Report of Foreign Issuer (6-k)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 6-K

REPORT OF FOREIGN PRIVATE ISSUER

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

OF THE SECURITIES EXCHANGE ACT OF 1934

For the month of August, 2018

Commission File Number 001-38055

NETSHOES (CAYMAN) LIMITED

(Exact name of registrant as specified in its charter)


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

Rua Vergueiro 961, Liberdade

01504-001 São Paulo, São Paulo, Brazil

+55 11 3028-3528

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

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

Form 20-F ☒ Form 40-F ☐

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

Yes ☐ No ☒

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

Yes ☐ No ☒

NETSHOES (CAYMAN) LIMITED

Unaudited condensed consolidated financial statements

as of and for the three and six months period ended June 30, 2017 and 2018

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Financial Position

December 31, 2017 and June 30, 2018

(Reais and Dollars in thousands)


				December 31,			June 30,
Assets	Note			2017			2018			2018
				BRL			BRL			USD
Current assets:										Note 2.2
Cash and cash equivalents		9	R$		395,962		R$	75,281	US$		19,524
Restricted cash					19,397			21,636			5,611
Trade accounts receivables, net		10			113,168			102,699			26,635
Inventories, net		11			456,632			415,891			107,861
Recoverable taxes		12			80,047			69,894			18,127
Prepaid expenses and other current assets					48,352			50,078			12,988

Total current assets					1,113,558			735,479			190,746

Non-current assets:
Restricted cash					15,048			13,752			3,567
Judicial deposits		24			106,914			112,932			29,289
Recoverable taxes		12			70,765			70,721			18,341
Other assets					1,950			1,950			506
Due from related parties		23			12			9			2
Property and equipment, net		13			73,039			81,344			21,097
Intangible assets, net		14			115,839			125,392			32,520

Total non-current assets					383,567			406,100			105,322

Total assets			R$		1,497,125	R$		1,141,579	US$		296,068

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

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Financial Position

December 31, 2017 and June 30, 2018

(Reais and Dollars in thousands)


				December 31,				June 30,
Liabilities and Shareholders’ Equity	Note			2017				2018				2018
				BRL				BRL				USD
Current liabilities:													Note 2.2
Trade accounts payable		15	R$		365,835		R$		230,567		US$		59,797
Reverse factoring		16			148,928				91,671				23,775
Current portion of long-term debt		18			106,577				110,428				28,639
Taxes and contributions payable					19,875				19,325				5,012
Deferred revenue		7			3,732				4,016				1,042
Accrued expenses		17			120,366				103,199				26,765
Other current liabilities					31,017				30,215				7,838

Total current liabilities					796,330				589,421				152,868

Non-current liabilities:
Long-term debt, net of current portion		18			179,394				128,692				33,376
Provision for labor, civil and tax risks		24			12,523				14,769				3,830
Deferred revenue		7			25,502				24,101				6,251
Other non-current liabilities					27				40				10

Total non-current liabilities					217,446				167,602				43,467

Total liabilities					1,013,776				757,023				196,335

Shareholders’ equity:
Share capital					244				244				63
Additional-paid in capital					1,345,507				1,348,201				349,655
Treasury shares					(1,533	)			(1,533	)			(398	)
Accumulated other comprehensive loss					(13,664	)			(14,954	)			(3,878	)
Accumulated losses					(847,125	)			(947,195	)			(245,655	)

Equity attributable to owners of the parent					483,429				384,763				99,787

Equity attributable to non-controlling interests					(80	)			(207	)			(54	)

Total shareholders’ equity					483,349				384,556				99,733
Total liabilities and shareholders’ equity			R$		1,497,125		R$		1,141,579		US$		296,068

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

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Profit or Loss

For the six and three months ended in June 30, 2017 and 2018

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


				For the six months ended in June 30,												For the three months ended in June 30,
	Note			2017				2018				Note				2017				2018				2018
				BRL				BRL				USD				BRL				BRL				USD
												Note 2.2												Note 2.2
Net sales		6	R$		857,559		R$		849,090				220,211		R$		461,331		R$		449,797		US$		116,655
Cost of sales		8a			(574,954	)			(590,712	)			(153,201	)			(308,492	)			(312,009	)			(80,919	)

Gross profit					282,605				258,378				67,010				152,839				137,788				35,736

Operating expenses:
Selling and marketing expenses		8b			(222,526	)			(220,845	)			(57,277	)			(121,000	)			(110,247	)			(28,593	)
General and administrative expenses		8c			(74,647	)			(98,204	)			(25,469	)			(43,020	)			(44,485	)			(11,536	)
Other operating expenses, net					(2,116	)			(2,082	)			(541	)			(1,024	)			(965	)			(249	)

Total operating expenses					(299,289	)			(321,131	)			(83,287	)			(165,044	)			(155,697	)			(40,378	)

Operating loss					(16,684	)			(62,753	)			(16,277	)			(12,205	)			(17,909	)			(4,642	)

Financial income		8d			15,195				7,519				1,951				10,166				2,935				761
Financial expenses		8d			(71,383	)			(43,213	)			(11,207	)			(33,116	)			(23,136	)			(6,000	)

Loss before income tax					(72,872	)			(98,447	)			(25,533	)			(35,155	)			(38,110	)			(9,881	)

Income tax expense					(2	)			–				—				(2	)			—				—

Net Loss			R$		(72,874	)	R$		(98,447	)			(25,533	)	R$		(35,157	)	R$		(38,110	)	US$		(9,881	)

Net loss attributable to:
Owners of the Parent			R$		(72,499	)	R$		(98,216	)			(25,473	)	R$		(34,991	)	R$		(37,997	)	US$		(9,855	)
Non-controlling interests					(375	)			(231	)			(60	)			(166	)			(113	)			(29	)
Loss per share attributable to owners of the Parent
Basic and diluted		5	R$		(3.09	)	R$		(3.16	)	US$		(0.82	)	R$		(1.49	)	R$		(1.22	)	US$		(0.32	)

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

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)

For the six and three months ended in June 30, 2017 and 2018

(Reais and Dollars in thousands)


		For the six months ended in June 30,												For the three months ended in June 30,
		2017				2018				2018				2017				2018				2018
										USD												USD
		BRL				BRL				Note 2.2				BRL				BRL				Note 2.2
Net Loss	R$		(72,874	)	R$		(98,447	)	US$		(25,533	)	R$		(35,157	)	R$		(38,110	)	US$		(9,881	)

Items that will subsequently be recorded to profit or loss
Foreign currency translation			7,588				(1,186	)			(308	)			9,276				(737	)			(191	)
Cash flow hedges – effective portion of changes in fair value			348				—				—				775				—				—
Cash flow hedges – reclassified to initial cost of inventories			—				—				—				(214	)			—				—
Cash flow hedges – reclassified to profit or loss			197				—				—				(114	)			—				—

Other comprehensive income (loss)			8,133				(1,186	)			(308	)			9,723				(737	)			(191	)

Total comprehensive income (loss)			(64,741	)			(99,633	)			(25,841	)			(25,434	)			(38,847	)			(10,072	)

Total comprehensive income (loss) attributable to:
Owners of the Parent	R$		(64,398	)	R$		(99,506	)	US$		(25,808	)	R$		(25,346	)	R$		(38,852	)	US$		(10,075	)
Non-controlling interests			(343	)			(127	)			(33	)			(88	)			5				1

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

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows

For the six months ended in June 30, 2017 and 2018

(Reais and Dollars in thousands)


		For the six months ended in June 30,
		2017				2018				2018
		BRL				BRL				USD
Cash flows from operating activities:											Note 2.2
Net loss	R$		(72,874	)	R$		(98,447	)	US$		(25,533	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Allowance for doubtful accounts			6,262				3,852				999
Depreciation and amortization			15,663				34,009				8,820
Loss on disposal of property and equipment, and intangible assets			170				307				80
Share-based payment			(13,469	)			2,145				556
Deferred taxes			2				—				—
Provision for labor, civil and tax risks			4,595				4,067				1,055
Interest expense, net			61,892				32,393				8,401
Provision for inventory losses			464				8,710				2,259
Other			179				3				1
Changes in operating assets and liabilities:
(Increase) decrease in:
Restricted cash			3,089				(2,240	)			(581	)
Trade accounts receivable			84,879				4,799				1,245
Inventories			(40,822	)			26,966				6,994
Recoverable taxes			(34,696	)			7,804				2,024
Judicial deposits			(23,615	)			(6,018	)			(1,561	)
Other assets			(11,832	)			(1,562	)			(405	)
Increase (decrease) in:
Derivative financial instruments			(186	)			—				—
Trade accounts payable			(52,674	)			(131,475	)			(34,098	)
Reverse factoring			1,489				(57,258	)			(14,850	)
Taxes and contributions payable			212				416				108
Deferred revenue			(1,449	)			(1,117	)			(290	)
Accrued expenses			(31,354	)			(15,167	)			(3,934	)
Share-based payment			(2,141	)			(431	)			(112	)
Other liabilities			(568	)			(2,652	)			(688	)

Net cash provided by (used in) operating activities			(106,784	)			(190,896	)			(49,510	)
Cash flows from investing activities:
Purchase of property and equipment			(4,487	)			(14,313	)			(3,712	)
Purchase of intangible assets			(22,770	)			(37,163	)			(9,638	)
Interest received on installment sales			197				1,121				291
Restricted cash			631				1,296				336

