Report of Foreign Issuer (6-k)

Date : 04/29/2019 @ 9:25PM
Source : Edgar (US Regulatory)
Stock : Netshoes (Cayman) Limited (NETS)
Quote : 3.7  0.0 (0.00%) @ 12:00AM
Netshoes (Cayman) Limited share price Chart

Report of Foreign Issuer (6-k)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 6-K

 

REPORT OF FOREIGN PRIVATE ISSUER

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

OF THE SECURITIES EXCHANGE ACT OF 1934

For the month of April, 2019

Commission File Number 001-38055

 

NETSHOES (CAYMAN) LIMITED

(Exact name of registrant as specified in its charter)

 

 

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

Rua Vergueiro 961, Liberdade

01504-001 São Paulo, São Paulo, Brazil

+55 11 3028-3528

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

 

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

Form 20-F  ☒            Form 40-F  ☐

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

Yes  ☐            No  ☒

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

Yes  ☐            No  ☒

 

 

 

 
 

                                                                            

 

 

 

 

 

 

 

 

NETSHOES (CAYMAN) LIMITED

Consolidated financial statements as of December 31, 2017 and 2018

and for the years ended

December 31, 2016, 2017 and 2018

 

 

 

 

 

 

 

 

 


 
 

 

Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors
Netshoes (Cayman) Limited

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated statements of financial position of Netshoes (Cayman) Limited and subsidiaries (the Company) as of December 31, 2018 and 2017, the related consolidated statements of profit or loss, comprehensive income (loss), cash flows and changes in shareholders’ equity for each of the years in the three‑year period ended December 31, 2018, and the related notes, collectively, the consolidated financial statements. In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2018, in conformity with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).

Translation of consolidated financial statements into United States Dollars

The accompanying consolidated financial statements as of and for the year ended December 31, 2018 have been translated into United States dollars solely for the convenience of the reader.  We have audited the translation and, in our opinion, the consolidated financial statements expressed in Brazilian reais have been translated into United States dollars on the basis set forth in note 2.2 of the notes to the consolidated financial statements

Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1.4 to the consolidated financial statements, the Company has incurred operating losses, negative cash flow from operating activities and has a working capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1.4. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/S/ KPMG Auditores Independentes

We have served as the Company’s auditor since 2010

São Paulo, Brazil
April 29, 2019

 


 
 

 

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

 Consolidated Statements of Financial Position

December 31, 2017 and 2018

(Reais and Dollars in thousands)

               
     

December 31,

 

December 31,

Assets

Note

 

2017

 

2018

 

2018

Current assets:

   

BRL

 

BRL

 

USD                   Note 2.2

     Cash and cash equivalents

9

R$

                395,962

R$

              67,321

US$

              17,374

     Restricted cash

   

                  19,397

 

                2,996

 

                  773

     Trade accounts receivables, net

10

 

                113,168

 

             163,807

 

              42,275

     Inventories, net

11

 

                456,632

 

             268,594

 

              69,318

     Recoverable taxes

12

 

                  80,047

 

              59,214

 

              15,282

     Prepaid expenses and other current assets

   

                  48,352

 

              20,138

 

                5,198

                    Total current assets

   

            1,113,558

 

           582,070

 

          150,220

               

Non-current assets:

             

Restricted cash

   

                  15,048

 

              18,533

 

                4,783

Judicial deposits

24

 

                106,914

 

             119,717

 

              30,896

     Recoverable taxes

12

 

                  70,765

 

              40,033

 

              10,332

     Other assets

   

                    1,950

 

              14,166

 

                3,656

Due from related parties

23

 

                        12

 

                      7

 

                      2

     Property and equipment, net

13

 

                  73,039

 

              76,489

 

              19,740

     Intangible assets, net

14

 

                115,839

 

             143,317

 

              36,987

                    Total non-current assets

   

               383,567

 

           412,262

 

          106,396

               

                    Total assets

 

R$

            1,497,125

R$

           994,332

US$

          256,616

               
               

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

       

 

 

 


 
 

 

 

 

 Consolidated Statements of Financial Position

December 31, 2017 and 2018

(Reais and Dollars in thousands)

               
               
     

December 31,

 

December 31,

Liabilities and Shareholders' Equity

Note

 

2017

 

2018

 

2018

Current liabilities:

   

BRL

 

BRL

 

USD                   Note 2.2

     Trade accounts payable

15

R$

                 365,835

 R$

             337,120

US$

              87,003

     Reverse factoring

16

 

                 148,928

 

              45,276

 

              11,685

     Current portion of long-term debt

18

 

                 106,577

 

              38,473

 

                9,929

     Taxes and contributions payable

   

                   19,875

 

              18,467

 

                4,766

     Deferred revenue

7

 

                    3,732

 

                3,983

 

                1,028

     Accrued expenses

17

 

                 120,366

 

             136,721

 

              35,285

     Other current liabilities

   

                   31,017

 

              25,711

 

                6,635

                    Total current liabilities

   

               796,330

 

           605,751

 

          156,331

               
               

Non-current liabilities:

             

     Long-term debt, net of current portion

18

 

                 179,394

 

             190,406

 

              49,140

     Provision for labor, civil and tax risks

24

 

                   12,523

 

              19,935

 

                5,145

     Deferred revenue

7

 

                   25,502

 

              21,690

 

                5,598

     Other non-current liabilities

   

                         27

 

                       -

 

                      -

                    Total non-current liabilities

   

               217,446

 

           232,031

 

            59,883

                    Total liabilities

   

            1,013,776

 

           837,782

 

          216,214

               

Shareholders' equity:

             

     Share capital

21

 

                       244

 

                   244

 

                    63

     Additional-paid in capital

21

 

              1,345,507

 

          1,347,581

 

            347,781

     Treasury shares

21

 

                   (1,533)

 

               (1,533)

 

                 (396)

     Accumulated other comprehensive loss

   

                 (13,664)

 

             (11,022)

 

              (2,845)

     Accumulated losses

   

               (847,125)

 

         (1,178,464)

 

           (304,135)

                    Equity attributable to owners of the parent

   

               483,429

 

           156,806

 

            40,468

     Equity attributable to non-controlling interests

   

                       (80)

 

                (256)

 

                  (66)

                    Total shareholders' equity

   

               483,349

 

           156,550

 

            40,402

               

                    Total liabilities and shareholders' equity

 

R$

            1,497,125

R$

           994,332

US$

          256,616

               
               

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

       

 

 

 

