MercadoLibre,

MercadoLibre, Inc.

Notes to Interim Condensed Consolidated Financial Statements (unaudited)of Cash Flows

For the three-month periods ended March 31, 2021 and 2020

(In thousands of U.S. dollars)

(Unaudited)

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

1. Nature of Business

MercadoLibre, Inc. (“MercadoLibre” or the “Company”) was incorporated in the state of Delaware, in the United States of America, in October 1999. MercadoLibre is the leading e-commerce companylargest online commerce ecosystem in Latin America, serving as an integrated regional platform and as an enablera provider of the necessary onlinedigital and technology tools tothat allow businesses and individuals to trade products and services in the region.

The Company enables commerce through its marketplace platform, (including online classifieds for motor vehicles, vessels, aircraft, services and real estate), which allows users to buy and sell in most of Latin America.

Through MercadoPago,Mercado Pago, the fintech solution, MercadoLibre enables individuals and businesses to send and receive onlinedigital payments; through MercadoEnvios,Mercado Envios, MercadoLibre facilitates the shipping of goods from the Company and sellers to buyers; through ourthe advertising products, MercadoLibre facilitates advertising services tofor large retailers and brands to promote their product and services on the web; through MercadoShops,Mercado Shops, MercadoLibre facilitatesallows users to set-up, manage, and promote their own on-line web-stores under a subscription-based business model; and through MercadoCredito,Mercado Credito, MercadoLibre extends loans to specificcertain merchants and consumers. In addition,consumers; and through Mercado Fondo, MercadoLibre develops and sells software enterprise solutionsallows users to e-commerce business clientsinvest funds deposited in Brazil.their Mercado Pago accounts.

As of September 30, 2017,March 31, 2021, MercadoLibre, through its wholly-owned subsidiaries, operated online ecommercee-commerce platforms directed towards Argentina, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Peru, Mexico, Panama, Honduras, Nicaragua, El Salvador, Portugal, Uruguay, Bolivia, Guatemala, Paraguay and Venezuela. Additionally, MercadoLibre operates an online paymentsits FinTech solution directed towardsin Argentina, Brazil, Mexico, Venezuela, Colombia, Chile, Peru and Uruguay.Uruguay, and extends loans through Mercado Credito in Argentina, Brazil and Mexico. It also offers a shipping solution directed towards Argentina, Brazil, Mexico, Colombia, Chile and Chile. In addition, the Company operates a real estate classified platform that covers some areas of State of Florida, in the United States of America.Uruguay.

2. Summary of significant accounting policies

Basis of presentation

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

Substantially all net revenues, cost of net revenues and operating expenses are generated in the Company’s foreign operations. Operating income of foreign operations amounted to 96.7% and 99.9% of the consolidated amounts during the nine-month periods ended September 30, 2017 and 2016. Long-lived assets, Intangibleintangible assets and Goodwillgoodwill located in the foreign jurisdictions totaled $247,401$552,837 thousands and $232,314$490,464 thousands as of September 30, 2017March 31, 2021 and December 31, 2016,2020, respectively.

These interim condensed consolidated financial statements reflect the Company’s consolidated financial position as of September 30, 2017March 31, 2021 and December 31, 2016.2020. These consolidated financial statements also showinclude the Company’s consolidated statements of income, and comprehensive income, for the nineequity and three-month periods ended September 30, 2017 and 2016; and statement of cash flows for the nine-monththree-month periods ended September 30, 2017 and 2016.March 31, 2021. These interim condensed consolidated financial statements include all normal recurring adjustments that managementManagement believes are necessary to fairly state the Company’s financial position, operating results and cash flows.

From the quarter ended March 31, 2021 the Company disclosed Net product revenues as a separate line of Net revenues following its growth in significance relative to Net service revenues. As a result, the Company has reclassified the corresponding amount of the three month period ended March 31, 2020 to the line Net product revenues for an amount of $12,199 thousands for comparative purposes.

Because all of the disclosures required by U.S. GAAP for annual consolidated financial statements are not included herein, these unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for the year ended December 31, 2016,2020, contained in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”). The Company has evaluated all subsequent events through the date these condensed consolidated financial statements were issued. The condensed consolidated statements of income, of comprehensive income, equity and of cash flows for the periods presented herein are not necessarily indicative of results expected for any future period. For a more detailed discussion of the Company’s significant accounting policies, see note 2 to the financial statements in the Company’s Form 10-K.10-K for the year ended December 31, 2020. During the nine-monththree-month period ended September 30, 2017,March 31, 2021, there were no material updates made to the Company’s significant accounting policies.

