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EX-10.02 - EX-10.02 - MERCADOLIBRE INCmeli-20150630ex1002b3388.htm
EX-32.2 - EX-32.2 - MERCADOLIBRE INCmeli-20150630xex322.htm
EX-31.2 - EX-31.2 - MERCADOLIBRE INCmeli-20150630xex312.htm
EX-32.1 - EX-32.1 - MERCADOLIBRE INCmeli-20150630xex321.htm
EX-31.1 - EX-31.1 - MERCADOLIBRE INCmeli-20150630xex311.htm
EX-10.07 - EX-10.07 - MERCADOLIBRE INCmeli-20150630ex100700e18.htm
EX-10.04 - EX-10.04 - MERCADOLIBRE INCmeli-20150630ex1004a7488.htm
EX-10.06 - EX-10.06 - MERCADOLIBRE INCmeli-20150630ex100654d80.htm
EX-10.03 - EX-10.03 - MERCADOLIBRE INCmeli-20150630ex1003eeae6.htm
EX-10.05 - EX-10.05 - MERCADOLIBRE INCmeli-20150630ex100545c4a.htm
EX-10.01 - EX-10.01 - MERCADOLIBRE INCmeli-20150630ex10016ee7b.htm

 

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

 

 

 

 

 

 

FORM 10-Q

 

 

 

 

 

 

 

(Mark One)

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June  30, 2015

-OR-

 

 

 

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

 

98-0212790

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

Arias 3751, 7th Floor

Buenos Aires, C1430CRG, Argentina

(Address of registrant’s principal executive offices)

(+5411) 4640-8000

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

 

 

 

 

 

 

 

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       No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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       No  

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

 

Smaller reporting company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes       No  

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

44,155,589 shares of the issuer’s common stock, $0.001 par value, outstanding as of July 28, 2015.

 

 

 

 

 

 

 


 

 

MERCADOLIBRE, INC.

INDEX TO FORM 10-Q

 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1 — Unaudited Interim Condensed Consolidated Financial Statements

 

Interim Condensed Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014 

Interim Condensed Consolidated Statements of Income for the six and three-month periods ended June 30, 2015 and 2014 

Interim Condensed Consolidated Statements of Comprehensive Income for the six and three-month periods ended June 30, 2015 and 2014 

Interim Condensed Consolidated Statements of Cash Flows for the six-month period ended June 30, 2015 and 2014 

Notes to Interim Condensed Consolidated Financial Statements (unaudited) 

Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations 

30 

Item 3 — Qualitative and Quantitative Disclosures About Market Risk 

57 

Item 4 — Controls and Procedures 

64 

PART II. OTHER INFORMATION 

64 

Item 1 — Legal Proceedings 

64 

Item 1A — Risk Factors 

66 

Item 5 — Other information 

66 

Item 6 — Exhibits 

70 

INDEX TO EXHIBITS 

72 

 

 

 


 

MercadoLibre, Inc.

Interim Condensed Consolidated Financial Statements

as of June 30, 2015 and December 31, 2014

and for the six and three-month periods

ended June 30, 2015 and 2014

 

 

 

 


 

 

MercadoLibre, Inc.

Interim Condensed Consolidated Balance Sheets

As of June 30, 2015 and December 31, 2014

(In thousands of U.S. dollars, except par value)

(Unaudited)

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

2015

 

2014

Assets

 

 

 

Current assets:

 

 

 

 

Cash and cash equivalents

 

$        170,391

 

$       223,144

Short-term investments

 

167,161 

 

148,810 

Accounts receivable, net

 

46,123 

 

46,672 

Credit cards receivables, net

 

130,971 

 

85,162 

Prepaid expenses

 

5,332 

 

3,458 

Deferred tax assets

 

10,927 

 

11,520 

Other assets

 

16,449 

 

13,984 

Total current assets

 

547,354 

 

532,750 

Non-current assets:

 

 

 

 

Long-term investments

 

209,324 

 

205,265 

Property and equipment, net

 

82,735 

 

91,545 

Goodwill

 

101,840 

 

68,829 

Intangible assets, net

 

34,265 

 

23,171 

Deferred tax assets

 

13,343 

 

21,554 

Other assets

 

31,774 

 

23,734 

Total non-current assets

 

473,281 

 

434,098 

 

 

 

 

 

Total assets

 

$     1,020,635

 

$       966,848

Liabilities and Equity

 

 

 

Current liabilities:

 

 

 

 

Accounts payable and accrued expenses

 

$          67,371

 

$         58,006

Funds payable to customers

 

197,793 

 

165,034 

Salaries and social security payable

 

27,626 

 

28,777 

Taxes payable

 

37,092 

 

26,013 

Loans payable and other financial liabilities

 

1,499 

 

1,642 

Deferred tax liabilities

 

1,702 

 

1,645 

Other liabilities

 

8,048 

 

4,176 

Dividends payable

 

4,548 

 

7,330 

Total current liabilities

 

345,679 

 

292,623 

Non-current liabilities:

 

 

 

 

Salaries and social security payable

 

10,913 

 

11,326 

Loans payable and other financial liabilities

 

286,525 

 

282,184 

Deferred tax liabilities

 

21,620 

 

18,746 

Other liabilities

 

11,455 

 

6,181 

Total non-current liabilities

 

330,513 

 

318,437 

Total liabilities

 

$        676,192

 

$       611,060

 

 

 

 

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

Common stock, $0.001 par value, 110,000,000 shares authorized,

 

 

 

 

44,155,589 and 44,154,572 shares issued and outstanding at June 30,

 

 

 

 

2015 and December 31, 2014, respectively

 

$                 44

 

$                44

Additional paid-in capital

 

137,787 

 

137,645 

Retained earnings

 

365,261 

 

353,173 

Accumulated other comprehensive loss

 

(158,649)

 

(135,074)

Total Equity

 

344,443 

 

355,788 

Total Liabilities and Equity

 

$     1,020,635

 

$       966,848

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

 

 

1


 

MercadoLibre, Inc.