 


 
 

 

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Consolidated Statements of Profit or Loss

Years ended December 31, 2016, 2017 and 2018

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

                   
     

Years ended December 31,

 

Note

 

2016

 

2017

 

2018

 

2018

     

BRL
Restated

 

BRL
Restated

 

BRL

 

USD                   Note 2.2

Revenue

6

R$

         1,685,151

R$

         1,835,212

R$

         1,808,064

US$

           466,621

Cost of sales

8

 

        (1,144,231)

 

        (1,247,014)

 

       (1,389,842)

 

          (358,687)

                    Gross profit

   

          540,920

 

          588,198

 

          418,222

 

          107,934

                   

Operating expenses:

                 

     Selling and marketing expenses

8

 

          (431,065)

 

          (495,190)

 

          (480,206)

 

          (123,931)

     General and administrative expenses

8

 

          (162,338)

 

          (143,253)

 

          (191,695)

 

            (49,472)

     Other operating expenses, net

   

              (5,251)

 

              (3,933)

 

             (9,312)

 

             (2,403)

                    Total operating expenses

   

          (598,654)

 

          (642,376)

 

          (681,213)

 

          (175,806)

                    Operating loss

   

          (57,734)

 

          (54,178)

 

        (262,991)

 

          (67,872)

 

                 

     Financial income

8

 

             28,285

 

             28,996

 

             15,026

 

               3,878

     Financial expenses

8

 

          (104,795)

 

          (129,040)

 

            (83,223)

 

            (21,478)

     Monetary position (loss) gain, net

   

                      -

 

                      -

 

               9,595

 

               2,476

                    Loss before income tax

   

        (134,244)

 

        (154,222)

 

        (321,593)

 

          (82,996)

 

                 

     Income tax expense

20

 

                      -

 

                      -

 

                (202)

 

                  (52)

                    Net loss from continuing operations

 

R$

        (134,244)

R$

        (154,222)

R$

        (321,795)

US$

          (83,048)

 

                 

                    Net loss from discontinued operations

3

R$

            (17,652)

 

            (16,123)

 

            (10,579)

US$

             (2,730)

                   

                    Net loss

 

R$

        (151,896)

 

        (170,345)

 

        (332,374)

US$

          (85,778)

 

                 

     Net loss attributable to:

                 

          Owners of the Parent from continuing operations

R$

          (133,422)

R$

          (153,623)

R$

          (321,166)

US$

            (82,886)

          Owners of the Parent from discontinued operations

 

            (17,652)

 

            (16,123)

 

            (10,579)

 

             (2,730)

          Non-controlling interests

   

                (822)

 

                (599)

 

                (629)

 

                (159)

 

                 

     Loss per share attributable to owners of the Parent

                 

          Basic and diluted

5

R$

              (7.05)

R$

              (5.95)

R$

            (10.68)

US$

              (2.76)

 

                 

     Loss from continuing operations per share attributable to owners of the Parent

                 

          Basic and diluted

5

R$

              (6.22)

R$

              (5.39)

R$

            (10.34)

US$

              (2.67)

 

                 

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

     

 

 

 

 


 
 

 

 

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss)

Years ended December 31, 2016, 2017 and 2018

(Reais and Dollars in thousands)

                   
     

Years ended December 31,

     

2016

 

2017

 

2018

 

2018

     

BRL
Restated

 

BRL
Restated

 

BRL

 

USD                   Note 2.2

                   
                   

Net Loss

 

R$

       (151,896)

R$

       (170,345)

R$

       (332,374)

US$

         (85,778)

                   

Items that will subsequently be recorded to profit or loss

                 

     Foreign currency translation

   

         (11,015)

 

            5,502

 

            2,989

 

              771

     Foreign currency translation - sale of subsidiary

   

                  -

 

                  -

 

                64

 

                17

     Cash flow hedges – effective portion of changes in fair value

   

          (3,907)

 

              348

 

                  -

 

                  -

     Cash flow hedges – reclassified to initial cost of inventories

   

            3,119

 

                  -

 

                  -

 

                  -

     Cash flow hedges – reclassified to profit or loss

   

             (670)

 

              197

 

                  -

 

                  -

                    Other comprehensive income (loss)

   

         (12,473)

 

            6,047

 

            3,053

 

              788

                    Total comprehensive income (loss)

   

     (164,369)

 

     (164,298)

 

     (329,321)

 

       (84,990)

 

                 

 

                 

     Total comprehensive income (loss) attributable to:

                 

          Owners of the Parent

 

R$

       (163,829)

R$

       (163,833)

R$

       (329,103)

US$

         (84,934)

          Non-controlling interests

   

             (540)

 

             (465)

 

             (218)

 

               (56)

 

                 

 

                 

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

           

 


 
 

 

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Years ended December 31, 2016, 2017 and 2018

(Reais and Dollars in thousands)

 

 

 

2016

   

2017

 

 

2018

 

2018

   

BRL
Restated

   

BRL
Restated

   

BRL

 

USD

Cash flows from continuing operating activities:

                 

Note 2.2

     Net loss from continuing operations

R$

(134,244)

 

R$

(154,222)

 

R$

(321,795)

US$

(83,048)

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

                   

          Allowance for doubtful accounts

 

1,167

   

25,443

   

13,014

 

3,359

          Depreciation and amortization

 

30,776

   

31,487

   

58,022

 

14,974

          Loss on disposal of property and equipment, and intangible assets

 

901

   

179

   

3,770

 

973

          Impairment of property and equipment, and intangible assets

 

-

   

-

   

851

 

220

          Impairment of recoverable taxes (note 3)

 

-

   

-

   

4,828

 

1,246

          Share-based payment

 

930

   

(13,860)

   

7,923

 

2,045

          Provision for labor, civil and tax risks

 

1,247

   

10,111

   

10,795

 

2,786

          Interest expense, net

 

90,605

   

110,568

   

62,066

 

16,018

          Monetary position (loss) gain, net

 

-

   

-

   

5,428

 

1,401

          Provision for inventory losses

 

949

   

4,904

   

72,526

 

18,717

          Provision for expected losses, Other non-current assets (note 19)

 

-

   

-

   

13,225

 

3,413

          Other

 

(9)

   

179

   

205

 

52

               Changes in operating assets and liabilities:

                   

                    (Increase) decrease in:

                   

                         Restricted cash

 

(8)

   

2,549

   

16,401

 

4,233

                         Derivative financial instruments

 

148

   

-

   

-

 