Net cash provided by (used in) investing activities			(26,429	)			(49,059	)			(12,723	)
Cash flows from financing activities:
Proceeds from debt			123,936				18,654				4,838
Payments of debt			(52,973	)			(66,886	)			(17,347	)
Payments of interest			(60,960	)			(32,696	)			(8,480	)
Proceeds from issuance of common shares			424,533				—				—

Net cash provided by (used in) financing activities			434,536				(80,928	)			(20,989	)
Effect of exchange rate changes on cash and cash equivalents			7,322				202				52

Change in cash and cash equivalents			308,645				(320,681	)			(83,170	)
Cash and cash equivalents, beginning of period			111,304				395,962				102,694
Cash and cash equivalents, end of period			419,949				75,281				19,524
	R$		308,645		R$		(320,681	)	US$		(83,170	)
Supplemental disclosure
Non-cash investing and financing activities:
Acquisition of property and equipment and intangible assets (Note 17)	R$		1,241		R$		1,001		US$		260
Adjustment on initial application of IFRS 15 and IFRS 9			—				1,854				481
Deferred offering costs reclassified to equity			6,808				—				—
Convertible notes converted to common shares			94,151				—				—
Reclassification of share-based payment from Cash-settled arrangement to Equity-settled arrangement			13,706				—				—

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

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity

For the six months ended in June 30, 2017 and 2018

(Reais and Dollars in thousand)


		Equity Attributable to owners of the Parent
		Share Capital			Additional Paid-in Capital			Treasury Shares				Accumulated Losses				Foreign Currency Translation				Gain (Loss) on Hedge Accounting				Total				Non-controlling Interest				Total Equity
		BRL			BRL			BRL				BRL				BRL				BRL				BRL				BRL				BRL
Balance, January 1, 2017	R$		141	R$		821,988	R$		(1,533	)	R$		(677,379	)	R$		(19,032	)	R$		(545	)	R$		123,640		R$		385		R$		124,025
Comprehensive Income (Loss)
Net loss			—			—			—				(72,499	)			—				—				(72,499	)			(375	)			(72,874	)
Other comprehensive income (loss)			—			—			—				—				7,556				545				8,101				32				8,133

Total comprehensive income (loss)			—			—			—				(72,499	)			7,556				545				(64,398	)			(343	)			(64,741	)

Issuance of common shares in initial public offering, net of offering costs			84			417,140			—				—				—				—				417,224				—				417,224
Conversion of convertible notes to common shares			19			94,132			—				—				—				—				94,151				—				94,151
Share-based payments			—			15,089			—				—				—				—				15,089				—				15,089

Balance, June 30, 2017	R$		244	R$		1,348,349	R$		(1,533	)	R$		(749,878	)	R$		(11,476	)	R$		—		R$		585,706		R$		42		R$		585,748

Balance, January 1, 2018	R$		244	R$		1,345,507	R$		(1,533	)	R$		(847,125	)	R$		(13,664	)	R$		—		R$		483,429		R$		(80	)	R$		483,349
Adjustment on initial adoption of IFRS 15			—			—			—				(1,153	)			—				—				(1,153	)			—				(1,153	)
Adjustment on initial adoption of IFRS 9													(701	)											(701	)			—				(701	)
Adjusted balance, January 1, 2018			244			1,345,507			(1,533	)			(848,979	)			(13,664	)			—				481,575				(80	)			481,495
Comprehensive Income (Loss)
Net loss			—			—			—				(98,216	)			—				—				(98,216	)			(231	)			(98,447	)
Other comprehensive income (loss)			—			—			—				—				(1,290	)			—				(1,290	)			104				(1,186	)

Total comprehensive income (loss)			—			—			—				(98,216	)			(1,290	)			—				(99,506	)			(127	)			(99,633	)

Share-based payments			—			2,694			—				—				—				—				2,694				—				2,694

Balance, June 30, 2018	R$		244	R$		1,348,201	R$		(1,533	)	R$		(947,195	)	R$		(14,954	)	R$		—		R$		384,763		R$		(207	)	R$		384,556

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

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the three months ended March 31, 2018

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

1.	Organization and background

1.1

Nature of operations

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

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

The Company’s shares are offered, sold and registered under the Securities Act of 1933, as amended, pursuant to the Company’s Registration Statement on Form F-1 (Registration No.333-216727), which was declared effective by the Securities and Exchange Commission on April 12, 2017. The common stock began trading on the New York Stock Exchange on April 12, 2017 under the symbol “NETS” and its Initial Public Offering (IPO) was completed on April 18, 2017.

1.2

Split of shares

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

2.	Summary of significant accounting policies

2.1.

Statement of compliance

These interim financial statements have been prepared in accordance with International Accounting Standard 34, “Interim Financial Reporting” and should be read in conjunction with the Company’s last annual consolidated financial statements as at and for the year ended December 31, 2017 (“last annual financial statements”). These interim financial statements, which are unaudited, do not include all of the information required for a complete set of financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”). However, selected explanatory notes are included to explain events and transactions that are significant to an understanding of the changes in the Company’s financial position and performance since the last annual financial statements.

These condensed consolidated financial statements as of and for the six months period ended June 30, 2018 were authorized for issuance by the Board of Directors on August 7, 2018.

2.2.

Basis of presentation

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

Translations of balances in the condensed consolidated statement of financial positions, condensed consolidated statement of profit or loss, condensed consolidated statement of comprehensive income (loss) and condensed consolidated statement of cash flows from R$ into US$ are solely for the convenience of the readers and have been calculated at the rate of US$1.00 = R$3.8558, representing the exchange rate set forth by the Banco Central do Brasil (Central Bank of Brazil) on June 30, 2018. No representation is made that the R$ amounts could have been, or could be, converted, realized or settled into US$ at that rate on June 30, 2018, or at any other rate. All values have been rounded to the nearest thousands of R$ and US$, except where noted.

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the three months ended March 31, 2018

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

This interim information was prepared pursuant to the accounting principles, practices and criteria consistent with those adopted in financial statements for the year ended December 31, 2017 and must be analyzed jointly with the referred to financial statements.

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

2.3.

Use of judgments, estimates and assumptions

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

The significant judgments made by management in applying the Company’s accounting policies and the key sources of estimation uncertainty were the same as those applied to the consolidated financial statements as at and for the year ended December 31, 2017.

2.4.

Fair value measurements

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

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

•

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

•

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

•

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

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

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

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

2.5.

New accounting pronouncements

The Company applied as of January 1, 2018, IFRS 15 (Revenue from Contracts with Customers) and IFRS 9 (Financial Instruments). As required by IAS 34, the nature and effect of these changes are described below.

IFRS 15 Revenue from Contracts with Customers

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

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the six months ended June 30, 2018

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

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

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

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

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

(a)	Revenue from product sales

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

(i)	Variable consideration

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

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

Rights of return

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

The effect of adoption in January 1, 2018 resulted in the recognition of right of return assets (increase in inventories) of R$1,592 and refund liabilities (increase in other liabilities) of R$2,745. The net effect of R$1,153 was recorded in Accumulated losses.

(b)	Freight-related services

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

(c)	Marketplace platform

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

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the six months ended June 30, 2018

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

(d)

NCard

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

(e)	Presentation and disclosure requirements

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

IFRS 9 Financial Instruments

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

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

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

(a)	Classification and measurement of financial assets and liabilities

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

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

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

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


Financial instrument	Classification under IAS 39	Classification under IFRS 9
Cash and cash equivalents	Loans and receivables	Amortized cost
Restricted cash, current and non-current portion	Loans and receivables	Amortized cost
Trade accounts receivables	Loans and receivables	Amortized cost
Due from related parties	Loans and receivables	Amortized cost
Judicial deposits	Loans and receivables	Amortized cost
Other assets, current and non-current portion	Loans and receivables	Amortized cost

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the six months ended June 30, 2018

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

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

(i)	Impairment

IFRS 9 replaces the “incurred loss” model in IAS 39 with a forward-looking “expected credit loss” (ECL) model. This new model requires the Company to record expected credit losses on trade accounts receivables, either on 12-month or lifetime basis.

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

Trade accounts receivables

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

Factors considered were:

•

Significant financial difficulty of the customer;

•

Payment default;

•

Exposure to expected losses;

•

High probability of customer bankruptcy;

•

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

•

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

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

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


		As at January 1, 2018
		Allowance for doubtful accounts (as previously disclosed)				Restated allowance for expected losses
		BRL				BRL
Not past due	R$		(8,199	)	R$		(11,222	)
Past due 1-30 days			(2,134	)			(2,134	)
Past due 31-90 days			(3,686	)			(3,686	)
Past due 91-120 days			(1,845	)			(1,845	)
Past due 120-180 days			(3,108	)			(3,108	)
Past due over 180 days			(1,899	)			(1,899	)

Total	R$		(20,871	)	R$		(23,894	)

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

(b)	Hedge accounting

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

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the six months ended June 30, 2018

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

Other Clarifications, amendments and interpretations

Several other amendments and interpretations apply for the first time in 2018, but do not have an impact on the condensed consolidated financial statements of the Company. Also, the Company has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective, including the IFRS 16 – Leases, which the Company is currently evaluating the effect of adopting the standard and the impact it may have on its consolidated financial statements.

3.	Seasonality

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

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

4.	Segment information

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

The Company is organized around geographical divisions and discloses the following reportable segments: Brazil and International.

