Report of Foreign Issuer (6-k)

Date : 05/10/2019 @ 9:23PM
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 May, 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

Unaudited condensed consolidated interim financial statements

as of March 31, 2019, and for the three-month periods ended March 31, 2018 and 2019

 

 

1

 


 
 

 

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Financial Position

December 31, 2018 and March 31, 2019

(Reais and Dollars in thousands)

               
     

December 31,

 

March 31,

Assets

Note

 

2018

 

2019

 

2019

Current assets:

   

BRL

 

BRL

 

USD

Note 2.2

     Cash and cash equivalents

10

R$

                       67,321

R$

     43,194

US$

     11,085

     Restricted cash

   

                         2,996

 

         777

 

         199

     Trade accounts receivables, net

11

 

                     163,807

 

     90,789

 

     23,299

     Inventories, net

12

 

                     268,594

 

   255,824

 

     65,651

     Recoverable taxes

13

 

                       59,214

 

     58,577

 

     15,032

     Prepaid expenses and other current assets

   

                       20,138

 

     25,397

 

       6,518

     

                   582,070

 

  474,558

 

  121,784

               

Non-current assets held for sale

3

 

                               -

 

     14,192

 

       3,642

                    Total current assets

   

                   582,070

 

  488,750

 

  125,426

               

Non-current assets:

             

Restricted cash

   

                       18,533

 

     21,623

 

       5,549

Judicial deposits

25

 

                     119,717

 

   124,516

 

     31,954

     Recoverable taxes

13

 

                       40,033

 

     37,463

 

       9,614

     Other assets

   

                       14,166

 

     14,166

 

       3,635

Due from related parties

24

 

                               7

 

             -

 

             -

     Property and equipment, net

14

 

                       76,489

 

   152,889

 

     39,236

     Intangible assets, net

15

 

                     143,317

 

   143,328

 

     36,782

                    Total non-current assets

   

                   412,262

 

  493,985

 

  126,770

               

                    Total assets

 

R$

                   994,332

R$

  982,735

US$

  252,196

 

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

2

 


 
 

 

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Financial Position

December 31, 2018 and March 31, 2019

(Reais and Dollars in thousands)

               
     

December 31,

 

March 31,

Liabilities and Shareholders' Equity

Note

 

2018

 

2019

 

2019

Current liabilities:

   

BRL

 

BRL

 

USD

Note 2.2

     Trade accounts payable

16

R$

                337,120

 R$

     312,440

US$

     80,181

     Reverse factoring

17

 

                 45,276

 

       38,217

 

       9,808

     Current portion of long-term debt

19

 

                 38,473

 

       66,882

 

     17,164

     Taxes and contributions payable

   

                 18,467

 

       15,736

 

       4,038

     Deferred revenue

8

 

                   3,983

 

         3,927

 

       1,008

     Accrued expenses

18

 

                136,721

 

     125,917

 

     32,314

     Current portion of lease liabilities

2.5

 

                          -

 

       16,121

 

       4,136

     Other current liabilities

   

                 25,711

 

       23,654

 

       6,069

     

              605,751

 

    602,894

 

  154,718

               

Liabilities associated with non-current assets held for sale

3

 

                          -

 

       18,076

 

       4,639

                    Total current liabilities

   

              605,751

 

    620,970

 

  159,357

               
               

Non-current liabilities:

             

     Long-term debt, net of current portion

19

 

                190,406

 

     164,109

 

     42,115

     Provision for labor, civil and tax risks

25

 

                 19,935

 

       23,714

 

       6,086

     Deferred revenue

8

 

                 21,690

 

       20,397

 

       5,234

     Leases liabilities, net of current portion

2.5

 

                          -

 

       63,650

 

     16,333

                    Total non-current liabilities

   

              232,031

 

    271,870

 

    69,768

                    Total liabilities

   

              837,782

 

    892,840

 

  229,125

               

Shareholders' equity:

             

     Share capital

   

                      244

 

           244

 

           63

     Additional-paid in capital

   

             1,347,581

 

   1,348,043

 

   345,945

     Treasury shares

   

                  (1,533)

 

       (1,533)

 

        (393)

     Accumulated other comprehensive loss

   

                (11,022)

 

      (11,228)

 

     (2,881)

     Accumulated losses

   

            (1,178,464)

 

 (1,245,338)

 

  (319,588)

                    Equity attributable to owners of the parent

   

              156,806

 

      90,188

 

    23,146

     Equity attributable to non-controlling interests

   

                   (256)

 

         (293)

 

         (75)

                    Total shareholders' equity

   

              156,550

 

      89,895

 

    23,071

               

                    Total liabilities and shareholders' equity

 

R$

              994,332

R$

    982,735

US$

  252,196

 

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

 

 

3

 


 
 

 

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Profit or Loss

For the three months ended March 31, 2018 and 2019

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

               
               
     

For the three months ended in March 31,

 

Note

 

2018

 

2019

 

2019

     

BRL

 

BRL

 

USD

Note 2.2

Continuing operations

   

Restated

       

Revenue

7

R$

              360,351

R$

   326,703

US$

    83,841

Cost of sales

9

 

             (248,802)

 

 (238,164)

 

   (61,119)

                    Gross profit

   

             111,549

 

   88,539

 

   22,722

               

Operating expenses:

             

     Selling and marketing expenses

9

 

               (98,771)

 

   (89,394)

 

   (22,941)

     General and administrative expenses

9

 

               (49,189)

 

   (44,700)

 

   (11,471)