-

                         Trade accounts receivable

 

67,767

   

75,095

   

(67,290)

 

(17,366)

                         Inventories

 

(79,904)

   

(108,386)

   

84,034

 

21,687

                         Recoverable taxes

 

(57,610)

   

(53,172)

   

34,236

 

8,836

                         Judicial deposits

 

(39,940)

   

(35,097)

   

(12,803)

 

(3,304)

                         Other assets

 

(20,901)

   

9,525

   

6,196

 

1,599

                    Increase (decrease) in:

                   

                         Derivative financial instruments

 

(209)

   

(186)

   

-

 

-

                         Trade accounts payable

 

98,545

   

29,880

   

(1,497)

 

(386)

                         Reverse factoring

 

8,104

   

121,061

   

(103,652)

 

(26,750)

                         Taxes and contributions payable

 

9,334

   

5,112

   

537

 

139

                         Deferred revenue

 

(1,875)

   

(3,641)

   

(3,562)

 

(919)

                         Accrued expenses

 

30,118

   

(2,978)

   

24,719

 

6,378

                         Share-based payment

 

(715)

   

(2,366)

   

(611)

 

(158)

                         Other liabilities

 

(12,954)

   

(8,683)

   

(8,273)

 

(2,135)

                               Net cash provided by (used in) continuing operating activities

 

(7,778)

   

43,502

   

(100,707)

 

(25,990)

 

                   

Cash flows from continuing investing activities:

                   

     Proceeds from sale of discontinued operation (note 3a)

 

-

   

-

   

241

 

62

     Purchase of property and equipment

 

(25,069)

   

(7,728)

   

(22,185)

 

(5,725)

     Loan to third parties (note 3a)

 

-

   

-

   

(8,801)

 

(2,271)

     Purchase of intangible assets

 

(47,043)

   

(49,378)

   

(71,743)

 

(18,515)

     Interest received on installment sales

 

6,987

   

2,071

   

1,445

 

373

     Restricted cash

 

760

   

6,206

   

(3,485)

 

(900)

                              Net cash used in continuing investing activities

 

(64,365)

   

(48,829)

   

(104,528)

 

(26,976)

 

                   

Cash flows from continuing financing activities:

                   

     Proceeds from debt

 

137,325

   

134,152

   

-

 

-

     Payments of debt

 

(79,004)

   

(141,788)

   

(57,040)

 

(14,721)

     Payments of interest

 

(105,234)

   

(108,429)

   

(62,889)

 

(16,230)

     Share-based payment

 

-

   

(5,824)

   

-

 

-

     Proceeds from issuance of common shares

 

-

   

423,166

   

-

 

-

                               Net cash provided by (used in) continuing financing activities

 

(46,913)

   

301,277

   

(119,929)

 

(30,951)

 

                   

Net cash used in discontinued operations (note 03)

 

(13,620)

   

(18,162)

   

(8,121)

 

(2,096)

 

                   

Effect of exchange rate changes on cash and cash equivalents

 

(5,083)

   

6,869

   

4,644

 

1,198

 

                   

                              Change in cash and cash equivalents

 

(137,759)

   

284,657

   

(328,641)

 

(84,815)

 

                   

Cash and cash equivalents, beginning of period

 

249,064

   

111,305

   

395,962

 

102,189

Cash and cash equivalents, end of period

 

111,305

   

395,962

   

67,321

 

17,374

 

R$

(137,759)

 

R$

284,657

   

(328,641)

US$

(84,815)

 

                   

Supplemental disclosure

                   

  Non-cash investing  and financing activities:

                   

     Acquisition of property and equipment and intagible assets

R$

4,677

 

R$

1,710

 

R$

2,182

US$

563

     Deferred offering costs reclassified to equity

R$

-

 

R$

6,808

 

R$

-

US$

-

     Convertible notes converted to common shares

R$

-

 

R$

94,151

 

R$

-

US$

-

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

                   

       Equity-settled arrangement

R$

-

 

R$

13,706

 

R$

-

US$

-

                     

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

                     

 

 

 


 
 

 

 

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders’ Equity

Years ended December 31, 2016, 2017 and 2018

(Reais in thousand)

                                     
                                     
                                     
   

Equity Attributtable to owners of the Parent

       
   

Share
Capital

 

Additional
Paid-in
Capital

 

Tresuary
Shares

 

Accumulated
Losses

 

Foreign
Currency
Translation

 

Gain (Loss) on Hedge
Accounting

 

Total

 

Non-controlling
Interest

 

Total Equity

   

BRL

 

BRL

 

BRL

 

BRL

 

BRL

 

BRL

 

BRL

 

BRL

 

BRL

                                     
                                     

Balance, January 1, 2016

R$

                     141

R$

               821,988

R$

                    (925)

R$

              (526,305)

R$

                 (7,735)

R$

                     913

R$

               288,077

R$

                     925

R$

               289,002

                                     

Comprehensive Income (Loss)

                                   

     Net loss

 

                         -

 

                         -

 

                         -

 

              (151,074)

 

                         -

 

                         -

 

              (151,074)

 

                    (822)

 

              (151,896)

     Other comprehensive income (loss)

 

                         -

 

                         -

 

                         -

 

                         -

 

                (11,297)

 

                 (1,458)

 

                (12,755)

 

                     282

 

                (12,473)

                    Total comprehensive income (loss)

 

                         -

 

                         -

 

                         -

 

              (151,074)

 

                (11,297)

 

                 (1,458)

 

              (163,829)

 

                    (540)

 

              (164,369)

                                     

Transactions with Owners and Other

                                   

     Purchase of treasury shares

 

                         -

 

                         -

 

                    (608)

 

                         -

 

                         -

 

                         -

 

                    (608)

 

                         -

 

                    (608)

                    Total transactions with owners and other

 

                         -

 

                         -

 

                    (608)

 

                         -

 

                         -

 

                         -

 

                    (608)

 

                         -

 

                    (608)

                                     

Balance, December 31, 2016

R$

                     141

R$

               821,988

R$

                 (1,533)

R$

              (677,379)

R$

                (19,032)

R$

                    (545)

R$

               123,640

R$

                     385

R$

               124,025

                                     

Comprehensive Income (Loss)

                                   

     Net loss

 

                         -

 

                         -

 

                         -

 

              (169,746)

 

                         -

 

                         -

 

              (169,746)

 

                    (599)

 

              (170,345)

     Other comprehensive income (loss)

 

                         -

 

                         -

 