•

Brazil: consists of retail sales of consumer products from all of our verticals (which includes sales of sporting goods and related garments as well as fashion and more recently, beauty goods) carried out through our sites Netshoes.com.br and Zattini.com.br and third-party sites that we manage as well as our business to business offline operation.

•

International: consists of retail sales of consumer products (mainly sporting goods and related garments) from our sites Netshoes.com.ar and Netshoes.com.mx in Argentina and Mexico.

The items not allocated directly to the reportable segments are disclosed as corporate and others. Corporate and others comprises operating expenses, financial income and financial expenses recorded in Netshoes (Cayman) Limited and Netshoes Holding, LLC.

The CODM receives individual financial information based on the nature of revenues and expenses incurred. There is no regular reporting of individual financial information for products, services, or major customers, and therefore the Company concluded that Brazil and International were each independent reportable segments.

The Company has aggregated Mexico and Argentina geographic divisions into one reportable segment, International. Mexico and Argentina share similar characteristics as an operating segment, including, but not limited to the same degree of risk, same opportunities for growth and similar products and service offerings to local customers.

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

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the six months ended June 30, 2018

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

The Company evaluates the performance of its reportable segments using “segment net income (loss)”. A reconciliation of reportable segments is as follows:


		Brazil												International												Corporate and others												Total
		Three months ended in June 30,												Three months ended in June 30,												Three months ended in June 30,												Three months ended in June 30,
		2017				2018				2018				2017				2018				2018				2017				2018				2018				2017				2018				2018
		BRL				BRL				USD				BRL				BRL				USD				BRL				BRL				USD				BRL				BRL				USD
Net Sales	R$		407,522		R$		400,449		US$		103,857		R$		53,809		R$		49,348		US$		12,798		R$		—		R$		—		US$		—		R$		461,331		R$		449,797		US$		116,655
Cost of sales			(264,687	)			(274,003	)			(71,062	)			(43,805	)			(38,006	)			(9,857	)			—				—				—				(308,492	)			(312,009	)			(80,919	)

Segment gross profit			142,835				126,446				32,795				10,004				11,342				2,941				—				—				—				152,839				137,788				35,736
Salaries and employees’ benefits			(39,964	)			(42,323	)			(10,976	)			(7,570	)			(6,415	)			(1,664	)			(406	)			(248	)			(65	)			(47,940	)			(48,986	)			(12,705	)
Marketing expenses			(47,307	)			(44,407	)			(11,517	)			(8,014	)			(6,105	)			(1,583	)			(78	)			(269	)			(70	)			(55,399	)			(50,781	)			(13,170	)
Operating lease			(6,340	)			(6,671	)			(1,730	)			(1,062	)			(1,109	)			(287	)			—				—				—				(7,402	)			(7,780	)			(2,017	)
Credit card fees			(7,395	)			(7,196	)			(1,866	)			(1,679	)			(1,425	)			(371	)			—				—				—				(9,074	)			(8,621	)			(2,237	)
Information technology services			(8,017	)			(4,752	)			(1,232	)			(275	)			(230	)			(60	)			(1,297	)			—				—				(9,589	)			(4,982	)			(1,292	)
Amortization and depreciation			(6,448	)			(10,006	)			(2,595	)			(258	)			(188	)			(49	)			(866	)			(7,927	)			(2,056	)			(7,572	)			(18,121	)			(4,700	)
Consulting			(2,588	)			(2,468	)			(640	)			(357	)			(317	)			(82	)			(1,103	)			(541	)			(139	)			(4,048	)			(3,326	)			(861	)
Allowance for doubtful accounts			(1,701	)			984				255				—				(155	)			(40	)			—				—				—				(1,701	)			829				215
Sales commissions and royalties			(3,243	)			(4,150	)			(1,076	)			(251	)			(347	)			(90	)			—				—				—				(3,494	)			(4,497	)			(1,166	)
Facilities expenses			(4,047	)			(3,597	)			(933	)			(347	)			(306	)			(79	)			(277	)			—				—				(4,671	)			(3,903	)			(1,012	)
Other selling, general and administrative expenses			(11,411	)			(2,911	)			(755	)			(1,718	)			(1,286	)			(334	)			(1	)			(367	)			(95	)			(13,130	)			(4,564	)			(1,184	)
Other operating (expense) income, net			(1,014	)			(966	)			(249	)			(4	)			1				—				(6	)			—				—				(1,024	)			(965	)			(249	)

Total operating expenses			(139,475	)			(128,463	)			(33,314	)			(21,535	)			(17,882	)			(4,639	)			(4,034	)			(9,352	)			(2,425	)			(165,044	)			(155,697	)			(40,378	)
Financial income			9,812				2,622				680				296				261				68				58				52				13				10,166				2,935				761
Financial expenses			(29,280	)			(18,900	)			(4,902	)			(3,317	)			(4,231	)			(1,097	)			(519	)			(5	)			(1	)			(33,116	)			(23,136	)			(6,000	)

Loss before income tax			(16,108	)			(18,295	)			(4,741	)			(14,552	)			(10,510	)			(2,727	)			(4,495	)			(9,305	)			(2,413	)			(35,155	)			(38,110	)			(9,881	)
Income tax expense			—				—				—				(2	)			—				—				—				—				—				(2	)			—				—

Net loss	R$		(16,108	)	R$		(18,295	)	US$		(4,741	)	R$		(14,554	)	R$		(10,510	)	US$		(2,727	)	R$		(4,495	)	R$		(9,305	)	US$		(2,413	)	R$		(35,157	)	R$		(38,110	)	US$		(9,881	)

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the six months ended June 30, 2018

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


		Brazil												International												Corporate and others												Total
		Six months ended in June 30,												Six months ended in June 30,												Six months ended in June 30,												Six months ended in June 30,
		2017				2018				2018				2017				2018				2018				2017				2018				2018				2017				2018				2018
		BRL				BRL				USD				BRL				BRL				USD				BRL				BRL				USD				BRL				BRL				USD
Net Sales	R$		763,034		R$		760,801		US$		197,313		R$		94,525		R$		88,289		US$		22,898		R$		—		R$		—		US$		—		R$		857,559		R$		849,090		US$		220,211
Cost of sales			(498,445	)			(522,807	)			(135,590	)			(76,509	)			(67,905	)			(17,611	)			—				—				—				(574,954	)			(590,712	)			(153,201	)

Segment gross profit			264,589				237,994				61,723				18,016				20,384				5,287				—				—				—				282,605				258,378				67,010
Salaries and employees’ benefits			(75,047	)			(91,947	)			(23,846	)			(13,635	)			(12,593	)			(3,266	)			(685	)			(689	)			(179	)			(89,367	)			(105,229	)			(27,291	)
Marketing expenses			(76,523	)			(82,439	)			(21,381	)			(14,006	)			(11,450	)			(2,970	)			(157	)			(487	)			(126	)			(90,686	)			(94,376	)			(24,477	)
Operating lease			(12,434	)			(13,534	)			(3,510	)			(1,961	)			(2,251	)			(583	)			—				—				—				(14,395	)			(15,785	)			(4,093	)
Credit card fees			(13,745	)			(13,663	)			(3,543	)			(3,028	)			(2,557	)			(663	)			—				—				—				(16,773	)			(16,220	)			(4,206	)
Information technology services			(16,581	)			(13,377	)			(3,469	)			(558	)			(473	)			(124	)			(2,520	)			(1,836	)			(476	)			(19,659	)			(15,686	)			(4,069	)
Amortization and depreciation			(13,692	)			(19,025	)			(4,934	)			(510	)			(401	)			(104	)			(1,461	)			(14,583	)			(3,782	)			(15,663	)			(34,009	)			(8,820	)
Consulting			(4,855	)			(4,331	)			(1,123	)			(675	)			(612	)			(159	)			(1,294	)			(1,326	)			(344	)			(6,824	)			(6,269	)			(1,626	)
Allowance for doubtful accounts			(6,262	)			(3,697	)			(959	)			—				(155	)			(40	)			—				—				—				(6,262	)			(3,852	)			(999	)
Sales commissions and royalties			(5,783	)			(8,062	)			(2,091	)			(417	)			(622	)			(161	)			—				—				—				(6,200	)			(8,684	)			(2,252	)
Facilities expenses			(7,275	)			(7,056	)			(1,830	)			(698	)			(600	)			(156	)			(277	)			—				—				(8,250	)			(7,656	)			(1,986	)
Other selling, general and administrative expenses			(20,181	)			(8,080	)			(2,096	)			(2,912	)			(2,527	)			(655	)			(1	)			(676	)			(176	)			(23,094	)			(11,283	)			(2,927	)
Other operating (expense) income, net			(2,058	)			(2,073	)			(538	)			(8	)			(2	)			(1	)			(50	)			(7	)			(2	)			(2,116	)			(2,082	)			(541	)

Total operating expenses			(254,436	)			(267,284	)			(69,320	)			(38,408	)			(34,243	)			(8,882	)			(6,445	)			(19,604	)			(5,085	)			(299,289	)			(321,131	)			(83,287	)
Financial income			13,768				6,738				1,747				639				721				188				788				60				16				15,195				7,519				1,951
Financial expenses			(63,499	)			(36,205	)			(9,390	)			(5,814	)			(6,995	)			(1,814	)			(2,070	)			(13	)			(3	)			(71,383	)			(43,213	)			(11,207	)

Loss before income tax			(39,578	)			(58,757	)			(15,240	)			(25,567	)			(20,133	)			(5,221	)			(7,727	)			(19,557	)			(5,072	)			(72,872	)			(98,447	)			(25,533	)

Income tax expense			—				—				—				(2	)			—				—				—				—				—				(2	)			—				—

Net loss	R$		(39,578	)	R$		(58,757	)	US$		(15,240	)	R$		(25,569	)	R$		(20,133	)	US$		(5,221	)	R$		(7,727	)	R$		(19,557	)	US$		(5,072	)	R$		(72,874	)	R$		(98,447	)	US$		(25,533	)

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the six months ended June 30, 2018

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

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

Six months ended in June 30,

Three months ended in June 30,

2017

2018

2017

2018

BRL

USD

BRL

USD

Sports ⁽¹⁾

735,260

689,466

US$

178,813

384,488

354,617

US$

91,970

Fashion ⁽¹⁾

110,030

136,095

35,296

69,170

83,187

21,575

Market Place

12,269

23,529

6,102

7,673

11,993

3,110

Total net sales

857,559

849,090

US$

220,211

461,331

449,797

US$

116,655

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

Net sales generated from our international segment are denominated in local functional currencies. Revenues are translated at average rates prevailing throughout the period.