     Other operating (expenses) income, net

   

                (1,114)

 

      1,110

 

         285

                    Total operating expenses

   

             (149,074)

 

 (132,984)

 

   (34,127)

                    Operating loss

   

             (37,525)

 

  (44,445)

 

 (11,405)

               

     Financial income

9

 

                  4,125

 

      3,256

 

         836

     Financial expenses

9

 

               (17,314)

 

   (23,102)

 

     (5,929)

                    Loss before income tax

   

             (50,714)

 

  (64,291)

 

 (16,498)

               

     Income tax expense

   

                        -

 

             -

 

             -

                    Net Loss from continuing operations

   

             (50,714)

 

  (64,291)

 

 (16,498)

               

                    Net Loss from discontinued operations

3

 

               (10,586)

 

     (2,626)

 

       (674)

               

                    Net Loss

 

R$

             (61,300)

R$

  (66,917)

US$

 (17,172)

               
               

     Net loss attributable to:

             

          Owners of the Parent from continuing operations

 

R$

               (50,714)

R$

   (64,291)

US$

   (16,499)

          Owners of the Parent from discontinued operations

   

               (10,468)

 

     (2,583)

 

       (663)

          Non-controlling interests from discontinued operations

   

                   (118)

 

         (43)

 

         (11)

               

     Loss per share attributable to owners of the Parent

             

          Basic and diluted

6

R$

                  (1.97)

R$

      (2.15)

US$

      (0.55)

               

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

         

          Basic and diluted

6

R$

                  (1.63)

R$

      (2.07)

US$

      (0.53)

 

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

 

4

 


 
 

 

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)

For the three months ended March 31, 2018 and 2019

(Reais and Dollars in thousands)

             
   

For the three months ended in March 31,

   

2018

 

2019

 

2019

   

BRL

 

BRL

 

USD

Note 2.2

   

Restated

       
             

Net Loss

R$

  (61,300)

R$

  (66,917)

US$

             (17,172)

             

Items that will subsequently be recorded to profit or loss

           

     Foreign currency translation

 

       (449)

 

       (200)

 

                   (51)

                    Other comprehensive income (loss)

 

       (449)

 

       (200)

 

                   (51)

                    Total comprehensive income (loss)

 

 (61,749)

 

 (67,117)

 

            (17,223)

             
             

     Total comprehensive income (loss) attributable to:

           

          Owners of the Parent

R$

  (61,617)

R$

  (67,080)

US$

             (17,216)

          Non-controlling interests

 

       (132)

 

        (37)

 

                     (9)

 

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

 

5

 


 
 

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows

For the three months ended March 31, 2018 and 2019

(Reais and Dollars in thousands)

             
   

For the three months ended in March 31,

             
   

2018

 

2019

 

2019

   

BRL

 

 BRL

 

USD

   

Restated

       

Cash flows from continuing operating activities:

         

Note 2.2

     Net loss

R$

      (50,714)

R$

      (64,291)

US$

      (16,498)

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

           

          Allowance for doubtful accounts

 

         4,681

 

        (1,675)

 

           (430)

          Depreciation and amortization

 

       15,676

 

       17,262

 

         4,430

          Loss on disposal of property and equipment, and intangible assets

 

            259

 

              48

 

              12

          Share-based payment

 

         2,557

 

            571

 

            147

          Provision for labor, civil and tax risks

 

         1,878

 

         4,857

 

         1,246

          Interest expenses, net

 

       14,397

 

       11,292

 

         2,898

          Provision for inventory losses

 

         4,181

 

        (1,424)

 

           (365)

          Other

 

                4

 

               -  

 

               -  

               Changes in operating assets and liabilities:

           

                    (Increase) decrease in:

           

                         Restricted cash

 

        (2,765)

 

         2,219

 

            569

                         Trade accounts receivable

 

        (1,395)

 

       72,317

 

       18,559

                         Inventories

 

      (20,855)

 

            685

 

            176

                         Recoverable taxes

 

        (1,329)

 

         1,968

 

            505

                         Judicial deposits

 

        (2,972)

 

        (4,799)

 

        (1,232)

                         Other assets

 

        (9,979)

 

        (8,138)

 

        (2,088)

                    Increase (decrease) in:

           

                         Trade accounts payable

 

      (80,423)

 

      (13,927)

 

        (3,574)

                         Reverse factoring

 

      (87,802)

 

        (7,059)

 

        (1,812)

                         Taxes and contributions payable

 

           (520)

 

        (1,889)

 

           (485)

                         Deferred revenue

 

           (951)

 

        (1,348)

 

           (346)

                         Accrued expenses

 

      (25,057)

 

        (8,780)

 

        (2,253)

                         Share-based payment

 

               -  

 

           (109)

 

             (28)

                         Other liabilities

 

           (691)

 

        (2,121)

 

           (544)

                               Net cash used in continung operating activities

 

    (241,820)

 

        (4,341)

 

        (1,113)

             

Cash flows from continuing investing activities:

           

     Purchase of property and equipment

 

      (10,424)

 

           (390)

 

           (100)

     Purchase of intangible assets

 

      (16,793)

 

        (8,676)

 

        (2,226)

     Restricted cash

 

        (2,242)

 

        (3,090)

 

           (793)

     Other

 

            961

 

               -  

 

               -  

                              Net cash used in continuing investing activities

 

      (28,498)

 

      (12,156)

 

        (3,119)

             

Cash flows from continuing financing activities:

           

     Proceeds from debt

 

               -  

 