                         -

 

                         -

 

                   5,368

 

                     545

 

                   5,913

 

                     134

 

                   6,047

                    Total comprehensive income (loss)

 

                         -

 

                         -

 

                         -

 

              (169,746)

 

                   5,368

 

                     545

 

              (163,833)

 

                    (465)

 

              (164,298)

 

                                   

Transactions with Owners and Other

                                   

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

 

                       84

 

               415,466

 

                         -

 

                         -

 

                         -

 

                         -

 

               415,550

 

                         -

 

               415,550

     Conversion of convertible notes to common shares

 

                       19

 

                 94,132

 

                         -

 

                         -

 

                         -

 

                         -

 

                 94,151

 

                         -

 

                 94,151

     Share-based payments

 

                         -

 

                 13,921

 

                         -

 

                         -

 

                         -

 

                         -

 

                 13,921

 

                         -

 

                 13,921

                    Total transactions with owners and other

 

                     103

 

               523,519

 

                         -

 

                         -

 

                         -

 

                         -

 

               523,622

 

                         -

 

               523,622

 

                                   

Balance, December 31, 2017

R$

                     244

R$

             1,345,507

R$

                 (1,533)

R$

              (847,125)

R$

                (13,664)

R$

                         -

R$

               483,429

R$

                      (80)

R$

               483,349

 

                                   

     Adjustment on initial adoption of IFRS 15 (see note 2.6)

 

                         -

 

                         -

 

                         -

 

                 (1,153)

 

                         -

 

                         -

 

                 (1,153)

 

                         -

 

                 (1,153)

     Adjustment on initial adoption of IFRS 9 (see note 2.6)

 

                         -

 

                         -

 

                         -

 

                    (701)

 

                         -

 

                         -

 

                    (701)

 

                         -

 

                    (701)

     Hyperinflation adjustment - IAS 29 (see note 3)

 

                         -

 

                         -

 

                         -

 

                   2,260

 

                         -

 

                         -

 

                   2,260

 

                       42

 

                   2,302

 

                                   

Comprehensive Income (Loss)

                                   

     Net loss

 

                         -

 

                         -

 

                         -

 

              (331,745)

 

                         -

 

                         -

 

              (331,745)

 

                    (629)

 

              (332,374)

     Other comprehensive income (loss)

 

                         -

 

                         -

 

                         -

 

                         -

 

                   2,642

     

                   2,642

 

                     411

 

                   3,053

                    Total comprehensive income (loss)

 

                         -

 

                         -

 

                         -

 

              (331,745)

 

                   2,642

 

                         -

 

              (329,103)

 

                    (218)

 

              (329,321)

 

                                   

     Share-based payments

 

                         -

 

                   2,074

 

                         -

 

                         -

 

                         -

 

                         -

 

                   2,074

 

                         -

 

                   2,074

 

                                   

Balance, December 31, 2018

R$

                     244

R$

             1,347,581

R$

                 (1,533)

R$

           (1,178,464)

R$

                (11,022)

R$

                         -

R$

               156,806

R$

                    (256)

R$

               156,550

 

                                   

 

                                   

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

                           

 

 


 
 

1.            Organization and background

 

1.1     Nature of Operations

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

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

 

In August 2018, the Company entered into an agreement with the Grupo Sierra Capital (“Sierra”) to sell the entirety of its Mexico operations. On October 11, 2018 the Company and Sierra concluded the transaction, which was preceded by final adjustments agreed by the parties under the original terms and conditions of the negotiation (see note 3).

 

In January 2019, the Company decided to divest Argentina operations (see note 3).

 

1.2    Split of Shares

 

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

 

1.3    Convertible Notes and Initial Public Offering

On February 22, 2017, the Company entered into a note purchase agreement pursuant to which it issued and sold unsecured promissory notes convertible into its common shares, in the aggregate principal amount of US$30.0 million, to certain of its shareholders.

The Company determined that the convertible notes constituted a hybrid instrument with characteristics of a debt containing embedded derivative features requiring separate accounting as a derivative instrument. The liability related to the convertible notes was initially recorded at fair value and, subsequently, at amortized cost. The embedded derivative associated with the convertible notes was recorded at fair value with its changes being recorded in the statement of profit or loss.

Immediately prior to the completion of the IPO, the convertible notes (principal amount and any unpaid accrued interest) and its embedded derivative was converted into our common shares with a 10% price discount relative to the initial public offering price of the Company’s outstanding common shares. The value of the Company’s outstanding convertible notes (principal amount and unpaid accrued interest) and its embedded derivative was US$ 30,4 million (or R$94,2 million, using the exchange rate on the date of completion of the IPO) that was converted in 1,870,709 common shares.

 


 
 

On April 18, 2017, the Company completed its Initial Public Offering (IPO). The Company sold 8,250,000 of its common shares at a public offering price of $18.00 per common share, for gross proceeds of $148.5 million (or R$459.7 million, using the exchange rate on the date of completion of the IPO). The Company received net proceeds of $134.2 million (or R$415.6 million, using the exchange rate on the date of completion of the IPO), after deducting $9.7 million (or R$29.9 million, using the exchange rate on the date of completion of the IPO) in underwriting discounts and commissions and $4.6 million (or R$14.2 million, using the exchange rate on the date of completion of the IPO) of other offering expenses.

The shares offered and sold in the initial public offering were registered under the Securities Act of 1933, as amended, pursuant to the Company’s Registration Statement on Form F-1 (Registration No.333-216727), which was declared effective by the Securities and Exchange Commission on April 12, 2017. The common stock began trading on the New York Stock Exchange on April 12, 2017 under the symbol "NETS."

 

1.4    Going concern considerations

The Company recorded a net loss and a significant negative operating cash flow in the year ended December 31, 2018. As of and for the year ended December 31, 2018, the Company had accumulated losses of R$ 1,178,464 (compared to R$ 847,125 as of December 31, 2017), net loss of R$ 332,374 (compared to R$170,345 for the year ended December 31, 2017) and net cash used in operating activities of R$ 100,707 (compared to  R$43,502 of net cash provided in operating activities for the year ended December 31, 2017). In addition, the Company has a working capital deficiency as of December 31, 2018, with R$ 23,681 of net current liabilities (compared to a working capital surplus of R$ 317,228 of net current assets as of December 31, 2017).

