UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
☐ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20182021
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
OR
☐ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Date of event requiring this shell company report
for the transition period from to
Commission file numberFile Number 001-38655
Farfetch Limited
(Exact name of Registrant as specified in its charter)
Not Applicable
(Translation of Registrant’s name into English)
Cayman Islands
(Jurisdiction of incorporation or organization)
The Bower, 211 Old Street
London EC1V 9NR, United Kingdom
(Address of principal executive offices)
James L. Maynard
Chief Legal Officer & General Counsel & Senior Vice President Group LegalTelephone: +44 (0) 20 7549 5400IR@farfetch.com
Farfetch Limited
The Bower, 211 Old Street
London EC1V 9NR, United Kingdom
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered, pursuant to Section 12(b) of the Act
Title of each class | Trading Symbol(s) |
| Name of each exchange on which registered |
Class A ordinary shares, par value $0.04 per share | FTCH |
| New York Stock Exchange |
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuer’s classes of capital stock or common stock as of the close of businessthe period covered by the annual report. 256,998,920 337,923,238 Class A ordinary shares and 42,858,080 Class B ordinary sharesshares.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐☒ No ☒☐
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ☐ No ☒
Note—Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
| Accelerated filer | ☐ | Non-accelerated filer |
| Emerging growth company |
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If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards † provided pursuant to Section 13(a) of the Exchange Act. ☐
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ☐ |
| International Financial Reporting Standards as issued by the International Accounting Standards Board ☒ |
| Other ☐ |
If “Other” has been checked in response to the previous question indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ☐ Item 18 ☐
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
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Item 14. | Material Modifications to the Rights of Security Holders and Use of Proceeds |
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Item 16E. | Purchases of Equity Securities by the Issuer and Affiliated Purchasers |
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Item 16I. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | 132 |
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F-1 |
2
PRESENTATION OF FINANCIALFINANCIAL AND OTHER INFORMATION
We report under International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (the “IASB”). None of the financial statements were prepared in accordance with generally accepted accounting principles in the United States (“U.S.”). We have historically conducted our business through Farfetch.com Limited and its subsidiaries (“Farfetch.com”)., a company incorporated under the laws of the Isle of Man. In connection with our initial public offering consummated on September 25, 2018 (our “IPO”), we carried out reorganization transactions (the “Reorganization Transactions”) whereby Farfetch.com became a wholly owned subsidiary of Farfetch Limited, an exempted company incorporated with limited liability under the Companies Law (2018 Revision) of the Cayman Islands, as amended and restated from time to time (the “Companies Law”). Following the Reorganization Transactions, our business is conducted through Farfetch Limited and its subsidiaries. For additional information about the Reorganization Transactions, see Item 4. “Information on the Company — A. History and Development of the Company — The Reorganization Transactions.”
General Information
Our consolidatedConsolidated financial statements are reported in U.S. Dollars,dollars, which are denoted “dollars,” “USD” or “$” throughout this Annual Report (as defined below)on Form 20-F (“Annual Report”). Also, throughout this Annual Report:
except where the context otherwise requires or where otherwise indicated, the terms “Farfetch,” the “Company,” “we,” “us,” “our,” “our company”
• | except where the context otherwise requires or where otherwise indicated, the terms “Farfetch,” the “Company,” “we,” “us,” “our,” “our Company” and “our business” refer to Farfetch Limited, an exempted company incorporated with limited liability under the Companies Act (as amended) of the Cayman Islands, as amended and restated from time to time (the “Companies Act”), in each case together with its consolidated subsidiaries as a consolidated entity; |
• | the terms “€” or “euro” refer to the currency introduced at the start of the third stage of European economic and monetary union pursuant to the treaty establishing the European Community, as amended; and |
• | the terms “pound sterling” or “£” refer to the legal currency of the United Kingdom. |
Certain figures in this Annual Report may not recalculate exactly due to rounding. This is because percentages and/or figures contained herein are calculated based on actual numbers and not the rounded numbers presented.
Segment Change
Following the acquisition of New Guards, in the fourth quarter of the year ended December 31, 2019, management determined that we have three reportable operating segments: (i) Digital Platform, (ii) Brand Platform and (iii) In-Store, given our organizational structure and the manner in which our business is reviewed and managed. In the fourth quarter of the year ended December 31, 2019, we realigned our reportable operating segments to reflect how our Chief Operating Decision-Maker was making operating decisions, allocating resources and evaluating operating performance. Refer to Item 5. “Operating and Financial Review and Prospects — Operating Results” and Note 6, Segmental and geographical information, within our Consolidated financial statements included elsewhere in this Annual Report for additional information about these segments. Information presented in this Annual Report for periods prior to the Reorganization Transactions,this segment change has been revised to Farfetch.com and, after the Reorganization Transactions, to Farfetch Limited, in each case together with its consolidated subsidiaries as a consolidated entity;reflect this segment realignment.
the terms “€” or “euro” refer to the currency introduced at the start of the third stage of European economic and monetary union pursuant to the treaty establishing the European Community, as amended; and
the terms “pound sterling” or “£” refer to the legal currency of the United Kingdom (“UK”).
KeyDefined Terms and Performance Indicators Used in this Annual Report
Throughout this Annual Report, we use a number of keydefined terms and provide information about a number of key performance indicators used by management. TheseDefinitions are as follows, and additional information about our key performance indicators are discussed in more detailis provided in Item 3. “Key Information5. “Operating and Financial Review and Prospects — A. SelectedKey Operating and Financial Data.Metrics.”
Additionally, we use other terms in this Annual Report specific to us and our industry, which are defined as follows:
“API” means our application programming interfaces that enable third parties to connect with our platform.
• | “Alibaba” means Alibaba Group Holding Limited. |
“Articles” means our amended and restated memorandum and articles of association.
• | “API” means our application programming interfaces that enable third-parties to connect with our platform. |
“brands” means the brands with whom we have a direct contractual relationship to display and sell their products on the Farfetch Marketplace. Please refer to the definition of “Retailers” below for the difference between “brands” and “retailers,” both of which are a source of supply on the Farfetch Marketplace.
• | “Articles” means our amended and restated memorandum and articles of association (as may be amended from time to time). |
“Farfetch Black & White” means Farfetch Black & White Solutions, our comprehensive modular white-label business to business e-commerce solution for brands and retailers.
“Farfetch Marketplace,” or our “Marketplace,” is as defined in Item 4. “Information on the Company — B. Business Overview.”
“Farfetcher” means an employee of Farfetch.
“first-party sales” means sales on our platform of inventory directly purchased by us.
“Group” means Farfetch Limited and its consolidated subsidiaries.
• | “brands” means entities that produce, sell and/or market luxury merchandise. We refer to brands owned and operated by the New Guards Group as “New Guards’ brands” or “brands in the New Guards portfolio” or the “New Guards portfolio of brands.” Please refer to the definition of “retailers” |
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“consumer” means a person who browses and/or completes a purchase on the Farfetch Marketplace, BrownsFashion.com, Stadium Goods, New Guards-owned sites or third-party websites or platforms on which we operate. |
• | “e-concession” means the retail distribution by brands via the operation of concessions on multi-brand digital platforms, such as when brands sell directly to consumers via the Farfetch Marketplace. |
• | “FPS” means Farfetch Platform Solutions, our comprehensive modular white-label business-to-business e-commerce solution for brands and retailers. |
• | “Farfetch China” means Farfetch China Holdings Ltd, our joint venture partnership with Alibaba and Richemont and the entity through which our Farfetch Marketplace operations in the China region are conducted. We conduct other operations in China, for example FPS, outside of this joint venture. Within our Consolidated financial statements included elsewhere in this Annual Report, we account for Farfetch China Holdings Ltd as a consolidated subsidiary, which the Group controls through its majority ownership of the issued share capital of Farfetch China Holdings Ltd. |
• | “Farfetch Marketplace” is as defined in Item 4. “Information on the Company — B. Business Overview.” |
• | “first-party original” refers to products developed by brands in the New Guards portfolio of brands and sold direct-to-consumers on the Farfetch Marketplace. |
• | “first-party sales” means sales on our platform of inventory purchased by us. |
• | “Group” means Farfetch Limited and its consolidated subsidiaries. |
• | “JD.com” means JD.com, Inc. |
• | “Luxury New Retail” or “LNR” is the overarching strategy aiming to redefine the future of luxury retail for Farfetch and the luxury industry at-large. This strategy is activated via our FPS business unit which offers a full suite of enterprise solutions including our connected retail products and other emerging technologies powered by the Farfetch platform. |
• | “luxury sellers” means the retailers and brands with whom we have a direct contractual relationship to display and sell their products on the Farfetch Marketplace. |
• | “Marketplaces” means the Farfetch Marketplace and Stadium Goods Marketplace. |
• | “New Guards” is as defined in Item 4. “Information on the Company — B. Business Overview.” |
• | “retailers” means boutiques and department stores. Retailers buy wholesale from multiple luxury brands to sell to the end consumer. Brands (1) sell wholesale to retailers; (2) operate concessions within the offline stores of retailers and online via e-commerce sites; and/or (3) sell to consumers directly through a mono-brand store or website. Both “brands” and “retailers” sell via the Farfetch Marketplace, but the distinction is not apparent to our consumer. |
• | “Richemont” means Compagnie Financière Richemont SA. |
• | “Stadium Goods Marketplace” is as defined in Item 4. “Information on the Company — B. Business Overview.” |
• | “stock value” means the combined amount of all stock units available on the Farfetch Marketplace and/or the Stadium Goods Marketplace multiplied by each item’s retail unit price. |
• | “Tmall Luxury Pavilion” is Alibaba’s e-commerce platform on which we make available our luxury shopping channel. |
4
Non-IFRS and Other Financial and Operating Metrics
We have included in this Annual Report certain financial measures not based on IFRS, including Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted EPS, Adjusted Revenue, Digital Platform Order Contribution and Digital Platform Order Contribution Margin (together, the “Non-IFRS Measures”), as well as operating metrics, including GMV, Digital Platform GMV, Brand Platform GMV, In-Store GMV, Active Consumers and Average Order Value. Refer to Item 5. “Operating and Financial Review and Prospects – Reconciliations of Non-IFRS and Other Financial and Operating Metrics” for additional information on the use of these Non-IFRS Measures and reconciliations to the most directly comparable IFRS measures.
We define our non-IFRS Measures and other financial and operating metrics as follows:
“Marketplace consumer”Active Consumers” means aactive consumers on our directly owned and operated sites and related apps or on third-party websites or platforms on which we operate. A consumer who has completedis deemed to be active if they made a purchase onwithin the last twelve-month period, irrespective of cancellations or returns. Active Consumers includes the Farfetch Marketplace.
“Millennial” means a person bornMarketplace, BrownsFashion.com, Stadium Goods, and the New Guards-owned sites operated by Farfetch Platform Solutions plus third-party websites or platforms on which we operate, including Amazon.com and Tmall Luxury Pavilion. Due to limitations in the years 1980data we are provided by certain third-party websites or platforms on which we operate, a limited number of consumers who transact on such websites or platforms and on our directly owned and operated sites and related apps, may be duplicated in the number of Active Consumers we report. The number of Active Consumers is an indicator of our ability to 1994. Millennialsattract and retain our consumer base to our platform and of our ability to convert platform visits into sale orders.
“Adjusted EBITDA” means net income/(loss) after taxes before net finance expense/(income), income tax expense/(benefit) and depreciation and amortization, further adjusted for share based compensation expense, share of results of associates and items outside the normal scope of our ordinary activities (including other items, within selling, general and administrative expenses, losses/(gains) on items held at fair value and remeasurements through profit and loss, impairment losses on tangible assets, and impairment losses on intangible assets). Adjusted EBITDA provides a basis for comparison of our business operations between current, past and future periods by excluding items that we do not believe are indicative of our core operating performance. Adjusted EBITDA may not be comparable to other similarly titled metrics of other companies.
“Adjusted EBITDA Margin” means Adjusted EBITDA calculated as a percentage of Adjusted Revenue.
“Adjusted EPS” means earnings per share further adjusted for share based payments, amortization of acquired intangible assets, items outside the normal scope of our ordinary activities (including other items, within selling, general and administrative expenses, losses/(gains) on items held at fair value and remeasurements through profit and loss, impairment losses on tangible assets, and impairment losses on intangible assets) and the related tax effects of these adjustments. Adjusted EPS provides a basis for comparison of our business operations between current, past and future periods by excluding items that we do not believe are indicative of our core operating performance. Adjusted EPS may not be comparable to other similarly titled metrics of other companies.
“Adjusted Revenue” means revenue less Digital Platform Fulfilment Revenue.
“Average Order Value” (“AOV”) means the average value of all orders excluding value added taxes placed on either the Farfetch Marketplace or the Stadium Goods Marketplace, as indicated.
“Brand Platform Gross Profit” means Brand Platform Revenue less the direct cost of goods sold relating to Brand Platform Revenue.
“Brand Platform GMV” and “Brand Platform Revenue” mean revenue relating to the New Guards operations less revenue from New Guards’: (i) owned e-commerce websites, (ii) direct to consumer channel via our Marketplaces and (iii) directly operated stores. Revenue realized from Brand Platform is equal to GMV as such sales are not commission based.
5
“Digital Platform Fulfilment Revenue” means revenue from shipping and customs clearing services that we provide to our digital consumers, net of centrally Farfetch-funded consumer promotional incentives, such as free shipping and promotional codes. Digital Platform Fulfilment Revenue was referred to as Platform Fulfilment Revenue in previous filings with the U.S. Securities and Exchange Commission (“SEC”).
“Digital Platform GMV” means GMV excluding In-Store GMV and Brand Platform GMV. Digital Platform GMV was referred to as Platform GMV in previous filings with the SEC.
“Digital Platform Gross Profit” means gross profit excluding In-Store Gross Profit and Brand Platform Gross Profit. Digital Platform Gross Profit was referred to as Platform Gross Profit in previous filings with the SEC.
“Digital Platform Gross Profit Margin” means Digital Platform Gross Profit calculated as a percentage of Digital Platform Services Revenue. We provide fulfilment services to Marketplace consumers and receive revenue from the provision of these services, which is primarily a pass-through cost with no economic benefit to us. Therefore, we calculate our Digital Platform Gross Profit Margin, including Digital Platform third-party and first-party gross profit margin, excluding Digital Platform Fulfilment Revenue.
“Digital Platform Order Contribution” means Digital Platform Gross Profit after deducting demand generation expense, which includes fees that we pay for our various marketing channels. Digital Platform Order Contribution provides an indicator of our ability to extract digital consumer value from our demand generation expense, including the costs of retaining existing consumers and our ability to acquire new consumers. Digital Platform Order Contribution was referred to as Platform Order Contribution in previous filings with the SEC.
“Digital Platform Order Contribution Margin” means Digital Platform Order Contribution calculated as a percentage of Digital Platform Services Revenue. Digital Platform Order Contribution Margin was referred to as Platform Order Contribution Margin in previous filings with the SEC.
“Digital Platform Revenue” means the sum of Digital Platform Services Revenue and Digital Platform Fulfilment Revenue. Digital Platform Revenue was referred to as Platform Revenue in previous filings with the SEC.
“Digital Platform Services Revenue” means Revenue less Digital Platform Fulfilment Revenue, In-Store Revenue and Brand Platform Revenue. Digital Platform Services Revenue is driven by our Digital Platform GMV, including commissions from third-party sales and revenue from first-party sales. Digital Platform Services Revenue was also referred to as “Generation Y.”Adjusted Platform Revenue or Platform Services Revenue in previous filings with the SEC.
“Digital Platform Services third-party revenues” represent commissions and other income generated from the provision of services to sellers in their transactions with consumers conducted on our consumer” means a person who browses and/or purchases luxury fashion productstechnology platforms, as well as fees for services provided to brands and retailers.
“Digital Platform Services first-party revenues” represents sales of owned-product, including First-Party Original through our digital platform. The revenue realized from first-party sales is equal to the GMV of such sales because we act as principal in these transactions and, therefore, related sales are not commission based.Digital Platform Services first-party revenues represent sales net of promotional incentives, such as free shipping and promotional codes, where these incentives are not designated as Farfetch-funded.
“Digital Platform Services third-party cost of revenues” and “Digital Platform Services first-party cost of revenues" include packaging costs, credit card fees, and incremental shipping costs provided in relation to the provision of these services. Digital Platform Services first-party cost of revenues also includes the cost of goods sold of the owned products.
“First-Party Original” refers to brands developed by New Guards and sold direct to consumers on the Farfetch Marketplace.digital platform.
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“retailers”Gross Merchandise Value” (“GMV”) means the boutiquestotal dollar value of orders processed. GMV is inclusive of product value, shipping and departmentduty. It is net of returns, value added taxes and cancellations. First-party GMV is also net of promotions. GMV does not represent revenue earned by us, although GMV and revenue are correlated.
“In-Store Gross Profit” means In-Store Revenue less the direct cost of goods sold relating to In-Store Revenue.
“In-Store GMV” and “In-Store Revenue” mean revenue generated in our retail stores with whomwhich include Browns, Stadium Goods and New Guards’ directly operated stores. Revenue realized from In-Store sales for Browns and New Guards’ directly operated stores is equal to GMV of such sales because such sales are not commission based. Revenue realized from In-store sales for Stadium Goods does not equal GMV of such sales as a certain portion of those sales are third-party and are commission based.
“Order Contribution” means gross profit after deducting demand generation expense, which includes fees that we have a direct contractual relationshippay for our various marketing channels to displaysupport the Digital Platform. Order Contribution provides an indicator of our ability to extract consumer value from our demand generation expense, including the costs of retaining existing consumers and sell their products on the Farfetch Marketplace. Retailers buy wholesale from multiple luxury brandsour ability to then sell to the end consumer. Brands (1) sell wholesale to retailers; (2) operate concessions within the offline and online stores of retailers; and/or (3) sell to consumers directly through a mono-brand store or website. Both “brands” and “retailers” sell via the Farfetch Marketplace, but the distinction is not apparent to our consumer.acquire new consumers.
“stock value” means the combined amount of all stock units available on our Marketplace multiplied by each item’s retail unit price.
“Third-Party Take Rate”means Digital Platform Services Revenue excluding revenue from first-party sales, as a percentage of Digital Platform GMV excluding GMV from first-party sales and Digital Platform Fulfilment Revenue. Revenue from first-party sales, which is equal to GMV from first-party sales, means revenue derived from sales on our platform of inventory purchased by us.
4
Refer to Item 5. “Operating and Financial Review and Prospects – Reconciliations of Non-IFRS and Other Financial and Operating Metrics” for reconciliations of our Non-IFRS measures to the most directly comparable IFRS financial measures.
Market and Industry Data
We obtained industry, market and competitive position data in this Annual Report from our own internal estimates, surveys and research as well as from publicly available information, industry and general publications and research, surveys and studies conducted by third-parties, such as public reports by Bain & Company (“Bain”). Information contained in this Annual Report attributable to Bain is from the “Bain-Altagamma Luxury Goods Worldwide Market Study, Fall 2021” (November 11, 2021).
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CAUTIONARY STATEMENT REGARDINGREGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 20-F (“Annual Report”) contains statements that constitute “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. These statements are neither historical facts nor assurances of future performance. Although we believe that these estimates and forward-looking statements are based upon reasonable assumptions, they are subject to numerous known and unknown risks and uncertainties, some of which are beyond our control, and are made in light of the information currently available to us. Our actual results or performance may differ materially from any future results or performance expressed or implied by these forward-looking statements.
In some cases, these forward-looking statements can be identified by words or phrases such as “believe,” “may,” “will,” “expect,” “estimate,” “project,” “forecast,” “could,” “should,” “anticipate,” “aim,” “intend,” “plan,” “potential,” “continue,” “is/are likely to”to,” or other similar expressions. Forward-looking statements contained in this Annual Report include, but are not limited to, statements about:
our future financial performance, including our revenue, operating expenses and our ability to maintain profitability and our future business and operating results;
• | Our future financial performance, including our revenue, operating expenses and our ability to maintain profitability and our future business and operating results; |
our strategies, plans, objectives and goals; and
• | Our strategies, plans, objectives and goals; |
• | Our expectations regarding acquisitions, partnerships and collaborations; |
our expectations regarding the development of our industry, market size and the competitive environment in which we operate.