Net sales attributable to geographical areas are as follows:

Six months ended in June 30,

Three months ended in June 30,

2017

2018

2017

2018

BRL

USD

BRL

USD

Brazil

763,034

760,801

US$

197,313

407,522

400,449

US$

103,857

Argentina

68,442

59,657

15,472

38,407

32,946

8,544

Mexico

26,083

28,632

7,426

15,402

16,402

4,254

Total net sales

857,559

849,090

US$

220,211

461,331

449,797

US$

116,655

Property and equipment, and intangible assets by geography are as follows:

December 31,
2017

June 30, 2018

BRL

USD

Property and equipment, net

Brazil

69,350

78,184

US$

20,277

Argentina

2,574

1,988

516

Mexico

1,115

1,172

304

Total property and equipment, net

73,039

81,344

US$

21,097

Intangible assets, net

Brazil

95,684

114,365

US$

29,660

Argentina

Mexico

Cayman

20,103

10,953

2,840

Total intangible assets, net

115,839

125,392

32,520

Total

188,878

206,736

US$

53,617

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the six months ended June 30, 2018

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

5.	Earnings (Loss) per share (“EPS”)

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

Earnings per share data for both periods presented has been calculated giving effect to the stock split of 1.0 for 3.0 which occurred immediately prior to the completion of the Initial Public Offering on April 18, 2017 (see note 1.2).

The following table sets forth the computation of the Company’s basic and diluted loss per share attributable to the owners of the Parent for the three and six months ended June 30, 2017 and 2018:


		Six months ended in June 30,												Three months ended in June 30,
		2017				2018				2018				2017				2018				2018
		BRL				BRL				USD				BRL				BRL				USD
Numerator
Net loss for the period attributable to the owners of the Parent	R$		(72,499	)	R$		(98,216	)	US$		(25,473	)	R$		(34,991	)	R$		(37,997	)	US$		(9,855	)

Denominator
Weighted average number of outstanding shares of common stock			23,435,524				31,053,166				31,053,166				23,435,524				31,053,166				31,053,166
Loss per share attributable to the owners of the Parent ⁽¹⁾
Basic and diluted	R$		(3.09	)	R$		(3.16	)	US$		(0.82	)	R$		(1.49	)	R$		(1.22	)	US$		(0.32	)

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

6.	Net sales

Details of net sales for the three and six months ended June 30, 2017 and 2018 were as follows:


		Six months ended in June 30,									Three months ended in June 30,
		2017			2018			2018			2017			2018			2018
		BRL			BRL			USD			BRL			BRL			USD
Product sales—B2C	R$		796,718	R$		791,089	US$		205,169	R$		429,964	R$		422,968	US$		109,698
Product sales—B2B			24,960			7,366			1,910			9,295			1,138			295
Other revenues—Freight related services			23,571			25,985			6,739			14,357			12,952			3,359
Other revenues—Marketplace			12,269			23,529			6,102			7,674			11,993			3,110
Other revenues—Ncard			41			1,121			291			41			746			193

Total net sales	R$		857,559	R$		849,090	US$		220,211	R$		461,331	R$		449,797	US$		116,655

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

As a result of such tax incentives, sales to purchasers outside of the State of Pernambuco originated from our distribution center located in the city of Recife (State of Pernambuco, Brazil), enjoyed Pernambuco State ICMS tax rates of a range from 0.5% to 1.0% during the three and six months ended June 30, 2017 and 2018, depending on the type of product offered. Also, sales to purchasers outside of the State of Minas Gerais originated from our distribution center located in the city of Extrema (State of Minas Gerais, Brazil) enjoyed a Minas Gerais State ICMS tax rate of 1.0% during the three and six months ended June 30, 2017 and 2018.

The incentive also determines that the Company is not allowed to take any credit for taxes paid on the purchase of products subsequently sold outside of those states such that these amounts become non-recoverable taxes and increase the Cost of Sales. Note 8 (a) of these financial statements presents the impact on cost of sales.

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the six months ended June 30, 2018

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

For the three and six months ended June 30, 2017 and 2018, the total amounts of tax incentives recorded in net sales are as follows:

Six months ended in June 30,

Three months ended in June 30,

2017

2018

2017

2018

BRL

USD

BRL

USD

State of Pernambuco

32,259

22,007

US$

5,708

15,058

11,132

US$

2,887

State of Minas Gerais

64,058

62,114

16,109

35,310

33,579

8,709

Total tax incentives—Net sale

96,317

84,121

US$

21,817

50,368

44,711

US$

11,596

7.	Deferred revenue

Deferred revenue from exclusive use of the Company’s customer database is recognized as Other operating (expense) income, net in the consolidated statements of profit or loss using the straight-line method, over the period of the contract (10 years). In the three months ended June 30, 2017 and 2018 the amount of R$375 and R$375 (US$97), respectively, and in the six months ended June 30, 2017 and 2018 the amount of R$750 and R$750 (US$195), respectively, were recorded in Other operating income.

Deferred revenue from credit card activation is recognized as Other revenues – NCard within Net sales (see note 6), in the consolidated statements of profit or loss, when the credit cards are activated with the bank by the Company’s customers.

8.	Expenses

(a)

Costs of sales

The following is the breakdown of cost of sales for the six and three months ended June 30, 2017 and 2018, respectively:

Six months ended in June 30,

Three months ended in June 30,

2017

2018

2017

2018

BRL

USD

BRL

USD

Cost of product sales

504,983

519,570

US$

134,751

271,768

274,916

US$

71,300

Shipping costs

67,830

69,131

17,929

36,294

35,421

9,186

Others

2,141

2,011

521

430

1,673

434

Total cost of sales

574,954

590,712

US$

153,201

308,492

312,010

US$

80,920

Cost of product sales include the non-recoverable ICMS taxes resulting from the tax incentives disclosed in note 6 granted by the States of Minas Gerais and Pernambuco. For the three and six months ended June 30, 2017 and 2018, the total amounts of non-recoverable ICMS are as follows:

Six months ended in June 30,

Three months ended in June 30,

2017

2018

2017

2018

BRL

USD

BRL

USD

State of Pernambuco

10,626

9,021

US$

2,340

5,900

5,220

US$

1,354

State of Minas Gerais

32,555

36,634

9,501

16,736

19,358

5,020

Non-recoverable ICMS

43,181

45,655

US$

11,841

22,636

24,578

US$

6,374

The impact of tax incentives net of non-recoverable ICMS for the three months ended June 30, 2017 and 2018 is R$27,732 and R$20,133 (US$5,222), respectively, and for the six months ended June 30, 2017 and 2018 is R$53,136 and R$38,466 (US$9,976), respectively.

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the six months ended June 30, 2018

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

During the first semester of 2017, the Company reviewed and changed ICMS tax positions taken on past transactions and recorded ICMS tax credits amounting to R$10,118 (US$2,624), as a reduction of the cost of product sales.