The Company expects to continue to incur net losses for at least the next twelve-months following the issue of these consolidated financial statements. Although the Company continues to take action to improve its operating performance and expects to generate positive net operating cash flow over the next twelve-months, this positive cash flow from operating activities by itself may not be sufficient to meet the Company’s cash requirements in the same period arising from its financing activities. As such, Management has concluded that financing alternatives will be necessary to meet its obligations within one year from the date of issue of these consolidated financial statements. However, there can be no assurance that the Company’s plan to improve its operating performance and financial position will be successful or that the Company will be able to obtain additional financing on commercially reasonable terms, or at all.

The Company is currently exploring alternatives to obtain access to other sources of capital necessary to meet its ongoing liquidity needs, such as obtaining new lines of credit, and is taking measures to improve its operating performance and cash, liquidity and financial position. Such measures include, among others, the following:

·         pursuing the sale of its operations in Argentina by the second quarter of 2019, which have not performed as expected and have had a negative effect on the Company’s operating cash flows;

·         continuing to implement cost-saving initiatives across the Company;

·         negotiating alternative payment terms with suppliers;

·         seeking with current creditors the partial release of collateral provided under certain of the Company’s financing arrangements (basically restricted cash and cash equivalents, which as of December 31, 2018 amounted to R$ 88,760); and

·         assessing ways of monetizing the Company’s PIS/COFINS judicial deposits, following a favorable decision in its judicial disputes challenging the tax authorities’ interpretation of the calculation basis for PIS/COFINS taxes over products sold by the Company (such tax credits amounted to R$ 101,971 as of December 31, 2018). Following the favorable decision, the Company expects these deposits to be released, however authorization for release is subject to government approval, the timing of which is currently unknown.


 
 

The Company has also engaged financial and other advisors to assist it in those efforts.

Given the above, management acknowledges there is a material uncertainty which may cast substantial doubt on the Company’s ability to continue as a going concern.

The financial statements of the Company have been prepared assuming the Company’s ability to continue as an going concern as management has a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future based on the projections and measures being taken.  If for any reason the Company is unable to continue as a going concern, then this could have an impact on the Company’s ability to realize assets at their recognized values, and to settle liabilities in the ordinary course of business at the amounts stated in the consolidated financial statements. The financial statements do not include any adjustments that might result from this uncertainty.

1.5   Merger agreement – subsequent event

The Company announced, on April 29, 2019, that it has entered into an Agreement and Plan of Merger (“Merger Agreement”) with Magazine Luiza S.A. and its wholly-owned subsidiary located in the Cayman Islands (“Merger Sub”). Pursuant to the Merger Agreement, Magazine Luiza S.A. will acquire the Company, such that, at the effective time of the transaction, Merger Sub will merge with and into the Company (the “Merger”), with the Company continuing after the Merger as the surviving company and a wholly-owned subsidiary of Magazine Luiza S.A. Subject to the terms and conditions of the Merger Agreement, each of Company´s shareholders will receive US$2.00 per share in cash for each common share. 

The Merger is subject to the satisfaction of certain conditions precedent established in the Agreement and Plan of Merger, including, among others, its approval by two-thirds (2/3) of the votes cast by the shareholders entitled to vote who are present in person or by proxy at a Company’s general meeting, and by the Administrative Council for Economic Defense (Conselho Administrativo de Defesa Econômica – CADE), the Brazilian anti-trust agency.

In addition, on April 29, 2019, Magazine Luiza S.A. announced that it has entered into a voting and support agreement, with shareholders representing 47.9% of our capital stock, pursuant to which, among other things, each such shareholder has agreed to vote all common shares beneficially owned by such shareholder in favor of the adoption of the Merger Agreement and the approval of the Merger and the other transactions contemplated by the Merger Agreement.

 

 

2.            Summary of Significant Accounting Policies

 

2.1.        Statement of Compliance

 

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRSs”) as issued by the International Accounting Standards Board. The consolidated financial statements were authorized for issuance by the Board of Directors on April 29, 2019.

 

2.2.        Basis of Presentation

 

The consolidated financial statements have been prepared under the historical-cost basis, unless otherwise indicated. The presentation of the consolidated financial statements in conformity with IFRS requires the use of certain accounting estimates, and also requires the Company´s Management to exercise its judgment in the process of applying the Company’s accounting policies. Note 2.5 to these consolidated financial statements shows the areas in which a greater level of judgment and estimates have been applied.

 

Intercompany balances and transactions, including income and expenses and any unrealized income and expenses and the balance of receivables and payables arising from intercompany transactions, are eliminated. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment.

 

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

 

Due to the significant inflation in Argentina over the past few years, the three-year cumulative inflation rate in Argentina has exceeded 100% based on data from the national wholesale price index and various available inflation indices in May 2018. As such, Argentina was considered as hyperinflationary economy effective July 1, 2018 and, in these annual financial statements, beginning January 1, 2018 the Company is required to apply inflation accounting. Thus, its statement of financial position and statement of profit or loss are adjusted for the changes in the general purchasing power of the local currency, using official indices at the reporting date, before translation into Brazilian Real (“R$”) and, as a result, are stated in terms of the measuring unit current at the reporting date. The details of recognition of the effects of inflation in Argentina operations are disclosed in note 3.

 


 
 

The comparative information for the years ended December 31, 2016 and 2017 were restated for the purposes of applying IFRS 5 "Non-current assets held for sale and discontinued operations" after approval by the Board of Directors of the sale of its operation in Mexico on August 6, 2018 as presented in note 3.

 

Translations of balances in the consolidated statement of financial positions, consolidated statement of profit or loss, consolidated statement of comprehensive income (loss) and consolidated statement of cash flows from R$ into US$ are solely for the convenience of the readers and have been calculated at the rate of US$1.00 = R$ 3.8748, representing the exchange rate set forth by the Banco Central do Brasil (Central Bank of Brazil) on December 31, 2018. No representation is made that the R$ amounts could have been, or could be, converted, realized or settled into US$ at that rate on December 31, 2018, or at any other rate. All values have been rounded to the nearest thousands of R$ and US$, except where noted.

 

2.3.        Principles of Consolidation

 

The consolidated financial statements include the accounts of all entities in which NSC has a controlling financial interest.

 

i.                  Consolidated subsidiaries

 

Consolidated subsidiaries are entities controlled by the Parent. The Parent controls an entity when it is exposed, or has the right to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The financial statements of consolidated subsidiaries are included in the consolidated financial statements from the date on which control commences until the date on which control ceases.