‎

Foreign currency translation

All of the Company’s consolidated foreign operations have determineduse the local currency to beas their functional currency, except for VenezuelaArgentina, which has used the U.S. dollar as its functional currency since JanuaryJuly 1, 2010,2018. Accordingly, the foreign subsidiaries with local currency as described below. Accordingly, these foreign operating subsidiariesfunctional currency translate assets and liabilities from their local currencies into U.S. dollars by using period-endyear-end exchange rates while income and expense accounts are translated at the average monthly rates in effect during the period,year, unless exchange rates fluctuate significantly during the period, in which case the exchange rates at the date of the transaction are used. The resulting translation adjustment is recorded as a component of other comprehensive (loss) income.loss.
‎

Argentine currency status

Pursuant to U.S. GAAP,

As of July 1, 2018, the Company has transitioned its VenezuelanArgentinian operations to highly inflationary status as from January 1, 2010, which requires that transactionsin accordance with U.S. GAAP, and balances are re-measured as if the U.S. dollar waschanged the functional currency for such operation. The cumulative three year inflation rate asArgentine subsidiaries from December 31, 2010 exceeded 100% at each period end. Thus, the Company continues to treat the economy of Venezuela as highly-inflationary.

On March 9, 2016 the Central Bank of Venezuela (“BCV”) issued the Exchange Agreement No.35. The agreement established a “protected” exchange rate (“DIPRO”) for certain transactions, such as but not limited to: imports of goods of the food and health sectors, as well as supplies associated with the production of said sectors; expenses relating to health treatments, sports, culture, scientific research, and other urgent matters defined by the exchange regulations. All foreign currency transactions not expressly provided in Exchange Agreement No.35 will be processed on the alternate foreign currency markets governed by the exchange regulations, at the floating supplementary market exchange rate (“DICOM”).

Additionally, the agreement established that the alternate foreign currency markets referred to in Exchange Agreement No.33 of February 10, 2015 (“SIMADI”) will continue to operate until replaced by others. From March 31, 2016 through June 30, 2016, the SIMADI exchange rate increased from 273 BsF per U.S. dollar to 628 BsF per U.S. dollar, a 130% increase in the exchange rate. As a consequence of the local currency devaluation, the Company recorded a foreign exchange loss of $4.9 million during the second quarter of 2016.

Considering the significant devaluation and the lower U.S. dollar-equivalent cash flows then expected from the Venezuelan business, the Company reviewed its long-lived assets (including non-current other assets), goodwill and intangible assets with indefinite useful life for impairment and concluded that the carrying value of certain real estate investments in Venezuela as of June 30, 2016 would not be fully recoverable. As a result, on June 30, 2016, the Company recorded an impairment of offices and commercial property under construction included within non-current other assets of $13.7 million. The carrying amount of offices and commercial property under construction was adjusted to its estimated fair value of approximately $12.5 million as of June 30, 2016, by using the market approach, and considering prices for similar assets.

On May 19, 2017, the BCV issued the Exchange Agreement No.38, which established a new foreign exchange mechanism under DICOM, replacing SIMADI. The new mechanism consists of auctions, administered by an auction committee, where sellers and buyers from the private sector may offer foreign currency under certain limits determined by the BCV.

In light of the disappearance of SIMADI  (which closed at 728.0 per U.S. dollar), and the Company’s inability to gain accessArgentine Pesos to U.S. dollars, under SIMADI, it started requesting U.S. dollars through DICOM. As a result,which is the Company expectsfunctional currency of their immediate parent company.

Since the second half of 2019, the Argentine government instituted certain foreign currency exchange controls, which may restrict or partially restrict access to settle its transactions through DICOM going forwardforeign currency, like the US dollar, to make payments abroad, either for foreign debt or the importation of goods or services, dividend payments and concluded thatothers, without prior authorization. Those regulations have continued to evolve, sometimes making them more or less stringent depending on the DICOMArgentine government´s perception of availability of sufficient national foreign currency reserves. The above has led to the existence of an informal foreign currency market where foreign currencies quote at levels significantly higher than the official exchange rate. However, the only exchange rate should be used as from June 1, 2017 to measure its bolivar-denominated monetary assetsavailable for external commerce and liabilities and to measurefinancial payments is the revenues and expenses of the Venezuelan subsidiaries. Therefore,official exchange rate, which as of June 30, 2017, monetary assets and liabilities in Bolivares Fuertes (“BsF”) were re-measured to the U.S. dollar using the DICOM closingMarch 31, 2021 was 92.0.