         1,426

 

            366

     Payments of debt

 

      (28,296)

 

               -  

 

               -  

     Payments of interest

 

      (15,648)

 

      (10,362)

 

        (2,659)

                               Net cash provided by (used in) continuing financing activities

 

      (43,944)

 

        (8,936)

 

        (2,293)

             

Net cash (used) provided by discontinued operations (note 3)

 

      (20,965)

 

         1,285

 

            330

             

Effect of exchange rate changes on cash and cash equivalents

 

             (83)

 

              21

 

                4

   

 

 

 

 

 

                              Change in cash and cash equivalents

 

    (335,310)

 

      (24,127)

 

        (6,191)

             

Cash and cash equivalents, beginning of period

 

     395,962

 

       67,321

 

       17,276

Cash and cash equivalents, end of period

 

       60,652

 

       43,194

 

       11,085

 

R$

    (335,310)

R$

      (24,127)

US$

        (6,191)

Supplemental disclosure

           

  Non-cash investing  and financing activities:

           

     Acquisition of property and equipment and intangible assets (Note 18)

R$

         1,431

R$

         1,088

US$

            279

     Adjustment on initial application of IFRS 15 and IFRS 9

 

         1,854

 

               -  

 

               -  

 

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

 

 

6

 


 
 

 

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity

For the three months ended March 31, 2018 and 2019

(Reais and Dollars in thousand)

                                 
                                 
                                 
   

Equity Attributable to owners of the Parent

       
   

Share
Capital

 

Additional
Paid-in
Capital

 

Treasury
Shares

 

Accumulated
Losses

 

Foreign
Currency
Translation

 

Total

 

 Non-controlling
Interest

 

Total Equity

   

BRL

 

BRL

 

BRL

 

BRL

 

BRL

 

BRL

 

 BRL

 

BRL

                                 
                                 

Balance, December 31, 2017

R$

        244

R$

  1,345,507

R$

    (1,533)

R$

    (847,125)

R$

  (13,664)

R$

  483,429

R$

        (80)

R$

  483,349

                                 

     Adjustment on initial adoption of IFRS 15

 

            -

 

              -

 

            -

 

       (1,153)

 

            -

 

    (1,153)

 

            -

 

    (1,153)

     Adjustment on initial adoption of IFRS 9

 

            -

 

              -

 

            -

 

          (701)

 

            -

 

       (701)

 

            -

 

       (701)

     Adjustment on initial adoption of IAS 29

 

            -

 

              -

 

            -

 

         2,260

 

            -

 

      2,260

 

          42

 

      2,302

                                 

Adjusted balance, January 1, 2018

 

        244

 

  1,345,507

 

    (1,533)

 

    (846,719)

 

  (13,664)

 

  483,835

 

        (38)

 

  483,797

                                 

Comprehensive Income (Loss)

                               

     Net loss

 

            -

 

              -

 

            -

 

      (61,182)

 

            -

 

  (61,182)

 

       (118)

 

  (61,300)

     Other comprehensive income (loss)

 

            -

 

              -

 

            -

 

               -

 

       (435)

 

       (435)

 

        (14)

 

       (449)

                    Total comprehensive income (loss)

 

            -

 

              -

 

            -

 

      (61,182)

 

       (435)

 

  (61,617)

 

       (132)

 

  (61,749)

                                 

     Share-based payments

 

            -

 

        2,181

 

            -

 

               -

 

            -

 

      2,181

 

            -

 

      2,181

                                 

Balance, March 31, 2018

R$

        244

R$

  1,347,688

R$

    (1,533)

R$

    (907,901)

R$

  (14,099)

R$

  424,399

R$

       (170)

R$

  424,229

                                 

Balance, January 1, 2019

R$

        244

R$

  1,347,581

R$

    (1,533)

R$

 (1,178,464)

R$

  (11,022)

R$

  156,806

R$

       (256)

R$

  156,550

                                 

Comprehensive Income (Loss)

                               

     Net loss

 

            -

 

              -

 

            -

 

      (66,874)

 

            -

 

  (66,874)

 

        (43)

 

  (66,917)

     Other comprehensive income (loss)

 

            -

 

              -

 

            -

 

               -

 

       (206)

 

       (206)

 

            6

 

       (200)

                    Total comprehensive income (loss)

 

            -

 

              -

 

            -

 

      (66,874)

 

       (206)

 

  (67,080)

 

        (37)

 

  (67,117)

                                 

     Share-based payments

 

            -

 

          462

 

            -

 

               -

 

            -

 

        462

 

            -

 

        462

                                 

Balance, March 31, 2019

R$

        244

R$

  1,348,043

R$

    (1,533)

R$

 (1,245,338)

R$

  (11,228)

R$

    90,188

R$

       (293)

R$

    89,895

 

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

 

7

 


 
 

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated interim financial statements

For the three months ended March 31, 2019

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

 

1.               Organization and background

 

1.1       Nature of Operations

 

Netshoes (Cayman) Limited (“NSC” or the “Parent") was incorporated in the Cayman Islands on April 12, 2011. NSC is a holding company and conducts its business primarily through its subsidiaries (together with NSC, the “Company”, “we” or “us”). The Company’s registered office is at Willow House, Cricket Square, George Town, KY 1-1104, Cayman Islands. Major shareholders of the Company include Tiger Global Private Investment Partners V, L.P. (“Tiger Global V”), Tiger Global Private Investment Partners 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 Brazil. 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 and in April 2019 the Company entered into an agreement with BT8 S.A. to sell the entirety of its Argentina operations (see note 3).

