Filed by Bowne Pure Compliance
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2008
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-33647
MercadoLibre, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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98-0212790 |
(State of incorporation)
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(I.R.S. Employer Identification Number) |
Tronador 4890, 8 th Floor
Buenos Aires, C1430DNN, Argentina
(Address of principal executive offices)
011-54-11-5352-8000
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of Class
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Name of Exchange upon Which Registered |
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Common Stock, $0.001 par value per share
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Nasdaq Global Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes o No þ
Indicate by check mark whether the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K
is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment of this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See definitions of large accelerated filer,
accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check
one):
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Large Accelerated Filer þ
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Accelerated Filer o
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Non-Accelerated Filer o
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Smaller reporting company o |
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(Do not check if smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
The aggregate market value of the registrants Common Stock, $0.001 par value per share, at
June 30, 2008, held by those persons deemed by the registrant to be non-affiliates (based upon the
closing sale price of the Common Stock on the Nasdaq Global Market on June 30, 2008) was
approximately $749,468,114. Shares of the registrants Common Stock held by each executive officer
and director and by each entity or person that, to the registrants knowledge, owned 10% or more of
the registrants outstanding common stock as of June 30, 2008 have been excluded from this number
in that these persons may be deemed affiliates of the registrant. This determination of affiliate
status is not necessarily a conclusive determination for other purposes.
As of the latest practicable date, there were 44,070,367 shares of the registrants Common Stock,
$0.001 par value per share, outstanding.
Documents Incorporated By Reference
Portions of the Companys Definitive Proxy Statement relating to its 2009 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission by no later than April 30,
2009, are incorporated by reference in Part III, Items 10-14 of this Annual Report on Form 10-K as
indicated herein.
MERCADOLIBRE, INC.
FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 2008
TABLE OF CONTENTS
2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Any statements contained in this report that are not statements of historical fact, including
statements about our beliefs and expectations, are forward-looking statements and should be
evaluated as such. The words anticipate, believe, expect, intend, plan, estimate,
target, project, should, may, could, will and similar words and expressions are
intended to identify forward-looking statements. These forward-looking statements are contained
throughout this report, for example in Risk Factors, Managements Discussion and Analysis of
Financial Condition and Results of Operations and Business. Forward-looking statements generally
relate to information concerning our possible or assumed future results of operations, business
strategies, financing plans, competitive position, industry environment, potential growth
opportunities, the effects of future regulation and the effects of competition. Such
forward-looking statements reflect, among other things, our current expectations, plans,
projections and strategies, anticipated financial results, future events and financial trends
affecting our business, all of which are subject to known and unknown risks, uncertainties and
important factors in addition to those discussed elsewhere in this report that may cause our actual
results to differ materially from those expressed or implied by these forward-looking statements,
including, among other things:
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continued growth of online commerce and Internet usage in Latin America; |
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our ability to attract new customers, retain existing customers and increase revenues; |
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our ability to expand our operations and adapt to rapidly changing technologies; |
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system interruptions or failures; |
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our ability to attract and retain qualified personnel; |
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reliance on third-party service providers; |
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litigation and legal liability; |
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security breaches and illegal uses of our services; |
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enforcement of intellectual property rights; and |
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political, social and economic conditions in Latin America, and in particular, Venezuela. |
Many of these risks are beyond our ability to control or predict. All forward-looking
statements attributable to us or persons acting on our behalf are expressly qualified in their
entirety by the cautionary statements contained throughout this report. Because of these risks,
uncertainties and assumptions, you should not place undue reliance on these forward-looking
statements. Furthermore, forward-looking statements speak only as of the date they are made. We do
not undertake any obligation to update or review any forward-looking information, whether as a
result of new information, future events or otherwise. Moreover, we operate in a very competitive
and rapidly changing environment. New risk factors emerge from time to time and it is not possible
for management to predict all such risk factors, nor can it assess the impact of all such risk
factors on our companys business or the extent to which any factor, or combination of factors, may
cause actual results to differ materially from those contained in any forward-looking statements.
For a further discussion of these and other factors that could cause our future results to differ
materially from any forward-looking statements, see the risk factors described in Item 1A herein
and in other documents that we file from time to time with the Securities and Exchange Commission
(SEC).
3
PART I
ITEM 1. BUSINESS
MercadoLibre, Inc. (together with its subsidiaries us, we, our or the company) is the
largest online commerce platform in Latin America, called MercadoLibre and located at
www.mercadolibre.com . We are market leaders in e-commerce in each of Argentina, Brazil, Chile,
Colombia, Ecuador, Mexico, Peru, Uruguay and Venezuela, based on unique visitors and page views
during 2008. Additionally, we also operate online commerce platforms in Costa Rica, the Dominican
Republic and Panama. With a population of over 550 million people and a region with one of the
worlds fastest-growing Internet penetration rates, we provide buyers and sellers a robust online
commerce environment that fosters the development of a large and growing e-commerce community. We
offer a technological and commercial solution that addresses the distinctive cultural and
geographic challenges of operating an online commerce platform in Latin America.
We offer our users two principal services:
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The MercadoLibre marketplace: The MercadoLibre marketplace is a
fully-automated, topically-arranged and user-friendly online commerce
service. This service permits both businesses and individuals to list
items and conduct their sales and purchases online in either a
fixed-price or auction-based format. Additionally, through online
classified listings, our registered users can list and purchase motor
vehicles, vessels, aircraft, real estate and services. Users and
advertisers are also able to place, display and/or text advertisements
on our web pages in order to promote their brands and offerings. Any
Internet user can browse through the various products and services
that are listed on our web site and register with MercadoLibre to
list, bid for and purchase items and services. |
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The MercadoPago online payments solution: To complement the
MercadoLibre marketplace, we developed MercadoPago, an integrated
online payments solution. MercadoPago is designed to facilitate
transactions both on and off the MercadoLibre marketplace by providing
a mechanism that allows our users to securely, easily and promptly
send and receive payments online. |
During 2008, visitors to our web site were able to browse an average of over 2.5 million
listings on any given day, organized by country, in over 2,000 different product categories. We
believe that we have achieved a critical mass of active buyers, sellers and product listings in
most of the countries where we operate and that our business can be readily scaled to handle
increases in our user base and transaction volume. At December 31, 2008, we had over 33.7 million
confirmed registered MercadoLibre users. During 2008 we had 2.4 million unique sellers, 6.5 million
unique buyers and 21.1 million successful items sold.
History of MercadoLibre
In March of 1999, Marcos Galperín, our co-founder and Chief Executive Officer, while working
towards his masters degree in business administration from Stanford Business School, wrote our
business plan and began to assemble a team of professionals to implement it. We were incorporated
in Delaware in October of 1999.
We commenced operations in Argentina in August of 1999, and began operations in other
countries subsequently. The following table shows the timeline of different launches and events in
each country:
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MercadoLibre |
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MercadoPago |
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Office opening |
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1 Argentina |
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August 1999 |
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July 1999 |
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November 2003 |
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2 Brazil |
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October 1999 |
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September 1999 |
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January 2004 |
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3 Mexico |
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November 1999 |
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October 1999 |
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January 2004 |
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4 Uruguay |
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December 1999 |
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September 2004 |
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N/A |
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5 Colombia |
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February 2000 |
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January 2000 |
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December 2007 |
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6 Venezuela |
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March 2000 |
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March 2000 |
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April 2005 |
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7 Chile |
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March 2000 |
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April 2000 |
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September 2007 |
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8 Ecuador |
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December 2000 |
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N/A |
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N/A |
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9 Peru |
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December 2004 |
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N/A |
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N/A |
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10 Costa Rica |
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November 2006 |
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N/A |
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N/A |
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11 Dominican Republic |
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December 2006 |
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N/A |
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N/A |
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12 Panama |
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December 2006 |
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N/A |
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N/A |
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Our business is organized using the same technological platform in each country where we
operate. However, each country has its own specific local site with no interaction with other
country sites. For example, searchs done in our Brazilian site show only results of listings
uploaded in that particular site and do not show listings from other countries.
We received two rounds of financing in addition to our initial seed funding. The first round,
carried out in November of 1999, raised $7.6 million from investors that included J.P. Morgan
Partners BHCA L.P., Flatiron Fund entities and Hicks, Muse, Tate & Furst. The second round of
financing occurred in May of 2000 and raised $46.7 million from, among others, Goldman Sachs
entities (GS Capital Partners III, L.P., GS Capital Partners III Offshore, L.P. and Goldman Sachs &
Co. Verwaltungs GmbH), Capital Riesgo Internet SCR S.A. (CRI Banco Santander Central Hispano), GE
Capital Equity Investments, Inc., J.P. Morgan Partners BHCA L.P. and Hicks, Muse, Tate & Furst.
In September of 2001, we entered into a strategic alliance with eBay, which became one of our
stockholders and started working with us to better serve the Latin American online commerce
community. As part of this strategic alliance, we acquired eBays Brazilian subsidiary at the time,
iBazar, and eBay agreed not to compete with us in the region during the term of the agreement. This
agreement also provided us with access to certain know-how and experience, which accelerated
aspects of our development. The agreement governing our strategic alliance with eBay expired on
September 24, 2006. Even though eBay is one of our stockholders, with the termination of this
agreement, there are no contractual restrictions upon eBay becoming one of our competitors. See
Risk FactorsRisks related to our businessWe operate in a highly competitive and evolving market,
and therefore face potential reductions in the use of our service.
In November of 2002, we acquired certain key strategic assets of Lokau.com , a competing
Brazilian online commerce platform and we incorporated all registered users of Lokau.com into our
platform.
In November of 2005, we acquired certain operations of a regional competitor in online
commerce, DeRemate.com Inc., including all of its operations and the majority of shares of capital
stock of its subsidiaries in Brazil, Colombia, Ecuador, Mexico, Peru, Uruguay and Venezuela for an
aggregate purchase price of $12.1 million, net of cash and cash equivalents acquired. We did not
acquire its Argentine and Chilean subsidiaries, which continued to operate under the control of
certain previous stockholders of DeRemate. This acquisition increased our user base by
approximately 1.3 million confirmed registered users and solidified our market leadership position
in Brazil, Mexico, Venezuela, Colombia, Peru, and Uruguay.
In August 2007, we completed our initial public offering pursuant to which 3,000,000 shares of
common stock were sold by us and 15,488,762 shares were sold by certain selling stockholders,
resulting in net proceeds to us of approximately $49.6 million.
In January 2008, we acquired 100% of the issued and outstanding shares of capital stock of
CMG, Classified Media Group, Inc., or CMG, and its subsidiaries. CMG and its subsidiaries operate
an online classified advertisements platform primarily dedicated to the sale of automobiles at
www.tucarro.com in Venezuela, Colombia and Puerto Rico and real estate at www.tuinmueble.com in
Venezuela, Colombia, Panama, the United States, Costa Rica and the Canary Islands. The purchase
price for the shares of CMG and its subsidiaries was $19 million, subject to certain escrows and
working capital adjustment clauses. On January 22, 2009, we
released the escrow balance of $1.1 million to the Sellers.
In September 2008, we acquired the remaining operations of DeRemate.com in Chile, Argentina, Mexico
and Colombia for an aggregate purchase price of $ 37.6 million and we also purchased certain URLs,
domains, trademarks, databases and intellectual property rights for $ 2.4 million, subject to
certain set off rights and working capital adjustment clauses. On
February 12, 2009, the purchase price allocation period finished
and the Company agreed with the Sellers to a working capital
adjustment of $480,912 to be paid by the Sellers to the Company.
Our strategy
We seek to serve people in Latin America by offering an online marketplace and an electronic
payment service that can improve the quality of life of those who use it, while creating
significant value for our stockholders. We serve our buyers by giving them access to a broader and
more affordable variety of products and services than those available on other online and offline
venues. We serve our sellers by allowing them to reach a larger and more geographically diverse
user base at a lower overall cost and investment than offline venues. At the same time, we provide
payment settlement services to facilitate such transactions. More broadly, we strive to turn
inefficient markets into more efficient ones and in that process generate value for our
stockholders. To achieve these objectives, we pursue the following strategies:
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Continue to grow our business and maintain market leadership. We have
focused and intend to continue to focus on growing our business by
strengthening our position as the preferred online marketplace in each
of the countries in which we operate. We also intend to grow our
business and maintain our leadership by taking advantage of the
expanding potential client base that has resulted from the growth of
Internet penetration rates in Latin America. We intend to achieve
these goals through organic growth, by entering into new countries and
category segments, by launching new transactional business endeavours,
such as advertising sales on our websites and, when possible and
advantageous, through potential strategic acquisitions of key
businesses and assets. |
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Increase monetization of our transactions. We have focused and will
continue to focus on improving the revenue generation capacity of our
business by implementing initiatives designed to maximize the revenues
we receive from transactions on our platform. Some of these
initiatives include increasing our fee structure, and selling
advertising and Internet marketing services on our platform.
Additionally, we intend to take advantage of the natural synergies
that exist between our marketplace and payments service by promoting
increased use of MercadoPago so that it becomes the preferred online
payment method on and off our platform. |
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Expand into additional transactional service offerings. Our strategic
focus is to enable on-line transactions of multiple types of goods and
services throughout Latin America. Consequently, we strive, and will
continue to strive, to launch on-line transactional offerings in new
product and service categories where we consider business
opportunities exist. These new transactional offerings include
expanded participation in, but are not limited to: (a) additional
product categories in our marketplace business, (b) greater presence
in vehicle, real estate and services classifieds, (c) off platform
payments services, and (d) on-line advertisement services. We believe
that a significant portion of our future growth will be derived from
these new launches. |
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Enhance brand awareness. We believe that enhancing awareness of the
MercadoLibre brand is important to achieve our business objectives. We
intend to continue to promote, advertise and increase recognition of
our brand through a variety of marketing and promotional campaigns.
These may include marketing agreements with companies with significant
online presence and advertising through traditional media, such as
cable television. We may also use leading web sites and other media
such as affiliate programs, banner advertisements and keyword
searches. In addition, by enhancing our e-commerce community
experience, we believe we will promote brand awareness through word of
mouth. |
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Focus on user loyalty and web site enhancement. We will continue to
focus on increasing purchase frequency and transaction volumes from
our existing users. We intend to do so by maintaining an appealing and
convenient platform for e-commerce, improving the functionality of our
web site to deliver a more efficient user experience and providing our
users with the help of a dedicated customer support department. We
employ a number of programs aimed at fostering customer loyalty and
repeated purchases, such as our MercadoLider loyalty program for
high-volume sellers, our targeted and segmented direct marketing
program, and our MercadoPago special promotions. |
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Increase operational efficiency. We believe we run an attractive
business model with strong potential for healthy profit margins. We
plan to maximize this potential by achieving economics of scale,
maintaining controls on overhead costs and reducing variable costs
whenever possible. |
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Continue to develop innovative and creative solutions. We intend to
continually enhance our commerce platform in order to better serve
both individuals and businesses that want to buy or sell goods and
services online. We intend to continue investing to develop new tools
and technologies that facilitate e-commerce on our platform and
improve our users online experience on MercadoLibre, while addressing
the distinctive cultural, geographical and other challenges of online
commerce in Latin America. |
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Serve our dynamic and active user community. We seek to operate
MercadoLibre as an open and trusted Web-based marketplace where users
can access a broad market of products. We believe in treating our
users with respect by applying a consistent set of policies that
reinforces good online and offline behavior within our user community.
We also seek to offer superior customer care in order to maintain the
loyalty and satisfaction of our active user base. |
The MercadoLibre marketplace
The MercadoLibre marketplace is an Internet-based commerce platform where buyers and sellers
can meet, exchange information and complete e-commerce transactions for a wide range of goods and
services using either a fixed-price sale or an auction-based format. The MercadoLibre marketplace
also allows sellers to list motor vehicles, vessels, aircraft, real estate and services on our
online classified section. Additionally, sellers and advertisers can purchase, display and link
advertising on our web pages to promote their brands, businesses and products. The MercadoLibre
marketplace offers buyers a large selection of new and used items that are often more expensive or
otherwise hard to find through traditional offline sellers, such as brick-and-mortar retail
establishments, offline classified advertisements, community bulletin boards, auction houses and
flea markets. We believe that the MercadoLibre marketplace allows sellers to reach a large number
of potential buyers more cost-effectively than through traditional offline commerce channels or
other online venues.
6
The MercadoPago online payments solution
Our online payments service is called MercadoPago and is currently available to MercadoLibre
users in each of Brazil, Mexico and Venezuela. MercadoPago is also available to MercadoLibre users
in Argentina, Chile and Colombia as well as to non-MercadoLibre users who choose to register only
with MercadoPago. MercadoPago was launched as an escrow product in Argentina in November of 2003
and then was gradually introduced in Brazil, Mexico and Venezuela. In September and December 2007,
we introduced our new direct payments product in Chile and Colombia, respectively. In February
2008, in Argentina we migrated from our original escrow product to our new direct payments product.
At December 31, 2008, MercadoPago was available in local currency in each of Argentina,
Brazil, Chile, Colombia, Mexico and Venezuela.
During the year ended December 31, 2008, our users paid approximately $255.9 million for items
by using MercadoPago, which represented 12.3% of our gross merchandise volume for that year. During
2007, our users paid approximately $ 158.0 million for items by using MercadoPago, which
represented 10.5% of our gross merchandise volume for that year. MercadoPago enables any individual
or business registered with MercadoLibre to securely and easily send and receive payments online
for MercadoLibre marketplace items.
Escrow product
In Brazil, Mexico and Venezuela we offer our escrow product. The escrow product works
exclusively within the MercadoLibre platform. After buying an item that accepts MercadoPago, a
buyer may pay us using a wide array of payment methods. Then, we inform the seller that we have
received the payment so that he or she ships the item. Once the buyer receives the item, he/she
lets us know so we release the payment to the buyer. We also release the payment to the seller 14
days after the transaction if we have not been asked by the buyer to hold the payment.
We charge buyers who use the escrow product a commission. This commission varies by country
from 2% to 10% for payments made in a single payment, and from 13% to 39% for payments made in
installments (depending on the country and the number of installments).
Direct payments product
During 2007 and the first quarter of 2008, we introduced a new version of MercadoPago, a
direct payments product, in Chile (September 2007), Colombia (December 2007), and Argentina
(February 2008). This version of MercadoPago, eliminates the escrow component and simplifies the
payment of transactions in the MercadoLibre marketplace.
The direct payments product also allows users who are not registered with the MercadoLibre
marketplace to send and receive payments to each other as long as they register on MercadoPago.
Furthermore, direct payments offers online sellers who accept MercadoPago as a means of payment on
their web sites the ability to provide to their customers a MercadoPago shopping cart that
streamlines the shopping and payment processes. We believe that the ease of use, safety and
efficiency that the MercadoPago shopping cart offers will allow us to generate additional business
from Web merchants that sell items outside the MercadoLibre marketplace. We believe that there is a
significant business opportunity to increase use of MercadoPago as a payment mechanism in and
outside of the MercadoLibre marketplace.
Direct payments offers two different types of accounts for sellers:
A personal account that is available to all users and withholds payments for 12-14 days
to ensure the security of the transaction; and
a professional account available to users who have a good track record or who complete a
credit scoring process. Sellers with professional accounts may withdraw their payments two
days after receiving them. In the countries where direct payments is available, we expect
our high volume sellers will progressively migrate to a professional account improving the
speed of the transaction versus the escrow method.
Direct payments also have a different pricing structure than the one we have for our escrow
product. The price for purchases made in single installment is charged to the seller as opposed to
the buyer, as in the case of our escrow product. The commission charged varies by country, ranging
from 7% to 9%. For purchases made in installments, the seller will continue to be charged the
single installment fee, but in addition to that, the buyer will be charged between approximately
13% and 40% of the purchase price as a financing fee (depending on the country and number of
installments).
MercadoPago strategy
We seek to increase adoption and penetration of MercadoPago among MercadoLibre marketplace
users. In the countries where MercadoPago was available, during 2008 approximately 48.4% of the
MercadoLibre marketplaces listings accepted MercadoPago for payments and 12.3% of our total gross
merchandise volume (excluding motor vehicles, vessels, aircraft and real estate) was completed
through MercadoPago. In order to strengthen MercadoPagos penetration into the online payments
activity of the MercadoLibre marketplace, we plan to continue our marketing efforts on our web
site, further integrate MercadoPago payment options into MercadoLibre marketplace listings and
develop new product features to enhance and streamline our users experience.
We also seek to foster adoption of our direct payments version of MercadoPago outside the
MercadoLibre platform. Direct payments allow online sellers to use MercadoPago to facilitate
checkout and payment processes on their web site and also enables users to simply transfer money to
each other.
7
Marketing
Our marketing strategy is to grow our platform by promoting the MercadoLibre brand, attracting
new users, and generating more frequent trading by our existing users. To this end, we employ
various means of advertising, including placement in leading portals and networks across the
region, our affiliates program, cable television, paid and natural positioning in leading search
engines, email marketing, onsite marketing and presence in off-line events. Our investment in
online and offline marketing activities was $13.9 million for 2006, $17.1 for 2007 and $22.5
million during 2008.
Specifically, we rely mostly on online advertising to promote our brand and attract
potential buyers and sellers to our web site. Our online activities focus on:
Entering into agreements with portals, networks and web sites that we believe could
reach our target audience. These agreements allow us to purchase online advertising positions
where we can market ourselves and show relevant promotions to potential and already registered
users.
Actively managing our MercadoSocios program, an affiliates program that
financially rewards site owners for directing to our platform buyers, sellers and new users who
ultimately register with, and conduct transactions on MercadoLibre. The MercadoSocios program is
available in all countries where we operate, except Ecuador, Uruguay, Costa Rica, Dominican
Republic and Panama. With our MercadoSocios program any site or online tool owner can place a
link to our web site with a pre-approved creative design that we provide or XML data feeds. If
an Internet user clicks on the link, arrives at our web site, registers as a user and completes
transactions on our platform, we compensate the site or tool owner. For each new registered user
that completes a transaction on our platform, we pay the site or tool owner that directed the
user to us a fee per active registered user and a percentage of the commissions that that
selling user pays us for transactions carried out in the first 30 days after that user
registered.
Investing in preferential placing on the most popular search engines in each country
where we operate, such as Google and Yahoo Search. We purchase advertising space next to the
results of certain keyword searches related to our activities.
Structuring our web site so that it appears among the top natural results for certain
keyword searches.
Since 2005, we have been running an annual cable television commercial campaign on a regional
basis to increase brand awareness and recognition. We believe that cable television subscribers in
Latin America offer an attractive demographic group based on both socio-economic profiling and the
high penetration of Internet usage among cable television subscribers. During 2008, our cable media
campaign ran from May to December.
In addition to online and television advertising, we seek to reinforce our brand and increase
transaction levels within the existing MercadoLibre user base through activities such as
permission-based e-mail marketing and special promotions on our web site. We utilize information
regarding our users past bids, sales and purchases in order to better target the messages that we
communicate through these activities. Additionally, we use street billboards, radio and magazine to
promote our automobile classifieds business.
We also conduct a variety of initiatives that focuses on attracting and training sellers. We
organize events such as MercadoLibre Universities and seller meetings in all countries where we
have an office. MercadoLibre Universities are full-day sessions of approximately 100 to 250 new
users where we teach how to buy and sell on the MercadoLibre marketplace. During seller meetings we
teach sellers with high-potential or with MercadoLider status more advanced selling techniques and
allow them to discuss issues of interest with our employees. Additionally, certain seller
activities are streamed over the Internet to reach a larger audience than is possible in live
meetings.
The positioning of the MercadoLibre brand among Internet users is one of our key marketing
concerns, and our goal is to position MercadoLibres name and concept as a trustworthy platform in
the publics mind. We conduct surveys every year in our key markets to gauge the position of our
brand in the minds of consumers. We consistently appear at the top of these surveys in areas such
as consumer recall and preference for e-commerce and online commerce sites. We believe these
ratings are the result of the quality of our product and our marketing efforts.
8
Product development
At December 31, 2008, we had 195 employees in our information technology and product
development staff, including those who work in our MercadoPago operations, an increase from 129
employees at December 31, 2007. We incurred product development expenses (including salaries) in
the amount of $2.2 million for 2005, $3.1 million for 2006, $ 4.4 million for 2007 and $7.3million
for 2008. We also incurred information technology capital expenditures, including software licenses
of $2.2 million for 2006, $2.3 million for 2007 and $2.6 million for 2008.
We continually work to improve both our MercadoLibre marketplace and MercadoPago platforms so
that they better serve our users needs and work more efficiently. A significant portion of our
information technology resources are allocated to these purposes. We strive to maintain the right
balance between offering new features and enhancing the existing functionality and architecture of
our software and hardware.
The development of new and improved features usually begins by listening to the suggestions of
our community of buyers and sellers. We hold meetings periodically with both regular and highly
active users to obtain feedback regarding our services and suggestions and ideas relating to
possible additional features on the MercadoLibre marketplace and MercadoPago. We also receive
suggestions from our chat rooms and bulletin boards. Additionally, we monitor the market for new
features, formats and elements that could be adapted to our platform to improve our users
experience.
We place significant importance on the testing and implementation phase of newly developed
features. After an internal team of testers ensures that new features and upgrades are working
properly, we typically involve a select group of users in testing these features before we release
them to the general public. Through this process we receive feedback and suggestions on how to
perfect the final details of a feature. Additionally, we typically introduce new features country
by country, in order to isolate and resolve any potential problems and release improved versions to
subsequent countries.
The adequate management of the MercadoLibre and MercadoPago software architecture and hardware
requirements is as important as introducing additional and better features for our users. Because
our business grows relatively fast, we must ensure that our systems are capable of absorbing this
incremental volume. Therefore, our engineers work to optimize our processes and equipment by
designing more effective and efficient ways to run our platforms.
We develop most of our software technology in-house. Since our inception in 1999, we have had
a development center in Buenos Aires where we concentrate the majority of our development efforts.
In June of 2007, we also launched a second development center in the province of San Luis in
Argentina. The center is a collaborative effort with the Technological University of La Punta. In
this effort, the university offers us access to dedicated development facilities and a recruiting
base for potential employees.
While we have developed most of our software technology in-house, we also outsource certain
projects to outside developers. We believe that outsourcing the development of these projects
allows us to have a greater operating capacity and strengthen our internal know-how by
incorporating new expertise to our business. In addition, our team of developers frequently
interacts with technology suppliers and attends technology-related events to familiarize themselves
with the latest inventions and developments in the field.
We anticipate that we will continue to devote significant resources to product development in
the future as we add new features and functionality to our services. The market in which we compete
is characterized by rapidly changing technology, evolving industry standards, frequent new service
and product announcements, introductions and enhancements and changing customer demands.
Accordingly, our future success will depend on our ability to adapt to rapidly changing
technologies, to adapt our services to evolving industry standards and to continually improve the
performance, features and reliability of our service in response to competitive service and product
offerings and evolving demands of the marketplace. In addition, the widespread adoption of new
Internet, networking or telecommunications technologies or other technological changes could
require us to make substantial expenditures to modify or adapt our services or infrastructure. See
Risk FactorsRisks related to our businessOur future success depends on our ability to expand and
adapt our operations to meet rapidly changing industry and technology standards in a cost-effective
and timely manner, and on the continued market acceptance of our products and services.
Seasonality
Like most retail businesses, we experience the effects of seasonality in all our operating
territories throughout the calendar year. Although much of our seasonality is due to the Christmas
season, the geographic diversity of our operations helps mitigate the seasonality attributed to
summer vacation time (i.e. southern and northern hemispheres) and national holidays.
Typically, the fourth quarter of the year is the strongest in every country where we operate
due to the significant increase in transactions before the Christmas season (see Management
Discussion and Analysis of Financial Conditions and Results of Operations Seasonality for more
detail). The first quarter of the year is generally our slowest period. The months of January,
February and March normally correspond to summer vacation time in Argentina, Brazil, Chile, Peru
and Uruguay. Additionally, the Easter holiday falls in March or April, and Brazil celebrates
Carnival for one week in February or March. This first quarter seasonality is partially mitigated
by the countries located in the northern hemisphere, such as Colombia, Mexico and Venezuela, the
slowest months for which are the summer months of July, August and September.
9
Additionally, we experience the effects of seasonality within the week because during working
days we have significantly more site activity than on weekend or holidays.
Competition
The market for trading over the Internet is rapidly evolving and highly competitive, and we
expect competition to intensify even further in the future. Barriers-to-entry for large,
established Internet companies are relatively low, and current and new competitors can launch new
sites at relatively low cost using commercially available software. While we are currently the
market leaders in a number of the markets in which we operate, we currently or potentially compete
with a very limited number of other small marketplace operators such as Mas Oportunidades. We also
compete with businesses that offer business-to-consumer online e-commerce services such as pure
play Internet retailer Submarino (a website of B2W Inc), and a growing number of bricks and mortar
retailers who have launched on line offerings such as Americanas (a website of B2W Inc), Casas
Bahia and Falabella, and with shopping comparison sites located throughout Latin America such as
Buscape and Bondfaro. In the classified market although no regional competitor exists, local
players such as Webmotors, VivaStreet, Zap have important positions in certain markets.
In addition, we could face competition from a number of large online communities and services
that have expertise in developing online commerce and facilitating online interaction. Some of
these competitors, such as Google, Yahoo and Microsoft, currently offer a variety of online
services, and certain of these companies may introduce online commerce to their large user
populations. Other large companies with strong brand recognition and experience in on line
commerce, such as large newspaper or media companies also compete in the online listing market in
Latin America.
In September of 2001, we entered into a strategic alliance with eBay, which became one of our
stockholders and started working with us to better serve the Latin American online commerce
community. As part of this strategic alliance, we acquired eBays Brazilian subsidiary at the time,
iBazar, and eBay agreed not to compete with us in the region during the term of the agreement. This
agreement also provided us with access to certain know-how and experience, which accelerated
aspects of our development. The agreement governing our strategic alliance with eBay expired on
September 24, 2006. Even though eBay is one of our stockholders, with the termination of this
agreement, there are no contractual restrictions upon eBay competing with us.
MercadoPago competes with existing online and offline payment methods, including, among
others, banks and other providers of traditional payment methods, particularly credit cards,
checks, money orders, and electronic bank deposits, international online payments services such as
Paypal and Google Checkout, local online payment services such as DineroMail in Argentina, Chile,
Colombia and Mexico, and Pagamento Digital and PagSeguro in Brazil, money remitters such as
Western Union, the use of cash, which is often preferred in Latin America, and offline funding
alternatives such as cash deposit and money transmission services. Some of these services may
operate at lower commission rates than MercadoPagos current rates.
Intellectual property
We regard the protection of our copyrights, service marks, trademarks, domain names, trade
dress and trade secrets as critical to our future success and rely on a combination of copyright,
trademark, service mark and trade secret laws and contractual restrictions to establish and protect
our proprietary rights in our products and services. We have entered into confidentiality and
invention assignment agreements with our employees and certain contractors. We have also
established non-disclosure agreements with our employees, strategic partners and some suppliers in
order to limit access to and disclosure of our proprietary information.
We pursue the registration of our trademarks and service marks in each country where we
operate, in the United States and in certain other Latin American countries. Generally, we register
the name MercadoLibre, MercadoLivre, MercadoPago and MercadoSocios as well as our handshake
logo, and other names and logos in each country where we operate. As part of our acquisition of
DeRemate, we acquired the trademarks of DeRemate throughout the countries where it operates, as
well as certain other jurisdictions. As part of our acquisition of CMG, we acquired the trademarks
of CMG throughout the countries where it operates.
We have licensed in the past, and expect that we may license in the future, certain of our
proprietary rights, such as trademarks or copyrighted material, to third parties. While we attempt
to ensure that our licensees maintain the quality of the MercadoLibre brand, our licensees may take
actions that could materially adversely affect the value of our proprietary rights or reputation.
We also rely on certain technologies that we license from third parties, such as Oracle Corp., SAP
AG, Salesforce.com Inc., Microstrategy, Radware, Check Point Software Technologies Ltd, Cisco Systems Inc, Blue Coat Systems, and Netapp, the suppliers of key database technology, the operating system and
specific hardware components for our services.
Third parties have from time to time claimed, and others may claim in the future, that we have
infringed their intellectual property rights by allowing sellers to list certain items on
MercadoLibre. See Legal proceedings below and Risk factorsRisks related to our businessWe
could potentially face legal and financial liability for the sale of items that infringe on the
intellectual property rights of others and for information disseminated on the MercadoLibre
marketplace.
10
Employees
The following table shows the number of our employees at December 31, 2008.
|
|
|
|
|
|
|
Number of |
|
Country |
|
employees |
|
|
|
|
|
|
Argentina |
|
|
718 |
|
Brazil |
|
|
350 |
|
Colombia |
|
|
47 |
|
Chile |
|
|
9 |
|
Mexico |
|
|
37 |
|
Panamá |
|
|
4 |
|
Uruguay |
|
|
4 |
|
Venezuela |
|
|
126 |
|
|
Total |
|
|
1,295 |
|
We manage operations in the remaining countries remotely from our headquarters in Argentina.
Our employees in Brazil are represented by an Information Technology Companies Labor Union in
the State of São Paulo (Sindicato dos Trabalhadores nas Empresas e Cursos de Informática do
Estado de São Paulo). Unions or local regulations in other countries could also require that
employees are represented. We consider our relations with our employees to be good and we
implement a variety of human resources practices, programs and policies that are designed to hire,
retain, develop and compensate our employees.
We are very proud of our employees and believe that our team is one of the most important
assets of our business. We believe that our employees are among the most knowledgeable in the Latin
American Internet industry, and they have developed a deep understanding of our business and
e-commerce in general. We have attracted and retained outstanding individuals over the years. A
significant portion of our personnel has been with the company for several years, and we strive to
bring more talent by hiring individuals with an Internet-related background and experience.
Similarly, our future success will depend on our ability to attract and retain capable
professionals. See Risk factorsRisks related to our businessWe depend on key personnel, the loss
of which could have a material adverse effect on us.
In order to support our Human Resources department, in 2006 we implemented SAPs human
resources module across our business. We believe this will allow us to centralize our employee
database and important human resources functions, such as payroll processing, to improve our
controls and reduce certain administrative costs.
In 2007 we were distinguished as one of the three best Companies to work for in Argentina and
in 2008 as one of the best companies to work for in Latin America, both by Great Place to Work
Institute.
Government regulation
A variety of laws, decrees and regulations govern our main activities in the countries where
we operate. In Argentina, we are subject to e-commerce laws such as Resolution N°104/05 adopted by
the Ministry of Economy and the Argentine Consumer Protection Agency, which establishes certain
information requirements for Internet providers. We are also subject to Law N°25,326, as amended,
and its corresponding regulations, which mandate the registration of databases with the Data
Protection Agency and regulate, among other things, the type of information that can be collected,
and how information can be used. In Brazil, we are subject to Law N°9,507, as amended, and its
corresponding regulations, which establish, among other things, privacy requirements and the Habeas
Data process, recognizes consumers rights to access, modify and know information collected in
databases. In Chile, we are subject to Law N°19,628, as amended, and its corresponding regulations,
which establish, among other things, consumers rights to access, modify and know information
collected in databases. In Mexico, we are subject to the Ley Federal de Protección al Consumidor
(Consumer Protection Federal Law), which establishes certain provisions for e-commerce
transactions. We are also subject to a decree adopted on June 7, 2000 that amended and introduced
provisions in the Mexican Commercial Code, Civil Federal Code and Consumer Protection Law,
addressing different issues related to e-commerce, consumer affairs, digital signatures and
electronic messages. In Mexico, we are also subject to law NOM-151-SCFI-2002, which establishes
certain required commercial practices related to the conservation of messages with data.
11
We believe that the agency-based structure that we currently use for MercadoPago allows us to
operate this service without obtaining any governmental authorizations or licenses or being
regulated as a financial institution in the countries where we offer MercadoPago. However, as we
continue to develop MercadoPago, we may need to secure governmental authorizations or licenses or
comply with regulations applicable to financial institutions in the countries where we offer this
service.
There are laws and regulations that address foreign currency and exchange rates in every
country where we operate. We need governmental authorization to pay invoices to a foreign supplier
or send money abroad only in Venezuela due to foreign exchange restrictions. See Risk
factorsRisks related to doing business in Latin AmericaLocal currencies used in the conduct of
our business are subject to depreciation, volatility and exchange controls for more information.
At May 15, 2007, the Argentine Ministry of Economy approved MercadoLibre S.A., our wholly
owned Argentine subsidiary as a beneficiary of the Argentine Regime to promote the software
industry. Benefits of receiving this treatment include a 70% discount on mandatory Argentine labor
taxes, a 60% reduction of Argentine income tax and a fixed federal tax rate in Argentina at the
rate effective in April of 2007 until September of 2014.
Segment and Geographic Information
For an analysis of financial information about our segments as well as our geographic areas,
see Note 7, Segments to our Consolidated Financial Statement included elsewhere in this report.
Offices
We are a Delaware corporation incorporated on October 15, 1999. Our registered office is
located at 15 East North Street, Dover, Delaware. Our principal executive offices are located at
Tronador 4890, 8th floor, Buenos Aires, Argentina, C1430DNN.
Available Information
We maintain a web site, http://www.mercadolibre.com, which contains additional information
concerning our company. We make available free of charge through our web site our annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as
reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
Our Corporate Governance Guidelines, Code of Business Conduct and Ethics, and the charters of the
Audit, the Compensation and the Nominating and Corporate Governance Committees are also available
on our web site and are available in print to any stockholder upon request in writing to
MercadoLibre, Inc., Attention: Investor Relations, Tronador 4890, 8th floor, Buenos Aires,
Argentina, C1430DNN. Information on or connected to our web site is neither part of nor
incorporated into this report on Form 10-K or any other SEC filings.
ITEM 1A. RISK FACTORS
For purposes of this section, the term stockholders means the holders of shares of our
common stock. Set forth below are the risks that we believe are material to our stockholders. You
should carefully consider the following factors in evaluating our company, our properties and our
business. The occurrence of any of the following risks might cause our stockholders to lose all or
a part of their investment. The risks and uncertainties described below are not the only ones
facing us. Other risks that we do not currently anticipate or that we currently deem immaterial
also may affect our results of operations and financial condition. Some statements in this report
including statements in the following risk factors constitute forward-looking statements. Please
refer to the section entitled Special Note Regarding Forward-Looking Statements at the beginning
of this report.
Risks related to our business
The market for the sale of goods over the Internet is developing in Latin America, and our business
depends on the continued growth of online commerce and the availability and suitability of the
Internet in Latin America.
The market for the sale of goods over the Internet is a new and emerging market in Latin
America. Our future revenues depend substantially on Latin American consumers widespread
acceptance and use of the Internet as a way to conduct commerce. Rapid growth in the use of and
interest in the Internet (particularly as a way to conduct commerce) is a recent phenomenon, and we
cannot assure you that this acceptance and use will continue to exist or develop. For us to grow
our user base successfully, consumers who have historically used traditional means of commerce to
purchase goods must accept and use new ways of conducting business and exchanging information.
Furthermore, the price of personal computers and Internet access may limit our potential growth in
countries with low levels of Internet penetration and/or high levels of poverty.
12
In addition, the Internet may not be commercially viable in Latin America in the long term for
a number of reasons, including potentially inadequate development of the necessary network
infrastructure or delayed development of enabling technologies, performance improvements and
security measures. The infrastructure for the Internet may, however, not be able to support
continued growth in the number of Internet users, their frequency of use or their bandwidth
requirements. In addition, the Internet could lose its viability due to delays in
telecommunications technological developments, or due to increased government regulation. If
telecommunications services change or are not sufficiently available to support the Internet,
response times would be slower, which would adversely affect use of the Internet and our service in
particular.
Our future success depends on our ability to expand and adapt our operations to meet rapidly
changing industry and technology standards in a cost-effective and timely manner, and on the
continued market acceptance of our products and services.
We plan to continue to expand our operations by developing and promoting new and complementary
services. We may not be able to expand our operations in a cost-effective or timely manner, and our
expansion efforts may not have the same or greater overall market acceptance as our current
services. Furthermore, any new business or service that we launch that is not favorably received by
consumers could damage our reputation and diminish the value of our brand name. To expand our
operations we will also need to spend significant amounts on development, operations and other
resources, and we may place strain on our management, financial and operational resources.
Similarly, a lack of market acceptance of these services or our inability to generate satisfactory
revenues from any expanded services to offset their cost could have a material adverse effect on
our business, results of operations and financial condition.
Any delay or problem with upgrading our existing information technology infrastructure could cause
a disruption in our business and adversely impact our financial results.
Our ability to operate our business from day to day largely depends on the efficient operation
of our information technology infrastructure. We are frequently implementing hardware and software
technology upgrades, which may include migrations to new technology systems, in an effort to
improve our systems. Our information technology systems may experience errors, interruptions,
delays or cessations of service. We are particularly susceptible to errors in connection with any
systems upgrade or migration to a different hardware or software system. Errors or interruptions
could impede or delay our ability to process transactions on our site, which could reduce our
revenue from activity on our site and adversely affect our reputation with, or result in the loss
of customers. These issues could cause business disruptions and be more expensive, time consuming,
and resource intensive than anticipated. Defects or disruptions in our technology infrastructure
could adversely impact our ability to process transactions, our financial results and our
reputation.
Internet regulation in the countries where we operate is scarce, and several legal issues related
to the Internet are uncertain. We are subject to a number of other laws and regulations, and
governments may enact laws or regulations that could adversely affect our business.
Unlike the United States, none of the countries where we operate have specific laws governing
the liability of Internet service providers, such as ourselves, for fraud, intellectual property
infringement, other illegal activities committed by individual users or third-party infringing
content hosted on a providers servers. This legal uncertainty allows for different judges or
courts to decide very similar claims in different ways and establish contradictory jurisprudence.
Certain judges may decide that Internet service providers are liable to an intellectual property
owner for a users sale of counterfeit items using our platform, while others may decide that the
responsibility lies solely with the offending user. This legal uncertainty allows for rulings
against us and could set adverse precedents, which individually or in the aggregate could have a
material adverse effect on our business, results of operations and financial condition. In
addition, legal uncertainty may negatively affect our clients perception and use of our services.
We are not currently subject to direct government regulation in most of the countries where we
operate, other than those regulations applicable to businesses in general. It is not clear how
existing laws governing issues such as general commercial activities, property ownership,
copyrights and other intellectual property issues, taxation, libel and defamation, obscenity, and
personal privacy apply to online businesses. The majority of these laws were adopted before the
Internet was available and, as a result, do not contemplate or address the unique issues of the
Internet. Due to these areas of legal uncertainty, and the increasing popularity and use of the
Internet and other online services, it is possible that new laws and regulations will be adopted
with respect to the Internet or other online services. These laws and regulations could cover
issues such as online commerce, Internet service providers responsibility for third party content
hosted in their servers, user privacy, freedom of expression, pricing, content and quality of
products and services, taxation (including imposition of value added or sales taxes collection
obligations), advertising, intellectual property rights, consumer protection and information
security. If these laws are enacted they may have negative effects on our business, results of
operation and financial condition.
As our activities and the types of goods listed on our web site expands, regulatory agencies
or courts may argue or rule that we or our users must either obtain licenses or not be allowed to
conduct business in their jurisdiction, either with respect to our services in general or only
relating to certain items, such as auctions, real estate and motor vehicles. For example, numerous
jurisdictions, including Brazil and Argentina, have regulations regarding auctions and
auctioneers and the handling of property by secondhand dealers or pawnbrokers. Attempted
enforcement of these laws against us or our users and other regulatory and licensing claims could
result in expensive litigation or could require us to change the way we or our users do business.
Any changes in our or our users business methods could increase costs or reduce revenues
or force us to prohibit listings of certain items for some locations. We could also be subject
to fines or other penalties, and any of these outcomes could harm our business.
13
In addition, because our services are accessible worldwide and we facilitate sales of goods to
users worldwide, other foreign jurisdictions may claim that we are required to comply with their
laws. As we expand and localize our international activities, we have to comply with the laws of
the countries in which we operate. Laws regulating Internet companies outside of the Latin American
jurisdictions where we operate may be more restrictive to us than those in Latin America. In order
to comply with these laws we may have to change our business practices or restrict our services. We
could be subject to penalties ranging from criminal prosecution to bans on our services for failure
to comply with foreign laws.
We are subject to laws relating to the use, storage and transfer of personally identifiable
information about our users, especially financial information. Several jurisdictions have passed
new laws in this area, and other jurisdictions are considering imposing additional restrictions. If
we violate these laws, which in many cases apply not only to third-party transactions but also to
transfers of information among ourselves, our subsidiaries, and other parties with which we have
commercial relations, we could be subject to significant penalties and negative publicity, which
would adversely affect us.
Our business is an Internet platform for commercial transactions in which all commercial activity
depends on our users and is therefore largely outside of our control.
Our business is dependent on Internet users listing and purchasing their items and services on
our Internet platform. Therefore, we depend on the commercial activity, including both sales and
purchases that our users generate. We do not choose which items will be listed, nor do we make
pricing or other decisions relating to the products and services bought and sold on our platform.
Therefore, the principal drivers of our business are largely outside of our control, and we depend
on the continued preference for our platform by millions of individual users.
We could face liability for the sale of regulated and prohibited items, unpaid items or undelivered
purchases, and the sale of defective items.
Laws specifying the scope of liability of providers of online services for activities of their
users through their service are currently unsettled in the Latin American countries where we
operate. We have implemented what we believe to be clear policies that are incorporated in our
terms of use that prohibit the sale of certain items on our platform and have implemented programs
to monitor and exclude unlawful goods and services. Despite these efforts, we may be unable to
prevent our users from exchanging unlawful goods or services or exchanging goods in an unlawful
manner, and we may be subject to allegations of civil or criminal liability for the unlawful
activities of these users.
More specifically, we are aware that certain goods, such as alcohol, tobacco, firearms, adult
material and other goods that may be subject to regulation by local or national authorities of
various jurisdictions have been traded on the MercadoLibre marketplace. As a consequence of these
transactions, we have at times been subject to fines in Brazil for certain users sale of products
that have not been approved by the government. We cannot provide any assurances that we will
successfully avoid civil or criminal liability for unlawful activities that our users carry out
through our service in the future. If we suffer potential liability for any unlawful activities of
our users, we may need to implement additional measures to reduce our exposure to this liability,
which may require, among other things, that we spend substantial resources and/or discontinue
certain service offerings. Any costs that we incur as a result of this liability or asserted
liability could have a material adverse effect on our business, results of operations and financial
condition.
We believe that government and consumer protection agencies have received a substantial number
of complaints about both the MercadoLibre marketplace and MercadoPago. We believe that these
complaints are small as a percentage of our total transactions, but they could become large in
aggregate numbers over time. In fact, various governmental regulatory agencies have already
contacted us from time to time with questions about our operations and may continue to do so. If
during these inquiries any of our processes are found to violate laws on consumer protection, or to
constitute unfair business practices, we could be subject to an enforcement action, fines or
penalties. Such actions or fines could require us to restructure our business processes in ways
that would harm our business and cause us to incur substantial costs.
In addition, our success depends largely upon sellers accurately representing and reliably
delivering the listed goods and buyers paying the agreed purchase price. We have received in the
past, and anticipate that we will receive in the future, complaints from users who did not receive
the purchase price or the goods agreed to be exchanged. While we can suspend the accounts of users
who fail to fulfill their delivery obligations to other users, we do not have the ability to
require users to make payments or deliver goods sold. We also receive complaints from buyers
regarding the quality of the goods purchased or the partial or non-delivery of purchased items. We
have tried to reduce our liability to buyers for unfulfilled transactions or other claims related
to the quality of the purchased goods by offering a free Buyer Protection program to buyers who
meet certain conditions. Although the number of claims that we have paid through this program is
not currently significant, payments made during 2008 totaled $0.1 million, we may in the future
receive additional requests from users requesting reimbursement or threatening legal action against
us if we do not reimburse them. We are in the process of introducing a new version of the Buyers
Protection Program, which will have broader and higher coverage. This new version may impact the
number and amount of reimbursements we are required to make.
14
Any resulting litigation related to unpaid or undelivered purchases could be expensive for us,
divert managements attention and could result in increased costs of doing business. In addition,
any negative publicity generated as a result of the fraudulent or deceptive conduct of our users
could damage our reputation and diminish the value of our brand name.
We could face legal and financial liability for the sale of items that infringe on the intellectual
property and distribution rights of others and for information disseminated on the MercadoLibre
marketplace.
Even though we monitor listings on our web sites, we are not able to detect every item that
may infringe on the intellectual property rights of third parties. As a result, we have received in
the past, and anticipate that we will receive in the future, complaints alleging that certain items
listed and/or sold through the MercadoLibre marketplace infringe third-party copyrights, trademarks
or other intellectual property rights. Content owners and other intellectual property rights owners
have been active in defending their rights against online companies, including us. We have taken
steps to work in coordination and cooperation with the intellectual property rights owners to seek
to eliminate allegedly infringing items listed in the MercadoLibre marketplace. Our user policy
prohibits the sale of goods which may infringe third-party intellectual property rights, and we may
suspend the account of any user who infringes third-party intellectual property rights. Despite all
these measures, an allegation of infringement could result in litigation against us.
Specifically, allegations of infringement of intellectual property rights have already
resulted in claims against us from time to time, including litigation in Brazil brought by Cartier
International B.V., Montblanc Simplo Gmbh, Richemont International S.A., Puma Sports Ltda., Lacoste
do Brasil Indústria e Comrcio Ltda., Sporloisirs S.A., Qix Skateboards Indústria e Comrcio Ltda,
Vintage Denim Ltda., Editora COC Empreendimentos Culturais Ltda., Barros Fischer e Associados
Ltda., Fallms Distribuição de Fitas Ltda., 100% Nacional Distribuidora de Fitas Ltda., Xuxa
Promoções e Produções Artísticas Limitada, Praetorium Instituto de Ensino, Pesquisas e Atividades
de Extensāo e Direito Ltda., Sette Informações Educacionāis Ltda., Serasa S.A. and Botelho
Industria e Distribuiçāo Cinematográfica Ltda., and in Argentina brought by Nike International
Ltd. and Iglesia Mesianica Mundial Sekai Kyusei Kio.
While we have been largely successful to date in settling existing claims by agreeing to
monitor the brands and have not paid any damages, the current lack of laws regarding the Internet
results in great uncertainty as to the outcome of any future claims. Other companies providing
similar services to us have also been subject to these types of claims in the United States and
other countries. In June 2008, the Paris Court of Commerce ruled that eBay, Inc. and eBay
International AG were liable to Louis Vuitton Malletier and Christian Dior Couture for failing to
prevent the sale of counterfeit items on its web sites that traded on plaintiffs brand names and
for interfering with the plaintiffs selective distribution network. The court awarded plaintiffs
approximately EUR 38.6 million in damages and issued an injunction prohibiting all sales of
perfumes and cosmetics bearing the Dior, Guerlain, Givenchy and Kenzo brands over all worldwide
eBay sites to the extent they are accessible from France. We cannot assure you that MercadoLibre
and MercadoPago will not be subject to similar suits, which could result in substantial awards and
costly injunctions against us.
We continue to have outstanding litigation and, although we intend to defend each of these claims,
we cannot assure you that we will be successful. This type of litigation is expensive for us, could
result in damage awards or increased costs of doing business through adverse judgments or
settlements, could require us to change our business practices in expensive ways, or could
otherwise harm our business. Litigation against other online companies could result in
interpretations of the law that could also require us to change our business practices or otherwise
increase our costs.
If the public perception were that counterfeit items are commonplace on our site, it could damage
our reputation and our business.
It is possible that third parties could bring claims against online services companies for
defamation, libel, invasion of privacy, negligence, or other theories based on the nature and
content of the materials disseminated through their services. Other online services companies are
facing several lawsuits for this type of liability. As mentioned previously, the liability of
online services companies for content hosted, information carried on or disseminated through their
services is currently unclear in the Latin American countries where we operate. This could allow
for claims being made against us by purportedly aggrieved third parties. For example, the
MercadoLibre service contains a User Feedback feature, which includes reviews and ratings from
users regarding the reliability of other users in paying or delivering goods sold in a transaction
promptly. Although users generate all the feedback, it is possible that a party could bring a claim
for defamation or other injury against us for content posted through the User Feedback feature. If
we or other online services providers are held liable or potentially liable for information carried
on or disseminated through our services, we may have to implement measures to reduce our exposure
to this liability. Any measures we may need to implement may involve spending substantial resources
and/or discontinuing certain services. Any costs that we incur as a result of liability or asserted
liability could have a material adverse effect on our business, results of operations and financial
condition. In addition, public attention to liability issues, lawsuits and legislative proposals
could impact the growth of Internet use, and subsequently have a negative impact on our business
results.
15
We have achieved profitability in a new and rapidly evolving market, but we may not continue to be
profitable.
We were incorporated in Delaware in October of 1999 and commenced operations in Argentina in
August of 1999, in Brazil in October of 1999, in Mexico in November of 1999 and in Uruguay in
December of 1999. Our operations in the remaining Latin American countries
where we operate have all been launched after January of 2000, including our launch in Costa
Rica, Panama and the Dominican Republic as recently as December of 2006. Our net income and cash
flow from operations were negative from the time we commenced operations in 1999 until 2004.
Accordingly, we have a limited history of profits and positive cash flow operations on which to
base an evaluation of our business and prospects. You must consider our prospects in light of the
risks, uncertainties, expenses and difficulties that companies in their early stages of development
frequently encounter, particularly companies in new and rapidly evolving markets such as online
commerce. Because our business has evolved rapidly and we have a limited operating history, and an
even more limited history of profit and positive cash flow, we believe that period-to-period
comparisons of our operating results are not necessarily meaningful and you should not rely on them
as indications of future performance.
Furthermore, as a result of our limited operating history, the emerging nature of the markets
in which we compete, the increased variety of services offered on our web site and the rapidly
evolving nature of our business, it is particularly difficult for us to forecast our revenues or
earnings accurately. In addition, we have no backlog and substantially all of our net revenues for
each quarter are derived from listing fees, optional feature fees, final value fees, commissions on
MercadoPago payments and advertising that are earned during that quarter. Our current and future
expense levels are based largely on our investment plans and estimates of future revenues and are,
to a large extent, fixed. We may not be able to adjust spending in a timely manner to compensate
for any unexpected revenue shortfall. Accordingly, any significant shortfall in revenues relative
to our planned expenditures would have an immediate adverse effect on our business, results of
operations and financial condition.
If we continue to grow, we may not be able to appropriately manage the increased size of our
business.
We are currently experiencing a period of significant expansion and anticipate that further
expansion will be required to address potential growth in our customer base and market
opportunities. This expansion has placed, and is expected to continue to place, a significant
strain on management and our operational and financial resources.
We must constantly add new hardware, update software, enhance and improve our billing and
transaction systems, and add and train new engineering and other personnel to accommodate the
increased use of our web site and the new products and features we regularly introduce. This
upgrade process is expensive, and the increasing complexity and enhancement of our web site results
in higher costs. Failure to upgrade our technology, features, transaction processing systems,
security infrastructure, or network infrastructure to accommodate increased traffic or transaction
volume could harm our business. Adverse consequences could include unanticipated system
disruptions, slower response times, degradation in levels of customer support, impaired quality of
users experiences of our services and delays in reporting accurate financial information.
Our revenues depend on prompt and accurate billing processes. Our failure to grow our
transaction-processing capabilities to accommodate the increasing number of transactions that must
be billed on our web site would harm our business and our ability to collect revenue.
Furthermore, we may need to enter into relationships with various strategic partners, web
sites and other online service providers and other third parties necessary to our business. The
increased complexity of managing multiple commercial relationships could lead to execution problems
that can affect current and future revenues and operating margins.
Our current and planned systems, procedures and controls, personnel and third party
relationships may not be adequate to support our future operations. Our failure to manage growth
effectively could have a material adverse effect on our business, results of operations and
financial condition.
Our systems may fail or suffer interruptions due to human acts, technical problems, or natural
disasters.
Our success, and in particular our ability to facilitate trades successfully and provide high
quality customer service, depends on the efficient and uninterrupted operation of our computer and
communications hardware systems. Substantially all of our computer hardware for operating the
MercadoLibre marketplace and MercadoPago services is currently located at the facilities of the
Savvis Datacenter in Sterling, Virginia, with a redundant database backup in Atlanta, Georgia.
These systems and operations are vulnerable to damage or interruption from earthquakes, floods,
fires, power loss, computer viruses, telecommunication failures, physical or electronic break-ins,
sabotage, intentional acts of vandalism, terrorism, and similar events. If our system suffers a
major failure, it would take as much as several days to get the service running again because our
Atlanta database is only a backup with very limited hardware. We also have no formal disaster
recovery plan or alternative providers of hosting services and do not carry business interruption
insurance to compensate us for losses that may occur. Despite any precautions we have taken and
plan to take, if there is a natural disaster or major failure, a decision by our providers to close
one of the facilities we use without adequate notice, or other unanticipated problem at the
Virginia or Atlanta facilities, the services we provide could suffer interruptions. We currently
have no plans to upgrade the Atlanta facility capabilities. Additionally, in the occurrence of such
pronounced, frequent or persistent system failures, our reputation and name brand could be
materially adversely affected.
16
We are subject to security breaches or other confidential data theft from our systems, which can
adversely affect our reputation and business.
A significant risk associated with online commerce and communications is the secure
transmission of confidential information over public networks. Currently, a number of MercadoLibre
users authorize us to bill their credit card accounts or debit their bank accounts directly, or use
MercadoPago for all the transaction fees that we charge. We rely on encryption and authentication
necessary to provide the security and authentication technology to transmit confidential
information securely, including customer credit card numbers and other account information.
Advances in computer capabilities, new discoveries in the field of cryptography, or other events or
developments may result in a compromise or breach of the technology that we use to protect customer
transaction data. If our security were compromised, it could have a material adverse effect on our
reputation. We cannot assure you that our security measures will prevent security breaches or that
failure to prevent them will not have a material adverse effect on our business, results of
operations and financial condition.
We depend on key personnel, the loss of which could have a material adverse effect on us.
Our performance depends substantially on the continued services and on the performance of our
senior management and other key personnel. Our ability to retain and motivate these and other
officers and employees is fundamental to our performance.
Our most senior executive officers have been with us since 2000 or before, providing us with a
stable and experienced management team. The loss of the services of any of these executive officers
or other key employees could have a material adverse effect on our business, results of operations
and financial condition. We do not have employment agreements with any of our key technical
personnel other than our senior executives (whose agreements are for an undetermined period and
establish general employment terms and conditions) and maintain no key person life insurance
policies. The option grants to most of our senior management and key employees are fully vested.
Therefore, these employees may not have sufficient financial incentive to stay with us.
Consequently we may have to incur costs to replace key employees who leave and our ability to
execute our business model could be impaired if we cannot replace them in a timely manner.
Our future success also depends on our ability to identify, attract, hire, train, retain and
motivate other highly skilled technical, managerial, marketing and customer service personnel.
Competition for this personnel is intense, and we cannot assure you that we will be able to
successfully attract, integrate, train, retain, motivate and manage sufficiently qualified
personnel.
Currently our revenues depend substantially on the listing, optional feature and final value fees
we charge to sellers and may decrease if market conditions force us to lower such fees or if we
fail to diversify our sources of revenue.
Our revenues currently depend primarily on listing, optional feature and final value fees that
we charge to our sellers for listing and upon selling their items and services. Our platform
depends upon providing access to a large market at a lower cost than other comparable alternatives.
If market conditions force us to substantially lower our listing or final value fees or if we fail
to continue to attract new buyers and sellers, and if we are unable to effectively diversify and
expand our sources of revenue, our profitability, results of operations and financial condition
could be adversely affected.
We are subject to consumer trends and could lose revenue if certain items become less popular.
We derive substantially all of our revenues from fees charged to sellers for listing products
for sale on our service, fees charged to sellers who purchase optional features, fees from
successfully completed transactions and fees for making payments through MercadoPago. Our future
revenues depend on continued demand for the types of goods that users list on the MercadoLibre
marketplace. The popularity of certain categories of items, such as computer and electronic
products, cellular telephones, toys, clothing and sporting goods, among consumers may vary over
time due to perceived availability, subjective value, and trends of consumers and society in
general. A decline in the demand for or popularity of certain items sold through the MercadoLibre
marketplace without an increase in demand for different items could reduce the overall volume of
transactions on the MercadoLibre service, resulting in reduced revenues. In addition, certain
consumer fads may temporarily inflate the volume of certain types of items listed on the
MercadoLibre marketplace, placing a significant strain on our infrastructure and transaction
capacity. These trends may also cause significant fluctuations in our operating results from one
quarter to the next.
The success of other e-commerce companies such as eBay and Amazon is not an indication of our
future financial performance.
Several companies that operate e-commerce web sites, such as eBay, have been successful and
profitable in the past. However, we operate in a business environment that is different from eBays
and other e-commerce companies operating outside of Latin America. These differences include the
smaller size of the national markets, lower Internet adoption rates, lower confidence in remote
payment mechanisms and less reliable postal and parcel services. Therefore, you should not
interpret the success of any of these companies as indicative of our financial prospects.
We could be subject to liability and forced to change our MercadoPago business practices if we were
found to be subject to or in violation of any laws or regulations governing banking, money
transmission, or electronic funds transfers in any country where we operate.
A number of jurisdictions where we operate have enacted legislation regulating money
transmitters. We believe we do not require a license under the existing statutes of Argentina,
Brazil, Mexico, Chile, Colombia and Venezuela to operate MercadoPago with its current agency-based
structure. If our operation of MercadoPago were found to be in violation of money services laws or
regulations, or engaged in an unauthorized banking business, we could be subject to liability,
forced to cease doing business with residents of certain countries, or forced to change our
business practices. Any change to our MercadoPago business practices that makes the service less
attractive to customers or
prohibits its use by residents of a particular jurisdiction could decrease the speed of trade
on the MercadoLibre marketplace, which would further harm our business. Even if we are not forced
to change our MercadoPago business practices, we could be required to obtain licenses or regulatory
approvals that could be very expensive and time consuming, and we cannot assure you that we would
be able to obtain these licenses in a timely manner or at all.
17
MercadoPago is susceptible to illegal uses, and we could potentially face liability for any illegal
use of MercadoPago.
MercadoPago, like the MercadoLibre platform, is also susceptible to potentially illegal or
improper uses, including, fraudulent and illicit sales, money laundering, bank fraud, and online
securities fraud. In addition, MercadoPagos service could be subject to unauthorized credit card
use, identity theft, break-ins to withdraw account balances, employee fraud or other internal
security breaches, and we may be required to reimburse customers for any funds stolen as a result
of such breaches. Merchants could also request reimbursement, or stop using MercadoPago, if they
are affected by buyer fraud.
In addition, MercadoPago may be subject to anti-money laundering laws and regulations that
prohibit, among other things, its involvement in transferring the proceeds of criminal activities.
Because of different laws and regulations in each jurisdiction where we operate, as we roll-out and
adapt MercadoPago in other countries, additional verification and reporting requirements could
apply. These regulations could impose significant costs on us and make it more difficult for new
customers to join the MercadoPago network. Future regulation (under the USA Patriot Act or
otherwise), may require us to learn more about the identity of our MercadoPago customers before
opening an account, to obtain additional verification of customers and to monitor our customers
activities more closely. These requirements, as well as any additional restrictions imposed by
credit card associations, could raise our MercadoPago costs significantly and reduce the
attractiveness of MercadoPago. Failure to comply with money laundering laws could result in
significant criminal and civil lawsuits, penalties, and forfeiture of significant assets.
We incur losses from claims that customers did not authorize a purchase, from buyer fraud and
from erroneous transmissions. For 2006, MercadoPagos transaction loss arising from charge backs
from unrecognized credit card payments totaled $1.2 million, representing 1.3% of MercadoPagos
total payment volume and 15.8% of the net revenues of MercadoPago. For 2007, this loss totaled $0.9
million, representing 0.6% of MercadoPagos total payment volume and 5.9% of net revenues of
MercadoPago. For 2008, this loss totaled $0.3 million, representing 0.1% of MercadoPagos total
payment volume and 1.1% of net revenues of MercadoPago. In addition to the direct costs of such
losses, if they are related to credit card transactions and become excessive, they could result in
MercadoPago losing the right to accept credit cards for payment. If MercadoPago is unable to accept
credit cards, our business will be adversely affected given that credit cards are the most widely
used method for funding the MercadoPago accounts. We have taken measures to detect and reduce the
risk of fraud on MercadoPago, such as running address verification system (AVS) and card security
code (CSC) checks in some countries, asking users to fax extra documentation for higher risk
transactions, implementing caps on overall spending per users and data mining to detect potentially
fraudulent transactions. However, these measures may not be effective against current and new forms
of fraud. If these measures do not succeed, excessive charge-backs may arise in the future and our
business will be adversely affected.
Our failure to manage MercadoPago customer funds properly would harm our business.
Our ability to manage and account accurately for MercadoPago customer funds requires a high
level of internal controls. We have neither an established operating history nor proven management
experience in maintaining, over a long term, these internal controls. As our MercadoPago business
continues to grow, we must strengthen our internal controls accordingly. MercadoPagos success
requires significant public confidence in our ability to handle large and growing transaction
volumes and amounts of customer funds. Any failure to maintain necessary controls or to properly
manage customer funds could severely reduce customer use of MercadoPago.
MercadoPago is a relatively new service that faces competition from other payment methods, and
competitors may adversely affect the success of MercadoPago.
MercadoPago competes with existing online and offline payment methods, including, among
others, banks and other providers of traditional payment methods, particularly credit cards,
checks, money orders, and electronic bank deposits; international online payments services such as
Paypal and Google Checkout, and local online payment services such as DineroMail in Argentina,
Chile, Colombia and Mexico, and Pagamento Digital and PagSeguro in Brazil; money remitters such as
Western Union; the use of cash, which is often preferred in Latin America; and offline funding
alternatives such as cash deposit and money transmission services. Some of these services may
operate at lower commission rates than MercadoPagos current rates. Therefore MercadoPago is
subject to market pressures on the commissions it charges for its services.
MercadoPagos competitors may respond to new or emerging technologies and changes in customer
requirements faster and more effectively than us. They may devote greater resources to the
development, promotion, and sale of products and services than we do for MercadoPago. Competing
services tied to established banks and other financial institutions may offer greater liquidity and
create greater consumer confidence in the safety and efficacy of their services than MercadoPago.
Established banks and other financial institutions currently offer online payments and those which
do not yet provide such a service could quickly and easily develop it.
We are currently in the process of rolling out our direct payments product in some countries
in order to achieve better monetization of transactions. Since, with this direct payments product,
sellers (rather than buyers as with our traditional escrow product) are charged a commission, this
may result in a lower acceptance of MercadoPago for purchases made on the MercadoLibre marketplace
and in decreased use
of MercadoPago. We consider MercadoPago direct payments product to be still an early release
and have identified several opportunities to improve it. In addition, the transition to the new
system may not be a smooth one. The occurrence of any of these events could adversely affect our
business.
18
We continue to expand MercadoPagos services internationally. We have no experience with the
online payments business in Costa Rica, the Dominican Republic, Ecuador, Panama, Peru or Uruguay.
In order to introduce MercadoPago in some countries we may require a close commercial relationship
with one or more local banks. These or other factors may prevent, delay or limit our introduction
of MercadoPago in other countries, or reduce its profitability.
We rely on banks or payment processors to fund transactions, and changes to credit card association
fees, rules or practices may adversely affect our business.
Because MercadoPago is not a bank, we cannot belong to or directly access credit card
associations, such as Visa and MasterCard. As a result, we must rely on banks or payment processors
to process the funding of MercadoPago transactions and MercadoLibre marketplace collections, and
must pay a fee for this service. From time to time, credit card associations may increase the
interchange fees that they charge for each transaction using one of their cards. The credit card
processors of MercadoPago and the MercadoLibre marketplace have the right to pass any increases in
interchange fees on to us as well as increase their own fees for processing. These increased fees
increase the operating costs of MercadoPago, reduce our profit margins from MercadoPago operations
and, to a lesser degree, affect the operating margins of the MercadoLibre marketplace.
We
are also required by MercadoPago and MercadoLibres processors to comply with credit card
association operating rules. The credit card associations and their member banks set and interpret
the credit card rules. Some of those member banks compete with MercadoPago. Visa, MasterCard,
American Express or other credit card companies could adopt new operating rules or re-interpret
existing rules that we or MercadoPagos processors might find difficult or even impossible to
follow. As a result, we could lose our ability to provide MercadoPago customers the option of using
credit cards to fund their payments and MercadoLibre users the option to pay their fees using a
credit card. If MercadoPago were unable to accept credit cards, our MercadoPago business would be
adversely affected.
We could lose the right to accept credit cards if MasterCard and/or Visa determine that users
are using MercadoPago to engage in illegal or high risk activities. Accordingly, we are working
to prevent high risk merchants from using MercadoPago. To date, we have not incurred fines from
MercadoPagos credit card processor relating to our failure to detect the use of MercadoPago by
high risk merchants.
Additionally, we may be unable to access financing in the credit and capital markets at
reasonable rates to fund our payment business and for that reason our profitability and total
payments volume could decrease.
Our operating results may be impacted by the current economic crisis.
General adverse economic conditions, including the possibility of a severe recession and a
worldwide economic slowdown, would adversely impact our operating results and business. Our net
revenues for the fourth quarter of 2008, which historically has been our strongest quarter, were
lower than our net revenues for the third quarter of 2008. If the current worldwide economic
crisis continues for an extended period of time, many of our users may delay or reduce their
purchases of goods on the MercadoLibre marketplace, which would reduce our revenues and have a
material adverse impact on our business. Furthermore, future changes in trends could result in a
material impact to future consolidated statements of income and cash flows.
The failure of the financial institutions with which we conduct business may have a material
adverse effect on our business, operating results, and financial condition.
The financial services industry has been experiencing a period of unprecedented turmoil in
recent months, characterized by the bankruptcy, failure or sale of various financial institutions
and an unprecedented level of intervention from the United States and other governments. If the
condition of the financial services industry continues to deteriorate or remains weak for an
extended period of time, the following factors could have a material adverse effect on our
business, operating results, and financial condition:
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Disruptions to the capital markets or the banking system may impair the value of
investments or bank deposits we currently consider safe or liquid. We may be unable to
find suitable alternative investments that are safe, liquid, and provide a reasonable
return. This could result in lower interest income or longer investment horizons. |
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We may be required to increase the installment and financing fees we charge to customers
for purchases made in installments or cease offering installment purchases altogether, each
of which may result in a lower volume of transactions completed. |
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We may be unable to access financing in the credit and capital markets at reasonable
rates in the event we find it desirable to do so. Due to the nature of our MercadoPago
business we generate high account receivable balances that we typically sell to financial
institutions, and accordingly, lack of access to credit, or banks liquidations could cause us
to experience severe difficulties in paying our sellers. |
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The failure of financial institution counterparties to honor their obligations to us
under credit instruments could jeopardize our ability to rely on and benefit from those
instruments. Our ability to replace those instruments on the same or similar terms may be
limited under poor market conditions. |
19
Changes in MercadoPagos funding mix could adversely affect MercadoPagos results.
MercadoPago pays significant transaction fees when senders fund payment transactions using
credit cards, PagoMisCuentas and Pago Fácil, nominal fees when customers fund payment transactions
from their bank accounts in Brazil and Mexico, and no fees when customers fund payment transactions
from an existing MercadoPago account balance. Senders funded approximately 72.8% and 73.9% of
MercadoPagos payment volume using credit cards during 2007 and 2008, respectively (either in a
single payment or in installments), and MercadoPagos financial success will remain highly
sensitive to changes in the rate at which its senders fund payments using credit cards. Senders may
prefer credit card funding rather than bank account transfers for a number of reasons, including
the ability to pay in installments in Brazil, Mexico and Argentina, the ability to dispute and
reverse charges if merchandise is not delivered or is not as described, the ability to earn
frequent flyer miles or other incentives offered by credit cards, the ability to defer payment, or
a reluctance to provide bank account information to us.
We have no business insurance coverage, which would require us to spend significant resources in
the event of a disruption of our services or other contingency.
Insurance companies in Latin America offer limited business insurance products. We do not
carry any business liability or disruption insurance coverage for our operations. Any business
disruption, litigation, system failure or natural disaster may cause us to incur substantial costs
and divert resources, which could have a material adverse effect on our business, results of
operation and financial condition.
We may not be able to adequately protect and enforce our intellectual property rights. We could
potentially face claims alleging that our technologies infringe the property rights of others.
We regard the protection of our copyrights, service marks, trademarks, domain names, trade
dress and trade secrets as critical to our future success and rely on a combination of copyright,
trademark, service mark and trade secret laws and contractual restrictions to establish and protect
our proprietary rights in our products and services. We have entered into confidentiality and
invention assignment agreements with our employees and certain contractors, and non-disclosure
agreements with our employees and certain suppliers and strategic partners in order to limit access
to and disclosure of our proprietary information. We cannot assure you that these contractual
arrangements or the other steps that we have taken or will take in the future to protect our
intellectual property will prove sufficient to prevent misappropriation of our technology or to
deter independent third-parties from developing similar or competing technologies.
We pursue the registration of our trademarks and service marks in each country where we
operate, in the United States and in certain other Latin American countries. Effective trademark,
service mark, copyright, domain name and trade secret protection may not be available in every
country in which our services are made available online.
We have licensed in the past, and expect that we may license in the future, certain of our
proprietary rights, such as trademarks or copyrighted material, to third parties. While we attempt
to ensure that our licensees maintain the quality of the MercadoLibre brand, our licensees may take
actions that could materially adversely affect the value of our proprietary rights or reputation,
which could have a material adverse effect on our business, results of operations and financial
condition.
To date, we have not been notified that our technology infringes on the proprietary rights of
third parties, but third parties may claim infringement on our part with respect to past, current
or future technologies or features of our services. We expect that participants in our markets will
be increasingly subject to infringement claims as the number of services and competitors in the
e-commerce segment grows. Any of these claims could have a material adverse effect upon our
business, results of operations and financial condition.
Since 2001, eBay has been subject to a lawsuit alleging infringement of patents relating to
online consignment auction technology, multiple database searching and electronic consignment
systems. In September 2001, MercExchange LLC filed a complaint against eBay and their subsidiaries
in the U.S. District Court for the Eastern District of Virginia alleging infringement of three
patents (relating to online consignment auction technology, multiple database searching and
electronic consignment systems) and seeking a permanent injunction and damages (including treble
damages for willful infringement). Following a trial and jury verdict, in August 2003, the court
entered judgment for MercExchange in the amount of approximately $30 million plus pre-judgment
interest and post-judgment interest, but refused to grant an injunction. eBay appealed the verdict
and judgment in favor of MercExchange, and MercExchange filed a cross-appeal. In May, 2006,
following appeals to the U.S. Court of Appeals for the Federal Circuit and the U.S. Supreme Court,
the Supreme Court ruled that an outright denial of an injunction in a patent case is not
appropriate, and remanded the case to the district court for further proceedings. On August 28,
2006, MercExchange renewed its motion for a permanent injunction in the U.S. District Court for the
Eastern District of Virginia. Final briefs on such motion were filed in March 2007, and in July
2007, the U.S. District Court for the Eastern District of Virginia denied MercExchanges motion for
permanent injunction. MercExchange subsequently entered a notice of appeal. In December 2007, the
court entered judgment for MercExchange for $25 million plus prejudgment and post judgment
interest. eBay subsequently entered a notice of appeal.
20
In February 2008, eBay and all parties involved agreed to settle and dismiss all claims and
appeals stemming from the lawsuit. As a part of the settlement, eBay will purchase all three
patents involved in the lawsuit, and related technology and inventions, as well as a license to
another search-related patent portfolio that was not asserted in the lawsuit.
We filed our first three applications to register the name MercadoLivre in Brazil with the
Instituto Nacional da Propriedade Industrial (the National Institute of Industrial Property, or
INPI) on October 7, 1999. Editora Livre Mercado Ltda., a publishing company, challenged these three
applications based on their trademark Livre Mercado, a trade magazine. These challenges are
currently pending with INPI. We may not succeed in obtaining these trademarks or in our challenges
to existing or future applications by other parties. If we are not successful, we could face claims
by any future trademark owners. Any past or future claims relating to these issues, whether
meritorious or not, could cause us to enter into costly royalty and/or licensing agreements. We may
also have to modify our brand name in certain countries if any successful demands against us are
too expensive. Any of these circumstances could adversely affect our business, results of
operations and financial condition.
From time to time, we are involved in other disputes or regulatory inquiries that arise in the
ordinary course of business. The number and significance of these disputes and inquiries are
increasing as our business expands and we grow larger. Any claims or regulatory actions against us,
whether meritorious or not, could be time consuming, result in expensive litigation, require
significant amounts of management time, and result in the diversion of significant operational
resources.
We may not be able to secure licenses for third-party technologies upon which we rely.
We also rely on certain technologies that we license from third parties, such as Oracle Corp.,
SAP AG, Salesforce.com Inc., Microstrategy, Radware, Check Point Software Technologies Ltd, Cisco
Systems Inc, Blue Coat Systems., and Netapp, the suppliers of key database technology, operating
system and specific hardware components for our services. We cannot assure you that these
third-party technology licenses will continue to be available to us on commercially reasonable
terms. If we were not able to make use of this technology, we would need to obtain substitute
technology that may be of lower quality or performance standards or at greater cost, which could
materially adversely affect our business, results of operations and financial condition.
Problems that affect our third-party service providers could potentially adversely affect us as
well.
A number of parties provide beneficial services to us or to our users. These services include
the hosting of our servers, and the postal and payments infrastructures that allow users to deliver
and pay for the goods and services traded amongst themselves, in addition to paying their
MercadoLibre marketplace bills. Financial, regulatory, or other problems that might prevent these
companies from providing services to us or our users could reduce the number of listings on our web
sites or make completing transactions on our web sites more difficult, which would harm our
business. Any security breach at one of these companies could also affect our customers and harm
our business. Although we generally have been able to renew or extend the terms of contractual
arrangements with these third party service providers on acceptable terms, we cannot assure you
that we will continue to be able to do so in the future.
Complaints from customers or negative publicity about our services can diminish consumer confidence
and adversely affect our business.
Because volume and growth in adoption are key factors for our profitability, customer
complaints or negative publicity about our customer service could severely diminish consumer
confidence in and use of our services. Measures we sometimes take to combat risks of fraud and
breaches of privacy and security can damage relations with our customers. To maintain good customer
relations, we need prompt and accurate customer service to resolve irregularities and disputes.
Effective customer service requires significant personnel expense and investment in developing
programs and technology infrastructure to help customer service representatives carry out their
functions. These expenses, if not managed properly, could significantly impact our profitability.
Failure to manage or train our customer service representatives properly could compromise our
ability to handle customer complaints effectively. If we do not handle customer complaints
effectively, our reputation may suffer and we may lose our customers confidence.
As part of our program to reduce fraud losses in relation to MercadoPago, we make use of
MercadoPago anti-fraud models and we may temporarily restrict the ability of customers to withdraw
their funds if we identify those funds or the customers account activity as suspicious.
MercadoPago has not been subject to any significant negative publicity about this, but a few users
who were banned from withdrawing funds started legal actions against us. As a result of our efforts
to police the use of our services, MercadoPago may receive negative publicity, our ability to
attract new MercadoPago customers may be damaged, and we could become subject to litigation. If any
of these events happen, current and future revenues could suffer, and our database technology
operating margins may decrease. In addition, negative publicity about or experiences with
MercadoPago customer support could cause MercadoLibres reputation to suffer or affect consumer
confidence in the MercadoLibre brand.
We may not be able to efficiently integrate CMGs operations with our business and may incur
unexpected liabilities in connection with our acquisition of CMG.
On January 22, 2008, we acquired 100% of the issued and outstanding shares of capital stock of
CMG and its subsidiaries. We may not be able to successfully integrate CMGs businesses or
technologies, which could adversely impact our operations. Furthermore, the integration of CMG may
divert our managements time and resources from our core business and disrupt our operations. We
may also become responsible
for unexpected liabilities that we failed or were unable to discover in the course of
performing due diligence in connection with our acquisition of CMG. Any of these liabilities could
have an adverse effect on our business, financial condition and results of operations.
21
We may incur unexpected liabilities in connection with our acquisition of DeRemate operations.
In September 2008, we acquired all of the issued and outstanding shares of capital stock of
DeRemate.com de Argentina S.A., DeRemate.com Chile S.A., Interactivos y Digitales México S.A. de
C.V. and Compañía de Negocios Interactiva de Colombia E.U. as well as certain URLs, domains,
trademarks, databases and intellectual property rights related to those businesses. We may become
responsible for unexpected liabilities that we failed or were unable to discover in the course of
performing due diligence in connection with our acquisition of DeRemate operations. Any of these
liabilities could have an adverse effect on our business, financial condition and results of
operations
If
our goodwill become impaired, we may be required to record a
significant charge to earnings.
As
of December 31, 2008, we have recorded goodwill for
approximately 42% of our consolidated assets. Under United States
Generally Accepted Accounting Principles, we review our goodwill for
impairment annually or more frequently when events or changes in circumstances indicate that the
carrying value may not be recoverable. Factors that may be
considered a change in circumstances indicating that the carrying
value of our goodwill may not be recoverable include a decline in
stock price and market capitalization, future cash flows, and slower
growth rates in our industry. We may be required to record a
significant charge to earnings in our financial statements during the
period in which any impairment of our goodwill is determined,
resulting in an adverse impact on our results of operations.
We may not realize benefits from recent or future strategic acquisitions of businesses,
technologies, services or products despite their costs in cash and dilution to our stockholders.
We intend to continue to acquire businesses, technologies, services or products, as we have
done in the past with our acquisitions of iBazar, Lokau, DeRemate, and CMG, which we believe are
strategic if an appropriate opportunity presents itself. We may not, however, be able to identify,
negotiate or finance such future acquisitions successfully or at favorable valuations, or to
effectively integrate these acquisitions with our current business. The process of integrating an
acquired business, technology, service or product into our business may result in unforeseen
operating difficulties and expenditures. Moreover, future acquisitions may also generate unforeseen
pressures and/or strains on our organizational culture.
Additionally, acquisitions could result in potentially dilutive issuances of equity
securities, the incurrence of debt, contingent liabilities and/or amortization expenses related to
goodwill and other intangible assets, which could materially adversely affect our business, results
of operations and financial condition. Any future acquisitions of other businesses, technologies,
services or products might require us to obtain additional equity or debt financing, which might
not be available on favorable terms, or at all. If financing is available, it might cause the
dilution of our common stock.
Our required contributions to the real estate trust for the construction of our headquarters in
Argentina may be materially higher than we currently estimate.
On June 19, 2008, our Argentine subsidiary agreed to participate in a real estate trust for
the construction of an office building located in the City of Buenos Aires, where we plan to move
our corporate headquarters and Argentina operations. As of December 31, 2008, our Argentine
subsidiary holds an undivided interest in approximately 26.3% of the total trust. We currently
estimate that we will be required to contribute an aggregate of approximately $10.1 million to the
trust. Under the trust documents, if the cost of construction exceeds the budgeted amount, we will
be required to fund our proportionate share of any excess, in amounts that may be material. In
addition, if one or more investors in the trust default in their funding commitments and
alternative investors are not located, the other investors, including us, may be required to fund
their proportionate share of the defaulted commitment(s). Any material increase in the amount we
are required to contribute to the trust would adversely impact our financial condition and results
of operations. In addition, there can be no assurances that, despite the funds provided,
construction of the office building will be completed.
We are subject to seasonal fluctuations in our results of operations.
We believe that our results of operations are somewhat seasonal in nature (as is the case with
traditional retailers), with relatively fewer listings and transactions in the first quarters of
the year, and increased activity as the year-end shopping season initiates. This seasonality is the
result of fewer listings after the Christmas and other holidays and summer vacation periods in our
Southern hemisphere markets. To some degree, our historical rapid growth may have overshadowed
seasonal or cyclical factors that might have influenced our business to date. Seasonal or cyclical
variations in our operations could become more pronounced over time, which could materially
adversely affect our quarter to quarter results of operations in the future.
We have spent significant resources to launch and market classified advertisements on the
MercadoLibre marketplace, which may not be successful in generating sufficient revenues for us.
In order to address the specific needs of buyers and sellers of motor vehicles, vessels,
aircraft, real estate and services, we created classified advertisements in the MercadoLibre
marketplace.
We have spent considerable resources in creating and marketing this space. However, this
investment may not be successful in generating additional revenues for us and we may incur losses
from offering this service. These losses could have a material adverse effect on our business,
results of operations and financial condition.
We operate in a highly competitive and evolving market, and therefore face potential reductions in
the use of our service.
The market for trading over the Internet is relatively new in Latin America, rapidly evolving
and intensely competitive, and we expect competition to become more intense in the future. Barriers
to entry are relatively low, and current and new competitors can launch new sites at a relatively
low cost using software that is commercially available. We currently or potentially compete with a
number of other companies.