 

The consolidated subsidiaries are listed as follows:

       

Percentage Ownership and Voting Interest

       

Company

 

Country of
Incorporation

 

December 31,
2017

 

December 31,
2018

             

Netshoes Holding, LLC

 

United States of America

 

100.00%

 

100.00%

NS2 Com Internet S.A.

 

Brazil

 

100.00%

 

100.00%

NS3 Internet S.A.

 

Argentina

 

98.17%

 

98.22%

NS4 Com Internet S.A.

 

Mexico

 

100.00%

 

0.00%

NS4 Servicios de México S.A. C.V.

 

Mexico

 

100.00%

 

0.00%

NS5 Participações Ltda.

 

Brazil

 

99.99%

 

99.99%

NS6 Serviços Esportivos Ltda.

 

Brazil

 

100.00%

 

100.00%

 

 

ii.                Non-controlling interests

 

Non-controlling interests in the net assets of consolidated subsidiaries are identified separately from the Company’s equity. The interest of non-controlling shareholders may be initially measured either at fair value or at the non-controlling interest’s proportionate share of the fair value of the identifiable net assets of the relevant entity. The choice of measurement basis is made on an individual basis. Subsequent to the acquisition of a non-controlling interest, the carrying amount of non-controlling interest is the amount of relevant interests at initial recognition plus the non-controlling interest share of subsequent changes in equity. Total comprehensive income (loss) is attributed to non-controlling interests even if it results in the non-controlling interest having a deficit balance.


 
 

 

Changes in the Parent’s interest in subsidiaries that do not result in a loss of control are accounted for as equity transactions.

 

 

 

2.4.        Foreign Currency Translation and Transactions

 

i.                  Foreign Currency Translation

 

The financial statements of foreign entities that use a functional currency different from the reporting currency are translated into Brazilian Real as described below:

 

·         Assets and liabilities are translated into Brazilian Real at the closing rate, corresponding to the spot exchange rate at the reporting date; and

·         Income statement and cash flow items are translated into Brazilian Real using the average rate of the period unless significant variances occur.

 

The resulting exchange differences are recognized directly in other comprehensive income (loss). When a foreign operation is disposed of, the cumulative amount of the exchange differences in consolidated equity relating to that operation is recorded to the consolidated statements of profit or loss.

 

ii.                Foreign Currency Operations

 

Foreign currency transactions are converted into the functional currency using the exchange rate at the transaction date. Monetary assets and liabilities denominated in foreign currencies are re-measured into functional currency using the exchange rate at the reporting date and the resulting exchange differences are recognized as financial income (expenses) in the consolidated statements of profit or loss. Non-monetary assets and liabilities denominated in foreign currencies are not re-measured at the reporting date. 

 

2.5.    Use of Judgments, Estimates and Assumptions

 

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

 

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are recognized prospectively.

 

Information about judgments, assumptions and estimates made in applying accounting policies that have the most significant effects on the amounts recognized in the consolidated financial statements are included in the following notes:

 

-         Note 3 – Hyperinflation: Determining inflation rate;

-         Note 6 – Revenue: Estimating the sales returns;

-         Note 10 – Trade Accounts Receivable: Estimated losses on doubtful accounts;

-         Note 11 – Inventories: Provision for inventory losses;

-         Note 13, 14 and 25 – Property and Equipment and Intangible Assets: Useful lives of property and equipment and intangible, software development costs related to intangible assets and impairment of long-lived assets;

-         Note 19 – Credit risk of Other non-current assets: Uncertainty of possible outcomes


 
 

-         Note 20 – Income Taxes: Recognition of deferred income tax assets and availability of future taxable profit against which tax losses carried forward can be used. The determination of tax positions that are probable of being sustained also involves significant judgment;

-         Note 22 – Share-based payments: Valuation and classification of awards; and

-         Note 24 – Contingencies: Key assumptions about the likelihood and magnitude of an outflow of resources.

 

2.6.        Changes in accounting policies

 

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

 

i.                  IFRS 15 Revenue from Contracts with Customers

 

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

 

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

 

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

 

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

 

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

 

a.       Revenue from product sales

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

Variable consideration

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


 
 

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

Rights of return

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

The effect of adoption in January 1, 2018 resulted in the recognition of right of return assets (increase in inventories) of R$1,592 and refund liabilities (increase in other liabilities) of R$2,745. The net effect of R$1,153 was recorded in Accumulated losses. The effect of adoption on Revenues for the year ended December 31, 2018 is a decrease of R$1,058 (USD 273).

b.       Freight-related services

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

c.       Marketplace platform

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

d.       NCard

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

e.       Presentation and disclosure requirements

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

 

ii.                IFRS 9 Financial Instruments

 

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

 


 
 

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

 

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

 

a.       Classification and measurement of financial assets and liabilities

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

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

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

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

 

Financial instrument

 

Classification under IAS 39

 

Classification under IFRS 9

 

 

 

 

 

     Cash and cash equivalents

 

Loans and receivables

 

Amortized cost

     Restricted cash, current and non-current portion

 

Loans and receivables

 

Amortized cost

     Trade accounts receivables

 

Loans and receivables

 

Amortized cost

     Due from related parties

 

Loans and receivables

 

Amortized cost

     Judicial deposits

 

Loans and receivables

 

Amortized cost

     Other assets, current and non-current portion

 

Loans and receivables

 

Amortized cost

 

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

b.       Impairment

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

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


 
 

Trade accounts receivables

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

Factors considered were:

·         Significant financial difficulty of the customer;

·         Payment default;

·         Exposure to expected losses;

·         High probability of customer bankruptcy;

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

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

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

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

 

 

As at January 1, 2018

   

Allowance for doubtful accounts (as previously disclosed)

 

Restated allowance for expected losses

 

 

 

 

 

     Not past due

R$

(8,199)

R$

(11,222)

     Past due 1-30 days

 

(2,134)

 

(2,134)

     Past due 31-90 days

 

(3,686)

 

(3,686)

     Past due 91-120 days

 

(1,845)

 

(1,845)

     Past due 120-180 days

 

(3,108)

 

(3,108)

     Past due over 180 days

 

(1,899)

 

(1,899)

                    Total

R$

(20,871)

R$

(23,894)

 

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

 

c.       Hedge accounting

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

 

2.7.        New Accounting Pronouncements not yet effective

 

i.                  IFRS 16 Leases


 
 

IFRS 16, Leases replaces IAS 17, Leases and related interpretations. The core principle is that a lessee recognizes assets and liabilities for all leases with a lease term of more than 12 months. A lessee is required to recognize a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments. Assets and liabilities arising from a lease are initially measured on a present value basis. The measurement includes non-cancellable lease payments (including inflation-linked payments), and also includes payments to be made in optional periods if the lessee is reasonably certain to exercise an option to extend the lease, or not to exercise an option to terminate the lease. The new standard is intended to provide a faithful representation of leasing transactions, in particular those that do not currently require the lessees to recognize an asset and liability arising from an operating lease. IFRS 16 is effective for annual periods beginning on January 1, 2019.