 

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

 

1.2     Going concern considerations

The Company recorded a net loss and a significant negative operating cash flow in the year ended December 31, 2018 and in the three-month period ended March 31, 2019. As of and for the period ended March 31, 2019, the Company had accumulated losses of R$ 1,245,338 (compared to R$1,178,464 as of December 31, 2018), net loss of R$66,917 (compared to R$61,300 for the period ended March 31, 2018) and net cash used in operating activities of R$4,341 (compared to  R$241,820 for the period ended March 31, 2018). In addition, the Company has a working capital deficiency as of March 31, 2019 with R$ 132,220 of net current liabilities (compared to R$ 23,681 as of December 31, 2018).

The Company expects to continue to incur net losses for at least the next twelve-months following the issue of these condensed 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 condensed 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:

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

·          negotiating alternative payment terms with suppliers;

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NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated interim financial statements

For the three months ended March 31, 2019

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

 

·          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 March 31, 2019 amounted to R$65,594); 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$ 103,595 as of March 31, 2019). 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 a 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 condensed consolidated financial statements. The condensed consolidated interim financial statements do not include any adjustments that might result from this uncertainty.

1.3     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 Company’s 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

 

These condensed consolidated interim financial statements have been prepared in accordance with International Accounting Standard 34, “Interim Financial Reporting” and should be read in conjunction with the Company’s last annual consolidated financial statements as at and for the year ended December 31, 2018 (“last annual financial statements”). These interim financial statements, which are unaudited, do not include all of the information required for a complete set of financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”). However, selected explanatory notes are included to explain events and transactions that are significant to

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NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated interim financial statements

For the three months ended March 31, 2019

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

 

an understanding of the changes in the Company’s financial position and performance since the last annual financial statements.

 

These condensed consolidated interim financial statements as of and for the three-month period ended March 31, 2019 were authorized for issuance by the Board of Directors on May 10, 2019.

 

2.2.           Basis of Presentation

 

The functional currency of the Company is US$ and the reporting currency is Brazilian Real (“R$”) as this currency better reflects the underlying operations of the consolidated entities. The Company’s subsidiaries with operations in Brazil, Argentina and Mexico (last two presented as discontinued operations, as described in note 3) use their respective currencies as their functional currencies.

 

Translations of balances in the condensed consolidated statement of financial positions, condensed consolidated statement of profit or loss, condensed consolidated statement of comprehensive income (loss) and condensed consolidated statement of cash flows from R$ into US$ are solely for the convenience of the readers and have been calculated at the rate of US$1.00 = R$ 3.8967, representing the exchange rate set forth by the Banco Central do Brasil (Central Bank of Brazil) on March 31, 2019. No representation is made that the R$ amounts could have been, or could be, converted, realized or settled into US$ at that rate on March 31, 2019, or at any other rate. All values have been rounded to the nearest thousands of R$ and US$, except where noted.

 

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, as from January 1, 2018, the Company was 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.

 

These interim condensed consolidated interim financial statements were prepared pursuant to the accounting principles, practices and criteria consistent with those adopted in financial statements for the year ended December 31, 2018 and must be analyzed jointly with the referred to financial statements, except for:

·          the comparative information for the three-month period ended March 31, 2018 which was restated, see note 3 for further information; and

·          the adoption of IFRS 16, see note 2.5 for further information.

 

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

 

2.3.           Use of Judgments, Estimates and Assumptions

 

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

 

The significant judgments made by management in applying the Company’s accounting policies and the key sources of estimation uncertainty were the same as those applied to the consolidated financial statements as at and for the year ended December 31, 2018, except for the initial adoption of IFRS 16 disclosed in note 2.5.

 

2.4.           Fair Value Measurements

 

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

 

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

 

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NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated interim financial statements

For the three months ended March 31, 2019

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

 

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

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

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

 

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

 

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

 

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

 

2.5.           Changes in accounting policies

 

The Company applied as of January 1, 2019, IFRS 16 (Leases). The nature and effect of these changes are described below.

 

IFRS 16 supersedes IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases-Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. The standard sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet model.

Lessor accounting under IFRS 16 is substantially unchanged under IAS 17. Lessors will continue to classify leases as either operating or finance leases using similar principles as in IAS 17.

The Company adopted IFRS 16 using the modified retrospective method of adoption with the date of initial application as of January 1, 2019. Under this method, the standard is applied retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial application. The Company elected to use the transition practical expedient allowing the standard to be applied only to contracts that were previously identified as leases applying IAS 17 and IFRIC 4 at the date of initial application. The Company also elected to use the recognition exemptions for lease contracts that, at the commencement date, have a lease term of 12 months or less and do not contain a purchase option (‘short-term leases’), and lease contracts for which the underlying asset is of low value (‘low-value assets’).

a.        Nature of the effect of adoption of IFRS 16

The Company has lease contracts on buildings where its distribution centers and administrative headquarters are located with third parties. Before the adoption of IFRS 16, the Company classified each of its leases (as lessee) at the inception date as either a finance lease or an operating lease (the buildings mentioned were classified as operating leases under IAS 17). A lease was classified as a finance lease if it transferred substantially all of the risks and rewards incidental to ownership of the leased asset to the Company; otherwise it was classified as an operating lease. Finance leases were capitalized at the commencement of the lease at the inception date fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments were apportioned between interest (recognized as finance costs) and reduction of the lease liability. In an operating lease, the leased property was not capitalized, and the lease payments were recognized as rent expense in the statement of profit or loss on a straight-line basis over the lease term. Any prepaid rent and accrued rent were recognized under Prepaid expenses and other current assets and Other current liabilities, respectively.