• | Our expectations regarding the development of our industry, market size and the competitive environment in which we operate; and |
• | Our environmental, sustainability, responsible sourcing, social and inclusion and diversity goals. |
These forward-looking statements reflect our current views with respect to future events and are not a guarantee of future performance. Actual outcomes may differ materially from the information contained in the forward-looking statements as a result of a number of factors, including, without limitation, the risk factors set forthdescribed under “Risk Factor Summary” below and the risk factors described in Item 3. “Key Information — D. Risk Factors” of this Annual Report, including, but not limited to, the following:Report.
purchasers of luxury products may not choose to shop online in sufficient numbers;
our ability to generate sufficient revenue to be profitable or to generate positive cash flow on a sustained basis;
the volatility and difficulty in predicting the luxury fashion industry;
our reliance on a limited number of retailers and brands for the supply of products on our Marketplace;
our reliance on retailers and brands to anticipate, identify and respond quickly to new and changing fashion trends, consumer preferences and other factors;
our reliance on retailers and brands to make products available to our consumers on our Marketplace and to set their own prices for such products;
fluctuations in exchange rates;
our reliance on information technologies and our ability to adapt to technological developments;
our ability to acquire or retain consumers and to promote and sustain the Farfetch brand;
our ability or the ability of third parties to protect our sites, networks and systems against security breaches, or otherwise to protect our confidential information;
our ability to successfully launch and monetize new and innovative technology;
our dependence on highly skilled personnel, including our senior management, data scientists and technology professionals, and our ability to hire, retain and motivate qualified personnel; and
José Neves, our chief executive officer and Co-Chair of our Board, has considerable influence over important corporate matters due to his ownership of us, and our dual-class voting structure will limit your ability to influence corporate matters, including a change of control.
The forward-looking statements contained in this Annual Report speak only as of the date of this Annual Report. Except as required by law, we do not undertake to update any forward-looking statement to reflect events or circumstances after that date or to reflect the occurrence of unanticipated events. You should read this Annual Report and the documents that we reference herein and have filedfile as exhibits hereto completely and with the understanding that our actual future results may be materially different from what we expect.
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Our business is subject to numerous risks and uncertainties, including those described in Item 3. “Key Information — D. Risk Factors.” You should carefully consider these risks and uncertainties when investing in our Class A ordinary shares. Principal risks and uncertainties affecting our business include the following:
• | The COVID-19 global pandemic has had and may continue to have an adverse effect on our business and results of operations. |
• | Purchasers of luxury products may not choose to shop online, which would prevent us from growing our business. |
• | We may be unable to generate sufficient revenue to be profitable or to generate positive cash flow on a sustained basis, and our revenue growth rate may decline. |
• | We have experienced losses in the past, and we may experience losses in the future. |
• | The luxury fashion industry can be volatile and difficult to predict. |
• | We rely on a limited number of luxury sellers for the supply of products that we make available to consumers on the Farfetch Marketplace. |
• | Our efforts to acquire or retain consumers may not be successful, which could prevent us from maintaining or increasing our sales. |
• | Luxury sellers set their own prices for the products they make available on our Marketplaces, which could affect our ability to respond to consumer preferences and trends. |
• | If our luxury sellers fail to anticipate, identify and respond quickly to new and changing fashion trends in consumer preferences, our business could be harmed. |
• | Our software is highly complex and may contain undetected errors. |
• | Our failure or the failure of third-parties to protect our or their sites, networks and systems against security breaches, or otherwise to protect our or consumers’ and luxury sellers’ confidential information, could damage our reputation and brand and substantially harm our business and operating results. |
• | We rely on information technologies and systems to operate our business and maintain our competitiveness, and any failure to invest in and adapt to technological developments and industry trends could harm our business. |
• | Any significant disruption in service on our websites or apps or in our computer systems, some of which are currently hosted by third-party providers, could damage our reputation and result in a loss of consumers, which would harm our business and results of operations. |
• | We face significant competition in the global retail industry and may be unsuccessful in competing against current and future competitors. |
• | We are subject to governmental regulation and other legal obligations related to privacy, data protection and information security. If we are unable to comply with these, we may be subject to governmental enforcement actions, litigation, fines and penalties or adverse publicity. |
• | We rely on our luxury sellers, suppliers, third-party warehousing providers, third-party carriers and transportation providers as part of our fulfilment process, and these third-parties may fail to adequately serve our consumers. |
9
• | Our failure to address the operational, compliance and regulatory risks associated with payment methods could damage our reputation and brand and may cause our business and results of operations to suffer. |
• | Our global operations involve additional risks, and our exposure to these risks will increase as our business continues to expand. |
• | Assertions by third-parties of infringement or misappropriation by us of their intellectual property rights or confidential know how could result in significant costs and substantially harm our business and results of operations. |
• | Our use of open source software may pose particular risks to our proprietary software and systems. |
• | Failure to adequately protect, maintain or enforce our intellectual property rights could substantially harm our business and results of operations. |
• | Our New Guards business is dependent on its production, inventory management and fulfilment processes and systems, which could adversely affect its business if not successfully executed. |
• | The operation of retail stores subjects us to numerous risks, some of which are beyond our control. |
• | Our Chief Executive Officer, José Neves, has considerable influence over important corporate matters due to his ownership of us. Our dual‑class voting structure will limit your ability to influence corporate matters and could discourage others from pursuing any change of control transactions that holders of our Class A ordinary shares may view as beneficial. |
• | Our indebtedness could adversely affect our financial health and competitive position. |
10
PART I
Item 1. Identity of Directors, Senior Management and Advisers
Not applicable.
Item 2. Offer Statistics and Expected Timetable
Not applicable.
A. Selected Financial Data
We prepare our consolidated financial statements in accordance with IFRS as issued by the IASB.
The following selected historical consolidated financial data as of and for the years ended December 31, 2016, 2017, and 2018 and for year ended December 31, 2015 has been derived from our audited consolidated financial statements and the notes thereto (our audited consolidated financial statements as of December 31, 2016 and for the fiscal year ended December 31, 2015 are not included in this Annual Report). Our historical results for any prior period are not necessarily indicative of results expected in any future period.
We have historically conducted our business through Farfetch.com and, therefore, our historical financial statements prior to the Reorganization Transactions reflect the result of operations of Farfetch.com and, following the Reorganization Transactions, reflect the results of operations of Farfetch Limited. Farfetch Limited’s financial statements are the same as Farfetch.com’s financial statements, as adjusted for the Reorganization Transactions. Following the Reorganization Transactions, we have retroactively reflected the Reorganization Transactions in Farfetch Limited’s financial statements.
6
The financial data set forth below should be read in conjunction with, and are qualified by reference to Item 5. “Operating and Financial Review and Prospects” and the audited consolidated financial statements and notes thereto included elsewhere in this Annual Report. Our historical results for any prior period do not necessarily indicate our results to be expected for any future period.
|
| Year ended December 31, |
| |||||||||||||
|
| 2015 |
|
| 2016 |
|
| 2017 |
|
| 2018 |
| ||||
|
| (in thousands, except share and per share data) |
| |||||||||||||
Consolidated Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
| $ | 142,305 |
|
| $ | 242,116 |
|
| $ | 385,966 |
|
| $ | 602,384 |
|
Cost of revenue |
|
| (69,702 | ) |
|
| (125,238 | ) |
|
| (181,200 | ) |
|
| (303,934 | ) |
Gross profit |
|
| 72,603 |
|
|
| 116,878 |
|
|
| 204,766 |
|
|
| 298,450 |
|
Selling, general and administrative expenses |
|
| (130,073 | ) |
|
| (205,558 | ) |
|
| (299,260 | ) |
|
| (471,766 | ) |
Share of profits of associates |
|
| - |
|
|
| 18 |
|
|
| 31 |
|
|
| 33 |
|
Operating loss |
|
| (57,470 | ) |
|
| (88,662 | ) |
|
| (94,463 | ) |
|
| (173,283 | ) |
Net finance (costs)/ income |
|
| (4,265 | ) |
|
| 7,402 |
|
|
| (17,642 | ) |
|
| 19,866 |
|
Loss before tax |
|
| (61,735 | ) |
|
| (81,260 | ) |
|
| (112,105 | ) |
|
| (153,417 | ) |
Income tax credit/(expense) |
|
| 628 |
|
|
| (199 | ) |
|
| (170 | ) |
|
| (2,158 | ) |
Loss after tax |
| $ | (61,107 | ) |
| $ | (81,459 | ) |
| $ | (112,275 | ) |
| $ | (155,575 | ) |
Loss per share attributable to owners of the parent: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
| $ | (0.35 | ) |
| $ | (0.43 | ) |
| $ | (0.50 | ) |
| $ | (0.59 | ) |
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
| 171,929,007 |
|
|
| 188,679,490 |
|
|
| 223,465,734 |
|
|
| 264,432,214 |
|
Consolidated Statement of Cash Flow Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash outflow from operating activities |
| $ | (37,258 | ) |
| $ | (47,079 | ) |
| $ | (59,320 | ) |
| $ | (116,205 | ) |
Net cash outflow from investing activities |
|
| (27,571 | ) |
|
| (16,961 | ) |
|
| (28,863 | ) |
|
| (63,538 | ) |
Net cash inflow from financing activities |
| $ | 77,414 |
|
| $ | 161,173 |
|
| $ | 300,142 |
|
| $ | 859,526 |
|
|
| As of December 31, |
| |||||||||
|
| 2016 |
|
| 2017 |
|
| 2018 |
| |||
|
| (in thousands) |
| |||||||||
Consolidated Statement of Financial Position Data: |
|
|
|
|
|
|
|
|
|
|
|
|
Non-current assets |
| $ | 64,128 |
|
| $ | 110,266 |
|
| $ | 151,983 |
|
Current assets |
|
| 180,904 |
|
|
| 452,792 |
|
|
| 1,199,410 |
|
Total assets |
|
| 245,032 |
|
|
| 563,058 |
|
|
| 1,351,393 |
|
Current liabilities |
|
| 89,425 |
|
|
| 155,890 |
|
|
| 194,158 |
|
Non-current liabilities |
|
| 36,691 |
|
|
| 10,265 |
|
|
| 28,804 |
|
Total liabilities |
|
| 126,116 |
|
|
| 166,155 |
|
|
| 222,962 |
|
Share capital and premium |
|
| 348,832 |
|
|
| 686,972 |
|
|
| 784,294 |
|
Total equity |
| $ | 118,916 |
|
| $ | 396,903 |
|
| $ | 1,128,431 |
|
7
|
| Year ended December 31, |
| |||||||||||||
|
| 2015 |
|
| 2016 |
|
| 2017 |
|
| 2018 |
| ||||
Selected Other Data(1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Group: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GMV |
| $ | 381,809 |
|
| $ | 585,842 |
|
| $ | 909,826 |
|
| $ | 1,407,698 |
|
Revenue |
|
| 142,305 |
|
|
| 242,116 |
|
|
| 385,966 |
|
|
| 602,384 |
|
Adjusted Revenue (1) |
|
| 113,688 |
|
|
| 193,605 |
|
|
| 311,784 |
|
|
| 504,590 |
|
Adjusted EBITDA (1) |
|
| (47,375 | ) |
|
| (53,380 | ) |
|
| (58,079 | ) |
|
| (95,960 | ) |
Adjusted EBITDA Margin (1) |
| (41.7%) |
|
| (27.6%) |
|
| (18.6%) |
|
| (19.0%) |
| ||||
Platform: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Platform GMV |
| $ | 374,915 |
|
| $ | 573,174 |
|
| $ | 894,392 |
|
| $ | 1,392,104 |
|
Platform Services Revenue (1) |
|
| 106,794 |
|
|
| 180,937 |
|
|
| 296,350 |
|
|
| 488,995 |
|
Platform Gross Profit (1) |
|
| 69,355 |
|
|
| 111,762 |
|
|
| 196,581 |
|
|
| 291,706 |
|
Platform Order Contribution Margin(1) |
| 33.0% |
|
| 35.0% |
|
| 43.0% |
|
| 39.8% |
| ||||
Third-Party Take Rate |
| 30.0% |
|
| 31.3% |
|
| 32.9% |
|
| 32.0% |
| ||||
Farfetch Marketplace: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Consumers |
|
| 415.7 |
|
|
| 651.7 |
|
|
| 935.8 |
|
|
| 1,353.4 |
|
Number of orders |
|
| 800.5 |
|
|
| 1,259.7 |
|
|
| 1,881.0 |
|
|
| 2,913.0 |
|
Average Order Value (actual) |
| $ | 586.8 |
|
| $ | 583.6 |
|
| $ | 620.0 |
|
| $ | 618.6 |
|
|
|
Non-IFRS and Other Financial and Operating Metrics
We have included in this Annual Report certain financial measures and metrics not based on IFRS, including Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Revenue, Platform Services Revenue, Platform Gross Profit, Platform Order Contribution and Platform Order Contribution Margin, as well as operating metrics, including GMV, Platform GMV, Active Consumers, Number of Orders and Average Order Value.
Management uses Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Revenue, Platform Services Revenue, Platform Gross Profit, Platform Order Contribution, and Platform Order Contribution Margin:
as measurements of operating performance because they assist us in comparing our operating performance on a consistent basis, as they remove the impact of items not directly resulting from our core operations;
for planning purposes, including the preparation of our internal annual operating budget and financial projections;
to evaluate the performance and effectiveness of our strategic initiatives; and
to evaluate our capacity to fund capital expenditures and expand our business.
Adjusted EBITDA, Adjusted Revenue and Platform Services Revenue may not be comparable to similar measures disclosed by other companies, because not all companies and analysts calculate Adjusted EBITDA and Adjusted Revenue in the same manner. We present Adjusted EBITDA, Adjusted Revenue and Platform Services Revenue because we consider them to be important supplemental measures of our performance, and we believe they are frequently used by securities analysts, investors and other interested parties in the evaluation of companies. Management believes that investors’ understanding of our performance is enhanced by including these non-IFRS financial measures as a reasonable basis for comparing our ongoing results of operations. Many investors are interested in understanding the performance of our business by comparing our results from ongoing operations period over period and would ordinarily add back non-cash expenses such as depreciation, amortization and items that are not part of normal day-to-day operations of our business. By providing these non-IFRS financial measures, together with reconciliations to IFRS, we believe we are enhancing investors’ understanding of our business and our results of operations, as well as assisting investors in evaluating how well we are executing our strategic initiatives.
8
We believe that Platform Gross Profit, Adjusted Platform Gross Profit Margin, Platform Order Contribution and Platform Order Contribution Margin are useful measures in evaluating our operating performance because they take into account demand generation expense and are used by management to analyze the operating performance of our platform for the periods presented. We also believe that Platform Gross Profit, Adjusted Platform Gross Profit Margin, Platform Order Contribution and Platform Order Contribution Margin are useful measures in evaluating our operating performance within our industry because they permit the evaluation of our platform productivity, efficiency and performance.
Items excluded from these non-IFRS measures are significant components in understanding and assessing financial performance. Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Revenue and Platform Services Revenue have limitations as analytical tools and should not be considered in isolation, or as an alternative to, or a substitute for loss after tax, revenue or other financial statement data presented in our consolidated financial statements as indicators of financial performance. Some of the limitations are:
such measures do not reflect revenue related to fulfilment, which is necessary to the operation of our business;
such measures do not reflect our expenditures, or future requirements for capital expenditures or contractual commitments;
such measures do not reflect changes in our working capital needs;
such measures do not reflect our share based payments, income tax (credit)/expense or the amounts necessary to pay our taxes;
although depreciation and amortization are eliminated in the calculation of Adjusted EBITDA, the assets being depreciated and amortized will often have to be replaced in the future and such measures do not reflect any costs for such replacements; and
other companies may calculate such measures differently than we do, limiting their usefulness as comparative measures.
Due to these limitations, Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Revenue and Platform Services Revenue should not be considered as measures of discretionary cash available to us to invest in the growth of our business and are in addition to, not a substitute for or superior to, measures of financial performance prepared in accordance with IFRS. In addition, the non-IFRS financial measures we use may differ from the non-IFRS financial measures used by other companies and are not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with IFRS. Furthermore, not all companies or analysts may calculate similarly titled measures in the same manner. We compensate for these limitations by relying primarily on our IFRS results and using these non-IFRS measures only as supplemental measures.
We define our non-IFRS and other financial and operating metrics as follows:
“Active Consumers” means active consumers on the Farfetch Marketplace. A consumer is deemed to be active if they made a purchase on the Farfetch Marketplace within the last 12-month period, irrespective of cancellations or returns. The number of Active Consumers is an indicator of our ability to attract and retain an increasingly large consumer base to our platform and of our ability to convert platform visits into sale orders.
“Adjusted EBITDA” means loss after taxes before net finance costs/(income), income tax (credit)/expense and depreciation and amortization, further adjusted for share based compensation expense, other items (represents items outside the normal scope of our ordinary activities) and share of results of associates. Adjusted EBITDA provides a basis for comparison of our business operations between current, past and future periods by excluding items that we do not believe are indicative of our core operating performance. Adjusted EBITDA may not be comparable to other similarly titled metrics of others.
“Adjusted EBITDA Margin” means Adjusted EBITDA calculated as a percentage of Adjusted Revenue.
“Adjusted Revenue” means revenue less Platform Fulfilment Revenue.
9
“Average Order Value” (“AOV”) means the average value of all orders placed on the Farfetch Marketplace excluding value added taxes.
“Gross Merchandise Value” (“GMV”) means the total dollar value of orders processed. GMV across our platform is inclusive of product value, shipping and duty. It is net of returns, value added taxes and cancellations. GMV does not represent revenue earned by us, although GMV and revenue are correlated.
“In-Store Revenue” means revenue generated in our Browns retail stores.
“Marketplace Order Contribution” means Platform Order Contribution after deducting Platform Order Contribution not derived from the Farfetch Marketplace.
“Number of Orders” means the total number of consumer orders placed on the Farfetch Marketplace, gross of returns and net of cancellations, in a particular period. An order is counted on the day the consumer places the order. The Number of Orders represents an indicator of our ability to generate sales opportunities for luxury sellers through our Marketplace. Analyzed in the context of Active Consumers, the Number of Orders provides an indicator of our ability to attract recurring purchases on our platform and also the effectiveness of our targeted advertising.
“Platform Fulfilment Revenue” means revenue from shipping and customs clearing services that we provide to our consumers, net of consumer promotional incentives, such as free shipping and promotional codes.
“Platform GMV” means GMV excluding In-Store Revenue.
“Platform Gross Profit” means gross profit excluding In-Store Gross Profit.
“Platform Order Contribution” means gross profit after deducting demand generation expense, which includes fees that we pay for our various marketing channels. Platform Order Contribution provides an indicator of our ability to extract consumer value from our demand generation expense, including the costs of retaining existing consumers and our ability to acquire new consumers.
“Platform Order Contribution Margin” means Platform Order Contribution calculated as a percentage of Platform Services Revenue.
“Platform Services Revenue” means Adjusted Revenue less In-Store Revenue. Platform Services Revenue is driven by our Platform GMV, including revenue from first-party sales, and commission from third-party sales. The revenue realized from first-party sales is equal to the GMV of such sales because we act as principal in these transactions, and thus related sales are not commission based. Platform Services Revenue was also referred to as Adjusted Platform Revenue in previous filings with the Securities and Exchange Commission (“SEC”).
