Edgar Filing: MERCADOLIBRE INC

10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)


þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2009


o		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)


Delaware (State of incorporation)		98-0212790 (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
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of Class		Name of Exchange upon Which Registered

Common Stock, $0.001 par value per share		Nasdaq Global Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o

Indicate by check mark if 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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o 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 registrant’s 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):


Large Accelerated Filer þ	Accelerated Filer o	Non-Accelerated Filer o	Smaller reporting company o
		(Do not check if smaller reporting company)

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 registrant’s Common Stock, $0.001 par value per share, at June 30, 2009, 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, 2009) was approximately $649,047,974. Shares of the registrant’s Common Stock held by each executive officer and director and by each entity or person that, to the registrant’s knowledge, owned 10% or more of the registrant’s outstanding common stock as of June 30, 2009 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 44,122,326 shares of the registrant’s Common Stock, $0.001 par value per share, outstanding.

Documents Incorporated By Reference

Portions of the Company’s Definitive Proxy Statement relating to its 2010 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission by no later than April 30, 2010, 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, 2009


	Page

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS		3

PART I

ITEM 1. BUSINESS		4

ITEM 1A. RISK FACTORS		13

ITEM 1B. UNRESOLVED STAFF COMMENTS		30

ITEM 2. PROPERTIES		31

ITEM 3. LEGAL PROCEEDINGS		32

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS		35

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES		35

ITEM 6. SELECTED FINANCIAL DATA		37

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		39

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		68

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA		71

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE		71

ITEM 9A. CONTROLS AND PROCEDURES		71

ITEM 9B. OTHER INFORMATION		72

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE		72

ITEM 11. EXECUTIVE COMPENSATION		72

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS		72

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE		74

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES		74

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES		75

INDEX TO FINANCIAL STATEMENTS		75

EXHIBIT INDEX		75

SIGNATURES		78

Exhibit 10.19
Exhibit 10.20
Exhibit 10.21
Exhibit 10.22
Exhibit 10.23
Exhibit 10.24
Exhibit 10.25
Exhibit 10.26
Exhibit 21.01
Exhibit 23.01
Exhibit 31.01
Exhibit 31.02
Exhibit 32.01
Exhibit 32.02

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 within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 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,” “Management’s 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. These risks and uncertainties include, among other things:

	•		continued growth of online commerce and Internet usage in Latin America;

	•		our ability to expand our operations and adapt to rapidly changing technologies;

	•		government regulation;

	•		litigation and legal liability;

	•		systems interruptions or failures;

	•		our ability to attract and retain qualified personnel;

	•		consumer trends; security breaches and illegal uses of our services;

	•		competition;

	•		reliance on third-party service providers;

	•		enforcement of intellectual property rights;

	•		our ability to attract new customers, retain existing customers and increase revenues;

	•		seasonal fluctuations; and

	•		political, social and economic conditions in Latin America in general, and Venezuela and Argentina in particular, including Venezuela’s status as a highly inflationary economy.

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 company’s 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”).

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 2009. 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 world’s 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 currently offer our users two principal services:

	•		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. As a further enhancement to the MercadoLibre marketplace, in 2009 we launched our MercadoClics program to allow businesses to promote their products and services on the web. MercadoClics offers advertisers a cost efficient and automated platform with which to acquire traffic from us. Advertisers purchase, on a cost per clicks basis, advertising space that appear alongside product search results for specific categories. These advertising placements are clearly differentiated from product search results and direct traffic both on or off-platform to the advertisers destination of choice.

	•		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 2009, visitors to our web site were able to browse an average of over 4.4 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, 2009, we had over 42.6 million confirmed registered MercadoLibre users up from 33.7 million at December 31, 2008. During 2009 we had 3.0 million unique sellers, 9.1 million unique buyers and 29.5 million successful items sold.

History of MercadoLibre

In March of 1999, Marcos Galperín, our co-founder and Chief Executive Officer, while working towards his master’s 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:


	MercadoLibre		MercadoPago
Country	Launch date	Office opening	Launch date
Argentina	August 1999	July 1999	November 2003

Brazil	October 1999	September 1999	January 2004

Mexico	November 1999	October 1999	January 2004

Uruguay	December 1999	September 2004	N/A


	MercadoLibre		MercadoPago
Country	Launch date	Office opening	Launch date
Colombia	February 2000	January 2000	December 2007

Venezuela	March 2000	March 2000	April 2005

Chile	March 2000	April 2000 (*)	September 2007

Ecuador	December 2000	N/A	N/A

Peru	December 2004	N/A	N/A

Costa Rica	November 2006	N/A	N/A

Dominican Republic	December 2006	N/A	N/A

Panama	December 2006	N/A	N/A


(*)		During 2009 the office was closed

Our business is organized using the same technological platform in each country where we operate. However, each country has its own specific local website which has no interaction with other country sites. For example, searchs done on our Brazilian site show only results of listings uploaded on 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 eBay’s 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 Factors—Risks related to our business—We 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 the 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 DeRemate’s 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. On the acquisition date, we paid $19 million subject to certain escrows and working capital adjustment clauses. On June 27, 2008, the Company released to the former CMG shareholders $1.9 million in full satisfaction of the management escrow. 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 ended and the Company and the Sellers agreed 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:

	•		*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 our MercadoClics program and other advertising sales on our websites and, when possible and advantageous, through potential strategic acquisitions of key businesses and assets.

	•		*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.

	•		*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, but are not limited to,efforts involving: (a) the offer of additional product categories in our marketplace business, (b) the expansion of our presence in vehicle, real estate and services classifieds, (c) the expansion of our off platform payments services, (d) the increase of our on-line advertisement services and (e) the offer of on-line software as service e-commerce solutions. We believe that a significant portion of our future growth will be derived from these new or expanded product and service launches.

	•		*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.

	•		*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.

	•		*Increase operational efficiency*. We believe our business model provides us with an opportunity to generate 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.

	•		*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.

•

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 reinforce 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.

The MercadoPago online payments solution

Our online payments service is called MercadoPago and enables any individual or business registered with MercadoPago to securely and easily send and receive payments online for MercadoLibre marketplace items. MercadoPago is currently available to MercadoLibre users in each of Brazil, Mexico, Venezuela, Argentina, Chile and Colombia. Also, MercadoPago is available to non-MercadoLibre users who choose to register only with MercadoPago in Argentina, Chile and Colombia. 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. In December 2009, as part of a Beta test, we started processing off-MercadoLibre transactions within selected sites in Brazil using our new direct payments product, while maintaining the escrow product for on-MercadoLibre transactions.

At December 31, 2009, MercadoPago was available in local currency in each of Argentina, Brazil, Chile, Colombia, Mexico and Venezuela.

During the year ended December 31, 2009, our users paid approximately $382.5 million for items by using MercadoPago, which represented 13.9% of our gross merchandise volume for that year. During 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.

Escrow product

In Brazil (for transactions completed on the MercadoLibre platform), 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 35% 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. In December 2009, as part of a Beta test, we started processing transactions off the MercadoLibre platform within selected sites in Brazil using the direct payments product. 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. The direct payments product 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 within 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 are 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. In Chile and Colombia, 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%. In Argentina, we do not currently charge sellers for using MercadoPago within MercadoLibre; however in those cases we allocate 6.25% (VAT included) of Revenues in the MercadoPago business from the MercadoLibre business. We do charge a 6.99% commission (VAT included) to sellers in Argentina for using MercadoPago for transactions outside of the MercadoLibre platform.

For purchases made in installments, beyond the seller fee (in Argentina and Brazil for off-MercadoLibre platform transactions), the buyer is charged between approximately 10% and 36% 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, as of December 31, 2009 approximately 64% of the MercadoLibre marketplace’s listings accepted MercadoPago for payments and 13.9% of our total gross merchandise volume (excluding motor vehicles, vessels, aircraft and real estate) was completed through MercadoPago. In order to strengthen MercadoPago’s 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.

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 $17.1 million during 2007, $22.5 million during 2008 and $22.0 million during 2009.

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, Perú 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 2009, 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 ads to promote our automobile classifieds business.

We also conduct a variety of initiatives that focus 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 MercadoLibre’s name and concept as a trustworthy platform in the public’s 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.

Product development

At December 31, 2009, we had 245 employees on our information technology and product development staff, including those who work in our MercadoPago operations, an increase from 195 employees at December 31, 2008. We incurred product development expenses (including salaries) in the amount of $4.4 million for 2007, $7.3 million for 2008 and $12.1 million for 2009. We also incurred information technology capital expenditures, including software licenses, of $2.3 million for 2007, $2.6 million for 2008 and $4.4 million for 2009.

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 Factors—Risks related to our business—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.”

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.

Additionally, we experience the effects of seasonality within each week because we have significantly more site activity on working days than on weekends 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 limited number of 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 retailer’s 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.

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 MercadoPago’s current rates.

Intellectual property

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, F5 Networks, 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 factors—Risks related to our business—We 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”.

Employees

The following table shows the number of our employees at December 31, 2009.


	Number of
Country	employees

Argentina		829
Brazil		410
Colombia		45
Chile		3
Mexico		33
Uruguay		4
Venezuela		142

Total		1,466

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”) and some of our employees in Argentina are represented by the Argentine Federation of Commercial and Service Employees (“Federación Argentina de Empleados de Comercio y Servicios”(“FAECYS”)). Unions or local regulations in other countries could also require that employees be 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 factors—Risks related to our business—We 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 SAP’s 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

We are subject to a variety of laws, decrees and regulations that affect companies conducting business on the Internet in some of the countries where we operate related to e-commerce, information requirements for Internet providers, obligations to provide information to certain authorities about transactions occurring on our platforms or about our users, and other legislation which also applies to other companies conducting business 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 (including imposition to provide certain information about transactions occurred in our platforms, or about our users), libel and defamation, obscenity, consumer protection, digital signatures 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 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, obligation to provide certain information about transactions occurred in our platforms, or about our users), advertising, intellectual property rights, consumer protection and information security.

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 factors—Risks related to doing business in Latin America—Local currencies used in the conduct of our business are subject to depreciation, volatility and exchange controls” for more information.

On 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 status 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.

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 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 a 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, most of the countries where we operate do not 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 provider’s servers. This legal uncertainty allows for different judges or courts to decide very similar claims in different ways and establish contradictory jurisprudence. For example, in June 2009, a judge of a first instance court in the State of São Paulo ruled that our Brazilian subsidiary should be held liable for fraud committed by sellers and losses incurred by buyers when purchasing items on the Brazilian version of the MercadoLibre website. We are appealing this ruling and, in December 2009, the effect of the ruling was suspended until the appeal is decided by State Court of Appeals. A similar claim is pending in Uberlândia, State of Minas Gerais, Brazil. If the ruling is upheld, it could require us to restructure our business model in ways that would harm our business and or cause us to incur substantial costs

In addition, certain judges may decide that Internet service providers are liable to an intellectual property owner for a user’s 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 subject to a variety of laws, decrees and regulations that affect companies conducting business on the Internet in some of the countries where we operate related to e-commerce, information requirements for Internet providers, obligations to provide certain information to certain authorities about transactions which occurred in our platforms or about our users and those regulations applicable to businesses in general and consumer protection. It is not clear how existing laws governing issues such as general commercial activities, property ownership, copyrights and other intellectual property issues, taxation (including imposition to provide certain information about transactions occurred in our platforms or about our users), 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, obligation to provide certain information about transactions occurred in our platforms or about our users), 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.

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 regulations in this area, and other jurisdictions are considering imposing additional restrictions or regulations. 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 most of 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. From time to time, we are involved in disputes or regulatory inquiries that arise in the ordinary course of business. The number and significance of these disputes and inquiries have increased as our business has expanded and our company has grown larger. We are likely to receive new inquiries from regulatory agencies in the future, which may lead to action against us. We have responded to all inquiries from regulatory agencies and described our services, operating procedures and requested information. If one or more of these agencies is not satisfied with our response to current or future inquiries, we could be subject to enforcement actions, fines or other penalties, or forced to change our operating practices in ways that could harm our business, or 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 civil damages, enforcement actions, 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 2009 totaled $0.4 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. As discussed above, we are currently appelaing a determination by a Brazilian court that our Brazilian subsidiary should be held liable for fraud committed by sellers and losses incurred by buyers when purchasing items on the Brazilian version of the MercadoLibre website. We are in the process of introducing a new version of the Buyer’s 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.

Any litigation related to unpaid or undelivered purchases or defective items could be expensive for us, divert management’s 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 and/or using MercadoPago 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 some rights owners have expressed that our efforts are insufficient. Content owners and other intellectual property rights owners have been active in asserting their purported rights against online companies, including eBay. Allegations of infringement of intellectual property rights could result in in threats of litigation and actual litigation against us by rights owners.

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.

We are subject to risks with respect to information and material disseminated thorugh our platforms.

It is possible that third parties could bring claims against us for defamation, libel, invasion of privacy, negligence, or other theories based on the nature and content of the materials disseminated through our 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 and the 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.

The market in which we operate is rapidly evolving and we may not be able to maintain our profitability.

As a result of 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, up-front 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 or payments 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.

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 up-front 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 up-front 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 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 and Amazon, have been successful and profitable in the past. However, we operate in a business environment that is different from eBay’s 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 or financial 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.

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, different fraud schemes and online securities fraud. In addition, MercadoPago’s 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 2007, MercadoPago’s transaction loss arising from charge backs from unrecognized credit card payments totaled $0.9 million, representing 0.6% of MercadoPago’s total payment volume and 5.9% of net revenues of MercadoPago. For 2008, this loss totaled $0.3 million, representing 0.1% of MercadoPago’s total payment volume and 1.1% of net revenues of MercadoPago. For 2009, this loss totaled $0.3 million, representing 0.1% of MercadoPago’s total payment volume and 0.8% 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, calling users to have them answer personal questions to confirm their identity or 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. MercadoPago’s 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 MercadoPago’s current rates and, accordingly, we are subject to market pressures with respect to the commissions we charge for MercadoPago services.

MercadoPago’s 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) may be 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’s direct payment’s product to be in early release and have identified several opportunities to improve upon the product. 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.