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NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated interim financial statements

For the three months ended March 31, 2019

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

 

Upon adoption of IFRS 16, the Company applied a single recognition and measurement approach for all leases, except for short-term leases and leases of low-value assets. The standard provides specific transition requirements and practical expedients, which has been applied by the Company.

Leases previously accounted for as operating leases

The Company recognized right-of-use assets and lease liabilities for those leases previously classified as operating leases, except for short-term leases and leases of low-value assets. The right-of-use assets for most leases were recognized based on the carrying amount as if the standard had always been applied, apart from the use of incremental borrowing rate at the date of initial application. In some leases, the right-of-use assets were recognized based on the amount equal to the lease liabilities, adjusted for any related prepaid and accrued lease payments previously recognized. Lease liabilities were recognized based on the present value of the remaining lease payments, discounted using the incremental borrowing rate at the date of initial application.

The Company also applied the available practical expedients wherein it:

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

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

-           does not restate its prior-period financial information;

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

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

o     measure 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 foregoing, as at January 1 st , 2019:

-           Right-of -use assets of R$83,516, recognized in Property and equipment, net, such as Property, were recognized and presented as in the statement of financial position; and

-           Additional lease liabilities of R$83,516 (included in Lease liabilities current and non-current) were recognized.

 

b.        Summary of new accounting policies

Set out below are the new accounting policies of the Company upon adoption of IFRS 16, which have been applied from the date of initial application:

Right-of-use assets

The Company recognizes right-of-use assets at the commencement date of the lease (i.e., the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognized, initial direct costs incurred, and lease payments made at/or before the commencement date less any lease incentives received. Unless the Company is reasonably certain to obtain ownership of the leased asset at the end of the lease term, the recognized right-of-use assets are depreciated on a straight-line basis over the shorter of its estimated useful life and the lease term. Right-of-use assets are subject to impairment.

Lease liabilities

At the commencement date of the lease, the Company recognizes lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments (including in-substance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expected to be paid under residual value guarantees. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by the Company and payments of penalties for terminating a lease, if the lease term reflects the Company exercising the option to terminate. The variable lease payments that do not depend on an index or a rate are recognized as expense in the period on which the event or condition that triggers the payment occurs.

12

 


 
 

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated interim financial statements

For the three months ended March 31, 2019

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

 

In calculating the present value of lease payments, the Company uses the incremental borrowing rate at the lease commencement date if the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the in-substance fixed lease payments or a change in the assessment to purchase the underlying asset.

 

January 1st,

 

2019

 

BRL

Operating lease commitment at December 31, 2018 as disclosed in the Company's consolidated financial statements

        132,419

Discounted using the incremental borrowing rate at January 1st, 2019

         32,147

Discontinued operations effect

           4,507

Tax (PIS/COFINS) effect

         12,249

Lease liabilities recognized at January 1st, 2019

         83,516

 

Short-term leases and leases of low-value assets

The Company applies the short-term lease recognition exemption to its short-term leases of machinery and equipment (i.e., those leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option). It also applies the lease of low-value assets recognition exemption to leases of office equipment that are considered of low value. Lease payments on short-term leases and leases of low-value assets are recognized as expense on a straight-line basis over the lease term.

Significant judgement in determining the lease term of contracts with renewal options

The Company determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if it is reasonably certain not to be exercised.

The Company applies judgement in evaluating whether it is reasonably certain to exercise the option to renew. That is, it considers all relevant factors that create an economic incentive for it to exercise the renewal. After the commencement date, the Company reassesses the lease term if there is a significant event or change in circumstances that is within its control and affects its ability to exercise (or not to exercise) the option to renew (e.g., a change in business strategy).

The Company recognized rent expense from short-term leases and leases of low-value assets.

 

Other Clarifications, amendments and interpretations

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

 

3.               Specific events occurred

 

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NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated interim financial statements

For the three months ended March 31, 2019

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

 

3.1            Discontinued operations

 

(a)      Argentina operation

The subsidiaries (NS2.Com Internet S.A. and NS5 Participações Ltda.) have signed an agreement, on April 26, 2019 (“closing date”), to sell the entirety of its Argentina operations (NS3 Internet S.A.), which belongs to the reportable International segment, through the sale of all shares which they hold.

 

Pursuant to terms of this transaction, the Company:

- will receive ARS 1 (one Argentinean peso) for the shares that are transferred;

- has granted to the former subsidiary a license for the period of eighteen months from the closing date, in Argentina, for the Company brand and e-commerce platform;

- has agreed to provide certain services relating to IT for the period of eighteen months from the closing date; and

- has agreed to contribute approximately ARS106,000 (approximately USD2,500) into NS3.

 

The Company estimated a total loss of R$15,100 (USD3,873), including the estimated costs for fulfilling the conditions listed above, which will be recognized in the income statement from discontinued operations in the second quarter of 2019.