10
The following table reconciles Adjusted EBITDA to the most directly comparable IFRS financial measure, which is loss after tax:
|
| Year ended December 31, |
| |||||||||||||
|
| 2015 |
|
| 2016 |
|
| 2017 |
|
| 2018 |
| ||||
|
| (in thousands) |
| |||||||||||||
Loss after tax |
| $ | (61,107 | ) |
| $ | (81,459 | ) |
| $ | (112,275 | ) |
| $ | (155,575 | ) |
Net finance costs/(income) |
|
| 4,265 |
|
|
| (7,402 | ) |
|
| 17,642 |
|
|
| (19,866 | ) |
Income tax (credit)/ expense |
|
| (628 | ) |
|
| 199 |
|
|
| 170 |
|
|
| 2,158 |
|
Depreciation and amortization |
|
| 3,104 |
|
|
| 6,897 |
|
|
| 10,980 |
|
|
| 23,537 |
|
Share-based payments(a) |
|
| 6,505 |
|
|
| 19,848 |
|
|
| 21,486 |
|
|
| 53,819 |
|
Other items(b) |
|
| 486 |
|
|
| 8,555 |
|
|
| 3,949 |
|
|
| - |
|
Share of results of associates |
|
| - |
|
|
| (18 | ) |
|
| (31 | ) |
|
| (33 | ) |
Adjusted EBITDA |
| $ | (47,375 | ) |
| $ | (53,380 | ) |
| $ | (58,079 | ) |
| $ | (95,960 | ) |
|
|
|
|
The following table reconciles Adjusted Revenue and Platform Services Revenue to the most directly comparable IFRS financial performance measure, which is revenue:
|
| Year ended December 31, |
| |||||||||||||
|
| 2015 |
|
| 2016 |
|
| 2017 |
|
| 2018 |
| ||||
|
| (in thousands) |
| |||||||||||||
Revenue |
| $ | 142,305 |
|
| $ | 242,116 |
|
| $ | 385,966 |
|
| $ | 602,384 |
|
Less: Platform Fulfilment Revenue |
|
| (28,617 | ) |
|
| (48,511 | ) |
|
| (74,182 | ) |
|
| (97,794 | ) |
Adjusted Revenue |
|
| 113,688 |
|
|
| 193,605 |
|
|
| 311,784 |
|
|
| 504,590 |
|
Less: In-Store Revenue |
|
| (6,894 | ) |
|
| (12,668 | ) |
|
| (15,434 | ) |
|
| (15,595 | ) |
Platform Services Revenue |
| $ | 106,794 |
|
| $ | 180,937 |
|
| $ | 296,350 |
|
| $ | 488,995 |
|
The following table reconciles Platform Gross Profit and Platform Order Contribution to the most directly comparable IFRS financial performance measure, which is gross profit:
|
| Year ended December 31, |
| |||||||||||||
|
| 2015 |
|
| 2016 |
|
| 2017 |
|
| 2018 |
| ||||
|
|
|
|
|
| (in thousands) |
| |||||||||
Gross profit |
| $ | 72,603 |
|
| $ | 116,878 |
|
| $ | 204,766 |
|
| $ | 298,450 |
|
Less: In-Store Gross Profit(a) |
|
| (3,248 | ) |
|
| (5,116 | ) |
|
| (8,185 | ) |
|
| (6,744 | ) |
Platform Gross Profit |
|
| 69,355 |
|
|
| 111,762 |
|
|
| 196,581 |
|
|
| 291,706 |
|
Less: Demand generation expense |
|
| (34,158 | ) |
|
| (48,381 | ) |
|
| (69,202 | ) |
|
| (97,295 | ) |
Platform Order Contribution |
| $ | 35,197 |
|
| $ | 63,381 |
|
| $ | 127,379 |
|
| $ | 194,411 |
|
|
|
B. Capitalization and Indebtedness[Reserved]
Not applicable.
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
11
An investment in our Class A ordinary shares involves a high degree of risk. You should carefully consider the risks and uncertaintyuncertainties described below, together with all of the other information in this Annual Report, including our consolidatedaudited Consolidated financial statements and related notes, before deciding to invest in our Class A ordinary shares. Additional risks not presently known to us or that we currently deem immaterial may also impair our business and operations. Our business, financial condition or results of operations could be materially and adversely affected by any of these risks. In addition to the effects of the COVID-19 pandemic and resulting global disruptions discussed in Item 5. “Operating and Financial Review and Prospects,” and in the important factors below, additional or unforeseen effects from the COVID-19 pandemic and the global economic climate may give rise to or amplify many of the risks discussed below. The trading price and value of our Class A ordinary shares could decline due to any of these risks, and you maycould lose all or part of your investment.
Risks Relating to our Business and Industry
The COVID-19 global pandemic has had and may continue to have an adverse effect on our business and results of operations.
The impact of the ongoing COVID-19 pandemic is widespread and continues to evolve. In March 2020, the World Health Organization declared COVID-19 a global pandemic, and since then governmental authorities around the world have implemented a range of measures to reduce the spread of COVID-19. These measures, including quarantines, travel bans, vaccination requirements and other heightened restrictions suggested or mandated by governmental authorities or otherwise elected by companies as preventive measures, have affected workforces, customers, consumer sentiment, economies, and financial markets. It is impossible to predict all the effects and the ultimate impact of the COVID-19 pandemic, as the situation continues to rapidly evolve, including as a result of the emergence and spread of new variants.
The COVID-19 pandemic and resulting disruptions to our production facilities, offices and retail stores could materially affect our operations. During 2020 and 2021, for example, our operations continued to be impacted as a result of the COVID-19 pandemic. We temporarily closed most of our office locations and, at certain points, our Browns, Stadium Goods and New Guards retail stores. In addition, in 2020 we temporarily closed our Los Angeles
11
and Hong Kong production facilities, and may have to do so again as the pandemic continues to develop and related government orders evolve. Adapting our business to different or changing policies in the various countries in which we operate may also create additional costs or disruptions. We continue to evaluate whether the actions we took during 2020-2021 in response to the COVID-19 pandemic may need to be taken again.
A subset of our employees continue to work remotely as a result of the COVID-19 pandemic with others gradually returning to our offices, and as some regions ease restrictions we are adopting a hybrid approach between working from home and working in-office. If a natural disaster, power outage, connectivity issue, or other event occurs that impacts our employees’ ability to work remotely, it could be difficult or, in certain cases, impossible, for us to continue our business effectively for a period of time. Further, as the COVID-19 pandemic continues, and as we aim to adapt to a more flexible in-person approach, we may experience disruptions if we are unable to successfully manage this hybrid work environment, if our employees or third-party providers’ employees become ill and are unable to perform their duties, or if our operations, or the operations of one or more of our third-party providers, is impacted. The increase in remote working may also result in related consumer privacy, information technology security and fraud concerns. In addition, the challenges to working caused by the COVID-19 pandemic and related restrictions may have an impact on our employees’ wellness which could impact employee retention, productivity and our culture.
The impact of the COVID-19 pandemic on our luxury sellers may have short and long-term impacts on our supply. Since March 2020 and continuing through 2021, certain brands and retailers that serve as our luxury sellers have temporarily for some period of time closed their physical stores, warehouses or distribution centers in response to heightened restrictive measures, and may have to do so again as the pandemic progresses, which could impact the breadth and depth of our supply and delivery times. For example, at its highest point in March 2020, more than 280 of our luxury sellers’ locations were fully or partially closed as a result of the COVID-19 pandemic. Long term, the impacts of government measures, decreased global travel and changes in consumer spending could result in bankruptcies among our luxury sellers and store closures or significant operational changes at our luxury sellers, which could have a negative impact on supply.
In addition, the global supply chain has been impacted by the COVID-19 pandemic, which could interfere with the ability of the luxury sellers who sell items through the Farfetch Marketplace to deliver products to consumers. While much of our business is conducted online, the COVID-19 pandemic has caused and may continue to cause disruptions or delays in our supply chain, fulfilment network and shipments. For example, the COVID-19 related preventative measures established by local government authorities in certain Chinese cities since January 2022 in relation to overseas parcels have had a direct impact on our operations in the short-term, including order cancellations, returns and a forty-eight-hour closure of our Shanghai warehouse and closures of certain partners’ stock points in Hong Kong. These measures also impacted consumer sentiment toward cross-border e-commerce in China, which, if it continues, could impact our business and financial results. In addition, delays in deliveries of merchandise due to production slowdowns or other distribution disruptions may impact our and our sellers’ inventory levels and seasonality of stock. If delivery services are delayed or shut down, our business could be negatively impacted. Further, as we continue to rely on third-parties to provide shipping services, changes in their operations due to the ongoing impacts of the COVID-19 pandemic, as well as fluctuations in the supply and demand for delivery services resulting from the COVID-19 pandemic have had an adverse impact on our results. During the COVID-19 pandemic demand for carrier capacity has increased which has resulted in increased costs for carrier services and operational difficulties that could decrease the quality of service provided to our consumers, including delays and lost packages. In addition, competition for carrier capacity may be exacerbated by a decreased number of flights due to government restrictions or impacts to the airline industry. These global supply chain challenges have had a negative effect on our business, results of operations and financial condition.
We are unable to accurately predict the ultimate impact on our operations that the COVID-19 pandemic will continue to have going forward, due to uncertainties that will be dictated by the length of time that such disruptions continue, which will, in turn, depend on the currently unknowable duration of the COVID-19 pandemic, the impact of government regulations that may be imposed in response to the pandemic, the efficiency and efficacy of vaccination programs and overall changes in consumer behavior. The uncertainty created by the COVID-19 pandemic, for example, could impact our ability to attract new enterprise solutions clients, who may prefer to rely on their existing e-commerce infrastructure during a period of uncertainty.
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Furthermore, any global deterioration in economic conditions resulting from the COVID-19 pandemic could have an adverse impact on discretionary consumer spending and impact our business. A reduction in consumer spending or disposable income could affect us more significantly than companies in other industries and companies with a more diversified product offering due in part to the fact that luxury items are often discretionary purchases for consumers. In the past, governments have taken unprecedented actions in an attempt to address and rectify these extreme market and economic conditions by providing liquidity and stability to financial markets. If such actions or other economic measures are not successful or governments decrease or cease economic stimulus or support, the return of adverse economic conditions could have a negative effect on our business, results of operations and financial condition.
To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in this “Risk Factors” section.
Purchasers of luxury products may not choose to shop online, which would prevent us from growing our business.
Our success will depend,depends, in part, on our ability to attract additional consumers who have historically purchased luxury products through traditional retailers rather than online. The online market for luxury products is significantly less developed than the online market for other goods and services such as books, music, travel and other consumer products. If thisthe online market for personal luxury goods does not gain widespread acceptance, our business may suffer. Furthermore, we may have to incur significantly higher and more sustained advertising and promotional expenditures or offer more incentives than we currently anticipate in order to attract additional online consumers to our Marketplace and convert them into purchasing consumers. Specific factors that could prevent consumers from purchasing luxury products from us include:
• | concerns about buying luxury products online without a physical storefront, face-to-face interaction with sales personnel and the ability to physically handle and examine products; |
• | preference for a more personal experience when purchasing luxury products; |
• | product offerings that do not reflect current consumer tastes and preferences; |
• | preference for shopping mono-brand, rather than multi-brand; |
• | pricing that does not meet consumer expectations; |
• | delayed shipments or shipments of incorrect or damaged products; |
• | inconvenience and costs associated with returning or exchanging items purchased online; |
• | concerns about the security of online transactions and the privacy of personal information; and |
• | usability, functionality and features of the Farfetch Marketplace. |
We have seen the increased adoption of online channels by luxury consumers during the COVID-19 pandemic and the related heightened restrictions imposed by governments around the world. However, we cannot guarantee that this trend will continue or accelerate, including after the heightened restrictions associated with the COVID-19 pandemic are lifted; particularly if traditional brick-and-mortar stores become more attractive to consumers as restrictions are lifted. Further, if this change in consumer behavior represents a secular trend toward online purchases for luxury products online without a physical storefront, faceby consumers, we cannot guarantee that we will continue to face interaction with sales personnel and the ability to physically handle and examine products;
preference for acapitalize on this trend or that our competitors will not capitalize more personal experience when purchasing luxury products;successfully.
product offerings that do not reflect current consumer tastes and preferences;
pricing that does not meet consumer expectations;
delayed shipments or shipments of incorrect or damaged products;
inconvenience and costs associated with returning or exchanging items purchased online;
concerns about the security of online transactions and the privacy of personal information; and
usability, functionality and features of our Marketplace.
If the online market for luxury products does not continue to develop and grow, or should we not succeed in leveraging such growth, our business will not grow and our results of operations, financial condition and prospects could be materially adversely affected.
We may not be ableunable to generate sufficient revenue to be profitable or to generate positive cash flow on a sustained basis, and our revenue growth rate may decline.decline.
We cannot assure you that we will generate sufficient revenue to offset the cost of maintaining and growing our platform and maintaining and growing our business. Although ourOur revenue grewgrowth from $386.0$1,673.9 million for the fiscal year ended December 31, 20172020, to $602.4$2,256.6 million for the fiscal year ended December 31, 2018,2021 is not indicative of our future performance, and our revenue growth rate may decline in the future because of a variety of factors, including increased competition and the maturation of our business. We cannot assure youguarantee that our revenue will continue to grow or will not decline. You should not consider our historical revenue growth or operating expenses as indicative of our future performance. If
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our revenue growth rate declines or our operating expenses exceed our expectations, our financial performance will be adversely affected.
Additionally, we also expect our costs to increase in future periods, which could negatively affect our future operating results and ability to achieve and sustain profitability. We expect to continue to expend substantial financial and other resources on acquiring and retaining consumers, our technology infrastructure, research and development, including investments in our research and development team and the development of new features,
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sales and marketing, international expansion, and general administration, including expenses, related to being a public company. These investments may not result in increased revenue or growth in our business. If we cannot successfullyare unable to continue to earn revenue at a rate that exceeds the costs associated with our business, we will not be able to achieve or sustain profitability or generate positive cash flow on a sustained basis and our revenue growth rate may decline. If we fail to continue to grow our revenue and overall business, our business, results of operations, financial condition and prospects could be materially adversely affected.
We have experienced losses in the past, and we may experience losses in the future.
We experienced losses after tax of $81.5 million, $112.3$3,315.6 million and $155.6$393.5 million in the years ended December 31, 2016, 20172020 and 2018,2019, respectively. Our ability to generate and sustain significant additional revenues and maintain after tax profitability will depend on, among other things, our ability to increase our levels of sales and attract consumers cost effectively, and the impact of the factors discussed elsewhere in this “Risk Factors” section, including impacts from the COVID-19 pandemic. We may continue to experience significant losses after tax in the future, and we cannot assure you that we will achievesustain profitability in future periods. In addition, our level of profitability cannot be predicted and may continuevary significantly from period to incur significant losses in future periods.period.
The luxury fashion industry can be volatile and difficult to predict.
As a global platform for luxury fashion, we are subject to variable industry conditions. Consumer demand can quickly change depending on many factors, including the behavior of both online and brick and mortarbrick-and-mortar competitors, promotional activities of competitors, rapidly changing tastes and preferences, frequent introductions of new and innovative products and services, advances in technology and the internet, macroeconomic conditions impacting discretionary spending, especially in light of the COVID-19 pandemic, and other macroeconomic and geopolitical factors, many of which are beyond our control. For example, we have seen a change in consumer spending habits since the fourth quarterbeginning of 2018the COVID-19 pandemic, as consumers have been purchasing more items in lower price-point categories.
As another example, over the last few years the industry experienced a trend toward promotional activity. While we believe promotional activity by luxury retailers demonstratedmay decrease in 2022 as brands continue to become more disciplined and increasingly move towards an e-concession model, the impact of the COVID-19 pandemic may delay such a higher than expected levelshift as omnichannel retailers seek to recover from the COVID-19-related heightened restrictions and store closures that occurred following the onset of the pandemic.
Promotional activity can have a material adverse effect on our results of operations, in particular on our gross margins and order contribution metrics, our prospects and our relationships with our luxury sellers. Alternatively, if we do not engage in promotional activity, in particular if we do not match competitors’ promotional activity, it may adversely impact consumer demand across our platform, which in turn may impact our overall market share capture and have a material adverse impact on our business, results of operations and prospects. We also may decide not to incentivize promotional activity by our retailers by not funding, by reducing our funding for, or by requiring our luxury sellers to fund in whole or part, promotional events on the Farfetch Marketplace, which could adversely impact our relationships with our luxury sellers. When the luxury retail market experiences increased promotional activity, we responded by carefully adjustingmay not be successful in responding in a manner that does not also adversely impact our approachresults of operations.
Changes in consumer demand or tastes may also impact our ability to promotions during that quarter. Withdeliver expected margins on inventory within our first-party and first-party original businesses. As a result of this constantly changing environment, our future business strategies, practices and results may not meet expectations or respond quickly enough to consumer
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demand, and we may face operational difficulties in adjusting to any changes.changes in consumer demand. Any of these developments could harm our business, results of operations, financial condition and prospects.
We rely on a limited number of retailers and brandsluxury sellers for the supply of products that we make available to consumers on ourthe Farfetch Marketplace.
We rely on a limited number of retailers and brandsluxury sellers for the supply of products available on ourthe Farfetch Marketplace. In the year ended December 31, 2018, 20%2021, 11.6% of our Marketplace GMV was from our top ten retailers, excluding Browns.Browns, and 12.8% of our Marketplace GMV was from our top ten brand partners, excluding brands in the New Guards portfolio. We cannot guarantee that these retailers and brandsluxury sellers will always choose to use ourthe Farfetch Marketplace to sell their products. We also typically enter into one‑yearone-year contracts with retailers and brands,our luxury sellers, and there is no guarantee our retailers and brandsluxury sellers will renew these contracts upon expiration, which currently automatically renew every year unless either party serves 90ninety days’ notice of termination. Wetermination for partners operating under our standard template. Other than Browns, Stadium Goods and the brands in the New Guards portfolio, we cannot control whether a retailer or brandluxury seller chooses to make any of its supply available on the Farfetch Marketplace, and brands may not appreciate our Marketplace.value proposition. Further, a small number ofother entities may, on their own, take actions that adversely affect our business, such as creating their own marketplace that could directly compete with us. Additionally, our business may be adversely affected if our access to products is limited or delayed because of deterioration in our relationships with one or more of our retailersluxury sellers, delays in deliveries of merchandise, including due to production slowdowns or brands,other distribution disruptions related to the COVID-19 pandemic, changes to their supply cycles, reductions in new seasonal product, or if they choose to not to sell their products with us for any other reason. IfFor example, at its highest point in March 2020, more than 280 of our luxury sellers’ locations were fully or partially closed as a result of the COVID-19 pandemic, which resulted in some limited disruption to our supply chain. In addition, we saw production delays from the ongoing effects of the United Kingdom’s withdrawal from the European Union, and if such delays were to re-appear they could have an adverse effect on our results of operations. Moreover, if we fail to successfully retain current, as well as acquire new, retailers and brandsluxury sellers on our platform, our business, results of operations, financial condition and prospects could be materially adversely affected.
Our efforts to acquire or retain consumers may not be successful, which could prevent us from maintaining or increasing our sales.
If we do not promote and sustain our brand and platform through marketing and other tools, we may fail to build and maintain the critical mass of consumers required to increase our sales. Promoting and positioning our brand and platform, as well as the Browns and Stadium Goods brands and the New Guards portfolio of brands, will depend largely on the success of our marketing efforts (including how we allocate resources among brand and direct marketing), our ability to understand and attract consumers cost effectively and our ability to consistently provide a high-quality product and user experience. In order to acquire and retain consumers, we have incurred and will continue to incur substantial expenses related to advertising and other marketing efforts, including investments in our ACCESS loyalty program. To the extent we are successful in retaining our existing customers, they may choose to purchase products with lower AOVs. Similarly, to the extent we are successful in acquiring new consumers, they may not be our most valuable consumers. We also may not be able to predict the behavior of new consumers as well as we do for existing consumers. We use promotions to drive sales, which may not be effective and may adversely affect our gross margins. Our investments in marketing may not effectively reach potential consumers and the spend of consumers that purchase from us may not yield the intended return on investment. Our ability to measure the effectiveness of our brand marketing remains relatively limited. Recent updates implemented by Apple in relation to the Identifier for Advertisers (“IDFA”) have adversely impacted our ability to target and measure the effectiveness of our new and existing consumer and retention marketing; and similar privacy measures by search engine and other companies could impact our ability to do so in the future. For example, in February 2022 Google announced plans to adopt new privacy restrictions to curtail tracking across apps on Android smartphones. In addition, the United States or other governments may take administrative, legislative, or regulatory action that could interfere with certain marketing efforts in particular jurisdictions. A failure of our marketing activities could also adversely affect our ability to attract new and maintain existing relationships with our consumers and our luxury sellers, which may have a material adverse effect on our business, results of operations, financial condition and prospects.
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Luxury sellers set their own prices for the products they make available on our Marketplaces, which could affect our ability to respond to consumer preferences and trends.
We do not control the pricing strategies of our luxury sellers on our Marketplaces (other than for our Group entities, i.e., Browns, Stadium Goods first-party sales and the New Guards portfolio of brands when sold direct-to-consumer via our Marketplaces), which could affect our revenue and our ability to effectively compete with other distribution channels used by our luxury sellers, including e-commerce retailers and brick-and-mortar stores. Furthermore, luxury sellers’ pricing on our Marketplaces, including certain region-specific promotions, may adversely affect a consumer’s shopping experience, which may encourage them to shop through other online or offline retailers. Luxury sellers may determine that they can more competitively price their products through other distribution channels and may choose such other channels instead of listing products on our Marketplaces.
The global catalogue and competitive pricing of our partners are key features of the Farfetch Marketplace. However, when brands adopt selective distribution models that restrict the distribution of goods in certain geographies, and decide not to include Farfetch in the selective distribution network, such selective distribution may reduce the Farfetch Marketplace catalogue available to consumers in particular markets. The adoption by brands of selective distribution may therefore lead to reduced supply and lost sales in key markets, and could negatively affect our business, results of operation, financial condition and prospects.
Additionally, where permitted by law, luxury sellers often employ different pricing strategies based on the geographical location of consumers, which is accomplished online through geo-blocking that blocks a consumer’s ability to access certain websites based on geography. EU legislation, which took effect in December 2018, prohibits geo-blocking in the European Economic Area (“EEA”). As a result, consumers registered in the EEA can make purchases at the prices listed in different EEA geographies irrespective of their country of residence in Europe, which could adversely impact our business. In addition, the EU Platform-to-Business Regulation (Regulation (EU) 2019/1150) on promoting fairness and transparency for business users of online intermediation services entered into force on July 12, 2020. This regulation introduced a number of new obligations on marketplaces, including disclosing the main parameters they use to rank goods and services on their sites, any advantage they may give to their own products over others, access that marketplace users may have to data generated through their use of the service and dispute remedies. These obligations could adversely affect our business, results of operations, financial condition and prospects.
If our brands and retailersluxury sellers fail to anticipate, identify and respond quickly to new and changing fashion trends in consumer preferences, our business could be harmed.
The luxury apparel, footwear and accessories available on our MarketplaceMarketplaces are subject to rapidly changing fashion trends and constantly evolving consumer tastes and demands. Our success is dependent on the ability of our retailersluxury sellers, including Browns, Stadium Goods and the New Guards portfolio of brands, to anticipate, identify and respond to the latest fashion trends and consumer demands and to translate such trends and demands into product offerings in a timely manner. The failure of our retailers and brandsluxury sellers to anticipate, identify or react swiftly and appropriately to new and changing styles, trends or desired consumer preferences, to accurately anticipate and forecast demand for certain product offerings or to provide relevant and timely product offerings to list on our MarketplaceMarketplaces may lead to lower demand for merchandise on our Marketplace,Marketplaces, which could cause, among other things, declines in GMV sold through our Marketplace.Marketplaces. If our retailersluxury sellers, including Browns, Stadium Goods and the New Guards portfolio of brands, are not able to accurately anticipate, identify, forecast, analyze or respond to changing fashion trends and consumer
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preferences, we may lose consumers and market share, which could have a material adverse effect on our business, results of operations, financial condition and prospects.
Retailers
In addition, New Guards’ success depends in large part on the brands in its portfolio being able to originate and define fashion product trends, as well as to anticipate, gauge, and react to changing consumer demands in a timely manner. Their products must appeal to consumers worldwide whose preferences cannot be predicted with certainty and are subject to rapid change, influenced by fashion trends and current economic conditions, among other factors. This issue is further compounded by the increasing use of digital and social media by consumers and the speed by which information and opinions are shared across the globe. We cannot assure that the brands set their own pricesin New Guards’ current or future portfolio will be able to continue to develop appealing styles or successfully meet constantly changing consumer demands in the future. In addition, we cannot assure that any new products or brands
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that we introduce will be successfully received by consumers. In particular, the majority of New Guards’ existing brands, including its largest brands, Off-White and Palm Angels, are currently focused on luxury streetwear and should consumer preferences for the products they make availablestreetwear decline that could have a significant impact on our Marketplace,business. Failures of brands in the New Guards portfolio to anticipate, identify, and respond effectively to changing consumer demands and fashion trends could adversely affect retail and consumer acceptance of their products and leave us with a substantial amount of unsold inventory or missed opportunities. Conversely, if we underestimate consumer demand for these brands’ products or if manufacturers fail to supply quality products in a timely manner, we may experience inventory shortages. Any of these outcomes could have a material adverse effect on our business, results of operations, and financial condition.
Our software is highly complex and may contain undetected errors.
The software underlying our sites is highly complex and may contain undetected errors or vulnerabilities, some of which may only be discovered after the code has been released. We have in place a software engineering practice known as “continuous deployment,” meaning that we typically release software code multiple times per day. This practice may result in more frequent introduction of errors or vulnerabilities into the software underlying our sites. Any errors or vulnerabilities discovered in our code after release could result in damage to our reputation, loss of consumers, disruption to our operations, decline of net sales or liability for damages, any of which could adversely affect our business, financial condition, result of operations and prospects.
Our failure or the failure of third-parties to protect our or their sites, networks and systems against security breaches, or otherwise to protect our or consumers’ and luxury sellers’ confidential information, could damage our reputation and brand and substantially harm our business and operating results.
We collect, maintain, transmit and store data about our consumers, luxury sellers and others, including credit card information (and other payment information) and other personally identifiable information, as well as other confidential and proprietary information about our business plans and activities.
We also engage third-parties that store, process and transmit these types of information on our behalf. We rely on encryption and authentication technology licensed from third-parties in an effort to securely transmit confidential and sensitive information, including credit card numbers. Advances in computer capabilities, new technological discoveries or other developments may result in the whole or partial failure of this technology to protect transaction data or other confidential and sensitive information from being breached or compromised. In addition, e-commerce websites are often attacked through compromised credentials, including those obtained through phishing and credential stuffing. Our security measures, and those of our third-party service providers, may not detect or prevent all attempts to breach our or their systems, denial-of-service attacks, viruses, malicious software, break-ins, phishing attacks, ransomware attacks, social engineering, security breaches or other attacks and similar disruptions that may jeopardize the security of information stored in or transmitted by our or their websites, networks and systems or that we or such third-parties otherwise maintain, including payment card systems, which may subject us to fines or higher transaction fees or limit or terminate our access to certain payment methods. We and such-third parties may not anticipate or prevent all types of attacks until after they have already been launched. We may not be able to adjust our security measures fast enough to keep pace with the evolving nature of cybersecurity risks, which could negatively impact our operations. Techniques used to obtain unauthorized access to or sabotage systems change frequently and may not be known until launched against us or our third-party service providers. In addition, security breaches can also occur as a result of non-technical issues, including intentional or inadvertent breaches by our employees or by third-parties.These risks may increase over time as we grow our business, including as a result of acquisitions, and as the complexity and number of technical systems and applications we use increases.
Breaches of our security measures or those of our third-party service providers or cyber security incidents could result in unauthorized access to our sites, networks and systems; unauthorized access to and misappropriation of consumer information, including consumers’ personal data, or other confidential or proprietary information; viruses, worms, spyware or other malware being served from our sites, networks or systems; deletion or modification of content or the display of unauthorized content on our sites; interruption, disruption or malfunction of operations; costs relating to breach remediation, deployment of additional personnel and protection technologies, governmental investigations and media inquiries and coverage; engagement of third-party experts and consultants;
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litigation, regulatory action and other potential liabilities. In the past, we have been the target of social engineering, phishing, malware and similar attacks and threats of denial-of-service attacks; and further attacks of this type in the future could have a material adverse effect on our operations. If any of these breaches of security should occur, our reputation and brand could be damaged, our business may suffer, we could be required to expend significant capital and other resources to alleviate problems caused by such breaches, and we could be exposed to a risk of loss, litigation or regulatory action and possible liability. In addition, with a subset of our employees, and employees of our third-party service providers, working from home as a result of the COVID-19 pandemic, our data and information technology infrastructure is subject to greater exposure than in an office environment, which carries an increased risk that our security measures or those of our third-party service providers could be compromised. We cannot guarantee that recovery protocols and backup systems will be sufficient to prevent data loss. Actual or anticipated attacks may cause us to incur costs, including costs to deploy additional personnel and protection technologies, train employees and engage third-party experts and consultants. In addition, any party who is able to illicitly obtain a consumer’s password could access the consumer’s transaction data or personal information, resulting in the perception that our systems are insecure.
Any compromise or breach of our security measures, or those of our third-party service providers, could violate applicable privacy, data protection, data security, network and information systems security and other laws and cause significant legal and financial exposure, adverse publicity and a loss of confidence in our security measures, which could have a material adverse effect on our business, results of operations, financial condition and prospects. We continue to devote significant resources to protect against security breaches and in the future we may need to address problems caused by breaches, including notifying affected subscribers and responding to any resulting litigation, which in turn, would divert resources from the growth and expansion of our business. Our insurance policies have coverage limits and may not be adequate to reimburse us for all losses caused by security or personal data breaches.
We may not succeed in promoting and sustaining our brand, which could have an adverse effect on our future growth, reputation, business and net sales.
A critical component of our future growth is our ability to respond to consumer preferencespromote and trends.
We do not control the pricing strategiessustain our brand, which we believe can be achieved by providing a high-quality user experience. An important element of our retailersbrand promotion strategy is establishing a relationship of trust with our consumers. In order to provide a high-quality user experience, we have invested and intend to continue to invest substantial amounts of resources in the development and functionality of our platform, website, technology infrastructure, fulfilment and customer service operations. Our ability to provide a high-quality user experience is also highly dependent on external factors over which we may have little or no control, including, without limitation, the reliability and environmental, social, governance, operational, and commercial performance of our luxury sellers, suppliers, third-party warehousing providers and third-party carriers. If our consumers are dissatisfied with the quality of the products sold on our platform or the customer service they receive and their overall customer experience, or if we or our service providers cannot deliver products to our consumers in a timely manner or at all, or if our consumers are dissatisfied with the environmental, social, or governance performance of our luxury sellers, suppliers, third-party warehousing providers and third-party carriers, our consumers may stop purchasing products from us. In addition, failures by any of New Guards’ brands (other than Browns),to provide consumers with high-quality products and high-quality customer experiences for any reason (including environmental, social and governance reasons) could substantially harm the reputation of that brand and the New Guards portfolio of brands more generally, which could affect our revenuehave a material adverse effect on its business, results of operations, financial condition and our ability to effectively competeprospects. We also rely on price with the other distribution channels used by our brandsthird-parties for information, including product characteristics and retailers, including e-commerce retailers and brick and mortar stores. Retailers and brands may determine that they can more competitively price their products through other distribution channels and may choose such other channels instead of listing products on our Marketplace. Additionally, retailers and brands often employ different pricing strategies basedavailability shown on the geographical location of consumers, which is accomplished online through geo‑blockingFarfetch Marketplace, that blocks a consumer’s abilitymay be inaccurate.
Our failure to access certain websites based on geography. European Union legislation, which took effect in December 2018, prohibits geo‑blocking in the European Union. As a result,provide our consumers registered in the European Union can make purchases at the prices listed in different European geographies irrespective of their country of residence in Europe whichwith high-quality products and high-quality user experiences for any reason (including environmental, social and governance reasons) could substantially harm our reputation and adversely impact our business. In addition, proposed legislation in Europe would require marketplacesefforts to disclose the main parameters they use to rank goods and servicesdevelop Farfetch as a trusted brand, which could have a material adverse effect on their sites, and any advantage they may give to their own products over others. This could adversely affect our business, results of operations, financial condition and prospects.
Fluctuations
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Use of social media, emails and text messages may adversely impact our reputation or subject us to fines or other penalties.
We use social media, emails and text messages as part of our approach to marketing. As laws and regulations rapidly evolve to govern the use of these channels, a failure by us, our employees or third-parties acting at our direction to abide by applicable laws and regulations in exchange rates maythe use of these channels could adversely affect our resultsreputation or subject us to fines or other penalties. In addition, our employees, including employees of operations.
Our financial information is presentedbrands within the New Guards portfolio, or third-parties acting at our direction (including influencers) may knowingly or inadvertently make use of social media in U.S. dollars, which differsways that could lead to the underlying functional currenciesloss or infringement of intellectual property, subject us to liability for illegal content as well as the public disclosure of proprietary, confidential or sensitive personal information about our business, employees, consumers or others. Any such inappropriate use of social media, emails and text messages could also cause damage to our reputation, the reputation of our subsidiaries, which causes translation risk. We do not hedge translation risk,businesses, including Browns, Stadium Goods and therefore, our resultsany of operations havethe brands in the past,New Guards portfolio, or the reputation of the designers or creative directors of New Guards’ brands.
Consumers value readily available information concerning retailers and will intheir goods and services and often act on such information without further investigation and without regard to its accuracy. Our consumers may engage with us online through social media platforms, including Facebook, Instagram, Pinterest, TikTok and Twitter, by providing feedback and public commentary about all aspects of our business. Information concerning us or our luxury sellers, whether accurate or not, may be posted on social media platforms at any time and may have a disproportionately adverse impact on our brand, reputation or business; and the future, fluctuate duethird-party services we use to movements in exchange rates when the currencies are translated into U.S. dollars. At a subsidiary level, we are also exposed to transactional foreign exchange risk because we earn revenues and incur expenses in a number of different foreign currencies relativemonitor such postings that may be inaccurate or harmful to the relevant subsidiary’s functional currency. Movements in exchange rates therefore impactreputation and perception of our subsidiariesbrand may fail to sufficiently identify such posts. Such harm could be immediate without affording us an opportunity for redress or correction and thus, our consolidated results and cash flows, which results in transactional foreign currency exposure. We generally hedgehave a portion of transactional exposure using forward foreign exchange contracts; however, because this is not fully hedged, we are exposed to fluctuations in exchange rates that could harmmaterial adverse effect on our business, results of operations, financial condition and prospects.
We rely on information technologies and systems to operate our business and maintain our competitiveness, and any failure to invest in and adapt to technological developments and industry trends could harm our business.
We depend on the use of sophisticated information technologies and systems, including technology and systems used for websites and apps, data analytics, customer service, supplier connectivity, communications, fraud detection, enterprise resource planning, inventory management, warehouse management and administration. As our operations grow in size, scope and complexity, we will need to continuously improve and upgrade our systems and infrastructure to offer an increasing number of consumer‑enhancedconsumer-enhanced services, features and functionalities, while maintaining and improving the reliability and integrity of our systems and infrastructure. In addition, with a subset of our employees continuing to work from home as a result of the COVID-19 pandemic, our information technologies and systems may be particularly strained.
Our future success also depends on our ability to adapt our services and infrastructure to meet rapidly evolving consumer trends and demands while continuing to improve our platform’s performance, features and reliability. The emergence of alternative platforms such as smartphones and tablets, and niche competitors who may be able to optimize such services or strategies, may require us to continue to invest in new and costly technology. We may not be successful or we may be less successful than our competitors, in developing and adopting new technologies that operate effectively across multiple devices and platforms and that are appealing to consumers, which would negatively impact our business and financial performance. New developments in other areas, such as cloud computing providers, could also make it easier for competitors to enter our markets due to lower up‑frontup-front technology costs. In addition, we may not be able to maintain our existing systems or replace our current systems or introduce new technologies and systems as quickly or cost effectively as we would like.desire. Failure to invest in and adapt to technological developments and industry trends may have a material adverse effect on our business, results of operations, financial condition and prospects.
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Our efforts to acquire or retain consumers may not be successful, which could prevent us from maintaining or increasing our sales.
If we do not promote and sustain our brand and platform through marketing and other tools, we may fail to build and maintain the critical mass of consumers required to increase our sales. Promoting and positioning our brand and platform will depend largely on the success of our marketing efforts, our ability to attract consumers cost effectively and our ability to consistently provide a high‑quality product and user experience. In order to acquire and retain consumers, we have incurred and will continue to incur substantial expenses related to advertising and other marketing efforts. We also use promotions to drive sales, which may not be effective and may adversely affect our gross margins. Our investments in marketing may not effectively reach potential consumers, potential consumers may decide not to buy through us or the spend of consumers that purchase from us may not yield the intended return on investment, any of which could negatively affect our financial results. The failure of our marketing activities could also adversely affect our ability to attract new, and maintain relationships with, our consumers, retailers and brands, which may have a material adverse effect on our business, results of operations, financial condition and prospects.
We may not succeed in promoting and sustaining our brand, which could have an adverse effect on our future growth and business.
A critical component of our future growth is our ability to promote and sustain our brand, which we believe can be achieved by providing a high‑quality user experience. An important element of our brand promotion strategy is establishing a relationship of trust with our consumers. In order to provide a high‑quality user experience, we have invested and will continue to invest substantial amounts of resources in the development and functionality of our platform, website, technology infrastructure, fulfilment and customer service operations. Our ability to provide a high‑quality user experience is also highly dependent on external factors over which we may have little or no control, including, without limitation, the reliability and performance of our retailers and brands, suppliers and third‑party carriers. If our consumers are dissatisfied with the quality of the products sold on our platform or the customer service they receive and their overall customer experience, or if we or our service providers cannot deliver products to our consumers in a timely manner or at all, our consumers may stop purchasing products from us. We also rely on third parties for information, including product characteristics and availability shown on our Marketplace that may be inaccurate. Our failure to provide our consumers with high‑quality products and high‑quality user experiences for any reason could substantially harm our reputation and adversely impact our efforts to develop Farfetch as a trusted brand, which could have a material adverse effect on our business, results of operations, financial condition and prospects.
Any significant disruption in service on our websites or apps or in our computer systems, some of which are currently hosted by third‑partythird-party providers, could damage our reputation and result in a loss of consumers, which would harm our business and results of operations.
Our brand, reputation and ability to attract and retain consumers to use our platform depend upon the reliable performance of our network infrastructure and content delivery processes. We have experienced interruptions in these systems in the past, including server failures that temporarily slowed down or interfered with the performance of our websites and apps, or particular features of our websites and apps, and we may experience interruptions in the future.future, particularly in light of the COVID-19 pandemic. For example, in December 2018 we had2021 and the first quarter of 2022, there were a partial outagetotal of seventeen interruptions and outages on our website that ranged in time from two to approximately fifty minutes, in which our customers experienced difficulties involving, among others, the inability to use our payment system for 9 hourssystems, the unavailability of thousands of products and 30 minutes, during which only approximately 20% of payments succeeded,our product catalogue, and in July 2017, we experienced a full platform outage for one hour and forty‑five minutes.the inability to complete their checkout process. Interruptions in these systems, whether due to system failures, human input errors, computer viruses or physical or electronic break‑ins,break-ins and denial‑of‑servicedenial-of-service attacks on us, third‑partythird-party vendors or communications infrastructure, could affect the availability of our services on our platform and prevent or inhibit the ability of consumers to access our websites and apps or complete purchases on our websites and apps. Volume of traffic and activity on our MarketplaceMarketplaces spikes on certain days, such as during a “Black Friday” promotion, and any such interruption would be particularly problematic if it were to occur at such a high volumehigh-volume time. Problems with the reliability of our systems could prevent us from earning revenue or commissioncommissions and could harm our reputation. Damage to our reputation, any resulting loss of consumer, retailer or brand confidence and the cost of remedying these problems could negatively affect our business, results of operations, financial condition and prospects.
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Substantially all of the communications, network and computer hardware used to operate our website are strategically located, for convenience and regulatory reasons, at facilities in Portugal, the Netherlands, Russia, China, Ireland and Ireland.Brazil. Our ability to maintain communications, network, and computer hardware in these countries is, or may in the future be, subject to regulatory review and licensing, and the failure to obtain any required licenses could negatively affect our business. We either lease or own our servers and have service agreements with data center providers. Our systems and operations are vulnerable to damage or interruption from fire, flood, power loss, telecommunications failure, terrorist attacks, acts of war, electronic and physical break‑ins,break-ins, computer viruses, earthquakes and similar events. The occurrence of any of the foregoing events could result in damage to our systems and hardware or could cause them to fail completely, and our insurance may not cover such events or may be insufficient to compensate us for losses that may occur. Our systems are not completely redundant, so a system failure at one site could result in reduced platform functionality for our consumers, and a total failure of our systems could cause our websites or apps to be inaccessible by some or all of our consumers.
We depend on third-parties to provide services in support of our website and fulfillment operations technology, and any failure on their part could lead to a disruption of our business. Problems faced by our third‑partythird-party service providers with the telecommunications network providers with whom they contract or with the systems by which they allocate capacity among their users, including us, could adversely affect the experience of our consumers. Our third‑partythird-party service providers could decide to close their facilities without adequate notice.notice, including in response to government-mandated restrictions or for health and safety reasons. Any financial difficulties, such as bankruptcy or reorganization, faced by our third‑partythird-party service providers or any of the service providers with whom they contract, may have negative effects on our business, the nature and extent of which are difficult to predict. If our third‑partythird-party service providers are unable to keep up with our needs for capacity, particularly in light of increased usage during the COVID-19 pandemic, this could have an adverse effect on our business. Any errors, defects, disruptions or other performance problems with our services could harm our reputation and may have a material adverse effect on our business, results of operations, financial condition and prospects.
Our
The rapid growth of our business may adversely impact our ability to successfully utilize our data and impact our sustained growth.
We employ a comprehensive approach to data analytics and data-led insights that helps guide our business strategy and operations. We utilize data collected through our digital platform, brand platform and in-store operations, including consumer data, to inform our approach to marketing, consumer targeting and expanding our reach. For example, we apply data science and machine learning technologies to facilitate the personalization of the consumer experience, use data insights to drive consumer acquisition, leverage data in support of our Luxury New
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Retail strategy (including in relation to FPS and connected retail) and our media solutions business, and proprietary data logistic insights in our fulfillment services. However, the rapid growth of our business may negatively impact data design, organization and accessibility across our operations. If we are unable to adequately utilize our data in support of our operations due to growth-driven fragmentation or technical limitations, our ability to attract new consumers to our Marketplaces, retain existing consumers, and continue the advancement of online and offline integrations could be impaired. We will also need to adapt our approach to the design, organization and accessibility of data across our business to keep pace with our growth and technological developments and regulatory requirements. Any failure or the failure of third partiesby us to protectadequately integrate such advancements in our sites, networks and systems against security breaches, or otherwiseapproach to protect our confidential information,data management could damage our reputation and brand and substantially harm our businessability to leverage data, including consumer data, collected through our technology and operating results.
We collect, maintain, transmit and store data about our consumers, retailers and brands and others, including credit card information (and other payment information) and other personally identifiable information, as well as other confidential and proprietary information about our business plans and activities.
We also engage third parties that store, process and transmit these types of informationsystems, which could have a negative effect on our behalf. business.
We rely on encryption and authentication technology licensed from third parties in an effort to securely transmit confidential and sensitive information, including credit card numbers. Advances in computer capabilities, new technological discoveries or other developments may result in the whole or partial failure of this technology to protect transaction data or other confidential and sensitive information from being breached or compromised. In addition, e-commerce websites are often attacked through compromised credentials, including those obtained through phishing and credential stuffing. Our security measures, and those of our third‑party service providers, may not detect or prevent all attempts to breach our systems, denial‑of‑service attacks, viruses, malicious software, break‑ins, phishing attacks, social engineering, security breaches or other attacks and similar disruptions that may jeopardize the security of information stored in or transmitted by our websites, networks and systems or that we or such third parties otherwise maintain, including payment card systems, which may subject us to fines or higher transaction fees or limit or terminate our access to certain payment methods. We and such third parties may not anticipate or prevent all types of attacks until after they have already been launched. Further, techniques used to obtain unauthorized access to or sabotage systems change frequently and may not be known until launched againstable to manage our growth effectively, and such growth may adversely affect our corporate culture.
We have consistently and significantly expanded our operations, including through the New Guards acquisition, Stadium Goods acquisition and our strategic partnership with Alibaba and Richemont; and anticipate expanding further as we pursue our growth strategies. Such expansion increases our complexity and places a significant burden on our management, operations, technical systems, financial resources and internal control over financial reporting functions. Our current and planned personnel, systems, procedures and controls may not be adequate to support and effectively manage our future operations, especially as we employ people in nineteen countries. We are currently in the process of transitioning our business, financial systems and operating model to a scale and organization that reflects the increased size, scope and complexity of our operations, and the process of migrating our legacy systems could disrupt our ways of working and ability to timely and accurately process information, which could adversely affect our results of operations and cause harm to our reputation. As a result, we may not be able to manage our expansion effectively.
Our culture is important to us, and we believe it has been a major competitive advantage and contributor to our success. We may have challenges maintaining our culture or adapting it sufficiently to meet the needs of our third‑party service providers.future and evolving operations as we continue to grow, in particular internationally and through acquisitions. This is heightened as we adapt to longer-term hybrid ways of working across all of our global offices. In addition, security breaches can also occurour ability to maintain our culture as a result of non‑technical issues, including intentional or inadvertent breaches bypublic company, and in a remote environment, with the attendant changes in policies, practices, corporate governance and management requirements may be challenging. Failure to maintain our employees or by third parties. These risks may increase over time as the complexity and number of technical systems and applications we use also increases.
Breaches of our security measures or those of our third‑party service providers or cyber security incidentsculture in a high-growth organization could result in unauthorized access to our sites, networks and systems; unauthorized access to and misappropriation of consumer information, including consumers’ personal data, or other confidential or proprietary information of ourselves or third parties; viruses, worms, spyware or other malware being served from our sites, networks or systems; deletion or modification of content or the display of unauthorized content on our sites; interruption, disruption or malfunction of operations; costs relating to breach remediation, deployment of additional personnel and protection technologies, response to governmental investigations and media inquiries and coverage; engagement of third‑party experts and consultants; litigation, regulatory action and other potential liabilities. In the past, we have
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experienced social engineering, phishing, malware and similar attacks and threats of denial‑of‑service attacks; however, such attacks could in the future have a material adverse effect on our business, results of operations, financial condition and prospects.
We face significant competition in the global retail industry and may be unsuccessful in competing against current and future competitors.
The global retail industry is intensely competitive. Online retail, including on mobile devices and tablets, is rapidly evolving and is subject to changing technology, shifting consumer preferences and tastes, increased convergence with offline retail and frequent introductions of new products and services. We face competition from technology enablement companies, marketplaces, platforms, luxury sellers and enterprise solutions providers. Technology enablement companies are those that enable commerce, such as Shopify or Square, and white-label service providers that offer end-to-end solutions. Luxury sellers are typically either larger more established companies, such as luxury department stores, luxury brand stores or online retailers, or multichannel players that are independent retailers operating brick-and-mortar stores (most notably those with an online presence), and these luxury sellers may have longer operating histories, greater brand recognition, existing consumer and supplier relationships and significantly greater financial, marketing and other resources. Additionally, larger competitors seeking to establish an online presence in luxury fashion may be able to devote substantially more resources to website systems development and exert more leverage over the supply chain for luxury products than we can. For example, in 2020 Amazon.com, Inc. launched “Amazon Luxury Stores.” Larger competitors may also be better capitalized to opportunistically acquire, invest in or partner with other domestic and international businesses. Such opportunistic acquisitions and investments may accelerate in an economic downturn. We believe that companies with a combination of technical expertise, brand recognition, financial resources and e-commerce experience also pose a significant threat of developing competing luxury fashion distribution technologies. In particular, if known incumbents in the e-commerce space choose to offer competing services, they may devote greater resources than we
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have available, have a more accelerated timeframe for deployment and leverage their existing user base and proprietary technologies to provide services or a user experience that our consumers may view as superior. We also compete with regionally focused luxury e-commerce companies who may have a competitive advantage because of their greater understanding of, and focus on, the local customer, as well as their established local brands.
The trend toward the online adoption of e-commerce platforms by consumers, including in the luxury sector, could increase competition as retailers and brands that have not typically participated in e-commerce may establish an online presence, particularly in light of the COVID-19 pandemic. For example, we have seen over the past year a number of luxury e-commerce players shift, or announce plans to shift, from a wholesale model to a hybrid wholesale and marketplace model; and have seen brands increasingly focus on prioritizing their own online channels. This may create new competitors or increase pressure from our existing competitors.
Online retail companies and marketplaces, including emerging startups, and other new entrants, may be able to innovate and provide products and services faster than we can, and they may be willing to price their products and services more aggressively in order to gain market share. Additionally, competitors may rely on markdowns or promotional sales to dispose of excess inventory, which could put pressure on us to follow suit, which could have an adverse effect on our gross margins and results of operations. As luxury products are often discretionary purchases for consumers, a reduction in consumer spending or disposable income resulting from the COVID-19 pandemic may affect us more significantly than competitors with a more diversified product offering. In addition, traditional brick-and-mortar based retailers offer consumers the ability to handle and examine products in person and may offer a more convenient means of returning and exchanging purchased products, and are increasingly benefitting from the implementation of new technologies in-store and from their online presences.
If anyour competitors are more successful in offering compelling products or in attracting and retaining consumers than we are, our revenue and growth rates could decline. If we are unable to compete successfully, or if competing successfully requires us to expend significant resources in response to our competitors’ actions, our business, results of these breaches of security should occur, our reputationoperations, financial condition and brandprospects could be damaged,materially adversely affected.
We are subject to governmental regulation and other legal obligations related to privacy, data protection and information security. If we are unable to comply with these, we may be subject to governmental enforcement actions, litigation, fines and penalties or adverse publicity.
We collect personal data and other data from our consumers and prospective consumers for a number of purposes. We use this information to provide services and relevant products to our consumers, to support, expand and improve our business, may suffer,and to tailor our marketing and advertising efforts. We store, handle, and process personal data on our own information systems, as well as through arrangements with third-parties and service providers. As a result, we are subject to governmental regulation and other legal obligations related to the protection of personal data, privacy and information security in certain countries where we do business and there has been, and will continue to be, a significant increase globally in such laws that govern, restrict or affect the collection, storage, sharing or use of data collected from or about individuals and their devices. Existing and future laws and regulations, or the inconsistent enforcement of such laws and regulations, including with regard to data localization requirements, could impede the growth of e-commerce or online marketplaces and negatively impact our business and operations. Moreover, any non-compliance with privacy, data protection or information security laws could result in proceedings against us by one or more data protection authorities, other public authorities, third-parties, or individuals.
In Europe, where we have significant business operations, the data privacy and information security regime has been through a significant change and continues to evolve. The collection and processing of personal data is subject to increasing regulatory scrutiny in the European Union and the United Kingdom. The EU General Data Protection Regulation (“GDPR”) and the UK data protection regime (“UK GDPR”) have stringent operational requirements for companies, including retailers, regarding information practices, such as expanded disclosures to consumers about how we collect and process their personal data, increased controls on profiling consumers and increased rights for consumers to access, control and delete their personal data. Recent case law has also increased requirements in relation to international transfers of personal data. In addition, there are mandatory data breach notification requirements and significantly increased penalties for non-compliance with each regime. Since January 1, 2021 (when the transitional period following the United Kingdom’s withdrawal from the European Union
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expired), we have been required to comply with GDPR and the UK GDPR. Each regime has the ability to fine us up to the greater of €20 million (£17.5 million) or 4% of global turnover for non-compliance.
Transfers of personal data from the European Union to the United Kingdom are permitted on the basis of an adequacy decision from the European Union, although this decision is subject to a time limit of four years (“Sunset Clause”) and requires that UK legislative developments do not cause the UK GDPR to deviate from certain protections under the GDPR. The UK government has recently closed a consultation on the simplification of the UK GDPR, and if certain of the proposed measures are adopted into UK law, it is not clear whether those measures would constitute a deviation that would impact the adequacy decision. In the event that the adequacy decision is withdrawn or the Sunset Clause is enforced, the United Kingdom will be considered a third country and we will be required to expend significant capitalimplement additional safeguards for personal data transfers from the European Union to the United Kingdom, which could lead to additional costs and other resourcesincrease our overall risk exposure.
The UK 2018 Network and Information Systems Regulations apply to alleviate problems caused by such breaches,us as an online marketplace and we could be exposed to a risk of loss, litigation or regulatory action and possible liability. We cannot guarantee that recovery protocols and backup systems will be sufficient to prevent data loss. Actual or anticipated attacks may cause us to incur increasing costs, including costs to deployplace additional personnel and protection technologies, train employees and engage third‑party experts and consultants. In addition, any party who is able to illicitly obtain a subscriber’s password could access the subscriber’s transaction data or personal information, resulting in the perception that our systems are insecure.
Any compromise or breach of our security measures, or those of our third‑party service providers, could violate applicable privacy, data protection, data security, network and information systems security obligations on us, as well as mandatory security incident notifications in certain circumstances with penalties of up to £17 million. Additionally, the EU Directive on Network and Information Systems also applies to us and requires us, as a digital service provider offering services in the EEA but with headquarters outside of the EEA, to appoint a representative in one of the EEA member states where services are offered. This regulation could lead to additional regulatory exposure and compliance costs.
In recent years, U.S. and EU lawmakers and regulators have expressed concern over the use of third-party cookies and similar technologies for online behavioral advertising, and laws and regulations in this area are also under reform. In the European Union, regulators are increasingly focusing on compliance with requirements in the online behavioral advertising ecosystem, and current national laws that implement the existing ePrivacy Directive will be replaced by an EU regulation known as the ePrivacy Regulation which will significantly increase fines for non-compliance. In the European Union and United Kingdom, informed consent is required for the placement of a cookie on a user’s device and for direct electronic marketing. The GDPR and UK GDPR impose conditions on obtaining valid consent, such as a prohibition on pre-checked consents and a requirement to ensure separate consents are sought for each type of cookie or similar technology. While the ePrivacy Regulation is still under development, recent European court decisions and regulators’ recent guidance are driving increased attention to cookies and tracking technologies and we are beginning to see regulatory enforcement actions. Changes to how we use cookies and related technology could lead to substantial costs, require significant systems changes, limit the effectiveness of our marketing activities, divert the attention of our technology personnel, adversely affect our margins, increase costs and subject us to additional liabilities. Regulation of cookies and similar technologies may lead to broader restrictions on our marketing and personalization activities and may negatively impact our efforts to understand users’ online shopping and other relevant online behaviors, as well as the effectiveness of our marketing and our business generally. The advertising technology ecosystem may not be able to adapt to the legal changes around the use of tracking technologies, which may have a negative effect on businesses, including ours, that collect and use online user information for consumer acquisition and marketing. Any decline of cookies or other online tracking technologies as a means to identify and target potential purchasers may increase the cost of operating our business and lead to a decline in revenues. In addition, uncertainties about the legality of cookies and other tracking technologies may lead to regulatory scrutiny and increase potential civil liability under data protection or consumer protection laws. In response to marketplace concerns about the use of third-party cookies and web beacons to track user behaviors, providers of major browsers have included features that allow users to limit the collection of certain data generally or from specified websites, and the draft ePrivacy Regulation also advocates the development of browsers that block cookies by default. These developments and other privacy-oriented software changes by operating systems or other third-parties, such as Apple’s app tracking transparency feature, have impaired our ability to collect user information, including personal data and usage information, that helps us provide more targeted advertising to our current and prospective consumers, and could adversely affect our business, in light of our use of cookies and similar technologies to target our marketing and personalize the customer experience.
In the United States, which is also a significant market for our goods and services, federal and state governments have adopted or are considering, laws, guidelines or rules for the collection, distribution, use and cause significant legalstorage of information collected from or about consumers or their devices. For example, California has enacted the California Consumer Privacy Act (“CCPA”) which went into effect on January 1, 2020. The law imposes new requirements on companies doing business in California and meeting other size or scale criteria for collecting or
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using information collected from or about California residents, affords California residents the ability to opt out of certain disclosures of personal information, and grants non-absolute rights to access or request deletion of personal information, subject to verification and certain exceptions. In response to the CCPA, we have reviewed and amended our information practices involving California consumers, as well as our use of service providers or interactions with other parties to whom we disclose personal information. We have updated our privacy disclosures to comply with the law, including as these requirements pertain to our California-based workforce. We are monitoring the CCPA implementing regulations, as they are continually being updated by the office of the California Attorney General. It also remains unclear how the statute or rules will be interpreted. Additionally, a recent California ballot initiative, the California Privacy Rights Act (“CPRA”), imposes additional data protection obligations on companies doing business in California, including additional consumer rights processes and opt-outs for certain uses of sensitive data and sharing of personal data starting in January 2022, with most provisions not coming into effect until January 2023. As voted into law by California residents in November 2020, the CPRA could have an adverse effect on our business, results of operations, and financial condition.
The effects of the CCPA and CPRA are potentially significant and may require us to modify our data collection or processing practices and policies, incur substantial costs and expenses in an effort to comply and increase our potential exposure to regulatory enforcement or litigation. Other U.S. states are considering enacting stricter data privacy laws. For example, on March 2, 2021, the Governor of Virginia signed into law the Virginia Consumer Data Protection Act (“VCDPA”). The VCDPA creates consumer rights, similar to the CCPA, but also imposes security and assessment requirements for businesses. In addition, on July 7, 2021, Colorado enacted the Colorado Privacy Act (“COPA”). The COPA closely resembles the VCDPA, and will be enforced by the respective states’ attorney generals and district attorneys, although the two differ in many ways; once they become enforceable in 2023, we would be required to comply with each if our operations fall within the scope of these newly enacted comprehensive mandates. Similar laws have been proposed in other states and at the federal level, reflecting a trend toward more stringent privacy legislation in the United States. The enactment of such laws could have potentially conflicting requirements that could make compliance with such laws challenging.
In the People’s Republic of China (the “PRC,” for the purposes hereof excluding Hong Kong, Macau and Taiwan), data security has become one of the fastest growing areas for new legislation reflecting the evolving e-commerce industry. The Standing Committee of the National People’s Congress (“SCNPC”) of the PRC promulgated the Data Security Law (“Data Security Law”), which became effective on September 1, 2021. The primary purpose of the Data Security Law is to regulate data activities, safeguard data security, promote data development and usage, protect individuals and entities’ legitimate rights and interests, and safeguard state sovereignty, state security and development interests. The Data Security Law applies extraterritorially, and to a broad range of activities that involve “data” (not only personal or sensitive data). Under the Data Security Law, entities and individuals carrying out data activities must abide by various data security obligations. For example, the Data Security Law proposes to classify and protect data based on the importance of such data to the state’s economic development, as well as the degree of harm it would cause to national security, public interests, or legitimate rights and interests of individuals or organizations if such data is tampered with, destroyed, leaked, or illegally acquired or used. The appropriate level of protective measures is required to be taken for each respective class of data. The Data Security Law also requires important data to be stored locally in the PRC. Such important data may only be transferred outside of the PRC subject to compliance with certain data transfer restrictions, such as passing a security assessment organized by the relevant authorities.
Additionally, on August 20, 2021, the SCNPC promulgated the Personal Information Protection Law (“PIPL”), which became effective on November 1, 2021. Notably, the PIPL, as with the GDPR, applies extraterritorially. The PIPL clarifies the scope and application of the definitions of personal information and sensitive personal information (which includes medical and health information), the legality of personal information processing and the basic requirements of notice and consent, among other things. The PIPL also sets out data localization requirements for critical information infrastructure operators and personal information processors who process personal information above a certain threshold prescribed by the relevant authorities. The PIPL includes a list of rules which must be complied with prior to the transfer of personal information outside of the PRC, such as compliance with a security assessment, certification by an agency designated by the relevant authorities, or entering into standard form model contracts approved by the relevant authorities with the overseas recipient. Failure to comply with the PIPL can result in fines of up to renminbi (“RMB”) fifty million or 5% of the prior year’s total annual revenue.
In addition, the government agencies of the PRC promulgated several regulations or released a number of draft regulations for public comment which are designed to provide further implementation guidance in accordance with the aforementioned laws. For example, on October 29, 2021, the Cyberspace Administration of China (“CAC”), the central internet regulator, issued draft Measures for the Security Assessment of Outbound Data (the “Draft Measures”) soliciting public comments by November 28, 2021. The Draft Measures remain under legislative review and may be subject to further revisions before being officially enacted. Once the Draft Measures are finalized and implemented, data processors in the PRC will be required to conduct a self-risk assessment to evaluate the risks of cross-border data transfer. In addition, we will be subject to the security assessment and approval by CAC with respect to cross-border data transfer, as we are deemed a “massive volume data processor” pursuant to the Draft Measures due to our processing of personal information of more than one million people in the PRC.
The evolving data security landscape and potential for heightened government enforcement actions could lead to compliance risks and increased costs in our operation of Farfetch China in the PRC. Failure to comply with such requirements may adversely affect our business and operations in the PRC region.
In Brazil, the Brazilian General Data Protection Law (Law No. 13,709/2018) (“LGPD”) that became effective on September 18, 2020, (with sanctions applying only after August 1, 2021) implemented operational requirements for the processing of personal data in Brazil. The LGPD’s requirements are substantially similar to GDPR and we have undertaken similar compliance efforts regarding our Brazilian consumers and employee data, potentially requiring us to incur substantial costs and expenses and exposing us to increased risks associated with non-compliance.
Beyond the aforementioned data protection laws, individual jurisdictions continue to pass laws related to data protection, such as data privacy and data breach notification laws, resulting in a diverse set of requirements across states, countries and regions. The complexity of navigating these varying data protection laws is particularly acute for our business due to our global reach; the Farfetch Marketplace connects consumers in over 190 countries and territories with items from more than fifty countries. In addition, the legal landscape relating to the transfer of personal data continues to evolve and remains uncertain in many jurisdictions. Many data protection regimes apply based on where the consumer is located, and as we expand and new laws are enacted or existing laws change, we may be subject to new laws, regulations or standards or new interpretations of existing laws, regulations or standards, including those in the areas of data security, data privacy and regulation of email providers and those that require localization of certain data (such as in Russia, where we have already undertaken localization), which could require us to incur additional costs and restrict our business operations.