(b)

Selling and marketing expenses

The following is the breakdown of selling and marketing expenses for the three and six months ended June 30, 2017 and 2018, respectively:


		Six months ended in June 30,									Three months ended in June 30,
		2017			2018			2018			2017			2018				2018
		BRL			BRL			USD			BRL			BRL				USD
Salaries and employees’ benefits	R$		66,609	R$		68,482	US$		17,761	R$		32,470	R$		33,182		US$		8,606
Marketing expenses			90,686			94,376			24,476			55,399			50,781				13,170
Operating lease			10,102			11,114			2,882			5,196			5,569				1,444
Credit card fees			16,773			16,220			4,206			9,074			8,621				2,237
Information technology services			716			592			155			356			297				77
Amortization and depreciation			1,987			3,453			895			1,162			1,745				453
Consulting			608			214			55			263			112				29
Allowance for doubtful accounts			6,262			3,852			999			1,701			(829	)			(215	)
Sales commissions and royalties			6,200			8,684			2,252			3,494			4,497				1,166
Facilities expenses			6,475			5,855			1,519			3,625			2,872				745
Others			16,108			8,003			2,077			8,260			3,400				881

Total selling and marketing expenses	R$		222,526	R$		220,845	US$		57,277	R$		121,000	R$		110,247		US$		28,593

(c)

General and administrative expenses

The following is the breakdown of general and administrative expenses for the three and six months ended June 30, 2017 and 2018, respectively:


		Six months ended in June 30,									Three months ended in June 30,
		2017			2018			2018			2017			2018			2018
		BRL			BRL			USD			BRL			BRL			USD
Salaries and employees’ benefits	R$		22,758	R$		36,747	US$		9,530	R$		15,470	R$		15,804	US$		4,099
Operating lease			4,293			4,671			1,211			2,206			2,211			573
Information technology services			18,943			15,094			3,915			9,233			4,685			1,215
Amortization and depreciation			13,676			30,556			7,925			6,410			16,376			4,247
Consulting			6,216			6,055			1,570			3,785			3,214			834
Facilities expenses			1,775			1,801			467			1,046			1,031			267
Others			6,986			3,280			851			4,870			1,165			301

Total general and administrative expenses	R$		74,647	R$		98,204	US$		25,469	R$		43,020	R$		44,486	US$		11,536

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the six months ended June 30, 2018

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

(d)

Financial income (expenses)

The following is the breakdown of financial income and expenses of the Company for three and six months ended June 30, 2017 and 2018, respectively:


		Six months ended in June 30,									Three months ended in June 30,
		2017			2018			2018			2017			2018			2018
		BRL			BRL			USD			BRL			BRL			USD
Interest income	R$		13,285	R$		5,074	US$		1,316	R$		9,482	R$		2,070	US$		537
Foreign exchange gain			727			1,034			268			290			463			120
Imputed interest on installment sales			380			1,232			320			334			271			70
Derivative financial instruments gain			764			—			—			33			—			—
Other			39			179			47			27			131			34

Total financial income	R$		15,195	R$		7,519	US$		1,951	R$		10,166	R$		2,935	US$		761


		Six months ended in June 30,									Three months ended in June 30,
		2017			2018			2018			2017			2018			2018
		BRL			BRL			USD			BRL			BRL			USD
Interest expense	R$		37,958	R$		17,391	US$		4,510	R$		18,224	R$		9,422	US$		2,444
Imputed interest on credit purchases			25,639			15,379			3,989			9,576			6,710			1,740
Bank charges			4,034			2,274			590			2,463			1,080			280
Foreign exchange loss			1,839			4,986			1,293			1,839			4,555			1,181
Debt issuance costs			1,462			1,123			291			698			597			155
Other			451			2,060			534			316			772			200

Total financial expense	R$		71,383	R$		43,213	US$		11,207	R$		33,116	R$		23,136	US$		6,000

9.	Cash and cash equivalents

December 31,
2017

June 30, 2018

BRL

USD

Cash and bank balances

17,801

16,452

US$

4,267

Cash equivalents

378,161

58,829

15,257

Total cash and cash equivalents

395,962

75,281

US$

19,524

Cash equivalents are investments in Bank Deposit Certificates (“CDB”) and investment funds, issued by Brazilian financial institutions, with original maturities of 90 days or less that accrue at an average interest rate of 87.24% of CDI (Interbank Deposit Certificate rate).

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the six months ended June 30, 2018

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

10.

Trade accounts receivable, net

December 31,
2017

June 30, 2018

BRL

USD

Trade accounts receivables

134,039

118,232

US$

30,663

Allowance for doubtful accounts

(20,871

)

(15,533

)

(4,028

)

Total trade accounts receivables, net

113,168

102,699

US$

26,635

The changes in the allowance for doubtful accounts receivable for the six months period ended June 30, 2017 and 2018 are as follows:


	June 30,
		2017				2018				2018
		BRL				BRL				USD
Balance at January 1	R$		(1,722	)	R$		(20,871	)	US$		(5,413	)
Additions			(6,262	)			(3,852	)			(999	)
Adjustment from adoption of IFRS 9 (a)			—				(2,322	)			(602	)
Adjustment from adoption of IFRS 9 (b)			—				(701	)			(182	)
Write-offs			7				12,213				3,168

Balance at June 30	R$		(7,977	)	R$		(15,533	)	US$		(4,028	)

a)	Impact of adopting IFRS9 on opening balance, related to reclassification from accounts receivables (“gross”) to allowance for doubtful accounts at January 1, 2018 as disclosed in Note 2.5.

b)	Impact of adopting IFRS9 on opening balance, recognized in Accumulated losses as at January 1, 2018 as disclosed in Note 2.5.

Information about the Company’s exposure to credit and other market risks is included in Note 20.

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the six months ended June 30, 2018

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

11.

Inventories, net


		December 31, 2017				June 30, 2018
		BRL				BRL				USD
Finished goods for resale	R$		466,486		R$		432,932		US$		112,280
Right to recover returned goods			—				1,591				413
Allowance for slow moving and others			(9,854	)			(18,632	)			(4,832	)

Total inventories, net	R$		456,632		R$		415,891		US$		107,861

Due to obsolescence, damaged and slow-moving items, the Company recognized losses on the related inventories to their net realizable value, which resulted in a (reversal)/loss of R$(227) and R$4,547 (US$1,179) for three months ended June 30, 2017 and 2018, respectively, and a loss of R$495 and R$8,778 (US$2,277) for the six months ended June 30, 2017 and 2018, respectively.

12.

Recoverable taxes


		December 31, 2017			June 30, 2018
		BRL			BRL			USD
VAT Taxes Brazil (ICMS)	R$		107,965	R$		109,223	US$		28,327
VAT Taxes International			16,261			15,973			4,143
Taxes other than income tax (PIS and COFINS)			14,829			6,785			1,760
Withholding income taxes			4,467			4,805			1,246
Others			7,290			3,829			992

Total recoverable taxes	R$		150,812	R$		140,615	US$		36,468

Current			80,047			69,894			18,127
Non-Current			70,765			70,721			18,341

13.

Property and equipment, net

The gross amount of property and equipment was R$122,382 at December 31, 2017 and increased to R$136,094 (US$35,296) at June 30, 2018. During the six months ended June 30, 2017 and 2018, the Company acquired property and equipment with a cost of R$4,487 and R$15,187 (US$3,939), respectively. During the six months ended June 30, 2017 and 2018, the Company disposed of property and equipment with a carrying amount of R$209 and R$829 (US$215), respectively.

During the three months ended June 30, 2017 and 2018 a loss on disposal of R$149 and R$31 (US$8) has occurred, respectively, and during the six months ended June 30, 2017 and 2018 R$170 and R$290 (US$75), respectively, which was included in Other operating expense in the condensed consolidated statements of profit or loss.

14.

Intangible assets, net

The gross amount of intangible assets was R$188,254 at December 31, 2017 and increased to R$208,270 (US$54,015) at June 30, 2018. During the six months ended June 30, 2017 and 2018, the Company acquired and developed intangible assets with a cost of R$23,269 and R$35,463 (US$9,197), respectively. The increase is mainly in connection with software acquired and software in development related to website platform and license software.

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the six months ended June 30, 2018

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

15.

Trade accounts payable

December 31,
2017

June 30, 2018

BRL

USD

Trade accounts payable—domestic

339,634

212,962

US$

55,231

Trade accounts payable—foreign

26,201

17,605

4,566

Total trade accounts payable

365,835

230,567

US$

59,797

Information about the Company’s exposure to currency and liquidity risks is included in Note 20.

16.

Reverse factoring

December 31,
2017

June 30, 2018

BRL

USD

Trade accounts payable

126,755

83,668

US$

21,700

Other liabilities

22,173

8,003

2,075

Total reverse factoring

148,928

91,671

US$

23,775

The Company has entered into supply chain finance transactions with financial institutions in order to allow suppliers to advance receivables related to the Company’s purchases of inventories and services.

17.

Accrued expenses


		December 31, 2017			June 30, 2018
		BRL			BRL			USD
Selling and marketing services	R$		76,228	R$		64,409	US$		16,704
Provision for sales with a right of return			—			2,267			588
Freight			11,087			10,020			2,599
Gift card			7,191			6,667			1,729
Information technology			3,460			4,265			1,106
Acquisition of fixed assets and intangible			1,710			1,001			260
Rentals			2,987			2,478			643
Services			4,047			3,170			822
Employees benefits			3,566			1,237			321
Other			10,090			7,685			1,993

Total accrued expenses	R$		120,366	R$		103,199	US$		26,765

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the six months ended June 30, 2018

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

18.

Debt

During the six months ended June 30, 2017 and 2018, the Company repaid R$52,973 and R$66,886 (US$17,347) of secured borrowings, nonconvertible loans and bank loans, respectively. The weighted average interest rate for debt was 14.27% and 9.53% for the six months ended June 30, 2017 and 2018, respectively.

As a consequence of obtaining secured borrowings for working capital purposes the subsidiary NS2.Com Internet S.A. assumed the covenant of maintaining the ratio between financial debt and accounts receivable from credit card operators lower or equal to 3 (three).

The Company was in compliance as of June 30, 2018, with the financial covenant described above, as demonstrated below:


	December 31, 2017		June 30, 2018
	BRL		BRL
Credit card operations—Gross (a)		114,218		104,579
Long-term debt		285,971		239,120
Coefficient ratio (lower or equal to 3)		2.50		2.29

(a)	For covenants calculation purposes, the numerator used to calculate the ratio (credit card gross) represents the balance receivable from credit card operators considering the face value of the corresponding sales invoices (i.e. including interest over installment sales).