Interim Condensed Consolidated Statements of Income

For the six and three-month periods ended June 30, 2015 and 2014

(In thousands of U.S. dollars, except for share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

Three Months Ended June 30,

 

 

 

 

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

Net revenues

 

 

 

 

 

 

$          302,417

 

$          247,231

 

$            154,314

 

$          131,849

Cost of net revenues

 

 

 

 

 

 

(95,019)

 

(67,911)

 

(50,311)

 

(36,372)

Gross profit

 

 

 

 

 

 

207,398 

 

179,320 

 

104,003 

 

95,477 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Product and technology development

 

 

 

 

 

 

(36,885)

 

(23,998)

 

(19,639)

 

(11,741)

Sales and marketing

 

 

 

 

 

 

(55,317)

 

(48,821)

 

(29,115)

 

(26,469)

General and administrative

 

 

 

 

 

 

(38,746)

 

(28,917)

 

(20,612)

 

(13,684)

Impairment of Long-Lived Assets

 

 

 

 

 

 

(16,226)

 

(49,496)

 

 —

 

(49,496)

Total operating expenses

 

 

 

 

 

 

(147,174)

 

(151,232)

 

(69,366)

 

(101,390)

Income (loss) from operations

 

 

 

 

 

 

60,224 

 

28,088 

 

34,637 

 

(5,913)

Other income (expenses):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income and other financial gains

 

 

 

 

 

 

8,991 

 

6,609 

 

4,683 

 

3,573 

Interest expense and other financial losses

 

 

 

 

 

 

(10,151)

 

(1,805)

 

(5,201)

 

(778)

Foreign currency losses

 

 

 

 

 

 

(9,217)

 

(12,871)

 

(648)

 

(15,965)

Net income (loss) before income / asset tax expense

49,847 

 

20,021 

 

33,471 

 

(19,083)

Income / asset tax expense

 

 

 

 

 

 

(28,663)

 

(15,281)

 

(14,008)

 

(6,506)

Net income (loss)

 

 

 

 

 

 

$            21,184

 

$              4,740

 

$              19,463

 

$           (25,589)

Less: Net Income attributable to Redeemable

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncontrolling Interest

 

 

 

 

 

 

 —

 

70 

 

 —

 

Net income (loss) attributable to MercadoLibre, Inc. shareholders

 

 

 

 

 

 

$            21,184

 

$              4,670

 

$              19,463

 

$           (25,595)

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

Three Months Ended June 30,

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

Basic EPS

 

 

 

 

 

 

 

 

Basic net income (loss) attributable to MercadoLibre, Inc.

 

 

 

 

 

 

 

 

Shareholders per common share

 

$               0.48

 

$               0.11

 

$               0.44

 

$              (0.58)

Weighted average of outstanding common shares

 

44,155,035 

 

44,153,658 

 

44,155,271 

 

44,153,892 

Diluted EPS

 

 

 

 

 

 

 

 

Diluted net income (loss) attributable to MercadoLibre, Inc.

 

 

 

 

 

 

 

 

Shareholders per common share

 

$               0.48

 

$               0.11

 

$               0.44

 

$              (0.58)

Weighted average of outstanding common shares

 

44,155,035 

 

44,168,126 

 

44,155,271 

 

44,182,668 

Cash Dividends declared

 

0.206 

 

0.332 

 

0.103 

 

0.166 

 

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

 

 

2


 

MercadoLibre, Inc.

Interim Condensed Consolidated Statements of Comprehensive Income

For the six and three-month periods ended June 30, 2015 and 2014

(In thousands of U.S. dollars)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

Three Months Ended June 30,

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

Net income (loss)

 

$            21,184

 

$              4,740

 

$            19,463

 

$             (25,589)

Other comprehensive (loss) income, net of income tax:

 

 

 

 

 

 

 

 

Currency translation adjustment

 

(23,927)

 

(16,102)

 

(1,397)

 

510 

Unrealized net (losses) gains on available for sale investments

 

(27)

 

122 

 

(288)

 

84 

Reclassification adjustment for gains (losses) on available for sale

 

 

 

 

 

 

 

 

investments included in net income

 

379 

 

(25)

 

 —

 

 —

Net change in accumulated other comprehensive (loss) gain, net of

 

 

 

 

 

 

 

 

income tax

 

(23,575)

 

(16,005)

 

(1,685)

 

594 

Total comprehensive (loss) income

 

$             (2,391)

 

$           (11,265)

 

$            17,778

 

$             (24,995)

Less: Comprehensive income attributable to Redeemable

 

 

 

 

 

 

 

 

Noncontrolling Interest

 

 —

 

101 

 

 —

 

29 

Comprehensive (loss) income attributable to MercadoLibre, Inc. Shareholders

 

$             (2,391)

 

$           (11,366)

 

$            17,778

 

$             (25,024)

 

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

 

 

3


 

 

MercadoLibre, Inc.

Interim Condensed Consolidated Statements of Cash Flow

For the six-month periods ended June 30, 2015 and 2014

(In thousands of U.S. dollars)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

 

 

 

 

 

2015

 

2014

 

 

 

 

 

 

 

 

Cash flows from operations:

 

 

 

 

 

 

 

 

 

Net income attributable to MercadoLibre, Inc. Shareholders

 

 

 

 

 

 

$            21,184

 

$         4,670

Adjustments to reconcile net income to net cash provided by

 

 

 

 

 

 

 

 

 

operating activities:

 

 

 

 

 

 

 

 

 

Net income attributable to Redeemable Noncontrolling Interest

 

 

 

 

 

 

 —

 

70 

Devaluation Loss, net

 

 

 

 

 

 

10,862 

 

13,808 

Impairment of Long-Lived Assets

 

 

 

 

 

 

16,226 

 

49,496 

Depreciation and amortization

 

 

 

 

 

 

10,970 

 

7,583 

Accrued interest

 

 

 

 

 

 

(5,769)

 

(4,211)

Convertible bonds accrued interest and amortization of debt discount

 

 

 

 

 

 

8,562 

 

 —

Long Term Retention Program accrued compensation

 

 

 

 

 

 

8,463 

 

1,931 

Deferred income taxes

 

 

 

 

 

 

7,736 

 

(8,672)

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

 

Accounts receivable 

 

 

 

 

 

 

(19,342)

 

(22,789)

Credit Card Receivables

 

 

 

 

 

 

(52,553)

 

(15,278)

Prepaid expenses

 

 

 

 

 

 

(2,327)

 

(1,528)

Other assets

 

 

 

 

 

 

(4,122)

 

1,487 

Accounts payable and accrued expenses

 

 

 

 

 

 

40,974 

 

33,770 

Funds payable to customers

 

 

 

 

 

 

52,006 

 

21,969 

Other liabilities

 

 

 

 

 

 

(652)

 

1,351 

Interest received from investments

 

 