The Company uses Argentina’s official exchange rate of 2640.0 BsF per U.S. dollar. As a consequence ofto record the local currency devaluation, the Company recorded a foreign exchange loss of $22.0 million during the second quarter of 2017.

Considering the significant devaluation and the lower U.S. dollar-equivalent cash flows then expected from the Venezuelan business, the Company reviewed its long-lived assets (including non-current other assets), goodwill and intangible assets with indefinite useful life for impairment and concluded that the carrying value of certain real estate investments in Venezuela as of June 30, 2017 would not be fully recoverable. As a result, on June 30, 2017, the Company recorded an impairment of offices and commercial property under construction included within non-current other assets of $2.8 million. The carrying amount of offices and commercial property under construction was adjusted to its estimated fair value of approximately $9.7 million as of June 30, 2017, by using the market approach and considering prices for similar assets. As of September 30, 2017, the DICOM exchange rate was 3,345.0 BsF per U.S. dollar.

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

The following table sets forth the assets, liabilities and net assets of the Company’s VenezuelanArgentine subsidiaries and consolidated VIEs, before intercompany eliminations, of a net liability of $29,594 thousands and $ 15,843 thousands, as of September 30, 2017March 31, 2021 and December 31, 2016 and net revenues for the nine-month periods ended September 30, 2017 and 2016:2020:

Income taxes

As of September 30, 2017, the net assets (before intercompany eliminations) of the Venezuelan subsidiaries amounted to 6.2% of consolidated net assets, and cash and investments of the Venezuelan subsidiaries held in local currency in Venezuela amounted to 2.2% of our consolidated cash and investments.

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

Despite the current difficult macroeconomic environment in Venezuela, the Company continues to actively manage, through its Venezuelan subsidiaries, its investment in Venezuela.

Income and asset taxes

The Company is subject to U.S. and foreign income taxes. The Company accounts for income taxes following the liability method of accounting which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Deferred tax assets are also recognized for tax loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets or liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company’s income tax expense consists of taxes currently payable, if any, plus the change during the period in the Company’s deferred tax assets and liabilities.

A valuation allowance is recorded when, based on the available evidence, it is more likely than not that all or a portion of the Company’s deferred tax assets will not be realized. The Company’s income tax expense consists of taxes currently payable, if any, plusAccordingly, Management periodically assesses the change during the period in the Company’sneed to establish a valuation allowance for deferred tax assets considering positive and liabilities.negative objective evidence related to the realization of the deferred tax assets. In connection with this assessment, Management considers, among other factors, the nature, frequency and magnitude of current and cumulative losses on an individual subsidiary basis, projections of future taxable income, the duration of statutory carryforward periods, as well as feasible tax planning strategies that would be employed by the Company to prevent tax loss carryforwards from expiring unutilized. Based on Management’s assessment of available objective evidence and considering the future effect of the Company’s initiatives to capture long-term business opportunities, the Company accounted for a valuation allowance in certain subsidiaries in its Mexican operations of $12,176 thousands and $14,186 thousands for the three-month periods ended March 31, 2021 and 2020, respectively.

On August 17, 2011,June 10, 2019, the Argentine government issued a new software development law and on September 9, 2013 the regulatory decree was issued,enacted Law No. 27,506 (knowledge-based economy promotional regime), which established a regime that provides certain tax benefits for companies that meet specific criteria, such as companies that derive at least 70% of their revenues from certain specified activities related to the knowledge-based economy. The regime was suspended on January 20, 2020 until new requirement to become beneficiaryrules for the application of the new software development law.knowledge-based economy promotional regime were issued.

On June 25, 2020, the Chamber of Deputies passed changes to the knowledge-based economy promotional regime. The decree establishes compliance requirements with annual incremental ratios relatedChamber of Senates proposed further amendments, which were returned to exportsthe Chamber of servicesDeputies and research and development expenses that must be achieved to remain within the tax holiday.finally approved on October 7, 2020. The Company’s Argentine subsidiary has to achieve certain required ratios annually under the software development law in order to be eligible for the benefits mentioned below.approved regime is effective as of January 1, 2020 until December 31, 2029.