22
Our direct competitors include various online sales and auction services, including
MasOportunidades.com in Argentina, and a number of other small services, including those that serve
specialty markets. We also compete with business-to-consumer online e-commerce services, such as
pure play Internet retailer Submarino (a website of B2W Inc), and a growing number of bricks and
mortar retailers who have launched on line offerings such as Americanas (a website of B2W Inc),
Casas Bahia and Falabella, and with shopping comparison sites located throughout Latin America such
as Buscape and Bondfaro, located throughout Latin America. In addition, we compete with online
communities that specialize in classified advertisements. And although no regional competitor
exists in the classified market, local players such as Webmotors, VivaStreet and Zap have important
positions in certain markets.
We face competition from a number of large online communities and services that have expertise
in developing online commerce and facilitating online interaction. Certain of these competitors,
including Google, Amazon.com, Microsoft and Yahoo! currently offer a variety of
business-to-consumer commerce services, searching services and classified advertising services, and
certain of these companies may introduce broader online commerce to their large user populations.
Other large companies with strong brand recognition and experience in online commerce, such as
large newspaper or media companies also compete in the online listing market. Companies with
experience in online commerce, such as Amazon, may also seek to compete in the online listing
market in Latin America. We also compete with traditional brick-and-mortar retailers to the extent
buyers choose to purchase products in a physical establishment as opposed to on our platform. In
connection with our payment business, our direct competitors include international online payments
services such as Paypal and Google Checkout, and local online payment services such as DineroMail
in Argentina, Chile, Colombia and Mexico, and Pagamento Digital and PagSeguro in Brazil; money
remitters such as Western Union. Any or all of these companies could create competitive pressures,
which could have a material adverse effect on our business, results of operations and financial
condition.
We no longer have a non-competition arrangement with eBay. If eBay were to compete directly
with us by launching a competing platform in Latin America, it would have a material adverse effect
on our results of operations and prospects. Similarly, eBay or other larger, well-established and
well-financed companies may acquire, invest in or enter into other commercial relationships with
competing online commerce services. Therefore, some of our competitors and potential competitors
may be able to devote greater resources to marketing and promotional campaigns, adopt more
aggressive pricing policies and devote substantially more resources to web site and systems
development than us, which could adversely affect us.
In many cases, companies that directly or indirectly compete with us provide Internet access.
These competitors include incumbent telephone companies, cable companies, mobile communications
companies and large Internet service providers. Some of these providers may take measures that
could degrade, disrupt, or increase the cost of customers use of our services. For example, they
could restrict or prohibit the use of their lines for our services, filter, block or delay the
packets containing the data associated with our products, charge increased fees to us or our users
for use of their lines to provide our services, or seek to charge us for our customers use of our
services or receipt of our e-mails. These activities are technically feasible. Although we have not
identified any providers who intend to take these actions, any interference with our services or
higher charges for access to the Internet, could cause us to lose existing users, impair our
ability to attract new users, limit our potential expansion and harm our revenue and growth.
Risks related to doing business in Latin America
We face the risk of political and economic crises, instability, terrorism, civil strife,
expropriation and other risks of doing business in emerging markets.
We conduct our operations in emerging market countries in Latin America. Economic and
political developments in these countries, including future economic changes or crises (such as
inflation, currency devaluation or recession), government deadlock, political instability,
terrorism, civil strife, changes in laws and regulations, expropriation or nationalization of
property, and exchange controls could impact our operations or the market value of our common stock
and have a material adverse effect on our business, financial condition and results of operations.
In the past, the performance of the economies of Latin American countries has been affected by
each countrys political situation. For example, during its crisis in 2001 and 2002, Argentina
experienced social and political turmoil, including civil unrest, riots, looting, protests, strikes
and street demonstrations which have resulted in significant changes in its general economic
policies and regulations. More recently, the
Venezuelan and Bolivian administrations have nationalized or announced plans to nationalize
certain industries and expropriate certain companies and property, and, in Venezuela, the
administration has imposed exchange controls.
23
Although economic conditions in one country may differ significantly from another country, we
cannot assure that events in one country alone will not adversely affect the market value of, or
market for, our common stock.
Latin American governments have exercised and continue to exercise significant influence over the
economies of the countries where we operate. This involvement, as well as political and economic
conditions, could adversely affect our business.
Governments in Latin America frequently intervene in the economies of their respective countries
and occasionally make significant changes in policy and regulations. Governmental actions to
control inflation and other policies and regulations have often involved, among other measures,
price controls, currency devaluations, capital controls and limits on imports. Our business,
financial condition, results of operations and prospects may be adversely affected by changes in
government policies or regulations, including such factors as: exchange rates and exchange control
policies; inflation rates; interest rates; tariff and inflation control policies; import duties on
information technology equipment; liquidity of domestic capital and lending markets; electricity
rationing; tax policies, including royalty, tax increases and retroactive tax claims; and other
political, diplomatic, social and economic developments in or affecting the countries where we
operate. An eventual reduction of foreign investment in any of the countries where we operate may
have a negative impact on such countrys economy, affecting interest rates and the ability of
companies such as ourselves to access financial markets. In addition, our employees in Brazil are
currently represented by a labor union and employees in other Latin American countries may
eventually become unionized. We may incur increased payroll costs and reduced flexibility under
labor regulations if unionization in other countries were to occur, any of which may negatively
impact our business.
Latin America has experienced adverse economic conditions.
Latin American countries have historically experienced uneven periods of economic growth, as
well as recession, periods of high inflation and economic instability. Currently, as a consequence
of adverse economic conditions in global marteks and diminishing commodity prices, many of the
economies of Latin American countries have slowed their rates of growth, and some have entered mild
recessions. The duration and severity of this slowdown is hard to predict and could adversely
affect our business, financial condition, and results of operations. Additionally, certain
countries have experienced severe economic crises, which may still have future effects. For
example, in 2001 Argentina defaulted on its sovereign debt due to severe economic turmoil. In the
first half of 2005, Argentina restructured part of this sovereign debt. Certain creditors did not
agree to the restructuring. Argentinas past default and its failure to restructure completely its
remaining sovereign debt and fully negotiate with the holdout creditors may prevent Argentina from
obtaining favorable terms or interest rates when accessing the international capital markets.
Litigation initiated by holdout creditors or other parties may result in material judgments against
the Argentine government and could result in attachments of or injunctions relating to assets of
Argentina that the government intended for other uses. As a result, the government may not have the
financial resources necessary to implement reforms and foster growth, which could have a material
adverse effect on the countrys economy. Any of these adverse economic conditions may occur again
in the future, which would adversely affect our business, financial condition and results of
operations.
Local currencies used in the conduct of our business are subject to depreciation, volatility and
exchange controls.
The currencies of many countries in Latin America, including Brasil, Argentina, Mexico and
Venezuela, which together accounted for 94.9% of our revenues for 2006, 95.4% for 2007 and 95.3%
for 2008, have experienced substantial depreciation in 2008 and volatility, particularly against
the U.S. dollar, in the past. Currency movements, as well as higher interest rates, have materially
and adversely affected the economies of many Latin American countries, including countries which
account or are expected to account for a significant portion of our revenues. The depreciation of
local currencies creates inflationary pressures that may have an adverse effect on us and generally
restricts access to the international capital markets. For example, the devaluation of the
Argentine peso has had a negative impact on the ability of Argentine businesses to honor their
foreign currency denominated debt, led to very high inflation initially, significantly reduced real
wages, had a negative impact on businesses whose success is dependent on domestic market demand,
and adversely affected the governments ability to honor its foreign debt obligations. On the other
hand, the appreciation of local currencies against the U.S. dollar may lead to the deterioration of
the public accounts and balance of payments of the countries where we operate, as well as to a
lower economic growth related to exports.
We may be subject to exchange control regulations which might restrict our ability to convert
local currencies into U.S. dollars. For example, in 2001 and 2002, Argentina imposed exchange
controls and transfer restrictions substantially limiting the ability of companies to retain
foreign currency or make payments abroad. In addition, Brazilian law provides that whenever there
is a serious imbalance in Brazils balance of payments or reason to foresee a serious imbalance,
the Brazilian government may impose temporary restrictions on the remittance to foreign investors
of the proceeds of their investments in Brazil. Currently, Venezuela has exchange control
regulations in place that restrict our ability to convert local currency into U.S. dollars. Any
additional imposition of exchange controls could adversely affect our company.
24
Our reporting currency is the U.S. dollar but our revenues are paid in foreign currencies.
Therefore, if the U.S. dollar strengthens relative to these foreign currencies (i.e. the foreign
currencies devaluate against the U.S. dollar), the economic value of our revenues in U.S. dollar
terms will decline.
We are subject to increased risks relating to foreign currency exchange rate fluctuations.
Because we conduct our business outside the United States and receive almost all of our revenues in
currencies other than the U.S. dollar, but report our results in U.S. dollars, we face exposure to
adverse movements in currency exchange rates. The currencies of certain countries where we operate,
including most notably Brazil, Argentina and Mexico, have historically experienced significant
devaluations. The results of operations in the countries where we operate are exposed to foreign
exchange rate fluctuations as the financial results of the applicable subsidiaries are translated
from the local currency into U.S. dollars upon consolidation. If the U.S. dollar weakens against
foreign currencies, as occurred in previous years, the translation of these
foreign-currency-denominated transactions will result in increased net revenues, operating
expenses, and net income. Similarly, our net revenues, operating expenses, and net income will
decrease if the U.S. dollar strengthens against foreign currencies. For 2008, 53.8% of our revenues
were denominated in Brazilian Reais, 16.9% in Venezuelan Bolivares Fuertes,14.5% in Argentine
Pesos, and 10.1% in Mexican Pesos. The foreign currency exchange rates for the full year 2008
relative to 2007 resulted in higher net revenues of approximately $4.2 million and an increase in
aggregate cost of net revenues and operating expenses of approximately $3.6 million. However, local
currency devaluations during the fourth quarter of 2008 resulted in a decrease in net revenues of
approximately $5.6 million and a decrease in the aggregate cost of net revenues and operating
expenses of approximately $3.9 million as compared to the fourth quarter of 2007. While we have
entered in the past into transactions to hedge portions of our foreign currency translation
exposure, these are expensive, and in addition it is very difficult to perfectly predict or
completely eliminate the effects of this exposure.
Inflation and certain government measures to curb inflation may have adverse effects on the
economies of the countries where we operate, our business and our operations.
Most Latin American countries have historically experienced high rates of inflation. Inflation
and some measures implemented to curb inflation have had significant negative effects on the
economies of Latin American countries. Governmental actions taken in an effort to curb inflation,
coupled with speculation about possible future actions, have contributed to economic uncertainty
over the years in most Latin American countries. The Latin American countries where we operate may
experience high levels of inflation in the future that could lead to further government
intervention in the economy, including the introduction of government policies that could adversely
affect our results of operations. In addition, if any of these countries experience high rates of
inflation, we may not be able to adjust the price of our services sufficiently to offset the
effects of inflation on our cost structures. A return to a high inflation environment would also
have negative effects on the level of economic activity and employment and adversely affect our
business and results of operations.
Political and economic conditions in Venezuela may have an adverse impact on our operations.
We conduct significant operations in Venezuela, offering both our MercadoLibre marketplace and
MercadoPago online payments solution, and have 126 employees who work in the country. Additionally,
with the acquisition of CMG, we now have more significant operations in Venezuela. In 2008, our
Venezuelan net revenues represented 16.9% of our consolidated net revenues. The political and
economic conditions are very unstable, and we cannot predict the impact of any future political and
economic events on our business. We cannot predict the economic and regulatory impact of President
Chávezs initiatives, or whether the Venezuelan government will extend nationalization to
e-commerce or other businesses that could impact our business and results of operations.
Nationalization of telecommunications, electrical or other companies could reduce our or our
customers access to our web site or our services or increase the costs of providing or accessing
our services.
In addition, the Venezuelan government has imposed foreign exchange and price controls on the
local currency. These foreign exchange controls increase our costs to, and also limit our ability
to, convert local currency into U.S. dollars and transfer funds out of Venezuela, and may have an
adverse effect on our Venezuelan customers. We cannot predict the long-term effects of exchange
controls on our ability to process payments from Venezuelan customers or on the Venezuelan economy
in general. Certain political events have also resulted in significant civil unrest in the country.
Continuation or worsening of the political and economic conditions in Venezuela could materially
and adversely impact our future business, financial condition and results of operations.
We may incur losses in the event we are unable to distribute dividends from our Venezuelan
subsidiaries at the official exchange rate, or as a result of changes in the political, economic or
regulatory environment changes in Venezuela.
Venezuela has a dual exchange rate system that includes an official exchange rate which was $2.15
Bolivares Fuertes per U.S. dollar at December 31, 2008, and a parallel exchange rate that was
$5.4 Bolivares Fuertes per U.S. dollar at December 31, 2008. During 2008, we re-measured the fair
value of our assets and liabilities in our Venezuelan subsidiaries at the parallel exchange rate
(5.4 Bolivares Fuertes per US dollar as of December 31, 2008) resulting in a foreign currency
gain of $5.0 million in the fourth quarter of 2008 and $3.6 million for all of 2008. The after tax
positive effect on Net Income of the re-measurement was $3.3 million in the fourth quarter of 2008
and $ 2.4 million for all of 2008. This re-measurement was included as non-current other assets of
$7.8 million in our Consolidated Balance Sheets. The re-measurement of the liabilities amounting to $4.2
million was included in Accounts Payable and accrued expenses. At the same time, according to SFAS 52 Foreign
Currency Translation, we translated the financial statements from our Venezuelan subsidiaries at
the official exchange rate (2.15 Bolivares Fuertes per US dollar) which is the exchange rate
applicable to dividend remittances. As 2008 was the first year in which we recorded positive
retained earnings in our Venezuelan subsidiaries, in 2009 we will be requesting U.S. dollars at the
official exchange rate for the first time to distribute dividends, through a process that includes
obtaining approval from the Venezuelan Commission of Foreign Exchange Administration (CADIVI). We
cannot predict if we will obtain approval of the CADIVI to distribute dividends using the official
Venezuelan exchange rate, and therefore we may have to recognize losses in the future. See ITEM
7. MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Year ended December 31,
2008 compared to year ended December 31, 2007 Other income (expenses) for further information.
25
In addition, due to unstable political and economic conditions in Venezuela, the official and
parallel exchange rates could devalue significantly, and we cannot provide any assurances that the
official exchange rate will continue to be the rate applicable to translate foreign currency
financial statements. Strong devaluations or changes in accounting rules could impact our results
materially and we may have to recognize losses in the future.
Developments in other markets may affect the Latin American countries where we operate, our
financial condition and results of operations.
The market value of securities of companies such as ourselves, may be, to varying degrees,
affected by economic and market conditions in other global markets. Although economic conditions
vary from country to country, investors perception of the events occurring in one country may
substantially affect capital flows into and securities from issuers in other countries, including
Latin American countries. Various Latin American economies have been adversely impacted by the
political and economic events that occurred in several emerging economies in recent times,
including Mexico in 1994, the collapse of several Asian economies between 1997 and 1998, the
economic crisis in Russia in 1998, the Brazilian devaluations in January of 1999 and in 2002, the
Argentine crisis of 2001 and the market decline after September 11, 2001. Furthermore, Latin
American economies may be affected by events in developed economies which are trading partners or
that impact the global economy.
Developments of a similar magnitude to the international markets in the future can be expected
to adversely affect the economies of Latin American countries and therefore us.
E-commerce transactions in Latin America may be impeded by the lack of secure payment methods.
Unlike in the United States, consumers and merchants in Latin America can be held fully liable
for credit card and other losses due to third-party fraud. As secure methods of payment for
e-commerce transactions have not been widely adopted in Latin America, both consumers and merchants
generally have a relatively low confidence level in the integrity of e-commerce transactions. In
addition, many banks and other financial institutions have generally been reluctant to give
merchants the right to process online transactions due to these concerns about credit card fraud.
Unless consumer fraud laws in Latin American countries are modified to protect e-commerce merchants
and consumers, and until secure, integrated online payment processing methods are fully implemented
across the region, our ability to generate revenues from e-commerce may be limited, which could
have a material adverse effect on our company.
Argentina and other countries in Latin America have experienced adverse economic conditions.
Latin American countries have historically experienced uneven periods of economic growth, as
well as recession, periods of high inflation and economic instability. Certain countries have
experienced severe economic crises, which may still have future effects. For example, in 2001
Argentina defaulted on its sovereign debt due to severe economic turmoil. In the first half of
2005, Argentina restructured part of this sovereign debt. Certain creditors did not agree to the
restructuring. Argentinas past default and its failure to restructure completely its remaining
sovereign debt and fully negotiate with the holdout creditors may prevent Argentina obtaining
favorable terms or interest rates when accessing the international capital markets. Litigation
initiated by holdout creditors or other parties may result in material judgments against the
Argentine government and could result in attachments of or injunctions relating to assets of
Argentina that the government intended for other uses. As a result, the government may not have the
financial resources necessary to implement reforms and foster growth, which could have a material
adverse effect on the countrys economy. In addition, as a result of this economic instability, the
Argentine peso has been subject to significant devaluation in the past and may be subject to
significant fluctuations in the future. In August 2008, Standard & Poors Inc. downgraded
Argentinas foreign debt rating based upon renewed concerns regarding economic conditions and
rising fears of increased inflationary pressures. Such economic turmoil has given rise to
significant uncertainties about Argentinas economic and political future. It is currently unclear
whether the economic and political instability experienced over the past several years will
continue and it is possible, that despite recent economic growth, Argentina may return to a deeper
recession, higher inflation and unemployment and greater social unrest. We conduct significant
operations in Argentina, offering both our MercadoLibre marketplace and MercadoPago online payments
solution in Argentina and have our corporate headquarters in that country. Argentina is our third
leading revenue producing country. As a result, our business is to a very large extent dependent
upon the economic additions prevalent in Argentina and adverse economic conditions in that country
could have a material adverse affect on our business, financial condition and results of
operations.
Internet regulation in the countries where we operate is limited, many legal issues related to
e-commerce and the Internet are unresolved and existing and new laws and regulations related to our
business could have a material adverse effect on us.
Unlike the United States, none of the countries where we operate have specific laws governing
the liability of Internet service providers, such as ourselves, for fraud, intellectual property
infringement, other illegal activities committed by individual users or third-party infringing
content hosted on a providers servers. This legal uncertainty allows for different judges or
courts to decide very similar claims in different ways and establish contradictory jurisprudence.
Certain judges may decide that Internet service providers are liable to an intellectual property
owner for a users sale of counterfeit items using our platform, while others may decide that the
responsibility lies solely with the offending user. This legal uncertainty allows for rulings
against us and could set adverse precedents, which individually or in the aggregate could have a
material adverse effect on our business, results of operations and financial condition. In
addition, legal uncertainty may negatively affect our clients perception and use of our services.
26
We are not currently subject to direct government regulation in most of the countries where we
operate, other than those regulations applicable to businesses and commerce in general. It is not
clear how existing laws governing issues such as general commercial activities, property ownership,
copyrights and other intellectual property issues, taxation, libel and defamation, obscenity, and
personal privacy apply to online businesses. The majority of these laws were adopted before the
Internet was available and, as a result, do not contemplate or address the unique issues of the
Internet. Due to these areas of legal uncertainty, and the increasing popularity and use of the
Internet and other online services, it is possible that new laws and regulations will be adopted
with respect to the Internet or other online services. These laws and regulations could cover
issues such as online commerce, Internet service providers responsibility for third party content
hosted in their servers, user privacy, freedom of expression, pricing, content and quality of
products and services, taxation (including imposition of value added or sales taxes collection
obligations), advertising, intellectual property rights, consumer protection, information storage
obligations and information security. If these laws are enacted, they may have negative effects on
our business, results of operations and financial condition.
As our activities and the types of goods listed on our web site grow, regulatory agencies or
courts may argue or rule that we or our users must either obtain licenses or not be allowed to
conduct business in their jurisdiction, either with respect to our services in general or only
relating to certain items, such as auctions, real estate and motor vehicles. For example, numerous
jurisdictions, including Brazil and Argentina, have regulations regarding auctions and
auctioneers and the handling of property by secondhand dealers or pawnbrokers. A bill has
been proposed in the Brazilian legislature that would specifically apply the auctioneer regulations
to on-line auctions. Passage of this law or attempted enforcement of existing laws against us or
our users and other regulatory and licensing claims could result in expensive litigation or could
require us to change the way we or our users do business. Any changes in our or our users business
methods could increase costs or reduce revenues or force us to prohibit listings of items in some
countries and substantially limit our operations in major markets. We could also be subject to
fines or other penalties, and any of these outcomes would harm our business.
In addition, because our services are accessible worldwide and we facilitate sales of goods to
users worldwide, other foreign jurisdictions may claim that we are required to comply with their
laws. As we expand and localize our international activities, we have to comply with the laws of
the countries in which we operate. Laws regulating Internet companies outside of the Latin American
jurisdictions where we operate may be more restrictive to us than those in Latin America. In order
to comply with these laws we may have to change our business practices or restrict our services. We
could be subject to penalties ranging from criminal prosecution to bans on our services for failure
to comply with foreign laws.
We are also subject to laws relating to the use, storage and transfer of personally
identifiable information about our users, especially financial information. Several jurisdictions
have passed new laws in this area, and other jurisdictions are considering imposing additional
restrictions. If we violate these laws, which in many cases apply not only to third-party
transactions but also to transfers of information among ourselves, our subsidiaries, and other
parties with which we have commercial relations, we could be subject to significant penalties and
negative publicity, which would adversely affect us.
Risks related to our shares
Our common stock has limited trading history, and the price of our shares may fluctuate
substantially, and our stockholders investment may decline in value.
Our common stock commenced trading on the Nasdaq Global Market on August 10, 2007. The trading
price of our common stock may be highly volatile and could be subject to wide fluctuations in
response to factors, many of which are beyond our control, including those described above under
Risks related to our business.
Further, the stock markets in general, and the Nasdaq Global Market and the market for
Internet-related and technology companies in particular, have especially recently, experienced
extreme price and volume fluctuations that have often been unrelated or disproportionate to the
operating performance of these companies. We cannot assure you that trading prices and valuations
will be sustained. These broad market and industry factors may materially and adversely affect the
market price of our common stock, regardless of our operating performance. Market fluctuations, as
well as general political and economic conditions in the countries where we operate, such as
recession or currency exchange rate fluctuations, may also adversely affect the market price of our
common stock. In the past, following periods of volatility in the market price of a companys
securities, that company is often subject to securities class-action litigation. This kind of
litigation could result in substantial costs and a diversion of managements attention and
resources, which would have a material adverse effect on our business, results of operations and
financial condition.
27
We continue to be significantly influenced by a group of stockholders that control a significant
percentage of our common shares and the value of our common stock could be negatively effected by
any significant disposition of our shares by any of these stockholders.
Several stockholders own a significant percentage of our common stock. As of December 31,
2008, eBay owned approximately 8.1 million shares of our common stock (which represents 18.4% of
our outstanding common stock as of December 31, 2008). Certain members of our management also hold
a significant percentage of our common stock. Investment entities affiliated with General Atlantic
LLC, collectively, General Atlantic, and investment entities affiliated with Tiger Global, L.P.,
collectively, Tiger, beneficially own approximately
3.9 million and 4.3 million shares of our common stock, respectively as of December 31, 2008
(which represent 8.9% and 9.8%, respectively of our outstanding common stock as of December 31,
2008). These stockholders retain the power to influence the outcome of important corporate
decisions or matters submitted to a vote of our stockholders. The interests of these stockholders
may conflict with, or differ from, the interests of other holders of our common shares. For
example, these stockholders could cause us to make acquisitions that increase the amount of our
indebtedness or outstanding shares of common stock, sell revenue-generating assets or inhibit
change of control transactions that benefit other stockholders. They may also pursue acquisition
opportunities that may be complementary to our business, and as a result, those acquisition
opportunities may not be available to us. So long as these stockholders continue to own a
substantial number of shares of our common stock, they will significantly influence all our
corporate decisions and together with other stockholders may be able to effect or inhibit changes
in control of our company.
Additionally, the actual sale, communication of an intention to sell or perceptions that any
of the above mentioned stockholders may sell any significant amount of our common stock could
negatively impact the market value of our common stock.
Provisions of our certificate of incorporation and Delaware law could inhibit others from acquiring
us, prevent a change of control, and may prevent efforts by our stockholders to change our
management.
Certain provisions of our certificate of incorporation and by-laws may inhibit a change of
control that our board of directors does not approve or changes in the composition of our board of
directors, which could result in the entrenchment of current management. These provisions include:
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advance notice requirements for stockholder proposals and director nominations; |
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a staggered board of directors; |
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limitations on the ability of stockholders to remove directors other than for cause; |
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limitations on the ability of stockholders to own and/or exercise voting power over 20% of our common stock; |
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limitations on the ability of stockholders to amend, alter or repeal our by-laws; |
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the inability of stockholders to act by written consent; |
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the authority of the board of directors to adopt a stockholder rights plan; |
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the authority of the board of directors to issue, without stockholder
approval, preferred stock with any terms that the board of directors
determines and additional shares of our common stock; and |
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limitations on the ability of certain stockholders to enter into certain business combinations with us, as provided under
Section 203 of the Delaware General Corporation Law. |
These provisions of our certificate of incorporation and by-laws may delay, defer or prevent a
transaction or a change in control that might otherwise be in the best interests of our
stockholders. See Description of capital stock for more information.
We may require additional capital in the future, and this additional capital may not be available
on acceptable terms or at all.
We may need to raise additional funds in order to fund more rapid expansion (organically or
through strategic acquisitions), to develop new or enhanced services or products, to respond to
competitive pressures or to acquire complementary products, businesses or technologies. If we raise
additional funds through the issuance of equity or convertible debt securities, the percentage
ownership of our stockholders will be reduced, stockholders may experience additional dilution and
the securities that we issue may have rights, preferences and privileges senior to those of our
common stock. Additional financing may not be available on terms favorable to us or at all. If
adequate funds are not available or are not available on acceptable terms, we may not be able to
fund our expansion, take advantage of unanticipated acquisition opportunities, develop or enhance
services or products or respond to competitive pressures. These inabilities could have a material
adverse effect on our business, results of operations and financial condition.
Shares eligible for future sale may cause the market price of our common stock to drop
significantly, even if our business is doing well.
The market price of our common stock could decline as a result of sales of a large number of
shares of our common stock in the market in the future or the perception that these sales could
occur. These sales, or the possibility that these sales may occur, also might make it more
difficult for us to sell equity securities in the future at a time and at a price that we deem
appropriate.
Certain stockholders or entities controlled by them or their permitted transferees will,be
able to sell their shares in the public market from time to time without registering them, subject
to certain limitations on the timing, amount and method of those sales imposed by regulations
promulgated by the Securities and Exchange Commission, or the SEC. Holders of restricted stock will
also have the right to cause us to register the resale of shares of common stock beneficially owned
by them.
28
Each of General Atlantic and Tiger agreed that, in respect of the shares each purchased in our
initial public offering, neither of them would, without our prior written consent, transfer or
dispose of directly or indirectly, any of its shares of our common stock or securities
convertible into or exchangeable into or exercisable for our shares, for a period of 18 months
following the closing of our initial public offering that closed in August 2007. These agreements
expired on January 31, 2009 and, accordingly, there are no further contractual
restrictions precluding General Atlantic and Tiger from selling the shares purchased in our initial
public offering. If any of these stockholders, the affiliated entities controlled by them or their
respective permitted transferees were to sell a large number of their shares, the market price of
our common stock could decline significantly. In addition, the perception in the public markets
that sales by them might occur could also adversely affect the market price of our common stock.
In the future, we may issue securities in connection with investments and acquisitions. The
amount of our common stock issued in connection with an investment or acquisition could constitute
a material portion of our then outstanding common stock.
It is unlikely that we will declare any dividends on our capital stock.
We have not declared or paid any cash dividends on our capital stock and do not anticipate
paying any cash dividends in the foreseeable future. Instead, we intend to retain earnings, if any,
for future operations and expansion and debt repayments. In addition, the terms of certain of our
credit agreements prohibit the payment of cash dividends on our capital stock. Any decision to
declare and pay dividends in the future will be made at the discretion of the board of directors
and will depend on, among other things, our results of operations, cash requirements, financial
condition, contractual restrictions and other factors that our board of directors may deem
relevant.
Our stock repurchase program may not result in a positive return of capital to our stockholders.
In November 2008, we announced that our board of directors approved a share repurchase plan
authorizing us to repurchase, from available capital, up to $20 million of our outstanding common
stock from time to time through November 13, 2009. Our share repurchases may not return value to
stockholders because the market price of our common stock may decline significantly below the
levels at which we repurchased shares of stock. Our share repurchase plan is intended to deliver
stockholder value over the long-term, but stock price fluctuations can reduce the plans
effectiveness.
As part of our share repurchase plan, we may sell put options or engage in structured
derivative transactions designed to reduce our cost of repurchasing stock. In the event of a
significant and unexpected drop in our stock price, these arrangements may require us to repurchase
shares at price levels that are significantly above the then-prevailing market prices of our stock.
These overpayments may have an adverse effect on the effectiveness of our overall share repurchase
plan and may reduce value for our stockholders.
Requirements associated with being a public company require significant company resources and
management attention.
In connection with our initial public offering, we became subject to the periodic reporting
requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the other
rules and regulations of the SEC and the Nasdaq Global Market. We are also subject to various
other regulatory requirements, including the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act.
Section 404 of the Sarbanes-Oxley Act requires that we evaluate and determine the effectiveness of
our internal control over financial reporting. If we have a material weakness or significant
deficiency in our internal control over financial reporting, we may not detect errors on a timely
basis and our financial statements may be materially misstated. As a result, our stockholders
could lose confidence in our financial reporting, which could harm the trading price of our stock.
In addition, in connection with our initial public offering in August 2007, we became subject to
the rules of the Nasdaq Global Market. Our compliance with these rules and regulations have
increased our legal and financial compliance costs and to make some activities more time-consuming
and costly.
It may be difficult to enforce judgments against us in U.S. courts.
Although we are a Delaware corporation, our subsidiaries and most of our assets are located
outside of the United States. Furthermore, most of our directors and officers and some experts
named in this report reside outside the United States. As a result, you may not be able to enforce
judgments against us or our directors or officers in U.S. courts judgments based on the civil
liability provisions of U.S. federal securities laws. It is unclear if original actions of civil
liabilities based solely upon U.S. federal securities laws are enforceable in courts outside the
United States. It is equally unclear if judgments entered by U.S. courts based on the civil
liability provisions of U.S. federal securities laws are enforceable in courts outside the United
States. Any enforcement action in a court outside the United States will be subject to compliance
with procedural requirements under applicable local law, including the condition that the judgment
does not violate the public policy of the applicable jurisdiction.
29
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
Our principal administrative, marketing and product development facilities are located in our
offices in Bogotá, Colombia; Buenos Aires, Argentina; Santana do Parnaíba and São Paulo, Brazil;
Caracas, Venezuela; Mexico City, Mexico; Santiago, Chile and Zona America, Uruguay. Currently, all
of our offices are occupied under lease agreements. Other than Chilean, Colombian, Uruguayan and
Venezuelan office leases, the leases for the rest of our facilities do not provide for renewal
options. After expiration of these leases, we can renegotiate the leases with our current
landlords, or move to another location. The following table shows the location of our offices and
centers, and the expiration date of the leases under which they operate.
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City and |
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Approximate |
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Country |
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Facility |
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Address |
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Square Meters |
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Lease Term |
Bogotá, Colombia
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Colombia operation
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Calle 93 B # 17-25 Ofc.406,
Bogotá, Colombia
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107 |
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April 2009 |
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Bogotá, Colombia
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TuCarro Colombia
operation
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Calle 93 B # 17-25 Ofc.210
and 211, Bogotá, Colombia
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132 |
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April and October
2009 |
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Buenos Aires,
Argentina
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Corporate
headquarters,
Argentina operation
& Customer service
center
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Tronador 4890floors
6th,
8th
and
2nd, Buenos Aires,
1430Argentina
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2,282.5 |
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March 2010, March
2010 and May 2011 |
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Buenos Aires,
Argentina
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Customer service
center
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Av. Costanera Rafael Obligado
y Geronimo Salguero, Buenos
Aires, Argentina
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1,740 |
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January 2012 |
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Caracas, Venezuela
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Venezuela operation
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Piso 7° Edificio Torre
Country, Francisco de
Miranda, Urbanización El
Rosal, Municipio de Chacao,
Estado de Miranda
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436 |
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April 2011 |
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Lithia Springs,
Georgia, U.S.A.
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SAVVIS Data Center
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375 Riverside Parkway
Lithia Springs, Georgia 30122,
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9.7 |
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April 2009 |
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Mexico City, Mexico
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Mexico operation
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Ibsen 43-101, Colonia
Polanco, Miguel Hidalgo,
Código Postal 11650, Mexico
D.F. Mexico
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147 |
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December 2008
In process of
renewal |
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Sterling, Virginia,
U.S.A.
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SAVVIS Data Center
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45901 Nokes Blvd.
Sterling, Virginia 20166
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356 |
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April 2009 |
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San Luis, Argentina
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Technology
Development center
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Av. Universitaria s/n, Ciudad
de la Punta, San Luis,
Argentina
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207 |
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no end date |
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Santana do Parnaíba,
Brazil
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Brazilian Customer
service center
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Rua Yojiro Takaoka, 4350 Cep
06541-038Santana do
Parnaíba, São Paulo, Brazil
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1,032 |
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October 2009 and
March 2013 |
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Santiago, Chile
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Chile operation
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Coronel Pereira 72, oficina
301, Las Condes, Santiago,
Chile
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131 |
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April 2009 |
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São Paulo, Brazil
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Brazil operation
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Rua Gomes de Carvalho, 1306
Vila Olimpia, Cep
04547-005São Paulo, Brazil
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598 |
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November 2009 |
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Zona America, Uruguay
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Uruguay Staff
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Ruta 8, km 17.5 Edificio 200,
local 108 Zona America,
Uruguay
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37 |
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December 2009 |
30
All of our properties are leased. We do not own any properties. From time to time we consider
various alternatives related to our long-term facility needs. While we believe our existing
facilities are adequate to meet our immediate needs, it may become necessary to lease or acquire
additional or alternative space to accommodate any future growth.
On June 19, 2008, our Argentine subsidiary agreed to participate in a real estate trust for
the construction of an office building located in the City of Buenos Aires, where we plan to move
our headquarters and Argentine offices once construction is complete. See ITEM 7. MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Recent Acquisitions for
further information regarding this investment.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are involved in disputes that arise in the ordinary course of our
business. The number and significance of these disputes is increasing as our business expands and
our company grows. Any claims against us, whether meritorious or not, may be time consuming, result
in costly litigation, require significant amounts of management time, result in the diversion of
significant operational resources and require expensive implementations of changes to our business
methods to respond to these claims. See Item 1ARisk Factors for additional discussion of the
litigation and regulatory risks facing our company.
As of December 31, 2008, our total reserves for proceeding-related contingencies were
approximately $0.9 million for 313 legal actions against us where we have determined that a loss is
probable. We do not reserve for losses we determine to be possible or remote.
As of December 31, 2008, there were 281 lawsuits pending against our Brazilian subsidiary in
the Brazilian ordinary courts. In addition, as of December 31, 2008, there were more than 1,940
lawsuits pending against our Brazilian subsidiary in the Brazilian consumer courts, where a lawyer
is not required to file or pursue a claim. In most of these cases, the plaintiffs asserted that we
were responsible for fraud committed against them, or responsible for damages suffered when
purchasing an item on our website, when using MercadoPago, or when we invoiced them. We believe we
have meritorious defenses to these claims and intend to continue defending them.
We do not believe that any single pending lawsuit or administrative proceeding, if adversely
decided, would have a material adverse effect on our financial condition results of operations and
cash flows. Set forth below is a description of the legal proceedings that we have determined to be
material to our business. We have excluded ordinary routine legal proceedings incidental to our
business. In each of these proceedings we also believe we have meritorious defenses, and intend to
continue defending these actions. We have established a reserve for these proceedings.
Litigation
On March 28, 2003, Qix Skateboards Indústria e Comercio Ltda., or Qix, sued MercadoLivre.com
Atividades de Internet Ltda., our Brazilian subsidiary, in the 3rd Civil Court, County of Novo
Hamburgo, State of Rio Grande do Sul, Brazil. Qix alleged that our Brazilian subsidiary was
infringing Qixs trademarks as a result of users selling allegedly counterfeit Qix shoes through
the Brazilian page of our website, based on Brazilian Industrial Property Law (Law 9,279/96). Qix
sought an order enjoining the sale of Qix-branded shoes on the MercadoLibre marketplace with a
$50,000 daily non-compliance penalty. On April 25, 2003 we were summoned of an injunction granted
to prohibit the offer of Qix products on our platform, but the penalty was established at $500. On
May 5, 2003 we appealed the decision, but the injunction was not lifted. To date, we have not
received the summons for the original action because we filed an appeal challenging the
jurisdiction of the court, which appeal is still pending.
On November 5, 2003, Editora COC Empreendimentos Culturais Ltda., or Editora COC, sued our
Brazilian subsidiary in the 3rd Civil Court of the County of Bauru, State of São Paulo, Brazil.
Editora COC alleged that our Brazilian subsidiary and an identified user were both infringing
Editora COCs trademarks as a result of our users selling allegedly pirate copies of Editoras COC
CD-ROMs through the Brazilian page of our website, based on Brazilian Industrial Property Law (Law
9,279/96) and the Brazilian Copyright Law (Law 9,610/98). Editora COC sought an order for the
search and seizure of products held by the user and enjoining the sale of Editora COC-branded
products on our platform. An injunction was granted to prohibit the offer of Editora COCs products
on our platform. On September 8, 2005, the court ruled against us and held that we had to pay $3,000
and our co-defendant had to pay $900 in moral damages, plus an amount of material damages to be
defined at judgment execution, plus attorneys fees in the amount of 10% of the total damages paid
by each defendant. On January 13, 2006 we appealed the ruling to the relevant court of appeals,
which appeal is still pending.
31
On March 17, 2006, Vintage Denim Ltda., or Vintage, sued our Brazilian subsidiaries
MercadoLivre.com Atividades de Internet Ltda. and eBazar.com.br Ltda. in the 29th Civil Court of
the County of São Paulo, State of São Paulo, Brazil. Vintage requested a preliminary injunction
alleging that these subsidiaries were infringing Diesel trademarks and their right of exclusive
distribution as a result of sellers listing allegedly counterfeit and original imported Diesel
branded clothing through the Brazilian page of our website, based on Brazilian Industrial Property
Law (Law 9,279/96). Vintage sought an order enjoining the sale of Diesel-branded clothing on our
platform. A preliminary injunction was granted on April 11, 2006 to prohibit the offer of
Diesel-branded products, and a fine for non-compliance was imposed in the approximate amount of
$5,300 per defendant per day of non-compliance. We appealed the decision, but the preliminary
injunction was not lifted. On August 16, 2007 we presented another appeal to the Superior Court of
Justice, in Brasilia. Vintage filed an action requesting a permanent injunction on May 12, 2006,
alleging the same facts as alleged in the preliminary injunction request. In September of 2006, a
fine of $157,000 was imposed
on our Brazilian subsidiaries due to the alleged non-compliance of the preliminary
injunction. We filed an appeal to the fine and requested its suspension pending a final
adjudication on the merits. In October of 2006, the fine was suspended and on January 23, 2007, the
fine was declared null and void. However, because our appeal of the preliminary injunction failed,
in March of 2007, Vintage presented new petitions alleging non-compliance of the preliminary
injunction granted to Vintage and requested a fine of approximately $3.3 million against us, which
represents approximately $5,300 per defendant per day of alleged non-compliance since April 13,
2006. On July 4, 2007, the judge ordered the payment of the fine mandated in the preliminary
injunction, without specifying the amount. When we are officially notified of the amount of the
fine, we will present a new appeal against the application of the fine. On July 18, 2007 the judge
set a conciliatory hearing for August 1, 2007. We attended the hearing but could not reach an
agreement. On September 14, 2007, the judge decided that (i) our Brazilian subsidiaries were not
responsible for alleged infringement of intellectual property rights by its users; and that
(ii) the plaintiffs did not prove the alleged infringement of its intellectual property rights. The
decision maintained the injunction until such ruling is non-appealable. We presented a request that
the injunction should be revoked, but it was rejected. Plaintiff presented appeal against the
decision on the September 14, 2007 ruling, which appeal was published on December 11, 2007. On
January 8, 2008, we presented an appeal to the Court of the State of São Paulo against the decision
that maintained the injunction, and, on January 14, 2008, we presented a reply to the appeal filed
by the plaintiff. On June 30, 2008, our appeal against the decision that maintained the injunction
was rejected and we presented another appeal to the Superior Court of Justice in Brasilia on
July 7, 2008. This appeal was denied on January 23, 2009. We presented another appeal to that
decision on February 2, 2009.
On April 6, 2006, Fallms Distribuiăo de Fitas Ltda., or Fallms, and 100% Nacional
Distribuidora de Fitas Ltda., or 100% Nacional, sued our Brazilian subsidiary in the Second Civil
Court of Santo Amaro, County of São Paulo, State of São Paulo, Brazil. Fallms and 100% Nacional
alleged that our Brazilian subsidiary was infringing their intellectual property rights as a result
of users selling unauthorized copies of their copyrighted movies through the Brazilian page of our
website and by using their trademark Brasileirinhas on such copies. Fallms and 100% Nacional
sought an order enjoining the sale of Fallms, 100% Nacional and Brasileirinhas branded movies on
our platform. An injunction was granted to prohibit the offer of Fallms, 100% Nacional and
Brasileirinhas branded movies. We were summoned in March of 2007 and presented our defense on
March 14, 2007. In June of 2007, Fallms filed a petition to increase the fine imposed in the
preliminary injunction, from approximately $200, to approximately $530 per day of noncompliance,
based on alleged non-compliance by our Brazilian subsidiary. On July 2, 2007, we presented a
petition requesting the judge to revoke the preliminary injunction. On July 25, 2007, the judge
revoked the preliminary injunction. On the same date, the judge decided that (i) our Brazilian
subsidiary was not responsible for alleged infringement of intellectual property rights by its
users; and that (ii) the plaintiffs did not prove that (a) they own the trademark Brasileirinhas
and copyrights of Brasileirinhas branded movies and (b) the alleged infringement of intellectual
property rights resulted in an effective copyright violation. The plaintiffs presented a request
asking for clarification of the decision, but it was rejected. On November 6, 2007, plaintiffs
appealed the July 25, 2007 decision that dismissed the case, and we presented our reply to that
appeal on February 1, 2008.