 

 

 

 

4,613 

 

4,250 

Net cash provided by operating activities

 

 

 

 

 

 

96,831 

 

87,907 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

Purchase of investments

 

 

 

 

 

 

(950,636)

 

(774,417)

Proceeds from sale and maturity of investments

 

 

 

 

 

 

926,058 

 

746,112 

Payment for acquired businesses, net of cash acquired

 

 

 

 

 

 

(45,009)

 

(32,127)

Purchases of intangible assets

 

 

 

 

 

 

(1,367)

 

(1,951)

Advance for property and equipment

 

 

 

 

 

 

(7,473)

 

 —

Purchases of property and equipment

 

 

 

 

 

 

(16,305)

 

(14,634)

Net cash used in investing activities

 

 

 

 

 

 

(94,732)

 

(77,017)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

Funds received from the issuance of convertible notes

 

 

 

 

 

 

 —

 

330,000 

Transaction costs from the issuance of convertible notes

 

 

 

 

 

 

 —

 

(7,425)

Purchase of convertible note capped call

 

 

 

 

 

 

 —

 

(19,668)

Payments on loans payable and other financial liabilities

 

 

 

 

 

 

(4,438)

 

(2,726)

Dividends paid

 

 

 

 

 

 

(11,878)

 

(13,643)

Repurchase of Common Stock

 

 

 

 

 

 

(2,714)

 

(1,944)

Net cash (used in) provided by financing activities

 

 

 

 

 

 

(19,030)

 

284,594 

Effect of exchange rate changes on cash and cash equivalents

 

 

 

 

 

 

(35,822)

 

(50,248)

Net (decrease) increase in cash and cash equivalents

 

 

 

 

 

 

(52,753)

 

245,236 

Cash and cash equivalents, beginning of the period

 

 

 

 

 

 

223,144 

 

140,285 

Cash and cash equivalents, end of the period

 

 

 

 

 

 

$          170,391

 

$     385,521

 

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

 

 

 

 

4


 

Table of Contents

 

MercadoLibre, Inc.

Notes to Interim Condensed Consolidated Financial Statements (unaudited)

 

1. Nature of Business

MercadoLibre, Inc. (“MercadoLibre” or the “Company”) was incorporated in the state of Delaware, in the United States of America in October 1999. MercadoLibre is the leading ecommerce company in Latin America, serving as an integrated regional platform and as an enabler of the necessary online and technology tools to allow businesses and individuals to trade products and services in the region. The Company enables commerce through its marketplace platform (including online classifieds for motor vehicles, vessels, aircraft, services and real estate), which allows users to buy and sell in most of Latin America. 

Through MercadoPago, MercadoLibre enables individuals and businesses to send and receive online payments; through MercadoEnvios, MercadoLibre facilitates the shipping of goods from sellers to buyers; through MercadoClics, MercadoLibre facilitates advertising services to large retailers and brands to promote their product and services on the web; and through MercadoShops, MercadoLibre facilitates users to set-up, manage, and promote their own on-line web-stores under a subscription-based business model.

As of June  30, 2015, MercadoLibre, through its wholly-owned subsidiaries, operated online ecommerce platforms directed towards Argentina, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Mexico, Panama, Peru, Portugal, Uruguay and Venezuela, and an online payments solution directed towards Argentina, Brazil, Mexico, Venezuela, Chile and Colombia. It also offers a shipping solution directed towards Argentina, Brazil, Mexico, and added Colombia to its list of countries where the service is offered as of June 2015. In addition, the Company operates a real estate classified platform that covers some areas of State of Florida, in the United States of America.

 

2. Summary of significant accounting policies

Basis of presentation

The accompanying unaudited interim condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) and include the accounts of the Company and its wholly-owned subsidiaries. These interim condensed consolidated financial statements are stated in U.S. dollars, except for amounts otherwise indicated. Intercompany transactions and balances have been eliminated for consolidation purposes.

Substantially all net revenues, cost of net revenues and operating expenses, are generated in the Company’s foreign operations, amounting to approximately 99.9% and 99.6% of the consolidated amounts during the six-month periods ended June 30, 2015 and 2014. Long-lived assets, Intangible assets and Goodwill located in the foreign operations totaled $207,843 thousands and $170,147 thousands as of June 30, 2015 and December 31, 2014, respectively.

These interim condensed consolidated financial statements reflect the Company’s consolidated financial position as of June 30, 2015 and December 31, 2014. These financial statements also show the Company’s consolidated statements of income and comprehensive income for the six and three-month periods ended June 30, 2015 and 2014; and statement of cash flows for the six-month periods ended June 30, 2015 and 2014. These interim condensed consolidated financial statements include all normal recurring adjustments that management believes are necessary to fairly state the Company’s financial position, operating results and cash flows.

Because all of the disclosures required by U.S. GAAP for annual consolidated financial statements are not included herein, these unaudited interim condensed financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for the year ended December 31, 2014, contained in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”). The condensed consolidated statements of income, of comprehensive income and of cash flows for the periods presented herein are not necessarily indicative of results expected for any future period.

Foreign currency translation

Venezuelan currency status

All of the Company’s foreign operations have determined the local currency to be their functional currency, except for Venezuela since January 1, 2010, as described below. Accordingly, these foreign subsidiaries translate assets and liabilities from their local currencies into U.S. dollars by using the period-end exchange rates while income and expense accounts are translated at the average rates in effect during the period, unless exchange rates fluctuate significantly during the period, in which case the exchange rates at the date of the transaction are used. The resulting translation adjustment is recorded as a component of other comprehensive (loss) income. Gains and losses resulting from transactions denominated in non-functional currencies are recognized in earnings.

 

5


 

Table of Contents

 

MercadoLibre, Inc.

Notes to Interim Condensed Consolidated Financial Statements (unaudited)

According to U.S. GAAP, the Company has transitioned its Venezuelan operations to highly inflationary status as from January 1, 2010, which requires that transactions and balances are re-measured as if the U.S. dollar were the functional currency for such operation.