The actual impacts of adopting the standard on January 1, 2019 may change because:

-         the Company has not finalized the testing and assessment over its controls; and

-         the new accounting policies are subject to change until the Company presents its first consolidated financial statements that include the date of initial application.

The Company will recognize new assets and liabilities for its operating leases of distribution centers and administrative headquarters. The nature of expenses related to those leases will change because the Company will recognize a depreciation charge for right-of-use assets and interest expense on lease liabilities.

Previously, the Company recognized operating lease expense on a straight-line basis over the term of the lease, and recognized assets and liabilities only to the extent that there was a timing difference between actual lease payments and the expense recognized. In addition, the Company will no longer recognize provisions for operating leases that it assesses to be onerous. Instead, the Company will include the payments due under the lease in its lease liability. No significant impact is expected for the Company’s finance leases.

 

The Company decides to adopt the modified retrospective application as of January 01, 2019, with the following expedients:

-         apply the new definition of a lease to all of their contracts;

-         exemptions for short term leases and/or with low values;

-         no restatement of its prior-period financial information;

-         calculate lease assets and lease liabilities as at the beginning of the current period using:

o    the lease liability at the date of initial application as the present value of the remaining lease payments;

o    the right of use assets at an amount equal to the lease liability; and

-         apply a single discount rate to the portfolio of leases with similar characteristics using market rates which reasonable approximates the Company risks.

Based on the information currently available, the Company estimates that it will recognize amounts between:

 


 
 

 

 

   

January 1st, 2019

   

BRL

Increase/(Decrease)

   

Right of use - non-current assets

R$

 80,000 - 90,000

Recoverable taxes - current and non-current assets

  10,000 - 12,000

Lease liability - current liabilities

 

 15,000 - 20,000

Lease liability - non-current liabilities

 

  75,000 - 82,000

 

 

The Company has operating leases on a number of buildings where its distribution centers and administrative headquarters are located with third parties in arm’s length conditions. The agreements mature on different date and are usually indexed to the General Market Price Index (IGP-M). The future minimum payments of non-cancellable operating leases are presented below:

 

     

BRL

 

USD

Up to one year

 

R$

              28,163

US$

                7,268

One to five years

   

              72,225

 

              18,640

More than five years

   

              32,031

 

                8,267

Total

 

R$

           132,419

US$

            34,175

 

During the years ended December 31, 2016, 2017 and 2018, the Company recorded total operating lease expenses of R$26,813, R$27,463 and R$28,105 (US$7,253), respectively.

ii.                IFRIC 23 - Uncertainty over Income Tax Treatments

IFRIC 23 clarifies how to apply the recognition and measurement requirements in IAS 12 when there is uncertainty over income tax treatments. In such a circumstance, the Company shall recognize and measure its current or deferred tax asset or liability applying the requirements in IAS 12 based on taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates determined applying this interpretation. The interpretation is effective from January 1, 2019.

The Company is evaluating the possible effects from the adoption of the interpretation, and until the present moment no relevant impact has been identified.

iii.               Other Clarifications, amendments and interpretations

Several other amendments and interpretations apply for the first time in 2018 and 2019, but do not have a significant impact on the consolidated financial statements of the Company.

 

 

3.            Events occurred during the year

 

i.                  Hyperinflation


 
 

Argentina was considered a hyperinflationary economy in 2018. As a result, the Company has applied the IAS 29 accounting requirements to its Argentinean subsidiary with effect from January 1, 2018. The main implications of this are as follows:

-         2017 figures were not restated (accounting policy);

-         Adjustment of the historical costs of non-monetary assets and liabilities and the various items of equity of the Argentinean subsidiary from their date of acquisition or inclusion in the consolidated statement of financial position to the end of the period to reflect the changes in purchase power of the currency caused by inflation;

-         The cumulative impact of the accounting restatement to adjust for the effects of hyperinflationary for years prior to 2018 is reflected in the translation differences (equity) in the beginning of 2018;

-         Adjustment of the consolidated statements of profit or loss to reflect the financial gain caused by the impact of inflation in the year on net monetary assets (loss of purchasing power);

-         The various components of consolidated statements of profit or loss and statement of cash flows have been adjusted for the inflation index since their recognition; and

-         All components of the financial statements of the Argentinean subsidiary have been translated at the closing exchange rate to the Company functional currency.

 

The main effects on the consolidated financial statement for 2018 are as follows:

 

 

   

Until December 31, 2017

 

Year ended December 31, 2018

   

BRL

 

BRL

 

USD

             

Gross profit

R$

                          -

R$

               5,232

US$

      1,350

Operating loss

 

                          -

 

           (13,866)

 

    (3,579)

Net loss

 

                          -

 

               6,870

 

      1,773

Non-monetary assets

 

                   3,165

 

               3,019

 

        779

Accumulated losses

 

                   2,302

 

               9,172

 

      2,367

 

 

The index used to reflect current values is derived from a combination of the wholesale price index (IPIM) and the consumer price index (IPC) published by Instituto Nacional de Estatisticas y Censos (INDEC – Argentinean government agency). The movement in the price index for year ended as of December 31, 2018 is 47.60% (24.80% as of December 31, 2017).

 

ii.                Foreign operations

 

Accounting policy, and Critical accounting estimates and judgments

 

The classification as a discontinued operation occurs through disposal or when the operation meets the criteria to be classified as held for sale, if this occurs earlier. A discontinued operation is a component of a Company business comprising cash flows and operations that may be clearly distinct from the rest of the Company and that represents an important separate line of business or geographical operational area.

 

The result of discontinued operations is presented in a single line in the statement of profit or loss, including the results after income tax of these operations less any impairment loss.

 


 
 

When an operation is classified as a discontinued operation, the statement of profit or loss and the cash flow of the prior periods are restated as if the operation had been discontinued since the beginning of the comparative period.