The secured borrowings and debentures contain certain affirmative financial covenants for which the Company was in compliance as of June 30, 2018.

The carrying value of the Company’s outstanding debt consists of the following:

December 31,
2017

June 30, 2018

BRL

USD

Secured borrowings

199,320

164,448

US$

42,650

Nonconvertible notes—Debentures

84,202

65,492

16,984

Bank loans

2,449

9,180

2,381

Total long-term debt

285,971

239,120

62,015

Current portion of long-term debt

106,577

110,428

28,639

Long-term debt, net of current portion

179,394

128,692

US$

33,376

19.

Derivative financial instruments

The Company recognized a derivative, not designated as hedge accounting, gain of R$33 and R$0 (US$0) as financial income for the three months ended June 30, 2017 and 2018, respectively, and a derivative gain of R$ 764 and R$0 (US$0) as financial income for the six months ended June 30, 2017 and 2018, respectively, in the condensed consolidated statements of profit or loss. The objective of these derivatives was to manage foreign exchange risks.

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the six months ended June 30, 2018

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

20.

Financial instruments—Fair value and risk management

(a)

Accounting classifications and fair values

The following table shows the carrying amounts and fair values of financial assets and financial liabilities, including their levels in the fair value hierarchy. It does not include fair value information for financial assets and financial liabilities if the carrying amount is a reasonable approximation of fair value.


				As at December 31, 2017
				Carrying amount
Financial assets or liabilities, not measured at fair value	Note			Fair value		Financial assets measured at amortized cost		Financial liabilities measured at amortized cost			Total
				BRL		BRL		BRL			BRL
Cash and cash equivalents		9			—		395,962		—			395,962
Restricted cash, current and non-current portion					—		34,445		—			34,445
Trade accounts receivables		10			—		113,168		—			113,168
Due from related parties		23			—		12		—			12
Judicial deposits		24			—		106,914		—			106,914
Other assets, current and non-current portion							22,246		—			22,246
Trade accounts payable		15			—		—		(365,835	)		(365,835	)
Reverse factoring		16			—		—		(148,928	)		(148,928	)
Long-term debt		18			—		—		(285,971	)		(285,971	)
Accrued expenses		17			—		—		(120,366	)		(120,366	)
Other current liabilities					—		—		(31,044	)		(31,044	)

Total			R$		—		672,747		(952,144	)		(279,397	)


				As at June 30, 2018
				Carrying amount
Financial assets or liabilities, not measured at fair value	Note			Fair value		Financial assets measured at amortized cost		Financial liabilities measured at amortized cost			Total				Total
				BRL		BRL		BRL			BRL				USD
Cash and cash equivalents		9	R$		—		75,281		—			75,281		US$		19,524
Restricted cash, current and non-current portion					—		35,388		—			35,388				9,178
Trade accounts receivables		10			—		102,699		—			102,699				26,635
Due from related parties		23			—		9		—			9				2
Judicial deposits		24			—		112,932		—			112,932				29,289
Other assets, current and non-current portion							26,328					26,328				6,828
Trade accounts payable		15			—		—		(230,567	)		(230,567	)			(59,797	)
Reverse factoring		16			—		—		(91,671	)		(91,671	)			(23,775	)
Long-term debt		18			—		—		(239,120	)		(239,120	)			(62,015	)
Accrued expenses		17			—		—		(103,199	)		(103,199	)			(26,765	)
Other current liabilities					—		—		(30,215	)		(30,215	)			(7,836	)

Total			R$		—		352,637		(694,772	)		(342,135	)	US$		(88,732	)

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the six months ended June 30, 2018

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

(b)

Measurement of fair values

The Company’s financial instruments, including cash and cash equivalents, trade accounts receivable, trade accounts payable and other liabilities, are carried at cost, which approximates fair value due to the short-term maturity of these instruments. The fair value estimate of debentures is based on the current rates offered to the Company for debentures of the same remaining maturities, which is categorized as a Level 2 measurement in the fair value hierarchy. As a substantial portion of the debentures has been contracted at floating rates of interest, which are reset at short intervals, the carrying value of the debentures at December 31, 2017 and June 30, 2018 closely approximated the fair value at December 31, 2017 and June 30, 2018, respectively.

During the year ended December 31, 2017 and six month ended June 30, 2018, there were no transfers between Level 1, 2 and 3 of fair value measurements.

(c)

Financial risk management

In the regular course of its business, the Company is exposed to market risks mainly related to the fluctuation of interest rates, exchange rate variation, credit risk on credit sales and liquidity risk.

The Company adopts certain instruments to minimize its exposure to such risks, based on monitoring, under the supervision of the Company’s executive officers, which in turn is under the oversight of the Company’s board of directors.

The Company has exposure to the following risks arising from financial instruments:

•

credit risk (see (i));

•

liquidity risk (see (ii)); and

•

market risk (see (iii)).

i.	*Credit risk*

Credit risk is the Company´s risk of financial loss if a customer or counterparty to a financial instrument fails to meet its contractual obligations. This risk principally comes from the outstanding receivables due by customers, derivatives and cash and cash equivalents.

Trade Accounts Receivable

The Company’s exposure to credit risk is influenced mainly by the individual characteristics of each customer.

The Company regularly monitors trade accounts receivable and considers the risk of not collecting from customers as limited because of the intrinsic nature of the payments of credit card operations methods.

For Business-to-business customers, the credit risk exposure and the carrying values reflect management’s assessment of the associated maximum exposure to such credit risk. The maximum exposure to credit risk is equal to the carrying value of the financial assets. The objective of managing counterparty credit risk is to prevent losses in financial assets. The Company assesses the credit quality of the counterparties, taking into account their financial position, past experience and other factors (e.g. credit rating).

No customer had balances representing more than 10% of the Company´s consolidated trade accounts receivable as of December 31, 2017 and June 30, 2018, respectively.

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the six months ended June 30, 2018

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

At December 31, 2017 and June 30, 2018, respectively, the maximum exposure to credit risk for trade accounts receivable by type of counterparty was as follows:

December 31,
2017

June 30, 2018

BRL

USD

Credit card operations

87,983

79,247

US$

20,552

B2B customers

46,056

38,985

10,111

Total trade accounts receivable

134,039

118,232

US$

30,663

Allowance for doubtful accounts

(20,871

)

(15,533

)

(4,028

)

Trade accounts receivable, net

113,168

102,699

US$

26,635

At December 31, 2017 and June 30, 2018, respectively, the aging of trade accounts receivable was as follows:


		December 31, 2017
		Gross amount			Allowance for doubtful accounts				Trade accounts receivable, net
		BRL			BRL				BRL
Not past due	R$		109,135	R$		(8,199	)	R$		100,936
Past due 1-30 days			5,449			(2,134	)			3,315
Past due 31-90 days			5,304			(3,686	)			1,618
Past due 91-120 days			3,551			(1,845	)			1,706
Past due 120-180 days			4,278			(3,108	)			1,170
Past due over 180 days			6,322			(1,899	)			4,423

Total	R$		134,039	R$		(20,871	)	R$		113,168


		June 30, 2018
		Gross amount			Allowance for doubtful accounts				Trade accounts receivable, net			Trade accounts receivable, net
		BRL			BRL				BRL			USD
Not past due	R$		95,033	R$		(1,782	)	R$		93,251	US$		24,185
Past due 1-30 days			5,565			(1,627	)			3,938			1,021
Past due 31-90 days			6,181			(2,520	)			3,661			949
Past due 91-120 days			2,588			(1,094	)			1,494			387
Past due 120-180 days			3,469			(3,219	)			250			65
Past due over 180 days			5,396			(5,292	)			104			27

Total	R$		118,232	R$		(15,534	)	R$		102,698	US$		26,634

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the six months ended June 30, 2018

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

Cash and cash equivalents

The Company held cash and cash equivalents of R$395,962 and R$75,281 (US$19,524) at December 31, 2017 and June 30, 2018, respectively. Cash and cash equivalents are held with bank and financial institution counterparties, which are rated BB-, based on Standard & Poor’s credit rating for local currency credit issuers.

ii.

Liquidity risk

Liquidity risk is the risk that the Company will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. The Company’s approach to managing liquidity is to ensure, as far as possible, that it will have sufficient liquidity to meet its liabilities when they are due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Company’s reputation.

The following are the remaining contractual maturities of financial liabilities as of June 30, 2018. The amounts are gross and undiscounted and include contractual interest payments. Estimated interest payments were calculated based on the interest rate indexes of the Company’s floating interest rate indebtedness, in effect as of June 30, 2018.