During December 2013, the Venezuelan regulation that created the SICAD 1 exchange system was amended to expand its use, and to require publication of the average exchange rate implied by transactions settled in SICAD 1 auctions. Additionally, on January 23, 2014, the exchange regulation was amended to include foreign currency sales for certain transactions, such as but not limited to: contracts for leasing and services, use and exploitation of patents, trademarks, foreign investments and payments of royalties, contracts for technology import and technical assistance. Due to the change in rules that provided for the creation of the SICAD 1 system, the official exchange rate remains only available to obtain foreign currency to pay for a limited list of goods considered to be of high priority by the Government, which does not include those relating to the Company’s business. As a consequence, SICAD 1 became, from that moment, the primary system to which the Company would have to request U.S. dollars to settle its transactions. As a result, from January 24 to May 15, 2014, the exchange rate used to re-measure the Company’s net monetary asset position in Bolivares Fuertes (“BsF”) and BsF transactions of its Venezuelan operations was the SICAD 1 exchange rate.

In late February 2014, the Venezuelan government issued a decree to open a new exchange control mechanism (“SICAD 2”) that was intended to allow the purchase of foreign exchange currencies, through authorized foreign exchange operators offered by individuals and companies such as Petróleos de Venezuela, S.A. (PDVSA, the oil state-owned corporation of Venezuela), the Central Bank of Venezuela (“BCV”) and other public entities authorized by the Ministry of Finance. The Venezuelan government published operating rules for that exchange mechanism in Exchange Agreement N° 27, and SICAD 2 began operating on March 24, 2014. Since implementation of the SICAD 1 system, the Company was unsuccessful in gaining access to U.S. dollars through SICAD 1. As a result of this ongoing lack of access to the SICAD 1 auction system, on May 16, 2014, the Company decided to start requesting U.S. dollars through the SICAD 2 mechanism. The SICAD 2 system was an open mechanism that was intended to permit any company to request dollars for any purpose. Consequently, the Company was eligible for and was granted, U.S. dollars through the SICAD 2 mechanism.

As a consequence of the determination to obtain U.S. dollars through SICAD 2 and the lack of access to SICAD 1, since May 16, 2014 the Company concluded that the SICAD 2 exchange rate should be used to re-measure their bolivar-denominated monetary assets and liabilities in BsF and to re-measure the results of its Venezuelan operations, effective as of May 16, 2014. As a consequence, the Company recorded a foreign exchange loss of $16.5 million during the second quarter of 2014.

In light of those economic conditions in Venezuela, the determination to access SICAD 2 and re-measure the BsF denominated monetary assets and liabilities of its Venezuelan subsidiaries, and the lower U.S. dollar-equivalent cash flows then expected from the Venezuelan business, the Company reviewed in May 2014, the long-lived assets, goodwill and intangible assets with indefinite useful life for impairment. For that purpose, the Company considered the current expected use of these assets, which in the case of two office spaces in Venezuela that had been expected to be used to support the growth of the main operating activities in that country, are currently for rent, and eventually consider opportunities for disposal if real estate market conditions are favorable in the future. Because the Company concluded that the carrying value of these two real estate properties would not be fully recoverable, it recorded an impairment of long-lived assets of $49.5 million in the second quarter of 2014. The carrying amount was adjusted to its estimated fair value of that date, by using the market approach, and considering prices for similar assets.

Later, on February 10, 2015, the Venezuelan government issued a decree that unified the two previous foreign exchange systems “SICAD 1 and SICAD 2” into a new single system denominated SICAD, with an initial public foreign exchange rate of 12 BsF per U.S. dollar. The SICAD auction process remains available only to obtain foreign currency to pay for a limited list of goods considered to be of high priority by the Venezuelan government, which does not include those relating to the Company’s business. In the same decree the Venezuelan government created the “Sistema Marginal de Divisas” (“SIMADI”), a new foreign exchange system that is separate from SICAD, which publishes a foreign exchange rate from the BCV on a daily basis.

In light of the disappearance of SICAD 2, and the Company’s inability to gain access to U.S. dollars through the new single system under SICAD, it started requesting and was granted U.S. dollars through SIMADI. As a result, the Company from that moment expected to settle its transactions through SIMADI and concluded that the SIMADI exchange rate should be used to re-measure its bolivar-denominated monetary assets and liabilities and to re-measure the revenues and expenses of the Venezuelan subsidiaries effective as of March 31, 2015. In connection with this re-measurement, the Company recorded a foreign exchange loss of $20.4 million during the first quarter of 2015. As of June 30, 2015, the SIMADI exchange rate was 197.30 BsF per U.S. dollar.

Considering this change in facts and circumstances and the lower U.S. dollar-equivalent cash flows now expected from the Venezuelan business, the Company has reviewed its long-lived assets, goodwill and intangible assets with indefinite useful life for impairment and concluded that the carrying value of certain real estate investments in Venezuela as of March 31, 2015 would not be fully recoverable. As a result, the Company has recorded an impairment of long-lived assets of $ 16.2 million on March 31,

 

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Table of Contents

 

MercadoLibre, Inc.

Notes to Interim Condensed Consolidated Financial Statements (unaudited)

2015. The carrying amount has been adjusted to its estimated fair value of approximately $9.2 million as of March 31, 2015, by using the market approach, and considering prices for similar assets.

Until 2010 the Company was able to obtain U.S. dollars for any purpose, including dividends distribution, using alternative mechanisms other than through the Commission for the Administration of Foreign Exchange Control (CADIVI). Those U.S. dollars, obtained at a higher exchange rate than the one offered by CADIVI, and held in balance at U.S. bank accounts of our Venezuelan subsidiaries, were used for dividend distributions from our Venezuelan subsidiaries. The Venezuelan subsidiaries have not requested authorization since 2012 to acquire U.S. dollars to make dividend distributions. The Company has not distributed dividends from the Venezuelan subsidiaries since 2011.

The following table sets forth the assets, liabilities and net assets of the Company’s Venezuelan subsidiaries, before intercompany eliminations, as of June 30, 2015 and December 31, 2014 and net revenues for the six-month periods ended June 30, 2015 and 2014:

 

 

 

 

 

 

 

 

 

Six-month periods ended
June 30,

 

 

2015

 

2014

Venezuelan operations

 

(In thousands)

Net Revenues

 

$            19,669

 

$            35,908

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

2015

 

2014

 

 

 

 

 

Assets

 

46,482 

 

75,153 

Liabilities

 

(43,701)

 

(43,359)

Net Assets

 

$              2,781

 

$            31,794

 

As of June 30, 2015, net assets (before intercompany eliminations) of the Venezuelan subsidiaries amounted to approximately 0.8%  of consolidated net assets, and cash and investments of the Venezuelan subsidiaries held in local currency in Venezuela amounted to approximately 1.1% of our consolidated cash and investments.

The Company’s ability to obtain U.S. dollars in Venezuela is negatively affected by the exchange regulations in Venezuela that are described above and elsewhere in these financial statements. In addition, its business and ability to obtain U.S. dollars in Venezuela would be negatively affected by additional material devaluations or the imposition of significant additional and more stringent controls on foreign currency exchange by the Venezuelan government.

Despite the current difficult macroeconomic environment in Venezuela, the Company continues to actively manage, through its Venezuelan subsidiaries, its investment in Venezuela. Regardless the current operating, political and economic conditions and certain other factors in Venezuela, management currently plans to continue supporting its business in Venezuela in the long run.

Argentine currency status

The Argentine government has implemented certain measures that control and restrict the ability of companies and individuals to exchange Argentine pesos for foreign currencies. Those measures include, among other things, the requirement to obtain the prior approval from the Argentine Tax Authority of the foreign currency transaction (for example and without limitation, for the payment of non-Argentine goods and services, payment of principal and interest on non-Argentine debt and also payment of dividends to parties outside of the country), which approval process could delay, and eventually restrict, the ability to exchange Argentine pesos for other currencies, such as U.S. dollars. Those approvals are administered by the Argentine Central Bank through the Local Exchange Market (“Mercado Unico Libre de Cambios”, or “MULC”), which is the only market where exchange transactions may be lawfully made.

Further, restrictions also currently apply to the acquisition of any foreign currency for holding as cash within Argentina. Although the controls and restrictions on the acquisition of foreign currencies in Argentina place certain limitations on our current ability to convert cash generated by our Argentine subsidiaries into foreign currencies, based on the current state of Argentine currency rules and regulations, we do not expect that the current controls and restrictions, will have a material adverse effect on our business plans in Argentina or on our overall business, financial condition or results of operations.

 

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Table of Contents

 

MercadoLibre, Inc.

Notes to Interim Condensed Consolidated Financial Statements (unaudited)

Additionally, during January 2014 the Argentinean peso exchange rate against the U.S. dollar increased in approximately 23%, from 6.52 Argentinean Pesos per U.S. dollar as of December 31, 2013 to approximately 8.0 Argentinean Pesos per U.S. dollar. Due to the abovementioned devaluation, during the first quarter of 2014, the reported net assets in Argentina decreased in $14,625 thousands with the related impact in Other Comprehensive Income and the Company recognized a foreign exchange gain of $4,597 thousands. As of June 30, 2015, the Argentinean Peso exchange rate was $ 9.09 per U.S. dollar.

Income Tax Holiday in Argentina

According to Argentine law, from fiscal year 2008, the Company’s Argentine subsidiary was a beneficiary of a software development law. Part of the benefits obtained from being a beneficiary of the aforementioned law was a relief of 60% of total income tax determined in each year, thus resulting in an effective tax rate in Argentina lower than the income tax law statutory rate. The law expired on September 17, 2014.

Aggregate tax benefit totaled $1,497 thousands for the three-month period ended June 30, 2014, while for the six-month period ended at such date amounted to $3,599 thousands. Aggregate per share effect of the Argentine tax holiday amounted to $0.03 for the three-month period ended June 30, 2014, while for the six-month period ended at such date amounted to $0.08. In addition, during fiscal year 2013 and on December 15, 2014 the Company acquired two software development companies, located in the Province of Cordoba and the City of Buenos Aires, Argentina, which were also beneficiaries of the aforementioned income tax holiday, however the total benefit obtained is immaterial.

On August 17, 2011, the Argentine government issued a new software development law and on September 9, 2013 the regulatory decree was issued, which established the new requirement to become beneficiary of the new software development law. The new decree establishes compliance requirements with annual incremental ratios related to exports of services and research and development expenses that must be achieved to remain within the tax holiday. The Argentine operation will have to achieve certain required ratios annually under the new software development law.

If we are successful in being admitted as beneficiaries under the new law, we estimate that the Argentine effective income tax rate would be materially lower than the statutory income tax rate. Also, the tax holiday under the new law would last until 2019.

The Industry Secretary resolution which rules, among other provisions, on the mechanism to file the information to obtain the benefits derived from the new software development law was issued in late February 2014. During May 2014, the Company presented all the required documentation in order to apply for the new software development law. At the date of issuance of these interim condensed consolidated financial statements, the Industry Secretary resolution which approves the Company’s application is still pending, and for that reason no tax holiday was recorded for the six-month period ended June 30, 2015.

Accumulated other comprehensive income

The following table sets forth the Company’s accumulated other comprehensive income as of June 30, 2015 and the year ended December 31, 2014:

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

2015

 

2014

 

 

(In thousands)

 

 

 

 

 

Foreign currency translation

 

$              (158,622)

 

$          (134,695)

Unrealized loss on investments

 

(43)

 

(578)

Estimated tax gain on unrealized losses on investments

 

16 

 

199 

 

 

$              (158,649)

 

$          (135,074)

 

 

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Table of Contents

 

MercadoLibre, Inc.

Notes to Interim Condensed Consolidated Financial Statements (unaudited)

The following tables summarize the changes in accumulated balances of other comprehensive income for the six-month period ended June 30, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized

 

Foreign

 

Estimated tax

 

 

 

 

Gains (Losses) on

 

Currency

 

(expense)

 

 

 

 

Investments

 

Translation

 

benefit

 

Total

 

 

(In thousands)

Balances as of December 31, 2014

 

$                    (578)

 

$          (134,695)

 

$                        199

 

$  (135,074)

Other comprehensive loss before reclassification

 

 

 

 

 

 

 

 

adjustments for gains on available for sale investments

 

(43)

 

(23,927)

 

16 

 

(23,954)

Amount of gain (loss) reclassified from accumulated

 

 

 

 

 

 

 

 

other comprehensive income to net income

 

578 

 

 —

 

(199)

 

379 

Net current period other comprehensive gain (loss)

 

535 

 

(23,927)

 

(183)

 

(23,575)

Balances as of June 30, 2015

 

$                      (43)

 

$          (158,622)

 

$                          16

 

$  (158,649)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount of Gain (Loss)

 

 

 

 

Details about Accumulated

 

Reclassified from

 

 

 

 

Other Comprehensive Income

 

Accumulated Other

 

 

 

 

Components for the six-month

 

Comprehensive

 

Affected Line Item

period ended June 30, 2015

 

Income

 

in the Statement of Income

 

 

(In thousands)

 

 

 

 

Unrealized losses on investments

 

$                    (578)

 

Interest income and other financial gains

 

 

Estimated tax gain on unrealized losses on investments

 

199 

 

Income / asset tax expense

Total reclassifications for the period

 

$                    (379)

 

Total, net of income taxes

 

Impairment of long-lived assets

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.