On September 17, 2015, theboth Argentine Industry Secretary issued Resolution 1041/2015 approving the Company’s application for eligibility under the new software development law for the Company’s Argentinean subsidiary, Mercadolibre S.R.L. Furthermore, on September 18, 2016, the Argentine Industry Secretary issued Resolutions 93/2016source income and 97/2016 approving the Company’s application for eligibility under the new software development law for the Company’s Argentinean subsidiaries, Neosur S.RL. and Business Vision S.A. As a result, the Company’s Argentinean subsidiaries have been granted a tax holiday retroactive from September 18, 2014. A portionforeign source income, ii) stability of the benefits obtainedestablished by the knowledge-based economy promotional regime (as long as beneficiaries of the new lawbeneficiary is registered and in good standing), iii) a relief of 60% of total incomenon-transferable tax relatedcredit bond amounting to software development activities and a 70% relief(which can be up to 80% in payroll taxes related to software development activities.

The benefits to the Company under the software development law will expire on December 31, 2019. As a resultcertain specific cases) of the Company’s eligibility undercontribution to the new law, it recorded an income tax benefitsocial security regime of $17,672 thousands and $6,367 thousands during the nine and three-month periods ended September 30, 2017, respectively. Aggregate per share effect of the Argentine tax holiday amounted to $0.40 and $0.14 for the nine and three-month periods ended September 30, 2017, respectively. Furthermore, the Company recorded a labor cost benefit of $5,513 thousands and $2,016 thousands during the nine and three-month periods ended September 30, 2017, respectively. Additionally, $1,623 thousands and $587 thousands were accrued to pay software development law audit fees during the nine and three-month periods ended September 30, 2017, respectively. During the nine months period ended September 30, 2016, the Company recorded an income tax benefit of $16,018 thousands, a labor cost benefit of $4,173 thousands and $1,416 thousands were accrued to pay software development law audit fees. Additionally, during the third quarter of 2016, the Company recorded an income tax benefit of $6,823 thousands, a labor cost benefit of $2,167 thousands and $631 thousands were accrued to pay software development law audit fees. Aggregate per share effect of the Argentine tax holiday amounted to $0.46 and $0.20 for the nine  and three-month periods ended September  30, 2016, respectively.

As of September 30, 2017 and December 31, 2016, the Company had included under non-current deferred tax assets the foreign tax creditsevery employee whose job is related to the dividend distributions receivedpromoted activities (caps on the number of employees are applicable). Such bonds can be used within 24 months from its subsidiariestheir issue date (which period can be extended for a total amount of $11,588 thousands and $13,515 thousands, respectively. Those foreignan additional 12 months in certain cases) to offset certain federal taxes, such as value-added tax, credits willbut they cannot be used to offset income tax.

On December 20, 2020, Argentina’s Executive Power issued Decree No. 1034/2020, which set the future domesticrules to implement the provisions of the knowledge-based economy promotional regime. Eligible companies must enroll in a registry according to the terms and conditions to be established by the Application Authority, which will verify compliance with the requirements. The Decree also set the mechanism for calculating the level of investment in research and development, the level of employee retention, exports, among others. It also establishes that exports of services from companies participating in this regime will not be subject to export duties.

On January 13, 2021, Argentina’s Ministry of Productive Development –current Application Authority of the knowledge-based economy promotional regime- issued Resolution No. 4/2021 which was followed by Disposition N° 11/2021 issued by the Under Secretariat of Knowledge Economy on February 12, 2021. Both rules establish further details on the requirements, terms, conditions, application, and compliance procedures to be eligible under the promotional regime.

MercadoLibre S.R.L. has submitted the application to be eligible to the knowledge-based economy promotional regime; such eligibility remains subject to Argentine government approval.

Fair value option applied to certain financial instruments

Under ASC 825, U.S. GAAP provides an option to elect fair value with impact on the statement of income tax payable.as an alternative measurement for certain financial instruments and other items on the balance sheet.

The Company has elected to measure certain financial assets at fair value with impact on the statement of income from January 1, 2019 for several reasons including to avoid the mismatch generated by the recognition of certain linked instruments / transactions, separately, in consolidated statement of income and consolidated statement of other comprehensive income and to better reflect the financial model applied for selected instruments.

The Company’s election of the fair value option applies to the: i) Brazilian federal government bonds and ii) U.S. treasury notes. As result of the election of the fair value option, the Company recognized gains in interest income and other financial gains of $1,173 thousands and $12,004 thousands as of March 31, 2021 and 2020, respectively.

Accumulated other comprehensive loss

The following table sets forth the Company’s accumulated other comprehensive loss as of September 30, 2017March 31, 2021 and the year ended December 31, 2016:2020: