782       207,350  

 

F-12

 

 

 

December 31,
2019

    Additions     Disposals    

June 30,
2020

 
Acquisition cost:                        
Land   Ps. 47,124       -       -       47,124  
Molds     41,269       3,844       -       45,113  
Vehicles     1,602       3,483       1,482       3,603  
Computers and equipment     66,823       1,408       47       68,184  
Leasehold improvements     29,882       16       -       29,898  
Construction in process     119,174       175,719       -       294,893  
    Ps. 305,874       184,470       1,529       488,815  

 

 

December 31,
2019

    Depreciation     Disposals    

June 30,
2020

 
Accrued depreciation:                        
Molds   Ps. (25,648 )     (1,512 )     -       (27,160 )
Vehicles     (1,505 )     (171 )     -       (1,676 )
Computers and equipment     (48,003 )     (6,820 )     47       (54,776 )
Leasehold improvements     (23,368 )     (1,053 )     -       (24,421 )
    Ps. (98,524 )     (9,556 )     47       (108,033 )

 

Depreciation expenses are included in administrative expenses in the condensed combined and consolidated interim statements of profit or loss and other comprehensive income. No impairment losses have been determined.

 

During August 2019, the Group began to build a distribution center, which is expected to be completed in the fourth quarter of 2020. As of June 30, 2020 and December 31, 2019, payments related to this construction amounted to Ps. 294,893 and Ps.165,000, respectively. The total investment is estimated at Ps. 581,000.

 

For the period ended on June 30, 2020 and the year ended December 31, 2019, the Group capitalized borrowings costs in the amount of Ps. 5,560 and Ps. 9,284, respectively, directly related to the distribution center that is under construction.

 

8. Goodwill

 

Goodwill corresponds to the excess resulted between the consideration paid and the fair values ​​of the net assets acquired on the acquisition date paid by Betterware Latinoamérica Holding México, S.A. de C.V. (BLHM) and Strevo Holding, S.A. de C.V.

 

For the purposes of impairment testing, goodwill has been allocated to a CGU. The recoverable amount of the CGU was based on the fair value less costs of disposal, estimated using discounted cash flows. The fair value measurement was categorized as a Level 3 fair value based on the inputs in the valuation technique used.

 

F-13

 

 

The values assigned to the key assumptions represent management’s assessment of future trends in the relevant industries and have been based on historical data from external and internal sources.

 

As of June 30, 2020, no signs of impairment have been identified.

 

9. Intangible assets, net

 

  December 31,
2019
    Additions     Disposals    

June 30,
2020

 
Acquisition costs:                        
Brand   Ps. 253,000       -       -       253,000  
Customer relationships     64,000       -       -       64,000  
Software     21,651       4,938       -       26,589  
Brand and logo rights     7,608       1,842       4,281       5,169  
    Ps. 346,259       6,780       4,281       348,758  

 

  December 31,
2019
    Amortization     Disposals    

June 30,
2020

 
Accumulated amortization:                        
Customer relationships   Ps. (30,933 )     (3,200 )       -       (34,133 )
Software     (421 )     (887 )     -       (1,308 )
Brand and logo rights     (3,940 )     (322 )     -       (4,262 )
    Ps. (35,294 )     (4,409 )     -       (39,703 )

 

On each reporting date, the Group reviews the carrying amounts of its non-financial assets to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. As of June 30, 2020, no signs of impairment have been identified.

 

F-14

 

 

10. Borrowings

 

   

June 30,
2020

   

December 31,
2019

 
Line of credit with MCRF P, S.A. de C.V. SOFOM, E.N.R. for Ps. 600,000, with fixed rate interest of 13.10%. This line of credit is payable on a quarterly basis from May 15, 2019 to May 15, 2023. BLSM Latino América Servicios, S.A. de C.V. is a guarantor in this loan.   Ps. -       516,597  
Secured line of credit with Banamex, up to for up to Ps. 400,000, bearing interest at the TIIE rate plus 260 basis points. Withdrawals from this line of credit have been extended through August 2020, and are payable on quarterly basis from December 17, 2019 up to December 18, 2025.     400,000       135,209  
Unsecured line of credit with Banamex, for up to Ps. 80,000, bearing interest at the TIIE rate plus 275 basis points (renewable on a yearly basis).     20,000       15,000  
Interest payable     3,522       10,907  
Total debt     423,522       677,713  
Less: Current portion     73,333       148,070  
Long-term debt   Ps. 350,189       529,643  

 

On March 10, 2020, Betterware entered into a current account credit agreement with HSBC México, S.A., for an amount of Ps. 50,000, with provisions by means of promissory notes specifying payment of principal and interest. BLSM is jointly liable for this credit. On May 4, 2020, the first amending agreement was signed, in which the amount of the loan was increased to Ps. 150,000. The maturity date of this line of credit is March 10, 2022, and it bears interest at TIIE plus 350 basis points. During the interim period, Ps. 115,000 were disposed, which as of June 30, 2020, were settled by the Group.

 

As of June 30, 2020 and December 31, 2019, the fair value of the borrowings amounted to Ps. 406,300 and Ps. 679,188, respectively. Fair value was calculated using the discounted cash flow method and the Interbank Equilibrium Interest Rate (TIIE), adjusted for credit risk, and it was used to discount future cash flows.

 

As of June 30, 2020, the interest rate spread of the Banamex unsecured credit line of up to Ps. 80,000 amounted to 285 basis points. As of December 31, 2019, the credit interest rate was TIIE plus 275 basis points.

 

Interest expenses related to the borrowings presented above are included in the interest expense line in the condensed combined and consolidated interim statement of profit or loss and other comprehensive income.

 

F-15

 

 

11. Income tax

 

The income tax expense is recognized by multiplying profits before taxes for the interim reporting period by the expected average annual income tax rate for the full year, adjusting for the tax effect of certain items recognized in full in the intermediate period.

 

The effective rate in the interim financial statements could differ from that of the annual financial statements.

 

The Group’s effective rate with respect to operations for the six-month periods ended on June 30, 2020 and 2019 was 31.1%, in both periods.

 

As of June 30, 2020 and December 31, 2019, the Group had no tax loss carryforwards.

 

12. Provisions

 

    Commissions,
promotions,
and other
   

Bonuses and other
employee benefits

    Professional
services fees
   

 

Total

 
                         
As of December 31, 2019   Ps. 32,779       13,356       554       46,689  
                                 
Increases     426,162       42,197       1,586       469,945  
Payments     373,954       38,932       2,140       415,026  
As of June 30, 2020   Ps. 84,987       16,621       -