		As at June 30, 2018
		Carrying amount			Carrying amount			Contractuall cash flows
								Within 1 year			1—3 years		3—5 years			More than 5 years
		BRL			USD			BRL			BRL		BRL			BRL
Financial liabilities:
Long-term debt	R$		239,120	US$		62,016	R$		158,795	R$		140,159		7,120	R$		7,806
Trade accounts payable			230,567			59,797			232,712			—		—			—
Reverse factoring			91,671			23,775			92,645			—		—			—
Taxes and contributions payable			19,325			5,012			19,325			—		—			—
Accrued expenses			103,199			26,765			103,199			—		—			—
Other current liabilities			30,215			7,836			30,215			—		—			—
Provision for labor, civil and tax risks			14,769			3,830			—			—		—			14,769
Other non-current liabilities			40			10			—			—		—			40

	R$		728,906	US$		189,041	R$		636,891	R$		140,159		7,120	R$		22,615

The following are the Company’s unrestricted cash and cash equivalents and unused portion of the credit facility at December 31, 2017 and June 30, 2018:

December 31, 2017

June 30, 2018

BRL

USD

Unrestricted cash and cash equivalents

395,962

75,281

US$

19,524

Undrawn credit facility

347

355

Available liquidity

396,309

75,636

US$

19,616

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the six months ended June 30, 2018

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

In recent years, the Company has financed its operations in large part with cash flows from operating activities, bank financing and cash proceeds from issuances of common shares. The Company has taken a number of measures designed to improve liquidity, including: (i) reducing the number of monthly credit card installments from customers, (ii) renegotiating payment terms with suppliers, (iii) entering into sales of receivables with financial institutions, whereby the Company transfers its rights to receive cash flows from a portion of trade accounts receivable, limited to the amount given as securities for borrowing and debentures, (iv) entering into reverse factoring of trade accounts payable with financial institutions, whereby they commit to pay suppliers at an accelerated rate in exchange for a trade discount, (v) raise capital from financial investors by issuing notes convertible into our common shares with total proceeds amounting to US$30.0 million. These measures are enabling the Company to secure liquidity to maintain its operations.

iii.

Market risk

(a)

Foreign currency exchange risk

The Company’s net sales are denominated in the functional currencies of the countries in which our operational subsidiaries are located. Accordingly, its receivables are generally not subject to foreign currency exchange risks.

In the ordinary course of business, the Company’s subsidiaries purchase goods from vendors in both local functional currency and foreign currencies (mainly U.S. dollars).

The summary of quantitative data about the Company’s exposure to currency risk as reported to management of the Company is as follows:


	June 30, 2018
	USD
Trade accounts payable		4,566
Accrued expenses		1,144

Net statement of financial position exposure		5,710

The following table indicates the changes in the Company’s income or (loss) before tax that would arise if foreign exchange rates to which the Company has exposure at the reporting date had changed by 10% at that date, assuming all other risk variables remained constant.


	Profit or loss
As at June 30, 2018	Strenghthening		Weakening
	BRL		BRL
Net exposure in USD	$	2,202		(2,202	)

This sensitivity analysis assumes that the change in foreign exchange rates had been applied to re-measure those financial instruments held by the Company which expose it to foreign currency exchange risk at the reporting date. This analysis excludes differences that would result from the translation of the consolidated financial statements of foreign operations into the Company’s reporting currency, which is Brazilian Real. The sensitivity analysis above is conducted for monetary assets and liabilities denominated in foreign currencies other than functional currency as of June 30, 2018.

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the six months ended June 30, 2018

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

(b)

Interest rate risk

Interest rates are highly sensitive to many factors, including fiscal and monetary policies and domestic and international economic and political considerations, as well as other factors beyond the Company’s control. Interest rate risk is the exposure to loss resulting from changes in the level of interest rates and the spread between different interest rates. The Company’s debt has floating interest rates. As a result, the Company is exposed to changes in the level of interest rates and to changes in the relationship or spread between interest rates for its floating rate debt. The Company’s floating rate debt requires payments based on variable interest rate indexes such as CDI. Therefore, increases in interest rates may increase the Company’s loss before taxes by increasing its financial expense. If interest rates were to increase or decrease by 50 basis points, the Company´s financial expense on borrowings subject to variable interest rates would increase or decrease by R$648 (US$168) for the six months ended June 30, 2018. This analysis assumes that all other variables, in particular foreign currency exchange rate, remain constant.

To reduce the exposure of variable interest rate (CDI), the Company invests its excess cash and cash equivalents in short-term investments. If interest rates were to increase or decrease by 50 basis points, the Company’s financial income on short-term investments subject to variable interest rates would increase or decrease by R$180 (US$47) for the six months ended June 30, 2018.

(c)

Inflation risk

Brazil and other countries in Latin America, in general, have historically experienced high rates of inflation. Inflationary pressures persist, and actions taken in an effort to curb inflation, coupled with public speculation about possible future governmental actions, have in the past contributed to economic uncertainty in Brazil and other Latin American countries and heightened volatility in the Latin American securities market.

The inflation rate in Argentina has exceeded projections over the past quarters. As a result, the consumer price index (CPI) currently being used to monitor inflation in Argentina indicate three-year cumulative inflation rates that have increased significantly, also related to the depreciation of the Argentinian Peso. The Company expects, unless current trends reverse significantly, to apply IAS 29 – Financial Reporting in Hyperinflationary Economies for the Argentinian operations in financial statements for reporting periods as from July 1, 2018.

The Company continues to monitor the impact of inflation in order to minimize its effects through pricing strategies and productivity improvements.

21.

Share-based payments

The number of share options has been disclosed giving effect to the stock split of 1.0 for 3.0 occurred immediately prior to the completion of Initial Public Offering on April 18, 2017 (see note 1.2).

Under the Share Plan (the “Plan”) established by the Company, its Board of Directors (the “Board”) may grant up to 956,470 share options to key employees, directors and independent contractors. The options under the Plan were granted at the discretion of the Board; as such, the Board has full authority to establish terms and conditions of any award consistent with the provisions of the Plan and to waive any such terms and conditions at any time. The Plan was set up for the following purposes: (i) attracting, retaining and motivating its beneficiaries; (ii) adding value to quote-holders; and (iii) encouraging the view of entrepreneurs of the business.

(a)

Arrangements previously classified as cash-settled

Each share option granted under the Plan contains a vesting period, during which the participant cannot exercise the option, and are generally subject to the following vesting schedule: over a four-year period, 25% of the total common shares subject to the award will vest at the first anniversary of the vesting commencement date and the remaining common shares subject to the award will vest in equal monthly installments over the 36 months of continuous service thereafter.

The Company held a right of first refusal to repurchase the shares exercised according to the Plan. The Company only had this right of first refusal until it has become public and, after that date, holders of the common shares can trade them in the market.

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the six months ended June 30, 2018

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

In addition, the Company had a non-contractual practice of (i) providing its employees whose employment relationship was terminated (whether voluntarily or involuntarily) with a repurchase proposal to buy back its common shares held by such persons at a discount of their fair value and (ii) to provide holders of vested awards that terminate their relationship with the Company (whether voluntarily or involuntarily) with a bonus equivalent to the exercise price of their exercisable option.

Due to the characteristics of the transaction, these awards had been regarded as a cash-settled plan and the liability was remeasured at each reporting date. The liability previously recognized in these consolidated financial statements took into account the fair value of Company´s shares, expected forfeitures and the discount the Company has obtained when repurchasing such shares.

Following the completion of Initial Public Offering, the condition of the right of first refusal by the Company of repurchasing the shares exercised is no longer applicable, as prescribed in the Plan.

Therefore, upon completion of Initial Public Offering, the Company reclassified the share-based plan from cash-settled to equity-settled, and the impact was a reduction in Non-current liabilities and an increase in Equity (Capital Reserves) of R$13,706.

For purposes of the statement of cash flows, share based payment transactions are fully reported under operating activities.

The Company did not repurchase shares during the six months period ended June 30, 2017 and 2018.

As the Company will provide holders of vested awards with a bonus equivalent to the exercise price of the options if they decide to exercise the options, the fair value of the awards was estimated based on the fair value of the Company´s shares.

A summary of option activities under the Plan and changes during the period ended June 30, 2017 is set forth in the following table:


	Number of Units				Weighted Average Exercise Price Per Unit			Weighted Average Remaining Contractual Term (in years)
					USD
Cash-settled arrangements

Oustanding at December 31, 2016		346,767		US$		16.76			1.3 year
Granted		—				—
Exercised		—				—
Forfeited/Cancelled		(73,710	)			43,31
Transfer from cash-settled arragements on April 12nd		(273,057	)			(9.59	)

Oustanding at June 30, 2017		—		US$		—			0 year

As mentioned before, the Company reclassified the share-based plan from cash-settled to equity-settled after conclusion of the IPO.

(b)

Equity-settled arrangements

During the first semesters of 2017 and 2018, the Company granted 127,500 and 108,000 share options, respectively, under the Plan with a non-market performance condition.

The share option expense has been recognized since the grant date and was fully recognized by October 2017. The Company only had a right of first refusal under the Plan until April 18, 2017 (IPO date), after that date, holders of the common shares can trade them in the market. Therefore, this arrangement has been regarded as equity-settled.

As the Company provides holders of vested awards with a bonus equivalent to the exercise price of the options, the fair value of the awards was estimated based on the fair value of the Company´s shares.

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the six months ended June 30, 2018

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

A summary of option activities under the Plan and changes during the period ended June 30, 2017 and 2018 is set forth in the following table:


Equity-settled arrangements	Number of Units				Weighted Average Exercise Price Per Unit		Weighted Average Remaining Contractual Term (in years)
					USD
Oustanding at December 31, 2016		23,250				8.10		0.8 year
Granted		127,500				8.10
Exercised		—				—
Forfeited/Cancelled		(22,302	)			8.10
Transfer from cash-settled arragements on April 12nd		273,057				9.59

Oustanding at June 30, 2017		401,505		US$		9.11		0.9 year

Oustanding at December 31, 2017		369,620				9.20		0.7 year
Granted		108,000				8.10
Exercised		—				—
Forfeited/Cancelled		(33,912	)			8.10

Oustanding at June 30, 2018		443,708		US$		9.02		2.1 years

Vested at June 30, 2017		164,733
Vested at June 30, 2018		405,262

As of June 30, 2018, the Company had remaining unrecognized compensation cost of R$3,103 (US$805), which is expected to be recognized over a weighted average period of 2.1 years.