Failures or perceived failures by us (including our acquired businesses which must be integrated into our privacy framework) to comply with rapidly evolving privacy or security laws such as those in the PRC, policies (including our own stated privacy policies), legal obligations or industry standards or any security incident that results in the unauthorized release or transfer of personally identifiable information or other personal or consumer data may result in governmental enforcement actions, litigation (including consumer class actions), fines and penalties or adverse publicity and a loss of confidencecould cause our consumers to lose trust in our security measures,us, which could have a material adverse effect on our business, results of operations, financial condition and prospects. We continue to devote significant resources to protect against security breaches or we may need to in the future to address problems caused by breaches, including notifying affected subscribers and responding to any resulting litigation, which in turn, diverts resources from the growth and expansion of our business.
We rely on retailers and brands,our luxury sellers, suppliers, third‑partythird-party warehousing providers, third-party carriers and transportation providers as part of our fulfilment process, and these third partiesthird-parties may fail to adequately serve our consumers.
We significantly rely on retailers and brandsour luxury sellers to properly and promptly prepare products ordered by our consumers for shipment. Any failureThese suppliers may have a reduced ability to prepare and ship products due to government mandates, heightened restrictions or reduced capacity to protect the health and safety of their workers. Failures by these suppliers to timely prepare such products for shipment to our consumers willwould have an adverse effect on the fulfilment of consumer orders, which could negatively affect the consumercustomer experience and harm our business and results of operations.
We rely on third-party warehousing providers to receive, store, pack and ship merchandise. We also rely upon third‑partythird-party carriers and transportation providers for substantially all of our merchandise shipments, including
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shipments of items from our retailersluxury sellers and brands,warehouses to our production facilities for processing, shipments returning these items to our retailersluxury sellers and brands and the shipments to our consumers after purchase. Failures of our third-party providers to meet the service levels expected by our consumers, including as a result of any closures, shutdowns, bankruptcies, disruptions and/or delays related to the COVID-19 pandemic, or to deliver merchandise in optimal condition, could negatively impact the customer experience, our brand and our business.
Our shipments are also subject to additional risks that could increase our distribution costs, including without limitation cost inflation, rising fuel costs, supply chain delays, labor shortages at transportation providers and warehouses, the impact of the COVID-19 pandemic, the United Kingdom’s withdrawal from the European Union, events such as employee strikes and inclement weather, events related to political instability, including, for example, in connection with the conflict between Russia and Ukraine, or threatened or actual acts of terrorism and security concerns, any of which may impact the third party’sa third-party’s ability to provide delivery services that adequately meet our needs. If we needed to change shipping companies,transportation providers, we could face logistical difficulties that could adversely impact deliveries, and we would incur costs and expend resources in connection with such change.change, and such change could divert the time and attention of management and technology personnel to implement. Moreover, we may not be able to obtain terms as favorable as those received from the independent third‑partythird-party transportation providers we currently use, which would increase our costs. AnyOur third-party carriers and transportation providers may face increased volumes as a result of increased online adoption stemming from the COVID-19 pandemic or a secular shift from offline to online consumer activity across industries, which, in turn, could cause a decrease in their service levels or result in an increase in their prices. If we are unable to negotiate acceptable pricing and other terms with these entities, if they significantly increase their shipping charges or if they experience performance problems, including as a result of the COVID-19 pandemic or the conflict between Russia and Ukraine, or other difficulties, it could negatively impact our results of operations and our customer experience. Increases in shipping costs or any other significant shipping difficulties or disruptions or any failure by our retailers, brands or third‑partythird-party carriers to deliver high‑qualityhigh-quality products to our consumers in a timely manner or to otherwise adequately serve our consumers could damage our reputation and brand and may substantially harm our business,business. In addition, if our merchandise is not delivered in a timely fashion or is damaged or lost during the delivery process as a result of a deterioration of such third-party services, it could result in our consumers becoming dissatisfied and choosing not to shop on our sites and our relationships with our payment providers and other third-party providers could be negatively impacted, which could have a material adverse effect on our financial condition, results of operations financial condition and prospects.
We rely on third partiesthird-parties to drive traffic to our website, and these providers may change their search engine algorithms or pricing in ways that could negatively affect our business, results of operations, financial condition and prospects.
Our success depends on our ability to attract consumers cost effectively. With respect to our marketing channels, we rely heavily on relationships with providers of online services, search engines, social media, directories and other websites and e-commerce businesses to provide content, advertising banners and other links that direct consumers to our websites. We rely on these relationships to provide significant sources of traffic to our website.websites. In particular, we rely on search engines, such as Google, Bing and Yahoo! and the major mobile app stores and social platforms, as important marketing channels. Search engine companies change their natural search engine algorithms periodically, and our ranking in natural searches may be adversely affected by those changes, as has occurred from time to time. Search engine companies may also determine that we are not in compliance with their guidelines and consequently penalize us in their algorithms as a result. If search engines change or penalize us with their algorithms, terms of service, display and featuring of search results, or if competition increases for advertisements, as it did in 2021, we may be unableincur increased costs to cost‑effectively drive consumers to our websitewebsites and apps.
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Our relationships with our marketing providers are not long termlong-term in nature and do not require any specific performance commitments. In addition, many of the parties with whom we have online advertising arrangements provide advertising services to other companies, including retailers with whom we compete. As competition for online advertising has increased,continues to increase, the cost for some of these services hasmay also increased.continue to do so. A significant increase in the cost of the marketing providers upon which we rely could adversely impact our ability to attract consumers cost effectively and harm our business, results of operations, financial condition and prospects.
We face significant competition in the retail industry and may be unsuccessful in competing against current and future competitors.
The retail industry is intensely competitive. Online retail, including on mobile devices and tablets, is rapidly evolving and is subject to changing technology, shifting consumer preferences and tastes and frequent introductions of new products and services. We could face competition from technology enablement companies and luxury sellers. Technology enablement companies are those that enable commerce, such as Shopify or Square, and white‑label service providers that offer end‑to‑end solutions. Luxury sellers are typically either larger more established companies, such as luxury department stores, luxury brand stores or online retailers, or multichannel players that are independent retailers operating brick and mortar stores with an online presence, and these luxury sellers may have longer operating histories, greater brand recognition, existing consumer and supplier relationships and significantly greater financial, marketing and other resources. Additionally, larger competitors seeking to establish an online presence in luxury fashion may be able to devote substantially more resources to website systems development and exert more leverage over the supply chain for luxury products than we can. Larger competitors may also be better capitalized to opportunistically acquire, invest in or partner with other domestic and international businesses. We believe that companies with a combination of technical expertise, brand recognition, financial resources and e-commerce experience also pose a significant threat of developing competing luxury fashion distribution technologies. In particular, if known incumbents in the e-commerce space choose to offer competing services, they may devote greater resources than we have available, have a more accelerated time frame for deployment and leverage their existing user base and proprietary technologies to provide services or a user experience that our consumers may view as superior.
Online retail companies and marketplaces, including emerging start‑ups, may be able to innovate and provide products and services faster than we can, and they may be willing to price their products and services more aggressively in order to gain market share. In addition, traditional brick and mortar based retailers offer consumers the ability to handle and examine products in person and offer a more convenient means of returning and exchanging purchased products. If our competitors are more successful in offering compelling products or in attracting and retaining consumers than we are, our revenue and growth rates could decline.
If we are unable to compete successfully, or if competing successfully requires us to expend significant resources in response to our competitors’ actions, our business, results of operations, financial condition and prospects could be materially adversely affected.
We are subject to governmental regulation and other legal obligations related Changes to privacy data protectionregulations, and information security. If we are unableactions by providers with regard to comply with these, weprivacy (including GDPR, UK GDPR, CCPA and changes to Apple’s application tracking transparency framework and IDFA) may be subject to governmental enforcement actions, litigation, fines and penalties or adverse publicity.
We collect personal data and other data from our consumers and prospective consumers. We use this information to provide services and relevant products to our consumers, to support, expand and improve our business, and to tailor our marketing and advertising efforts. We may also share consumers’ personal data with certain third parties as authorized by the consumer or as described in our privacy policy.
As a result, we are subject to governmental regulation and other legal obligations related to the protection of personal data, privacy and information security in certain countries where we do business and there has been and will continue to be a significant increase globally in such laws that restrict or control the use of personal data.
In Europe, where we have significant business operations, the data privacy and information security regime recently underwent a significant change and continues to evolve and is subject to increasingly regulatory scrutiny. The new General Data Protection Regulation (“GDPR”), which came into force on May 25, 2018, implemented
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more stringent operational requirements for our use of personal data. These more stringent requirements include expanded disclosures to tell our consumers about how we may use their personal data, increased controls on profiling customers and increased rights for customers to access, control and delete their personal data. In addition, there are mandatory data breach notification requirements and significantly increased penalties of the greater of €20 million or 4% of global turnover for the preceding financial year. The UK’s Network and Information Systems Regulations 2018, which came into force on May 10, 2018, apply to us as an online marketplace and place additional network and information systems security obligations on us, as well as mandatory security incident notification in certain circumstances with penalties of up to £17 million.
In recent years, U.S. and European lawmakers and regulators have expressed concern over the use of third‑party cookies and similar technologies for online behavioral advertising, and laws in this area are also under reform. In the European Union, current national laws that implement the ePrivacy Directive will be replaced by an EU regulation known as the ePrivacy Regulation. In the European Union, informed consent is required for the placement of a cookie on a user’s device and for direct electronic marketing, and the GDPR also imposes additional conditions in order to satisfy such consent, such as a prohibition on pre‑checked consents. The draft ePrivacy Regulation retains these additional consent conditions and also imposes the strict opt‑in marketing rules on direct marketing that is “presented” on a web page rather than sent by email, alters rules on third‑party cookies and similar technology and significantly increases penalties for breach of the rules. Regulation of cookies and similar technologies may lead to broader restrictions on our marketing and personalization activities and may negatively impact our efforts to understand users’ internet usage, as well as the effectiveness of our marketing and our business generally. Such regulations may have a negative effect on businesses, including ours, that collect and use online usage information for consumer acquisition and marketing, it may increase the cost of operating a business that collects or uses such information and undertakes online marketing, it may also increase regulatory scrutiny and increase potential civil liability under data protection or consumer protection laws. In response to marketplace concerns about the usage of third‑party cookies and web beacons to track user behaviors, providers of major browsers have included features that allow users to limit the collection of certain data generally or from specified websites, and the ePrivacy Regulations draft also advocates the development of browsers that block cookies by default. These developments could impair our ability to collect user information, including personal dataattract customers cost effectively and usage information, that helps us provide more targeted advertising to our current and prospective consumers, which could adversely affect our business, given our use of cookies and similar technologies to target our marketing and personalize the consumer experience.grow transaction volume from existing customers.
As the text of the ePrivacy Regulation is still under development, and as further guidance is issued and interpretation of both the ePrivacy Regulation and GDPR develop, we could incur substantial costs to comply with these regulations. The changes could require significant systems changes, limit the effectiveness of our marketing activities, adversely affect our margins, increase costs and subject us to additional liabilities.
In the United States, federal and various state governments have adopted or are considering, laws, guidelines or rules for the collection, distribution, use and storage of information collected from or about consumers or their devices. For example, in June 2018, California enacted the California Consumer Privacy Act (“CCPA”) which is presently going into effect on January 1, 2020. When effective, the new law will, among other things, require new disclosures to California consumers, impose new rules for collecting or using information about minors, and afford consumers new abilities to opt out of certain disclosures of personal information. California legislators have stated that they intend to propose amendments to the CCPA before it goes into effect, and it remains unclear what, if any, modifications will be made to this legislation or how it will be interpreted. The U.S. Congress may also pass a law to pre-empt all or part of the CCPA. As passed, the effects of the CCPA potentially are significant, however, and may require us to modify our data collection or processing practices and policies and to incur substantial costs and expenses in an effort to comply.
In China, the Personal Information Security Specification (“China Specification”) came into force on May 1, 2018. Although the China Specification is not a mandatory regulation, it nonetheless has a key implementing role in relation to China’s Cyber Security Law in respect of protecting personal information in China. Furthermore, it is likely that the China Specification will be relied on by Chinese government agencies as a standard to determine whether businesses have abided by China’s data protection rules. This China Specification has introduced many concepts and protection rules for personal information, such as “Data Controller” from GDPR. From the consent perspective the China Specification and GDPR are similar, but the China Specification has broadened the scope of
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Personal Sensitive Information (“PSI”) as compared to GDPR (including but not limited to phone number, transaction record and purchase history, bank account, browse history, and e‑ID info such as system account, email address and corresponding password) and thus, the application of explicit consent under the China Specification is more far reaching. Furthermore, under the China Specification, the data controller must provide the purpose of collecting and using subject personal information, as well as business functions of such purpose, and the China Specification requires the data controller to distinguish its core function from additional functions to ensure the data controller will only collect personal information as needed. Our failure to comply with the China Specification could result in governmental enforcement actions, litigation, fines and penalties, which could have a material adverse effect on our business, results of operations, financial condition and prospects.
Many data protection regimes apply based on where a consumer is located, and as we expand and new laws are enacted (such as the recently enacted data protection law in Brazil) or existing laws change, we may be subject to new laws, regulations or standards or new interpretations of existing laws, regulations or standards, including those in the areas of data security, data privacy and regulation of email providers and those that require localization of certain data (such as in Russia, where we have already undertaken localization), which could require us to incur additional costs and restrict our business operations. Any failure or perceived failure by us to comply with rapidly evolving privacy or security laws such as the China Specification, policies (including our own stated privacy policies), legal obligations or industry standards or any security incident that results in the unauthorized release or transfer of personally identifiable information or other personal or consumer data may result in governmental enforcement actions, litigation (including consumer class actions), fines and penalties or adverse publicity and could cause our consumers to lose trust in us, which could have a material adverse effect on our business, results of operations, financial condition and prospects.
Our failure to address the operational, compliance and regulatory risks associated with payment methods credit card fraud and other consumer fraud, or our failure to control any such fraud, could damage our reputation and brand and may cause our business and results of operations to suffer.
Under current credit card practices, we are liable for fraudulent activity on the majority of our credit and debit card transactions because we do not obtain a cardholder’s signature.signature nor use strong authentication (such as Verified by Visa) on all transactions. We are also exposed to financial crime risk and employ certain measures to identify and mitigate this risk, including utilizing third-party tools and services. We do not currently carry insurance against this risk. To date, we have experienced minimal losses from credit card fraud, but weWe face the risk of significant losses from this type of fraudfraudulent activity or financial crime as our net sales increase and as we continue to expand globally. Our failure to adequately control fraudulent credit card transactionsmitigate this risk could damage our reputation and brand and substantially harm our business, results of operations, financial condition, prospects and prospects.our ability to accept payments.
We also accept paymentspayment for many of our sales through credit and debit card transactions, which are handled through third‑partythird-party payment processors. In particular, for the year ended December 31, 2018, we relied on one third‑party payment processor, which processed, directly and indirectly, more than 80% of our transactions. As a result, we are subject to a number of risks related to credit and debit card payments, including that we, and the luxury sellers with whom we partner, pay interchange and other fees, which may increase over time and could require us or our luxury sellers to either increase the prices we charge for our products or absorb an increase in our costs and expenses. For example, in 2021 a fee introduced by Visa that applies specifically to marketplaces was applied to us, and other payment processors may do the same in the future. Our utilization of such payment processing tools may be impacted by factors outside of our control, including disruptions in the payment processing industry generally.
The United States or other governments may also take administrative, legislative, or regulatory action that could materially interfere with our ability to offer certain payment methods or to conduct our business in particular jurisdictions. We cannot predict what actions the United States or other governments, including China, may take, or what restrictions these governments may impose, that will affect our ability to process payments or to conduct our business in particular jurisdictions. Further, we may become subject to changing payment regulations and requirements that could potentially affect the compliance of our current payment processes and increase the operational costs we incur to support payments. Global laws and regulations that govern payment methods are complex and subject to change; and we may be required to expend considerable time and effort to determine if such laws and regulations apply to our business. Any noncompliance by us in relation to such laws and regulations, or any alleged noncompliance, could result in reputational damage, litigation, increased costs or liabilities, or require us to stop offering payment services in certain markets.
In addition, as part of the payment processing process, our consumers’ credit and debit card information is transmitted to our third‑partythird-party payment processors. We may in the future becomealso be subject to lawsuits or other proceedings for purportedly fraudulent transactions arising out of the actual or alleged theft of our consumers’ credit or debit card information if the security of our third‑partythird-party credit card payment processors areis breached. We and our third‑partythird-party credit card payment processors are also subject to payment card association operating rules, certification and classification requirements and rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply.comply without incurring higher fees, diverting resources to regulatory compliance or making changes to our business model. If we or our third‑partythird-party credit card payment processors fail to comply with these rules or requirements, we may be subject to fines and higher transaction fees and lose our ability to accept credit and debit card payments from our consumers in addition to the consequences that could arise from such action or inaction for violating applicable privacy, data protection, data security and other laws as outlined above, and there may bewhich could have an adverse impact on our business, results of operations, financial condition and prospects.
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Use of social media, emails and text messages may adversely impact our reputation or subject us to fines or other penalties.
We use social media, emails and text messages as part of our omnichannel approach to marketing. As laws and regulations rapidly evolve to govern the use of these channels, the failure by us, our employees or third parties acting at our direction to abide by applicable laws and regulations in the use of these channels could adversely affect our reputation or subject us to fines or other penalties. In addition, our employees or third parties acting at our direction may knowingly or inadvertently make use of social media in ways that could lead to the loss or infringement of intellectual property, as well as the public disclosure of proprietary, confidential or sensitive personal information of our business, employees, consumers or others. Any such inappropriate use of social media, emails and text messages could also cause reputational damage.
Consumers value readily available information concerning retailers and their goods and services and often act on such information without further investigation and without regard to its accuracy. Our consumers may engage with us online through our social media platforms, including Facebook, Instagram, Pinterest and Twitter, by providing feedback and public commentary about all aspects of our business. Information concerning us or our retailers and brands, whether accurate or not, may be posted on social media platforms at any time and may have a disproportionately adverse impact on our brand, reputation or business. The harm may be immediate without affording us an opportunity for redress or correction and could have a material adverse effect on our business, results of operations, financial condition and prospects.
If we are unable to successfully launch and monetize new and innovative technology, our growth and profitability could be adversely affected.
We are constantly developing new and innovative technology, such as Farfetch Store of the Future. Our ability to monetize these technologies and other new business lines in a timely manner and operate them profitably depends on a number of factors, many of which are beyond our control, including:
our ability to manage the financial and operational aspects of developing and launching new technology, including making appropriate investments in our software systems, information technologies and operational infrastructure;
our ability to secure required governmental permits and approvals;
the level of commitment and interest from our actual and potential third‑party innovators;
our competitors (including our existing retailers and brands who may launch competing technologies) developing and implementing similar or better technology;
our ability to effectively manage any third‑party challenges to the intellectual property behind our technology;
our ability to collect, combine and leverage data about our consumers collected online and through our new technology in compliance with data protection laws; and
general economic and business conditions affecting consumer confidence and spending and the overall strength of our business.
We may not be able to grow our new technologies or business lines or operate them profitability, and these new and innovative technology initiatives may never generate material revenue. In addition, the substantial management time and resources that our technology development requires may result in disruption to our existing business operations and adversely affect our financial condition, which may decrease our profitability and growth.
Our customer concentration may materially adversely affect our financial condition and results of operations.
For the year ended December 31, 2018, the top 1% of our consumers accounted for approximately 26% of our Marketplace GMV. Accordingly, our revenue, financial condition or results of operations may be unduly affected by fluctuations in the buying patterns of these consumers. If we were to lose the business of some or all of
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these consumers, it could materially adversely affect our business, results of operations, financial condition and prospects.
Our operating results are subject to seasonal and quarterly variations in our revenue and operating income, and as a result, our quarterly results may fluctuate and could be below expectations.
Our business is seasonal and historically, we have realized a disproportionate amount of our revenue and earnings for the year in the fourth quarter as a result of the holiday season and seasonal promotions, and we expect this to continue in the future. If we experience lower than expected revenue during any fourth quarter, it may have a disproportionately large impact on our operating results and financial condition for that year. Any factors that harm our fourth quarter operating results, including disruptions in our brands’ or retailers’ supply chains or unfavorable economic conditions, could have a disproportionate effect on our results of operations for our entire fiscal year.
In anticipation of increased sales activity during the fourth quarter, we may incur significant additional expenses, including additional marketing and additional staffing in our customer support operations. In addition, we may experience an increase in our net shipping costs due to complimentary upgrades, split‑shipments, and additional long‑zone shipments necessary to ensure timely delivery for the holiday season. At peak periods, there could also be further delays by our retailers and brands in processing orders, which could leave us unable to fulfill consumer orders due to “no stock,” or in packaging a consumer’s order once received, which could lead to lower consumer satisfaction. In the future, our seasonal sales patterns may become more pronounced, may strain our personnel and production activities and may cause a shortfall in net sales as compared with expenses in a given period, which could substantially harm our business, results of operations, financial condition and prospects.