We continue to expand MercadoPago’s 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 MercadoLibre’s 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 MercadoPago’s 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 MercadoPago’s 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 an 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. 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 2008 and 2009, 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:

	•		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.

	•		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.

	•		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.

•

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.

A rise in interest rates may negatively affect our MercadoPago payment volume .

In each of Brazil, Argentina and Mexico, we offer users the ability to pay for goods purchased using MercadoPago in installments. In 2008 and 2009, installment payments represented 59.3% and 58.4% of MercadoPago’s total payment volume, respectively. To faciliate the offer ofthe installment payment feature, we pay interest to credit card processors and issuer banks in Mexico and Argentina and we pay interest to advance credit card coupons in Brazil. In all of these cases, if interest rates increase, we may have to raise the installment fees we charge to users which would likely have a negative effect on MercadoPago’s total payment volume.

Changes in MercadoPago’s funding mix could adversely affect MercadoPago’s 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 73.9% and 74.3% of MercadoPago’s payment volume using credit cards during 2008 and 2009, respectively (either in a single payment or in installments), and MercadoPago’s 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 domain names, trademarks, logos 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 or granted to us by the appropriate regulatory authority in every country in which our services are made available online. For example, since 2009, we have filed several applications to register the name “MercadoLivre” and our logo in Brazil. Although most of the applications are still pending, certain applications were denied in December 2009 under the argument that the name was descriptive of its activities. We cannot assure you that we will succeed in obtaining these trademarks or in our challenges to existing or future applications by other parties or by the Instituto Nacional da Propriedade Industrial (the National Institute of Industrial Property). If we are not successful, MercadoLibre’s ability to protect its brand in Brazil against third-party infringers would be compromised and 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. If any of these claims against us are successful we may also have to modify our brand name in certain countries. Any of these circumstances could adversely affect 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 MercExchange’s 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.

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.

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 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, F5 Networks, 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 customer’s account activity as suspicious. MercadoPago has not been subject to any significant negative publicity about this. However, users who were banned from withdrawing funds or received fake mail appearing to be sent by MercadoPago initiated 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 MercadoLibre’s reputation to suffer or affect consumer confidence in the MercadoLibre brand.

We 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 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. These liabilities could have an adverse effect on our business, financial condition and results of operations.

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, 2009, we have recorded goodwill for approximately 32.8% 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, 2009, our Argentine subsidiary holds an undivided interest in approximately 26.3% of the total trust and has invested approximately $7.2 million. We currently estimate that we will be required to contribute an aggregate of approximately $2.2 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 offline and new competitors, including small businesses who want to create and promote their own stores or platforms, can easily launch new sites at relatively low cost using software that is commercially available. We currently or potentially compete with a number of other companies.

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, OLX, QueBarato 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. 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.

In addition, if certain websites stop linking or containing links in their properties that send us traffic across the internet in the future, our gross merchandise volume could substantially decrease and we could suffer a material adverse effect on our business, financial condition and results of operations.

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

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 142 employees who work in the country. In 2009, our Venezuelan net revenues represented 15.8% of our consolidated net revenues. The political and economic conditions in Venezuela 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 Chávez’s 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. 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.

Venezuela has recently suffered severe electricity shortages that prompted the Venezuelan government to declare an energy emergency. This situation could impact the operation of our automobile classifieds points of sale in Venezuela as well as our Venezuelan users’ ability to access the Internet, either of which could have a material adverse impact on our business.

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.

Venezuela has an official exchange rate which was $2.15 “Bolivares Fuertes” per U.S. dollar as of December 31, 2009, and a parallel exchange rate that was $6.05 “Bolivares Fuertes” per U.S. dollar at December 31, 2009. On January 8, 2010, the Venezuelan government announced that the fixed official rate of 2.15 “Bolivares Fuertes” per US would be changed to a dual system that includes a rate of 2.6 “Bolivares Fuertes” per US dollar for food and heavy machine importers and a rate of 4.3 “Bolivares Fuertes” per US dollar for all others.

In 2009, we requested U.S. dollars at the official exchange rate for the first time for dividend distributions, 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 the future impact in our financial condition. Starting in the fourth quarter of 2009, as a result of the changes in facts and circumstances that affect the Company’s ability to convert currency for dividends remittances using the official exchange rate in Venezuela, the Venezuelan subsidiaries assets, liabilities, income and expense accounts have been translated using the parallel exchange rate.

In addition, due to unstable political and economic conditions in Venezuela, the official and parallel exchange rates could continue devaluating significantly. Strong devaluations or changes in accounting rules could impact our results materially and we may have to recognize losses in the future.

For accounting purposes, Venezuela has been designated as a highly inflationary economy beginning January 1, 2010 because the three-year cumulative blended inflation rate exceeds 100%. For this reason, going forward, we will be required to account for the operations of our Venezuelan subsidiaries using the functional currency of MercadoLibre, Inc., which is the U.S. dollar, rather than the “Bolivar Fuerte” as the functional currency. As consequence, we may experience a decrease in terms of U.S. dollars of our Venezuela revenues and expenses, which would have an adverse impact on our reported results of operations in U.S. dollars.

The devaluation of the Venezuelan currency, the highly inflationary status and the government price control could have a material adverse effect on the country’s economy and adversely affect our business, financial condition and results of operations.

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 country’s 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, as described above, the administration has imposed exchange controls.

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; price 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 country’s 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, including Argentina, 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. Argentina’s 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 country’s 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 & Poor’s Inc. downgraded Argentina’s 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 Argentina’s 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 conditions prevalent in Argentina and adverse economic conditions in that country, as well as any other Latin American country in which we operate, could have a material adverse affect on 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 Brazil, Argentina, Mexico and Venezuela, which together accounted for 95.4% of our revenues for 2007, 95.3% for 2008 and 94.0% for 2009, have experienced 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 government’s 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 Brazil’s 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 and to distribute dividends at the official exchange rate. Any additional imposition of exchange controls could adversely affect our company.

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, Mexico and Venezuela, 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 2009, 53.9% of our revenues were denominated in Brazilian Reais, 15.8% in Venezuelan “Bolivares Fuertes”, 15.5% in Argentine “Pesos”, and 8.9% in Mexican “Pesos”. The foreign currency exchange rates for the full year 2009 relative to 2008 resulted in lower net revenues of approximately $22.5 million and a decrease in aggregate cost of net revenues and operating expenses of approximately $15.5 million. The abovementioned foreign currency exchange rate effect includes the Venezuelan translation effect discussed in Item 7 “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — Critical accounting policies and estimates — Foreign Currency Translation”. 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, particularly in Venezuela which has recently became highly inflationary, 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.

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.

Risks related to our shares

The price of our shares of common stock may fluctuate substantially, and our stockholders’ investment may decline in value.

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 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 company’s securities, that company is often subject to securities class-action litigation. This kind of litigation could result in substantial costs and a diversion of management’s attention and resources, which would have a material adverse effect on our business, results of operations and financial condition.

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, 2009, eBay owned approximately 8.1 million shares of our common stock (which represents 18.4% of our outstanding common stock as of December 31, 2009). 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 2.6 million and 3.4 million shares of our common stock, respectively as of December 31, 2009 (which represent 5.9% and 7.6%, respectively of our outstanding common stock as of December 31, 2009). 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:

	•		advance notice requirements for stockholder proposals and director nominations;

	•		a staggered board of directors;

	•		limitations on the ability of stockholders to remove directors other than for cause;

	•		limitations on the ability of stockholders to own and/or exercise voting power over 20% of our common stock;

	•		limitations on the ability of stockholders to amend, alter or repeal our by-laws;

	•		the inability of stockholders to act by written consent;

	•		the authority of the board of directors to adopt a stockholder rights plan;

	•		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

	•		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.

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.

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.


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 and Zona America, Uruguay. Currently, all of our offices are occupied under lease agreements. Other than our Colombian, Uruguayan and Venezuelan office leases, the leases for 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.


			Approximate
City and			Square		Lease
Country	Facility	Address	Meters		Expiration Date
Bogotá, Colombia	Colombia operation	Calle 93 B # 17-25 Ofc.406, Bogotá, Colombia		107	April 2010

Bogotá, Colombia	TuCarro Colombia operation	Calle 93 B # 17-25 Ofc.210 and 211, Bogotá, Colombia		132	January 2010. In process of renewal

Buenos Aires, Argentina	Corporate headquarters, Argentina operation & Customer service center	Tronador 4890—floors 6th, 8th and 2nd, Buenos Aires, 1430—Argentina		2,282.5	March 2010, March 2011 and May 2011

Buenos Aires, Argentina	Customer service center	Av. Costanera Rafael Obligado y Geronimo Salguero, Buenos Aires, Argentina		1,740	January 2012

Caracas, Venezuela	Venezuela operation	Piso 7° Edificio Torre Country, Francisco de Miranda, Urbanización El Rosal, Municipio de Chacao, Estado de Miranda		436	April 2011

Lithia Springs, Georgia, U.S.A.	SAVVIS Data Center	375 Riverside Parkway Lithia Springs, Georgia 30122,		2.6	July 2010

Mexico City, Mexico	Mexico operation	Ibsen 43-101, 102, 301 and 304, Colonia Polanco, Miguel Hidalgo, Código Postal 11650, Mexico D.F. Mexico		425	June 2010

Sterling, Virginia, U.S.A.	SAVVIS Data Center	45901 Nokes Blvd. Sterling, Virginia 20166		135	June 2010

San Luis, Argentina	Technology Development center	Av. Universitaria s/n, Ciudad de la Punta, San Luis, Argentina		207	No End Date

Santana do Parnaíba, Brazil	Brazilian Subsidiary main office — Customer service center	Rua Yojiro Takaoka, 4350 Cep 06541-038—Santana do Parnaíba, São Paulo, Brazil		1,020	October 2014

São Paulo, Brazil	Brazilian subsidiary Office	Rua Gomes de Carvalho, 1306 Vila Olimpia, Cep 04547-005—São Paulo, Brazil		598	November 2011

Zona America, Uruguay	Uruguay Staff	Ruta 8, km 17.5 Edificio 200, local 208-07 Zona America, Uruguay		37	December 2010

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. — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — Contractual Obligations” 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 1A—Risk Factors” for additional discussion of the litigation and regulatory risks facing our company.

As of December 31, 2009, our total reserves for proceeding-related contingencies were approximately $1.1 million for 299 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, 2009, there were 296 lawsuits pending against our Brazilian subsidiary in the Brazilian ordinary courts. In addition, as of December 31, 2009, there were more than 1,691 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.

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 Qix’s 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 notified of an injunction granted to prohibit the offer of Qix products on our platform, but the penalty was established at $500 a day. 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 COC’s trademarks as a result of our user’s selling allegedly pirated copies of Editora’s 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 COC’s 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.

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 appeal that fine and obtained its suspension in 2006. Because our appeal of the preliminary injunction failed, in March of 2007, Vintage presented petitions alleging our non-compliance with 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 2006. In July 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 intend to present a new appeal against the application of the fine. In September 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. However, the decision maintained the injunction until such ruling is non-appealable. The plaintiff appealed the judge’s ruling regarding our subsidiary’s non-responsibility and we appealed the decision that maintained the preliminary injunction. Both appeals are still pending.

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 in our website. In July, 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 have appealed the decision dismissing the case, which appeal is still pending. 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 presented our defense and appealed the injunction, which appeal is still pending. A hearing to present both parties’ arguments is scheduled for March 17, 2010. 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 Praetorium’s copyrights as a result of our users selling allegedly counterfeit copies of Praetorium’s 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 in July 2007. 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. We have appealed the decision granting the preliminary injunction, which appeal is still pending.

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 Serasa’s 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 Serasa’s database; and (ii) passwords, texts or any material that promises to consult, remove or teach how to remove someone name from Serasa’s database; (b) to prohibit on the 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. On June 5, 2009 the judge declared that the Brazilian Subsidiary shall not be held liable for the content posted by its users. Nonetheless, the sentence ordered the Brazilian Subsidiary to remove certain contents related to the plaintiff. Serasa filed a motion for clarification of that decision, which was rejected by the Judge. In July 2009, Serasa presented an appeal to the higher court. In August 2009 the Brazilian Subsidiary presented the response to the appeal. The ruling is still pending.

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 Botelho’s courses through the Brazilian website. Botelho seeks an injunction, fines, and compensatory and statutory damages, which was not yet analyzed by the judge. In February, 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. 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 Mesianica’s books through the Argentine page of our website. Iglesia Mesianica seeks monetary damages in the amount of approximately $95,000. We presented our defense in May 2008 and also filed a preliminary objection arguing the lack of jurisdiction of the Civil Court and requested that the case should be heard by a Federal Court instead. Iglesia Mesianica responded to the preliminary objection and requested its rejection. The court still has to render a decision on the preliminary objection. As of the date of this report, we believe the risk of loss of this case is remote.

On February 22, 2008, Nike International Ltd., or Nike, requested a preliminary injunction against our Argentine subsidiary DeRemate.com de Argentina S.A. in the Court on Civil and Commercial Matters in Buenos Aires, Argentina. Nike alleged that this subsidiary was infringing Nike trademarks as a result of sellers listing allegedly counterfeit Nike branded products through the website www.deremate.com.ar. A preliminary injunction was granted in February 2008 to suspend the offer of Nike-branded products until sellers could be properly identified. We appealed the decision. In November, 2008 the Federal Court of Appeals on Civil and Commercial Matters lifted the prohibition to allow on the website of this subsidiary any listing related to Nike branded products subject to our requesting certain personal information from users listing those items. On March 25, 2008 Nike sued our Argentine subsidiary DeRemate.com de Argentina S.A. in the same venue, for the same reasons argued in the request preliminary injunction. We presented our defense on September 11, 2009. The ruling is still pending. As of the date of this report, we believe the risk of loss of this case is remote.