As explained in section “Foreign Currency Translation” of the present Note to these interim condensed consolidated financial statements, the Company has subsequently accessed to more unfavorable exchange markets in Venezuela as from December 2013.

Considering these changes in facts and circumstances and the lower U.S. dollar-equivalent cash flows expected from the Venezuelan business, and long-lived assets expected use, the Company compared the carrying amount of the long-lived assets with the expected undiscounted future net cash flows and concluded that certain office spaces held in Caracas, Venezuela, should be impaired. As a consequence, the Company estimated the fair value of the impaired long-lived assets and recorded impairment losses of $16.2 million and $ 49.5 million on March 31, 2015 and the second quarter of 2014, respectively, by using the market approach and considering prices for similar assets.

Convertible Senior Notes

On June 30, 2014, the Company issued $330 million of 2.25% convertible senior notes due 2019 (the “Notes”). The Notes are unsecured, unsubordinated obligations of the Company, which pay interest in cash semi-annually, on January 1 and July 1, at a rate of 2.25% per annum. The Notes will mature on July 1, 2019 unless earlier repurchased or converted in accordance with their terms prior to such date. The Notes may be converted, under specific conditions, based on an initial conversion rate of 7.9353 shares of common stock per $1,000 principal amount of Notes (equivalent to an initial conversion price of approximately $126.02 per share of common stock), subject to adjustment as described in the indenture governing the Notes.

Prior to January 1, 2019, the Notes will be convertible only upon the occurrence of certain events and during certain periods, and thereafter, at any time until the close of business on the second scheduled trading day immediately preceding the maturity date of the Notes. The conversion rate is subject to customary anti-dilution adjustments. Following certain corporate events described in the Indenture that occur prior to the maturity date, the conversion rate will be increased for a holder who elects to convert its Notes in connection with such corporate event in certain circumstances. The Indenture contains customary terms and covenants, including that upon certain events of default occurring and continuing, either the Trustee or the holders of at least 25% in principal

 

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MercadoLibre, Inc.

Notes to Interim Condensed Consolidated Financial Statements (unaudited)

amount of the outstanding Notes may declare 100% of the principal of, and accrued and unpaid interest on, all the Notes to be due and payable.

In accordance with ASC 470-20 Debt with Conversion and Other Options, the convertible debt instrument within the scope of the cash conversion subsection, was separated into debt and equity components at issuance and a fair value was assigned. The value assigned to the debt component was the estimated fair value, as of the issuance date, of a similar debt without the conversion feature. As of the issuance date, the Company determined the fair value of the liability component of the Notes based on market data that was available for senior, unsecured nonconvertible corporate bonds issued by comparable companies. The difference between the cash proceeds and this estimated fair value, represents the value assigned to the equity component and was recorded as a debt discount. The debt discount is amortized using the effective interest method from the origination date through its stated contractual maturity date.

The initial debt component of the Notes was valued at $283,015 thousands, based on the contractual cash flows discounted at an appropriate market rate for a non-convertible debt at the date of issuance, which was determined to be 5.55%. The carrying value of the permanent equity component reported in additional paid-in-capital was initially valued at $46,985 thousands. The effective interest rate after allocation of transaction costs to the liability component is 6.1% and is used to amortize the debt discount and transaction costs.

In connection with the issuance of the Notes, the Company paid approximately $19,668 thousands to enter into capped call transactions with respect to its common shares (the “Capped Call Transactions”), with certain financial institutions. The Capped Call Transactions are expected generally to reduce the potential dilution upon conversion of the Convertible Notes and / or offset any cash payments the Company may be required to make in excess of the principal amount of any converted notes in the event that the market price of the common shares is greater than the strike price of the Capped Call Transactions, initially set at $126.02 per common share, which corresponds to the initial conversion price of the Notes and is subject to anti-dilution adjustments substantially similar to those applicable to the conversion rate of the Notes, and have a cap price of approximately $155.78 per common share.

The $19,668 thousands cost of the capped call transactions, which net of deferred income tax effect amounts to $12,784 thousands, is included as a net reduction to additional paid-in capital in the stockholders’ equity section of our consolidated balance sheets.

For more detailed information in relation to the Notes and the Capped Call transactions, see Note 9 to these interim condensed consolidated financial statements.

Use of estimates

The preparation of interim condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are used for, but not limited to accounting for allowance for doubtful accounts and chargeback provisions, depreciation, amortization, recoverability of goodwill and intangible assets with indefinite useful life, useful life of long-lived assets and intangible assets, impairment of short-term and long-term investments, impairment of long-lived assets, compensation costs relating to the Company’s long term retention plan, fair value of convertible debt note, recognition of income taxes and contingencies. Actual results could differ from those estimates.

Recently issued accounting pronouncements

On January 9, 2015, the FASB issued the ASU 2015-01. This new standard eliminates from general accepted accounting principles the concept of extraordinary items included in Subtopic 225-20. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted provided that the guidance is applied from the beginning of the year of adoption. The adoption of this standard is not expected to have a material impact on the Company’s financial statements.

On February 18, 2015 the FASB issued the ASU 2015-02. The update affects reporting entities that are required to evaluate whether they should consolidate certain legal entities and is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2015. The amendments eliminate three of the six conditions for evaluating whether a fee paid to a decision maker or a service provider represents a variable interest. The adoption of this standard is not expected to have a material impact on the Company’s financial statements.

On April 7, 2015 the FASB issued the ASU 2015-03. To simplify presentation of debt issuance costs, the amendments in this update would require that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums. The amendments in this update are effective for financial statements

 

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Table of Contents

 

MercadoLibre, Inc.

Notes to Interim Condensed Consolidated Financial Statements (unaudited)

issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The adoption of this standard is not expected to have a material impact on the Company’s financial statements.

On April 15, 2015 the FASB issued the ASU 2015-05. The amendments in this update will help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement by providing guidance as to whether an arrangement includes the sale or license of software. The amendments will be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. The Company is assessing the effects that the adoption of this accounting pronouncement may have on the Company’s financial statements.