 

 

 

a.       Mexico operation

In August 2018, the Company entered into an agreement with the Grupo Sierra Capital (“Sierra”) to sell the entirety of its Mexico operations. In October 11, 2018 (the “Closing date”) the Company and Sierra concluded the transaction, which was preceded by final adjustments agreed by the parties under the original terms and conditions of the negotiation. As consequence of these adjustments, the final consideration has changed, and the Company received an amount of R$ 6,271 (USD 1,693 as of October 11, 2018).

 

As part of the final agreement, the Company granted to the former Mexican subsidiaries a loan in the amount of R$8,801 (USD 2,462 as of October 11, 2018), recognized within Other current assets, with maturity on the first anniversary of the closing date.

 

The Company signed a Transitional Services Agreement (“TSA”) with Sierra to outsource certain services relating to IT and marketing. The IT services are being provided to the former subsidiary for a term of eighteen months and Marketing services are being provided for a term of twelve months, both as from the Closing Date. The Company has a cost estimate R$2,865 (USD 739) to provide these services to the former subsidiary, such amount was deferred and will be recognized as expense reduction when the service is rendered. The Company recognized a gain of BRL 241 (USD 62) in the consolidated statements of profit and loss from discontinued operations, as summarized below.

 

 

   

Year ended December 31, 2018

   

BRL

     

Proceeds from sale

R$

                                 6,271

Deferred revenue - TSA

 

                                (2,865)

Other related costs

 

                                (1,793)

Investments disposal

 

                                (1,308)

Foreign currency translation - OCI

 

                                    (64)

 

R$

                                   241

 

 

The Company may receive additional earn-out of the transaction up to USD 1,500 in circumstances where revenue exceed certain levels during each of the twelve months fiscal periods after the completion of the transaction, during three years.

 

The statements of profit or loss and cash flow from discontinued operations of the Mexico operation for the year ended December 31, 2018 are presented below, as well as the restatement of the corresponding years ended December 31, 2016 and 2017, as mentioned in Note 2.2.


 
 

   

   

Years ended December 31,

   

2016

 

2017

 

2018

 

2018

Discontinued operations

 

BRL

 

BRL

 

BRL

 

USD                   Note 2.2

Revenue

R$

    54,389

R$

       53,794

R$

    45,147

US$

      11,651

Cost of sales

 

   (44,422)

 

     (44,413)

 

  (35,984)

 

      (9,287)

                    Gross Profit

 

     9,967

 

       9,381

 

    9,163

 

       2,364

                 

Operating expenses:

               

     Selling and marketing expenses

 

   (12,708)

 

     (14,017)

 

    (9,550)

 

      (2,465)

     General and administrative expenses

 

   (12,238)

 

       (9,884)

 

    (8,514)

 

      (2,197)

                    Total operating expenses

 

   (24,946)

 

     (23,901)

 

  (18,064)

 

      (4,662)

                    Operating loss

 

 (14,979)

 

    (14,520)

 

   (8,901)

 

     (2,298)

                 

     Financial income

 

          82

 

        1,136

 

        905

 

          234

     Financial expenses

 

     (2,755)

 

       (2,737)

 

    (2,824)

 

         (729)

                    Loss before income tax

 

 (17,652)

 

    (16,121)

 

 (10,820)

 

     (2,793)

                 

     Income tax expense

 

             -

 

             (2)

 

            -

 

              -

                    Net loss

R$

 (17,652)

R$

    (16,123)

R$

 (10,820)

US$

     (2,793)

                 

     Gain on sale of discontinued operation

 

             -

 

               -

 

        241

 

            63

                 

                    Net loss from discontinued operations

R$

 (17,652)

R$

    (16,123)

R$

 (10,579)

US$

     (2,730)

 

 


 
 

 

   

Years ended December 31,

   

2016

 

2017

 

2018

 

2018

Discontinued operations

 

BRL

 

BRL

 

BRL

 

USD

Cash flows from operating activities:

 

 

 

 

 

 

 

Note 2.2

     Net loss

R$

       (17,652)

R$

       (16,123)

R$

       (10,820)

US$

         (2,793)

     Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

          Allowance for doubtful accounts

 

                -  

 

                -  

 

             155

 

               40

          Depreciation and amortization

 

             462

 

             333

 

             294

 

               76

          Loss on disposal of property and equipment, and intangible assets

 

                -  

 

               19

 

               13

 

                 3

          Interest expense, net

 

          1,831

 

          2,190

 

          2,155

 

             556

          Provision for inventory losses

 

            (100)

 

             479

 

             644

 

             166

          Other

 

            (125)

 

                 2

 

                -  

 

                -  

               Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

                    (Increase) decrease in:

 

 

 

 

 

 

 

 

                         Trade accounts receivable

 

             120

 

            (645)

 

              (85)

 

              (22)

                         Inventories

 

          2,709

 

         (5,696)

 

          3,916

 

          1,011

                         Recoverable taxes

 

          1,108

 

             458

 

          1,347

 

             348

                         Other assets

 

            (296)

 

             414

 

          1,374

 

             355

                    Increase (decrease) in:

 

 

 

 

 

 

 

                -  

                         Trade accounts payable

 

         (3,982)

 

          4,410

 

         (6,192)

 

         (1,598)

                         Taxes and contributions payable

 

            (157)

 

                 5

 

             169

 

               44

                         Accrued expenses

 

            (625)

 

          1,118

 

               11

 

                 3

                         Other liabilities

 

            (709)

 

              (82)

 

         (4,968)

 

         (1,282)

                               Net cash provided by (used in) operating activities

 

       (17,416)

 

       (13,118)

 

       (11,987)

 

         (3,093)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

     Purchase of property and equipment

 

            (165)

 

            (133)

 

              (59)

 

              (15)

     Purchase of intangible assets

 

              (23)

 

              (17)

 

                -  

 

                -  

                              Net cash provided by (used in) investing activities

 

            (188)

 

            (150)

 

              (59)

 

              (15)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

     Proceeds from debt

 

        25,306

 

        25,832

 

        26,169

 

          6,754

     Payments of debt

 

       (23,548)

 

       (28,671)

 

       (20,240)

 

         (5,224)

     Payments of interest

 

         (2,052)

 

         (2,203)

 

         (2,038)

 

            (526)

                               Net cash provided by (used in) financing activities

 

            (294)

 

         (5,042)

 

          3,891

 

          1,004

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

          4,278

 

             148

 

               34

 

                 8

                              Net cash used in discontinued operations

 

       (13,620)

 

       (18,162)

 

         (8,121)

 

         (2,096)

 

 

b.