 

As at March 31, 2019 the non-current assets and liabilities held for sale comprises:

 

   

March 31,

   

2019

 

2019

Current assets:

 

BRL

 

USD                   Note 2.2

     Cash and cash equivalents

R$

       2,468

US$

           633

     Trade accounts receivables, net

 

       4,094

 

       1,051

     Inventories, net

 

       6,718

 

       1,724

     Recoverable taxes

 

           735

 

           188

     Prepaid expenses and other current assets

 

           164

 

             43

                    Total current assets

 

     14,179

 

       3,639

         

                    Total non-current assets

 

                -

 

                -

         

                    Total assets

R$

     14,179

US$

       3,639

         

Current liabilities:

       

     Trade accounts payable

R$

     10,032

US$

       2,574

     Taxes and contributions payable

 

           955

 

           245

     Accrued expenses

 

       5,774

 

       1,482

     Other current liabilities

 

       1,315

 

           338

                    Total current liabilities

 

     18,076

 

       4,639

         

                    Total non-current liabilities

 

                -

 

                -

   

 

 

 

                    Total liabilities

R$

     18,076

US$

       4,639

         

Net non-current assets held for sale

R$

     (3,897)

US$

     (1,000)

 

 

The statements of profit or loss and cash flow from discontinued operations of the Argentina Operation for the period ended March 31, 2018 and 2019 are presented below.

 

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NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated interim financial statements

For the three months ended March 31, 2019

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

 

 

   

For the three months ended in March 31,

   

2018

 

2019

 

2019

   

BRL

 

BRL

 

USD                   Note 2.2

Net sales

R$

                27,240

R$

     18,120

US$

       4,650

Cost of sales

 

              (22,692)

 

   (14,693)

 

     (3,771)

                    Gross Profit

 

                  4,548

 

       3,427

 

           879

             

Operating expenses:

           

     Selling and marketing expenses

 

                (9,333)

 

     (5,132)

 

     (1,318)

     General and administrative expenses

 

                (2,193)

 

     (1,362)

 

         (350)

                    Total operating expenses

 

              (11,526)

 

     (6,494)

 

     (1,668)

                    Operating loss

 

                (6,978)

 

     (3,067)

 

         (789)

             

     Financial income

 

                        51

 

           380

 

           100

     Financial expenses

 

                (2,199)

 

     (1,887)

 

         (485)

     Monetary position (loss) gain, net

 

                  1,135

 

       1,947

 

           500

                    Loss before income tax

 

                (1,013)

 

           440

 

           115

             

     Income tax expense

 

                           -

 

                -

 

                -

                    Net loss from discontinued operations

R$

                (7,991)

R$

     (2,627)

US$

         (674)

 

 

 

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NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated interim financial statements

For the three months ended March 31, 2019

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

 

             
 

For the three months ended in March 31,

   

2018

 

2019

 

2019

   

 BRL

 

 BRL

 

USD

Cash flows from operating activities:

         

Note 2.2

     Net loss from discontinued operations

R$

           (7,991)

R$

           (2,627)

US$

              (674)

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

         

          Depreciation and amortization

 

                249

 

                   -  

 

                   -  

          Loss on disposal of property and equipment, and intangible assets

 

                  17

 

                   -  

 

                   -  

          Interest expense, net

 

             1,474

 

             1,190

 

                305

          Monetary (loss) gain, net

 

                839

 

              (621)

 

              (159)

               Changes in operating assets and liabilities:

           

                    (Increase) decrease in:

           

                         Trade accounts receivable

 

           (1,105)

 

           (2,145)

 

              (550)

                         Inventories

 

             2,523

 

             5,280

 

             1,355

                         Recoverable taxes

 

           (2,042)

 

                368

 

                  94

                         Other assets

 

              (124)

 

                180

 

                  47

                    Increase (decrease) in:

           

                         Trade accounts payable

 

           (9,519)

 

                830

 

                213

                         Taxes and contributions payable

 

             1,174

 

                228

 

                  59

                         Accrued expenses

 

              (985)

 

              (240)

 

                (62)

                         Other liabilities

 

                602

 

                219

 

                  56

                               Net cash provided from discontinued operations by (used in) operating activities

 

        (14,888)

 

 

             2,662

 

 

                684

 

           

Cash flows from investing activities:

           

     Purchase of property and equipment

 

                (95)

 

                  (6)

 

                  (2)

     Purchase of intangible assets

 

                  (8)

 

                   -  

 

                   -  

                              Net cash provided from discontinued operations by (used in) investing activities

 

              (103)

 

 

                  (6)

 

 

                  (2)

 

           

Cash flows from financing activities:

           

     Payments of interest

 

           (1,474)

 

           (1,190)

 

              (306)

                               Net cash provided from discontinued operation by (used in) financing activities

 

           (1,474)

 

 

           (1,190)

 

 

              (306)

 

           

Effect of exchange rate changes on cash and cash equivalents

 

              (463)

 

              (181)

 

                (47)

                              Net cash used in discontinued operations

 

        (16,928)

 

             1,285

 

                329

 

(b)      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. On 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.

 

The statements of profit or loss and cash flow from discontinued operations of the Mexico Operation for the period ended March 31, 2018 are presented below.