The Company recognized compensation expenses (income) for both cash and equity-settled arrangements of R$412 (US$107) and R$1,640 (US$425) for the three months ended June 30, 2017 and 2018, respectively.

The Company recognized compensation expense (income) for cash and equity-settled arrangements of R$(13,469) and R$2,145 (US$556) for the six months ended June 30, 2017 and 2018, respectively.

Upon completion of the initial public offering in April 2017, when the Company reclassified the share-based plan from cash-settled to equity-settled, the fair value per common share underlying the Company share options was re-measured to US$18.00 per common share, which was the price of the common shares on the date of its initial public offering. Subsequent to the initial public offering, the cost of equity-settled transactions is determined by the fair value at the grant date (and the Company uses the market price of the publicly traded common shares as an indicator of fair value).

The weighted average fair value of granted options were estimated at US$18.00 and US$16.12 per share at December 31, 2017 and June 30, 2018, respectively.

22.

Income taxes

Income tax expenses for the periods presented are based on the best estimate of the weighted average annual income tax rate expected for the full years.

The Company’s effective tax rate for the three and six months ended June 30, 2018 was 0% (three and six months ended June 30, 2017: 0%).

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the six months ended June 30, 2018

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

23.

Related party transactions

The consolidated subsidiaries of the Company as of December 31, 2017 and June 30, 2018 are listed below:


		Percentage Ownership and Voting Interest
Company	Country of Incorporation	December 31, 2017			June 30, 2018
Company	Country of Incorporation	December 31, 2017			June 30, 2018
Netshoes Holding, LLC	United States of America		100.00	%		100.00	%
NS2 Com Internet S.A.	Brazil		100.00	%		100.00	%
NS3 Internet S.A.	Argentina		98.17	%		98.17	%
NS4 Com Internet S.A.	Mexico		100.00	%		100.00	%
NS4 Servicios de México S.A. C.V.	Mexico		100.00	%		100.00	%
NS5 Participações Ltda.	Brazil		99.99	%		99.99	%
NS6 Serviços Esportivos Ltda.	Brazil		100.00	%		100.00	%

The Company has the following related party transactions:

December 31, 2017

June 30, 2018

BRL

USD

Balances from non-controlling owners

Receivables

US$


		Six months ended in June 30,									Three months ended in June 30,
		2017			2018			2018			2017				2018			USD Total
		BRL			BRL			USD			BRL				BRL			USD
Income statement amounts
Key management personnel compensation
Compensation and short-term benefits	R$		8,251	R$		6,225	US$		1,614	R$		6,290		R$		2,429	US$		630
Share-based payments			393			287			74			(55	)			61			16

Total	R$		8,644	R$		6,512	US$		1,688	R$		6,235		R$		2,490	US$		646

Financial expenses
Convertible notes interest			2,069			—			—			503				—			—

24.

Commitments and contingencies

(a)

Litigation

The Company is a party to legal proceedings and claims which arise during the ordinary course of business. It reviews its legal proceedings and claims, conducts regulatory reviews and inspections, and reviews other legal matters on an ongoing basis and follows appropriate accounting guidance when making accrual and disclosure decisions. The Company establishes provisions for those contingencies when the incurrence of a loss is probable and can be reasonably estimated, and the Company discloses the amount provided for and the amount of a reasonably possible loss in excess of the amount provided for, if such disclosure is necessary for its financial statements not to be misleading. The Company does not record a provision when the likelihood of loss being incurred is probable, but the amount cannot be reasonably estimated, or when the loss is believed to be only reasonably possible or remote. The Company´s assessment of whether a loss is reasonably possible, or probable is based on its assessment and consultation with legal counsel regarding the ultimate outcome of the matter following all appeals. After taking into consideration legal counsel’s evaluation of such actions, management is of the opinion that their outcome will not have a significant effect on the Company’s consolidated financial statements, other than the amount already provided for.

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the six months ended June 30, 2018

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

Breakdown of and changes in provisions whose unfavorable outcome is probable are as follows:


		Labor				Civil				Tax			Total				Total
		BRL				BRL				BRL			BRL				USD
As of December 31, 2017	R$		823		R$		1,023		R$		10,677	R$		12,523		U$		3,248
Additions, net of reversal			(37	)			2,411				2,000			4,374				1,134
Payments			(77	)			(2,051	)			—			(2,128	)			(552	)

As of June 30, 2018	R$		709		R$		1,383		R$		12,677	R$		14,769		U$		3,830

Labor claims presented above are related to different matters, such as overtime and salary equalization. Labor lawsuits are not individually significant.

Civil claims are related to the Company´s ordinary course of operations, and generally relate to consumer claims. None of these lawsuits are individually significant.

The Company has a tax claim related to challenging Brazilian tax authorities’ interpretation that retailers of imported goods are subject to paying additional sales taxes on manufactured products (“IPI”) and PIS and COFINS on financial income.

In September 2017, the Company received a tax assessment amounting to R$89,013 (US$23,085) from the Brazilian tax authorities, asserting that the Company had unduly considered PIS and COFINS tax credits related to marketing and information technology services, effectively reducing the PIS and COFINS payable calculation basis. The Company´s assessment, supported by external lawyers, is that the risk of loss of this case is possible and therefore, no provision has been recognized in relation to this claim.

(b)

Judicial deposits

In some situations, in connection with a legal requirement or presentation of guarantees, judicial deposits are made to secure the continuance of the claims under discussion. These judicial deposits may be required for claims whose likelihood of loss was analyzed by the Company, grounded on the opinion of its legal advisors as a probable, possible or remote loss.

Until the case is settled, the judicial deposits amounts accrues interest at Brazil’s official short-term interest rate (SELIC).


		December 31, 2017			June 30, 2018
		BRL			BRL			USD
VAT taxes Brazil (PIS and COFINS) (a)	R$		94,909	R$		98,167	US$		25,460
PIS and COFINS on financial income (a)			2,558			2,924			758
Tax on manufactured products (IPI) (b)			7,489			9,606			2,491
Other			1,958			2,235			580

Total judicial deposits			106,914			112,932			29,289

a)	Contribution tax on gross revenue for social integration program (PIS) and social security financing (COFINS):

The Company is involved in disputes related to:

Exclusion of VAT tax (ICMS) from PIS and COFINS calculation basis, which started in November 2014. On March 15, 2017, the Brazilian Federal Supreme Court decided for the unconstitutionality of considering the inclusion of the VAT tax (ICMS) from PIS and COFINS calculations basis. Based on this decision, the Company’s lawyers estimated chance of losing of this legal dispute remote as of December 31, 2017 and June 30, 2018. Since August of 2017, the Brazilian tax authority has ceased the obligation to make the judicial deposit. The Company is currently waiting the court to define which procedures are necessary to refund the judicial deposit.

ii)

A constitutional challenge on the imposition of PIS and COFINS on financial income.

b)	Tax on manufactured products (IPI)

The Company is involved in disputes related to the levy of taxes on manufactured products (IPI) over products it sells and obtained a preliminary injunction allowing it not to pay IPI on imports and sales of goods since it is a trading company.

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Notes to the unaudited condensed consolidated financial statements

For the six months ended June 30, 2018

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

25.

Subsequent events

Debt restructuring

In July 2018, the subsidiary NS2.Com Internet S.A. renegotiated a secured borrowing facility agreement with Banco do Brasil S.A. for an aggregate principal amount of R$96.2 million (US$24.9 million). Principal and interest on the loan are payable on a monthly basis, and the maturity, after renegotiation, changed from August 2020 to July 2021, with a 12-month grace-period (only principal), and the Company paid a debt renegotiation fee of 1.2% over the renegotiated value.

In July 2018, the subsidiary NS2.Com Internet S.A. renegotiated a secured borrowing facility agreement with Banco do Bradesco S.A. for an aggregate principal amount of R$46.1 million (US$11.96 million). Principal and interest on the loan are payable on a monthly basis, and the maturity, after renegotiation, changed from September 2020 to July 2021, with a 12-month grace-period (only principal).

In August 2018, the subsidiary NS2.Com Internet S.A. renegotiated a nonconvertible notes (Debentures) agreement for an aggregate principal amount of R$66.1 million (US$17.14 million). Principal and interest on the loan are payable on a quarterly basis, and the maturity, after renegotiation, changed from March 2020 to September 2021, with a 12-month grace-period (only principal).

Mexico operation deal

The subsidiaries (NS2.Com Internet S.A. and NS5 Participações Ltda.) have signed an agreement with Grupo Sierra Capital, to sell the entirety of its Mexico operations (NS4.Com Internet S.A. and NS4 Servicios de Mexico S.A. de C.V.), which belongs to the reportable International segment, through the sale of all Shares which they represent. This transaction is expected to close in the third quarter of 2018 and is subject to customary (a) closing conditions, and (b) purchase price adjustment mechanisms.

***********

SIGNATURE

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereto duly authorized.


Netshoes (Cayman) Limited

By:		/s/ Marcio Kumruian
Name:		Marcio Kumruian
Title:		Chief Executive Officer

Date: August 9, 2018

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