Our quarterly results of operations may also fluctuate significantly as a result of a variety of other factors, including those described above. As a result, historical period‑to‑period comparisons of our sales and operating results are not necessarily indicative of future period‑to‑period results. You should not rely on the results of a single fiscal quarter as an indication of our annual results or our future performance.
We may not accurately forecast income and appropriately plan our expenses.
We base our current and future expense levels on our operating forecasts and estimates of future income. Income and operating results are difficult to forecast because they generally depend on the volume and timing of the orders we receive, which are uncertain. Additionally, our business is affected by general economic and business conditions around the world. A softening in income, whether caused by changes in consumer preferences or a weakening in global economies, may result in decreased revenue levels, and we may be unable to adjust our spending in a timely manner to compensate for any unexpected shortfall in income. This inability could cause our (loss)/income after tax in a given quarter to be (higher)/lower than expected. We also make certain assumptions when forecasting the amount of expense we expect related to our share based payments, which includes the expected volatility of our share price, the expected life of share options granted and the expected rate of share option forfeitures. These assumptions are partly based on historical results. If actual results differ from our estimates, our net income in a given quarter may be lower than expected.
We depend on highly skilled personnel, including senior management and our technology professionals, and if we are unable to retain or motivate key personnel or hire, retain and motivate qualified personnel, our business could be harmed.
We believe our success has depended, and our future success depends, on the efforts and talents of our senior management,leadership, particularly José Neves, our founder and chief executive officer,Chief Executive Officer, and all of our highly skilled team members, including our software engineers, data scientistsexecutive team and technology professionals.business unit leaders. Our future success depends on our continuing ability to attract, develop, motivate and retain highly qualifiedhighly-qualified and skilled employees. Our ability to do so can be impacted by a number of factors. For example, our ways of working in an increasingly remote and mobile landscape, our compensation benchmarks relative to our competitors and the impact of the volatility of our share price on our equity compensation offering may impact the attractiveness of joining our team.
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In particular, our data specialists, software engineers and technology professionals are key to designing, maintaining and improving the code and algorithms necessary to our business. In addition, members of our Private Client team have a niche skill-set and cater to some of our most important and highest spending consumers. If employees inmembers of our Farfetch Private Client businessteam leave Farfetch, this maythey could be difficult to replace, and such departures could impact on the ability of Farfetch to retain customersconsumers associated with such Farfetch Private Client team member.
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The New Guards management team is responsible for discovering and developing the brands in the New Guards portfolio and we will continue to rely on their expertise to drive the expansion of the portfolio. Certain designers and creators are critical to the success of the brands within the New Guards portfolio and their departure could have a significant impact on the creative direction of the relevant brand which could have a significant impact on such brand and New Guards’ business.
Competition for well‑qualifiedwell-qualified employees in all aspects of our business, including software engineers, data scientists and other technology professionals, is intense globally. Our continued ability to compete effectively depends on our ability to attract new employees and to retain and motivate existing employees. If we do not succeed in attracting well‑qualifiedwell-qualified employees or retaining and motivating existing employees and key senior management, our business, results of operations, financial condition and prospects may be adversely affected.
We may not be able to manage our growth effectively, and such rapid growth may adversely affect our corporate culture.
We have rapidly and significantly expanded our operations and anticipate expanding further as we pursue our growth strategies. Such expansion increases the complexity of our business and places a significant strain on our management, operations, technical systems, financial resources and internal control over financial reporting functions. Our current and planned personnel, systems, procedures and controls may not be adequate to support and effectively manage our future operations, especially as we employ people in 13 geographic locations. We are currently in the process of transitioning certain of our business and financial systems to systems on a scale reflecting the increased size, scope and complexity of our operations, and the process of migrating our legacy systems could disrupt our ability to timely and accurately process information, which could adversely affect our results of operations and cause harm to our reputation. As a result, we may not be able to manage our expansion effectively.
Our entrepreneurial and collaborative culture is important to us, and we believe it has been a major competitive advantage and contributor to our success. We may have difficulties maintaining our culture or adapting it sufficiently to meet the needs of our future and evolving operations as we continue to grow, in particular as we grow internationally. In addition, our ability to maintain our culture as a public company, with the attendant changes in policies, practices, corporate governance and management requirements may be challenging. Failure to maintain our culture could have a material adverse effect on our business, results of operations, financial condition and prospects.
General economic factors, natural disasters or other unexpected events may adversely affect our business, financial performance and results of operations.
Our business, financial performance and results of operations depend significantly on worldwide macroeconomic economic conditions and their impact on consumer spending. Luxury products are discretionary purchases for consumers. Recessionary economic cycles, higher interest rates, volatile fuel and energy costs, inflation, levels of unemployment, conditions in the residential real estate and mortgage markets, access to credit, consumer debt levels, unsettled financial markets and other economic factors that may affect consumer spending or buying habits could materially and adversely affect demand for our products. In addition, volatility in the financial markets has had and may continue to have a negative impact on consumer spending patterns. A reduction in consumer spending or disposable income may affect us more significantly than companies in other industries and companies with a more diversified product offering. In addition, negative national or global economic conditions may materially and adversely affect our suppliers’ financial performance, liquidity and access to capital. This may affect their ability to maintain their inventories, production levels and/or product quality and could cause them to raise prices, lower production levels or cease their operations.
Economic factors such as increased commodity prices, shipping costs, inflation, higher costs of labor, insurance and healthcare, and changes in or interpretations of other laws, regulations and taxes may also increase our cost of sales and our selling, general and administrative expenses, and otherwise adversely affect our financial condition and results of operations. Any significant increases in costs may affect our business disproportionately compared to our competitors. Changes in trade policies or increases in tariffs, including those recently enacted by the United States and proposed by China, may have a material adverse effect on global economic conditions and the stability of global financial markets and may reduce international trade.
Natural disasters and other adverse weather and climate conditions, public health crises, political crises, such as terrorist attacks, war and other political instability or other unexpected events, could disrupt our operations, internet or mobile networks or the operations of one or more of our third‑party service providers. For example, the vast majority of our production processes take place at our facility in Guimarães, Portugal. If any such disaster were
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to impact this facility, our operations would be disrupted. Such events may also impact consumer discretionary spending. If any of these events occurs, our business could be adversely affected.
We have acquired, and may continue to acquire, other companies or technologies, which could divert management’s attention and otherwise disrupt our operations and harm our operating results. We may fail to acquire companies whose market power or technology could be important to the future success of our business.
We have acquired and may in the future seek to acquire or invest in other companies or technologies that we believe could complement or expand our brand and products, enhance our technical capabilities, or otherwise offer growth opportunities. Pursuit of future potential acquisitions may divert the attention of management and cause us to incur various expenses in identifying, investigating, and pursuing suitable acquisitions, whether or not they are consummated. In addition, we may be unsuccessful in integrating our acquired businesses or any additional business we may acquire in the future, and we may fail to acquire companies whose market power or technology could be important to the future success of our business. For example, we acquired Browns in 2015, Fashion Concierge and Style.com in 2017 and Stadium Goods in 2019. We also signed agreements in 2018 and 2019 to acquire, respectively, CuriosityChina and certain assets relating to JD.com’s luxury fashion offering, Toplife, from JD.com.
We also may not achieve the anticipated benefits from any acquired business due to a number of factors, including:
unanticipated costs or liabilities associated with the acquisition, including costs or liabilities arising from the acquired companies’ failure to comply with intellectual property laws and licensing obligations to which they are subject;
incurrence of acquisition‑related costs;
diversion of management’s attention from other business concerns;
regulatory uncertainties;
harm to our existing business relationships with retailers and boutiques as a result of the acquisition;
harm to our brand and reputation;
the potential loss of key employees;
use of resources that are needed in other parts of our business; and
use of substantial portions of our available cash to consummate the acquisition.
In addition, a significant portion of the purchase price of companies we acquire may be allocated to acquired goodwill, which must be assessed for impairment at least annually. In the future, if our acquisitions do not yield expected returns, we may be required to take charges to our operating results based on this impairment assessment process. Acquisitions also could result in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our operating results. In addition, if an acquired business fails to meet our expectations, this may have a material adverse effect on our business, results of operations, financial condition and prospects.
We are involved in and may pursue strategic relationships. We may have limited control over such relationships, and these relationships may not provide the anticipated benefits.
We are involved in various strategic relationships, including with JD.com and the Chalhoub Group, which we expect will benefit our business and help us to achieve growth in China and the Middle East, respectively. For example, in February 2019, we entered into agreements to strengthen our strategic relationship with JD.com, which was driven by our aim to expand our presence in China as described in further detail in Item 7. “Major Shareholders and Related Party Transactions — B. Related Party Transactions.” We also may pursue and enter into strategic relationships in the future. Such relationships involve risks, including but not limited to: maintaining good working relationships with the other party; any economic or business interests of the other party that are inconsistent with ours; the other party’s failure to fund its share of capital for operations or to fulfill its other commitments, including providing accurate and timely accounting and financial information to us, which could negatively impact our operating results; loss of key personnel; actions taken by our strategic partners that may not be compliant with
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applicable rules, regulations and laws; reputational concerns regarding our partners or our leadership; bankruptcy, requiring us to assume all risks and capital requirements related to the relationship, and the related bankruptcy proceedings could have an adverse impact on the relationship; and any actions arising out of the relationship that may result in reputational harm or legal exposure to us. Further, these relationships may not deliver the benefits that were originally anticipated. Any of these factors may have a material adverse effect on our business, results of operations, financial condition and prospects.
A failure to comply with current laws, rules and regulations or changes to such laws, rules and regulations and other legal uncertainties may adversely affect our business, financial performance, results of operations or business growth.
Our business and financial performance could be adversely affected by unfavorable changes in, or interpretations of, existing laws, rules and regulations or the promulgation of new laws, rules and regulations applicable to us and our businesses, including those relating to theonline intermediation services providers, internet and e-commerce, including geo‑blockingthose against geo-blocking and other geographically based restrictions, internet advertising and price display, consumer protection, anti‑corruption,anti-corruption, antitrust and competition, foreign investment, economic and trade sanctions, tax, banking, data security, network and information systems security, data protection and privacy.privacy, platform regulation, including the regulation of providing goods online, marketplace liability for counterfeit or damaged goods and any litigation resulting therefrom. As a result, regulatory authorities or state and supranational bodies with relevant powers, including courts, could prevent or temporarily suspend us from carrying on some or all of our activities or otherwise penalize us if our practices were found not to comply with applicable regulatory or licensing requirements or any binding interpretation of such requirements. Regulatory reform of the wider digital sector (including online marketplaces) is increasing the compliance burden on how online marketplaces can operate and provide services to their business users and customers in the European Union, the United States, China and beyond. These various laws, regulations and rules, depending on their final scope when passed, could adversely affect our business, results of operations, financial condition and prospects. Unfavorable new requirements and regulatory burdens as well as changes or new interpretations of existing laws could decrease demand for our products and services, limit our ability to expand our product and service offerings, limit marketing methods and capabilities, affect our margins, increase costs or subject us to additional liabilities.liabilities or affect our ability to deliver our growth strategy.
For example, there
There are, and will likely continue to be, an increasing number of laws and regulations pertaining to the internet, e-commerce and e-commercethe regulation of online platforms that may relate to liability for information retrieved from or transmitted over the internet, display of certain taxes and fees, online editorial and consumer‑generatedconsumer-generated content, user privacy, data security, network and information systems security, behavioral targeting and online advertising, taxation, liability for third‑partythird-party activities and the quality of services. For example, we are required to implement an additional level of consumer authentication for certain transactions involving parties in the European Union completed on our Marketplaces under an aspect of the EU Revised Payment Service Directive, which had a deadline of December 31, 2020, subject to applicable grace periods and ramp-up periods permitted by regulatory authorities. This additional authentication may deter consumers from completing transactions online, which may affect our business. Furthermore, the growth and development of e-commerce may promptis prompting calls for more stringent consumer protection laws and more aggressive enforcement efforts, which may impose additional burdens on online businesses generally. As we expand our offering, including in respect of highly regulated product categories such as kidswear and beauty, we expect the compliance burden to increase, and the risk of claims, lawsuits, government investigations, and other proceedings in respect of product compliance or safety may do the same. Additionally, changes in government trade policy, including the imposition of tariffs, export restrictions, or other limitations on
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commerce, may adversely and materially affect our ability to offer certain payment methods or to conduct our business in particular jurisdictions.
Likewise, the United States, European Union, United Kingdom and other competent regulatory authorities, including in the case of the United States, the SEC, the U.S. Department of Justice, the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”),and the U.S. Department of State as well as other foreign regulatory authorities continue to enforce economic and trade regulations and anti‑corruptionanti-corruption laws, as applicable, across industries. U.S. economic and trade sanctions relate to transactions with designated foreign countries and territories, includingwhich currently include Cuba, Iran, North Korea, Syria, the so-called Donetsk People’s Republic and Luhansk People’s Republic regions of Ukraine and the Crimea region of Ukraine, (“Crimea”) as well as specially targetedspecially-targeted individuals and entities that are identified on U.S. and other government blacklists, and those 50% or more owned, individually or in the aggregate, by them or those acting on their behalf. Anti‑corruptionEU and UK sanctions prohibit the export of luxury goods (including apparel over stated values) to certain countries, including Syria and North Korea, and transactions with designated persons and entities identified on EU and UK lists of asset freeze targets and entities majority-owned or controlled by any such designated persons. Anti-corruption laws, including the U.S. Foreign Corrupt Practices Act (the “FCPA”(“FCPA”) and the UK Bribery Act (the “Bribery(“Bribery Act”), generally prohibit direct or indirect corrupt payments to government officials and,(and, under certain laws, to private personspersons) to obtain or retain business or an improper business advantage. Some of our international operations are conducted in parts of the world where it is more common to engage in business practices that aremay be prohibited by these laws. Moreover, in the future additional U.S., EU and UK trade and economic sanctions or regulations, enacted due to geopolitics or otherwise, and any counter-sanctions enacted by such sanctioned countries, could restrict our ability to operate or to generate or collect revenue in certain other countries, such as Russia, which could adversely affect our business. In particular, in relation to Russia, which accounted for 6% of GMV in the year ended December 31, 2021, recent sanctions are expected to significantly impact the Company’s operations in this and the wider CIS region.
Although we have
The policies and procedures we have in place which are designed to promote compliance with laws and regulations and which we review and update as we expand our operations in existing and new jurisdictions, in order to proportionately address risks of non‑compliance with applicable laws and regulations,as well as new product categories, may not prevent our employees, partners, or agents could takefrom taking actions in contravention of our policies and procedures or violateand may result in a violation of applicable laws or regulations. As regulations continue to develop and evolve, and, as we expand into new jurisdictions, we may be subject to multiple overlapping legal or regulatory oversight continuesregimes, the scope of which are regularly changing, subject to focus on these areas, weuncertain and differing interpretations and may impose conflicting requirements. We cannot guarantee that our policies and procedures will ensure compliance at all times with all applicable laws or regulations. In the event our controls should fail, or we are found to be not in compliance for other reasons, we could be subject to monetary damages, substantial civil and criminal monetary penalties, withdrawal of business licenses or permits, litigation, investigation costs and expenses and damage to our reputation and the value of our brand.
As we expand our operations in existing and new jurisdictions internationally, we will need to increase the scope of our compliance programs to adequately address the risks relating to the potential for violations ofapplicable economic and trade sanctions, the FCPA, and the Bribery Act and other anti‑briberyanti-bribery and anti‑corruptionanti-corruption laws and consumer protection and product safety laws. Further, the promulgation of new laws, rules and regulations, or the new interpretation of existing laws, rules and regulations, in each case that restrict or otherwise unfavorably impact the ability or manner in which we or our retailers and brandsluxury sellers conduct business, could require us to change certain aspects of our business, operations and commercial relationships to ensure compliance, which could decrease demand for services, reduce revenue, increase costs or subject us to additional liabilities.
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The increasing impact of and focus on environmental, social and governance (“ESG”) matters could increase our costs, harm our reputation and adversely affect our financial results.
There has been an increased focus, including by consumers, investors, employees and other stakeholders, as well as by governmental and non-governmental organizations, on ESG matters generally (including climate change, diversity and inclusion and responsible sourcing) and with regard to the fashion industry specifically. From time to time, we announce certain initiatives, including goals, regarding our ESG focus areas, which include matters such as responsible sourcing and marketing, social investments and inclusion and diversity. Any failure or perceived failure by us to meet our commitments, or perception that our targets are insufficient, with regard to ESG matters could negatively affect our brand, the demand for our products, and, therefore, our financial condition and prospects. Our
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Wereputation could be damaged if we, our suppliers, and other parties in our supply chain do not (or are subjectperceived not to) act responsibly regarding ESG standards or if we fail to tradeappropriately respond to concerns raised by our consumers, investors and economic sanctions and export laws that may govern or restrictother stakeholders, which could have a material adverse effect on our business, financial condition, access to capital and results of operations. The costs to achieve our ESG goals, the increased costs in our supply chain in relation to ensuring the ESG performance of our suppliers, and the costs or potential impact from business decisions informed by ESG matters could have a material adverse effect on our business and financial condition; and we may decide to pursue less cost-efficient production, packaging or other operational elements of our business to ensure we are meeting our sustainability objectives. In addition, we and our suppliers may face increased costs arising from the physical effects of climate change and diminishing energy and water resources. Further, standards regarding ESG matters could develop and become more onerous both for us and the parties in our supply chain, which could result in additional costs that have a material adverse effect on our business and financial condition.
In addition, regulatory and consumer attention to responsible sourcing has placed an increased focus on supply chain integrity. We expect our suppliers to meet our standards, including those outlined in our Modern Slavery Statement, Vendor Code of Conduct and Ethical Sourcing Policy; however, we cannot guarantee their compliance. Increased global scrutiny and regulatory action may result in additional diligence and other requirements related to the integrity of our supply chain. Such requirements may be burdensome or costly to comply with and may impact the production strategy for our first-party original merchandise. The dispersed nature of our Marketplace model will make monitoring supplier compliance with regulatory or Farfetch standards more complex. As regulations continue to develop and evolve in this area, and as we expand into new jurisdictions or categories, we may be subject to finesnew regulatory regimes related to supply chain integrity, the scope of which are regularly changing, subject to uncertain and differing interpretations and may impose conflicting requirements. Challenges in complying with such regulations and the failure to implement robust diligence processes may result in reputational damage, business interruption, loss of trust in our brand or other penalties for non‑compliance with those laws.
We are subject to U.S. lawsESG efforts and regulations that may govern or restricthave a material adverse impact on our business and activitiesfinancial condition.
The adoption of new ESG-related regulations applicable to our business, or pressure from key stakeholders to comply with additional voluntary ESG-related initiatives or frameworks, could require us to make substantial investments in certain countries and with certain persons, including trade and economic sanctions regulations administered by OFAC and the Export Administration Regulations administered by the U.S. Commerce Department’s Bureau of Industry and Security (“BIS”). In March 2018, we determined that certain products purchased on our Marketplace were shipped to addresses associated with Crimea. In December 2014, the United States announced a near complete embargo on exports of items from the United States to Crimea. On April 27, 2018, we submitted an initial voluntary self‑disclosure regarding these shipments to OFAC and BIS, and on October 24, 2018 we submitted our final voluntary self-disclosure report (“Final Disclosure”) outliningESG matters, which could impact the results of our review ofoperations. Decisions or related investments in this matter. As described in the Final Disclosure, we determined that three products purchasedregard could affect consumer perceptions regarding our brand. Furthermore, if our competitors’ ESG performance is perceived to be better than ours, potential or current investors may elect to invest with our competitors instead, which could have a material adverse effect on our Marketplace from retailers or brands in the United States were shipped to parties whose addresses are associated with Crimeabusiness and that on one occasion, a retailer on our Marketplace outside the United States shipped what appears to be a U.S.‑origin product to an address associated with Crimea. The combined value of the four shipments at issue in the Final Disclosure was $391.24. Since March 2018 we have put in place measures designed to prevent the fulfilment of orders associated with addresses in Crimea and these measures are described in the Final Disclosure. By letter dated February 25, 2019, the U.S. Commerce Department closed out the matter with the issuance of a Warning Letter and no assessment of a monetary penalty. We cannot predict how long it will take OFAC to complete its review of the Final Disclosure and reach a determination on these shipments to Crimea. If we are found to be in violation of U.S. sanctions or export control laws, in relation to these shipments or other matters in the future, it could result in fines and penalties for us, which could be substantial. Moreover, notwithstanding the safeguards we have put in place to ensure compliance with U.S. sanctions or export control laws, we cannot be certain that these safeguards will be effective in all cases. In the future, additional U.S. trade and economic sanctions regulations, enacted due to geopolitics or otherwise, could restrict our ability to generate revenue in certain other countries, such as Russia, which could adversely affect our business.financial condition.