On March 7, 2007, Xuxa Promoções e Produções Artísticas Ltda., or Xuxa, sued our Brazilian
subsidiary in the Court of Barra da Tijuca, Rio de Janeiro, State of Rio de Janeiro, Brazil. Xuxa,
a popular television personality in Brazil, alleged that counterfeit copies of one of her CDs and
of a movie with her participation as an actress (for which she owns the copyright and distribution
rights) are being sold on our platform, and as such our Brazilian subsidiary is infringing her
intellectual and property rights. Xuxa seeks an injunction, the establishment of preventive
measures, fines, and compensatory and statutory damages. An injunction ordering the removal of any
offers of copies of this CD and movie was granted to Xuxa. We appealed the injunction on July 2,
2007 and presented our defense on July 6, 2007. On December 17, 2007, both parties filed a joint
petition requesting suspension of the process for 60 days until March 10, 2008, due to negotiation
of a settlement of the case. On March 10, 2008, both parties presented a joint petition requesting
the extension of the suspension term for 30 more days, however, did not reach an agreement to
settle the case. Our appeal against the injunction was rejected on July 14, 2008 and we presented
another appeal against that decision to the same court on July 18, 2008.
On
June 11, 2007, Praetorium Instituto de Ensino, Pesquisas e
Atividades de Extensăo e Direito
Ltda., or Praetorium, sued our Brazilian subsidiary in the Fourth Civil Court of the County of Belo
Horizonte, State of Minas Gerais, Brazil. Praetorium alleged that our Brazilian subsidiary was
infringing Praetoriums copyrights as a result of our users selling allegedly counterfeit copies of
Praetoriums courses through the Brazilian page of our website. Praetorium seeks an injunction,
fines, and compensatory and statutory damages. An injunction ordering the removal of any offers
containing the name of Praetorium was granted to Praetorium on July 11, 2007 giving us 48 hours to
comply. In addition to the preliminary injunction, a fine of approximately $5,300 per day of
noncompliance was imposed up to a maximum of approximately $131,000 and a fine of approximately
$530 was also imposed for each new product posted after July 13, 2007 containing the name of
Praetorium and listed in the Brazilian page of our website. On August 3, 2007, we appealed the
preliminary injunction to the State Court of Minas Gerais and presented our defense on August 8,
2007. On November 20, 2007, the State Court of Minas Gerais rejected our request that the
injunction should be suspended until judgment of the appeal. Notwithstanding, the appeal against
the decision that granted the preliminary injunction is still pending.
32
On August 23, 2007, Serasa S.A., or Serasa, sued our Brazilian subsidiary in the Sixth Civil
Court of Santo Amaro, City of São Paulo, State of São Paulo, Brazil. Serasa, a company which
provides credit-related analysis, information services and data bank and payment habits related to
individuals and corporations, alleged that our Brazilian subsidiary should be responsible for the
sale by its users of allegedly unlawful content and unfair uses of its services and Serasas trade
name and trademarks. Serasa seeks an injunction, fines, and compensatory damages. On November 5,
2007 a preliminary injunction was granted to Serasa, ordering our Brazilian subsidiary (a) to
remove any content offering: (i) consultation of Serasas database; and (ii) passwords, texts or
any material that promises to consult, remove or teach how to remove someone name from Serasas
database; (b) the prohibition to allow in its website any content similar to the aforementioned;
and (c) to provide
certain personal data of certain users who have offered such products. In addition to the
preliminary injunction, a fine of approximately $5,500 per day of noncompliance was imposed. On
December 17, 2007, our Brazilian subsidiary presented the information requested. We appealed the
preliminary injunction to the State Court of São Paulo and presented our defense on January 7,
2008. Serasa replied to our appeal on January 30, 2008. On March 26, 2008, we were summoned with a
petition presented by Serasa alleging non-compliance with the injunction. We presented our response
on March 31, 2008, arguing that we are in full compliance with the injunction. On August 26, 2008
the State Court of São Paulo lifted the prohibition to allow in the Brazilian website any content
related to Serasa as established in the injunction but it was not appealed by the plaintiff. The
judge set a conciliatory hearing for March 13, 2009.
On November 23, 2007 Botelho Indústria e Distribuição Cinematográfica Ltda., or Botelho, sued
our Brazilian subsidiary in the Third Civil Court of the City of Rio de Janeiro, State of Rio de
Janeiro, Brazil. Botelho alleged that our Brazilian subsidiary was infringing its intellectual
property rights as a result of users selling unauthorized copies of Botelhos courses through the
Brazilian website. Botelho seeks an injunction, fines, and compensatory and statutory damages,
which was not yet analyzed by the judge. On February 25, 2008 we presented arguments to give the
judge support and background to analyze the requested injunction. We presented our defense on
March 5, 2008.
On October 25, 2007, Iglesia Mesianica Mundial Sekai Kyusei Kio en la Argentina, or Iglesia
Mesianica, filed suit against our Argentine subsidiary, MercadoLibre S.A., in the Thirteenth Civil
Court of the City of Buenos Aires, Argentina. The complaint was officially notified on April 17,
2008. Iglesia Mesianica alleged in the complaint that our Argentine subsidiary should be held
liable as a result of our users selling books that allegedly plagiarized certain Iglesia
Mesianicas books through the Argentine page of our website. Iglesia Mesianica seeks monetary
damages in the amount of approximately $95,000. We presented our defense on May 9, 2008.
On February 29, 2008, Mr. Eduardo Paoletti presented a claim against our Brazilian subsidiary
and Banco do Brasil S.A. and Banco Nossa Caixa S.A., in the Forty Second Civil Court of the Central
Court of the City of São Paulo. Plaintiff alleges that his personal information was used by third
parties to (i) register in our Brazilian website and (ii) open bank accounts in the aforementioned
banks in order to commit fraud against users of our Brazilian website. Plaintiff alleges that our
Brazilian shall be held joint and severally responsible with the other defendants for damages.
Mr. Paoletti seeks compensatory and statutory damages estimated for approximately $1.8 million. We
were summoned on June 19, 2008 and presented our defense on July 28, 2008.
On July 25, 2008, Nike International Ltd. or Nike requested a preliminary injunction against
our Argentine subsidiary in the First Civil and Commercial Federal Court, Argentina. We were
officially notified on August 14, 2008. Nike requested the injunction alleging that this subsidiary
was infringing Nike trademarks as a result of sellers listing allegedly counterfeit Nike branded
products through the Argentine page of our website. A preliminary injunction was granted on
August 11, 2008 to suspend the offer of Nike-branded products until sellers could be properly
identified. We appealed the decision on August 22, 2008.
State of São Paulo Fraud Claim
On June 12, 2007, a state prosecutor of the State of São Paulo, Brazil presented a claim
against our Brazilian subsidiary. The state prosecutor alleges that our Brazilian subsidiary should
be held liable for any fraud committed by sellers on the Brazilian version of our website, or
responsible for damages suffered by buyers when purchasing an item on the Brazilian version of the
MercadoLibre website. We were summoned on December 12, 2007 and presented our defense on January 4,
2008.
State of Minas Gerais Fraud Claim
On October 5, 2007, a state prosecutor of the State of Minas Gerais, city of Uberlandia,
Brazil presented a claim against our Brazilian subsidiary. The state prosecutor alleges that our
Brazilian subsidiary should be held liable for any fraud committed by sellers on the Brazilian
version of our website, or responsible for damages suffered by buyers when purchasing an item on
the Brazilian version of the MercadoLibre website. We were summoned on June 30, 2008 and presented
our defense on July 25, 2008, which was replied on November 14, 2008.
City of São Paulo Tax Claim
On September 13, 2007, we paid to tax authorities in São Paulo, Brazil approximately
$1.1 million, consisting of $1.0 million in accrued taxes and $0.1 million in fines, related to our
Brazilian subsidiarys activities in São Paulo for the period 2002 through 2004. We had reserved
approximately $1.1 million against these taxes as of December 31, 2006 so no additional provision
was recorded for the payment. São Paulo tax authorities have also asserted taxes and fines against
us relating to the period from 2005 to 2007 in an approximate additional amount of $5.9 million. In
January 2005, we had moved our operations to Santana de Parnaíba City, Brazil and began paying
taxes to that jurisdiction, therefore we believe we have strong defenses to the claims of the São
Paulo authorities with respect to this period. We believe the risk of loss for this period is
remote, and as a result, have not reserved provisions for this claim. On August 31, 2007, we
presented administrative defenses against the authorities claim; however, their response is still
pending.
33
Brazilian National Public Treasury Tax Claim
On March 17, 2008, our Brazilian subsidiary received a tax claim for approximately $198,000
presented by the National Public Treasury of Brazil. The notice claims non-payment of income taxes
that we believe we paid, and accordingly, we consider the risk of loss for this claim to be remote.
On March 28, 2008, we presented our defense requesting a declaration that no such taxes are due.
Trademark Claim
We filed our first three applications to register the name MercadoLivre in Brazil with the
Instituto Nacional da Propriedade Industrial (the National Institute of Industrial Property, or
INPI) on October 7, 1999. Editora Livre Mercado Ltda., a publishing company, challenged these three
applications based on their trademark Livre Mercado, a trade magazine. These challenges are
currently pending with INPI. However, we cannot assure you that we will succeed in obtaining these
trademarks or in our challenges to existing or future applications by other parties. If we are not
successful, we could face claims by any future trademark owners. Any past or future claims relating
to these issues, whether meritorious or not, could cause us to enter into costly royalty and/or
licensing agreements. We may also have to modify our brand name in Brazil (or other jurisdictions)
if any successful demands against us are too expensive. Any of these circumstances could adversely
affect our business, results of operations and financial condition.
Other third parties have from time to time claimed, and others may claim in the future, that
we have infringed their intellectual property rights. We have been notified of several potential
third-party claims for intellectual property infringement through our website. These claims,
whether meritorious or not, are time consuming, can be costly to resolve, could cause service
upgrade delays, and could require expensive implementations of changes to our business methods to
respond to these claims. See Item 1A Risk factorsRisks related to our businessWe could
potentially face legal and financial liability for the sale of items that infringe on the
intellectual property rights of others and for information disseminated on the MercadoLibre
marketplace.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the fourth quarter of the
fiscal year ended December 31, 2008.
PART II
|
|
ITEM 5. |
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES |
Market Price of and Dividends on the Registrants Common Equity
Shares
of our common stock, par value $0.001 per share, or our common stock, trade on the
Nasdaq Global Market (NASDAQ) under the symbol MELI. As of December 31, 2008, the closing price
of our common stock was $16.41 per share. As of February 17, 2009, we had approximately 40 holders
of record of our common stock. This figure does not reflect the beneficial ownership of shares held
in nominee name. The following table sets forth, for the indicated periods, the high and low
closing sale prices for our common stock on the Nasdaq Global Market and the cash distributions
declared per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
|
|
|
|
|
|
|
|
|
dividends |
|
|
|
Closing stock price |
|
|
declared |
|
|
|
High |
|
|
Low |
|
|
per share |
|
2007: |
|
|
|
|
|
|
|
|
|
|
|
|
3rd quarter |
|
$ |
41.06 |
|
|
$ |
18.00 |
|
|
|
|
|
4th quarter |
|
$ |
78.81 |
|
|
$ |
35.18 |
|
|
|
|
|
2008: |
|
|
|
|
|
|
|
|
|
|
|
|
1st quarter |
|
$ |
70.01 |
|
|
$ |
31.72 |
|
|
|
|
|
2nd quarter |
|
$ |
56.05 |
|
|
$ |
37.11 |
|
|
|
|
|
3rd quarter |
|
$ |
36.98 |
|
|
$ |
20.10 |
|
|
|
|
|
4th quarter |
|
$ |
21.58 |
|
|
$ |
8.28 |
|
|
|
|
|
Recent Sales of Unregistered Securities
There were no sales of unregistered securities by us during the three-month period ending
December 31, 2008.
Use of Proceeds from IPO
Our registration statement on Form S-1, as amended (Registration No. 333-142880) (the
Registration Statement), with respect to our initial public offering (the Offering) of common
stock, par value $0.001 per share, was declared effective on August 9, 2007. We sold a total of
3,000,000 shares of common stock in the Offering and the selling shareholders sold a total of
15,488,762 shares of common stock in the Offering. The net proceeds to us of the Offering were
approximately $49.6 million. These proceeds have been used to repay a $9.5 million outstanding loan
(including interest) with eBay Inc., $19.4 million for our acquisition of CMG, and the remainder
for our acquisition of the DeRemate Operations and general corporate purposes. See our quarterly
report on Form 10-Q filed with the Securities and Exchange Commission on November 14, 2007 for a
further discussion of our use of proceeds from the Offering.
34
Dividend Policy
We have never paid cash dividends on our stock and do not anticipate paying cash dividends in
the foreseeable future.
Equity Compensation Plan Information
Information regarding securities authorized for issuance under the Companys equity
compensation plan as of December 31, 2008 is set forth in Item 12, Security Ownership of Certain
Beneficial Owners and Management.
Performance Graph
The graph below shows the total stockholder return of an investment of $100 on August 10, 2007
(the first day of trading of our common stock on the Nasdaq Stock Exchange) through December 31,
2008 for (i) our common stock (ii) The Nasdaq Composite Index (iii) The S&P 500 Index and (iv) the
Dow Jones Ecommerce Index. The Dow Jones Ecommerce Index is a weighted index of stocks of companies
in the e-commerce industry. Stock price performance show in the graph below is not indicative of
future stock price performance.
We cannot assure you that our share performance will continue into the future with the same or
similar trends depicted in the graph above. We will not make or endorse any predictions as to our
future stock performance.
35
The foregoing graph and chart shall not be deemed incorporated by reference by any general
statement incorporating by reference this Annual Report on Form 10-K into any filing under the
Securities Act of 1933, as amended, or under the Securities Exchange Act of 1934, as amended,
except to the extent we specifically incorporate this information by reference, and shall not
otherwise be deemed filed under those acts.
Issuer Purchases of Equity Securities
The following table describes common stock repurchases made by the Company during the fourth
quarter of 2008:
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|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
Approximate |
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
Dollar Value of |
|
|
|
Total |
|
|
|
|
|
|
Purchased as |
|
|
Shares that May |
|
|
|
Number of |
|
|
Average |
|
|
Part of Publicly |
|
|
Yet Be |
|
|
|
Shares |
|
|
Price Paid |
|
|
Announced |
|
|
Purchased |
|
Period |
|
Purchased |
|
|
Per Share |
|
|
Plans(1) |
|
|
Under the Plans |
|
November 1, 2008 November 30, 2008 |
|
|
249,700 |
|
|
$ |
10.38 |
|
|
|
249,700 |
|
|
$ 17.4 million |
(2) |
December 1, 2008 December 31, 2008 |
|
|
|
|
|
|
n/a |
|
|
|
|
|
|
$ 17.4 million |
(2) |
|
|
|
(1) |
|
On November 14, 2008, we announced that our board of directors approved a share repurchase plan
authorizing us to repurchase, from available capital, up to $20 million of our outstanding common
stock from time to time through November 13, 2009. The timing and amount of any share repurchase
under the share repurchase plan will be determined by our management based on market conditions and
other considerations, and repurchases may be effected in the open market, through derivative,
accelerated repurchase and other privately negotiated transactions and through plans designed to
comply with Rules 10b-18 or 10b5-1(c) under the Exchange Act. The share repurchase plan does not
require us to acquire any specific number of shares and may be temporarily or permanently suspended
or discontinued by us at any time. A committee of the board of directors will reevaluate the
operation of the plan each fiscal quarter. |
|
(2) |
|
The approximate total dollar value of shares that may yet be purchased is the difference
between the total amount of repurchases authorized and the total amount spent on repurchases to
date. To enhance our share repurchase plan, we sell equity put options. These put options entitle
the holders to sell shares of our common stock to us on certain dates at specified prices. As of
December 31, 2008, options to purchase 185,000 shares of our common stock were outstanding, each
with a strike price of $10 per share. The dollar amount available for open market repurchases will
be reduced by the dollar amount paid to holders for shares upon the exercise of outstanding
options. None of these warrants has been exercised to date. |
36
ITEM 6. SELECTED FINANCIAL DATA
The following summary financial data is qualified by reference to and should be read in
conjunction with Managements Discussion and Analysis of Financial Condition and Results of
Operations and our consolidated financial statements and related notes thereto included elsewhere
in this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
(in millions) |
|
2004 |
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
Statement of income data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
12.7 |
|
|
$ |
28.2 |
|
|
$ |
52.1 |
|
|
$ |
85.1 |
|
|
$ |
137.0 |
|
Cost of net revenues |
|
|
(2.5 |
) |
|
|
(6.1 |
) |
|
|
(12.1 |
) |
|
|
(18.3 |
) |
|
|
(27.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
10.2 |
|
|
|
22.1 |
|
|
|
40 |
|
|
|
66.9 |
|
|
|
109.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product and technology development |
|
|
(1.3 |
) |
|
|
(2.2 |
) |
|
|
(3.1 |
) |
|
|
(4.4 |
) |
|
|
(7.3 |
) |
Sales and marketing |
|
|
(9.1 |
) |
|
|
(14.7 |
) |
|
|
(23.4 |
) |
|
|
(27.6 |
) |
|
|
(40.0 |
) |
General and administrative |
|
|
(3.1 |
) |
|
|
(4.4 |
) |
|
|
(8.2 |
) |
|
|
(13.2 |
) |
|
|
(22.8 |
) |
Compensation Cost related to CMG acquisition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
(13.5 |
) |
|
|
(21.3 |
) |
|
|
(34.6 |
) |
|
|
(45.2 |
) |
|
|
(72.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
(3.3 |
) |
|
|
0.8 |
|
|
|
5.4 |
|
|
|
21.7 |
|
|
|
37.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income and other financial gains |
|
|
1.2 |
|
|
|
0.4 |
|
|
|
0.5 |
|
|
|
1.6 |
|
|
|
1.8 |
|
Interest expense and other financial charges |
|
|
(0.3 |
) |
|
|
(0.5 |
) |
|
|
(1.7 |
) |
|
|
(2.7 |
) |
|
|
(8.4 |
) |
Foreign currency (loss) gain
|
|
|
0.2 |
|
|
|
0.3 |
|
|
|
(0.4 |
) |
|
|
(3.1 |
) |
|
|
(1.5 |
) |
Other expenses, net |
|
|
|
|
|
|
(0.3 |
) |
|
|
(1.5 |
) |
|
|
(3.0 |
) |
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before income and asset tax and
cumulative effect of change in accounting
principle |
|
|
(2.2 |
) |
|
|
0.7 |
|
|
|
2.3 |
|
|
|
14.4 |
|
|
|
29.4 |
|
Income and asset tax (expense) benefit |
|
|
|
|
|
|
1.4 |
|
|
|
(1.2 |
) |
|
|
(4.7 |
) |
|
|
(10.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before cumulative effect of
change in accounting principle and gain from
discontinued operations
|
|
|
(2.2 |
) |
|
|
2.0 |
|
|
|
1.1 |
|
|
|
9.7 |
|
|
|
18.8 |
|
Cumulative effect of change in accounting principle |
|
|
|
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
(2.2 |
) |
|
|
2.4 |
|
|
|
1.1 |
|
|
|
9.7 |
|
|
|
18.8 |
|
Accretion of preferred stock |
|
|
(0.5 |
) |
|
|
(0.5 |
) |
|
|
(0.5 |
) |
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common stockholders |
|
$ |
(2.7 |
) |
|
$ |
1.9 |
|
|
$ |
0.6 |
|
|
$ |
9.4 |
|
|
$ |
18.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, |
|
(in millions) |
|
2004 |
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
Balance sheet data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
24.1 |
|
|
$ |
44.4 |
|
|
$ |
53.8 |
|
|
$ |
134.5 |
|
|
$ |
156.7 |
|
Long term debt |
|
|
|
|
|
|
12.0 |
|
|
|
9.0 |
|
|
|
|
|
|
|
3.1 |
|
Total liabilities |
|
|
5.1 |
|
|
|
23.2 |
|
|
|
30.5 |
|
|
|
42.8 |
|
|
|
63.3 |
|
Net assets |
|
|
19.0 |
|
|
|
21.2 |
|
|
|
23.3 |
|
|
|
91.7 |
|
|
|
93.4 |
|
Mandatorily
redeemable convertible preferred stock |
|
|
63.1 |
|
|
|
63.6 |
|
|
|
64.1 |
|
|
|
|
|
|
|
|
|
Common stock |
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.1 |
|
Stockholders equity (deficit) |
|
$ |
(44.1 |
) |
|
$ |
(42.4 |
) |
|
$ |
(40.7 |
) |
|
|
91.7 |
|
|
|
93.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2004 |
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
Earnings (loss) per share data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) available
to common stockholders per common
share |
|
$ |
(0.21 |
) |
|
$ |
0.05 |
|
|
$ |
0.01 |
|
|
$ |
0.22 |
|
|
$ |
0.43 |
|
Diluted net income per common share |
|
$ |
|
|
|
$ |
0.05 |
|
|
$ |
|
|
|
$ |
0.22 |
|
|
$ |
0.42 |
|
Weighted average shares (2): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
12,739,980 |
|
|
|
13,065,496 |
|
|
|
13,149,139 |
|
|
|
25,149,405 |
(1) |
|
|
44,239,443 |
|
Diluted |
|
|
|
|
|
|
13,671,359 |
|
|
|
|
|
|
|
25,478,336 |
|
|
|
44,348,950 |
|
|
|
|
(1) |
|
Includes the effect of the issuance of 3,000,000 shares of our common stock in connection
with our initial public offering in August 2007. |
|
(2) |
|
Shares outstanding at December 31, 2008 were 44,070,367. |
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
(in millions) |
|
2004 |
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
Other data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of confirmed registered users at end of period (1) |
|
|
6.5 |
|
|
|
12.2 |
|
|
|
18.2 |
|
|
|
24.9 |
|
|
|
33.7 |
|
Number of confirmed new registered users during period
(2) |
|
|
2.5 |
|
|
|
5.7 |
|
|
|
6.0 |
|
|
|
6.7 |
|
|
|
8.8 |
|
Gross merchandise volume (3) |
|
$ |
299.3 |
|
|
$ |
607.7 |
|
|
$ |
1,075.1 |
|
|
$ |
1,511.5 |
|
|
$ |
2,078.9 |
|
Number of successful items sold (4) |
|
|
5.1 |
|
|
|
8.4 |
|
|
|
13.8 |
|
|
|
17.5 |
|
|
|
21.1 |
|
Total payment volume (5) |
|
$ |
8.9 |
|
|
$ |
38.5 |
|
|
$ |
89.0 |
|
|
$ |
158.0 |
|
|
$ |
255.9 |
|
Total payment transactions (6) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.3 |
|
|
|
1.9 |
|
Capital expenditures |
|
$ |
2.1 |
|
|
$ |
2.0 |
|
|
$ |
2.4 |
|
|
$ |
3.1 |
|
|
$ |
61.6 |
|
Depreciation and amortization |
|
$ |
1.1 |
|
|
$ |
1.6 |
|
|
$ |
2.0 |
|
|
$ |
2.3 |
|
|
$ |
3.3 |
|
|
|
|
(1) |
|
Measure of the cumulative number of users who have registered on the MercadoLibre marketplace
and confirmed their registration. |
|
(2) |
|
Measure of the number of new users who have registered on the MercadoLibre marketplace and
confirmed their registration. |
|
(3) |
|
Measure of the total U.S. dollar sum of all transactions completed through the MercadoLibre
marketplace, excluding motor vehicles, vessels, aircraft and real estate. |
|
(4) |
|
Measure of the number of items that were sold/purchased through the MercadoLibre
marketplace. |
|
(5) |
|
Measure of total U.S. dollar sum of all transactions paid for using MercadoPago. |
|
(6) |
|
Measure of the number of all transactions paid for using MercadoPago. |
|
|
|
ITEM 7. |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS |
You should read the following discussion and analysis of our financial condition and results
of our operations in conjunction with our Selected Financial Data and our audited consolidated
financial statements and the notes to those statements included elsewhere in this report. This
discussion contains forward-looking statements reflecting our current expectations that involve
risks and uncertainties. Actual results and the timing of events may differ materially from those
contained in these forward-looking statements due to a number of factors, including those discussed
in the section entitled Risk Factors and elsewhere in this report.
The discussion and analysis of our financial condition and results of operations has been
organized to present the following:
|
|
|
a brief overview of our company; |
|
|
|
|
a review of our financial presentation and accounting policies, including our critical accounting policies; |
|
|
|
|
a discussion of our principal trends and results of operations for the years ended December 31, 2006, 2007, and 2008; |
|
|
|
|
a discussion of the principal factors that influence our results of operations, financial condition and liquidity; |
|
|
|
|
a discussion of our liquidity and capital resources, a discussion of
our capital expenditures and a description of our contractual
obligations; and |
|
|
|
|
a discussion of the market risks that we face. |
Overview
We host the largest online commerce platform in Latin America focused on enabling e-commerce
and its related services. Our services are designed to provide our users with mechanisms to buy,
sell, pay for and collect on e-commerce transactions effectively and efficiently. With a population
of over 550 million people and a region with one of the fastest-growing Internet penetration rates,
we provide buyers and sellers with a robust online commerce environment that fosters the
development of a large and growing e-commerce community. We offer technological and commercial
solutions that seek to address the distinctive cultural and geographic challenges of operating an
online commerce platform in Latin America.
We were incorporated in Delaware in October 1999 and introduced web sites in Argentina,
Brazil, Mexico, Colombia, Chile, Uruguay and Venezuela by April 2000. In order to build a critical
mass of customers, we initially offered our services free of charge in all of these markets.
38
In May 2000, we obtained significant financing and reached gross merchandise volume of $14.3
million. In 2001, we launched a new version of our site and brand and launched our operations in
Ecuador. Our gross merchandise volume for the year ending December 31, 2001 grew to $21.3 million.
Our gross merchandise volume reached $55.4 million for 2002, $164.3 million for 2003 and $299.3
million for 2004. In November of 2005, we acquired certain operations of DeRemate.com, Inc. and our
gross merchandise volume reached $607.7 million. During 2006, we launched sites in Costa Rica, the
Dominican Republic and Panama, and our gross merchandise volume reached $1,075.1 million. Our gross
merchandise volume was $1,511.5 million for 2007.
In August 2007, we successfully completed our initial public offering through which 16,077,185
shares of our common stock were sold at a initial public offering price of $18.00 per share less an
underwriting discount of 4.5%. Out of that total, 2,608,696 shares of common stock were sold by us
and 13,468,489 were sold by selling shareholders. We, along with certain shareholders, granted to
the underwriters an option, exercisable for 30 days from August 9, 2007, to purchase up to
2,411,577 additional shares at the public offering price less the underwriting discount. The option
was exercised in full, and of that total, an additional 391,304 shares were sold by us and
2,020,273 were sold by the selling shareholders.
In January 2008, we acquired 100% of the issued and outstanding shares of capital stock of
Classified Media Group, Inc., or CMG, and its subsidiaries. CMG and its subsidiaries operate an
online classified advertisements platform primarily dedicated to the sale of automobiles at
www.tucarro.com in Venezuela, Colombia and Puerto Rico and real estate at www.tuinmueble.com in
Venezuela, Colombia, Panama, the United States, Costa Rica and the Canary Islands. The purchase
price for the shares of CMG and its subsidiaries was $19 million, subject to certain escrows and
working capital adjustment. On January 22, 2009, we released the
escrow balance of $1.1 million to the Sellers.
In September 2008, we completed the acquisition of DeRemate.com de Argentina S.A., DeRemate.com
Chile S.A., Interactivos y Digitales México S.A. de C.V. and Compañía de Negocios Interactiva de
Colombia E.U. for an aggregate purchase price of $ 37.6 million. We also purchased of certain URLs,
domains, trademarks, databases and intellectual property rights related to those businesses for $
2.4 million. On February 12, 2009, the purchase price
allocation period finished and the Company agreed with the Sellers to
a working capital adjustment of $480,912 to be paid by the Sellers to
the Company.
We offer our users two principal services:
|
|
|
The MercadoLibre marketplace: The MercadoLibre marketplace, which we
sometimes refer to as our Marketplace business, is a fully-automated,
topically-arranged and user-friendly online commerce service. This
service permits both businesses and individuals to list items and
conduct their sales and purchases online in either a fixed-price or
auction-based format. Additionally, through online classified
advertisements, our registered users can list and purchase motor
vehicles, vessels, aircraft, real estate and services. Any Internet
user can browse through the various products and services that are
listed on our website and register with MercadoLibre to list, bid for
and purchase items and services. |
|
|
|
|
The MercadoPago online payments solution: To complement the
MercadoLibre marketplace, we developed MercadoPago, an integrated
online payments solution, which we sometimes refer to as our Payments
business, an integrated online payments solution. MercadoPago is
designed to facilitate transactions on the MercadoLibre marketplace
and off our marketplace in certain markets, by providing a mechanism
that allows our users to securely, easily and promptly send and
receive payments online |
We operate in six reporting segments, five of which related to our Marketplace business and
the remainder which relates to our Payment business. Within our Marketplace business, we
separately report our operations in each of Brazil, Argentina, Mexico, Venezuela and other
countries (Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Panama, Peru and Uruguay).
The operations of our Payments business, which is available in each of Brazil, Argentina, Mexico
and Chile, Colombia, and Venezuela, are reported in one segment.
During 2008, our gross merchandise volume reached $ 2,078.9 million and visitors to our web
site were able to browse an average of over 2.5 million listings on any given day, organized by
country, in over 2,000 different product categories. We believe that we have achieved a critical
mass of active buyers, sellers and product listings in most of the countries where we operate and
that our business can be readily scaled to handle increases in our user base and transaction
volume. At December 31, 2008, we had 33.7 million confirmed registered MercadoLibre users. For
2008, we had 2.4 million unique sellers, 6.5 million unique buyers and 21.1 million successful
items sold.
39
For 2008, our net revenues were $137.0 million. Of those $137.0 million in revenues
approximately 80.0% were attributable to MercadoLibre marketplace listing, optional feature, final
value and advertisement fees. The remaining 20.0% of revenues were attributable to MercadoPago
fees. Although we discuss long-term trends in our business, it is our policy to not provide
earnings guidance in the traditional sense. We believe that uncertain conditions make the
forecasting of near-term results difficult. Further, we seek to make decisions focused primarily on
the long-term welfare of our company and believe focusing on short term earnings does not best
serve the interests of our stockholders. We believe that execution of key strategic initiatives as
well as our expectations for long-term growth in our markets will best create stockholder value.
We, therefore, encourage potential investors to consider this strategy before making an investment
in our common stock. A long-term focus may make it more difficult for industry analysts and the
market to evaluate the value of our company, which could reduce the value of our common stock or
permit competitors with short term tactics to grow stronger than us.
Description of line items
Net revenues
We recognize revenues in each of our reporting segments. The MercadoLibre marketplace segments
include Brazil, Argentina, Mexico, Venezuela and other countries (Chile, Colombia, Costa Rica,
Dominican Republic, Ecuador, Panama, Peru and Uruguay). The MercadoPago segment includes our
regional payments platform consisting of our MercadoPago business.
We generate revenues from the MercadoLibre marketplace segments from:
|
|
|
online advertising fees. |
The MercadoLibre marketplace business generated 85.9% of our net revenues for 2006, 81.7% for
2007 and 80.0% for 2008. Of these revenues, during 2008, 46.1% were generated in Brazil, 16.7% in
Argentina, 11.4% in Mexico, 20.1% in Venezuela and the remainder, or 5.7%, in Colombia, Chile,
Peru, Ecuador, Uruguay, Panama, Costa Rica and the Dominican Republic.
The following table sets forth the percentage of consolidated net revenues by country from our
MercadoLibre marketplace for each of 2006, 2007 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
(% of total MercadoLibre marketplace net revenues) |
|
2006 |
|
|
2007 |
|
|
2008 |
|
Brazil |
|
|
57.2 |
% |
|
|
54.0 |
% |
|
|
46.1 |
% |
Argentina |
|
|
15.7 |
|
|
|
16.3 |
|
|
|
16.7 |
|
Mexico |
|
|
13.9 |
|
|
|
13.8 |
|
|
|
11.4 |
|
Venezuela |
|
|
7.4 |
|
|
|
10.2 |
|
|
|
20.1 |
|
Other countries |
|
|
5.8 |
|
|
|
5.7 |
|
|
|
5.7 |
|
Revenues generated by our MercadoPago business represented 14.1% our total net revenues for
2006, 18.3% for 2007 and 20.0% for 2008. These revenues were attributable to commissions charged to
buyers and sellers for the use of MercadoPago. We generate revenues from our MercadoPago payments
segment by charging users a commission and a financial charge when the user elects to pay in
installments, which in both cases we recognize once the transaction is completed. For the
transactions where we finance the extended payment terms internally rather than by discounting
receivables, incurring financial debt or selling credit card coupons the financial charge is recognized over the life of the
installment financing. During the year ended December 31, 2008, commission and installment-related
financial charges averaged 6.6% and 4.2%, respectively, of the payment amounts made by the user
through MercadoPago.
We have a highly fragmented customer revenue base given the large numbers of sellers and
buyers who use our platforms. For 2006, 2007 and 2008, no single customer accounted for more than
10.0% of our net revenues in our MercadoLibre marketplace business or our MercadoPago payments
business.
Our MercadoLibre marketplace is available in 12 countries (Argentina, Brazil, Chile, Colombia,
Costa Rica, Dominican Republic, Ecuador, Mexico, Panama, Peru, Uruguay and Venezuela), and
MercadoPago is available in six countries (Argentina, Brazil, Chile, Colombia, Mexico and
Venezuela). The functional currency in each countrys operations is the local currency. Therefore,
our net revenues are generated in multiple foreign currencies and then translated into U.S. dollars
at the average monthly exchange rate.
40
The following table sets forth the percentage of consolidated net revenues by country from
both our MercadoLibre marketplace and MercadoPago businesses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
(% of total consolidated net revenues) |
|
2006 |
|
|
2007 |
|
|
2008 |
|
Brazil |
|
|
59.1 |
% |
|
|
59.0 |
% |
|
|
53.8 |
% |
Argentina |
|
|
15.1 |
|
|
|
14.8 |
|
|
|
14.5 |
|
Mexico |
|
|
13.8 |
|
|
|
12.6 |
|
|
|
10.1 |
|
Venezuela |
|
|
7.0 |
|
|
|
9.0 |
|
|
|
16.9 |
|
Other countries |
|
|
5.0 |
|
|
|
4.6 |
|
|
|
4.7 |
|
Our subsidiaries in Brazil, Argentina, Venezuela and Colombia are subject to certain taxes on
revenues which are classified as costs of net revenues. These taxes represented 5.6%, 5.9% and 6.0%
of net revenues for 2006, for 2007 and 2008, respectively.
Cost of net revenues
Cost of net revenues primarily represents bank and credit card processing charges for
transactions and fees paid with credit cards and other payment methods, certain taxes on revenues,
compensation for customer support personnel, ISP connectivity charges, depreciation and
amortization and hosting and site operations fees.
Product and technology development
Our product and technology development related expenses consist primarily of depreciation and
amortization costs related to product and technology development, compensation for our engineering
and web-development staff, telecommunications costs and payments to third-party suppliers who
provide technology maintenance services to our company.
Sales and marketing
Our sales and marketing expenses consist primarily of marketing costs for our platforms
through online and offline advertising, bad debt charges, the salaries of employees involved in
these activities, public relations costs, marketing activities for our users and depreciation and
amortization costs.
We carry out the vast majority of our marketing efforts on the Internet. In that context, we
enter in agreements with portals, search engines, ad networks and other sites in order to attract
Internet users to the MercadoLibre marketplace and convert them into confirmed registered users and
active traders on our platform. Additionally, we invest a portion of our marketing budget on cable
television advertising in order to improve our brand awareness and to complement our online
efforts.
We also work intensively on attracting, developing and growing sellers through our supply
efforts. We have dedicated professionals in most of our operations that work with sellers, through
trade show participation, seminars and meetings to provide them with important tools and skills to
become effective sellers on our platform.
General and administrative
Our general and administrative expenses consist primarily of salaries for management and
administrative staff, compensation for outside directors, long term retention plan compensation and
expenses for legal, accounting and other professional services, insurance expenses, office space
rental expenses, travel and business expenses, as well as depreciation and amortization costs.
General and administrative expenses include the costs of the following areas of our company:
general management, finance, administration, accounting, legal and human resources.
Compensation Cost related to acquisitions
As part of our acquisition of CMG which closed in the first quarter of 2008, we entered into a
management escrow agreement to secure the obligations of the CMG shareholders that remained as
managers. We accrued those compensation expenses as operating expenses, instead of considering them
part of the purchase price, following EITF 95-8 Accounting for Contingent Consideration Paid to
the Shareholders of an Acquired Enterprise in a Purchase Business Combination (See note 6 to our
audited consolidated financial statements included in this report).
Other income (expenses)
Other income (expenses) consists of interest expense (interest expense relating to the working
capital requirements for our MercadoPago operations are recorded as interest expense and not as
cost of net revenues) and other financial charges, interest income derived primarily from our
short-term investments and cash equivalents, foreign currency gains or losses, the effect of
changes in the fair value of derivative instruments and outstanding warrants, and other
non-operating results.
41
Income and asset tax
We are subject to federal and state taxes in the United States, as well as foreign taxes in
the multiple jurisdictions where we operate. Our tax obligations consist of current and deferred
income taxes and asset taxes incurred in these jurisdictions. We account for income taxes following
the liability method of accounting. Therefore, our income tax expense consists of taxes currently
payable, if any (given that in certain jurisdictions we still have net operating loss
carry-forwards), plus the change during the period in our deferred tax assets and liabilities.
The following table summarizes the composition of our income/asset taxes for the years ending
December 31, 2006, 2007 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
(in millions) |
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Foreign |
|
|
1.9 |
|
|
|
5.0 |
|
|
|
8.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.9 |
|
|
|
5.0 |
|
|
|
8.1 |
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
(0.7 |
) |
|
|
(0.1 |
) |
|
|
1.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.7 |
) |
|
|
(0.1 |
) |
|
|
1.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.2 |
|
|
|
4.9 |
|
|
|
9.8 |
|
|
|
|
|
|
|
|
|
|
|
Asset Tax: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
0.1 |
|
|
|
(0.2 |
) |
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
|
|
(0.2 |
) |
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
Income / asset tax expense |
|
$ |
1.2 |
|
|
$ |
4.7 |
|
|
$ |
10.6 |
|
|
|
|
|
|
|
|
|
|
|
42
Seasonality
The following table presents certain unaudited quarterly financial information for each of the
twelve quarters set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
|
|
March 31, |
|
|
June 30, |
|
|
September 30, |
|
|
December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues |
|
|
28,840,730 |
|
|
|
34,471,508 |
|
|
|
40,260,643 |
|
|
|
33,449,739 |
|
Gross profit |
|
|
22,822,449 |
|
|
|
27,570,005 |
|
|
|
32,106,781 |
|
|
|
26,986,812 |
|
Net Income |
|
|
2,067,677 |
|
|
|
2,947,095 |
|
|
|
5,875,792 |
|
|
|
7,921,097 |
|
Net Income per share-basic |
|
|
0.05 |
|
|
|
0.07 |
|
|
|
0.13 |
|
|
|
0.18 |
|
Net Income per share-diluted |
|
|
0.05 |
|
|
|
0.07 |
|
|
|
0.13 |
|
|
|
0.17 |
|
Weighted average shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
44,227,460 |
|
|
|
44,238,166 |
|
|
|
44,290,540 |
|
|
|
44,264,906 |
|
Diluted |
|
|
44,368,011 |
|
|
|
44,369,317 |
|
|
|
44,379,682 |
|
|
|
44,369,635 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues |
|
|
16,459,337 |
|
|
|
18,973,288 |
|
|
|
22,800,130 |
|
|
|
26,893,586 |
|
Gross profit |
|
|
12,971,998 |
|
|
|
14,973,366 |
|
|
|
17,918,082 |
|
|
|
20,989,955 |
|
Net Income |
|
|
994,187 |
|
|
|
590,886 |
|
|
|
2,785,474 |
|
|
|
5,322,393 |
|
Net Income per share-basic |
|
|
0.02 |
|
|
|
0.01 |
|
|
|
0.07 |
|
|
|
0.13 |
|
Net Income per share-diluted |
|
|
0.02 |
|
|
|
0.01 |
|
|
|
0.07 |
|
|
|
0.13 |
|
Weighted average shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
13,375,482 |
|
|
|
13,575,158 |
|
|
|
27,538,652 |
|
|
|
41,226,563 |
|
Diluted |
|
|
13,375,482 |
|
|
|
13,987,128 |
|
|
|
27,685,028 |
|
|
|
41,375,907 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues |
|
|
10,989,133 |
|
|
|
12,382,750 |
|
|
|
13,224,610 |
|
|
|
15,462,397 |
|
Gross profit |
|
|
8,472,837 |
|
|
|
9,633,122 |
|
|
|
10,058,051 |
|
|
|
11,809,232 |
|
Net Income / (Loss) |
|
|
110,342 |
|
|
|
(920,886 |
) |
|
|
37,541 |
|
|
|
1,845,086 |
|
Net Income per share-basic |
|
|
|
|
|
|
(0.08 |
) |
|
|
(0.01 |
) |
|
|
0.04 |
|
Net Income per share-diluted |
|
|
(* |
) |
|
|
(* |
) |
|
|
(* |
) |
|
|
0.04 |
|
Weighted average shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
13,114,575 |
|
|
|
13,140,100 |
|
|
|
13,141,676 |
|
|
|
13,141,728 |
|
Diluted |
|
|
13,114,575 |
|
|
|
13,140,100 |
|
|
|
13,141,676 |
|
|
|
13,141,728 |
|
|
|
|
(*) |
|
For the Quarters ended March 31, June 30, and September 30, 2006 the diluted EPS is equal to the Basic EPS. |
Seasonal fluctuations in Internet usage and retail seasonality have affected, and are likely
to continue to affect, our business. Typically, the fourth quarter of the year is the strongest in
every country where we operate due to the significant increase in transactions before the Christmas
season. However, the result of our operations in the fourth quarter of 2008 have been impacted by
the global economic crisis and, for that reason, our 2008 fourth quarter revenues were lower when
measured in U.S. dollars than the third quarter revenues, as a result of local currencies
depreciating versus the U.S. dollar during the period.. At this time, we cannot accurately predict
the impact of this global crisis on our operations for 2009 and beyond. Our slowest period is
typically the first quarter of the year. The months of January, February and March normally
correspond to summer vacation time in Argentina, Brazil, Chile, Peru and Uruguay. Additionally, the
Easter holiday falls in March or April, and Brazil celebrates Carnival for one week in February or
March. This is partially mitigated by the countries located in the northern hemisphere, such as
Colombia, Mexico and Venezuela for which the slowest months are their summer months of July, August
and September.