On May, 2015 the FASB issued the ASU 2015-07. The amendments in this update remove, from the fair value hierarchy, investments for which the practical expedient is used to measure fair value at net asset value. Instead, an entity is required to include those investments as a reconciling line item so that the total fair value amount of investments in the disclosure is consistent with the amount on the balance sheet. For public companies, this amendment is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. Early adoption is permitted. The amendment should be applied retrospectively to all periods presented. The Company is assessing the effects that the adoption of this accounting pronouncement may have on the Company’s financial statements.

 

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MercadoLibre, Inc.

Notes to Interim Condensed Consolidated Financial Statements (unaudited)

 

3. Net income per share

Basic earnings per share for the Company’s common stock is computed by dividing, net income available to common shareholders attributable to common stock for the period, and the corresponding adjustment attributable to changes in redeemable non-controlling interest, by the weighted average number of common shares outstanding during the period.

Diluted earnings per share for the Company’s common stock assume the issuance of shares as a consequence of a convertible debt securities conversion event (refer to Note 9 to these interim condensed consolidated financial statements) and the effect of assumed share settlement of Long-term retention plans (refer to Note 8 to these interim condensed consolidated financial statements) for earnings per share calculations.

The following table shows how net income is allocated using the “if converted” and the “treasury stock” method for convertible debt securities and Long-term retention plans, respectively, for earnings per common share for the six and three-month periods ended June 30, 2015 and 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

2015

 

2014

 

 

(In thousands)

 

 

Basic

 

Diluted

 

Basic

 

Diluted

Net income

 

$               21,184

 

$        21,184

 

$              4,740

 

$              4,740

 

 

 

 

 

 

 

 

 

Net income attributable to noncontrolling interests

 

 —

 

 —

 

(70)

 

(70)

 

 

 

 

 

 

 

 

 

Change in redeemable amount of noncontrolling interest

 

 —

 

 —

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to MercadoLibre, Inc. Shareholders

 

 

 

 

 

 

 

 

corresponding to common stock

 

$               21,184

 

$        21,184

 

$              4,674

 

$              4,674

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

 

2015

 

2014

 

 

(In thousands)

 

 

Basic

 

Diluted

 

Basic

 

Diluted

Net income (loss)

 

$               19,463

 

$        19,463

 

$           (25,589)

 

$           (25,589)

Net income attributable to noncontrolling interests

 

 —

 

 —

 

(6)

 

(6)

Change in redeemable amount of noncontrolling interest

 

 —

 

 —

 

(121)

 

(121)

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to MercadoLibre, Inc. Shareholders

 

 

 

 

 

 

 

 

corresponding to common stock

 

$               19,463

 

$        19,463

 

$           (25,716)

 

$           (25,716)

 

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MercadoLibre, Inc.

Notes to Interim Condensed Consolidated Financial Statements (unaudited)

 

Net income per share of common stock is as follows for the six and three-month periods ended June 30, 2015 and 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months Ended June 30,

 

Three Months Ended June 30,

 

 

2015

 

2014

 

2015

 

2014

 

 

(In thousands, except per share data)

 

(In thousands, except per share data)

 

 

Basic

 

Diluted

 

Basic

 

Diluted

 

Basic

 

Diluted

 

Basic

 

Diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to MercadoLibre, Inc. Shareholders per common share

 

$
0.48 

 

$
0.48 

 

$
0.11 

 

$
0.11 

 

$                0.44 

 

$                0.44 

 

$              (0.58)

 

$              (0.58)

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to MercadoLibre, Inc. Shareholders

 

$
21,184 

 

$
21,184 

 

$
4,674 

 

$
4,674 

 

$            19,463 

 

$            19,463 

 

$          (25,716)

 

$          (25,716)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average of common stock outstanding for Basic earnings per share

 

44,155,035 

 

44,155,035 

 

44,153,658 

 

44,153,658 

 

44,155,271 

 

44,155,271 

 

44,153,892 

 

44,153,892 

Adjustment for Convertible Notes

 

 -

 

 -

 

 -

 

14,468 

 

 —

 

 —

 

 —

 

28,776 

Adjusted weighted average of common stock outstanding for Diluted earnings per share

 

44,155,035 

 

44,155,035 

 

44,153,658 

 

44,168,126 

 

44,155,271 

 

44,155,271 

 

44,153,892 

 

44,182,668 

 

For the six and three-month period ended June 30, 2015 and 2014 there was no impact on the calculation of diluted earnings per share as a consequence of the consideration of the Notes and the Long term retention plan referred to above.

 

4. Business combinations, goodwill and intangible assets

Business combinations

Acquisition of online classifieds advertisement company in Mexico

On April 22, 2015, through its subsidiaries Deremate.com de Mexico, S. de R.L. de C.V. and MercadoLibre, S. de R.L. de C.V., the Company acquired 100% of the issued and outstanding shares of capital stock of Metros Cúbicos, S.A. de C.V., company that operates an online classified advertisement platform dedicated to the sale of real estate in Mexico, in order to increase its participation on e-commerce business in that country.

The aggregate purchase price for the acquisition of the 100% of the acquired business was $29,917 thousands, measured at its fair value, amount that included: (i) the total cash payment of $26,917 thousands at closing day; and (ii) an escrow of $3,000 thousands held in an escrow account, according to the stock purchase agreement.

In addition, the Company incurred in certain direct costs of the business combination which were expensed as incurred.

The Company’s unaudited interim condensed consolidated statement of income includes the results of operations of the acquired business as from April 22, 2015. The net revenues and net income of the acquiree included in the Company’s unaudited interim condensed consolidated statement of income since the acquisition amounted to $831 thousands and $296 thousands, respectively.

The following table summarizes the preliminary purchase price allocation for the acquisition:

 

 

 

 

 

 

 

 

 

 

Metros Cúbicos

S.A. de C.V.

In thousands of U.S. dollars

Cash and cash equivalents

 

$

593 

Other net tangible assets / (liabilities)

 

 

241 

Trademarks

 

 

4,568 

Customer Lists

 

 

3,924 

Non-solicitation and Non-compete agreements

 

 

229 

Deferred tax assets and liabilities

 

 

(2,616)

Goodwill

 

 

22,978 

Purchase Price

 

$

29,917 

 

 

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Table of Contents

 

MercadoLibre, Inc.