 

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NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated interim financial statements

For the three months ended March 31, 2019

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

 

 

   

For the three months ended in March 31,

   

2018

   

BRL

Net sales

R$

                12,231

Cost of sales

 

                (9,437)

                    Gross Profit

 

                  2,794

     

Operating expenses:

   

     Selling and marketing expenses

 

                (2,679)

     General and administrative expenses

 

                (2,510)

                    Total operating expenses

 

                (5,189)

                    Operating loss

 

                (2,395)

     

     Financial income

 

                      409

     Financial expenses

 

                    (609)

                    Loss before income tax

 

                    (200)

     

     Income tax expense

 

                           -

                    Net loss from discontinued operations

R$

                (2,595)

 

 

17

 


 
 

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated interim financial statements

For the three months ended March 31, 2019

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

 

     
 

For the three months ended in March 31,

   

2018

   

 BRL

Cash flows from operating activities:

   

     Net loss from discontinued operations

R$

         (2,595)

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

   

          Depreciation and amortization

 

                 88

          Interest expense, net

 

               505

          Provision for inventory losses

 

                   5

               Changes in operating assets and liabilities:

   

                    (Increase) decrease in:

   

                         Trade accounts receivable

 

               (80)

                         Inventories

 

               769

                         Recoverable taxes

 

               975

                         Other assets

 

               (87)

                    Increase (decrease) in:

   

                         Trade accounts payable

 

         (2,110)

                         Taxes and contributions payable

 

             (573)

                         Accrued expenses

 

             (794)

                         Other liabilities

 

                 68

                               Net cash provided from discontinued operations by (used in) operating activities

 

         (3,829)

 

   

Cash flows from investing activities:

   

     Purchase of property and equipment

 

               (25)

                              Net cash provided from discontinued operations by (used in) investing activities

 

               (25)

 

   

Cash flows from financing activities:

   

     Proceeds from debt

 

           3,839

     Payments of debt

 

         (3,469)

     Payments of interest

 

             (505)

                               Net cash provided from discontinued operation by (used in) financing activities

 

             (135)

 

   

Effect of exchange rate changes on cash and cash equivalents

 

               (48)

                              Net cash used in discontinued operations

 

         (4,037)

 

 

4.               Seasonality

 

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

18

 


 
 

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated interim financial statements

For the three months ended March 31, 2019

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

 

 

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

 

5.               Segment Information

 

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

 

The Company, after past reorganizations and deals, organized around geographical divisions has only one reportable segment, Brazil. Which comprises operating revenues, expenses, financial income and financial expenses recorded in Netshoes (Cayman) Limited Netshoes Holding, LLC and NS2.Com Internet S.A.

 

The CODM receives individual financial information based on the nature of revenues and expenses incurred. There is no regular reporting of individual financial information for products, services, or major customers.

 

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

 

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

 

   

Three months ended in March 31,

   

2018

 

2019

 

2019

   

BRL

 

BRL

 

USD

   

Restated

       

     Sports (1)

R$

                 299,687

R$

             248,044

US$

              63,655

     Fashion (1)

 

                  49,127

 

              55,880

 

              14,340

     Marketplace

 

                  11,537

 

              22,779

 

                5,846

                    Total revenues

R$

                 360,351

R$

             326,703

US$

              83,841

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

6.               Earnings (Loss) Per Share (“EPS”)

 

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

19

 


 
 

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated interim financial statements

For the three months ended March 31, 2019

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

 

 

The following table sets forth the computation of the Company’s basic and diluted loss, from continuing operations and discontinued operations, per share attributable to the owners of the Parent for the three months ended March 31, 2018 and 2019:

 

   

Three months ended in March 31,

   

2018

 

2019

 

2019

   

BRL

 

BRL

 

USD

   

Restated

       

Numerator

           

     Net loss for the period attributable to the owners of the Parent from continuing operations

R$

      (50,714)

R$

      (64,291)

US$

      (16,499)

     Net loss for the period attributable to the owners of the Parent from discontinued operations

 

      (10,468)

 

        (2,583)

 

          (663)

             

Denominator

           

     Weighted average number of outstanding shares of common stock

 

  31,048,672

 

  31,056,244

 

  31,056,244

             

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

           

     Basic and diluted

R$

         (1.97)

R$

         (2.15)

US$

         (0.55)

     Basic and diluted from continuing operations

 

         (1.63)

 

         (2.07)

 

         (0.53)

     Basic and diluted from discontinued operations

 

         (0.34)

 

         (0.08)

 

         (0.02)

(1) When the Company reports net loss, from continuing operations and from discontinued operations, attributable to the owners of the Parent, the diluted loss per common share is equal to the basic losses per common share due to the anti-dilutive effect of the outstanding share options.

7.               Revenues

Details of revenues for the three months ended March 31, 2018 and 2019 were as follows:

 

   

Three months ended in March 31,

   

2018

 

2019

 

2019

   

BRL

 

BRL

 

USD

   

Restated

       

     Product sales - B2C

R$

                 330,194

R$

             290,219

US$

              74,478

     Product sales - B2B

 

                    6,228

 

                   202

 

                    52

     Other revenues - Freight related services

 

                  12,017

 

              12,754

 

                3,273

     Other revenues - Marketplace

 

                  11,537

 

              22,779

 

                5,846

     Other revenues - Ncard

 

                       375

 

                   749

 

                   192

                 Total Revenue

R$

                 360,351

R$

             326,703

US$

              83,841

 

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

As a result of such tax incentives, sales to purchasers outside of the State of Pernambuco originated from our distribution center located in the city of Recife (State of Pernambuco, Brazil), enjoyed Pernambuco State ICMS tax rates of a range from 0.5% to 1.0% during the three months ended March 31, 2018 and 2019, depending on the type of product offered. Also, sales to purchasers outside of the State of Minas Gerais originated from our distribution center located in the city of Extrema (State of Minas Gerais, Brazil) enjoyed a Minas Gerais State ICMS tax rate of 1.0% during the three months ended March 31, 2018 and 2019.

20

 


 
 

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated interim financial statements

For the three months ended March 31, 2019

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

 

The incentive also determines that the Company is not allowed to take any credit for taxes paid on the purchase of products subsequently sold outside of those states such that these amounts become non-recoverable taxes and increase the Cost of Sales. Note 9 (a) of these financial statements presents the impact on cost of sales.

For the three months ended March 31, 2018 and 2019, the total amounts of tax incentives recorded in revenues are as follows:

   

Three months ended in March 31,

   

2018

 

2019

 

2019

   

BRL

 

BRL

 

USD

             

     State of Pernambuco

R$

                  10,875

R$

                7,192

US$

                1,846

     State of Minas Gerais

 

                  28,535

 

              15,726

 

                4,036

                 Total tax incentives - Net sales

R$

                  39,410

R$

              22,918

US$

                5,882

 

8.               Deferred Revenue

Deferred revenue from exclusive use of the Company’s customer database is recognized as Other operating (expense) income, net in the consolidated statements of profit or loss using the straight-line method, over the period of the contract (10 years).  In the three months ended March 31, 2018 and 2019 the amount of R$375 and R$340 (US$87) were recognized, respectively.

Deferred revenue from credit card activation is recognized as Other revenues – NCard within Revenues (see note 7), in the consolidated statements of profit or loss, when the credit cards are activated with the bank by the Company’s customers.

9.               Expenses

 

(c)      Costs of Sales

The following is the breakdown of cost of sales for the three months ended March 31, 2018 and 2019, respectively:

 

   

Three months ended in March 31,

   

2018

 

2019

 

2019

   

BRL

 

BRL

 

USD

   

Restated

       

     Cost of product sales

R$

                 217,587

R$

             202,225

US$

              51,896

     Shipping costs

 

                  30,847

 

              35,939

 

                9,223

     Others

 

                       368

 

                       -

 

                       -

                    Total cost of sales

R$

                 248,802

R$

             238,164

US$

              61,119

 

Cost of product sales include the non-recoverable ICMS taxes resulting from the tax incentives disclosed in note 6 granted by the States of Minas Gerais and Pernambuco. For the three months ended March 31, 2018 and 2019, the total amounts of non-recoverable ICMS are as follows:

21

 


 
 

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated interim financial statements

For the three months ended March 31, 2019

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

 

   

Three months ended in March 31,

   

2018

 

2019

 

2019

   

BRL

 

BRL

 

USD

             

     State of Pernambuco

R$

                    3,801

R$

                6,612

US$

                1,697

     State of Minas Gerais

 

                  17,276

 

              12,352

 

                3,170

                    Non-recoverable ICMS

R$

                  21,077

R$

              18,964

US$

                4,867

 

The impact of tax incentives net of non-recoverable ICMS for the three months ended March 31, 2018 and 2019 is R$18,333 and R$3,954 (US$1,015), respectively.

(d)      Selling and Marketing Expenses

The following is the breakdown of selling and marketing expenses for the three months ended March 31, 2018 and 2019, respectively:

 

   

Three months ended in March 31,

   

2018

 

2019

 

2019

   

BRL

 

BRL

 

USD

   

Restated

       

     Salaries and employees' benefits

R$

          31,676

R$

        29,636

US$

           7,605

     Marketing expenses

 

          38,251

 

        36,651

 

           9,406

     Operating lease

 

            5,128

 

             328

 

                84

     Credit card fees

 

            6,466

 

          6,499

 

           1,668

     Information technology services

 

               295

 

             259

 

                66

     Amortization and depreciation

 

            1,708

 

          6,324

 

           1,623

     Consulting

 

                75

 

          1,394

 

              358

     Allowance for doubtful accounts

 

            4,681

 

        (1,676)

 

             (430)

     Sales commissions and royalties

 

            3,912

 

          3,722

 

              955

     Facilities expenses

 

            2,780

 

          2,099

 

              539

     Others

 

3,799

 

          4,158

 

           1,067

                    Total selling and marketing expenses

R$

          98,771

R$

        89,394

US$

         22,941

 

(e)      General and Administrative Expenses

The following is the breakdown of general and administrative expenses for the three months ended March 31, 2018 and 2019, respectively:

 

   

Three months ended in March 31,

   

2018

 

2019

 

2019

   

BRL

 

BRL

 

USD

   

Restated

       

     Salaries and employees' benefits

R$

    18,390

R$

    15,801

US$

      4,055

     Operating lease

 

      1,735

 

            6

 

            2

     Information technology services

 

    10,166

 

      7,589

 

      1,948

     Amortization and depreciation

 

    13,967

 

    10,949

 

      2,810

     Consulting

 

      2,574

 

      7,786

 

      1,998

     Facilities expenses

 

        679

 

        575

 

        148

     Others

 

      1,678

 

      1,994

 

        510

                    Total general and administrative expenses

R$

  49,189

R$

  44,700

US$

  11,471

 

 

 

22

 


 
 

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated interim financial statements

For the three months ended March 31, 2019

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

 

 

(f)       Financial Income (Expenses)

 

The following is the breakdown of financial income and expenses of the Company for the three months ended March 31, 2018 and 2019, respectively:

   

Three months ended in March 31,

   

2018

 

2019

 

2019

   

BRL

 

BRL

 

USD

   

Restated

       

     Interest income

R$

      3,908

R$

      2,660

US$

         683

     Foreign exchange gain

 

        217

 

        596

 

        153

                    Total financial income

R$

    4,125

R$

    3,256

US$

       836

 

   

Three months ended in March 31,

   

2018

 

2019

 

2019

   

BRL