On July 25, 2008, Nike requested a preliminary injunction against our Argentine subsidiary in the First Civil and Commercial Federal Court, Argentina 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 in August , 2008 to suspend the offer of Nike-branded products until sellers could be properly identified. We appealed the decision on August 22, 2008. In March 2009 the Federal Court of Appeals on Civil and Commercial Matters, lifted the prohibition to allow on the Argentine website any listing related to Nike branded products subject to our requesting certain personal information from users listing those items. On May 22, 2009 we received official notice of a lawsuit filed by Nike against our Argentine subsidiary in the same venue, for the same reasons argued in the request preliminary injunction. On May 27, 2009 we presented a preliminary objection requesting that Nike deposit as a security bond for costs. The court established that a bond for costs of approximately $ 3,500 should be deposited by Nike and both parties appealed that amount. The ruling is still pending. As of the date of this report, we believe the risk of loss of this case is remote.

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. On June 26, 2009, the Judge of the first instance court ruled in favor of the State of São Paulo prosecutor, declaring that our Brazilian subsidiary shall be held joint and severally liable for frauds committed by sellers and damages suffered by buyers when using the website, and ordering us to remove from the Terms of Service of the Brazilian website any provision limiting our responsibility, with a penalty of approximately $2,500 per day of non-compliance. On June 29, 2009 the Company presented a recourse to the lower court. On September 29, 2009 we presented an appeal and requested to suspend the effects of the ruling issued by the lower court until the appeal is decided by State Court of Appeals, which request was granted on December, 1, 2009. The decision on the appeal is still pending.

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 presented our defense in July 2008, which was replied in November 2008. As of the date of this report, we believe the risk of loss of this case is remote.

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 subsidiary’s 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 according to the exchange rate at that moment. 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. As of the date of this report, 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. On September, 12, 2009 the tax authorities ruled against our Brazilian subsidiary. On October 13, 2009, we presented an appeal to the Conselho Municipal de Tributos or Sao Paulo Municipal Council of Taxes. The ruling is still pending.

Intelectual Property Claims

In the past 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 factors—Risks related to our business—We 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, 2009.

PART II


ITEM 5.		MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Price of and Dividends on the Registrant’s 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, 2009, the closing price of our common stock was $51.87 per share. As of February 18, 2010, we had approximately 35 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:


	Closing stock price
	High		Low
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
2009:
1st quarter	$	19.61	$	12.47
2nd quarter	$	28.94	$	18.53
3rd quarter	$	38.93	$	23.22
4th quarter	$	54.45	$	35.60

Recent Sales of Unregistered Securities

There were no sales of unregistered securities by us during the three-month period ending December 31, 2009.

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 Company’s equity compensation plan as of December 31, 2009 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, 2009 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.

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

We did not repurchase any shares of common stock during the fourth quarter of 2009. 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 was determined by our management based on market conditions and other considerations, and repurchases were 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 did not require us to acquire any specific number of shares and may be temporarily or permanently suspended or discontinued by us at any time.

To enhance our share repurchase plan, during the year ended December 31, 2009, we sold equity put options. These put options entitled the holders to sell shares of our common stock to us on certain dates at specified prices. None of the put options sold have been exercised and there were no options outstanding as of December 31, 2009.

The term of the stock repurchase plan expired on November 13, 2009.


ITEM 6.		SELECTED FINANCIAL DATA

The following summary financial data is qualified by reference to and should be read in conjunction with “Management’s 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)	2005			2006			2007			2008			2009
Statement of income data:

Net revenues	$	28.2		$	52.1		$	85.1		$	137.0		$	172.8
Cost of net revenues		(6.1	)		(12.1	)		(18.3	)		(27.5	)		(36.0	)


Gross profit		22.1			40			66.9			109.5			136.9

Operating expenses:
Product and technology development		(2.2	)		(3.1	)		(4.4	)		(7.3	)		(12.1	)
Sales and marketing		(14.7	)		(23.4	)		(27.6	)		(40.0	)		(42.9	)
General and administrative		(4.4	)		(8.2	)		(13.2	)		(22.8	)		(25.8	)
Compensation cost related to acquisitions		—			—			—			(1.9	)		—


Total operating expenses		(21.3	)		(34.6	)		(45.2	)		(72.0	)		(80.9	)


Income from operations		0.8			5.4			21.7			37.5			56.0

Other income (expenses):
Interest income and other financial gains		0.4			0.5			1.6			1.8			2.7
Interest expense and other financial charges		(0.5	)		(1.7	)		(2.7	)		(8.4	)		(13.4	)
Foreign currency (loss) gain		0.3			(0.4	)		(3.1	)		(1.5	)		(2.7	)
Other income (expenses), net		(0.3	)		(1.5	)		(3.0	)		0.1			—


Net income before income and asset tax and cumulative effect of change in accounting principle		0.7			2.3			14.4			29.4			42.7
Income and asset tax (expense) benefit		1.4			(1.2	)		(4.7	)		(10.6	)		(9.5	)


Net income before cumulative effect of change in accounting principle and gain from discontinued operations		2.0			1.1			9.7			18.8			33.2
Cumulative effect of change in accounting principle		0.3			—			—			—			—


Net income		2.4			1.1			9.7			18.8			33.2
Accretion of preferred stock		(0.5	)		(0.5	)		(0.3	)		—			—


Net income available to common stockholders	$	1.9		$	0.6		$	9.4		$	18.8		$	33.2

The table above may not total due to rounding.


	At December 31,
(in millions)	2005			2006			2007		2008		2009
Balance sheet data:
Total assets	$	44.4		$	53.8		$	134.5	$	156.7	$	182.6
Long term debt		12.0			9.0			—		3.1		—
Total liabilities		23.2			30.5			42.8		63.3		68.4
Net assets		21.2			23.3			91.7		93.4		114.2
Mandatorily redeemable convertible preferred stock		63.6			64.1			—		—		—
Common stock		0.1			0.1			0.1		0.1		0.1
Stockholders’ equity (deficit)	$	(42.4	)	$	(40.7	)	$	91.7		93.4		114.2


	Year Ended December 31,
	2005		2006		2007			2008		2009
Earnings (loss) per share data:
Basic net income (loss) available to common stockholders per common share	$	0.05	$	0.01	$	0.22		$	0.43	$	0.75
Diluted net income per common share	$	0.05	$	—	$	0.22		$	0.42	$	0.75
Weighted average shares (2):
Basic		13,065,496		13,149,139		25,149,405	(1)		44,239,443		44,086,892
Diluted		13,671,359		—		25,478,336			44,348,950		44,144,368


(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, 2009 were 44,120,269.


	Year ended December 31,
(in millions)	2005		2006		2007		2008		2009
Other data:

Number of confirmed registered users at end of period (1)		12.2		18.2		24.9		33.7		42.6
Number of confirmed new registered users during period (2)		5.7		6.0		6.7		8.8		8.9
Gross merchandise volume (3)	$	607.7	$	1,075.1	$	1,511.5	$	2,078.9	$	2,750.7
Number of successful items sold (4)		8.4		13.8		17.5		21.1		29.5
Total payment volume (5)	$	38.5	$	89.0	$	158.0	$	255.9	$	382.5
Total payment transactions (6)		—		—		1.3		1.9		3.1
Capital expenditures	$	2.0	$	2.4	$	3.1	$	5.0	$	4.8
Depreciation and amortization	$	1.6	$	2.0	$	2.3	$	3.3	$	3.9


(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. As of December 31, 2008 the number of confirmed new registered users includes 2.2 million coming from the DeRemate integration.


(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.		MANAGEMENT’S 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, 2007, 2008, and 2009;

	•		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.

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. On the acquisition date, we paid $19 million subject to certain escrows and working capital adjustment clauses. On June 27, 2008, the Company released to the former CMG shareholders $1.9 millions in full satisfaction of the management escrow. 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 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 ended and we 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 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. As a further enhancement to the MercadoLibre marketplace we have launched our MercadoClics program to allow businesses to promote their products and services on the web. MercadoClics offers advertisers a cost efficient and automated platform with which to adquire traffic from us. Advertisers purchase, on a cost per clicks basis, advertising space that appear alongside product search results on specific categories. These advertising placements are clearly differentiated from product search results and direct traffic both on or off-platform to the advertisers destination of choice.

	•		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.

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 2009, our gross merchandise volume reached $2,750.7 million and visitors to our web site were able to browse an average of over 4.4 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, 2009, we had 42.6 million confirmed registered MercadoLibre users. For 2009, we had 3.0 million unique sellers, 9.1 million unique buyers and 29.5 million successful items sold.

For 2009, our net revenues were $172.8 million. Of those $172.8 million in revenues approximately 74.2% were attributable to MercadoLibre marketplace listing, optional feature, up-front, final value and advertisement fees. The remaining 25.8% 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.

Recent Developments

Highly inflationary status in Venezuela

The CPI has existed since 1984. However, the CPI covers only the cities of Caracas and Maracaibo. Commencing on January 1, 2008, the National Consumer Price Index (NCPI) was developed to cover the entire country of Venezuela. Since inflation data is not available to compute a cumulative three year inflation rate for the entire country solely based on the NCPI, we use a blended rate using the NCPI and CPI to calculate Venezuelan inflation rate.

The cumulative three year inflation rate as of December 31, 2009 was calculated using the CPI information for periods before January 1, 2008 and NCPI information for the periods after January 1, 2008.

The blended CPI/NCPI three-year inflation index (23 months of NCPI and 13 months of CPI) at November 30, 2009 exceeded 100%. According to US GAAP, calendar year-end companies should apply highly inflationary accounting as from January 1, 2010. Therefore, we will transition our Venezuelan operations to highly inflationary status as of January 1, 2010 and, going forward, will consider the US dollar as the functional currency for Venezuela.

Monetary assets amounting to $10,304,291, and monetary liabilities amounting to $6,493,561, as of December 31, 2009, will be exposed to exchange rate changes as from January 1, 2010. Income and expenses will be measured in U.S. Dollars at the parallel exchange rate which is $6.05 “Bolivares Fuertes” per U.S. dollar at December 31, 2009.

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.

Historically, we have generated revenues from the MercadoLibre marketplace segments from:

	•		listing fees;

	•		optional feature fees;

	•		final value fees; and

	•		online advertising fees.

During the third quarter of 2009, we modified our pricing structure by replacing our previous listing fees and optional feature fees for consolidated up-front fees which bundle these features. We now offer three types of up-front fees for three different combinations of placement and features. Up-front fees are charged at the time the listing is uploaded onto our platform and is not subject to successful sale of the items listed. Following this fee structure modification, revenues for the MercadoLibre marketplace segments are now generated by:

	•		up front fees;

	•		final value fees; and

	•		online advertising fees.

The MercadoLibre marketplace business generated 81.7% of our net revenues for 2007, 80.0% for 2008 and 74.2% for 2009. Of these revenues, during 2009, 42.6% were generated in Brazil, 20.4% in Venezuela, 18.3% in Argentina, 10.7% in Mexico and the remainder, or 8.0%, in Colombia, Chile, Peru, Ecuador, Uruguay, and Panama. The following table sets forth the percentage of consolidated net revenues by country from our MercadoLibre marketplace for each of 2007, 2008 and 2009:


	Year ended December 31,
(% of total MercadoLibre marketplace net revenues)	2007			2008			2009
Brazil		54.0	%		46.1	%		42.6	%
Venezuela		10.2			20.1			20.4
Argentina		16.3			16.7			18.3
Mexico		13.8			11.4			10.7
Other countries		5.7			5.7			8.0

The following table summarizes our business margin for the years ended December 31, 2009, 2008 and 2007:


	Year Ended
	December 31,
	2007			2008			2009

Net Revenues breakdown by businesses
As a percentage of total net revenues:
Marketplaces		81.7	%		80.0	%		74.2	%
Payments		18.3	%		20.0	%		25.8	%

Revenues generated by our MercadoPago business represented 18.3% our total net revenues for 2007, 20.0% for 2008 and 25.8% for 2009. Revenues generated by our Payments business are 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 as well as a financial charge when the user elects to pay in installments, which we recognize, in both cases, once the transaction is completed. During the year ended December 31, 2009, commission and installment-related financial charges averaged 6.1% and 5.6%, 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 the years ended December 31, 2009 and 2008, no single customer accounted for more than 1.0% of our net revenues in our MercadoLibre Marketplace business or our MercadoPago Payments business. Our MercadoLibre marketplace is available in twelve 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 country’s operations is the local currency. See “Critical accounting policies and estimates — Foreign Currency Translation” included in this report. Therefore, our net revenues are generated in multiple foreign currencies and then translated into U.S. dollars at the average monthly exchange rate.

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)	2007			2008			2009
Brazil		59.0	%		53.8	%		53.9	%
Venezuela		9.0			16.9			15.8
Argentina		14.8			14.5			15.5
Mexico		12.6			10.1			8.9
Other countries		4.6			4.7			6.0

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 5.9%, 6.0% and 6.2% of net revenues for 2007, for 2008 and 2009, 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 operation fees.

Product and technology development expenses

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 expenses

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 our seller community 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 expenses

Our general and administrative expenses consist primarily of salaries for management and administrative staff, compensation for outside directors, long term retention plan compensation, 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. (See Note 6 to our consolidated financial statements included in this report).

Other income (expenses), net

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 investments and cash equivalents, foreign currency gains or losses, the effect of changes in the fair value of derivative instruments, and other non-operating results.

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, 2007, 2008 and 2009.


	Year ended December 31,
(in millions)	2007			2008		2009

Current:
Federal	$	—		$	—	$	—
Foreign		5.0			8.1		11.5

		5.0			8.1		11.5

Deferred:
Federal		—			—		—
Foreign		(0.1	)		1.6		(2.5	)

		(0.1	)		1.6		(2.5	)

		4.9			9.8		9.0


Asset Tax:
Federal		—			—		—
Foreign		(0.2	)		0.8		0.5

		(0.2	)		0.8		0.5


Income / asset tax expense	$	4.7		$	10.6	$	9.5

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,

2009

Net Revenues		32,322,501		40,901,799		50,599,276		49,020,045
Gross profit		25,688,515		32,306,322		40,208,605		38,682,129
Net Income		5,391,176		6,679,779		9,852,268		11,285,570
Net Income per share-basic		0.12		0.15		0.22		0.26
Net Income per share-diluted		0.12		0.15		0.22		0.26
Weighted average shares
Basic		44,069,134		44,074,462		44,088,936		44,108,207
Diluted		44,130,866		44,127,208		44,138,031		44,143,281

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 / (Loss)		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

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 were 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. In addition, the result of our operations in the fourth quarter of 2009 were impacted by the change in Venezuelan translation rate as described in Foreign currency translation below, for that reason, our 2009 fourth quarter revenues were lower when measured in U.S. dollars than the third quarter revenues. 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.