Notes to Interim Condensed Consolidated Financial Statements (unaudited)

The purchase price was allocated based on the provisional measurement of the fair value of assets acquired and liabilities assumed considering the information available as of the date of these unaudited interim condensed consolidated financial statements. The valuation of identifiable intangible assets acquired reflects management’s estimates based on the use of established valuation methods. Such assets consist of trademarks, customer lists and non-solicitation and non-compete agreements for a total amount of $8,721 thousands. Management of the Company estimates that trademarks have an indefinite useful life and the intangible asset associated with the customer list will be amortized over a five-year period. The non-solicitation and non-compete agreement intangible asset will be amortized over a three-year period.

The Company recognized goodwill for this acquisition based on management expectation that the acquired business will improve the Company’s business in Mexico.

Arising goodwill has been allocated to the Mexican segment identified by the Company’s management, considering the synergies expected from this acquisition and it is expected that the acquiree will contribute to the earnings generation process of such segment.

Goodwill is not deductible for tax purposes.

Acquisition of a software development company in Brazil

On April 1, 2015, through its subsidiaries Ebazar.com.br Ltda. and MercadoLivre.com Atividades de Internet Ltda, the Company acquired 100% of the issued and outstanding shares of capital stock of the company KPL Soluções Ltda., a company that develops ERP software for the e-commerce industry in Brazil.

The aggregate purchase price for the acquisition of the 100% of the acquired business was $22,685 thousands, measured at its fair value, amount that included: (i) the total cash payment of $12,529 thousands at closing day; (ii) an escrow of $3,316 thousands, and (iii) the contingent additional cash considerations up to $6,840 thousands in case the company achieves certain performance targets during the 24 months since the acquisition date, measured at fair value. Additionally, a payment of $1,584 thousands will be transferred to the sellers after the end of the second year after the acquisition date,  aiming to continue the employment relationship as key employees. This additional payment will be expensed over the 24 month-period up to fulfillment of the conditions required by the selling and purchase agreement.

The Company’s unaudited interim condensed consolidated statement of income includes the results of operations of the acquired business as from April 1, 2015. The net revenues and net loss of the acquiree included in the Company’s interim condensed consolidated statement of income since the acquisition amounted to $838 thousands and $299 thousands, respectively.

In addition, the Company incurred in certain direct costs of the business combination which were expensed as incurred.

As of June 30, 2015, the fair value of the contingent consideration recorded is $7,158 thousands. Contingent additional cash considerations are to be paid after the achievement of the performance targets.

The following table summarizes the preliminary purchase price allocation for the acquisition:

 

 

 

 

 

 

 

 

 

 

KPL Soluções Ltda.

In thousands of U.S. dollars

Cash and cash equivalents

 

$

159 

Other net tangible assets / (liabilities)

 

 

27 

Customer lists

 

 

3,137 

Software

 

 

4,791 

Non-solicitation and Non-compete agreements

 

 

505 

Goodwill

 

 

14,066 

Purchase Price

 

$

22,685 

 

The purchase price was allocated based on the provisional measurement of the fair value of assets acquired and liabilities assumed considering the information available as of the date of these unaudited interim condensed consolidated financial statements. The valuation of identifiable intangible assets acquired reflects management’s estimates based on the use of established valuation methods. Such assets consist of customer lists, software, non-solicitation and non-compete agreements for a total amount of $8,433 thousands. Management of the Company estimates that customer lists, the software and the non-solicitation and non-compete agreements will be amortized over a five-year period.

The Company recognized goodwill for this acquisition based on management expectation that the acquired business will improve the Company’s business.

 

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MercadoLibre, Inc.

Notes to Interim Condensed Consolidated Financial Statements (unaudited)

Arising goodwill has been allocated to the Brazilian segment identified by the Company’s management, considering the synergies expected from this acquisition and it is expected that the acquiree will contribute to the earnings generation process of such segment.

Goodwill is deductible for tax purposes.

Supplemental pro forma financial information required by U.S. GAAP for each acquisition, both individually and in the aggregate, was not material to the interim condensed consolidated financial statements of income of the Company and, accordingly, such information has not been presented.

Goodwill and intangible assets

The composition of goodwill and intangible assets is as follows:

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

2015

 

2014

 

 

(In thousands)

Goodwill

 

$          101,840

 

$            68,829

Intangible assets with indefinite lives

 

 

 

 

— Trademarks

 

14,312 

 

10,276 

Amortizable intangible assets

 

 

 

 

— Licenses and others

 

10,033 

 

5,111 

— Non-compete / solicitation  agreement

 

1,679 

 

1,829 

— Customer lists

 

14,631 

 

11,294 

Total intangible assets

 

$            40,655

 

$            28,510

Accumulated amortization

 

(6,390)

 

(5,339)

Total intangible assets, net

 

$            34,265

 

$            23,171

 

Goodwill

The changes in the carrying amount of goodwill for the six-month period ended June 30, 2015 and the year ended December 31, 2014 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Period ended June 30, 2015

 

 

(In thousands)

 

 

Brazil

 

Argentina

 

Chile

 

Mexico

 

Venezuela

 

Colombia

 

Other
Countries

 

Total

Balance, beginning of the period

 

$           10,557 

 

$           11,859 

 

$                19,101 

 

$                 15,719 

 

$             5,729 

 

$              4,521 

 

$             1,343 

 

$           68,829 

- Business acquisition

 

14,066 

 

 —

 

 —

 

22,978 

 

 —

 

 —

 

 —

 

37,044 

- Effect of exchange rates changes

 

(819)

 

(614)

 

(924)

 

(1,268)

 

 —

 

(324)

 

(84)

 

(4,033)

Balance, end of the period

 

$           23,804 

 

$           11,245 

 

$                18,177 

 

$                 37,429 

 

$             5,729 

 

$              4,197 

 

$             1,259 

 

$         101,840 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2014

 

 

(In thousands)

 

 

Brazil

 

Argentina

 

Chile

 

Mexico

 

Venezuela

 

Colombia

 

Other
Countries

 

Total

Balance, beginning of year

 

$           10,366 

 

$           14,676 

 

$                  6,520 

 

$                 11,376 

 

$             5,252 

 

$              5,506 

 

$             1,405 

 

$           55,101 

- Bussiness Acquisition

 

1,538 

 

775 

 

14,710 

 

6,293 

 

477 

 

82 

 

48 

 

23,923 

- Effect of exchange rates changes

 

(1,347)

 

(3,592)

 

(2,129)

 

(1,950)

 

 —

 

(1,067)

 

(110)

 

(10,195)

Balance, end of the year

 

$           10,557