43
Critical accounting policies and estimates
The preparation of our consolidated financial statements and related notes requires us to make
judgments, estimates and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and liabilities. We have based
our estimates on historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from other sources. Our
management has discussed the development, selection and disclosure of these estimates with our
audit committee and board of directors. Actual results may differ from these estimates under
different assumptions or conditions.
An accounting policy is considered to be critical if it requires an accounting estimate to be
made based on assumptions about matters that are highly uncertain at the time the estimate is made,
and if different estimates that reasonably could have been used, or changes in the accounting
estimates that are reasonably likely to occur periodically, could materially impact the
consolidated financial statements. We believe that the following critical accounting policies
reflect the more significant estimates and assumptions used in the preparation of our consolidated
financial statements. You should read the following descriptions of critical accounting policies,
judgments and estimates in conjunction with our audited consolidated financial statements and the
notes thereto and other disclosures included in with this report.
Impairment of long-lived assets and goodwill
We review long-lived assets for impairments whenever events or changes in circumstances
indicate that the carrying value of an asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of an asset to undiscounted future
net cash flows expected to be generated by the asset. If such assets are considered to be impaired
on this basis, the impairment loss to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.
Goodwill is reviewed at least annually for impairment. Impairment of goodwill is tested at the
reporting unit level (considering each segment of the Company as a reporting unit) by comparing the
reporting units carrying amount, including goodwill, to the fair value of the reporting unit. The
fair values of the reporting units are estimated using a combination of the income or discounted
cash flows approach and the market approach, which utilizes comparable companies data. Cash flow
projections used are based on financial budgets approved by management. The growth rates applied do
not exceed the long-term average growth rate for the business in which the reporting unit operates.
The average discount rate used is 22.6% which reflects the Companys real weighted average cost of
capital. Key drivers in the analysis include Gross Merchandise Volume (GMV) which represents a
measure of the total U.S. dollar amount of all transactions completed through the MercadoLibre
marketplace, excluding motor vehicles, vessels, aircraft, real estate, and services and take rate
defined as marketplace revenues as a percentage of gross merchandise volume. In addition, market
share in the analysis include a business to e-commerce rate, which represents growth of e-commerce
as a percentage of GDP, internet penetration rates as well as trends in the Companys market
share. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered
impaired and a second step is performed to measure the amount of impairment loss, if any. No
impairments were recognized during the reporting periods and, managements assessment of each
reporting unit value in use materially exceeds its carrying value.
We believe that the accounting estimate related to impairment of long lived assets and
goodwill is a critical accounting estimate because it is highly susceptible to change from period
to period because: (i) it requires management to make assumptions about future interest rates,
sales and costs; and (ii) the impact that recognizing an impairment would have on the assets
reported on our balance sheet as well as our net income would be material. Our managements
assumptions about future sales and future costs require significant judgment.
Provision for doubtful accounts
We are exposed to losses due to uncollectible accounts and credits to sellers. Provisions for
these items represent our estimate of future losses based on our historical experience. Our
provision for doubtful accounts amounted to $4.6 million at December 31, 2006, $7.2 million at
December 31, 2007 and $8.7 million at December 31, 2008. The provision for doubtful accounts is
recorded as a charge to sales and marketing expenses.
The following table illustrates our bad debt charges as a percentage of net revenues for 2006,
2007 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
(in millions, except percentages) |
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
52.1 |
|
|
$ |
85.1 |
|
|
$ |
137.0 |
|
Bad debt charges |
|
|
6.2 |
|
|
|
6.2 |
|
|
|
8.7 |
|
Bad debt charges as a percentage of net revenues |
|
|
11.9 |
% |
|
|
7.3 |
% |
|
|
6.3 |
% |
Historically, our actual losses have been consistent with our charges. However, future changes
in trends could result in a material impact to future consolidated statements of income and cash
flows.
We
believe that the accounting estimate related to provision for
doubtful accounts is a critical accounting estimate because it
requires management to make assumptions about future collections and
credit analysis. Our managements assumptions about future
collections requires significant judgment.
44
Legal Contingencies
In connection with certain pending litigation and other claims, we have estimated the range of
probable loss and provided for such losses through charges to our consolidated statement of income.
These estimates have been based on our assessment of the facts and circumstances at each balance
sheet date and are subject to change based upon new information and future events.
From time to time, we are involved in disputes that arise in the ordinary course of business.
We are currently involved in certain legal proceedings as discussed in BusinessLegal
Proceedings, and in Note 16 to our audited consolidated financial statements. We believe that we have
meritorious defenses to the claims against us, and we will defend ourselves vigorously. However,
even if successful, our defense could be costly and could divert managements time. If the
plaintiffs were to prevail on certain claims, we might be forced to pay damages or modify our
business practices. Any of these results could materially harm our business and could have a
material adverse impact on our financial position, results of operations or cash flows.
Income taxes
We are required to recognize a provision for income taxes based upon taxable income and
temporary differences between the book and tax bases of our assets and liabilities for each of the
tax jurisdictions in which we operate. This process requires a calculation of taxes payable under
currently enacted tax laws in each jurisdiction and an analysis of temporary differences between
the book and tax bases of our assets and liabilities, including various accruals, allowances,
depreciation and amortization. The tax effect of these temporary differences and the estimated tax
benefit from our tax net operating losses are reported as deferred tax assets and liabilities in
our consolidated balance sheet. We also assess the likelihood that our net deferred tax assets will
be realized from future taxable income. To the extent we believe that it is more likely than not
that some portion or all of deferred tax asset will not be realized, we establish a valuation
allowance. At December 31, 2008, we had a valuation allowance on certain foreign and domestic net
operating losses based on our assessment that it is more likely than not that the deferred tax
asset will not be realized. To the extent we establish a valuation allowance or change the
allowance in a period, we reflect the change with a corresponding increase or decrease in our tax
provision in our consolidated statement of income.
As
of December 31, 2008, our deferred tax assets amounts to $
16.1 million of which 30.1%
correspond to our 2005 DeRemate.com acquisition, 21.7% correspond to
our Brazilian operation, 11.4%
correspond to our 2008 DeRemate.com acquisition, 11.2% correspond to
our Venezuelan operation, 8.9% correspond to our holding company in the
United States, 6.4% correspond to our Argentine operation, 5.9% correspond to our Mexican operation
and 4.4% correspond to our operations in other countries. At December 31, 2008, our deferred tax
assets are comprised mainly by loss carry forwards representing 67.0% of the total deferred tax
assets. As of December 31, 2008, 43.1% of these loss carry forwards correspond to our 2005
DeRemate.com acquisition, 16.4% correspond to our 2008 DeRemate.com acquisition, 8.9% correspond to
our holding company in the United States, 20.7% correspond to our Brazilian operation, 5.2%
correspond to our Mexican operation, 4.6% correspond to our Chilean operation and 1.1% correspond
to our operations in other countries. We also assess the likelihood that our net deferred tax
assets will be realized from future taxable income. To the extent we believe that it is more likely
than not that some portion or all of deferred tax asset will not be realized, we establish a
valuation allowance. At December 31, 2008, our valuation allowance amounted to $ 11.7 million of
which 41.6% correspond to our 2005 DeRemate.com acquisition, 15.8% correspond to our 2008
DeRemate.com acquisition, 19.1% correspond to our Brazilian operation, 12.2% correspond to our
holding company in the United States and 11.3% correspond to our operations in other countries. Our
valuation allowance is based on our assessment that it is more likely than not that the deferred
tax asset will not be realized. The fluctuations in the valuation allowance will depend on the
capacity of each country operation to generate taxable income or our execution of future tax
planning strategies that allow us to use the aforementioned deferred tax assets. To the extent we
establish a valuation allowance or change the allowance in a period, we reflect the change with a
corresponding increase or decrease in our tax provision in our consolidated statement of income.
Upon adoption of FAS 141 (R), any release related to the acquired operations of DeRemate valuation
allowance will be allocated to net income.
As of December 31, 2007, our deferred tax assets amounts to $ 18.8 million of which 33.2%
correspond to our DeRemate.com acquisition, 24.7% correspond to our Brazilian operation, 25.6%
correspond to our holding company in the United States, 9.0% correspond to our Mexican operation,
3.8% correspond to our Argentine operation and 3.8% correspond to our operations in other
countries. At December 31, 2007, our deferred tax assets are comprised mainly by loss carry
forwards represented 85.2% of the total deferred tax assets. As of December 31, 2007, 37.6% of
these loss carry forwards correspond to our DeRemate.com acquisition, 27.8% correspond to our
holding company in the United States, 22.6% correspond to our Brazilian operation, 8.4% correspond
to our Mexican operation and 3.6% correspond to our operations in other countries. We also assess
the likelihood that our net deferred tax assets will be realized from future taxable income. To the
extent we believe that it is more likely than not that some portion or all of deferred tax asset
will not be realized, we establish a valuation allowance. At December 31, 2007, our valuation
allowance amounted to $ 15.0 millions of which 41.5% correspond to our DeRemate.com acquisition,
19.6% correspond to our Brazilian operation, 31.8% correspond to our holding company in the United
States and 7.0% correspond to our operations in other countries. The 2007 blended tax rate was
reduced due to a reverse of the valuation allowance related to our Mexican operations for $2.0
millions. Our blended tax without including the reverse of the Mexican valuation allowance would
have been 44.6%.
45
The following table sets forth the effective tax rates for 2006, 2007 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
(in millions, except percentages) |
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income and asset tax expense |
|
$ |
(1.2 |
) |
|
$ |
(4.7 |
) |
|
$ |
(10.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of income before
income and asset tax |
|
|
(53.7 |
)% |
|
|
(32.8 |
)% |
|
|
(36.1 |
)% |
|
|
|
|
|
|
|
|
|
|
Historically, these provisions have adequately provided for our actual income tax liabilities.
Our future effective tax rates could be adversely affected by earnings being lower than anticipated
in countries where we have lower statutory rates and higher than anticipated in countries where we
have higher statutory rates, by changes in the valuations of our deferred tax assets or
liabilities, or by changes or interpretations in tax laws, regulations or accounting principles.
Stock-based compensation
During 2007 and 2008, we granted our outside directors restricted shares of our common stock
as part of their compensation, as described in the following table:
|
|
|
|
|
|
|
Number of restricted |
|
Grant date |
|
shares |
|
September 17, 2007 |
|
|
2,000 |
|
January 24, 2008 |
|
|
600 |
|
June 9, 2008 |
|
|
1,348 |
|
In accordance with SFAS 123(R) these restricted share awards are measured at the grant-date
fair value of our shares as if these shares were vested and issued on the grant date. Based on the
fair value of our shares at the grant date, total compensation cost for the 3,948 restricted shares
awarded amounted to $149,470. For the periods ended December 31, 2008 and 2007, we recognized
$105,561 and $15,966 of compensation expense related to these awards, respectively, which are
included in operating expenses in the accompanying consolidated statements of income. Regarding the
additional grants for fixed amounts of $30,000 and $40,000, in accordance with Statement of
Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity (SFAS 150) and SFAS 123(R), they are classified as
liabilities in the accompanying consolidated balance sheet. For the periods ended December 31, 2008
and 2007, the Company recognized $115,566 and $16,283 of compensation expense related to these
awards, respectively, which are included in operating expenses in the accompanying consolidated
statement of income.
In addition, on August 8, 2008 the Board of Directors approved a four year employee retention
program which will be payable 50% in cash and 50% in shares. The vesting schedule will be the
following:
|
|
|
Year One Paid on or before March 31, 2009: 17% (8.5% in cash and 8.5% in common stock); |
|
|
|
|
Year Two Paid on or before March 31, 2010: 22% (11% in cash and 11% in common stock); |
|
|
|
|
Year Three Paid on or before March 31, 2011: 27% (13.5% in cash and
13.5% in common stock); and |
|
|
|
|
Year Four Paid on or before March 31, 2012: 34% (17% in cash and 17% in common stock). |
In addition, the Long Term Retention Plan (LTRP) has a performance condition which has been
achieved at the date of these report and also requires the employee to remain in the Company at the
payment date. The compensation cost is recognized in accordance with the graded-vesting attribution
method and is accrued up to each payment date.
The total compensation cost of the LTRP amounts to approximately $2.1 million ($ 1.3 million
related to cash compensaton and social securities expenses and $0.8 million related to shares
compensation) considering that the shares granted were valued at the grant date fair value
of the shares. As of December 31, 2008, the related accrued compensation expense was $0.8
million. The accrued compensation expense includes $0.3 million related to 21,591 shares granted
under the LTRP.
46
During
2008, we granted 3,082 restricted shares to an employee in connection with his
hiring. These restricted shares vest in four equal amounts over a four year period. The related
compensation cost is recognized in accordance with the straight-line vesting attribution method.
The total compensation cost of this contract amounts to approximately $0.1 million. For purposes of
determining compensation cost, the shares granted were valued at the grant date fair value of the
shares.
On January 1, 2006, we adopted Statement of Financial Accounting Standard No. 123(R),
Share-Based Payment (SFAS 123(R)), which requires the measurement and recognition of compensation
expense for all share-based payment awards based on estimated fair values. No stock option equity
grants were made during 2007 and 2008.
The following table summarizes information with respect to our stock option equity grants
during 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair |
|
|
Estimated |
|
|
|
|
|
|
|
|
|
|
|
value of |
|
|
fair value |
|
Grant |
|
Options |
|
|
Exercise |
|
|
common |
|
|
of stock |
|
date |
|
granted |
|
|
price |
|
|
stock |
|
|
options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2006 |
|
|
17,000 |
|
|
$ |
1.50 |
|
|
$ |
2.93 |
|
|
$ |
2.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1, 2006 |
|
|
2,000 |
|
|
$ |
6.00 |
|
|
$ |
8.34 |
|
|
$ |
5.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1, 2006 |
|
|
4,500 |
|
|
$ |
6.00 |
|
|
$ |
9.64 |
|
|
$ |
6.21 |
|
We calculated the fair value of each option award on the date of grant using the Black-Scholes
option pricing model. The Black-Scholes model requires the input of highly subjective assumptions,
including the fair value of our common stock, volatility, risk-free interest rate and dividend
yield. Since we have no history of volatility, the expected volatility is based on the historical
volatilities of similar entities common stock over the most recent period commensurate with the
estimated expected term of the awards. The expected term of an award is based on the simplified
method allowed by SEC-issued Staff Accounting Bulletin No. 107 (SAB No. 107), which provides
supplemental implementation guidance for SFAS No. 123(R), whereby the expected term is equal to the
midpoint between the vesting date and the end of the contractual term of the award. The risk-free
interest rate is based on the rate on U.S. Treasury zero coupon issues with maturities consistent
with the estimated expected term of the awards. We have not paid any dividends and do not
anticipate paying any dividends in the foreseeable future and accordingly, use an expected dividend
yield of zero.
The weighted-average grant-date fair value of stock options granted during 2006 was $4.68 per
share, using the Black-Scholes model with the following weighted-average assumptions:
|
|
|
|
|
Risk-free interest rates |
|
|
6 |
% |
Expected term |
|
7 years |
|
Dividend yield |
|
|
0 |
% |
Expected volatility |
|
|
36 |
% |
We recognize stock-based compensation expense based on the estimated portion of the awards
that are expected to vest. Stock-based compensation expense recognized for the years ended
December 31, 2008, 2007 and 2006 were $4,719, $15,477 and $33,233, respectively which consisted of
stock-based compensation expense related to stock options. See Note 13 to our audited consolidated
financial statements included elsewhere in this report for additional information.
As of December 31, 2008, total stock-based compensation expense related to non-vested stock
options not yet recognized amounts to $1,997 and the weighted-average period in which it is
expected to be recognized is 2 years.
The fair value of our common stock at each grant date prior to our initial public offering in
August 2007, was based on internally developed valuations. We did not engaged an independent
third-party valuation specialist and cannot assure you that an independent valuation firm would not
determine different valuations for our common stock. We have based our internally developed
valuations on our analysis of valuations of our significant subsidiaries completed by an unrelated
third-party valuation specialist as of December 31, 2006, complemented by internally prepared
projections and analyses of our company. The valuations of the subsidiaries were prepared to
perform impairment tests as required by Statement of Financial Accounting Standard No. 142
Goodwill and Other Intangible Assets. We believe that a combination of these independent
valuations and the experience of our internal accounting staff produced reasonable valuations of
the fair value of our common stock.
47
The difference between our estimate of the fair value of our common stock as of October 2006
and our $18.00 initial public offering price in August 2007 related to improvements in our
financial performance, improved prospects as we increase in size and scope, appreciation of the
currencies in the countries in which we operate versus the U.S. dollar resulting in increased
revenues and profits measured in U.S. dollars, and other factors that were relevant in setting
initial our public offering price in August 2007 but that were not necessarily considered in the
determination of the fair value of our common stock pursuant to SFAS 123(R), such as improved
multiples of comparable publicly-traded companies and then prevailing market conditions for public
offerings of equity securities. The fair value of our common stock at the October 1, 2006 grant
date, was $9.64 per share. Factors affecting our October 2006 estimate of the fair value of our
common stock pursuant to SFAS 123(R) that we had not considered in setting our initial public
offering price in August 2007 include: (1) a discount rate of 19.2% applied in October 2006versus
a rate of 16.0% that we would have applied if we were to perform the same analysis as of the date
of the initial public offering prospectus (the reduced applicable rate resulting primarily from
lower current interest rates in the countries in which we operate and the lower estimated risk
associated with our company given our increased profitability and scale of operations since October
2006), (2) the fact that the October 2006 discounted cash flow model had a starting date nine
months or more prior to the one that would be applied if we were to have performed the same
analysis as of the date of the initial public offering prospectus, which starting dates have a
substantial impact on valuation in a business with significantly increasing profitability like
ours, (3) a 10.0% discount related to the lack of liquidity of our shares of common stock in
October 2006 and (4) an approximately 8.0% discount related to the negative effect of preferred
stock liquidation preferences (upon completion of our initial public offering in August 2007, all
of our outstanding shares of preferred stock were converted into shares of common stock).
Recent accounting pronouncements
Business Combinations
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised
2007), Business Combinations (SFAS 141 R). This Statement replaces SFAS 141, Business
Combinations. This Statement retains the fundamental requirements in Statement 141 that the
acquisition method of accounting (which Statement 141 called the purchase method) be used for all
business combinations. This Statement defines the acquirer as the entity that obtains control of
one or more businesses in the business combination and establishes the acquisition date as the date
that the acquirer achieves control. Statement 141 did not define the acquirer, although it included
guidance on identifying the acquirer, as does this Statement. This Statements scope is broader
than that of Statement 141, which applied only to business combinations in which control was
obtained by transferring consideration.
This Statement applies prospectively to business combinations for which the acquisition date
is on or after the beginning of the first annual reporting period beginning on or after
December 15, 2008. An entity may not apply it before that date.
Noncontrolling Interests in Consolidated Financial Statements
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160,
Noncontrolling Interests in Consolidated Financial Statementsan amendment of ARB No. 51 (SFAS
160). This Statement amends ARB Nº 51 to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies
that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity
that should be reported as equity in the consolidated financial statements. This Statement is
effective for fiscal years, and interim periods within those fiscal years, beginning on or after
December 15, 2008. Earlier adoption is prohibited.
Determination of the useful life of intangible assets
In April 2008, the FASB issued FASB Staff Position 142-3, Determination of the Useful Life of
Intangible (FSP 142-3). Under FSP 142-3, for renewable intangible assets acquired in fiscal
years beginning after December 15, 2008, an entity should consider its own historical experience in
renewing or extending similar arrangements when developing its assumptions about renewals or
extensions used to determine the useful life of an intangible asset; however, these assumptions
should be adjusted for the entity specific factors in paragraph 11 of FAS 142. In the absence of
that experience, an entity should consider the assumptions that market participants would use about
renewals or extensions (consistent with the highest and best use of the asset by market
participants), adjusted for the entity specific factors in paragraph 11 of FAS 142. The Company
will evaluate the impact of FSP 142-3 on its consolidated financial statements.
48
Determination of the fair value of financial assets
In October 2008, the FASB issued FASB Staff Position FAS 157-3, Determining the Fair Value of
a Financial Asset When the Market for That Asset Is Not Active (FSP 157-3). FSP 157-3 clarified
the application of FAS 157. FSP 157-3 demonstrated how the fair value of a financial asset is
determined when the market for that financial asset is inactive. FSP 157-3 was effective upon
issuance, including prior periods for which financial statements had not been issued. The
implementation of this standard did not have an impact on the Companys consolidated financial
statements.
Hierarchy of Generally Accepted Accounting Principles
In May 2008, the FASB issued Statement of Financial Accounting Standards No.162, The
Hierarchy of Generally Accepted Accounting Principles. This Statement identifies the sources of
accounting principles and the framework for selecting the principles to be used in the preparation
of financial statements of nongovernmental entities that are presented in conformity with generally
accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). The Board believes
that the GAAP hierarchy should be directed to entities because it is the entity that is responsible
for selecting accounting principles for financial statements that are presented in conformity with
GAAP. Accordingly, the Board concluded that the GAAP hierarchy should reside in the accounting
literature established by the FASB and is issuing this Statement to achieve that result. This
Statement is effective 60 days following the SECs approval of the Public Company Accounting
Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles.
Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating
Securities
In June 2008, the FASB issued Financial Standard Position No. EITF 03-6-1, Determining
Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. This
FASB Staff Position (FSP) addresses whether instruments granted in share-based payment transactions
are participating securities prior to vesting and, therefore, need to be included in the earnings
allocation in computing earnings per share (EPS) under the two-class method described in paragraphs
60 and 61 of FASB Statement No. 128, Earnings per Share. Issue 03-6 provides guidance on
share-based payment awards that contain a right to receive dividends declared on the common stock
of the issuer that are fully vested. However, in Issue 2(a) the Task Force declined to provide
guidance on share-based payment awards that were not fully vested (that is, awards for which the
requisite service had not yet been rendered). This FSP shall be effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim periods within those years.
All prior-period EPS data presented shall be adjusted retrospectively (including interim financial
statements, summaries of earnings, and selected financial data) to conform with the provisions of
this FSP. Early application is not permitted.
Recent acquisitions
On January 22, 2008, we acquired 100% of the issued and outstanding shares of capital stock of
CMG and its subsidiaries. CMG and its subsidiaries operate an online classified advertisements
platform primarily dedicated to the sale of automobiles at www.tucarro.com in Venezuela, Colombia
and Puerto Rico and real estate at www.tuinmueble.com in Venezuela, Colombia, Panama, the United
States, Costa Rica and the Canary Islands. The purchase price for the shares of CMG and its
subsidiaries was $19 million, subject to certain escrows and a
working capital adjustment. On January 22, 2009, we released the
escrow balance of $1.1 million to the Sellers.
On June 19, 2008, our Argentine subsidiary agreed to participate in a real estate trust for
the construction of an office building located in the City of Buenos Aires, entitling us to 5,340
square meters of office space divided in five floors and 70 parking spaces, where we plan to move
our headquarters and Argentine operation offices. Our total estimated contractual obligation to the
real estate trust is $10,109,398 which will be paid over 20 months. As of December 31, 2008, our
Argentine subsidiary has invested $3,287,823 in the aforementioned trust representing an undivided
interest of 26.3% of the total amount of the real estate trust. This investment is accounted for
under the equity method and it is classified as Long-Term Investments in our consolidated balance
sheet. We expect this investment to decrease our aggregate rental space over time.
On September 5, 2008, we completed, through one of our wholly-owned subsidiary, Hammer.com
LLC, our previously announced acquisition of all of the issued and outstanding shares of capital
stock of DeRemate.com de Argentina S.A., a company organized under the laws of Argentina (DR
Argentina), DeRemate.com Chile S.A., a company organized under the laws of Chile (DR Chile),
Interactivos y Digitales México S.A. de C.V., a company organized under the laws of Mexico (ID
Mexico) and Compañía de Negocios Interactiva de Colombia E.U., a company organized under the laws
of Colombia (CNI Colombia and together with DR Argentina, DR Chile, ID Mexico and CNI Colombia,
the Acquired Entities). We completed the stock purchase from Hispanoamerican Educational
Investments BV, a corporation organized under the laws of Holland (HEI) and S.A. La Nación, a
company organized under the laws of Argentina (SALN and together with HEI, the Sellers). The
Acquired Entities operate online commerce platforms in Argentina (www.deremate.com.ar), Chile
(www.deremate.cl), Mexico (www.dereto.com.mx) and Colombia (www.dereto.com.co).
49
The aggregate purchase price paid by us to the Sellers for the shares of capital stock of the
Acquired Entities was $37.6 million. On the closing date, we paid the Sellers $19.6 million in
cash. In addition, we issued to HEI ten (10) unsecured promissory notes having an aggregate
principal amount of $18.0 million, $8.0 million of which was subject to set-off rights in our favor
for working capital adjustments and liabilities relating to the assumption of certain contracts by
us, $4.0 million of which is subject to set-off rights in our favor for indemnification obligations
of the Sellers and the remaining $6.0 million without set-off rights. Each of the promissory notes
has a one-year term, bears interest at 3.17875% plus 1.5% for the first four months, 2.0% for the
second four months and 2.5% for the third four months and can be prepaid by us without penalty.
Pursuant to the terms of each promissory note, until the principal amount plus interest is repaid,
we may not incur indebtedness in excess of $55.0 million in the aggregate.
We also completed the purchase of certain URLs, domain names, trademarks, databases and
intellectual property rights that are used or useful in connection with the online platforms of the
Acquired Entities. The aggregate purchase price paid by us to Intangible Assets LLC, a Delaware
limited liability company (IA), an affiliate of the Sellers, pursuant to the asset purchase
agreement was $2.4 million in cash. The set-off rights in our favor for indemnification obligations
of the Sellers under the stock purchase agreement also secure the indemnification obligations of IA
under the asset purchase agreement.
On February 12, 2009 we
agreed to modify the maturity conditions of the promissory notes as
follows: (i) $3,000,000 on June 5, 2009 (ii) $9,000,000 on September 5, 2009, (iii) $3,000,000 on December 5, 2009 and,
(iv) $3,000,000 on March 5, 2010. The promissory notes bear interest at 3.17875% plus 1.5% for the first
four months, 2.0% for the second four months and 2.5% for the
remaining period up to its maturity. In addition, on that date we
finished the purchase price allocation period and the Company agreed
with the Sellers a working capital adjustment for $480,912 to be paid
by the Sellers to the Company.
Results of operations
The following table sets forth, for the periods presented, certain data from our consolidated
statement of income. This information should be read in conjunction with our audited consolidated
financial statements and the notes to those statements included elsewhere in this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
52.1 |
|
|
$ |
85.1 |
|
|
$ |
137.0 |
|
Cost of net revenues |
|
|
(12.1 |
) |
|
|
(18.3 |
) |
|
|
(27.5 |
) |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
40.0 |
|
|
|
66.9 |
|
|
|
109.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Product and technology development |
|
|
(3.1 |
) |
|
|
(4.4 |
) |
|
|
(7.3 |
) |
Sales and marketing |
|
|
(23.4 |
) |
|
|
(27.6 |
) |
|
|
(40.0 |
) |
General and administrative |
|
|
(8.2 |
) |
|
|
(13.2 |
) |
|
|
(22.8 |
) |
Compensation Cost related to acquisitions |
|
|
|
|
|
|
|
|
|
|
(1.9 |
) |
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
(34.6 |
) |
|
|
(45.2 |
) |
|
|
(72.0 |
) |
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
5.4 |
|
|
|
21.7 |
|
|
|
37.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income and other financial gains |
|
|
0.5 |
|
|
|
1.6 |
|
|
|
1.8 |
|
Interest expense and other financial charges |
|
|
(1.7 |
) |
|
|
(2.7 |
) |
|
|
(8.5 |
) |
Foreign currency loss |
|
|
(0.4 |
) |
|
|
(3.1 |
) |
|
|
(1.5 |
) |
Other expenses, net |
|
|
(1.5 |
) |
|
|
(3.0 |
) |
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
Net income before income / asset tax expense |
|
|
2.3 |
|
|
|
14.4 |
|
|
|
29.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income / asset tax expense |
|
|
(1.2 |
) |
|
|
(4.7 |
) |
|
|
(10.6 |
) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1.1 |
|
|
$ |
9.7 |
|
|
$ |
18.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of preferred stock |
|
|
(0.5 |
) |
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders |
|
$ |
0.6 |
|
|
$ |
9.4 |
|
|
$ |
18.8 |
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
(% of net revenues) |
|
2006 |
|
|
2007 |
|
|
2008 |
|
Net revenues |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
Cost of net revenues |
|
|
(23.2 |
) |
|
|
(21.7 |
) |
|
|
(20.1 |
) |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
76.8 |
|
|
|
78.3 |
|
|
|
79.9 |
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Product and technology development |
|
|
(5.9 |
) |
|
|
(5.1 |
) |
|
|
(5.3 |
) |
Sales and marketing |
|
|
(44.9 |
) |
|
|
(32.4 |
) |
|
|
(29.2 |
) |
General and administrative |
|
|
(15.7 |
) |
|
|
(15.5 |
) |
|
|
(16.6 |
) |
Compensation Cost related to acquisitions |
|
|
|
|
|
|
|
|
|
|
(1.4 |
) |
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
(66.4 |
) |
|
|
(53.1 |
) |
|
|
(52.5 |
) |
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
10.4 |
|
|
|
25.4 |
|
|
|
27.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income and other financial gains |
|
|
1.0 |
|
|
|
1.9 |
|
|
|
1.3 |
|
Interest expense and other financial charges |
|
|
(3.3 |
) |
|
|
(3.2 |
) |
|
|
(6.2 |
) |
Foreign currency loss |
|
|
(0.8 |
) |
|
|
(3.6 |
) |
|
|
(1.1 |
) |
Other expenses, net |
|
|
(2.8 |
) |
|
|
(3.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before income / asset tax expense |
|
|
4.4 |
|
|
|
16.9 |
|
|
|
21.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income / asset tax expense |
|
|
(2.4 |
) |
|
|
(5.6 |
) |
|
|
(7.8 |
) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
2.1 |
|
|
|
11.4 |
|
|
|
13.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of preferred stock |
|
|
(1.0 |
) |
|
|
(0.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders |
|
|
1.1 |
% |
|
|
11.0 |
% |
|
|
13.7 |
% |
|
|
|
|
|
|
|
|
|
|
Principal trends in results of operations
Growth in net revenues from year to year
Since our inception, we have consistently generated revenue growth from our MercadoLibre
marketplace and from MercadoPago, driven by the strong growth of our key operational metrics. From
2006 to 2007, our gross merchandise volume increased by 40.6%, our successful items increased by
26.8% and MercadoPago total payment volume increased by 77.5%. From 2007 to 2008, those growth
rates were 37.5%, 20.6% and 62.0%, respectively. Our growth in net revenues was 63.5% from 2006 to
2007 and 61.0% from 2007 to 2008. As our business grows, we expect that this year-to-year rate of
increase of net revenues and the related operational metrics, will decline. Additionally, currently
weak global macro-economic growth, coupled with possible devaluations of local currencies in Latin
America versus the U.S. dollar, and high interest rates, could even lead to declining year-to-year
net revenues and related operational metrics.
Diversification of revenues from year to year
We have been growing revenues from our payments business at a faster rate than our revenues
from our marketplace business, and anticipate this trend to continue. For the year 2006, revenues
from our payments business represented 14.1% of net revenues. For the year 2007 and 2008, payments
revenues represented 18.3% and 20.0% of our net revenues, respectively. This trend is sensitive to
macroeconomic fluctuations, primarily in interest rates for consumer credit, and might be
interrupted during periods of higher costs of lending as the one we are currently in.
Gross profit margins
Our business has generated sustained high gross profit margins over time, as defined by total
net revenues minus total cost of net revenues, as a percentage of net revenues. These gross margins
were 76.8% for 2006, 78.5% for 2007 and 79.9% for 2008. Variations in gross profit margins are
mainly attributable to increased economies of scale in customer service, Internet Service Provider
(ISP) connectivity and site operations, improved economic terms obtained from payment processors
as well as increases in interest fees that we charge our MercadoPago buyers, that more than offset
a faster rate of increase of our lower gross profit margin Payments business. We expect that gross
profit margins could decline in the future if cost of net revenues increase as a percentage of net
revenues as our payments business grows faster
relative to our marketplace business, if we cannot sustain the economies of scale that we have
achieved, or if we decrease the interest fees charged.
51
Improving Operating income margins
We have generated economies of scale in operating expenses. For the past three years, our
income from operations as a percentage of net revenues has improved from 10.4% for 2006, to 25.4%
for 2007, and to 27.4% for 2008, mostly as a result of the impact of economies of scale and from
improvements in gross profit margins. We anticipate, however, that as a result of the high
operating income margin achieved in 2008, and as we continue to invest in product development,
sales and marketing, general and administrative expenses and in human resources in order to promote
our services and capture the long term business opportunity offered by the Internet in Latin
America, it will become increasingly difficult to sustain growth in operating income margins, and
at some point in the future we could experience decreasing operating income margins.
Growth in Net Income
We have generated growth in our net income as a consequence of the above mentioned trends. For
2006 net income was $1.1 million. In 2007 our net income grew by 804.1% to $9.7 million. For 2008
our net income grew 94.1% to $18.8 million. However, as mentioned above, if any of these trends
were to revert, our net income growth could be affected, or could even become negative on a
year-to-year basis.
Year ended December 31, 2008 compared to year ended December 31, 2007
Net revenues
Net revenues were $137.0 million for 2008, an increase of $51.9 million, or 61.0%, from net
revenues of $85.1 million for 2007. This increase was attributable to a 57.6% increase in revenues
derived from our MercadoLibre marketplace, from $69.5 million for 2007 to $109.6 million for 2008,
and to a 75.8% increase in revenues derived from MercadoPago, from $15.6 million to $27.4 million.
Growth in the MercadoLibre marketplace revenues from 2007 to 2008 resulted principally from a
37.5% increase in the gross merchandise volume transacted through our platform and from an increase
in our marketplace take rate, defined as marketplace revenues as a percentage of gross merchandise volume, from
4.6% to 5.3%. In the same periods, our payments take rate, defined as payments revenues as a percentage of
total payment volume, increased from 9.9% to 10.7% (see Description of Line items: Net Revenue
section for an explanation on how revenues are recorded for MercadoPago installments).
The growth in MercadoPago revenues from 2007 to 2008 resulted principally from a 62.0%
increase in the total payments volume completed on our MercadoPago payments platform. The use of
MercadoPago increased to 12.3% of our gross merchandise volume for 2008 from 10.5% for 2007.
On a segment basis, for the year ended December 31, 2008 net revenue increased by $51.9
million compared to the same period in 2007, primarily due to increases of $ 14.9 million, or
210.1% in our marketplace in Venezuela, mainly due to the CMG acquisition, $12.9 million, or 34.5%
in our Marketplace segment in Brazil, $6.9 million, or 60.9% in our Marketplace in Argentina, $2.8
million, or 29.6% in our Marketplace in Mexico, and $2.5 million or 63.3% from our Marketplace in
all other countries and $11.8 million, or 75.8% from our MercadoPago payments platform.
Based on geography, net revenue increase, by country, was primarily a result of an increase of
$23.4 million, or 46.6% in net revenues in Brazil, an increase of $15.4 million, or 395.5% in net
revenues in Venezuela, mainly due to the CMG acquisition, an increase of $7.3 million, or 57.9% in
Argentina and $3.2 million, or 29.9% in Mexico. All other countries combined grew by $2.5 million
or 3.0% for 2008 as compared to 2007.
Cost of net revenues
Cost of net revenues was $27.5 million for 2008, an increase of $9.3 million, or 50.7%, from
cost of net revenues of $18.3 million for 2007. Cost of net revenues represented 20.1% of net
revenues for 2008 and 21.7% of net revenues for 2007.
This increase was primarily attributable to additional billing and collections costs, sales
taxes, and customer support expenditures. The billing and collections fees increased by $3.9
million, or 56.7% for 2008 compared to 2007. Billing and collections charges tend to increase at
about the same pace as net revenues, since most of the associated costs grow with our transaction
volume. Taxes on our net revenues increased by $3.1 million, or 61.5%. These taxes represented 6.0%
of net revenues in 2008. We also increased expenditures in our in-house customer support operations
in the amount of $1.6 million, an increase of 36.0% compared to 2007, as we invested in improved
service, initiatives to combat fraud, illegal items and fee evasion, and increases in compensation
costs. The cost of net revenues margin decrease 1.4% from 21.5% in 2007 to 20.1% in 2008 due to
increased economies of scale in customer service, Internet Service Provider (ISP) connectivity
and site operations, as well as improved economic terms obtained from payment processors.
52
Product and technology development
Product and technology development expenses were $7.3 million for 2008, an increase of $2.9
million, or 67.2%, from $4.4 million for 2007. Product and technology development expenses were
5.3% of net revenues for 2008 and 5.1% for 2007.
The growth in product and technology development expenses was primarily attributable to an
increase in compensation costs in the amount of $2.0million, an increase of 109.1% from 2007. These
added compensation expenses, were primarily related to the addition of engineers, in both our
Buenos Aires and San Luis development centers, to implement planned upgrades and new features to
our platform and to a lesser extent related to increases in salaries, as we continue to invest in
top quality talent to develop enhancements and new features across our commerce platforms. We
believe product development is one of our key competitive advantages and intend to continue to
invest in additional engineering personnel to meet the increasingly sophisticated product
expectations of our customer base.
Product and technology development expenses also grew as a consequence of an increase in
maintenance expenses of $ 0.4 million or 72.5% compared to 2007 and an increase in depreciation and
amortization expenses related to product and technology development of $0.4 million, or 18.9%
compared to 2007.
Sales and marketing
Sales and marketing expenses were $ 40.0 million for 2008, an increase of $12.4 million, or
44.8%, from $27.6 million for 2007. Sales and marketing expenses represented 29.2% of our net
revenues for 2008 and 32.4% of net revenues for 2007.
The growth in sales and marketing expenses resulted primarily from our increased expenditures
on online advertising programs in the amount of $5.3 million, an increase of 35.1% from 2007.
Online advertising fees represented 14.8% of our net revenues in 2008 down from 17.7% for the same
period in 2007. In addition, these expenses also grew due to an increase in compensation costs in
the amount of $3.1 million, or 97.1%, driven by employees hired, the incorporation of CMG
employees, and higher salaries to retain talent. Bad debt charges for the year ended December 31,
2008, represented 6.3% of net revenues, versus 7.3% for the same period in 2007.
General and administrative
Our general and administrative expenses were $ 22.8 million for 2008, an increase of $9.5
million, or 72.1%, from general and administrative expenses of $13.2 million for 2007. As a
percentage of net revenues, our general and administrative expenses were 16.6% for 2008 and 15.5%
for 2007.
The primary reason for the increase in general and administrative expenses in 2008 was a $4.5
million, or 74.7%, increase in compensation costs. These added compensation costs primarily went
into hiring additional employees to support our growing business and public company requirements,
increases in salaries to retain talent, long term retention plan compensation costs, compensation
for outside directors and the incorporation of CMG employees. Additionally, outside service fees
grew $2.8 million, or 75.6%, for the year ended December 31, 2008, due to increased legal expenses
and other costs associated with being a publicly traded company, and expenses related to the
follow-on offering that was withdrawn in March, 2008.
Compensation Cost related to acquisitions
As part of the $19.0 million acquisition of CMG, which closed in the first quarter of 2008, $2.0
million of the purchase price was placed into an escrow account for twelve months in order to
secure the obligations of the shareholders that remained as managers. On June 27, 2008, we released
to the former shareholders $ 1.9 million of the total Management Escrow Agreement, in exchange for
a discount. These compensation cost were fully accrued in the first half of 2008. The compensation
expense was recorded as operating expenses, instead of considering them part of the purchase price,
following EITF 95-8 Accounting for Contingent Consideration Paid to the Shareholders of an
Acquired Enterprise in a Purchase Business Combination (See Note 6 to our audited consolidated
financial statements included in this report). There is no expense related to compensation cost in
the second half of 2008.
Other income (expenses)
Our other expenses were $8.1 million for 2008, an increase of $0.9 million from other expenses
of $7.2 million for 2007. The increase during the year ended December 31, 2008 was primarily a
result of an increase in interest expense and other financial charges from $2.7 million in 2007 to
$8.5 million in 2008. The increase of interest expense and other financial charges was mainly
attributable to an increase of $6.4 million in interest expenses from $0.8 million for 2007 to $7.2
million for 2008, as a result of financing incurred to fund working capital needs in our Payments
operations in Brazil and $0.3 related to the seller financing of the DeRemate acquisition. In the
fourth quarter of 2008, we decided to sell all the credit card coupons at that time related to
Funds Receivable from Customers in our MercadoPago business, for $51.2 million, which resulted in
our incurrence of an expense of $4.6 million. As of December 31, 2008, total interest
expense relating to the working capital requirements for our MercadoPago operations have been
recorded as interest expense and not as cost of net revenues. In the year ended December 31, 2007,
interest expenses of $0.7 million, have been reclassified for comparison purposes to current years
presentation.
53
The increase in interest expenses was partially offset by a $1.6 million decrease in foreign
currency losses from $3.1 million in 2007, to $1.5 million in 2008. This decrease was primarily due
to a foreign currency gain of $4.2 million recorded in the fourth quarter of 2008, which was mainly
a result of a positive impact of the net assets denominated in U.S. dollars position of our
Venezuelan subsidiaries. Venezuela has a dual exchange rate system that comprises an official
exchange rate which was $2.15 Bolivares Fuertes per U.S. dollar at December 31, 2008, and a
parallel exchange rate that was $5.4 Bolivares Fuertes per U.S. dollar at December 31, 2008.
Based on a change in the accounting standards to International Financial Reporting Standard
(IFRS) implemented by Venezuela in 2008, which establishes that the parallel exchange rate should
be used to account for assets and liabilities in U.S. dollars in the statutory local Financial
Statements, we will be recording positive retained earnings in our two main subsidiaries in
Venezuela, MercadoLibre Venezuela S.A. and Grupo Veneclasificados C.A., as of December 31, 2008. We
anticipated that this positive result will allow us to access U.S. dollars at the official exchange
rate, after a process that includes obtaining approval from the Venezuelan Commission of Exchange
Administration (CADIVI), to distribute dividends. If the CADIVI approves the transaction, the
Venezuelan subsidiaries could then sell U.S. dollars held in the United States at the parallel
exchange rate, buy Bolivares Fuertes, and then distribute dividends buying the U.S. dollars at
the official exchange rate. Therefore, based on paragraph 27a of
FAS 52 Foreign Currency Translation, the Venezuelan
subsidiaries have re-measured the asset and liabilities in
U.S. dollar balances outstanding at the December 31, 2008
parallel exchange rate. Further, in accordance with
paragraph 27b of FAS 52, the Venezuelan subsidiaries
assets, liabilities, income and expense accounts were translated at
the rate applicable for dividend remittances, which at
December 31, 2008 is the official exchange rate. According to
the International Practices Task Force Joint Meeting with SEC Staff
of June 2, 2008, the existence of a parallel market does not
constitute unusual circumstances potentially justifying the use of an
exchange rate other than the official rate for purposes of foreign
currency translation. Before the fourth quarter of 2008, this asset position ,which is
mainly comprised of cash and short-term investments held in US bank accounts, had been historically
re-measured at the official exchange rate of 2.15 Bolivares Fuertes per US dollar, because (a)
the subsidiaries used the US bank account balances to pay foreign suppliers, (b) there was no
management intention to return those funds to Venezuela and (c) MercadoLibre Venezuela had no
accumulated profits to make a dividend distribution for statutory
purposes. That re-measurement of the net asset position
contributed a positive $5.0 million foreign currency gain in the fourth quarter of 2008 in our
Consolidated Statements of Income and $3.6 million for the full year. The after tax positive effect
on Net Income of the re-measurement was $3.3 million in the fourth quarter 2008, and $ 2.4 million
for the full year. This re-measurement was included as non-current other assets for $7.8 million in
our Consolidated Balance Sheets. The re-measurement of the liabilities amounting to $4.2 million was included in Accounts Payable and accrued expenses. We could have to record foreign currency losses in the future to
reverse these gains, or for other factors. Given the risks in Venezuela (see Risk Factors We may
incur losses in the event we are unable to distribute dividends from our Venezuelan subsidiaries at
the official exchange rate, or as a result of changes in the political, economic or regulatory
environment in Venezuela, and Political and economic conditions in Venezuela may have an
adverse impact on our operations) Additionally, we had foreign currency losses of $0.8 million in
the fourth quarter of 2008, and of $5.1 million in for the full year, in all the other countries
combined.
In addition, we had no impact from the accrual of expenses related to the fair value of
warrants in 2008, versus $3.0 million of that were recorded for the year ended December 31, 2007,
and we had a $0.2 million increase of interest income and other financial charges, that included
accrued gains related to changes in the fair value of put options, from $1.6 million in 2007 to
$1.8 million in 2008.
Income and asset tax
Our reported income and asset tax expense for 2008 was $10.6 million compared to a reported
expense of $4.7 million for 2007. Our blended tax rate as a percentage of income before income and
asset tax was 36.1% for 2008 and 32.8% for 2007. The increase of our blended tax rate is
consequence of certain factors including the impact of a new $ 0.8 million Mexican tax called
Impuesto Empresarial a Tasa Única (IETU), which affects our Mexican operations, the impact of
$0.5 million of foreign exchange losses in Venezuela that were not deductible, and by the impact of
$ 1.9 million of accrued compensation expenses because this charge reduced pre-tax income, but the
related tax credit had a full valuation allowance. With regards to these compensation expenses, we
followed the guidance in EITF 95-8 Accounting for Contingent Consideration Paid to the
Shareholders of an Acquired Enterprise in a Purchase Business Combination (See Compensation Cost
related to acquisitions above). In addition, the 2007 blended tax rate was reduced due to a
reverse of the valuation allowance related to our Mexican operations for $2.0 millions. Our blended
tax rate in 2007, without including the reverse of the Mexican valuation allowance, would have been
44.6%.
As a result of the effect of permanent differences, our effective tax rate was approximately
27.7% for 2008 and 33.2% for 2007. The variation in the effective tax rate for these periods
reflects the taxes payable plus the change during the period in our deferred tax assets and
liabilities. The effective income tax rate excludes the effects of the deferred income tax, and of
the above mentioned Mexican tax.
Year ended December 31, 2007 compared to year ended December 31, 2006
Net revenues
Net revenues were $85.1 million for 2007, an increase of $33.1 million, or 63.5%, from net
revenues of $52.1 million for 2006. This increase was attributable to a 55.4% increase in revenues
derived from our MercadoLibre marketplace, from $44.7 million for 2006 to $69.5 million for 2007,
and to a 112.9% increase in revenues derived from MercadoPago, from $7.3 million to $ 15.6 million.
Growth in the MercadoLibre marketplace revenues resulted principally from a 40.6% increase in the
gross merchandise volume transacted through our platform. The growth in MercadoPago revenues
resulted principally from a 77.5% increase in the total payments completed on our MercadoPago
payments platform. The use of MercadoPago increased to 10.5% of our gross merchandise volume for
2007 from 8.3% for 2006.
54
The $33.1 million growth in net revenues for 2007, by country, was primarily a result of an
increase of $19.5 million, or 63.3% in net revenues in Brazil, of $3.5 million, or 49.2% in Mexico,
and $4.7 million, or 60.5% in Argentina. All other countries combined grew by $5.3 million or 84.6%
for 2007 as compared to 2006.
Cost of net revenues
Cost of net revenues was $18.3 million for 2007, an increase of $6.2 million, or 51.2%, from
cost of net revenues of $12.1 million for 2006. Cost of net revenues represented 21.5% of net
revenues for 2007 and 23.2% of net revenues for 2006.
This increase was primarily attributable to additional billing and collections costs, sales
taxes, and customer support expenditures. The billing and collections fees increased by $2.1
million, or 43.8% for 2007 compared to 2006. Billing and collections charges tend to increase at
about the same pace as net revenues, since most of the associated costs grow with our transaction
volume. Taxes on our net revenues increased by $2.1 million, or 73.1%. These taxes represented 5.9%
of net revenues in 2007. We also increased expenditures in our in-house customer support operations
in the amount of $1.5 million, an increase of 47.3% compared to 2006, as we invested in improved
service, initiatives to combat fraud, illegal items and fee evasion, and upgraded the pay scale of
customer service personnel in order to retain and attract top-level customer service
representatives.
Product and technology development
Product and technology development expenses were $ 4.4 million for 2007, an increase of $1.3
million, or 42.5%, from $3.1 million for 2006. Product and technology development expenses were
5.1% of net revenues for 2007 and 5.9% for 2006.
The growth in product and technology development expenses was primarily attributable to an
increase in compensation costs in the amount of $0.7 million, 66.9% higher than 2006, for
additional engineers, in both our Buenos Aires and San Luis development centers, to implement
planned upgrades and new features to our platform, as well as increased compensation to retain
staff, an increase in maintenance expenses of $ 0.4 million or 140.9% compared to 2006 and an
increase in depreciation and amortization expenses related to product and technology development of
$0.2 million, or 12.4% compared to 2006.
Sales and marketing
Sales and marketing expenses were $ 27.6 million for 2007, an increase of $4.2 million, or
18.2%, from $23.4 million for 2006. Sales and marketing expenses represented 32.4% of our net
revenues for 2007 and 44.9% of net revenues for 2006.
The growth in sales and marketing expenses resulted primarily from our increased expenditures
in online advertising programs in the amount of $3.2 million, a 27.2% increase over 2006. Online
advertising represented 17.7% of our net revenues in 2007. In addition, these expenses also grew
due to an increase in compensation costs in the amount of $1.4 million, or 54.1%, driven by
additional headcount, higher salaries to retain talent and options expenses.
General and administrative
Our general and administrative expenses were $ 13.2 million for 2007, an increase of $5.1
million, or 62.2%, from general and administrative expenses of $8.2 million for 2006. As a
percentage of net revenues, our general and administrative expenses were 15.5% for 2007 and 15.7%
for 2006. The major components that drove our growth over the comparable period were $4.4 million
in increased compensation costs, a 111.8% rate of growth over 2006, attributable to additional
employees to support our growing business and public company requirements, higher salaries to
retain talent, and fees and expenses for legal, audit and other professional services that grew
$1.8 million, or 93.1%, in part due to additional costs incurred as a public company.
Other income (expenses)
Our other expenses were $7.2 million for 2007, an increase of $4.1 million from other expenses
of $3.1 million for 2006. This increase in other expenses was primarily attributable to $3.1
million in foreign currency loss, an increase of $2.7 million from $0.4 million for the same period
in 2006 primarily due to the costs of transferring cash from Venezuela to the United States, and
$3.0 million in expenses accrued to account for the increase in the fair value of warrants, up
136.9% from $1.3 million for the same period in 2006. In addition these expenses also grew due to
an increase in interest expense and other financial charges from $1.7 million in 2006 to $2.7
million in 2007. These interest expenses included $1.1 million, which was obtained to fund payments
working capital needs in Brazil. The related liability was structured as a loan backed with credit
card receivables, and was therefore recorded as interest expense and not as cost of net revenues.
Other expenses in 2007 were partially offset by $1.6 million in interest income, an increase
of $1.1 million, up 209.2% from $0.5 million in 2006.
Income and asset tax
Our reported income and asset tax expense for 2007 was $4.7 million compared to a reported
expense of $1.2 million for 2006. Our blended tax rate as a percentage of income before income and
asset tax was 32.8% for 2007 and 38.0% for 2006. However, as a result of the effect of permanent
differences, our effective tax rate was approximately 33.2% for 2007 and 53.7% for 2006. The
variation in the effective tax
rate for these periods reflects the taxes payable plus the change during the period in our
deferred tax assets and liabilities. During 2007, we recognized a deferred income tax benefit of
$0.1 million, and of $0.7 million during 2006, mainly as a result of the utility of the loss
carryforwards.
55
Factors affecting results of operations and financial condition
Our prospects must be considered in light of the risks, uncertainties, expenses and
difficulties frequently encountered by companies in their early stages of development, particularly
companies in new and rapidly evolving markets such as online commerce and emerging markets like
Latin America. To address these risks and uncertainties, we must, among other things, maintain and
increase the number of our confirmed registered users, items listed on our service and completed
transactions, maintain and enhance our brand, implement and execute our business and marketing
strategy successfully, continue to develop and upgrade our technology and information-processing
systems, continue to enhance the MercadoLibre and MercadoPago services to meet the needs of a
changing market, provide superior customer service, respond to competitive developments, and
attract, integrate, retain and motivate qualified personnel. Accordingly, we intend to invest
heavily in marketing and promotion, site development, technology and operating infrastructure
development and personnel. We cannot, however, assure you that we will be successful in
accomplishing all of these goals, and the failure to do so could have a material adverse effect on
our business, results of operations and financial condition.
Although we have experienced significant revenue growth and significant growth in the number
of our confirmed registered users and items listed by our users in recent periods, such growth
rates are not sustainable and will decrease in the future. In view of the rapidly evolving nature
of our business and our limited operating history, we believe that period-to-period comparisons of
our operating results are not necessarily meaningful and should not be relied upon as indications
of future performance.
Our operating results have varied on an annual basis during our short operating history and
may fluctuate significantly as a result of a variety of factors, many of which are outside our
control. The following list includes factors that may affect our operating results:
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|
|
continued growth of online commerce and Internet usage in Latin America; |
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|
|
|
our ability to expand our operations and adapt to rapidly changing technologies; |
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|
|
|
governmental regulation in the countries where we operate, including exchange controls; |
|
|
|
|
litigation, legal liability and intellectual property rights enforcement; |
|
|
|
|
system interruptions or failures; |
|
|
|
|
our ability to attract and retain qualified personnel; |
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|
|
the announcement or introduction of new sites, services and products by us or our competitors, and price competition; |
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Reliance on third-party service providers; |
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|
|
increasing consumer confidence in and acceptance of the Internet and
other online services for commerce and, in particular, the trading of
products such as those listed on our web site; |
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Security breaches and consumer confidence in the security of transactions over the Internet; |
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consumer trends and popularity of certain categories of items; |
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our ability to attract new customers, retain existing customers and increase revenues; |
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|
|
|
seasonal fluctuations; and |
|
|
|
|
political, social and economic conditions in Latin America,
particularly Venezuela, including foreign exchange rate fluctuations. |
Also see Item 1A Risk Factors for a discussion of factors that could adversely affect our
results of operations.
Liquidity and capital resources
Our main cash requirement historically has been working capital to fund MercadoPago financing
operation in Brazil. We also require cash for capital expenditures relating to technology
infrastructure, software applications and office space. In addition,
we require cash to repay the promissory notes related to DeRemate
Operations acquisition. Since our inception, we have funded our
operations primarily through contributions received from our stockholders obtained during the first
two years of operations, from funds raised during our initial public offering, and from cash
generated from our operations. We have funded MercadoPago by discounting credit card receivables,
with loans backed with credit card receivables, selling credit cards
coupons and through cash advances derived from our
MercadoLibre marketplace business.
At December 31, 2008, our principal source of liquidity was $49.1 million of cash and cash
equivalents and short-term investments, in addition to $ 9.2 million of long-term investments,
provided by cash generated from operations as well as the net proceeds of our initial public
offering.
56
The significant components of our working capital are cash and cash equivalents, short-term
investments, accounts receivable, accounts payable and accrued expenses, funds receivable from and
payable to MercadoPago users, and short-term debt. As MercadoPago grows as a percentage of total
revenues we anticipate increased working capital needs. Historically, we have funded these needs
through a combination of sale of credit card coupons to financial institutions, loans
backed by credit card receivables and cash advances from our marketplace business, and
currently we are relying mostly on transferring credit card receivables to financial institutions.
The following table presents our cash flows from operating activities, investing activities
and financing activities for the three years ended December 31, 2006, 2007 and 2008:
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|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
(In millions) |
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
6.2 |
|
|
$ |
6.8 |
|
|
$ |
54.5 |
|
Net cash (used in) investing activities |
|
|
(5.2 |
) |
|
|
(48.6 |
) |
|
|
(37.6 |
) |
Net cash (used in) provided by financing activities |
|
|
(3.0 |
) |
|
|
50.2 |
|
|
|
(11.6 |
) |
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash and cash equivalents |
|
|
0.2 |
|
|
|
0.1 |
|
|
|
(3.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (decrease) increase in cash and cash equivalents |
|
$ |
(1.8 |
) |
|
$ |
8.5 |
|
|
$ |
1.8 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
Net cash provided by operating activities consisted of net income adjusted for certain
non-cash items, and the effect of changes in working capital and other activities. Our net cash
provided by operating activities was $54.5 million for 2008 compared to $6.8 million for 2007, an
increase of $47.7 million or 706.6%. This improvement was primarily a result of a decrease in funds
receivable from customers of $42.1 million from $(15.5) million in 2007 to $26.6 million in 2008,
mainly due to sales of credit card receivables to financial institutions in order to finance our
MercadoPago business, whereas in the past we had sold only a portion of the credit card receivables
we held. Starting in the fourth quarter of 2008, we transferred
credit card receivables to financial institutions accounted for as a
sale of financial assets under FAS 140 Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities a replacement of FASB Statement 125, at that
time related to Funds Receivable from Customers in our
MercadoPago business. For that reason as of December 31, 2008 we
no longer recognized the credit card portfolio as assets and no
liability was recorded. This sale of
receivables generated significant additional cash provided by operating activities. Additionally,
net cash provided by operating activities was impacted by an increase in net income of $9.1 million
to $18.8 million for 2008, from $ 9.7 million in 2007. Net cash provided by operating activities
also increased as a consequence of a $4.8 million decreases in accounts receivable, and $6.3
million increase in accounts payable.
These increases in cash provided by operations were partially offset by a decrease of $3.1
million in funds payable to customers related to our Payments segment, from $5.4 million for the
year ended December 31, 2007 to $2.3 million for the same period in 2008. Also affecting cash
provided by operations were the decrease in non-cash charges to earnings such as foreign currency
gains of $7.8 million related to our Venezuelan cash and cash equivalents and investments (See
ITEM 7.- MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -
Year ended December 31, 2008 compared to year ended December 31, 2007 Other income (expenses),
and note 5 Other Non Current Assets to our consolidated financial statements for more
detail),changes in fair value of warrants during the year ended December 31, 2007 of $3.0 million,
and the increase in other liabilities of $1.6 million.
For 2007, our net cash provided by operating activities was $6.8 million for 2007 compared to
$6.2 million for 2006, an increase of $0.6 million or 9.8%. This improvement was primarily a result
of an increase in net income of $8.6 million to $9.7 million for 2007, from $1.1 million in 2006,
and non-cash charges to earnings such as depreciation and amortization on our assets for $2.3
million, and changes in the fair value of warrants for $3.0 million. Cash provided by working
capital in our Marketplace segment was more than offset by cash used in working capital in our
Payments segment. In 2007 we began to finance Payments funds payable with loans backed with
Payments credit card receivables, which are recorded as financial debt, and not as a reduction in
the receivable balance, and therefore the cash inflow is recorded as cash flow from financing
activities in the statements of cash flows, and not as cash flow from operating activities.
For 2006, our net cash provided by operating activities was $6.2 million. The annual cash
flow provided by operating activities was greater than net income for the year, due primarily to
non-cash charges to earnings such as depreciation and amortization on our assets, changes in fair
value of warrants, deferred income taxes and realized gains on investments.
57
Net cash used in investing activities
Net cash used in investing activities was $37.6 million compared to $48.6 million for 2007 and
$5.2 million for 2006. For 2008, net cash used in investing activities resulted mainly from
purchases of investments in the amount of $110.1 million which includes $3.3 million for our real
estate investment in the Arias trust and payments made for the CMG and DeRemate acquisitions, net
of cash acquired, for $ 39.2 million.
The purchase of DeRemate, includes the fair value of the assets and liabilities acquired of
$(0.8) million, customer lists and non-compete agreement net of tax of $1.2 million and goodwill of
$39.6 million and the purchase of 100% of the issued and outstanding shares of capital stock of CMG
which includes the fair value of the assets and liabilities acquired of $0.7 million, trademarks of
$5.6 million and goodwill of $13.0 million. The CMG acquisition related cash outflow on our
statement of cash flows amounted to $ 16.8 million which is net of $0.5 million of cash acquired
and excludes $ 1.9 million recorded as compensation expense and not as part of the purchase price,
following EITF 95-8 (See Note 6 to our condensed consolidated financial statements and General and
Administrative above). The DeRemate acquisition related outflow on our statement of cash flows
does not include $17.5 million of promissory notes issued to the seller net of certain working
capital adjustments. Additionally, net cash used in investing activities includes $4.9 million of
capital expenditures related to technological equipment, software licenses and to a lesser degree
office equipment.
During the year ended December 31, 2008, the use of cash for investment activities was
partially offset by our receipt of $116.6 million of cash proceeds from the sale and maturity of
investments mainly due to sale of investments to pay acquisitions and as part of our financial
strategy. For 2007, net cash used in investing activities was $48.6 compared to $5.2 million for
2006. Net cash used in investing activities resulted primarily from purchases of investment
grade-listed debt securities with a portion of the proceeds from our initial public offering in
August 2007, as part of our financial investment strategy. Purchases of investments accounted for
$75.3 million of cash used in investing activities. This use of cash in investment activities was
partially offset by proceeds from the sale of investments (primarily debt securities and
certificates of deposit) of $29.8 million. For 2006, net cash provided by investing activities
resulted primarily from purchases of investments with our cash and cash equivalents, partially
offset for sales of those investments, as part of our financial investment strategy.
Net cash provided by (used in) financing activities
Net cash used in financing activities was $(11.6) million for 2008 compared to net cash
provided by financing activities of $50.2 million for 2007 and net cash provided by financing
activities of $(3.0) million for 2006. During 2008, the main factor that contributed to our use of
cash in financing activities was a reduction in our financing from loans backed by Payments credit
card receivables of $9.1 million, and $2.6 million used to repurchase shares of our common stock
(See note 18 to our consolidated financial statements). During 2008, we transferred credit card
receivables to financial institutions accounted for as a sale of financial assets under FAS 140
Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities a
replacement of FASB Statement 125. For that reason as of December 31, 2008 we no longer recognized
the credit card portfolio as assets and no liability was recorded. The loans backed by credit card
receivables used in 2007 were recorded keeping the credit card portfolio as an account receivable
and a debt for the commitments with banks. The difference in the accounting treatment generates the
decrease in net cash provided by (used in) financing activities.
The promissory notes issued to the seller related to the acquisition of DeRemate net of
certain working capital adjustments for $17.5 million was considered as a non-cash transaction and
for that reason was not included as net cash provided by financing activities.
In the event that we decide to pursue strategic acquisitions in the future, we may fund them
with available cash, third party debt financing, or by raising equity capital, as market conditions
allow.
For 2007, the increase in net cash provided by financing activities was mainly attributable to
the issuance of common stock from our initial public offering which provided cash in the amount of
$49.6 million, the increase in short term debt of $8.9 million to finance our Payments segment,
consisting of loans backed with Payments credit card receivables, as described above in the section
Net cash provided by operating activities, offset by the $9.0 million of cash used to pay the
balance of the loan from eBay. Net cash used in financing activities for 2006 was attributable to
a partial prepayment of principal of the loan from eBay.
Debt
In connection with the DeRemate acquisition, on September 5, 2008, we issued to the Seller
ten unsecured promissory notes in the aggregate principal amount of $18 million. These promissory
notes mature as follows: (i) 3,000,000 on June 5, 2009 (ii) 9,000,000 on September 5, 2009, (iii)
3,000,000 on December 5, 2009 and, (iv) 3,000,000 on March 5, 2010. The promissory notes bear
interest at 3.17875% plus 1.5% for the first four months, 2.0% for the second four months and 2.5%
for the remaining period up to its maturity and can be prepaid by the Company without penalty. (See
Recent Acquisitions section of this report). As of December 31, 2008 the balance of those promissory notes was disclosed in our balance sheet net of
certain working capital adjustments for $17.5 million as
principal and $0.3 million as interest accrued. Pursuant to the terms of the notes, we have
agreed that, for as long as the notes are outstanding, we will not incur indebtedness, on a
consolidated basis, in excess of $55 million (including the debt incurred under the notes), except
for intercompany debt or guarantees and guarantees provided by us or our affiliates under any
discount of funds receivable from customers of MercadoPago.
58
In 2007, we began to finance Payments funds payable in part with loans backed by Payments
credit card receivables, which were recorded as financial debt, and not as a reduction in the
receivable balance. As of December 31, 2007, we had $9.7 million in loans of this type.
As a result, the cash inflow was recorded as cash flow from financing activities in the
statements of cash flows, and not as cash flow from operating activities. As discussed in Net cash
provided by (used in) financing activities section, during 2008, we have been primarily
transferring credit card receivables to financial institutions, accounted for as a sale of
financial assets under FAS 140 Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities a replacement of FASB Statement 125 and for that reason no
liability has been recorded as of December 31, 2008
In 2005, we financed the acquisition of DeRemate with a loan from eBay, one of our
stockholders, in the amount of $12.0 million, secured by our assets, including equity interests we
have acquired in DeRemate. The loan bore an interest rate of 7% per year, payable in November of
each year. The loan matured on the issuance of securities upon the closing of our initial public
offering. At December 31, 2007, no principal or interest on the loan remained outstanding as we
repaid the loan in full with a portion of the net proceeds of our initial public offering in August
2007.
Capital expenditures
Our capital expenditures increased by $58.6 million in 2008 as compared to 2007, to $61.7
million for 2008 as compared to $3.1 million for 2007. This increase was mainly due to $39.2
million recorded as capital expenditures in connection with our CMG and DeRemate acquisitions (net
of cash acquired), as described above in the sections Liquidity and Capital resources and Net
cash used in investing activities and $17.5 million related to the DeRemate seller financing net
of certain working capital adjustments. Additionally, in Property and Equipment we primarily
recorded purchases of hardware and software licenses necessary to maintain and update the
technology of our platform, and to a lesser degree cost of computer software developed internally,
office equipment and investing in new office space. These expenditures were $4.9 million, $
3.1 million and $2.4 million for the years ended December 31, 2008, 2007 and 2006 respectively. We
anticipate continued investments in capital expenditures in the future as we strive to maintain our
position in the Latin American e-commerce market. In 2008, our Argentine subsidiary invested in a
real estate trust. The investment in this trust represents a beneficial ownership interest in 5,340
square meters divided in five floors of an office building and 70 parking spots under construction
in the City of Buenos Aires, Argentina, where we expect to relocate our office headquarters upon
completion of the building. As of December 31, 2008, the Argentine subsidiary paid $3.3 million
into the trust. For U.S. GAAP purposes the investment was recorded as a long term investment
instead of as Property and Equipment. We believe that our existing cash and cash equivalents,
including the net proceeds from our initial public offering, selling credit card receivables
and cash generated from operations will be sufficient to fund our operating activities, property
and equipment expenditures and to repay the promissory notes related
to the DeRemate Operations acquisition and other obligations going forward.
Off-balance sheet arrangements
At December 31, 2008, we did not have any off-balance sheet arrangements or relationships with
unconsolidated entities for the purpose of facilitating contractually narrow or limited purposes.
Contractual obligations
We have certain fixed contractual obligations and commitments that include future estimated
payments. Changes in our business needs, cancellation provisions and other factors may result in
actual payments differing materially from the estimates. We cannot provide certainty regarding the
timing and amount of payments. Below is a summary of the most significant assumptions used in our
determination of amounts presented in the table. Contractual obligations at December 31, 2008 are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment due by period |
|
|
|
|
|
|
|
Less than |
|
|
1 to 3 |
|
|
3 to 5 |
|
|
More than |
|
(in millions) |
|
Total |
|
|
1 year |
|
|
years |
|
|
years |
|
|
5 years |
|
Operating lease obligations (1) |
|
$ |
3.2 |
|
|
$ |
1.5 |
|
|
$ |
1.5 |
|
|
$ |
0.2 |
|
|
$ |
|
|
Purchase obligations (2) |
|
|
8.2 |
|
|
|
6.5 |
|
|
|
1.7 |
|
|
|
|
|
|
|
|
|
Long Term Obligations - Principal (3) |
|
|
18.0 |
|
|
|
15.0 |
|
|
|
3.0 |
|
|
|
|
|
|
|
|
|
Long Term Obligations - Interest (3) |
|
|
1.0 |
|
|
|
0.8 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
30.4 |
|
|
$ |
23.9 |
|
|
$ |
6.3 |
|
|
$ |
0.2 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes leases of office space. |
|
(2) |
|
On June 19, 2008, our Argentine subsidiary offered to participate in a
real estate trust, which investment represents a beneficial ownership
interest in 5,340 square meters divided in five floors of an office
building and 70 parking spots under construction in the City of Buenos
Aires, Argentina. We expect to relocate our office headquarters to
this newly acquired office space upon completion of the building,
which we expect to occur in the second quarter of 2010. Under the
terms of our commitments, the total estimated contractual obligation
with the Trust is $10.1 million which shall be paid within 20 months.
As of December 31, 2008, the Argentine subsidiary has invested $3.3
million in the aforementioned trust. Due to the impact of the
Argentine inflation, future payments could differ significantly from
our estimates. Certain of our officers and former officers also
entered into an investment in a portion of the trust, which investment
represents a beneficial ownership interest in a separate floor of the
same building. We do not intend to occupy the space to be owned by
this group. |
|
(3) |
|
Due to DeRemate acquisition, on September 5, 2008, the Company issued
to the Sellers ten unsecured promissory notes having an aggregate
principal amount of $18,000,000. These promissory notes mature as
follows: (i) 3,000,000 on June 5, 2009 (ii) 9,000,000 on September 5,
2009, (iii) 3,000,000 on December 5, 2009 and, (iv) 3,000,000 on March
5, 2010. The promissory notes bear interest at 3.17875% plus 1.5% for
the first four months, 2.0% for the second four months and 2.5% for
the remaining period up to its maturity and can be prepaid by the
Company without penalty. |
59
We have leases for office space in certain countries in which we operate. These are our only
operating leases. Purchase obligation amounts include an obligation in Arias Trust, minimum
purchase commitments for advertising, capital expenditures (technological equipment and software
licenses) and other goods and services that were entered into in the ordinary course of business.
We have developed estimates to project payment obligations based upon historical trends, when
available, and our anticipated future obligations. Given the significance of performance
requirements within our advertising and other arrangements, actual payments could differ
significantly from these estimates.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks arising from our business operations. These market risks arise
mainly from the possibility that changes in interest rates and the U.S. dollar exchange rate with
local currencies, particularly the Brazilian reais due to Brazils share of our revenues, may
affect the value of our financial assets and liabilities.
Foreign currencies Risk
At December 31, 2008, the Seller financing related to the acquisition of DeRemate consisting
of unsecured promissory notes for an aggregate principal amount of
$18.0 million, which will be settled for $17.5 million due
to $0.5 million of working capital adjustments was denominated
in U.S. dollars. We also hold cash and cash equivalents in local currencies in our subsidiaries,
and have receivables denominated in local currencies in all of our operations. Our subsidiaries
generate revenues and incur most of their expenses in local currency. As a result, our subsidiaries
use their local currency as their functional currency. At December 31, 2008, the total cash and
cash equivalents denominated in foreign currencies totaled $12.1 million, and accounts receivable
and funds receivable from customers in foreign currencies totaled $6.1 million. To manage exchange
rate risk, our treasury policy is to transfer all cash and cash equivalents in excess of working
capital requirements into dollar-denominated accounts in the United States. At December 31, 2008,
these dollar-denominated cash and cash equivalents and short-term investments totaled $31.3
million. For the year ended December 31, 2008, we incurred in foreign currency losses in the amount
of $1.5 million as the cash balances of the subsidiaries held in U.S. dollars depreciated in local
current terms, partially offset by a change in the re-measurement of the net assets position of our
Venezuelan subsidiaries (See Management Discussion and Analysis of Financial Condition and Results
of Operations Year ended December 31, 2008 compared to year ended December 31, 2007- Other income
(expenses) for more detail).
Our Venezuelan subsidiaries re-measure their foreign currency cash and cash equivalents and
investments at the parallel exchange rate of 5.4 Bolivares Fuertes per US dollar. Since there is
an observable market rate of exchange for securities traded in the parallel market, based on facts
and circumstances this market rate has been used for the re-measurement of foreign currency
denominated transactions that could be settled through the parallel market mechanism. According to paragraph 27
of FAS 52 Foreign Currency Translation, in the absence of unusual circumstances, the rate
applicable to conversion of a currency for purposes of dividend remittances shall be used to
translate foreign currency statements. Furthermore, based on the
International Practices Task Force Joint Meeting with SEC Staff of
June 2, 2008, the existence of a parallel market does not
constitute unusual circumstances potentially justifying the use of an
exchange rate other than the official rate for purposes of foreign
currency translation. The official exchange rate of 2.15 Bolivares Fuertes per
US dollar is used for dividend remittance. The foreign currency effect generated by applying
different exchange rates on the above mentioned assets has been accounted for in non-current other
assets for a total amount of $7.8 million.
In addition, if the U.S. dollar weakens against foreign currencies, the translation of these
foreign-currency-denominated transactions will result in increased net revenues, operating
expenses, and net income. Similarly, our net revenues, operating expenses and net income will
decrease if the U.S. dollar strengthens against foreign currencies. During the year ended
December 31, 2008, 53.8% of our revenues were denominated in Brazilian reais, 16.9% in Venezuelan
Bolivares Fuertes, 14.5% in Argentine pesos, and 10.1% in Mexican pesos.
We have estimated that the impact of exchange rate fluctuations on our results of operations
for the year period ended December 31, 2008 resulted in higher net revenues of approximately $4.2
million, and higher aggregate cost of net revenues and operating expenses of approximately $3.6
million, as compared to the same period in 2007. For net income, we estimated an increase of $0.7
million for the year ended December 31, 2008. This calculation was made taking the average monthly
exchange rates for each month in 2007, and applying them to the corresponding months in 2008, so as
to calculate what our financial results would have been had exchange rates remained stable from one
year to the next.
60
The following table summarizes the distribution of net revenues based on geography:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
(In millions) |
|
2006 |
|
|
2007 |
|
|
2008 |
|
Brazil |
|
|
30.8 |
|
|
|
50.3 |
|
|
|
73.7 |
|
Argentina |
|
|
7.8 |
|
|
|
12.6 |
|
|
|
19.9 |
|
Mexico |
|
|
7.2 |
|
|
|
10.7 |
|
|
|
13.9 |
|
Venezuela |
|
|
3.6 |
|
|
|
7.7 |
|
|
|
23.1 |
|
Other countries |
|
|
2.6 |
|
|
|
3.9 |
|
|
|
6.4 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
52.1 |
|
|
|
85.1 |
|
|
|
137.0 |
|
|
|
|
|
|
|
|
|
|
|
We have entered in the past into transactions to hedge portions of our foreign currency
translation exposure but during 2008 have not entered into any such agreement.
Interest Rate Risk
Our earnings and cash flows are also affected by changes in interest rates. These changes can
have an impact on our interest expenses derived from selling our MercadoPago receivables. At
December 31, 2008, MercadoPago funds receivable from customers totaled approximately $2.3 million.
Interest fluctuations could also negatively affect certain of our fixed rate and floating rate
investments comprised primarily of time deposits, money market funds, investment grade corporate
debt securities, sovereign debt securities and treasury bills. Investments in both fixed rate and
floating rate interest earning products carry a degree of interest rate risk. Fixed rate securities
may have their fair market value adversely impacted due to a rise in interest rates, while floating
rate securities may produce less income than predicted if interest rates fall. In addition, we
issued unsecured promissory notes to finance the DeRemate acquisition, for an aggregate principal
amount of $18.0 million. These promissory notes mature as follows: (i) 3,000,000 on June 5, 2009
(ii) 9,000,000 on September 5, 2009, (iii) 3,000,000 on December 5, 2009 and, (iv) 3,000,000 on
March 5, 2010. The promissory notes bear interest at 3.17875% plus 1.5% for the first four months,
2.0% for the second four months and 2.5% for the remaining period up to its maturity and can be
prepaid by the Company without penalty. Fixed rate liabilities may have their fair market value
adversely impacted due to a decrease in interest rates.
Under our current policies, we do not use interest rate derivative instruments to manage
exposure to interest rate changes. Due to the short-term nature of the main part of our
investments, a 100 basis point movement in market interest rates would not have a material impact
on the total fair market value of our portfolio as of December 31, 2008 or interest expenses
derived from discounting our MercadoPago receivables or our promissory notes issued in connection
with the DeRemate acquisition.
We consider a majority of our investments to be short-term investments, which are classified
on our balance sheet as current assets in the amount of $31.6 million, because the investments can
be readily converted at any time into cash or into securities with a shorter remaining time to
maturity. We determine the appropriate classification of our investments at the time of purchase
and re-evaluate such designations as of each balance sheet date. Time deposits, corporate debt
securities and sovereign debt securities are considered held-to-maturity securities. The book value
of held-to-maturity securities approximates their respective fair values and consequently there are
no significant unrecognized gains or losses.
Credit Risk
We invest in high-quality financial instruments, consisting primarily of time deposits, money
market funds, investment grade corporate and sovereign debt securities, and treasury bills, which
we believe are subject to limited credit risk. Credit risk is risk due to uncertainty in a
counterpartys ability to meet its financial obligations. For the year ended December 31, 2008,
market perception of these risks, together with certain market dislocations, had an adverse effect
on the fair value of certain classes of securities, including in some cases, high-quality financial
instruments that were not previously viewed as having credit risk. We seek, however, to minimize
such risk by entering into transactions with counterparties that are believed to be creditworthy
financial institutions or classes which we believe have not been affected by the current credit
market environment.
Equity Price Risk
In connection with our share repurchase program, we sell put options that may
require us to repurchase shares of our common stock at fixed prices. These written put options
subject us to equity price risk. At December 31, 2008, put options to purchase 185,000 shares of
our common stock were outstanding, enabling the holders to sell in the aggregate 185,000 shares of
our common stock upon exercise for approximately $1.5 million (net of the option premium received).
The put option liability, with a fair value of $0.2 million at December 31, 2008, was included in
Loans payable and other financial liabilities. The fair value of our shares should fall to 8.21 to settle our $0.3 million in premium received.
61
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and accompanying notes listed in Part IV, Item 15(a)(1)
of this report are included elsewhere in this report.
|
|
ITEM 9. |
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE |
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Based on managements evaluation (with the participation of our Chief Executive Officer and
our Chief Financial Officer), as of the end of the period covered by this report, our chief
executive officer and our chief financial officer have concluded that our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
as amended (the Exchange Act)), are effective to provide reasonable assurance that information
required to be disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized, and reported within the time periods specified in SEC rules and
forms, and is accumulated and communicated to management, including our principal executive officer
and principal financial officer, as appropriate to allow timely decisions regarding required
disclosure.
Changes in Internal Control Over Financial Reporting
As a newly public company, during this quarter we finished the process of upgrading our
internal controls over financial reporting in view of our annual assessment, first required by the
Exchange Act for the 2008 fiscal year end, including, among other things reinforcing accesses and
segregation of duties in our systems and improving the documentation of certain controls the
Company already had in place.
Except as described above, there were no changes in our internal controls over financial
reporting as defined in Exchange Act Rule 13a-15(f) that occurred during our most recently
completed fiscal quarter that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Managements Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) to provide
reasonable assurance regarding the reliability of our financial reporting and the preparation of
financial statements for external purposes in accordance with U.S. generally accepted accounting
principles.
Our management, including our Chief Executive Officer and our Chief Financial Officer,
conducted an evaluation of the effectiveness of our internal control over financial reporting based
on the framework in Internal Control Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Managements assessment included evaluation of elements
such as the design and operating effectiveness of key financial reporting controls, process
documentation, accounting policies, and our overall control environment. Based on its evaluation
under the framework in Internal Control Integrated Framework, our management concluded that our
internal control over financial reporting was effective as of December 31, 2008 to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external reporting purposes in accordance with U.S. generally accepted
accounting principles. We reviewed the results of managements assessment with the Audit Committee
of our Board of Directors.
This evaluation did not include the internal control over financial reporting related to the
following acquisitions completed during 2008: CMG Classified Media Group and its subsidiaries
(Venecapital Group Inc., Grupo Veneclasificados C.A., Clasificados Internacionales S.A. ,
ColClasificados S.A. and Clasificados Florida LLC) and DeRemate Operations (DeRemate.com de
Argentina S.A., DeRemate.com Chile S.A., Compañía de Negocios Interactiva de Colombia E.U. and
Interactivos y Digitales México S.A. de C.V.). Total assets and net revenues for these
acquisitions represent 4.1% and 6.1%, respectively, of the related consolidated financial statement
amounts as of and for the year ended December 31, 2008 (See Note 6 to the Financial Statements).
62
The effectiveness of our internal control over financial reporting as of December 31, 2008 has
been audited by Price Waterhouse & Co. S.R.L., an independent registered public accounting firm, as
stated in their report which appears in Item 15(a) of this Annual Report on Form 10-K.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not
expect that our disclosure controls or our internal control over financial reporting will prevent
or detect all error and all fraud. A control system, no matter how well designed and operated, can
provide only reasonable, not absolute, assurance that the control systems objectives will be met.
The design of a control system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Further, because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that
misstatements due to error or fraud will not occur or that all control issues and instances of
fraud, if any, have been detected. These inherent limitations include the realities that judgments
in decision-making can be faulty and that breakdowns can occur because of simple error or mistake.
Controls can also be circumvented by the individual acts of some persons, by collusion of two or
more people, or by management override of the controls. The design of any system of controls is
based in part on certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all potential future
conditions. Projections of any evaluation of controls effectiveness to future periods are subject
to risks. Over time, controls may become inadequate because of changes in conditions or
deterioration in the degree of compliance with policies or procedures.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information on our directors and executive officers and any material changes to the process by
which security holders may recommend nominees to the Board of Directors is incorporated by
reference from the Companys Proxy Statement (under the headings Proposal 1: Election of
Directors, Executive Officersand Information About Our Board of Directors and Committees))
with respect to the 2009 Annual Meeting of Stockholders to be filed with the SEC no later than
April 30, 2009. Information relating to our Code of Business Conduct and Ethics and to compliance
with Section 16(a) of the 1934 Act is incorporated by reference from the Companys Proxy Statement
(under the headings Code of Business Conduct and Ethics, and Section 16(a) Beneficial Ownership
Reporting Compliance) with respect to the 2009 Annual Meeting of Stockholders to be filed with the
SEC no later than April 30, 2009. To the extent permissible under Nasdaq rules, we intend to
disclose amendments to our Code of Business Conduct and Ethics, as well as waivers of the
provisions thereof, on our website at http://www.mercadolibre.com.
ITEM 11. EXECUTIVE COMPENSATION
This information is incorporated by reference from the Companys Proxy Statement (under the
headings Executive Compensation, Director Compensation, Compensation Committee Interlocks and
Insider Participation and Compensation Committee Report) with respect to the 2009 Annual Meeting
of Stockholders to be filed with the SEC no later than April 30, 2009.
|
|
ITEM 12. |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDERS MATTERS |
This information is incorporated by reference the Companys Proxy Statement (under the
headings Security Ownership of Certain Beneficial Owners and Management) with respect to the 2009
Annual Meeting of Stockholders to be filed with the SEC no later than April 30, 2009.
63
The following table represents information as of December 31, 2008 with respect to equity
compensation plans under which shares of the Companys common stock are authorized for issuance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Compensation Plan Information |
|
|
|
|
|
|
|
|
|
|
|
Number of securities |
|
|
|
|
|
|
|
|
|
|
|
remaining available for |
|
|
|
Number of securities |
|
|
Weighted-average |
|
|
future issuance under |
|
|
|
to be issued upon exercise |
|
|
exercise price of |
|
|
equity compensation plans |
|
Plan |
|
of outstanding options, |
|
|
outstanding options, |
|
|
(excluding securities |
|
Category |
|
warrants and rights |
|
|
warrants and rights |
|
|
reflected in column (a)) |
|
|
|
(a) |
|
|
(b) |
|
|
(c) |
|
Equity compensation
plans approved by
security holders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation
plans not approved
by security
holders(1) |
|
|
53,919 |
|
|
|
1.23 |
|
|
|
298,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
53,919 |
|
|
|
1.23 |
|
|
|
298,129 |
|
|
|
|
(1) |
|
Our Amended and Restated 1999 Stock Option and Restricted Stock Plan was entered into prior to our IPO. |
Amended and Restated 1999 Stock Option and Restricted Stock Plan
Our Stock Option Plan was adopted by the Board on November 3, 1999. The Stock Option Plan
provides for the grant of incentive stock options, within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the Internal Revenue Code), to our employees, and
non-qualified stock options and restricted stock to our employees, directors, agents, advisors,
independent consultants and contractors. Incentive stock options and non-qualified stock options
are referred to as stock options, and together with restricted stock are referred to as awards.
At December 31, 2008, options to purchase a total of 53,919 shares of common stock were outstanding
at a weighted average price of $1.23 per share. The Stock Option Plan will terminate on November 3,
2009 or earlier if so determined by our Board.
Number of shares of common stock available under the stock option plan. A total of 4,732,400
shares of common stock were reserved for issuance pursuant to the Stock Option Plan. Shares covered
by awards that are forfeited or terminated without exercise will be available for future awards.
The shares of common stock issuable under the Stock Option Plan shall be (1) authorized but
unissued shares, (2) shares of common stock held in our treasury, or (3) a combination of (1) and
(2).
Administration of the stock option plan. The Stock Option Plan is administered by our Board or
a committee appointed by the Board (the body in charge of administering the Stock Option Plan is
referred to as the administrator). If the common stock is registered under Section 12(b) or 12(g)
of the Exchange Act, the board shall consider in selecting the administrator and the membership of
any committee acting as administrator the provisions of Section 162(m) of the Internal Revenue Code
regarding outside directors and the provisions of Rule 16b-3 under the Exchange Act regarding
non-employee directors. The administrator determines the recipients of awards, times at which
awards are granted, number of shares subject to each type of award, the time for vesting of each
award and the duration of the exercise period for options.
Price, exercise and termination of awards . The exercise price for each share of common stock
subject to an option is determined by the administrator, and in the case of an incentive stock
option the exercise price cannot be less than 100% of the fair market value of the shares of common
stock on the date of the grant (or 110% in the case of employees who directly or indirectly own
more than 10% of the total combined voting power of all classes of our stock).
Options are exercisable on their vesting date, which is determined by the administrator and
set forth in the Award Agreement governing any particular option. Vesting dates can be accelerated
on the occurrence of a specified event, as provided in an Award Agreement, or can be accelerated at
the discretion of the administrator.
If a participant in the Stock Option Plan ceases to be employed or perform services for us, we
have the right to repurchase any unvested shares at the exercise price paid per share. The terms
and procedures of a repurchase are to be set forth in the Award Agreement that governs the relevant
unvested shares.
If an option expires or is terminated or canceled without having been exercised it shall
become null and void and of no further force and effect. The term of an option may not exceed
beyond the tenth anniversary on which the option is granted (or the fifth anniversary in the case
of incentive stock options granted to employees who directly or indirectly own 10% of the total
combined voting power of all classes of our stock.) An option terminates 30 days after a
participant ceases to be an employee or director as a result of a termination without cause, and
after 10 days of termination in the case of a termination for cause. Cause includes the conviction
of a crime involving fraud, theft, dishonesty or moral turpitude, the participants continuous
disregard of or willful misconduct in carrying lawful instructions of superiors, continued use of
alcohol or drugs that interfered with the performance of the participants duties, the
conviction of participant for committing a felony or similar foreign crime, and any other cause for
termination set forth in a participants employment agreement. An option terminates 10 days after a
participant ceases to be an independent consultant, contractor or advisor to us or agent of ours
for any reason. It also terminates three months after the death or permanent disability of a
participant, or, if the participant is a party to an employment agreement, the disability of such
participant as defined in the employment agreement. Other reasons for termination may be set out in
the Award Agreement.
64
An option will not be considered an incentive stock option to the extent that the aggregate
fair market value (on the date of the grant of the incentive stock option) of all stock with
respect to which incentive stock options are exercisable for the first time by a participant during
any calendar year is greater than $100,000. No option shall be affected by a change of duties or
position of a participant (including transfer to our subsidiaries) as long as the participant
continues to be our employee or an employee of our subsidiaries.
Adjustments upon the occurrence of material transactions . In the event we undergo dissolution
or liquidation, a reorganization, merger or consolidation in which we are not the surviving entity,
or a sale of all or substantially all of our assets (each, a Material Transaction) holders of
options will be given 10-day prior written notice and will decide within those 10 days whether to
exercise their respective options. Any option that is not so exercised will terminate. However,
such notice and exercise mechanism would not apply if provision is made in connection with a
Material Transaction for assumption of outstanding options, or substitution of options for new
options or equity securities, with any appropriate adjustments as to the number, kind and prices of
shares subject to options.
Transferability . Unless the prior written consent of the administrator is obtained, no option
can be assigned or otherwise transferred by any participant except by will or by the laws of
descent and distribution. Except in the case of an approved transfer, an option may be exercised
during the lifetime of a participant only by the participant or his/her legal representative if the
participant is legally disabled.
Restricted stock . Restricted stock awards are awards of shares of common stock that vest
according to the terms and conditions established by the administrator. The administrator may
impose whatever restrictions on transferability, risk of forfeiture and other restrictions as it
determines. A holder of restricted stock has the rights of a stockholder, including the right to
vote the restricted stock. During the restricted period applicable to the restricted stock, it may
not be sold, transferred, pledged, hypothecated, margined or otherwise encumbered. Except as
otherwise determined by the administrator, restricted stock that is subject to restrictions is
subject to forfeiture upon termination of a participants employment.
Amendment . The Board may modify the Stock Option Plan at any time. The approval by a majority
of our stockholders is necessary if required by law or necessary to comply with any applicable laws
and regulations. No amendment will affect the terms of any award granted prior to the effectiveness
of such amendment, except with the consent of the holder of the award.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
This information is incorporated by reference from the Companys Proxy Statement (under the
headings Certain Relationships and Related Transactions and Committees and Meetings of Our Board
of Directors) with respect to the 2009 Annual Meeting of Stockholders to be filed with the SEC no
later than April 30, 2009.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
This information is incorporated by reference from the Companys Proxy Statement (under the
heading Principal Accountant Fees and Services) with respect to the 2009 Annual Meeting of
Stockholders to be filed with the SEC no later than April 30, 2009.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements and Schedules. The following financial statements and schedules are
included in this report:
|
|
|
|
|
|
|
Page |
|
Consolidated Financial Statements |
|
|
|
|
|
|
|
|
|
Report of Independent Registered Public Accounting Firm |
|
|
F-1 |
|
Consolidated balance sheets as of December 31, 2008 and 2007 |
|
|
F-3 |
|
Consolidated statements of income for the three years ended December 31, 2008 |
|
|
F-4 |
|
Consolidated statements of changes in shareholders equity (deficit) for the
three years ended December 31, 2008 |
|
|
F-5 |
|
Consolidated statements of cash flows for the three years ended December 31, 2008 |
|
|
F-7 |
|
Notes to consolidated financial statements |
|
|
F-9 |
|
65
(b) Exhibits. The exhibits required by Item 601 of Regulation S-K are listed below.
|
|
|
|
|
Exhibit |
|
|
Number |
|
Exhibit Title |
|
2.01 |
|
|
Stock Purchase Agreement, or the Agreement, with 2050 Capital Group
Inc., Abax Group Inc., Gabinete De Diseño Industrial Inc., Stamford
One Group Ltd., EO Financial Group Inc., Meck Investments Ltd., CG
Interventures Inc., Luis Carlos Uzcategui, Luis Miguel Molina,
Roberto Rivas, Jorge Caldas, and CMG Classified Media Group, Inc. (3) |
|
|
|
|
|
|
2.02 |
|
|
Stock Purchase Agreement, dated August 25, 2008, by and among
Hammer.com, LLC, MercadoLibre, Inc., Hispanoamerican Educational
Investments BV, S.A. La Nación, DeRemate.com de Argentina S.A.,
DeRemate.com Chile S.A., Interactivos y Digitales México S.A. de C.V.
and Compañía de Negocios Interactiva de Colombia E.U. (4) |
|
|
|
|
|
|
2.03 |
|
|
Asset Purchase Agreement, dated August 25, 2008, by and among
Hispanoamerican Educational Investments BV, S.A. La Nación,
Intangible Assets LLC, Emprendimientos Veta, S.A., DeRemate.com USA,
Inc., MercadoLibre, Inc. and Hammer.com, LLC. (4) |
|
|
|
|
|
|
3.01 |
|
|
Registrants Amended and Restated Certificate of Incorporation. (1) |
|
|
|
|
|
|
3.02 |
|
|
Registrants Amended and Restated Bylaws. (1) |
|
|
|
|
|
|
4.01 |
|
|
Form of Specimen Certificate for Registrants Common Stock* |
|
|
|
|
|
|
4.02 |
|
|
Second Amended and Restated Registration Rights Agreement, dated
September 24, 2001, by and among the Registrant and the investors
named therein. (1) |
|
|
|
|
|
|
10.01 |
|
|
Form of Indemnity Agreement entered into by Registrant with each of
its directors and executive officers. (2) |
|
|
|
|
|
|
10.02 |
|
|
Lease Agreement, dated as of March 31, 2007, between Curtidos San
Luis S.A. and MercadoLibre S.A. (2) (translated from Spanish) |
|
|
|
|
|
|
10.03 |
|
|
Amendment Agreement, dated as of November 13, 2008, to the Lease
Agreement, dated March 31, 2007, between Curtidos San Luis S.A. and
MercadoLibre S.A.* (translated from Spanish) |
|
|
|
|
|
|
10.04 |
|
|
Lease Agreement, dated as of April 1, 2008, between Curtidos San Luis
S.A. and MercadoLibre S.A. (translated from Spanish)* |
|
|
|
|
|
|
10.05 |
|
|
Lease Agreement, dated as of May 5, 2008, between Curtidos San Luis
S.A. and MercadoLibre S.A. (translated from Spanish)* |
|
|
|
|
|
|
10.06 |
|
|
Concession Contract, dated as February 7, 2007, between Borders
Parking S.R.L. and MercadoLibre S.A. (1) |
|
|
|
|
|
|
10.07 |
|
|
Property Lease Agreement, dated June 28, 2005, between
MercadoLivre.com Atividades de Internet Ltda. and KW Radar
Construtora e Incorporadora Ltda. (1) |
|
|
|
|
|
|
10.08 |
|
|
Property Lease Agreement, dated as of November 1, 2004, between
MercadoLivre.com Atividades de Internet Ltda. and Barros e Spitaletti
Empreendimentos Ltda. (1) |
|
|
|
|
|
|
10.09 |
|
|
Property Lease Agreement, dated of April, 1, 2008, between
MercadoLivre.com Atividades de Internet Ltda. And CNA Spitaletti
Construtora e Incorporadora Ltda.* |
|
|
|
|
|
|
10.10 |
|
|
Arias Trust Contract, dated as of June 5, 2006 and amended as of May
29, 2008 (translated from Spanish)* |
|
|
|
|
|
|
10.11 |
|
|
Management Incentive Bonus Plan of the Registrant. (2) |
|
|
|
|
|
|
10.12 |
|
|
Amended and Restated 1999 Stock Option and Restricted Stock Plan (2) |
|
|
|
|
|
|
10.13 |
|
|
Employment Agreements with Officers.(2) |
|
|
|
|
|
|
10.14 |
|
|
Form of Restricted Stock Award for Outside directors. (3) |
|
|
|
|
|
|
10.15 |
|
|
Employment Agreement with Osvaldo Gimenez, dated as of March 26, 2008* |
|
|
|
|
|
|
21.01 |
|
|
List of Subsidiaries* |
|
|
|
|
|
|
23.01 |
|
|
Consent of Price Watherhouse & Co. S.R.L., Independent Registered
Public Accounting Firm* |
66
|
|
|
|
|
Exhibit |
|
|
Number |
|
Exhibit Title |
|
31.01 |
|
|
CEO Certification pursuant to Securities Exchange Act Rule 13a-14, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* |
|
|
|
|
|
|
31.02 |
|
|
CFO Certification pursuant to Securities Exchange Act Rule 13a-14, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* |
|
|
|
|
|
|
32.01 |
|
|
CEO Certification required by 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002** |
|
|
|
|
|
|
32.02 |
|
|
CFO Certification required by 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002** |
|
|
|
* |
|
Filed Herewith |
|
** |
|
Furnished Herewith |
|
(1) |
|
Incorporated by reference to the Registration Statement on Form S-1 of MercadoLibre, Inc. filed
on May 11, 2007; |
|
(2) |
|
Incorporate by reference to Amendment No. 1 to the Registration Statement on Form S-1 of
MercadoLibre, Inc. filed on July 13, 2007. |
|
(3) |
|
Incorporated by reference to the Registration Statement on Form S-1 of MercadoLibre, Inc. filed
on January 25, 2008 |
|
(4) |
|
Incorporated by reference to the Current Report on Form 8-K filed on August 26, 2008. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
|
|
|
|
MERCADOLIBRE, INC.
|
|
|
By: |
/s/ Marcos Galperín
|
|
|
|
Marcos Galperín |
|
|
|
Chief Executive Officer
Date: February 27, 2009 |
|
67
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report
has been signed below by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated.
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
/s/ Marcos Galperín
Marcos Galperín
|
|
Chief Executive Officer and Director
(Principal Executive Officer)
|
|
February 27, 2009 |
|
|
|
|
|
/s/ Nicolás Szekasy
Nicolás Szekasy
|
|
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
|
|
February 27, 2009 |
|
|
|
|
|
/s/ Mario Vazquez
Mario Vazquez
|
|
Director
|
|
February 27, 2009 |
|
|
|
/s/ Anton Levy
Anton Levy
|
|
Director
|
|
February 27, 2009 |
|
|
|
|
|
/s/ Michael Spence
Michael Spence
|
|
Director
|
|
February 27, 2009 |
|
|
|
|
|
/s/ Verónica Allende Serra
Veronica Allende Serra
|
|
Director
|
|
February 27, 2009 |
|
|
|
|
|
/s/ Nicolás Galperín
Nicolás Galperín
|
|
Director
|
|
February 27, 2009 |
|
|
|
|
|
/s/ Emiliano Calemzuk
Emiliano Calemzuk
|
|
Director
|
|
February 27, 2009 |
|
|
|
|
|
/s/ Martin de los Santos
Martin de los Santos
|
|
Director
|
|
February 27, 2009 |
68
MercadoLibre Inc.
Consolidated Financial Statements
as of December 31, 2008 and 2007
and for the three years in the period
ended December 31, 2008
69
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Shareholders of MercadoLibre, Inc.
In our opinion, the accompanying consolidated balance sheets and the related consolidated
statements of income, of changes in shareholders equity (deficit) and of cash flows present
fairly, in all material respects, the financial position of MercadoLibre, Inc. and its subsidiaries
at December 31, 2008 and 2007, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2008 in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as of December 31,
2008, based on criteria established in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Companys management
is responsible for these financial statements, for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial
reporting, included in Managements Report on Internal Control over Financial Reporting appearing
under Item 9A. Our responsibility is to express opinions on these financial statements and on the
Companys internal control over financial reporting based on our audits (which was an integrated
audit in 2008). We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was maintained in all
material respects. Our audits of the financial statements included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the companys assets that could have a material
effect on the financial statements.
F-1
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
As described in Managements Report on Internal Control over Financial Reporting, appearing under
Item 9A, management has excluded Classified Media Group and its subsidiaries and DeRemate
Operations from its assessment of internal control over financial reporting as of December 31, 2008
because those businesses were acquired by the Company in a purchase business combination during the
year ended December 31, 2008.
|
|
|
|
|
Price Waterhouse &
Co. S.R.L.
|
|
|
By:
|
|
/s/ Juan Carlos Grassi
Juan C. Grassi
|
|
|
Buenos Aires, Argentina
February 25, 2009
F-2
MercadoLibre Inc.
Consolidated Balance Sheets
As of December 31, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
17,474,112 |
|
|
$ |
15,677,407 |
|
Short-term investments |
|
|
31,639,400 |
|
|
|
52,300,007 |
|
Accounts receivable, net |
|
|
3,856,392 |
|
|
|
3,211,252 |
|
Funds receivable from customers |
|
|
2,322,416 |
|
|
|
29,162,763 |
|
Prepaid expenses |
|
|
426,869 |
|
|
|
283,477 |
|
Deferred tax assets |
|
|
1,628,871 |
|
|
|
3,445,101 |
|
Other assets |
|
|
2,953,164 |
|
|
|
894,163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
60,301,224 |
|
|
|
104,974,170 |
|
Non-current assets: |
|
|
|
|
|
|
|
|
Long-term investments |
|
|
9,218,153 |
|
|
|
1,323,789 |
|
Property and equipment, net |
|
|
5,940,160 |
|
|
|
4,143,204 |
|
Goodwill and intangible assets, net |
|
|
72,911,546 |
|
|
|
23,428,646 |
|
Deferred tax assets |
|
|
14,270 |
|
|
|
269,596 |
|
Other assets |
|
|
8,353,396 |
|
|
|
353,395 |
|
|
|
|
|
|
|
|
Total non-current assets |
|
|
96,437,525 |
|
|
|
29,518,630 |
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
156,738,749 |
|
|
$ |
134,492,800 |
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
$ |
16,941,173 |
|
|
$ |
9,278,138 |
|
Funds payable to customers |
|
|
14,727,891 |
|
|
|
16,418,177 |
|
Social security payable |
|
|
4,387,943 |
|
|
|
3,778,236 |
|
Taxes payable |
|
|
4,989,704 |
|
|
|
2,493,749 |
|
Loans payable and other financial liabilities |
|
|
14,963,421 |
|
|
|
9,713,227 |
|
Provisions |
|
|
299,753 |
|
|
|
69,979 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
56,309,885 |
|
|
|
41,751,506 |
|
Non-current liabilities: |
|
|
|
|
|
|
|
|
Social security payable |
|
|
339,854 |
|
|
|
|
|
Loans payable |
|
|
3,050,061 |
|
|
|
|
|
Deferred tax liabilities |
|
|
2,556,120 |
|
|
|
|
|
Other liabilities |
|
|
1,058,848 |
|
|
|
1,068,155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-current liabilities |
|
|
7,004,883 |
|
|
|
1,068,155 |
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
63,314,768 |
|
|
$ |
42,819,661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 16) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity: |
|
|
|
|
|
|
|
|
Common stock, $0.001 par value, 110,000,000 shares authorized,
44,070,367 and 44,226,563 shares issued and outstanding at December 31,
2008 and December 31, 2007, respectively (Note 9) |
|
|
44,071 |
|
|
|
44,227 |
|
Additional paid-in capital |
|
|
119,807,007 |
|
|
|
121,890,138 |
|
Accumulated deficit |
|
|
(15,552,256 |
) |
|
|
(34,363,917 |
) |
Accumulated other comprehensive (loss) income |
|
|
(10,874,841 |
) |
|
|
4,102,691 |
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
93,423,981 |
|
|
|
91,673,139 |
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
156,738,749 |
|
|
$ |
134,492,800 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-3
MercadoLibre Inc.
Consolidated Statements of Income
For the three years ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
Net revenues |
|
$ |
137,022,620 |
|
|
$ |
85,126,341 |
|
|
$ |
52,058,890 |
|
Cost of net revenues |
|
|
(27,536,573 |
) |
|
|
(18,272,940 |
) |
|
|
(12,085,648 |
) |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
109,486,047 |
|
|
|
66,853,401 |
|
|
|
39,973,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Product and technology development |
|
|
(7,307,008 |
) |
|
|
(4,369,376 |
) |
|
|
(3,066,304 |
) |
Sales and marketing |
|
|
(39,975,307 |
) |
|
|
(27,598,683 |
) |
|
|
(23,358,510 |
) |
General and administrative |
|
|
(22,759,931 |
) |
|
|
(13,223,522 |
) |
|
|
(8,150,499 |
) |
Compensation Cost related to acquisitions (Note 6) |
|
|
(1,919,870 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
(71,962,116 |
) |
|
|
(45,191,581 |
) |
|
|
(34,575,313 |
) |
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
37,523,931 |
|
|
|
21,661,820 |
|
|
|
5,397,929 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income and other
financial gains |
|
|
1,822,385 |
|
|
|
1,609,403 |
|
|
|
520,508 |
|
Interest expense and other financial charges |
|
|
(8,442,427 |
) |
|
|
(2,737,901 |
) |
|
|
(1,743,315 |
) |
Foreign currency loss |
|
|
(1,531,144 |
) |
|
|
(3,106,515 |
) |
|
|
(391,981 |
) |
Other income (expenses), net |
|
|
73,159 |
|
|
|
(3,006,416 |
) |
|
|
(1,468,220 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net income before income / asset tax expense |
|
|
29,445,904 |
|
|
|
14,420,391 |
|
|
|
2,314,921 |
|
|
|
|
|
|
|
|
|
|
|
|
Income / asset tax expense |
|
|
(10,634,243 |
) |
|
|
(4,727,451 |
) |
|
|
(1,242,838 |
) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
18,811,661 |
|
|
$ |
9,692,940 |
|
|
$ |
1,072,083 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of preferred stock |
|
|
|
|
|
|
(309,299 |
) |
|
|
(494,878 |
) |
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders |
|
$ |
18,811,661 |
|
|
$ |
9,383,641 |
|
|
$ |
577,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 (1) |
|
Basic EPS |
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share |
|
$ |
0.43 |
|
|
$ |
0.22 |
|
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares |
|
|
44,239,443 |
|
|
|
25,149,405 |
|
|
|
13,149,139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per common share |
|
$ |
0.42 |
|
|
$ |
0.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares |
|
|
44,348,950 |
|
|
|
25,478,336 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For the year ended December 31, 2006 the diluted EPS is equal to the Basic EPS |
The accompanying notes are an integral part of these consolidated financial statements.
F-4
MercadoLibre Inc.
Consolidated Statements of Changes in Shareholders Equity (Deficit)
For the three years ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Preferred |
|
|
|
|
|
|
other |
|
|
|
|
|
|
Comprehensive |
|
|
Common stock |
|
|
paid-in |
|
|
Treasury |
|
|
stock |
|
|
Accumulated |
|
|
comprehensive |
|
|
|
|
|
|
income |
|
|
Shares |
|
|
Amount |
|
|
capital |
|
|
Stock |
|
|
warrants |
|
|
deficit |
|
|
income (loss) |
|
|
Total |
|
Balance as of December 31, 2005 |
|
|
|
|
|
|
13,095,863 |
|
|
$ |
130,959 |
|
|
$ |
3,149,663 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(45,126,900 |
) |
|
$ |
(560,542 |
) |
|
$ |
(42,406,820 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised |
|
|
|
|
|
|
71,119 |
|
|
|
711 |
|
|
|
6,396 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,107 |
|
Stock-based compensation stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,223 |
|
Accretion of mandatorily redeemable convertible preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(494,878 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(494,878 |
) |
Net income |
|
|
1,072,083 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,072,083 |
|
|
|
|
|
|
|
1,072,083 |
|
Currency translation adjustment |
|
|
1,142,842 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,142,842 |
|
|
|
1,142,842 |
|
Unrealized net gains on investments |
|
|
102,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102,330 |
|
|
|
102,330 |
|
Realized net gain on investments |
|
|
(184,094 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(184,094 |
) |
|
|
(184,094 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
2,133,161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006 |
|
|
|
|
|
|
13,166,982 |
|
|
$ |
131,670 |
|
|
$ |
2,694,404 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(44,054,817 |
) |
|
$ |
500,536 |
|
|
$ |
(40,728,207 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued in 2000 and 2001 (1) |
|
|
|
|
|
|
204,000 |
|
|
|
2,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,040 |
) |
|
|
|
|
|
|
|
|
Stock options exercised |
|
|
|
|
|
|
483,470 |
|
|
|
4,835 |
|
|
|
33,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,577 |
|
Stock-based compensation stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,477 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,477 |
|
Stock-based compensation restricted shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,966 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,966 |
|
Accretion of mandatorily redeemable
convertible preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(309,299 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(309,299 |
) |
Change in par value of common stock |
|
|
|
|
|
|
|
|
|
|
(124,690 |
) |
|
|
124,690 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock |
|
|
|
|
|
|
3,000,000 |
|
|
|
3,000 |
|
|
|
49,570,239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,573,239 |
|
Conversion of mandatorily redeemable convertible preferred stock
into common stock preferred stock |
|
|
|
|
|
|
27,187,838 |
|
|
|
27,188 |
|
|
|
64,358,656 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64,385,844 |
|
Reclassification of warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,636,456 |
|
|
|
|
|
|
|
|
|
|
|
4,636,456 |
|
Exercise of warrants |
|
|
|
|
|
|
184,273 |
|
|
|
184 |
|
|
|
5,386,263 |
|
|
|
|
|
|
|
(4,636,456 |
) |
|
|
|
|
|
|
|
|
|
|
749,991 |
|
Net income |
|
|
9,692,940 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,692,940 |
|
|
|
|
|
|
|
9,692,940 |
|
Currency translation adjustment |
|
|
3,755,601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,755,601 |
|
|
|
3,755,601 |
|
Unrealized net gains on investments |
|
|
153,876 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
153,876 |
|
|
|
153,876 |
|
Realized net gain on investments |
|
|
(307,322 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(307,322 |
) |
|
|
(307,322 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
13,295,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007 |
|
|
|
|
|
|
44,226,563 |
|
|
$ |
44,227 |
|
|
$ |
121,890,138 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(34,363,917 |
) |
|
$ |
4,102,691 |
|
|
$ |
91,673,139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
These shares were issued in 2000 and 2001, but were not recorded until 2007. The amounts are immaterial to revise prior years financial statements. |
The accompanying notes are an integral part of these consolidated financial statements.
F-5
MercadoLibre Inc.
Consolidated Statements of Changes in Shareholders Equity (Deficit)
For the three years ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Preferred |
|
|
|
|
|
|
other |
|
|
|
|
|
|
Comprehensive |
|
|
Common stock |
|
|
paid-in |
|
|
Treasury |
|
|
stock |
|
|
Accumulated |
|
|
comprehensive |
|
|
|
|
|
|
income |
|
|
Shares |
|
|
Amount |
|
|
capital |
|
|
Stock |
|
|
warrants |
|
|
deficit |
|
|
income (loss) |
|
|
Total |
|
Balance as of December 31, 2007 |
|
|
|
|
|
$ |
44,226,563 |
|
|
$ |
44,227 |
|
|
$ |
121,890,138 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(34,363,917 |
) |
|
$ |
4,102,691 |
|
|
$ |
91,673,139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised and restricted shares issued |
|
|
|
|
|
|
93,504 |
|
|
|
94 |
|
|
|
82,995 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83,089 |
|
Stock-based compensation stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,719 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,719 |
|
Stock-based compensation restricted shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105,560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105,560 |
|
Stock -based compensation LTRP |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
321,568 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
321,568 |
|
Repurchase of Treasury Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,598,223 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,598,223 |
) |
Retirement of Treasury Stock |
|
|
|
|
|
|
(249,700 |
) |
|
|
(250 |
) |
|
|
(2,597,973 |
) |
|
|
2,598,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
18,811,661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,811,661 |
|
|
|
|
|
|
|
18,811,661 |
|
Currency translation adjustment |
|
|
(14,923,284 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,923,284 |
) |
|
|
(14,923,284 |
) |
Unrealized net gains on investments |
|
|
3,642 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,642 |
|
|
|
3,642 |
|
Realized net gain on investments |
|
|
(57,890 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(57,890 |
) |
|
|
(57,890 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
3,834,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008 |
|
|
|
|
|
$ |
44,070,367 |
|
|
$ |
44,071 |
|
|
$ |
119,807,007 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(15,552,256 |
) |
|
$ |
(10,874,841 |
) |
|
$ |
93,423,981 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-6
MercadoLibre Inc.
Consolidated Statements of Cash Flows
For the three years ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
Cash flows from operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
18,811,661 |
|
|
$ |
9,692,940 |
|
|
$ |
1,072,083 |
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
3,335,673 |
|
|
|
2,307,649 |
|
|
|
2,016,939 |
|
Foreign currency gains |
|
|
(7,827,112 |
) |
|
|
|
|
|
|
|
|
Interest expense |
|
|
300,368 |
|
|
|
|
|
|
|
96,833 |
|
Realized gains on investments |
|
|
(1,232,036 |
) |
|
|
(845,398 |
) |
|
|
(184,094 |
) |
Unrealized losses (gains) on investments |
|
|
57,293 |
|
|
|
(228,877 |
) |
|
|
(46,926 |
) |
Stock-based compensation expense stock options |
|
|
4,719 |
|
|
|
15,477 |
|
|
|
33,223 |
|
Stock-based compensation expense restricted shares |
|
|
105,560 |
|
|
|
15,966 |
|
|
|
|
|
Stock-based compensation LTRP |
|
|
839,303 |
|
|
|
|
|
|
|
|
|
Change in fair value of warrants |
|
|
|
|
|
|
3,045,992 |
|
|
|
1,269,377 |
|
Deferred income taxes |
|
|
446,287 |
|
|
|
(198,368 |
) |
|
|
(1,291,549 |
) |
Changes in assets and liabilities, excluding the effect of acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
4,026,218 |
|
|
|
(736,431 |
) |
|
|
403,075 |
|
Funds receivable from customers |
|
|
26,573,209 |
|
|
|
(15,517,486 |
) |
|
|
(6,026,226 |
) |
Prepaid expenses |
|
|
(153,582 |
) |
|
|
56,399 |
|
|
|
(207,130 |
) |
Other assets |
|
|
(1,415,575 |
) |
|
|
(967,264 |
) |
|
|
167,593 |
|
Accounts payable and accrued expenses |
|
|
10,610,141 |
|
|
|
4,282,955 |
|
|
|
4,651,264 |
|
Funds payable to customers |
|
|
2,294,847 |
|
|
|
5,423,976 |
|
|
|
4,704,108 |
|
Provisions |
|
|
(1,277,664 |
) |
|
|
(274,101 |
) |
|
|
(559,734 |
) |
Other liabilities |
|
|
(952,169 |
) |
|
|
689,154 |
|
|
|
59,518 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
54,547,141 |
|
|
|
6,762,583 |
|
|
|
6,158,354 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of investments |
|
|
(110,056,368 |
) |
|
|
(75,267,070 |
) |
|
|
(4,944,956 |
) |
Proceeds from sale and maturity of investments |
|
|
116,574,567 |
|
|
|
29,765,780 |
|
|
|
2,184,822 |
|
Payment for businesses acquired, net of cash acquired |
|
|
(39,181,473 |
) |
|
|
|
|
|
|
|
|
Purchase of intangible assets |
|
|
(58,238 |
) |
|
|
(28,748 |
) |
|
|
(346,365 |
) |
Purchases of property and equipment |
|
|
(4,904,991 |
) |
|
|
(3,058,813 |
) |
|
|
(2,097,555 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(37,626,503 |
) |
|
|
(48,588,851 |
) |
|
|
(5,204,054 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows
from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Increase in short term debt |
|
|
|
|
|
|
8,883,104 |
|
|
|
|
|
Decrease in short term debt |
|
|
(9,137,223 |
) |
|
|
|
|
|
|
(2,058 |
) |
Loans paid |
|
|
|
|
|
|
(9,000,000 |
) |
|
|
(3,000,000 |
) |
Repurchase of
Treasury Stock |
|
|
(2,598,223 |
) |
|
|
|
|
|
|
|
|
Stock options exercised |
|
|
83,089 |
|
|
|
38,576 |
|
|
|
7,107 |
|
Exercise of warrants |
|
|
|
|
|
|
749,991 |
|
|
|
|
|
Issuance of common stock |
|
|
|
|
|
|
49,573,239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in ) provided by financing activities |
|
|
(11,652,357 |
) |
|
|
50,244,910 |
|
|
|
(2,994,951 |
) |
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
(3,471,576 |
) |
|
|
115,738 |
|
|
|
203,840 |
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
|
1,796,705 |
|
|
|
8,534,380 |
|
|
|
(1,836,811 |
) |
Cash and cash equivalents, beginning of the year |
|
|
15,677,407 |
|
|
|
7,143,027 |
|
|
|
8,979,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of the year |
|
$ |
17,474,112 |
|
|
$ |
15,677,407 |
|
|
$ |
7,143,027 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-7
MercadoLibre Inc.
Consolidated Statements of Cash Flows
For the three years ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
7,138,402 |
|
|
$ |
1,572,909 |
|
|
$ |
851,667 |
|
Cash paid for income taxes |
|
$ |
7,921,206 |
|
|
$ |
3,864,908 |
|
|
$ |
1,916,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of preferred stock |
|
$ |
|
|
|
$ |
309,299 |
|
|
$ |
494,878 |
|
Conversion of mandatorily redeemable convertible preferred stock
into common stock |
|
$ |
|
|
|
$ |
64,385,844 |
|
|
$ |
|
|
Reclassifications of warrants |
|
$ |
|
|
|
$ |
4,636,456 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of DeRemate and Classified Media Group: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
691,632 |
|
|
$ |
|
|
|
$ |
|
|
Funds receivable from customers |
|
$ |
117,473 |
|
|
$ |
|
|
|
$ |
|
|
Accounts receivable |
|
|
6,569,098 |
|
|
|
|
|
|
|
|
|
Tax credits |
|
|
604,419 |
|
|
|
|
|
|
|
|
|
Other current assets |
|
|
918,856 |
|
|
|
|
|
|
|
|
|
Non current assets |
|
|
504,927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets acquired |
|
|
9,406,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
|
4,578,830 |
|
|
|
|
|
|
|
|
|
Funds payable to customers |
|
|
146,191 |
|
|
|
|
|
|
|
|
|
Taxes payable |
|
|
1,204,479 |
|
|
|
|
|
|
|
|
|
Social security payable |
|
|
395,112 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
1,590,371 |
|
|
|
|
|
|
|
|
|
Non current liabilities |
|
|
14,000 |
|
|
|
|
|
|
|
|
|
Provisions |
|
|
1,548,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities assumed |
|
|
9,477,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired |
|
|
(70,969 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
52,638,036 |
|
|
|
|
|
|
|
|
|
Trademarks |
|
|
5,622,188 |
|
|
|
|
|
|
|
|
|
Customer lists |
|
|
1,227,600 |
|
|
|
|
|
|
|
|
|
Non compete agreement |
|
|
573,484 |
|
|
|
|
|
|
|
|
|
Deferred income tax on intangible assets |
|
|
(2,598,145 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total purchase price |
|
|
57,392,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents acquired |
|
|
(691,632 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment for businesses acquired, net of
cash acquired |
|
$ |
39,181,473 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Seller financing for DeRemate business acquisition (1) |
|
$ |
17,519,088 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Seller financing for DeRemate business acquisition is presented net of working capital
adjustment (See note 6 for more details) |
The accompanying notes are an integral part of these consolidated financial statements.
F-8
MercadoLibre Inc.
Notes to Consolidated Financial Statements
MercadoLibre Inc. (the Company) is a marketplace manager. The Companys mission is to build
an online marketplace that enables practically anyone to trade almost anything in Latin
America, helping to make inefficient markets more efficient.
The Company operates in several reporting segments. The MercadoLibre marketplace segments
include Brazil, Argentina, Mexico, Venezuela and Other countries (Chile, Colombia, Costa Rica,
Dominican Republic, Ecuador, Panama, Peru and Uruguay). The MercadoPago segment includes our
regional payments platform consisting of our MercadoPago business available in Brazil,
Argentina, Mexico and Other countries (Chile, Colombia, and Venezuela).
Traditional offline marketplaces can be inefficient because they (i) are fragmented and
regional, (ii) offer a limited variety and breadth of goods, (iii) have high transaction costs,
and (iv) provide buyers with less information upon which they can make decisions. The Company
makes these inefficient marketplaces more efficient because (i) its community of users can
easily and inexpensively communicate and complete transactions, (ii) its marketplace includes a
very wide variety and selection of goods, and (iii) it brings buyers and sellers together for
much lower fees than traditional intermediaries. The Company attracts buyers by offering
selection, value, convenience and entertainment, and sellers by offering access to broad
markets, efficient marketing and distribution costs, ability to maximize prices and opportunity
to increase sales.
The Company pioneered online commerce in the region by developing a Web-based community in
which buyers and sellers are brought together to browse, buy and sell items such as computers,
electronics, collectibles, automobiles and a host of practical and miscellaneous items. The
Companys trading platform is a fully automated, topically arranged, intuitive, and easy-to-use
online service that is available 24 hours-a-day, seven-days-a-week. The Companys platform
supports a fixed price format in which sellers and buyers trade items at a fixed price
established by sellers, and an auction format in which sellers list items for sale and buyers
bid on items of interest.
Providing more efficient and effective payment methods from buyers to sellers is essential to
creating a faster, easier and safer online commerce experience. Traditional payment methods
such as bank deposits and cash on delivery present various obstacles to the online commerce
experience, including lengthy processing time, inconvenience and high costs. The Company
addressed this opportunity through the introduction in 2004 of MercadoPago, an integrated
online payments solution. MercadoPago was designed to facilitate transactions on the
MercadoLibre Marketplace by providing an escrow mechanism that enables users to securely,
easily and promptly send and receive payments online, and has experienced consistent growth
since its launch.
F-9
MercadoLibre Inc.
Notes to Consolidated Financial Statements
1. |
|
Nature of Business (Continued) |
In 2004, the Company introduced an online classified advertisements service platform for motor
vehicles, vessels and aircrafts. Buyers usually require a physical inspection of these items or
specific types of interactions before completing a transaction, and therefore an online
classified advertisements service is better suited for purchase and sales of these types
of items than the traditional online purchase and sales method. For these items, buyers
can search by make, model, year and price, and sellers can list their phone numbers and receive
prospective buyers e-mail addresses, in order to allow for instant and direct communication
between sellers and potential buyers.
In November of 2005, the Company acquired certain operations DeRemate.com Inc., a regional
competing online marketplace, including all of its operations in Brazil, Colombia, Ecuador,
Mexico, Peru, Uruguay and Venezuela and the majority of the shares of the capital stock of its
subsidiaries (except for its Argentine and Chilean subsidiaries, which were operated under the
control of certain previous stockholders of DeRemate), for an aggregate purchase price of
$12.1 million, net of cash and cash equivalents acquired.
During 2006, the online classified advertisements service platform was expanded to include real
estate. Much in the same way as with motor vehicles, vessels and aircrafts, purchases of real
estate, require physical inspection of the property and is therefore a business more suited to
a classifieds model. For real estate listings, in addition to posting their contact
information, individual owners or real estate agents can also upload pictures and videos of the
property for sale and include maps of the propertys location and layout.
During 2006, the Company launched several initiatives to improve its platform and expand its
reach. Particularly relevant were the launch of a new platform for eShops, to attract lower
rotation items and increase the breadth of products offered, the introduction of user generated
information guides for buyers that improve the shopping experience, and the expansion of the
online classifieds model by adding a services category. In terms of geographic expansion, the
Company launched sites in Costa Rica, the Dominican Republic, and Panama.
In August 2007, the Company successfully completed its initial public offering pursuant to
which the Company sold 3,000,000 shares of common stock and certain selling shareholders sold
15,488,762 shares of common stock, resulting in net proceeds for the Company of approximately
$49,573,239.
During 2007 the Company also launched a new and improved version of its MercadoPago payments
platform in Chile and Colombia as well as in Argentina during 2008. The new MercadoPago, in
addition to improving the ease of use and efficiency of payments for marketplace purchases,
also allows for payments outside of the Companys marketplaces. Users are able to transfer
money to other users with MercadoPago accounts and to incorporate MercadoPago as a means of
payments for their websites. In this way MercadoPago 3.0 as it has been called is designed to
meet the growing demand for Internet based payments systems in Latin America.
In January 2008, the Company acquired 100% of the issued and outstanding shares of capital
stock of Classified Media Group, Inc., or CMG, and its subsidiaries. CMG and its subsidiaries
operated an online classified advertisements platform primarily dedicated to the sale of
automobiles at www.tucarro.com in Venezuela, Colombia and Puerto Rico and real estate at
www.tuinmueble.com in Venezuela, Colombia, Panama, the United States, Costa
Rica and the Canary Islands. The purchase price for the shares of CMG and its subsidiaries was
$19 million, subject to certain escrows and working capital adjustment clauses.
F-10
MercadoLibre Inc.
Notes to Consolidated Financial Statements
1. |
|
Nature of Business (Continued) |
In September 2008, the Company completed the acquisition of DeRemate.com de Argentina S.A.,
DeRemate.com Chile S.A., Interactivos y Digitales México S.A. de C.V. and Compañía de Negocios
Interactiva de Colombia E.U. for an aggregate purchase price of $ 37.6 million. We also
purchased certain URLs, domains, trademarks, databases and intellectual property rights related
to those businesses for $ 2.4 million. The total purchase price was subject to certain set off
rights and working capital adjustment clauses.
As of December 31, 2008, the Company, through its wholly-owned subsidiaries, operated online
commerce platforms directed towards Argentina, Brazil, Chile, Colombia, Costa Rica, Dominican
Republic, Ecuador, Mexico, Panama, Peru, Uruguay and Venezuela, and online payments solutions
directed towards Argentina, Brazil, Mexico, Venezuela, Chile and Colombia.
2. |
|
Summary of Significant Accounting Policies |
Principles of consolidation
The accompanying consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All significant intercompany transactions and balances have been
eliminated.
Substantially all revenues and operating costs are generated in the Companys foreign
operations, amounting to approximately 98% of the consolidated totals during 2008, 2007 and
2006. Long-lived assets located in the foreign operations totaled $92,268,840 and $25,670,051
as of December 31, 2008 and 2007, respectively. Cash and cash equivalents as well as short-term
investments, totaling $49,113,512 and $67,977,414 at December 31, 2008 and 2007, respectively,
are mainly located in the United States of America.
Use of estimates
The preparation of consolidated financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Estimates are used for, but not limited to accounting for
allowance for doubtful accounts, depreciation, amortization, impairment and useful lives of
long-lived assets, impairment of goodwill and other indefinite lived intangible assets,
compensation cost related to cash and share-based compensation and restricted shares,
recognition of current and deferred income taxes and contingencies. Actual results could differ
from those estimates.
F-11
MercadoLibre Inc.
Notes to Consolidated Financial Statements
2. |
|
Summary of Significant Accounting Policies (Continued) |
Cash and cash equivalents
The Company considers all highly liquid investments with an original maturity of three months
or less at the date of purchase, consisting primarily of debt securities and certificates
of deposit, to be cash equivalents. Cash equivalents are stated at amortized cost plus accrued
interest.
Investments
Securities classified as available-for-sale are recorded at fair market value. Unrealized gains
and losses on available-for-sale securities are recorded as accumulated other comprehensive
income (loss) as a separate component of shareholders equity (deficit). Investments classified
as held-to-maturity are recorded at amortized cost with interest income recorded in earnings.
Investments are classified as current or non-current depending on their maturity dates and
availability to fund operations.
Fair Value Measurements
Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards
(FAS) No. 157, Fair Value Measurements (FAS 157). In February 2008, the Financial
Accounting Standards Board (FASB) issued FASB Staff Position (FSP) No. FAS 157-2,
Effective Date of FASB Statement No. 157, which provides a one year deferral of the effective
date of FAS 157 for non-financial assets and non-financial liabilities, except those that are
recognized or disclosed in the financial statements at fair value at least annually. Therefore,
the Company has adopted the provisions of FAS 157 with respect to its financial assets and
liabilities only. The adoption of FAS 157 did not have a material impact on the consolidated
results of operations or financial condition. See note 8 for further details.
Concentration of credit risk
Cash, cash equivalents, investments and accounts receivable are potentially subject to
concentration of credit risk. Cash and cash equivalents and investments are placed with
financial institutions that management believes are of high credit quality. Accounts receivable
are derived from revenue earned from customers located internationally. Accounts receivable
balances are settled through customer credit cards, debit cards, and MercadoPago accounts, with
the majority of accounts receivable collected upon processing of credit card transactions. The
Company maintains an allowance for doubtful accounts receivable and funds receivable from
customers based upon its historical experience. Historically, such losses have been within
management expectations. However, unexpected or significant future changes in trends could
result in a material impact to future statements of income or cash flows. Due to the relatively
small dollar amount of individual accounts receivable, the Company generally does not require
collateral on these balances. The allowance for doubtful accounts is recorded as a charge to
operating expense.
F-12
MercadoLibre Inc.
Notes to Consolidated Financial Statements
2. |
|
Summary of Significant Accounting Policies (Continued) |
Concentration of credit risk (Continued)
During the years ended December 31, 2008, 2007, and 2006, no customers accounted for more
than 10% of net revenues. As of December 31, 2008 and 2007, no customers accounted for more
than 10% of accounts receivables, net.
Allowance for doubtful accounts
The company maintains allowances for doubtful accounts for estimated losses that may result
from the inability of its customers to make required payments. Allowances are based upon
several factors including, but not limited to, historical experience and the current condition
of specific customers.
Funds receivable and funds payable to customers
Funds receivable relate to the Companys Payments segment and arise due to the time taken to
clear transactions through external payment networks. When customers fund their account using
their bank account or credit card, there is a period before the cash is received by the
Company. Hence, these funds are treated as a receivable until the cash is settled. These funds
are presented net of the related allowance for chargebacks.
Funds payable relate also to the Companys Payments segment and represent amounts due to
customers which are held by the Company until the transaction is completed.
Transfer of Financial Assets
During 2008, the Company has sold funds receivable from customers comprised by credit cards
coupons to financial institutions. These transactions were accounted for as a true sale
according to Financial Accounting Standard No. 140 Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities a replacement of FASB Statement 125. This
standard establishes that the transferor has surrendered control over transferred assets if and
only if all of the following conditions are met: (1)the transferred assets have been isolated
from the transferor, (2) each transferee has the right to pledge or exchange the assets it
received (3) the transferor does not maintain effective control over the transferred assets. As
all the conditions were met the Company derecognizes the financial assets from its balance
sheet.
Property and equipment, net
Property and equipment are recorded at cost and depreciated over their estimated useful lives
using the straight-line method. Repairs and maintenance costs are expensed as incurred.
Costs related to the planning and post implementation phases of website development efforts are
recorded as an operating expense. Direct costs incurred in the development phase are
capitalized and amortized over an estimated useful life of three years.
F-13
MercadoLibre Inc.
Notes to Consolidated Financial Statements
2. |
|
Summary of Significant Accounting Policies (Continued) |
Goodwill and intangible assets, net
Goodwill represents the excess of the purchase price over the fair value of the net tangible
and intangible assets acquired in a business combination. Goodwill is not subject to
amortization, but is subject to at least an annual assessment for impairment, applying a
fair-value based test.
Intangible assets resulting from the acquisitions of entities accounted for using the
purchase method of accounting are estimated by management based on the fair value of assets
received. Identifiable intangible assets are comprised of purchased customer lists, trademarks,
licenses and non-compete agreements. Identifiable intangible assets with definite useful life,
are being amortized over the period of estimated benefit using the straight-line method and
estimated useful lives ranging from three to five years. Certain trademarks with indefinite
useful life are not subject to amortization, but are subject to at least an annual assessment
for impairment, applying a fair-value based test.
Impairment of Long-Lived Assets
The Company reviews long-lived assets for impairments whenever events or changes in
circumstances indicate that the carrying value of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount
of an asset to undiscounted future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired on this basis, the impairment loss to be recognized
is measured by the amount by which the carrying amount of the assets exceeds the fair value of
the assets.
Goodwill and certain indefinite live trademarks are reviewed at least annually for impairment.
Impairment of goodwill and certain trademarks are tested at the reporting unit level
(considering each segment of the Company as a reporting unit) by comparing the reporting units
carrying amount, including goodwill and certain trademarks, to the fair value of the reporting
unit. The fair values of the reporting units are estimated using a combination of the income or
discounted cash flows approach and the market approach, which utilizes comparable companies
data. Cash flow projections used are based on financial budgets approved by management. The
growth rates applied do not exceed the long-term average growth rate for the business in which
the reporting unit operates. The average discount rate used is 22.6% which reflects the
Companys real weighted average cost of capital. Key drivers in the analysis include Gross
Merchandise Volume (GMV) which represents a measure of the total U.S. dollar amount of all
transactions completed through the MercadoLibre marketplace, excluding motor vehicles, vessels,
aircraft, real estate, and services and take rate defined as marketplace revenues as a
percentage of gross merchandise volume. In addition, the benchmark in the analysis include a
business to e-commerce rate, which represents growth of e-commerce as a percentage of GDP,
internet penetration rates as well as trends in the Companys market share.
F-14
MercadoLibre Inc.
Notes to Consolidated Financial Statements
2. |
|
Summary of Significant Accounting Policies (Continued) |
If the carrying amount of the reporting unit exceeds its fair value, goodwill or indefinite
useful life intangible assets are considered impaired and a second step is performed to measure
the amount of impairment loss, if any. No impairments were recognized during the reporting
periods and managements assessment of each reporting unit fair value materially exceeds its
carrying value.
Revenue Recognition
The Companys net revenues are derived primarily from final value fees calculated as a
percentage of the final sales transaction value, from listing fees, from optional feature fees,
and from payment services processing fees; and to a much lesser extent, from online advertising
and eShops fees.
Revenues are recognized when evidence of an arrangement exists, the fee is fixed or
determinable, no significant obligation remains and collection of the receivable is reasonably
assured.
Revenues related to final value fees are recognized at the time that the transaction is
successfully concluded. A transaction is considered successfully concluded at the sellers
specified fixed price or the highest bid in the case of an auction at the end of the
transaction term.
Advertising revenues, which are principally derived from the sale of banners or sponsorship on
the sites, are recognized as the impressions are delivered.
Revenues related to listing fees, optional feature fees, eShops fees and certain classified
advertising fees are recognized ratably over the estimated period of the auction. Revenues
resulting from a payment processing transaction are recognized once the transaction is
completed.
Derivative Financial Instruments
During November and December 2008, the Company entered into written put options of its own
stock. Those derivative financial instruments are not accounted for as hedges and, therefore,
changes in the fair value of these instruments are recorded in the statement of income as
interest income and other financial gains. The Company accounts for its written put options
pursuant to Financial Accounting Standards No. 150 Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity and Financial Accounting
Standards No. 133 Accounting for Derivative Instruments and Hedging Activities (FAS 133).
The liabilities associated with the derivative instruments are recorded at fair value in
current liabilities in the consolidated balance sheet. See Note 18 Share Repurchase Program
for a full description of derivative financial instrument activities and related accounting
policies.
F-15
MercadoLibre Inc.
Notes to Consolidated Financial Statements
2. |
|
Summary of Significant Accounting Policies (Continued) |
Share-based payments
|
|
|
Stock options, restricted and additional shares and shares granted under the long term
retention plan (LTRP) are accounted for at their grant date fair value. |
Fair value of stock options is calculated using the Black-Scholes option pricing model. This
calculation is affected by the Companys stock price as well as assumptions regarding a number
of highly complex and subjective variables. The use of a Black-Scholes model requires extensive
actual employee exercise behavior data and a number of complex assumptions including expected
life, expected volatility, risk-free interest rate and dividend yield. As a result, the future
stock-based compensation expense may differ from historical amounts.
Fair value of restricted and additional shares and shares granted under the LTRP is calculated
by the grant date price of the Companys shares.
Compensation cost is recognized on a straight-line basis over the requisite service period. For
awards that have a graded vesting schedule, compensation cost is recognized on a straight-line
basis over the requisite service period for each separately vesting portion of the award as if
the award was, in-substance, multiple awards.
Taxes on revenues
The Company subsidiaries in Brazil, Argentina, Venezuela and Colombia are subject to certain
taxes on revenues which are classified as cost of net revenues and totaled $8,179,443,
$5,064,264, and $2,925,624 for the years ended December 31, 2008, 2007 and 2006, respectively.
Advertising Costs
Advertising costs are expensed as incurred and totaled $22,512,409, $17,134,300, and
$13,788,791 for the years ended December 31, 2008, 2007 and 2006, respectively.
Comprehensive Income
Comprehensive income is comprised of two components, net income and other comprehensive income
(loss), and defined as all other changes in equity of the Company that result from transactions
other than with shareholders. Other comprehensive income includes the cumulative translation
adjustment relating to the translation of the financial statements of the Companys foreign
subsidiaries and unrealized gains on investments classified as available-for-sale securities.
Mandatorily Redeemable Convertible Preferred Stock
As of December 31, 2008 all shares of Preferred Stock has been converted to the same
class of Common Stock. Before the Initial Public Offering (See notes 10 and note 21 for
more details), the carrying value of mandatorily redeemable convertible preferred stock
was increased by periodic accretions so that the carrying amount equals the redemption
amount
at the redemption date. These increases were affected through charges against the
Companys additional-paid-in capital with effect on net income available to common
shareholders and earnings per share.
F-16
MercadoLibre Inc.
Notes to Consolidated Financial Statements
2. |
|
Summary of Significant Accounting Policies (Continued) |
Foreign Currency Translation
All of the Companys foreign operations have determined the local currency to be their
functional currency. Accordingly, these foreign subsidiaries translate assets and liabilities
from their local currencies to U.S. dollars using year end exchange rates while income and
expense accounts are translated at the average rates in effect during the year. The resulting
translation adjustment is recorded as part of other comprehensive income (loss), a component of
shareholders equity (deficit). Gains and losses resulting from transactions denominated in
non-functional currencies are recognized in earnings. Net foreign currency transaction losses
are included in the consolidated statements of income under the caption Foreign currency loss
and amounted to $(1,531,144), $(3,106,515) and $(391,981) for the years ended December 31,
2008, 2007 and 2006, respectively.
Income and Asset Taxes
The Company is subject to U.S. and foreign income taxes. The Company accounts for income taxes
following the liability method of accounting which requires the recognition of deferred tax
liabilities and assets for the expected future tax consequences of temporary differences
between the carrying amounts and the tax bases of assets and liabilities. Deferred tax assets
are also recognized for tax loss carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect on deferred tax
assets or liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. A valuation allowance is recorded when, based on the available
evidence, it is more likely than not that all or a portion of the Companys deferred tax assets
will not be realized. The Companys income tax expense consists of taxes currently payable, if
any, plus the change during the period in the Companys deferred tax assets and liabilities.
The Companys Argentine subsidiary is a beneficiary of a software development law. Part of the
benefits obtained from being a beneficiary of the aforementioned law is a relief of 60% of
total income tax determined in each year, for 10 years.
The Company is subject to a Mexican business flat tax called Impuesto Empresarial a Tasa
Unica (IETU) enacted in 2008. The Company pays the higher of IETU or income tax. Although
the Companys Mexican subsidiary had net operating loss carryforward (NOLs) as of December 31,
2008, it had to pay IETU for the year ended December 31, 2008. Once NOLs are consumed, the
Company expects to accrue and pay income tax only. The effect of IETU has been included in the
income / asset tax expense line for the year ended December 31, 2008 for approximately
$807,407.
F-17
MercadoLibre Inc.
Notes to Consolidated Financial Statements
2. |
|
Summary of Significant Accounting Policies (Continued) |
Uncertainty in Income Taxes
On January 1, 2007 the Company adopted Interpretation No. 48, Accounting for Uncertainty in
Income Taxes An Interpretation of FASB Statement No. 109 (FIN 48). This interpretation
clarifies the accounting for uncertain tax positions recognized in a companys financial
statements in accordance with Statement 109. FIN 48 prescribes a more likely than not
recognition threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on de-recognition, classification of a liability for unrecognized tax
benefits, accounting for interest and penalties, accounting in interim periods, and expanded
income tax disclosures. The adoption of FIN 48 had no significant impact on the Companys
consolidated financial statements.
The Company is subject to taxation in the U.S. and various foreign jurisdictions. The material
jurisdictions that are subject to examination by tax authorities for tax years after 2002
primarily include the U.S., Argentina, Brazil, Mexico and Venezuela.
The company classifies interest and penalties in the statement of income in income / asset tax
expense.
Recent Accounting Pronouncements
1. Business Combinations
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141
(revised 2007), Business Combinations (SFAS 141 R). This Statement replaces SFAS 141,
Business Combinations. This Statement retains the fundamental requirements in Statement 141
that the acquisition method of accounting (which Statement 141 called the purchase method) be
used for all business combinations. This Statement defines the acquirer as the entity that
obtains control of one or more businesses in the business combination and establishes the
acquisition date as the date that the acquirer achieves control. Statement 141 did not define
the acquirer, although it included guidance on identifying the acquirer, as does this
Statement. This Statements scope is broader than that of Statement 141, which applied only to
business combinations in which control was obtained by transferring consideration.
This Statement applies prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning on or after
December 15, 2008. An entity may not apply it before that date.
2. Noncontrolling Interests in Consolidated Financial Statements
In December 2007, the FASB issued Statement of Financial Accounting Standards No.160,
Noncontrolling Interests in Consolidated Financial Statementsan amendment of ARB No. 51
(SFAS 160). This Statement amends ARB No. 51 to establish accounting and reporting standards
for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It
clarifies that a noncontrolling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as equity in the consolidated
financial statements. This Statement is effective for fiscal years, and interim periods within
those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited.
F-18
MercadoLibre Inc.
Notes to Consolidated Financial Statements
2. |
|
Summary of Significant Accounting Policies (Continued) |
Recent Accounting Pronouncements (Continued)
3. Determination of the useful life of intangible assets
In April 2008, the FASB issued FASB Staff Position 142-3, Determination of the Useful
Life of Intangible (FSP 142-3). Under FSP 142-3, for renewable intangible assets acquired in
fiscal years beginning after December 15, 2008, an entity should consider its own historical
experience in renewing or extending similar arrangements when developing its assumptions about
renewals or extensions used to determine the useful life of an intangible asset; however, these
assumptions should be adjusted for the entity specific factors in paragraph 11 of FAS 142. In
the absence of that experience, an entity should consider the assumptions that market
participants would use about renewals or extensions (consistent with the highest and best use
of the asset by market participants), adjusted for the entity specific factors in paragraph 11
of FAS 142. The Company will evaluate the impact of FSP 142-3 on its consolidated financial
statements.
4. Hierarchy of Generally Accepted Accounting Principles
In May 2008, the FASB issued Statement of Financial Accounting Standards No.162, The
Hierarchy of Generally Accepted Accounting Principles. This Statement identifies the sources
of accounting principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are presented in
conformity with generally accepted accounting principles (GAAP) in the United States (the
GAAP hierarchy). The Board believes that the GAAP hierarchy should be directed to entities
because it is the entity that is responsible for selecting accounting principles for financial
statements that are presented in conformity with GAAP. Accordingly, the Board concluded that
the GAAP hierarchy should reside in the accounting literature established by the FASB and is
issuing this Statement to achieve that result. This Statement is effective 60 days following
the SECs approval of the Public Company Accounting Oversight Board amendments to AU Section
411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles.
F-19
MercadoLibre Inc.
Notes to Consolidated Financial Statements
2. |
|
Summary of Significant Accounting Policies (Continued) |
Recent Accounting Pronouncements (Continued)
5. Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities
In June 2008, the FASB issued Financial Standard Position No. EITF 03-6-1, Determining
Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.
This FASB Staff Position (FSP) addresses whether instruments granted in share-based payment
transactions are participating securities prior to vesting and, therefore, need to be included
in the earnings allocation in computing earnings per share (EPS) under the two-class method
described in paragraphs 60 and 61 of FASB Statement No. 128, Earnings per Share. Issue 03-6
provides guidance on share-based payment awards that contain a right to receive dividends
declared on the common stock of the issuer that are fully vested. However, in Issue 2(a) the
Task Force declined to provide guidance on share-based payment awards that were not fully
vested (that is, awards for which the requisite service had not yet been rendered). This FSP
shall be effective for financial statements issued for fiscal years beginning after December
15, 2008, and interim periods within those years. All prior-period EPS data presented shall be
adjusted retrospectively (including interim financial statements, summaries of earnings, and
selected financial data) to conform with the provisions of this FSP. Early application is not
permitted. The implementation of this standard will not have an impact on the Companys
consolidated financial statements.
6. Determination of the fair value of financial assets
In October 2008, the FASB issued FASB Staff Position FAS 157-3, Determining the Fair Value of
a Financial Asset When the Market for That Asset Is Not Active (FSP 157-3). FSP 157-3
clarified the application of FAS 157. FSP 157-3 demonstrated how the fair value of a financial
asset is determined when the market for that financial asset is inactive. FSP 157-3 was
effective upon issuance, including prior periods for which financial statements had not been
issued. The implementation of this standard did not have an impact on the Companys
consolidated financial statements.
Basic earnings per share for the Companys common stock is computed by dividing net income
available to common shareholders attributable to common stock for the year by the weighted
average number of common shares outstanding during the year.
F-20
MercadoLibre Inc.
Notes to Consolidated Financial Statements
3. |
|
Net income per share (Continued) |
Net income available to common shareholders is computed by deducting from net income accretion
of preferred stock.
The Companys mandatorily redeemable convertible preferred stock outstanding up to August 15,
2007 was a participating security. Accordingly, net income for the years ended December 31,
2007 and 2006 was allocated between common stock and preferred stock under the two class
method for purposes of computing basic earnings per share. Subsequent to conversion, on August
15, 2007, the common shares issued were included in the weighted average calculation of shares
outstanding used for both basic and diluted earnings per share.
Diluted earnings per share for the Companys common stock assume the exercise of outstanding
stock options and restricted shares under the Companys stock based compensation plans. For
diluted earnings per common share, net income for the years ended December 31, 2008, 2007 and
2006 was also allocated between common stock and preferred stock under the two class method
because assuming that mandatorily redeemable convertible preferred stock is fully converted
into common stock would result in the same dilutive effect.
The following table shows how net income is allocated using the two-class method for earnings
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and |
|
|
|
Basic |
|
|
Diluted |
|
|
Basic |
|
|
Diluted |
|
|
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
18,811,661 |
|
|
$ |
18,811,661 |
|
|
$ |
9,692,940 |
|
|
$ |
9,692,940 |
|
|
$ |
1,072,083 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of preferred stock |
|
|
|
|
|
|
|
|
|
|
(309,299 |
) |
|
|
(309,299 |
) |
|
|
(494,878 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders |
|
$ |
18,811,661 |
|
|
$ |
18,811,661 |
|
|
$ |
9,383,641 |
|
|
$ |
9,383,641 |
|
|
$ |
577,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common
shareholders
attributable to
preferred stock |
|
|
|
|
|
|
|
|
|
|
(3,772,510 |
) |
|
|
(3,734,758 |
) |
|
|
(389,047 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common
shareholders
attributable to
common stock |
|
$ |
18,811,661 |
|
|
$ |
18,811,661 |
|
|
$ |
5,611,131 |
|
|
$ |
5,648,883 |
|
|
$ |
188,158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-21
MercadoLibre Inc.
Notes to Consolidated Financial Statements
3. |
|
Net income per share (Continued) |
Net income per share of common stock is as follows for the years ended December 31, 2008, 2007
and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
Basic |
|
|
Diluted |
|
|
Basic |
|
|
Diluted |
|
|
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders per common share |
|
$ |
0.43 |
|
|
$ |
0.42 |
|
|
$ |
0.22 |
|
|
$ |
0.22 |
|
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders |
|
$ |
18,811,661 |
|
|
$ |
18,811,661 |
|
|
$ |
5,611,131 |
|
|
$ |
5,648,883 |
|
|
$ |
188,158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average of common stock outstanding for Basic earnings per share |
|
|
44,239,443 |
|
|
|
44,239,443 |
|
|
|
25,149,405 |
|
|
|
25,149,405 |
|
|
|
13,149,139 |
|
Adjustment for stock options |
|
|
|
|
|
|
98,507 |
|
|
|
|
|
|
|
328,931 |
|
|
|
|
|
Adjustment for restricted shares |
|
|
|
|
|
|
498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for additional shares |
|
|
|
|
|
|
10,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average of common stock outstanding for Diluted earnings per share |
|
|
44,239,443 |
|
|
|
44,348,950 |
|
|
|
25,149,405 |
|
|
|
25,478,336 |
|
|
|
13,149,139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The calculation of diluted net income per common share excludes all anti-dilutive shares. For
the years ended December 31, 2008, 2007 and 2006, the numbers of anti-dilutive shares are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Anti-dilutive shares |
|
|
|
|
|
|
|
|
|
|
|
|
Warrants |
|
|
|
|
|
|
114,603 |
|
|
|
184,272 |
|
Restricted shares |
|
|
3,082 |
|
|
|
3,895 |
|
|
|
|
|
Stock Options |
|
|
|
|
|
|
|
|
|
|
652,457 |
|
Shares granted under LTRP |
|
|
21,591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,673 |
|
|
|
118,498 |
|
|
|
836,729 |
|
|
|
|
|
|
|
|
|
|
|
4. |
|
Short-term and long-term investments |
The composition of short-term and long-term investments is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Short-term investments |
|
|
|
|
|
|
|
|
Time Deposits |
|
$ |
21,365,613 |
|
|
$ |
14,554,229 |
|
Commercial Papers |
|
|
|
|
|
|
12,996,502 |
|
Money Market Funds |
|
|
2,408,294 |
|
|
|
24,749,276 |
|
Bond Mutual Funds |
|
|
1,530,034 |
|
|
|
|
|
Treasury Bills |
|
|
6,335,459 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
31,639,400 |
|
|
$ |
52,300,007 |
|
|
|
|
|
|
|
|
Long-term investments |
|
|
|
|
|
|
|
|
Arias Trust (1) |
|
|
3,287,823 |
|
|
|
|
|
Time Deposits |
|
|
2,559,465 |
|
|
|
|
|
Corporate Debt Securities |
|
|
3,370,865 |
|
|
|
1,323,789 |
|
|
|
|
|
|
|
|
Total |
|
$ |
9,218,153 |
|
|
$ |
1,323,789 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As this investment represents an undivided interest for more than 20% of the total
amount of the real estate trust, it is accounted for under the equity method and it is
classified as Long-Term Investments in the balance sheet (See note 16 Other Commitments). |
F-22
MercadoLibre Inc.
Notes to Consolidated Financial Statements
4. |
|
Short-term and long-term investments (Continued) |
The Company has classified its investments in money market funds as available-for-sale
securities.
Available-for-sale securities are stated at market value, with unrealized gains and losses
reflected, net of tax, as other comprehensive income in shareholders equity (deficit).
Realized gains and losses are included in earnings and are derived using the specific
identification method for determining the cost of securities.
Unrealized gains of available-for-sale securities, net of tax, were $3,642, $153,876 and
$102,330 for the years ended December 31, 2008, 2007 and 2006, respectively. These investments
do not have a maturity date.
Time deposits, commercial papers, corporate debt securities and sovereign debt securities are
considered held-to-maturity securities. Interest Income on held to maturity securities were
$1,116,853, $766,953, and $46,926 for the years ended December 31, 2008, 2007 and 2006. The
short-term held-to-maturity securities mature on several dates between January and December
2009. The long-term held-to-maturity securities mature no longer than May 2011.
The book value of held-to-maturity securities approximates their respective fair value and
consequently there are no significant unrecognized gains or losses.
5. |
|
Balance sheet components |
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Accounts receivable, net: |
|
|
|
|
|
|
|
|
|
Users |
|
$ |
9,664,598 |
|
|
$ |
7,975,231 |
|
Credit cards and other means of payments |
|
|
1,471,203 |
|
|
|
1,294,136 |
|
Advertising |
|
|
1,203,710 |
|
|
|
489,146 |
|
Others debtors |
|
|
27,008 |
|
|
|
65,164 |
|
|
|
|
|
|
|
|
|
|
|
|
12,366,519 |
|
|
|
9,823,677 |
|
|
Allowance for doubtful accounts |
|
|
(8,510,127 |
) |
|
|
(6,612,425 |
) |
|
|
|
|
|
|
|
|
|
|
$ |
3,856,392 |
|
|
$ |
3,211,252 |
|
|
|
|
|
|
|
|
F-23
MercadoLibre Inc.
Notes to Consolidated Financial Statements
5. |
|
Balance sheet components (Continued) |
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Funds receivable from customers |
|
|
|
|
|
|
|
|
Credit cards and other means of payments |
|
$ |
2,489,436 |
|
|
$ |
29,751,867 |
|
Allowance for chargebacks |
|
|
(167,020 |
) |
|
|
(589,104 |
) |
|
|
|
|
|
|
|
|
|
$ |
2,322,416 |
|
|
$ |
29,162,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Other current assets: |
|
|
|
|
|
|
|
|
VAT credits |
|
$ |
681,660 |
|
|
$ |
315,167 |
|
Restricted assets |
|
|
358,900 |
|
|
|
|
|
Other taxes |
|
|
931,348 |
|
|
|
317,731 |
|
Other |
|
|
981,256 |
|
|
|
261,265 |
|
|
|
|
|
|
|
|
|
|
$ |
2,953,164 |
|
|
$ |
894,163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Other non current assets: |
|
|
|
|
|
|
|
|
Foreign currency effect on assets (1) |
|
$ |
7,827,112 |
|
|
$ |
|
|
Other |
|
|
526,284 |
|
|
|
353,395 |
|
|
|
|
|
|
|
|
|
|
$ |
8,353,396 |
|
|
$ |
353,395 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For the year ended December 31, 2008, the Venezuelan subsidiaries maintained a foreign
currency denominated asset in the form of US dollar denominated cash and cash equivalents. In
accordance with the Companys stated accounting policy, this investment should first be
re-measured into its functional currency Bolivares Fuertes. Upon re-measurement into its
functional currency, the investment will then be translated into the reporting currency of the
Company (US Dollar). In accordance with paragraph 27a of FAS 52 Foreign Currency Translation,
the asset was re-measured at the December 31, 2008 parallel exchange rate of 5.4 Bolivares
Fuertes per US dollar. Further, in accordance with paragraph 27b of FAS 52, the Venezuelan
subsidiaries assets, liabilities, income and expense accounts were translated at the rate
applicable for dividend remittances, which at December 31, 2008 is the official rate of 2.15
Bolivares Fuertes per US dollar. According to the International Practices Task Force Joint
Meeting with SEC Staff of June 2, 2008, the existence of a parallel market does not constitute
unusual circumstances potentially justifying the use of an exchange rate other than the official
rate for purposes of foreign currency translation. Accordingly, the asset is the result of
applying the Companys accounting policy for the related asset. |
F-24
MercadoLibre Inc.
Notes to Consolidated Financial Statements
5. |
|
Balance sheet components (Continued) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
|
|
useful life |
|
December 31, |
|
|
December 31, |
|
|
|
(years) |
|
2008 |
|
|
2007 |
|
Property and equipment, net: |
|
|
|
|
|
|
|
|
|
|
Equipment |
|
3-5 |
|
$ |
10,636,641 |
|
|
$ |
8,182,697 |
|
Furniture and fixtures |
|
3-5 |
|
|
2,413,000 |
|
|
|
1,646,746 |
|
Software |
|
3 |
|
|
1,693,951 |
|
|
|
1,380,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,743,592 |
|
|
|
11,209,883 |
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation |
|
|
|
|
(8,803,432 |
) |
|
|
(7,066,679 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,940,160 |
|
|
$ |
4,143,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Depreciation and amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of net revenues |
|
$ |
333,029 |
|
|
$ |
103,772 |
|
|
$ |
37,760 |
|
Product and technology development |
|
|
2,205,369 |
|
|
|
1,854,345 |
|
|
|
1,649,865 |
|
Sales and marketing |
|
|
154,130 |
|
|
|
22,772 |
|
|
|
14,525 |
|
General and administrative |
|
|
643,145 |
|
|
|
326,760 |
|
|
|
314,789 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,335,673 |
|
|
$ |
2,307,649 |
|
|
$ |
2,016,939 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Accounts payable and accrued expenses: (1) |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
7,980,983 |
|
|
$ |
4,022,469 |
|
Accrued expenses
|
|
|
|
|
|
|
|
|
Advertising |
|
|
2,205,954 |
|
|
|
3,132,771 |
|
Professional fees |
|
|
807,577 |
|
|
|
930,331 |
|
Other expense
provisions |
|
|
5,941,831 |
|
|
|
1,180,740 |
|
Other current liabilities |
|
|
4,828 |
|
|
|
11,827 |
|
|
|
|
|
|
|
|
|
|
$ |
16,941,173 |
|
|
$ |
9,278,138 |
|
|
|
|
|
|
|
|
(1) |
|
Includes $4,204,441 million related to the re-measurement of the Venezuelan subsidiaries liabilities denominated
in U.S. dollars. See footnote (1) in Other non-current assets for more detail. |
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Loans payable and other financial liabilities: |
|
|
|
|
|
|
|
|
Credit Card receivable-backed Loans (1) |
|
$ |
|
|
|
$ |
9,710,818 |
|
Loans related to DR operations
acquisition (2) |
|
|
14,769,395 |
|
|
|
|
|
Written Puts Options |
|
|
185,000 |
|
|
|
|
|
Other Loans |
|
|
9,026 |
|
|
|
2,409 |
|
|
|
|
|
|
|
|
|
|
$ |
14,963,421 |
|
|
$ |
9,713,227 |
|
|
|
|
|
|
|
|
F-25
MercadoLibre Inc.
Notes to Consolidated Financial Statements
5. |
|
Balance sheet components (Continued) |
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Non current loans payable: |
|
$ |
3,050,061 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Loans related to DR
operations acquisition
(2) |
|
$ |
3,050,061 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Certain working capital requirements of the Companys Payments operations in Brazil were
financed through bank advancements backed by credit card receivables. The weighted average
interest rate of these loans was 0.95% per month. |
|
(2) |
|
Due to the acquisition of DeRemate, on September 5, 2008, the Company issued to the Sellers
ten (10) unsecured promissory notes having an aggregate principal amount of $18,000,000. According to the modification of terms
dated February 12, 2009, these promissory notes mature as follows: (i) 3,000,000 on June 5, 2009 (ii) 9,000,000 on September
5, 2009, (iii) 3,000,000 on December 5, 2009 and, (iv) 3,000,000 on March 5, 2010. The
promissory notes bear interest at 3.17875% plus 1.5% for the first four months, 2.0% for the
second four months and 2.5% for the remaining period up to its maturity and can be prepaid by
the Company without penalty. The Seller financing for the DeRemate acquisition is presented
net of working capital adjustment (See note 6 for more detail). The figures shown above
include accrued interest of $250,306 and $50,061 related to the current and non-current
related liabilities, respectively. |
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Accumulated other comprehensive
income: |
|
|
|
|
|
|
|
|
Foreign currency translation |
|
$ |
(10,878,483 |
) |
|
$ |
4,044,801 |
|
Unrealized gains on investments |
|
|
5,603 |
|
|
|
89,061 |
|
Estimated tax loss on unrealized gains on investments |
|
|
(1,961 |
) |
|
|
(31,171 |
) |
|
|
|
|
|
|
|
|
|
|
$ |
(10,874,841 |
) |
|
$ |
4,102,691 |
|
|
|
|
|
|
|
|
6. |
|
Business Combinations, Goodwill and Intangible Assets |
Business Combinations
The following table summarizes the acquisitions consummated by the
Company during the year ended December 31, 2008. No acquisitions were
consummated during the years ended December 31, 2007 and 2006.
a) Classified Media Group, Inc.
On January 22, 2008, the Company completed the acquisition of 100% of the issued and
outstanding shares of capital stock of CMG Classified Media Group, Inc. (CMG) and its
subsidiaries from 2050 Capital Group Inc., a Panama corporation, Abax Group Inc., a
Panama corporation, Gabinete De Diseño Industrial Inc., a Panama
corporation, Stamford One Group Ltd., a British Virgin Islands limited company, EO Financial Group Inc., a Panama
corporation, Meck Investments Ltd., a British Virgin Islands limited company, CG Interventures
Inc., a Panama corporation, and other individuals (the Sellers). CMG and its subsidiaries
operate an online classified advertisements platform primarily dedicated to the sale of
automobiles (at www.tucarro.com) in Colombia, Venezuela and Puerto Rico and real
estate (at www.tuinmueble.com) in Venezuela, Colombia, Panama, the United States, Costa
Rica and the Canary Islands. This acquisition allows the Company to expand its operations
mainly in Venezuela and Colombia, solidify its market leadership position in those countries
and continue growing of online classified advertisements platform in the locations were the
acquired company operates.
F-26
MercadoLibre Inc.
Notes to Consolidated Financial Statements
6. |
|
Business Combinations, Goodwill and Intangible Assets |
Business Combinations (Continued)
On the acquisition date, the Company paid in cash for CMG $19,000,000.
The purchase price for the shares of CMG and its subsidiaries was $17,024,380, subject to an
escrow to cover unexpected liabilities and working capital adjustments. In addition,
acquisition costs amounting to $ 204,424 which were considered in the purchase price allocation
as part of the aggregate purchase price. On May 7, 2008, the Company paid $150,000 related to
certain working capital adjustments. On the Closing Date, an aggregate of $1,975,620, was
placed into an escrow account for a period of twelve (12) months after the Closing Date, in
order to secure the obligations of the former CMG shareholders that remained as managers,
pursuant to each of their respective employment agreements.
Under EITF 95-8 Accounting for Contingent Consideration Paid to the Shareholders of an
Acquired Enterprise in a Purchase Business Combination the Company has recognized this
contingent consideration paid to the former shareholders, as compensation for services. On May
12, 2008, the Company and these former shareholders agreed to an early release of the
$1,975,620 escrow on or before June 30, 2008, in exchange for a discount to the Company.
On June 27, 2008, the Company released to the former CMG shareholders $1,919,870 in full
satisfaction of the management escrow after deducting the aforementioned discount.
As of December 31, 2008, the compensation expense related to the escrow release was included in
Compensation costs related to acquisitions within operating expenses, for a total amount of
$1,919,870. This compensation expense was fully accrued in the first half of 2008.
The following table summarizes the allocation of the cash paid in the acquisition:
|
|
|
|
|
Purchase Price |
|
$ |
17,024,380 |
|
Post-closing working capital adjustments |
|
|
150,000 |
|
Direct cost of the business combination |
|
|
204,424 |
|
|
|
|
|
Total aggregate purchase price |
|
$ |
17,378,804 |
|
|
|
|
|
Compensation Cost |
|
|
1,919,870 |
|
|
|
|
|
Total Cash paid |
|
$ |
19,298,674 |
|
|
|
|
|
As from the acquisition date in January 2008, the acquired company results of operations have
been included in the Companys income statement.
F-27
MercadoLibre Inc.
Notes to Consolidated Financial Statements
6. |
|
Business Combinations, Goodwill and Intangible Assets |
Business Combinations (Continued)
The following table summarizes an allocation of the purchase price for the companies acquired
in the transaction (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Post |
|
|
Net Tangible |
|
|
Identifiable |
|
|
Deferred |
|
|
|
|
|
|
Aggregate |
|
|
|
|
|
Acquisition |
|
|
Assets / |
|
|
Intangible |
|
|
Tax |
|
|
|
|
|
|
Purchase |
|
Company Name |
|
Country |
|
Ownership |
|
|
(Liabilities) |
|
|
Assets |
|
|
Liabilities |
|
|
Goodwill |
|
|
Price |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMG Classified Media Group
Inc. |
|
Panama |
|
|
100 |
% |
|
$ |
846.3 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
846.3 |
|
Venecapital Group Inc. |
|
Panama |
|
|
100 |
% |
|
|
(26.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(26.8 |
) |
Grupo Veneclasificados C.A. |
|
Venezuela |
|
|
100 |
% |
|
|
(125.4 |
) |
|
|
4,934.2 |
|
|
|
(1,727.0 |
) |
|
|
11,442.0 |
|
|
|
14,523.8 |
|
Clasificados
Internacionales S.A. |
|
Panama |
|
|
100 |
% |
|
|
(44.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(44.8 |
) |
ColClasificados S.A. |
|
Colombia |
|
|
100 |
% |
|
|
36.4 |
|
|
|
688.0 |
|
|
|
(240.8 |
) |
|
|
1,595.5 |
|
|
|
2,079.1 |
|
Clasificados Florida LLC |
|
USA |
|
|
100 |
% |
|
|
1.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
$ |
686.9 |
|
|
$ |
5,622.2 |
|
|
$ |
(1,967.8 |
) |
|
$ |
13,037.5 |
|
|
$ |
17,378.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible net assets were valued at their respective carrying amounts adjusted to US GAAP since
the management of the Company believes that these amounts approximated their current fair
values at the acquisition date. The valuation of identifiable intangible assets acquired
reflects managements estimates based on, among other factors, use of established valuation
methods. Such assets consist of trademarks and trade names for a total amount of $5,622,188.
Management of the Company estimates that trademarks have an indefinite lifetime. For that
reason, these intangible assets are not amortized but they are subject to an annual impairment
test.
The goodwill of $13,037,504 is not expected to be deductible for tax purposes.
b) DeRemate Operations
On September 5, 2008, the Company completed, through one of its subsidiaries, Hammer.com, LLC,
the acquisition of all of the issued and outstanding shares of capital stock of DeRemate.com de
Argentina S.A., a company organized under the laws of Argentina (DR Argentina), DeRemate.com
Chile S.A., a company organized under the laws of Chile (DR Chile), Interactivos y Digitales
México S.A. de C.V., a company organized under the laws of Mexico (ID Mexico) and Compañía de
Negocios Interactiva de Colombia E.U., a company organized under the laws of Colombia (CNI
Colombia and together with DR Argentina, DR Chile, and ID Mexico, the Acquired Entities or
DeRemate). Also, on September 5, 2008, the Company entered into an asset purchase agreement
to acquired certain URLs, domain names, trademarks, databases and intellectual property rights
that are used or useful in connection with the online platforms of the Acquired Entities. The
Acquired Entities operate online trading platforms in Argentina (www.deremate.com.ar), Chile
(www.deremate.cl), Mexico (www.dereto.com.mx) and Colombia (www.dereto.com.co).
F-28
MercadoLibre Inc.
Notes to Consolidated Financial Statements
6. |
|
Business Combinations, Goodwill and Intangible Assets (Continued) |
|
|
|
Business Combinations (Continued) |
|
|
|
The aggregate purchase price paid by the Company to the Sellers for the shares of capital stock
of the Acquired Entities and the related assets was $40,000,000. The Company paid the Sellers
$22,000,000 in cash. In addition, on September 5, 2008, the Company issued to the Sellers ten
(10) unsecured promissory notes having an aggregate principal amount of $18,000,000, $8,000,000
of which are subject to set-off rights in favor of the Company for working capital adjustments
and liabilities relating to the assumption of certain contracts by the Company, $4,000,000 of
which are subject to set-off rights in favor of the Company for indemnification obligations of
the Sellers and the remaining $6,000,000 are not subject to set-off rights. Each of the
promissory notes have a one-year term, bear interest at 3.17875% plus 1.5% for the first four
months, 2.0% for the second four months and 2.5% for the third four months and can be prepaid
by the Company without penalty. Pursuant to the terms of each promissory note, until the
principal amount plus interest is repaid, the Company may not incur indebtedness in excess of
$55,000,000 in the aggregate. |
|
|
|
On February 12, 2009 we agreed to modify the maturity conditions of the
promissory note as follows: (i) 3,000,000 on June 5, 2009 (ii) 9,000,000 on September 5, 2009 (iii) 3,000,000 on December 5, 2009 and (iv) 3,000,000 on
March 5, 2010. The promissory notes bear interest at 3.17875% plus 1.5% for the first four months, 2.0% for the second four months and 2.5% for the
remaining period up to its maturity. In addition, on that date we finished the purchase price allocation period and the Company agreed with the Sellers a working
capital adjustment for $480,912 to be paid by the Sellers to the Company. |
|
|
|
The Sellers and certain of their affiliates have also agreed to enter into certain non-compete
agreements with the Company for 5 years. |
|
|
|
The Companys statement of income includes the results of operations of the acquired companies
from as September 1, 2008. |
The following table summarizes the allocation of the cash paid and debt assumed in the
acquisition:
|
|
|
|
|
Cash paid |
|
|
22,000,000 |
|
Seller financing (1) |
|
|
18,000,000 |
|
Working Capital adjustment |
|
|
(480,912 |
) |
Direct cost of the business combination |
|
|
494,301 |
|
|
|
|
|
Total aggregate purchase price |
|
$ |
40,013,389 |
|
|
|
|
|
|
|
|
(1) |
|
See Note 5 Loans
payable and other financial liabilities, for more detail. |
F-29
MercadoLibre Inc.
Notes to Consolidated Financial Statements
6. |
|
Business Combinations, Goodwill and Intangible Assets (Continued) |
|
|
|
Business Combinations (Continued) |
|
|
|
The following table summarizes the purchase price allocation of the Acquired Entities in the
transaction (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Post |
|
|
Net Tangible |
|
|
Identifiable |
|
|
Deferred |
|
|
|
|
|
|
Aggregate |
|
|
|
|
|
|
|
Acquisition |
|
|
Assets / |
|
|
Intangible |
|
|
Tax |
|
|
|
|
|
|
Purchase |
|
Company Name |
|
Country |
|
|
Ownership |
|
|
(Liabilities) |
|
|
Assets |
|
|
Liabilities |
|
|
Goodwill |
|
|
Price |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DeRemate.com de
Argentina S.A. |
|
Argentina |
|
|
100 |
% |
|
|
2,555.2 |
|
|
|
1,444.1 |
|
|
|
(505.4 |
) |
|
|
30,658.9 |
|
|
|
34,152.8 |
|
DeRemate.com Chile S.A. |
|
Chile |
|
|
100 |
% |