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.

Foreign Currency Translation

Historically, all of our foreign operations have used the local currency as 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. Gains and losses resulting from transactions denominated in non-functional currencies are recognized in earnings. Net foreign currency transacction losses are included in the consolidated statements of income under the caption “Foreign currency loss”.

Until September 30, 2009, our Venezuelan subsidiaries assets, liabilities, income and expenses were translated at the official rate of 2.15 “Bolivares Fuertes” per U.S. dollar.

During the fourth quarter of 2009, we changed from the official exchange rate to the parallel exchange rate to translate our Venezuelan financial statements. The following facts and circumstances have been considered in the analysis of the applicable exchange rate:

	•		At the date of these financial statements, we do not have a history of having obtained dividends remittances at the official exchange rate,

	•		The industry in which we operate may not influence our ability to access to the official exchange rate,

	•		The CADIVI volume of approvals of the use of the Official Rate was down 50% on a year-to-year basis measured in July 2009.

	•		CADIVI has not only delayed approvals but also removed many items from priority lists, further delaying approvals (current priorities appear to be food and medicine) and causing delays in the repatriation of dividends for many companies.

Consequently, starting in the fourth quarter of 2009, we translated our Venezuelan assets, liabilities, income and expense accounts using the parallel exchange rate. Our Venezuelan subsidiaries assets and liabilities were translated at the closing parallel exchange rate of 6.05 “Bolivares Fuertes” per US dollar and the fourth quarter Venezuelan subsidiaries income and expense accounts were translated at the average parallel exchange rate of 5.67 “Bolivares Fuertes” per US dollar. Accordingly, the foreign currency effect on assets, included in “Other non-current assets” in the consolidated balance sheet at September 30, 2009 for $11.2 million has been reversed as of December 31, 2009 and the corresponding effect was reflected in the currency translation adjustment (CTA) component of other comprehensive income in equity. As of December 31, 2009, the total effect in currency translation adjustment related to the Venezuelan subsidiaries assets, liabilities, income and expense accounts using the parallel exchange rate amounts to $16,977,276. The change in the translation exchange rate generated in the fourth quarter of 2009, result in a decrease in our net revenues and net income of $7.0 million and $2.3 million, respectively.

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 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 unit’s 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 20.6% which reflects our real weighted average cost of capital. Key drivers in the analysis include Confirmed Registered Users (“CRUs”) and 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 includes 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 our market share. 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 management’s assessment of each reporting unit’s fair value materially exceeds its carrying value.

We believe that the accounting estimate related to impairment of long lived assets and goodwill is critical since it is highly susceptible to change from period to period because: (i) it requires management to make assumptions about gross merchandise volume growth, 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. Management’s assumptions about future sales and future costs require significant judgment.

Allowance for doubtful accounts and chargebacks

We are exposed to losses due to uncollectible accounts and credits to sellers. Allowances for these items represent our estimate of future losses based on our historical experience. Our allowance for doubtful accounts and chargebacks amounted to $7.2 million at December 31, 2007, $8.7 million at December 31, 2008 and $3.8 million at December 31, 2009. The decrease in the 2009 allowance for doubtful accounts is due a change in our write off policy. Until 2008, we write off accounts receivable with an aging of 366 days, since 2009 we write off accounts receivable which aging is 181 days. The allowance 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 2007, 2008 and 2009:


	Year ended December 31,
(in millions, except percentages)	2007			2008			2009

Net revenues	$	85.1		$	137.0		$	172.8
Bad debt charges		6.2			8.7			10.0
Bad debt charges as a percentage of net revenues		7.3	%		6.3	%		5.8	%

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 allowances for doubtful accounts and chargebacks is a critical accounting estimate because it requires management to make assumptions about future collections and credit analysis. Our management’s assumptions about future collections require significant judgment.

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 “Business—Legal 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 management’s 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, 2009, we had a valuation allowance on certain foreign 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.

The following table summarizes the composition of our deferred tax assets for the years ended December 31, 2009 and 2008:


	Year Ended					Year Ended
	December 31,					December 31,
Deferred tax assets	2009		in %			2008		in %
	(in millions, except percentages)					(in millions, except percentages)

2005 DeRemate.com acquisition		5.5		28.4	%		4.8		30.1	%
Brazilian operations		4.7		24.5	%		3.5		21.7	%
Foreign tax credits & others domestic deferred tax assets		3.1		16.0	%		1.5		9.3	%
Operations in others countries		1.1		6.0	%		0.6		3.8	%
2008 DeRemate.com acquisition		1.0		5.5	%		1.8		11.4	%
Mexican operations		0.9		4.7	%		1.0		6.1	%
Venezuelan operations		0.9		4.6	%		1.8		11.1	%
Argentine operations		2.0		10.2	%		1.0		6.4	%

Total		19.2		100.0	%		16.1		100.0	%

At December 31, 2009, our deferred tax assets are comprised mainly of loss carryforwards and foreign tax credits representing 54.9% and 15.0%, respectively of the total deferred tax assets. At December 31, 2008, our deferred tax assets are comprised mainly by loss carry forwards representing 67.0% of the total deferred tax assets.

The following table summarizes the composition of our loss carry forward for the years ended December 31, 2009 and 2008:


	Year Ended					Year Ended
Loss carryforwards	December 31,					December 31,
	2009		in %			2008		in %
	(in millions, except percentages)					(in millions, except percentages)

2005 DeRemate.com acquisition		5.0		47.1	%		4.6		43.1	%
Brazilian operations		3.0		28.2	%		2.2		20.7	%
2008 DeRemate.com acquisition		1.0		9.4	%		1.8		16.4	%
Mexican operations		0.6		5.9	%		0.6		5.2	%
Domestic loss carry forwards		0.1		0.5	%		1.0		9.2	%
Chilean operations		0.5		5.2	%		0.5		4.6	%
Operations in others countries		0.4		3.8	%		0.1		0.8	%

Total		10.5		100	%		10.8		100	%

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, 2009 and 2008, our valuation allowance amounted to $9.3 million and $11.7 million, respectively.

The following table summarizes the composition of our valuation allowance for the years ended December 31, 2009 and 2008:


	Year Ended					Year Ended
	December 31,					December 31,
Valuation Allowance	2009		in %			2008		in %
	(in millions, except percentages)					(in millions, except percentages)

2005 DeRemate.com acquisition		4.6		49.9	%		4.8		41.6	%
Brazilian operations		2.0		21.4	%		2.2		19.1	%
2008 DeRemate.com acquisition		1.0		11.3	%		1.8		15.8	%
Operations in others countries		1.6		17.4	%		1.2		10.6	%
United States		0.0		0.1	%		1.5		12.9	%

Total		9.3		100	%		11.7		100	%

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.

During the year ended December 31, 2009, the Company has reversed $4,055,323 related to certain foreign and domestic valuation allowances based on the assessment that it is more likely than not that will be realized.

The following table sets forth the effective tax rates for 2007, 2008 and 2009:


	Year ended December 31,
(in millions, except percentages)	2007			2008			2009

Income and asset tax expense	$	(4.7	)	$	(10.6	)	$	(9.5	)


As a percentage of income before income and asset tax		(32.8	)%		(36.1	)%		(22.3	)%

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, 2008 and 2009, we granted our outside directors restricted shares of our common stock (“Restricted Shares”) 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
June 10, 2009		2,305
June 10, 2009		8,350

Under the compensation plan adopted in September 2007, each outside director is entitled to receive an annual grant of Restricted Shares. Each grant of Restricted Shares vests in full twelve months following the grant date. On September 17, 2007, we awarded two of our outside directors 1,000 Restricted Shares each for their original grants. On January 24, 2008, we awarded another outside director 600 Restricted Shares for his original grant. On June 9, 2008, we awarded the remaining two outside directors 674 Restricted Shares each for their original grants.

For the first and second year of board service following the date each outside director received his initial grant, he or she is entitled to receive a grant of additional Restricted Shares having a value equal to $30,000 and $40,000, respectively. Beginning in 2009, Restricted Shares issuable to the directors during the relevant year will be issued on the date of our annual stockholder’s meeting. Shares will be valued at the closing sale price of our common stock on the day preceding the annual meeting. As a result of moving the grant dates, other than the initial grants to directors in January and June 2008, we did not issue any Restricted Shares to any of the outside directors in 2008 and, accordingly, made catch up Restricted Share grants on the date of the 2009 annual meeting.

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 during 2007 and 2008 amounted to $149,470. For the years ended December 31, 2009, 2008 and 2007, we recognized $27,944, $105,560 and $15,966 of compensation expense related to these awards, respectively, which are included in operating expenses in the accompanying consolidated statements of income. As of December 31, 2009, the Restricted Shares issued in 2007 and 2008 are fully vested and are not restricted anymore.

The additional grants of shares for fixed amounts of $30,000 and $40,000 were classified as liabilities in the accompanying consolidated balance sheet up to June 10, 2009, the issuance date. On June 10, 2009, the Company issued 2,305 and 8,350 shares related to the abovementioned additional Restricted Shares for the first and second year of board service following the date each outside director received their initial grant, respectively. The 8,350 shares related to the second year are restricted shares and will vest on June 10, 2010. Non-vested shares awarded to employees are measured at their fair market value by the grant-date price of our shares. As from the issuance date, the outstanding liabilities amounting to $171,099 as well as all future compensation cost is classified as equity. For the years ended December 31, 2009, 2008 and 2007, we recognized $85,689, $115,566 and $16,283, respectively, of compensation expense related to these awards, which are included in operating expenses in the accompanying consolidated statement of income.

To date, all Restricted Shares have been granted pursuant to our Amended and Restated 1999 Stock Option and Restricted Stock Plan.

In addition, on August 8, 2008 the Board of Directors approved a four year employee retention program (the “2008 LTRP”) payable 50% in cash and 50% in shares subject to certain performance conditions which were satsified. Subject to an employee’s continued employment as of the applilcable payment date, the vesting schedule for awards under the 2008 LTRP is as follows:

	•		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).

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 2008 LTRP amounts to approximately $1.8 million, including cash and shares. The 21,591 shares to be issued in the four years of the plan were valued at the grant-date fair market value of $36.8 per share. For the year ended December 31, 2009, the related accrued compensation expense was $0.4 million corresponding $0.2 million to the share portion of the award credited to Additional Paid-in Capital and $0.2 million to the cash portion included in the Balance Sheet as Social security payable. As of December 31, 2008, the related accrued compensation expense was $0.8 million corresponding $0.3 million to the share portion of the award credited to Additional Paid-in Capital and $0.5 to the cash portion which includes the Social security payable.

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 July 15, 2009, our board of directors adopted the 2009 Long Term Retention Plan (the “2009 LTRP”). If earned, payments to eligible employees under the 2009 LTRP will be in addition to payments of base salary and cash bonus, if earned, made to these employees.

In order to receive an award under the 2009 LTRP, each eligible employee must satisfy the performance conditions established by the board of directors for him or her. If these conditions are satisfied, the eligible employee will, subject to his or her continued employment as of each applicable payment date, receive the full amount of his or her 2009 LTRP bonus, payable as follows:

	•		the eligible employee will receive a fixed cash payment equal to 6.25% of his or her 2009 LTRP bonus once a year for a period of eight years starting in 2010 (the “Annual Fixed Payment”); and

	•		on each date we pay the Annual Fixed Payment to an eligible employee, he or she will also receive a cash payment (the “Variable Payment”) equal to the product of (i) 6.25% of the applicable 2009 LTRP bonus and (ii) the quotient of (a) divided by (b), where (a), the numerator, equals the Applicable Year Stock Price (as defined below) and (b), the denominator, equals the 2008 Stock Price, defined as $13.81, which was the average closing price of the Company’s common stock on the NASDAQ Global Market during the final 60 trading days of 2008. The “Applicable Year Stock Price” shall equal the average closing price of the Company’s common stock on the NASDAQ Global Market during the final 60 trading days of the year preceding the applicable payment date.

The compensation cost related to the Annual Fixed Payments is recognized on a straight line basis using the equal annual accrual method. The compensation cost related to the Variable Payments is recognized in accordance with the graded-vesting attribution method and is accrued up to each payment day.

As of December 31, 2009, the total compensation cost of the 2009 LTRP amounts to approximately $5.8 million and the related accrued compensation expense for the year ended December 31, 2009 was $1.5 million.

Stock option awards granted under the “Amended and Restated 1999 Stock Option and Restricted Stock Plan”, (the “Plan”) are at the discretion of the Company’s Board of Directors and may be in the form of either incentive or nonqualified stock options. Options granted under the Plan generally vest over a three to four year period and expire ten years after the date of grant. As of December 31, 2009, there were 283,874 shares of Common Stock available for additional awards under the Plan.

Stock options 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 Company’s 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.

Stock-based compensation expense related to stock options for the years ended December 31, 2009, 2008 and 2007 was $1,752, $4,719 and $15,477, respectively. Stock-based compensation expense is based on the estimated portion of the awards that are expected to vest.

As of December 31, 2009, total stock-based compensation expense related to non-vested stock options not yet recognized amounts to $244 and the weighted-average period in which it is expected to be recognized is 1 year.

There was no granting during the period from January 1, 2007 to December 31, 2009.

Recent accounting pronouncements

Accounting for Transfers of Financial Assets

In June 2009, the FASB issued an amendment to the accounting and disclosure requirements for transfers of financial assets, in order to address practice issues highlighted most recently by events related to the economic downturn. The amendments include: (1) eliminating the qualifying special-purpose entity concept, (2) a new unit of account definition that must be met for transfers of portions of financial assets to be eligible for sale accounting, (3) clarifications and changes to the derecognition criteria for a transfer to be accounted for as a sale, (4) a change to the amount of recognized gain or loss on a transfer of financial assets accounted for as a sale when beneficial interests are received by the transferor, and (5) extensive new disclosures. The new accounting guidance is effective to new transfers of financial assets occurring from January 1, 2010. The implementation of the new accounting guidance will not have significant effect on the company’s financial statements.

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,
	2007			2008			2009

Net revenues	$	85.1		$	137.0		$	172.8
Cost of net revenues		(18.3	)		(27.5	)		(36.0	)


Gross profit		66.9			109.5			136.9

Operating expenses:
Product and technology development		(4.4	)		(7.3	)		(12.1	)
Sales and marketing		(27.6	)		(40.0	)		(42.9	)
General and administrative		(13.2	)		(22.8	)		(25.8	)
Compensation cost related to acquisitions		—			(1.9	)		—


Total operating expenses		(45.2	)		(72.0	)		(80.9	)


Income from operations		21.7			37.5			56.0


Other income (expenses):
Interest income and other financial gains		1.6			1.8			2.7
Interest expense and other financial charges		(2.7	)		(8.4	)		(13.4	)
Foreign currency loss		(3.1	)		(1.5	)		(2.7	)
Other income (expenses), net		(3.0	)		0.1			—


Net income before income / asset tax expense		14.4			29.4			42.7


Income / asset tax expense		(4.7	)		(10.6	)		(9.5	)


Net income	$	9.7		$	18.8		$	33.2


Accretion of preferred stock		(0.3	)		—			—


Net income available to common shareholders	$	9.4		$	18.8		$	33.2

The table above may not total due to rounding.


	Year Ended December 31,
(% of net revenues)	2007			2008			2009
Net revenues		100	%		100	%		100	%
Cost of net revenues		(21.5	)		(20.1	)		(20.8	)


Gross profit		78.5			79.9			79.2

Operating expenses:
Product and technology development		(5.1	)		(5.3	)		(7.0	)
Sales and marketing		(32.4	)		(29.2	)		(24.8	)
General and administrative		(15.5	)		(16.6	)		(15.0	)
Compensation cost related to acquisitions		—			(1.4	)		—


Total operating expenses		(53.1	)		(52.5	)		(46.8	)


Income from operations		25.4			27.4			32.4


Other income (expenses):
Interest income and other financial gains		1.9			1.3			1.6
Interest expense and other financial charges		(3.2	)		(6.2	)		(7.7	)
Foreign currency loss		(3.6	)		(1.1	)		(1.5	)
Other income (expenses), net		(3.5	)		—			—


Net income before income / asset tax expense		16.9			21.5			24.7


Income / asset tax expense		(5.6	)		(7.8	)		(5.5	)


Net income		11.4			13.7			19.2


Accretion of preferred stock		(0.4	)		—			—


Net income available to common shareholders		11.0	%		13.7	%		19.2	%

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 2007 to 2008, our gross merchandise volume increased by 37.5%, our successful items sold increased by 20.6% and MercadoPago total payment volume increased by 62.0%. From 2008 to 2009, those growth rates were 32.3%, 39.6% and 49.5%, respectively. Our growth in net revenues was 61.0% from 2007 to 2008 and 26.1% from 2008 to 2009. We believe that the growth in net revenues should continue in the future. However, despite this positive historical trend, current weak global macro-economic conditions, coupled with devaluations of certain local currencies in Latin America versus the U.S. dollar, the effect of Venezuelan translation and high interest rates, could lead to declining year-to-year net revenues, particularly as measured in U.S. dollars.

Increased diversification of revenues from year to year

Revenues from our Payments business have been increasing at a faster rate than revenues from our Marketplace business, and we anticipate this trend to continue long term. For 2007 and 2008, payments revenues represented 18.3% and 20.0% of our net revenues, respectively. For 2009, revenues from our Payments business represented 25.8% of net revenues. However, this trend is sensitive to macroeconomic fluctuations, including interest rate fluctuations for consumer credit. Accordingly, this revenue diversification trend may be interrupted during economic periods where there are higher costs of lending.

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. Historically, gains in gross profit margins have been 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.

Our gross profit margins were 78.5% for 2007, 79.9% for 2008 and 79.2% for 2009. In 2009, variations in gross profit margins are mainly a result of a faster growth in our Payments business as compared to our Marketplace business. Our Payments business has a lower gross profit margin than our Marketplace business. In the future, gross profit margins could decline if the cost of net revenues as a percentage of net revenues increases as our Payments business grows faster than our Marketplace business, if we cannot sustain the economies of scale that we have achieved, or if we decrease the interest fees charged.

Additionally in 2009, our gross profit margin was negatively impacted by the re-measurement of U.S. dollar denominated expenses of our Venezuelan subsidiaries discussed in detail below.

Improving Operating income margins

We have generated and expect to continue generating economies of scale in operating expenses. For the past three years, our operating income margins, defined as our income from operations as a percentage of net revenues has improved from 25.4% for 2007, to 27.4% for 2008, and to 32.4% for 2009, mostly as a result of the impact of economies of scale. We anticipate, however, that as we continue to invest in product development, sales and marketing and human resources in order to promote our services and capture the long term business opportunity offered by the Internet in Latin America, it is 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 2007 net income was $9.7 million. In 2008 our net income grew by 94.1% to $18.8 million. For 2009 our net income grew 76.5% to $33.2 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, 2009 compared to year ended December 31, 2008

Net revenues


	Year Ended				Change from 2008
	December 31,				to 2009
	2009		2008		in Dollars		in %
	(in millions, except percentages)

Net Revenues by Business:
Marketplaces	$	128.2	$	109.6	$	18.6		17.0	%
Payments		44.6		27.4		17.2		62.6	%

Total Net Revenues	$	172.8	$	137.0	$	35.8		26.1	%

Total net revenues increased by 26.1% from 2008 to 2009. Measured in local currencies, net revenues grew 42.6% in the year ended December 31, 2009 compared to the same year earlier. The local currency revenue growth was calculated by using the average monthly exchange rates for each month during 2008 and applying them to the corresponding months in 2009, so as to calculate what our financial results would have been had exchange rates remained stable from one year to the next.

The growth in MercadoLibre marketplace revenues from 2008 to 2009 resulted principally from a 32.3% increase in the gross merchandise volume transacted through our platform, partially offset by a decrease in our Marketplace take rate, defined as Marketplace revenues as a percentage of gross merchandise volume, from 5.3% for 2008 to 4.7% for 2009. The decrease in take rate was principally due to (i) higher growth in our smaller country operations that have a lower take rate, (ii) higher growth of final value listings as compared to up-front fee listings, which have a marginally lower take rate and (iii) the impact of currency devaluation on certain fixed components of our fee structure. In addition, there was a 39.6% increase in our successful items sold, defined as the number of items that were sold through the marketplace.

The growth in MercadoPago revenues from 2008 to 2009 resulted principally from a 49.5% increase in the total payments volume completed on our MercadoPago payments platform. The use of MercadoPago increased to 13.9% of our gross merchandise volume for 2009 from 12.3% for 2008. In the same periods, our payments take rate, defined as payments revenues as a percentage of total payment volume, increased from 10.7% to 11.7% (see “Description of Line items: Net Revenue” section for an explanation on how revenues are recorded for MercadoPago installments).

The following table summarizes the changes in net revenues by segment for the years ended December 31, 2009 and 2008:


	Year Ended				Change from 2008
	December 31,				to 2009
	2009		2008		in Dollars		in %
	(in millions, except percentages)

Net Revenues by Segment:
Brazil Marketplace	$	54.6	$	50.5	$	4.1		8.1	%
Argentina Marketplace		23.5		18.2		5.3		28.5	%
Mexico Marketplace		13.7		12.5		1.2		9.8	%
Venezuela Marketplace		26.2		22.0		4.2		19.3	%
Others Marketplace		10.2		6.4		3.8		60.4	%
Payments		44.6		27.4		17.2		62.6	%

Total Net Revenues	$	172.8	$	137.0	$	35.8		26.1	%

On a segment basis, our net revenues for the year ended December 31, 2009 as compared to the year ended December 31, 2008, increased across all segments. In local currency, our Marketplace revenues in Brazil grew 16.3% in the year ended December 31, 2009 compared to the same period a year earlier.

The following table summarizes the changes in net revenues of both our Marketplace and Payments business on an aggregate basis by geography for the years ended December 31, 2009 and 2008:


	Year Ended				Change from 2008
	December 31,				to 2009
	2009		2008		in Dollars		in %
	(in millions, except percentages)

Net Revenues by Geography:
Brazil	$	93.1	$	73.7	$	19.4		26.3	%
Venezuela		27.3		23.1		4.2		18.2	%
Argentina		26.7		19.9		6.8		34.6	%
México		15.3		13.9		1.4		10.2	%
Other Countries		10.4		6.4		4.0		60.8	%

Total Net Revenues	$	172.8	$	137.0	$	35.8		26.1	%

Based on geography, our net revenues for the year ended December 31, 2009 as compared to the same period ended December 31, 2008, increased across all geographies.

The following table sets forth our total net revenues and the sequential quarterly growth of these net revenues for the periods described below:


	Quarter Ended
	March 31,			June 30,			September 30,			December 31,
	(in millions, except percentages)
2009
Net Revenues	$	32.3		$	40.9		$	50.6		$	49.0
Percent change from prior quarter		-3	%		27	%		24	%		-3	%
2008
Net Revenues	$	28.8		$	34.5		$	40.3		$	33.4
Percent change from prior quarter		7	%		20	%		17	%		-17	%
2007
Net Revenues	$	16.5		$	19.0		$	22.8		$	26.9
Percent change from prior quarter		6	%		15	%		20	%		18	%

The 2009 fourth quarter decrease in net revenues is a consequence of the change in our Venezuelan translation rate from the official exchange rate of 2.15 to the parallel exchange rate of 5.67. See “Critical accounting policies and estimates — Foreign Currency Translation” for more detail.

Cost of net revenues



	Year Ended						Change from 2008
	December 31,						to 2009
	2009			2008			in Dollars		in %
	(in millions, except percentages)

Total cost of net revenues	$	36.0		$	27.5		$	8.5		30.9	%

As a percentage of net revenues		20.8	%		20.1	%

The increase in cost of net revenues was primarily attributable to additional collections costs, sales taxes, other costs related to the re-measurement of the US dollar denominated expenses of our Venezuelan subsidiaries and customer support expenditures. The collections fees increased by $3.1 million, or 28.1% in 2009 compared to 2008. 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 $2.6 million, or 31.5%. These taxes represented 6.2% of net revenues in 2009. Other costs related to the re-measurement of the US dollar denominated expenses of our Venezuelan subsidiaries increased by $1.5, or 528.8% for 2009 compared to 2008. For the year ended December 31, 2009, these expenses were re-measured until September 30, 2009 at an average parallel exchange rate of 6.15 “Bolivares Fuertes” per U.S. dollar, then translated at the official exchange rate (2.15 “Bolivares Fuertes” per U.S. dollar) and since October 1, 2009 were translated at the parallel exchange rate (the average parallel exchange rate for the fourth quarter was 5.67 “Bolivares Fuertes” per U.S. dollar). In 2008, the dollar denominated expenses of our Venezuelan subsidiaries were measured at 2.15 “Bolivares Fuertes” per U.S. dollar and the difference between the parallel exchange rate and the official exchange rate was reflected on the foreign currency line whenever cash in Venezuela was transferred to the U.S.

We also increased expenditures for our in-house customer support operations in the amount of $1.6 million, an increase of 24.2% compared to 2008, as compensation costs increased and we invested in improved service and initiatives to combat fraud, illegal items and fee evasion. The cost of net revenues margin increase 0.7% from 20.1% in 2008 to 20.8% in 2009 due to a faster growth in our Payments business as compared to our marketplace business. Our Payments business has a lower gross profit margin than our Marketplace business.

Product and technology development


	Year Ended						Change from 2008
	December 31,						to 2009
	2009			2008			in Dollars		in %
	(in millions, except percentages)

Product and technology development	$	12.1		$	7.3		$	4.8		66.1	%

As a percentage of net revenues		7.0	%		5.3	%

The growth in product and technology development expenses was primarily attributable to $1.8 million of expenses for certain income tax withholdings related to our Argentine and Brazilian operations for the year ended December 31, 2009, and a $1.9 million or 49.4% increase in compensation costs for the year ended December 31, 2009 over the same period for 2008. These additional compensation expenses were primarily related to the addition of engineers and, to a lesser extent, to increases in salaries, as we continue to invest in top quality talent to develop enhancements and new features across our platforms. We believe product development is one of our key competitive advantages and intend to continue to invest in adding engineers to meet the increasingly sophisticated product expectations of our customer base.

In addition, for the year ended December 31, 2009, product and technology development expenses increased by $0.7 million, over the comparable period for 2008 due to the re-measurement of the US dollar denominated expenses of our Venezuelan subsidiaries. For the year ended December 31, 2009, these expenses were re-measured until September 30, 2009 at an average parallel exchange rate of 6.15 “Bolivares Fuertes” per U.S. dollar, then translated at the official exchange rate (2.15 “Bolivares Fuertes” per U.S. dollar) until September 30, 2009 and since October 1, 2009 were translated at the parallel exchange rate (the average parallel exchange rate for the fourth quarter was 5.67 “Bolivares Fuertes” per U.S. dollar). In 2008, the dollar denominated expenses of our Venezuelan subsidiaries were measured at 2.15 “Bolivares Fuertes” per U.S. dollar and the difference between the parallel exchange rate and the official exchange rate was reflected on the foreign currency line whenever cash in Venezuela was transferred to the U.S.

Sales and marketing


	Year Ended						Change from 2008
	December 31,						to 2009
	2009			2008			in Dollars		in %
	(in millions, except percentages)

Sales and marketing	$	42.9		$	40.0		$	2.9		7.2	%

As a percentage of net revenues		24.8	%		29.2	%

Sales and marketing expenses increased by $2.0 million or 31.1%, due to increases in salaries to retain talent. The increase in sales and marketing expense was also related to a $1.7 million increase in expenses related to our affiliate program during the year ended December 31, 2009 as compared to the previous year. Bad debt charges for the year ended December 31, 2009, increased by $1.4 million from 2008, and represented 5.8% of net revenues in 2009, versus 6.3% for the same period in 2008. The increase in sales and marketing expenses for the year ended December 31, 2009 was partially offset by a $4.3 million decrease in our online advertising expenses related to strategic deals, as we have found better rates at which to drive traffic to our sites over the year ended December 31, 2009. The decrease in online advertising expense was partially offset by an increase of $0.6 million related to off-line marketing expenses and a $1.5 million charge related to the re-measurement of the U.S. dollars denominated online advertising expenses of our Venezuelan subsidiaries. For the year ended December 31, 2009, these expenses were re-measured until September 30, 2009 at an average parallel exchange rate of 6.15 “Bolivares Fuertes” per U.S. dollar, then translated at the official exchange rate (2.15 “Bolivares Fuertes” per U.S. dollar) and since October 1, 2009 were translated at the parallel exchange rate (the average parallel exchange rate for the fourth quarter was 5.67 “Bolivares Fuertes” per U.S. dollar). In 2008, the dollar denominated expenses of our Venezuelan subsidiaries were measured at 2.15 “Bolivares Fuertes” per U.S. dollar and the difference between the parallel exchange rate and the official exchange rate was reflected on the foreign currency line whenever cash in Venezuela was transferred to the U.S. Online advertising represented 11.1% of our net revenues in the year ended December 31, 2009, down from 14.8% for 2008.

General and administrative


	Year Ended						Change from 2008
	December 31,						to 2009
	2009			2008			in Dollars		in %
	(in millions, except percentages)

General and administrative	$	25.8		$	22.8		$	3.1		13.6	%

As a percentage of net revenues		15.0	%		16.6	%

The major component that drove the increase in general and administrative expenses in 2009 was a $2.5 million charge related to the re-measurement of the US dollar denominated expenses of our Venezuelan subsidiaries discussed in detail above and certain income tax withholdings related to our Argentine and Brazilian operations. In addition, general and administrative expenses grew as a consequence of an increase in compensation costs of $1.8 million or 17.2% from 2008 to 2009. These added compensation costs are primarily attributable to the 2008 and 2009 long term retention plan compensation costs accrued in 2009 versus a lower impact in 2008, increases in salaries to retain talent, hiring of more senior managers in Brazil and compensation for outside directors.

The increase in general and administrative expenses was partially offset by a $0.8 million decrease of outside service fees attributable to decreased legal expenses primarily in Brazil and the U.S. and decreased audit expenses and a $0.4 million decrease in travel and accommodation expenses and other general and administrative expenses.

Compensation cost related to acquisitions

As part of CMG acquisition, 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. This amount was recorded as operating expense, instead of considering such payment as part of the purchase price (See note 6 to our consolidated financial statements included in this report). The compensation expenses related to the acquisition were fully accrued in the second quarter of 2008.

Other income (expenses), net


	Year Ended						Change from 2008
	December 31,						to 2009
	2009			2008			in Dollars		in %
	(in millions, except percentages)

Other income (expenses)	$	-13.3		$	-8.1		$	-5.2		64.9	%

As a percentage of net revenues		-7.7	%		-5.9	%

The increase in other expenses during the year ended December 31, 2009 was primarily a result of an increase in interest expense and other financial charges from $8.5 million in 2008 to $13.4 million in 2009. The increase of interest expense was mainly attributable to a $4.5 million increase in interest expenses from $7.2 million for 2008 to $11.7 million for 2009, as a result of financing incurred by selling all our credit card coupons to fund working capital needs in our Payments operations in Brazil and to a $0.4 million increase from $0.3 million in 2008 to $0.7 million in 2009 related to the seller financing of the DeRemate acquisition. In addition, other expenses grew due to a $1.2 million increase in foreign currency losses, from $1.5 million for 2008 to $2.7 million in 2009. The increase in foreign currency losses was primarily due to losses in Brazil attributable to the impact of the local currency appreciation on the cash balances held by our Brazilian subsidiary in U.S. dollars.

The interest expense and foreign losses increases were partially offset by a $0.9 million increase in interest income and other financial charges to $2.7 million in 2009 from $1.8 million in 2008. The increase in interest income and other financial charges are mainly attributable to interest income from our investments and also to accrued gains related to changes in the fair value of put options.

Income and asset tax expense


	Year Ended						Change from 2008
	December 31,						to 2009
	2009			2008			in Dollars			in %

Income and asset tax		9.5			10.6			(1.1	)		-10.6	%

As a percentage of net revenues		5.5	%		7.8	%

The decrease in our Income and asset tax expense was driven by the reversal of certain foreign and domestic valuation allowances for $4.1 million derived from our tax planning strategies implemented during the year designed to more efficiently use our accumulated tax loss carryforward credits from acquired companies. We are still evaluating other tax planning strategies which at the date of this report are not considered feasible. In addition, the decrease in our income and asset tax expense was a consequence of a $0.3 million reduction of the impact of the Mexican tax called “Impuesto Empresarial a Tasa Única (“IETU”)” from $0.8 million in 2008 to $0.5 million in 2009. Additionally, in year ended December 31, 2008, part of the foreign exchange losses in Venezuela were not deductible and our blended tax rate was impacted by $1.9 million of accrued compensation expenses related to CMG acquisition (See “Compensation Cost related to acquisitions” above), as this charge reduced pre-tax income, but the related tax credit had a full valuation allowance.

Our blended tax rate is defined as income and asset tax expense as a percentage of income before income and asset tax. Our effective income tax rate is defined as the provision for income taxes as a percentage of pre tax income. The effective income tax rate excludes the effects of the deferred income tax, and of the “IETU” tax.

The following table summarizes the changes in our blended and effective tax rate for the years ended December 31, 2009 and 2008:


	Year Ended
	December 31,
	2009			2008

Blended tax rate		22.3	%		36.1	%
Effective tax rate		26.9	%		27.7	%

Year ended December 31, 2008 compared to year ended December 31, 2007

Net revenues


	Year Ended				Change from 2007
	December 31,				to 2008
	2008		2007		in Dollars		in %
	(in millions, except percentages)

Net Revenues by Business:
Marketplaces	$	109.6	$	69.5	$	40.1		57.6	%
Payments		27.4		15.6		11.8		75.8	%

Total Net Revenues	$	137.0	$	85.1	$	51.9		61.0	%

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.

The following table summarizes the changes in net revenues by segment for the years ended December 31, 2008 and 2007:


	Year Ended				Change from 2007
	December 31,				to 2008
	2008		2007		in Dollars		in %
	(in millions, except percentages)

Net Revenues by Segment:
Brazil Marketplace	$	50.5	$	37.6	$	12.9		34.5	%
Argentina Marketplace		18.3		11.3		6.9		60.9	%
Mexico Marketplace		12.5		9.6		2.8		29.6	%
Venezuela Marketplace		22.0		7.1		14.9		210.1	%
Others Marketplace		6.4		3.9		2.5		63.3	%
Payments		27.4		15.6		11.8		75.8	%

Total Net Revenues	$	137.0	$	85.1	$	51.9		61.0	%

The following table summarizes the changes in net revenues of both our Marketplace and Payments business on an aggregate basis by geography for the years ended December 31, 2008 and 2007:


	Year Ended				Change from 2007
	December 31,				to 2008
	2008		2007		in Dollars		in %
	(in millions, except percentages)

Net Revenues by Geography:
Brazil	$	73.7	$	50.3	$	23.4		46.6	%
Venezuela		23.1		7.7		15.4		201.1	%
Argentina		19.9		12.6		7.3		57.9	%
México		13.9		10.7		3.2		29.9	%
Other Countries		6.4		3.9		2.5		65.1	%

Total Net Revenues	$	137.0	$	85.1	$	51.9		61.0	%

The following table sets forth our total net revenues and the sequential quarterly growth of these net revenues for the periods described below:


	Quarter Ended
	March 31,			June 30,			September 30,			December 31,
	(in millions, except percentages)
2008
Net Revenues	$	28.8		$	34.5		$	40.3		$	33.4
Percent change from prior quarter		7	%		20	%		17	%		-17	%
2007
Net Revenues	$	16.5		$	19.0		$	22.8		$	26.9
Percent change from prior quarter		6	%		15	%		20	%		18	%

Cost of net revenues


	Year Ended						Change from 2007
	December 31,						to 2008
	2008			2007			in Dollars		in %
	(in millions, except percentages)

Total cost of net revenues	$	27.5		$	18.3		$	9.3		50.7	%

As a percentage of net revenues		20.1	%		21.5	%

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.

Product and technology development


	Year Ended						Change from 2007
	December 31,						to 2008
	2008			2007			in Dollars		in %
	(in millions, except percentages)

Product and technology development	$	7.3		$	4.4		$	2.9		67.2	%

As a percentage of net revenues		5.3	%		5.1	%

The growth in product and technology development expenses was primarily attributable to an increase in compensation costs in the amount of $2.0 million, 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


	Year Ended						Change from 2007
	December 31,						to 2008
	2008			2007			in Dollars		in %
	(in millions, except percentages)

Sales and marketing	$	40.0		$	27.6		$	12.4		44.8	%

As a percentage of net revenues		29.2	%		32.4	%

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


	Year Ended						Change from 2007
	December 31,						to 2008
	2008			2007			in Dollars		in %
	(in millions, except percentages)

General and administrative	$	22.8		$	13.2		$	9.5		72.1	%

As a percentage of net revenues		16.6	%		15.5	%

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

Other income (expenses), net


	Year Ended						Change from 2007
	December 31,						to 2008
	2008			2007			in Dollars		in %
	(in millions, except percentages)

Other income (expenses)	$	-8.1		$	-7.2		$	-0.9		11.8	%

As a percentage of net revenues		-5.9	%		-8.5	%

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 year’s presentation.

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 not be able to distribute dividends from our Venezuelan subsidiaries at the official exchange rate 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 expense


	Year Ended						Change from 2007
	December 31,						to 2008
	2008			2007			in Dollars		in %

Income and asset tax		10.6			4.7			5.9		124.9	%

As a percentage of net revenues		7.8	%		5.6	%

The following table summarizes the changes in our blended and effective tax rate for the years ended December 31, 2008 and 2007.


	Year Ended
	December 31,
	2008			2007

Blended tax rate		36.1	%		32.8	%
Effective tax rate		27.7	%		33.2	%

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. 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.

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 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:

	•		continued growth of online commerce and Internet usage in Latin America;

	•		our ability to expand our operations and adapt to rapidly changing technologies;

	•		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;

	•		the announcement or introduction of new sites, services and products by us or our competitors, and price competition;

	•		Reliance on third-party service providers;

	•		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;

	•		Security breaches and consumer confidence in the security of transactions over the Internet;

	•		consumer trends and popularity of certain categories of items;

	•		our ability to attract new customers, retain existing customers and increase revenues;

	•		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 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, 2009, our principal source of liquidity was $64.4 million of cash and cash equivalents and short-term investments and $19.5 million of long-term investments (mainly time deposits) provided by cash generated from operations as well as the net proceeds of our initial public offering.

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 long as we continue managing our Payments business by transferring credit card receivables to financial institutions in return for cash, as we have done since the last quarter of 2008, we expect that our MercadoPago business will generate cash. The cost of discounting these receivables is built in the financing fees of MercadoPago.

In the event we change the way we manage our Payments business, the working capital needs related to this business could be funded, as we did in the past, through a combination of the sale of credit card coupons to financial institutions, loans backed by credit card receivables and cash advances from our marketplace business. See “Recent accounting pronouncements — Accounting for Transfers of Financial Assets” included in this report.

The following table presents our cash flows from operating activities, investing activities and financing activities for the three years ended December 31, 2007, 2008 and 2009:


	Year Ended December 31,
(In millions)	2009			*2008()**			*2007()**
Net cash provided by operating activities	$	49.7		$	55.8		$	7.6
Net cash used in investing activities		(3.1	)		(38.9	)		(49.4	)
Net cash (used in) provided by financing activities		(15.3	)		(11.7	)		50.2

Effect of exchange rates on cash and cash equivalents		1.0			(3.5	)		0.1

Total increase in cash and cash equivalents	$	32.3		$	1.8		$	8.5


(*)		Certain items have been reclassified to comform with actual presentation. See Note 2 “Out of period adjustments” to our consolidated financial statements for more detail.

Net cash provided by operating activities


	Year Ended				Change from 2008
	December 31,				to 2009
	2009		2008		in Dollars		in %
	(in millions, except percentages)

Net Cash provided by:
Operating activities	$	49.7	$	55.8	$	-6.1		-10.9	%

The decrease in net cash provided by operating activities during the year ended December 31, 2009 was mainly attributable to a $17.4 million decreases in working capital in our Payments segment, derived mostly from the sale of credit cards receivables to financial institutions and increases of funds payable to customers due to a higher amount of transactions in 2009. Net cash provided by operating activities in 2008 included approximately $35 million mostly related to the one-off effect of discounting previous quarters MercadoPago credit cards receivables in October. Net cash provided by operating activities also decreased due to a $7.0 million increase in accounts receivable, a $2.4 million decrease in other liabilities and a $1.9 million decrease in accounts payable and accrued expenses.

These decreases in cash provided by operations were partially offset by a $14.4 million increase in net income. In addition, cash provided by operations in 2008 was affected by 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. Management’s 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)..


	Year Ended				Change from 2007
	December 31,				to 2008
	2008		2007		in Dollars		in %
	(in millions, except percentages)

Net Cash provided by:
Operating activities	$	55.8	$	7.6	$	48.2		633.2	%

For 2008, the increase in our net cash provided by operating activities 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, 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. Management’s 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. The annual cash flow provided by operating activities was lower than net income for the year, because 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.

Net cash used in investing activities


	Year Ended						Change from 2008
	December 31,						to 2009
	2009			2008			in Dollars		in %
	(in millions, except percentages)

Net Cash (used in) provided by:
Investment activities	$	(3.1	)	$	(38.9	)	$	35.8		-92.1	%

Net cash used in investing activities in 2009 resulted from $4.8 million of cash in the year ended December 31, 2009 to make capital expenditures related to technological equipment, software licenses and to a lesser degree office equipment. Additionally, purchases of investments for $80.1 million were offset by proceeds from the sale and maturity of investments for $81.7 million as part of our financial strategy.

As of December 31, 2008, net cash used in investing activities resulted primarily from the payments for 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. The related DeRemate acquisition outflow on our statement of cash flow does not include $18.0 million of promissory notes issued to the seller. The purchase of 100% of the issued and outstanding shares of capital stock of CMG 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 outflow shown in our statement of cash flow is net of cash acquired (0.5) million and does not consider $1.9 million recorded as compensation expense and not as part of the purchase price (See Note 6 to our consolidated financial statements and “Compensation Cost related to acquisitions” above). Additionally, purchases of investments accounted for $110.1 million of cash used in investing activities during the year ended December 31, 2008, as part of our financial investment strategy and capital expenditures of $5.0 million. This consumption of cash was partially offset during the first nine months of 2008 by proceeds from the sale of investments for $115.3 million also part of our financial strategy.


	Year Ended						Change from 2007
	December 31,						to 2008
	2008			2007			in Dollars		in %
	(in millions, except percentages)

Net Cash (used in) provided by:
Investment activities	$	(38.9	)	$	(49.4	)	$	10.5		-21.3	%

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 (See Note 6 to our 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 $5.0 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 $115.3 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 $49.4. 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, partially offset by proceeds from the sale of investments (primarily debt securities and certificates of deposit).

Net cash provided by (used in) financing activities


	Year Ended December 31,						Change from 2008 to 2009
	2009			2008			in Dollars			in %
	(in millions, except percentages)

Net Cash used in:
Financing activities	$	(15.3	)	$	(11.7	)	$	(3.6	)		31.2	%

For the year ended December 31, 2009, our primary use of cash for financing activities was related to a reduction in short term debts related to a $15.0 million payment of DeRemate acquisition seller financing. For the year ended December 31, 2008, our primary use of cash for financing activities was a reduction in our financing from loans backed by Payments credit card receivables. Since the fourth quarter of 2008, we began to sell all the credit card coupons related to “Funds Receivable from Customers” in our MercadoPago business to financial institutions and accounted for as a sale of financial assets. For that reason we no longer recognized the credit card portfolio as assets and no liability was recorded. The difference in the accounting treatment generates a decrease in net cash used in 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.


	Year Ended December 31,					Change from 2007 to 2008
	2008			2007		in Dollars			in %
	(in millions, except percentages)

Net Cash (used in) provided by:
Financing activities	$	(11.7	)	$	50.2	$	(61.9	)		-123.2	%

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. 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.

Net cash provided by financing activities for 2007 was mainly attributable to the issuance of common stock from our initial public offering

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. On June 3, 2009, August 31, 2009 and December 4, 2009 the Company paid to the Sellers $3,113,203, $9,470,222 and $3,018,893, respectively for principal and accrued interest. The outstanding promissory notes mature on March 5, 2010 for a principal amount of $3,000,000. The promissory notes bear interest at the rate of 3.17875% plus 2.5% for the remaining period up to their maturity and can be prepaid by us without penalty. As of December 31, 2009 the balance of the promissory notes was disclosed in our balance sheet for $3.0 million as principal and $0.2 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.

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 and for that reason no liability has been recorded as of December 31, 2008 and 2009.

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 decreased $0.2 million, to $4.8 million in 2009 as compared to $5.0 million in 2008. The Company maintained the same level of investment on hardware and software licenses necessary to maintain and update the technology of our platform, cost of computer software developed internally, office equipment and new office space. 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, 2009, the Argentine subsidiary has paid $7.2 million into the trust. For U.S. GAAP purposes the investment was recorded as a long term investment instead of as Property and Equipment. 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 our balance sheet.

We believe that our existing cash and cash equivalents, including the net proceeds from our initial public offering, sale of 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, 2009, 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, 2009 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)	$	2.9	$	1.5	$	1.1	$	0.3	$	—
Purchase obligations (2)		6.0		5.5		0.5		—		—


Total	$	8.9	$	7.0	$	1.6	$	0.3	$	—


(1)		Includes leases of office space.

(2)		On June 19, 2008, our Argentine subsidiary agreed 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 third quarter of 2010. As of December 31, 2009, the Argentine subsidiary has invested $7.2 million in the aforementioned trust and is expected to invest an additional $2.2 million in the following 6 months. Due to the impact of inflation and/or currency fluctuations, future payments could differ 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.

In connection with the DeRemate acquisition, the Company issued to the Sellers unsecured promissory notes. As of December 31, 2009, the outstanding principal amount of the debt was $3.0 million. The outstanding promissory notes mature on March 5, 2010. The promissory notes were issued on September 5, 2008 and bear interest at the rate of 3.17875% plus 2.5% for the remaining period up to their maturity and can be prepaid by us without penalty.

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 the real estate trust for our new Argentina office space, 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 Brazil’s share of our revenues, may affect the value of our financial assets and liabilities.

Foreign Currencies Risk

At December 31, 2009, the Seller financing related to the acquisition of DeRemate consisting of unsecured promissory notes for an aggregate principal amount of $3.0 million 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, 2009, the total cash and cash equivalents denominated in foreign currencies totaled $18.9 million, and accounts receivable and funds receivable from customers in foreign currencies totaled $8.3 million. To manage exchange rate risk, our treasury policy is to transfer most cash and cash equivalents in excess of working capital requirements into dollar-denominated accounts in the United States. At December 31, 2009, our dollar-denominated cash and cash equivalents and short-term investments totaled $45.2 million and our dollar-denominated long-term investments totaled $26.6 million. For the year ended December 31, 2009, we incurred foreign currency losses in the amount of $2.7 million as the cash and investment balances of the subsidiaries held in U.S. dollars depreciated in local current terms. (See “Management Discussion and Analysis of Financial Condition and Results of Operations — Year ended December 31, 2009 compared to year ended December 31, 2008 — 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 6.05 “Bolivares Fuertes” per US dollar. During the fourth quarter of 2009, we changed our Venezuelan translation exchange rate from the official exchange rate to the parallel exchange rate. See “Management Discussion and Analysis of Financial Condition and Results of Operations — Critical accounting policies and estimates — Foreign Currency Translation”. Consequently, starting in the fourth quarter of 2009, we translated our financial statements using the parallel exchange rate. Our Venezuelan subsidiaries assets and liabilities were translated at the closing parallel exchange rate of 6.05 “Bolivares Fuertes” per US dollar. Accordingly, the foreign currency effect on assets included in “Other non-current assets” in the consolidated balance sheet at September 30, 2009 for $11,222,508 has been reversed as of December 31, 2009, and the corresponding effect was reflected in the currency translation adjustment (CTA) component of other comprehensive income in equity. For the year ended December 31, 2009, Venezuelan subsidiaries dollar denominated expense accounts were re-measured until September 30, 2009 at an average parallel exchange rate of 6.15 “Bolivares Fuertes” per U.S. dollar, then translated at the official exchange rate (2.15 “Bolivares Fuertes” per U.S. dollar) and since October 1, 2009 were translated at the parallel exchange rate (the average parallel exchange rate for the fourth quarter was 5.67 “Bolivares Fuertes” per U.S. dollar). In 2008, the dollar denominated expenses of our Venezuelan subsidiaries were measured at 2.15 “Bolivares Fuertes” per U.S. dollar and the difference between the parallel exchange rate and the official exchange rate was reflected on the foreign currency line whenever cash in Venezuela was transferred to the U.S.

During May 2009, the International Practices Task Force discussed the highly inflationary status of the Venezuelan economy. Historically, the Task Force has used the Consumer Price Index (CPI) when considering the inflationary status of the Venezuelan economy. The CPI has existed since 1984. However, the CPI covers only the cities of Caracas and Maracaibo. Commencing on January 1, 2008, the National Consumer Price Index (NCPI) has been developed to cover the entire country of Venezuela. Since inflation data is not available to compute a cumulative three year inflation rate for the entire country solely based on the NCPI, the Company uses a blended rate using the NCPI and CPI to calculate Venezuelan inflation rate. The cumulative three year inflation rate as of December 31, 2009 was calculated using the CPI information for periods before January 1, 2008 and NCPI information for the periods after January 1, 2008. The blended CPI/NCPI three-year inflation index (23 months of NCPI and 13 months of CPI) at November 30, 2009 exceeded 100%. According to US GAAP, calendar year-end companies should apply highly inflationary accounting as from January 1, 2010. Therefore, the Company will transition its Venezuelan operations to highly inflationary status as of January 1, 2010 considering the US dollar as the functional currency.

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 while the re-measurement of our net asset position in US Dollars will have a negative impact in our Statement of Income. Similarly, our net revenues, operating expenses and net income will decrease if the U.S. dollar strengthens against foreign currencies, while the re-measurement of our net asset position in US Dollars will have a positive impact in our Statement of Income. During the year ended December 31, 2009, 53.9% of our revenues were denominated in Brazilian reais, 15.8% in Venezuelan “Bolivares Fuertes”, 15.5% in Argentine pesos, 8.9% in Mexican pesos and 6.0% in the currency of other countries.

The following table summarizes the distribution of net revenues based on geography:


	Year Ended December 31,
(In millions)	2007		2008		2009
Brazil		50.3		73.7		93.1
Argentina		12.6		19.9		26.7
Mexico		10.7		13.9		15.3
Venezuela		7.7		23.1		27.3
Other countries		3.9		6.4		10.4


Total		85.1		137.0		172.8

The table below shows the impact on the Company’s Net Revenues, Expenses, Other income and Income tax, Net Income and Shareholders’ Equity for a positive or negative 10% fluctuation on all the foreign currencies to which we are exposed as of December 31, 2009 and for the year ended December 31, 2009:


(In millions)	-10%			Actual			+10%
	(1)						(2)
Net revenues		191.9			172.8			157.2
Expenses		(129.6	)		(116.8	)		(106.3	)


Income from operations		62.3			56.0			50.9


Other income (expenses) and income tax related to P&L items		(22.2	)		(20.1	)		(18.3	)
Foreign Currency impact related to the remeasument of our Net Asset position		(8.5	)		(2.7	)		1.9


Net income		31.6			33.2			34.5


Total Shareholders’ Equity		115.2			114.2			116.0


(1)		Apreciation of the subsidiaries local currency against U.S. Dollar

(2)		Depreciation of the subsidiaries local currency agains U.S. Dollar

The table above shows a decrease in our net income when the U.S. dollar weakens against foreign currencies because the re-measurement of our net asset position in US Dollars has a greater impact than the increase in net revenues, operating expenses, and other income (expenses) and income tax lines related to the translation effect. Similarly, the table above shows an increase in our net income when the U.S. dollar strengthens against foreign currencies because the re-measurement of our net asset position in US Dollars has a greater impact than the decrease in net revenues, operating expenses, and other income (expenses) and income tax lines related to the translation effect.

In the past we have entered into transactions to hedge portions of our foreign currency translation exposure but during 2009 we did not enter 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, 2009, MercadoPago funds receivable from customers totaled approximately $3.8 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, and sovereign debt securities. 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.

The Seller financing related to the acquisition of DeRemate consisting of an unsecured promissory note for an aggregate principal amount of $3.0 million mature on March 5, 2010. The promissory note was issued on September 5, 2008 and bears interest at 3.17875% plus 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 and because all our long-term investments do not exceed a two year period, 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, 2009 or interest expenses derived from discounting our MercadoPago receivables or our promissory note issued in connection with the DeRemate acquisition.

Our short-term investments, which are classified on our balance sheet as current assets in the amount of $14.6 million, 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. The book value of held-to-maturity securities approximates their respective fair values and consequently there are no significant unrecognized gains or losses.

Equity Price Risk

In 2009, our Board of Directors approved the 2009 LTRP that will be payable as described in “Management’s Discussion and Analysis of Financial Conditions and Results of Operations — Critical accounting policies and estimates — Stock-based compensation”.

The 2009 Variable Payment LTRP liability subjects us to equity price risk. At December 31, 2009, the total contractual obligation fair value of our 2009 Variable Payment LTRP liability amounts to $4,457,346. As of December 31, 2009, the accrued liability related to the 2009 Variable Payment portion of the LTRP included in Social security payable in our consolidated balance sheet amounts to $1,335,560. The following table shows a sensitivity analysis of the risk associated with our total contractual obligation related to the 2009 variable payment if our stock price were to increases or decreases by up to 40%.


	As of December 31, 2009
	MercadoLibre, Inc		2009 variable
(In US dollars)	Equity Price		LTRP liability
Change in equity price in percentage

40%		64.05		6,240,285
30%		59.48		5,794,550
20%		54.90		5,348,815
10%		50.33		4,903,081
Static (*)		45.75		4,457,346
-10%		41.18		4,011,611
-20%		36.60		3,565,877
-30%		32.03		3,120,142
-40%		27.45		2,674,408


(*)		Average closing stock price for the last 60 trading days of the closing date


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 the evaluation of our disclosure control 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”)) 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 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 as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

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.

Management’s 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. Management’s 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, 2009 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 management’s assessment with the Audit Committee of our Board of Directors.

The effectiveness of our internal control over financial reporting as of December 31, 2009 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 system’s 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

The information required by this item is included in our Proxy Statement for our 2010 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2009 (the “2010 Proxy Statement”) and is incorporated herein by reference.


ITEM 11.		EXECUTIVE COMPENSATION

The information required by this item is included in the 2010 Proxy Statement and is incorporated herein by reference.


ITEM 12.		SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS

Except as set forth below, the information required by this item is included in the 2010 Proxy Statement and is incorporated herein by reference.

The following table represents information as of December 31, 2009 with respect to equity compensation plans under which shares of the Company’s 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

of outstanding options,

outstanding options,

(excluding securities

Plan Category

Warrants and rights

warrants and rights

reflected in column (a))

(a)

(b)

(c)

Equity compensation plans approved by security holders

—

294,529

Equity compensation plans not approved by security holders(1)

18,889

2.02

—

Total

18,889

2.02

294,529


(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, 2007, options to purchase a total of 144,174 shares of common stock were outstanding at a weighted average price of $1.04 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 participant’s 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 participant’s duties, the conviction of participant for committing a felony or similar foreign crime, and any other cause for termination set forth in a participant’s 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.

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 participant’s 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

The information required by this item is included in the 2010 Proxy Statement and is incorporated herein by reference.


ITEM 14.		PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is included in the 2010 Proxy Statement and is incorporated herein by reference.

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, 2009 and 2008		F-3

Consolidated statements of income for the three years ended December 31, 2009		F-4

Consolidated statements of changes in shareholders’ equity (deficit) for the three years ended December 31, 2009		F-5

Consolidated statements of cash flows for the three years ended December 31, 2009		F-7

Notes to consolidated financial statements		F-9

(b) Exhibits . The exhibits required by Item 601 of Regulation S-K are listed below.


Exhibit
Number		Exhibit Title

	2.01	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)

	2.02	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	Registrant’s Amended and Restated Certificate of Incorporation. (1)

	3.02	Registrant’s Amended and Restated Bylaws. (1)

	4.01	Form of Specimen Certificate for Registrant’s Common Stock (5)

	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. (5) (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) (5)

	10.05	Lease Agreement, dated as of May 5, 2008, between Curtidos San Luis S.A. and MercadoLibre S.A. (translated from Spanish) (5)

	10.06	Concession Contract, dated as February 7, 2007, between Border’s 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. (5)


Exhibit
Number		Exhibit Title

	10.10	Arias Trust Contract, dated as of June 5, 2006 and amended as of May 29, 2008 (translated from Spanish) (5)

	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* (5)

	10.16	2009 Equity Compensation Plan* (7)

	10.17	2008 Long-Term Retention Plan (6)

	10.18	2009 Long-Term Retention Plan (6)
	10.19	Property Lease Agreement, dated February 01, 2010, between MercadoLivre.com Atividades de Internet Ltda. and Verbo Empreendimentos e Participações Ltda.*

	10.20	Property Lease Agreement, dated June 28, 2005, between MercadoLivre.com Atividades de Internet Ltda. and KW Radar Construtora e Incorporadora Ltda.*

	10.21	Amendment Agreement, dated October 30, 2009, between MercadoLivre.com Atividades de Internet Ltda. and KW Radar Construtora e Incorporadora Ltda.*

	10.22	Property Lease Agreement, dated as of November 1, 2004, between MercadoLivre.com Atividades de Internet Ltda. and Barros e Spitaletti Empreendimentos Ltda.*

	10.23	Amendment Agreement, dated October 30, 2009, between MercadoLivre.com Atividades de Internet Ltda. and KW Radar Construtora e Incorporadora Ltda.*

	10.24	Property Lease Agreement, dated of April, 1, 2008, between MercadoLivre.com Atividades de Internet Ltda. and CNA Spitaletti Construtora e Incorporadora Ltda.*

	10.25	Amendment Agreement, dated October 30, 2009, between MercadoLivre.com Atividades de Internet Ltda. and CNA Spitaletti Construtora e Incorporadora Ltda.*

	10.26	Property Lease Amendment, dated May 5, 2008, between MercadoLibre Venezuela S.A. and G4 Grupo 4 Inmobiliaria Internacional Industrial Comercial, C.A.*

	21.01	List of Subsidiaries*

	23.01	Consent of Price Watherhouse & Co. S.R.L., Independent Registered Public Accounting Firm*

	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.

(5)		Incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009

(6)		Incorporated by reference to the Current Report on Form 8-K filed on July 21, 2009

(7)		Incorporated by reference to the Registration Statement on Form S-8 filed on June 11, 2009

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 26, 2010

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 26, 2010

/s/ Hernán Kazah Hernán Kazah	Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)	February 26, 2010

/s/ Mario Vazquez Mario Vazquez	Director	February 26, 2010

/s/ Anton Levy Anton Levy	Director	February 26, 2010

/s/ Michael Spence Michael Spence	Director	February 26, 2010

/s/ Verónica Allende Serra Veronica Allende Serra	Director	February 26, 2010

/s/ Nicolás Galperín Nicolás Galperín	Director	February 26, 2010

/s/ Emiliano Calemzuk Emiliano Calemzuk	Director	February 26, 2010

/s/ Martin de los Santos Martin de los Santos	Director	February 26, 2010

MercadoLibre, Inc.

Consolidated Financial Statements
as of December 31, 2009 and 2008
and for the three years in the period
ended December 31, 2009

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, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009 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, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s 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 Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our audits (which were an integrated audit in 2009 and 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.

F-1

A company’s 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 company’s 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 company’s assets that could have a material effect on the financial statements.

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.

Price Waterhouse & Co. S.R.L.


By		(Partner) Carlos Martín Barbafina

Buenos Aires, Argentina
February 26, 2010

F-2

MercadoLibre Inc.

Consolidated Balance Sheets
As of December 31, 2009 and 2008


	December 31,			December 31,
	2009			2008
Assets
Current assets:
Cash and cash equivalents	$	49,803,402		$	17,474,112
Short-term investments		14,580,185			31,639,400
Accounts receivable, net		4,868,377			3,856,392
Funds receivable from customers		3,785,802			2,322,416
Prepaid expenses		547,138			426,869
Deferred tax assets		5,481,182			1,628,871
Other assets		3,068,930			2,953,164

Total current assets		82,135,016			60,301,224
Non-current assets:
Long-term investments		26,627,357			9,218,153
Property and equipment, net		5,948,276			5,940,160
Goodwill and intangible assets, net		64,338,564			72,911,546
Deferred tax assets		2,897,492			14,270
Other assets		667,944			8,353,396

Total non-current assets		100,479,633			96,437,525
Total assets	$	182,614,649		$	156,738,749

Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable and accrued expenses	$	11,583,053		$	16,941,173
Funds payable to customers		31,453,410			14,727,891
Social security payable		7,428,340			4,387,943
Taxes payable		6,797,516			4,989,704
Loans payable and other financial liabilities		3,213,992			14,963,421
Provisions		16,581			299,753

Total current liabilities		60,492,892			56,309,885
Non-current liabilities:
Social security payable		1,355,006			339,854
Loans payable		—			3,050,061
Deferred tax liabilities		5,170,799			2,556,120
Other liabilities		1,402,715			1,058,848

Total non-current liabilities		7,928,520			7,004,883
Total liabilities	$	68,421,412		$	63,314,768


Commitments and contingencies (Note 16)

Shareholders’ equity:
Common stock, $0.001 par value, 110,000,000 shares authorized, 44,120,269 and 44,070,367 shares issued and outstanding at December 31, 2009 and December 31, 2008, respectively	$	44,120		$	44,071
Additional paid-in capital		120,257,998			119,807,007
Retained earnings / (Accumulated deficit)		17,656,537			(15,552,256	)
Accumulated other comprehensive loss		(23,765,418	)		(10,874,841	)

Total shareholders’ equity		114,193,237			93,423,981

Total liabilities and shareholders’ equity	$	182,614,649		$	156,738,749

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, 2009


	Year Ended December 31,
	2009			2008			2007

Net revenues	$	172,843,621		$	137,022,620		$	85,126,341
Cost of net revenues		(35,958,050	)		(27,536,573	)		(18,272,940	)

Gross profit		136,885,571			109,486,047			66,853,401

Operating expenses:
Product and technology development		(12,140,521	)		(7,307,008	)		(4,369,376	)
Sales and marketing		(42,861,735	)		(39,975,307	)		(27,598,683	)
General and administrative		(25,849,596	)		(22,759,931	)		(13,223,522	)
Compensation cost related to acquisitions (Note 6)		—			(1,919,870	)		—

Total operating expenses		(80,851,852	)		(71,962,116	)		(45,191,581	)

Income from operations		56,033,719			37,523,931			21,661,820


Other income (expenses):
Interest income and other financial gains		2,695,109			1,822,385			1,609,403
Interest expense and other financial charges		(13,357,554	)		(8,442,427	)		(2,737,901	)
Foreign currency loss		(2,658,476	)		(1,531,144	)		(3,106,515	)
Other income (expenses), net		—			73,159			(3,006,416	)

Net income before income / asset tax expense		42,712,798			29,445,904			14,420,391


Income / asset tax expense		(9,504,005	)		(10,634,243	)		(4,727,451	)

Net income	$	33,208,793		$	18,811,661		$	9,692,940


Accretion of preferred stock		—			—			(309,299	)

Net income available to common shareholders	$	33,208,793		$	18,811,661		$	9,383,641


	Year Ended December 31,
	2009		2008		2007
Basic EPS
Basic net income per common share	$	0.75	$	0.43	$	0.22

Weighted average shares		44,086,892		44,239,443		25,149,405


Diluted EPS
Diluted net income per common share	$	0.75	$	0.42	$	0.22

Weighted average shares		44,144,368		44,348,950		25,478,336

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, 2009


																						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, 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


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 — long term retention plan (“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 gains 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


(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, 2009


															Accumulated			Accumulated
								Additional					Preferred		deficit /			other
	Comprehensive			Common stock				paid-in			Treasury		stock		Retained			comprehensive
	income			Shares		Amount		capital			Stock		warrants		Earnings			income (loss)			Total
Balance as of December 31, 2008					44,070,367		44,071	$	119,807,007		$	—	$	—	$	(15,552,256	)	$	(10,874,841	)	$	93,423,981


Stock options exercised					35,031		35		28,319			—		—		—			—			28,354
Stock-based compensation — stock options					—		—		1,752			—		—		—			—			1,752
Stock-based compensation — restricted shares					—		—		74,382			—		—		—			—			74,382
Stock-based compensation LTRP					—		—		175,453			—		—		—			—			175,453
Restricted shares issued					10,655		10		171,089			—		—		—			—			171,099
LTRP shares issued					3,600		3		(3	)		—		—		—			—			—
Shares issued					616		1		(1	)		—		—		—			—
Net income	$	33,208,793			—		—		—			—		—		33,208,793			—			33,208,793
Currency translation adjustment	$	(12,914,565	)		—		—		—			—		—		—			(12,914,565	)		(12,914,565	)
Unrealized net gains on investments	$	27,630			—		—		—			—		—		—			27,630			27,630
Realized net gains on investments	$	(3,642	)		—		—		—			—				—			(3,642	)		(3,642	)

Comprehensive income	$	20,318,216

Balance as of December 31, 2009					44,120,269	$	44,120	$	120,257,998		$	—	$	—	$	17,656,537		$	(23,765,418	)	$	114,193,237

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, 2009


	Year Ended December 31,
	2009			2008			2007

Cash flows from operations:
Net income	$	33,208,793		$	18,811,661		$	9,692,940
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		3,893,752			3,335,673			2,307,649
Foreign currency gains		—			(7,827,112	)		—
Interest expense		213,878			300,368			—
Stock-based compensation expense — stock options		1,752			4,719			15,477
Stock-based compensation expense — restricted shares		74,382			105,560			15,966
LTRP accrued compensation		1,924,149			839,303			—
Change in fair value of warrants		—			—			3,045,992
Deferred income taxes		(3,607,292	)		(2,151,858	)		(198,368	)
Changes in assets and liabilities, excluding the effect of acquisitions:
Accounts receivable		(2,974,890	)		4,026,218			(736,431	)
Funds receivable from customers		(942,407	)		26,573,209			(15,517,486	)
Prepaid expenses		(287,836	)		(153,582	)		56,399
Other assets		(2,591,353	)		(1,415,575	)		(967,264	)
Accounts payable and accrued expenses		8,686,334			10,610,141			4,282,955
Funds payable to customers		12,421,412			2,294,847			5,423,976
Provisions		302,987			(1,277,664	)		(274,101	)
Other liabilities		(713,014	)		1,645,976			689,154
Accrued interest		90,339			57,293			(228,877	)

Net cash provided by operating activities		49,700,986			55,779,177			7,607,981

Cash flows from investing activities:
Purchase of investments		(80,060,909	)		(110,056,368	)		(75,267,070	)
Proceeds from sale and maturity of investments		81,728,485			115,342,531			28,920,382
Payment for businesses acquired, net of cash acquired		—			(39,181,473	)		—
Purchases of intangible assets		(955,679	)		(58,238	)		(28,748	)
Purchases of property and equipment		(3,798,170	)		(4,904,991	)		(3,058,813	)

Net cash (used in) provided by investing activities		(3,086,273	)		(38,858,539	)		(49,434,249	)

Cash flows from financing activities:
Increase in short term debt		—			—			8,883,104
Decrease in short term debt		(310,634	)		(9,137,223	)		—
Loans paid		(15,000,000	)		—			(9,000,000	)
Repurchase of Treasury Stock		—			(2,598,223	)		—
Stock options exercised		28,354			83,089			38,576
Exercise of warrants		—			—			749,991
Issuance of common stock		—			—			49,573,239

Net cash (used in) provided by financing activities		(15,282,280	)		(11,652,357	)		50,244,910

Effect of exchange rate changes on cash and cash equivalents		996,857			(3,471,576	)		115,738

Net increase in cash and cash equivalents		32,329,290			1,796,705			8,534,380
Cash and cash equivalents, beginning of the year		17,474,112			15,677,407			7,143,027

Cash and cash equivalents, end of the year	$	49,803,402		$	17,474,112		$	15,677,407

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, 2009


	Year Ended December 31,
	2009		2008			2007
Supplemental cash flow information:
Cash paid for interest	$	12,332,592	$	7,138,402		$	1,572,909
Cash paid for income taxes	$	11,650,007		7,921,206			3,864,908

Non-cash financing activities:
Accretion of preferred stock	$	—	$	—		$	309,299
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		—		57,392,194			—

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

1. Nature of Business

MercadoLibre Inc. (the “Company”) is an e-commerce enabler whose mission is to build the necessary online and technology tools to enable practically anyone to trade almost anything, helping to make inefficient markets more efficient in Latin America.

The Company operates in several reporting segments. The MercadoLibre online 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 the Company’s regional online payments platform consisting of its 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.