We are subject to customs and international trade laws that could require us to modify our current business practices and incur increased costs or could result in a delay in getting products through customs and port operations, which may limit our growth and cause us to suffer reputational damage.
Our business is conducted worldwide, with goods imported from and exported to a substantial number of countries. The vast majority of products sold on our MarketplaceMarketplaces are shipped internationally. We are subject to numerous regulations, including customs and international trade laws, that govern the importation and sale of luxury goods. Our ability to grow our operations globally may be adversely affected by any circumstances that reduce or hinder cross-border trade. For example, the shipping of goods cross-border typically involves complex customs and duty inspections and is dependent on national carrier systems. If jurisdictions become increasingly fragmented by tariffs and customs that increase the cost or complexity of cross-border trade, our business could be adversely impacted.
Our consumers in certain countries, such as China and Russia, are also subject to limitations and regulations governing the import of luxury goods. In addition, we face risks associated with trade protection laws, policies and measures and other regulatory requirements affecting trade and investment, including the loss or modification of exemptions for taxes and tariffs, the imposition of new tariffs and duties and import and export licensing requirements in the countries in which we operate, in particular in China, where trade relations betweenoperate. For example, the United StatesKingdom’s exit from the European Union has resulted in, and China are uncertain andmay result in additional, restrictions, regulations or other non-tariff barriers to trade as a result, in part, of a divergence in the United Kingdom where an exit fromand the European Union’s respective regulatory regimes, in each case concerning our cross-border operations between the United Kingdom and European Union. In addition, any imposition of tariffs by the United States or European Union could result in the creationadoption of additional tariffs or trade
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restrictions by other countries, which could affect the movement of our goods, or regulations concerning our operations in and outside of the United Kingdom.potentially lead to a global trade war. Our failure to comply with import or export rules and restrictions or to properly classify items under tariff regulations and pay the appropriate duties could expose us to fines and penalties. If these laws or regulations were to change or were violated by our management, employees, retailers or brands,our luxury sellers, we could experience delays in the shipments of our goods, be subject to fines or penalties, or suffer reputational harm, which could reduce demand for our services and negatively impact our results of operations.
Legal requirements are frequently changed and subject to interpretation, and we are unable to predict the ultimate cost of compliance with these requirements or their effects on our operations. We may be required to make significant expenditures or modify our business practices to comply with existing or future laws and regulations, which may increase our costs and materially limit our ability to operate our business.
Our business depends on our ability to source and distribute products in a timely manner. As a result, we rely on the free flow of goods through open and operational ports worldwide. Labor disputes or other disruptions at ports, including potentially as a result from changes in tariff structures in relation to the United Kingdom’s withdrawal from the European Union, for example, create significant risks for our business, particularly if work slowdowns, lockouts, strikes or other disruptions occur. Any of these factors could result in reduced sales or canceled orders, which may limit our growth and damage our
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reputation and may have a material adverse effect on our business, results of operations, financial condition and prospects.
Governmental control of currency conversion may limit our ability to utilize our cash balances effectively and affect our ability to pay dividends in the future.
We are subject to governmental regulation of currency conversion and transfers, which may particularly affect our subsidiaries in certain jurisdictions. For example, the Chinese government imposes controls on the convertibility of the Renminbi (“RMB”) into foreign currencies and, in certain cases, the remittance of currency out of China. Our revenue is partially derived from sales to consumers in China and earnings from our Chinese operations, and substantially all of our revenue from such sales is denominated in RMB. Shortages in the availability of foreign currency may restrict the ability of our Chinese operations to remit sufficient foreign currency to pay dividends or to make other payments to us, or otherwise to satisfy their foreign currency‑denominated obligations. Under existing Chinese foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade‑related transactions, can be made in foreign currencies without prior approval from China’s State Administration of Foreign Exchange (“SAFE”) by complying with certain procedural requirements. However, for any Chinese company, dividends can be declared and paid only out of the retained earnings of that company under Chinese law. Under Chinese laws, rules and regulations, each of our subsidiaries incorporated in China is required to set aside at least 10% of its net income each year to fund certain statutory reserves until the cumulative amount of such reserves reaches 50% of its registered capital. These reserves, together with the registered capital, are not distributable as cash dividends. As a result of these laws, rules and regulations, our subsidiaries incorporated in China are restricted in their ability to transfer a portion of their respective net assets to their shareholders as dividends, loans or advances.
Furthermore, approval from SAFE or its local branch is required where RMB are to be converted into foreign currencies and remitted out of China to pay capital expenses, such as the repayment of loans denominated in foreign currencies. Without a prior approval from SAFE, cash generated from our operations in China may not be used to pay off debt in a currency other than the RMB owed by entities within China to entities outside China, or make other capital expenditures outside China in a currency other than the RMB.
The Chinese government may also at its discretion restrict access in the future to foreign currencies for current account transactions. In response to the persistent capital outflow in China and RMB’s depreciation against the U.S. dollar in the fourth quarter of 2016, the People’s Bank of China and SAFE have implemented a series of capital control measures over recent months, including stricter vetting procedures for China‑based companies to remit foreign currency for overseas acquisitions, dividend payments and shareholder loan repayments. For instance, on January 26, 2017, SAFE issued the Notice of State Administration of Foreign Exchange on Improving the Review of Authenticity and Compliance to Further Promote Foreign Exchange Control, which stipulates several capital control measures with respect to the outbound remittance of profit from domestic entities to offshore entities, including (1) under the principle of genuine transaction, banks shall check board resolutions regarding profit distribution, the original version of tax filing records and audited financial statements; and (2) domestic entities shall hold income to account for previous years’ losses before remitting the profits. The People’s Republic of China government may continue to strengthen its capital controls, and more restrictions and substantial vetting process may be put in place by SAFE for cross‑border transactions falling under both the current account and the capital account. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay dividends in currencies other than RMB to our shareholders or service and repay our indebtedness when due.
For us to receive dividends from our operations in China, repatriation of funds from China to the United Kingdom will be required under our current structure. Insofar as such repatriation requires the prior approval of SAFE or is deemed to not be in compliance with the authenticity and compliance requirements, we could be delayed, restricted or limited in receiving dividends from our Chinese subsidiaries, which may limit our ability to pay dividends to holders of the Class A ordinary shares or otherwise fund and conduct our business. Moreover, there can be no assurance that the rules and regulations pursuant to which SAFE grants or denies such approval will not change in a way that adversely affects our ability to receive dividends from our Chinese operations, which, in turn, would restrict our ability to pay dividends to our shareholders or otherwise fund and conduct our business.
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Application of existing tax laws, rules or regulations are subject to interpretation by taxing authorities.
The application of the tax laws of various jurisdictions to our international business activities is subject to interpretation. The taxing authorities of the jurisdictions in which we operate may challenge our methodologies for valuing developed technology or intercompany arrangements, including our transfer pricing, or determine that the manner in which we operate our business does not achieve the intended tax consequences, which could increase our worldwide effective tax rate and adversely affect our financial position and results of operations.
Significant judgment and estimation is required in determining our worldwide tax liabilities. In the ordinary course of our business, there are transactions and calculations, including intercompany transactions and cross‑jurisdictional transfer pricing, for which the ultimate tax determination is uncertain or otherwise subject to interpretation. Tax authorities in any of the countries in which we operate may disagree with our intercompany charges, including the amount of, or basis for, such charges, cross‑jurisdictional transfer pricing or other matters such as the allocation of certain interest expenses and other tax items, and assess additional taxes.
As we operate in numerous taxing jurisdictions, the application of tax laws can be subject to diverging and sometimes conflicting interpretations by tax authorities of these jurisdictions. It is not uncommon for taxing authorities in different countries to have conflicting views, for instance, with respect to, among other things, whether a permanent establishment exists in a particular jurisdiction, the manner in which the arm’s length standard is applied for transfer pricing purposes, or with respect to the valuation of intellectual property. For example, if the taxing authority in one country where we operate were to reallocate income from another country where we operate, and the taxing authority in the second country did not agree with the reallocation asserted by the first country, we could become subject to tax on the same income in both countries, resulting in double taxation. If taxing authorities were to allocate income to a higher tax jurisdiction, subject our income to double taxation or assess interest and penalties, it could increase our tax liability, which could adversely affect our financial position and results of operations.
Although we believe our tax estimates and methodologies are reasonable, a taxing authority’s final determination in the event of a tax audit could materially differ from our historical corporate income tax provisions and accruals, in which case we may be subject to additional tax liabilities, possibly including interest and penalties, which could have a material adverse effect on our cash flows, results of operations, financial condition and prospects. Furthermore, taxing authorities have become more aggressive in their interpretation and enforcement of such laws, rules and regulations over time, as governments are increasingly focused on ways to increase revenues. This has contributed to an increase in audit activity and harsher stances by tax authorities. As such, additional taxes or other assessments may be in excess of our current tax reserves or may require us to modify our business practices to reduce our exposure to additional taxes going forward, any of which may have a material adverse effect on our business, results of operations, financial condition and prospects.
Amendments to existing tax laws, rules or regulations or enactment of new unfavorable tax laws, rules or regulations could have an adverse effect on our business and financial performance.
Many of the underlying laws, rules or regulations imposing taxes and other obligations were established before the growth of the internet and e-commerce. Tax authorities in non‑U.S. jurisdictions and at the U.S. federal, state and local levels are currently reviewing the appropriate treatment of companies engaged in internet commerce and considering changes to existing tax or other laws that could regulate our transmissions and/or levy sales, income, consumption, use or other taxes relating to our activities, and/or impose obligations on us to collect such taxes. For example, in March 2018 the European Commission proposed new rules for taxing digital business activities in the European Union. We cannot predict the effect of current attempts to impose taxes on commerce over the internet. If such tax or other laws, rules or regulations were amended, or if new unfavorable laws, rules or regulations were enacted, the results could increase our tax payments or other obligations, prospectively or retrospectively, subject us to interest and penalties, decrease the demand for our services if we pass on such costs to the consumer, result in increased costs to update or expand our technical or administrative infrastructure or effectively limit the scope of our business activities if we decided not to conduct business in particular jurisdictions. As a result, these changes may have a material adverse effect on our business, results of operations, financial condition and prospects.
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In addition, various governments and intergovernmental organizations could introduce proposals for tax legislation, or adopt tax laws, that may have a significant adverse effect on our worldwide effective tax rate, or increase our tax liabilities, the carrying value of deferred tax assets, or our deferred tax liabilities. For example, in October 2015, the Organization for Economic Co‑Operation and Development (“OECD”) released a final package of recommended tax measures for member nations to implement in an effort to limit “base erosion and profit shifting” (“BEPS”) by multinational companies. Since then, the OECD has continued to monitor key areas of action and issue additional reports and guidance on implementation of the BEPS recommendations. Multiple jurisdictions, including some of the countries in which we operate, have begun implementing recommended changes aimed at addressing perceived issues within their respective tax systems that may lead to reduced tax liabilities among multinational companies. It is possible that other jurisdictions in which we operate or do business could react to the BEPS initiative or their own concerns by enacting tax legislation that could adversely affect us through increasing our tax liabilities.
In December 2017, the United States enacted significant changes to the U.S. tax system (informally titled the “Tax Cuts and Jobs Act”). Among such significant changes, the Tax Cuts and Jobs Act reduced the marginal U.S. corporate income tax rate from 35% to 21%, limited the deduction for net business interest expense, shifted the United States toward a more territorial tax system, imposed a one‑time tax on accumulated offshore earnings held in cash and illiquid assets, and imposed new taxes to combat erosion of the U.S. federal income tax base. The Treasury Department and the IRS have already issued and are expected to continue to provide guidance on the implementation of the Tax Cuts and Jobs Acts. Based on our evaluation of the Tax Cuts and Jobs Act, we do not expect these changes to have an impact on our business, however, we cannot be certain that additional guidance from the Treasury Department and the IRS or additional changes to other U.S. tax laws, rules or regulations will not impact our business or results of operations in the future
The application of indirect taxes and the impact of managing our business model transition to a commissionaire structure could adversely affect our business and results of operations.
The application of indirect taxes, such as sales and use tax, value‑added tax, provincial taxes, goods and services tax, business tax and gross receipt tax, to our business and to our retailers and brands is a complex and evolving issue. Significant judgment is required to evaluate applicable tax obligations. As a result amounts recorded may be subject to adjustments by the relevant tax authorities. In many cases, the ultimate tax determination is uncertain because it is not clear how new and existing statutes might apply to our business or to the businesses of our retailers and brands. One or more states, the federal government or other countries may seek to impose additional reporting, record‑keeping or indirect tax collection obligations on businesses like ours that facilitate e-commerce. For example, state and local taxing authorities in the United States and taxing authorities in other countries have identified e-commerce platforms as a means to calculate, collect and remit indirect taxes for transactions taking place over the internet. Multiple U.S. states have enacted related legislation and other states are now considering such legislation. Furthermore, the U.S. Supreme Court has held in South Dakota v. Wayfair that a U.S. state may require an online retailer to collect sales taxes imposed by that state, even if the retailer has no physical presence in that state, thus permitting a wider enforcement of such sales tax collection requirements. Such legislation could require us or our retailers and brands to incur substantial costs in order to comply, including costs associated with legal advice, tax calculation, collection, remittance and audit requirements, which could make selling in such markets less attractive and could adversely affect our business.
We have historically operated under a “de‑coupling structure,” meaning that our business model currently involves a supply, which is the sale of goods to end consumers, by our retailers and brands, and then a separate supply by us comprising the shipping of those goods to the end consumers. However, the European Commission and courts in the United Kingdom are currently considering the effectiveness of such a structure from an indirect tax viewpoint. If this leads to a change in legislation or a change in interpretation of current legislation, we could be assessed to additional amounts of value added tax. To provide more certainty, we are transitioning our business model to one in which we will act as an “undisclosed agent” or “commissionaire” of our retailers and brands. For the purposes of calculating value added tax, our end consumers will contract with and be invoiced by us and there will be a supply by us to the end consumer of goods and other related services, although the legal sale of goods will continue to be between our retailers and brands and the end consumer. Such a transition is intended to provide greater certainty to our value added tax accounting position without materially increasing our overall value added tax liabilities.
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Our ability to achieve our business and financial objectives is subject to risks and uncertainties. Implementing the new business model requires a considerable investment of technical, financial and legal resources. If we are unable to successfully establish our new business model, our business, results of operations, financial condition and prospects could be negatively impacted.
We may be subject to claims that items listed on our website, or their descriptions, are counterfeit, infringing or illegal.
We occasionally receive communications alleging that items listed on our Marketplace infringe third‑party copyrights, trademarks or other intellectual property rights. We have intellectual property complaint and take‑down procedures in place to address these communications. We follow these procedures to review complaints and relevant facts to determine the appropriate action, which may include removal of the item from our website and, in certain cases, discontinuing our relationship with a retailer or brand who repeatedly violates our policies. However, our procedures may not effectively reduce or eliminate our liability. In particular, we may be subject to civil or criminal liability for activities carried out, including products listed, by retailers or brands on our platform.
Regardless of the validity of any claims made against us, we may incur significant costs and efforts to defend against or settle them and such claims could lead to negative publicity and damage to our reputation. If a governmental authority determines that we have aided and abetted the infringement or sale of counterfeit goods, we could face regulatory, civil or criminal penalties. Successful claims by third‑party rights owners could require us to pay substantial damages or refrain from permitting any further listing of the relevant items. These types of claims could force us to modify our business practices, which could lower our revenue, increase our costs or make our Marketplace less user friendly. Moreover, public perception that counterfeit or other unauthorized items are common on our Marketplace, even if factually incorrect, could result in negative publicity and damage to our reputation.
If our retailers and brands experience any recalls, product liability claims, or government, customer or consumer concerns about product safety with respect to products sold on our Marketplace, our reputation and sales could be harmed.
Our retailers and brands are subject to regulation by the U.S. Consumer Product Safety Commission and similar state and international regulatory authorities, and their products sold on our platform could be subject to involuntary recalls and other actions by these authorities. Concerns about product safety, including concerns about the safety of products manufactured in developing countries, could lead our retailers and brands to recall selected products sold on our Marketplace. Recalls and government, customer or consumer concerns about product safety could harm our reputation and reduce sales, either of which could have a material adverse effect on our business, results of operations, financial condition and prospects.
Our global operations involve additional risks, and our exposure to these risks will increase as our business continues to expand.
We operate in a number of jurisdictions and intend to continue to expand our global presence, including in emerging markets. We face complex, dynamic and varied risk landscapes in the markets in which we operate. As we enter countries and markets that are new to us, we must tailor our services and business model to the unique circumstances of such countries and markets, which can be complex, difficult, costly and divert management and personnel resources. In addition, we may face competition in other countries from companies that may have more experience with operations in such countries or with global operations in general. Laws and business practices that favor local competitors or prohibit or limit foreign ownership of certain businesses or our failure to adapt our practices, systems, processes and business models effectively to the consumer and supplier preferences of each country into which we expand, could slow our growth. Certain markets in which we operate have, or certain new markets in which we may operate in the future may have, lower margins than our more mature markets, which could have a negative impact on our overall margins as our revenue from these markets growgrows over time. Additionally, our operations in certain countries may be adversely affected by the COVID-19 pandemic, which can trigger government-mandated restrictions and other measures to minimize the spread of COVID-19. These heightened restrictions have been adopted at the country, state and local level and differ in the various regions in which we operate, which could make complying with such restrictions complex.
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In addition to the risks outlined elsewhere in this section, our global operations are subject to a number of other risks, including:
currency exchange restrictions or costs and exchange rate fluctuations;
• | currency exchange restrictions or costs and exchange rate fluctuations; |
exposure to local economic or political instability, threatened or actual acts of terrorism and security concerns in general;
• | exposure to local economic or political instability, including, for example, in connection with the conflict between Russia and Ukraine, or threatened or actual acts of terrorism and security concerns; |
compliance with various laws and regulatory requirements relating to anti‑corruption, antitrust or competition, economic sanctions, data content, data protection and privacy, consumer protection, employment and labor laws, health and safety, and advertising and promotions;
• | compliance with various laws and regulatory requirements relating to anti-corruption, antitrust or competition, economic sanctions, customs, data content, data protection and privacy, consumer protection, employment and labor laws, health and safety, and advertising and promotions; |
differences, inconsistent interpretations and changes in various laws and regulations, including international, national, state and provincial and local tax laws;
• | differences, inconsistent interpretations and changes in various laws and regulations, including international, national, state and provincial and local tax laws; |
weaker or uncertain enforcement of our contractual and intellectual property rights;
• | weak or uncertain protection and enforcement of our contractual and intellectual property rights; |
preferences by local populations for local providers;
• | preferences by local populations for local providers; |
slower adoption of the internet and mobile devices as advertising, broadcast and commerce mediums and the lack of appropriate infrastructure to support widespread internet and mobile device usage in those markets;
• | slow adoption of the internet and mobile devices as advertising, broadcast and commerce mediums and the lack of appropriate infrastructure to support widespread internet and mobile device usage in those markets; |
• | our ability to support new technologies, including mobile devices, that may be more prevalent in certain global markets; |
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our ability to support new technologies, including mobile devices, that may be more prevalent in certain global markets;
• | difficulties in attracting and retaining qualified employees in certain international markets, as well as managing staffing and operations due to increased complexity, distance, time zones, language and cultural and employment law differences; and |
difficulties in attracting and retaining qualified employees in certain international markets, as well as managing staffing and operations due to increased complexity, distance, time zones, language and cultural differences; and
• | uncertainty regarding liability for services and content, including uncertainty as a result of local laws and lack of precedent. |
We are subject to regulatory activity and antitrust litigation under competition laws.
We are subject to scrutiny by various government agencies, including competition authorities. Some jurisdictions also provide private rights of action for competitors, consumers, suppliers or business users to assert claims of anti-competitive conduct or breach of law. Other companies or government agencies have in the past and may in the future allege that our actions violate the antitrust or competition laws of the European Union, individual member states or other countries or otherwise constitute unfair competition. We do not control the pricing strategies of luxury sellers on our Marketplaces (other than for our Group entities, i.e., Browns, Stadium Goods’ first-party sales and the New Guards portfolio of brands when sold direct-to-consumer via our Marketplaces), and such pricing strategies may be subject to challenges from various government agencies including competition authorities. An increasing number of governments, including the government of the PRC and the member states of the European Union, are regulating competitive behavior, and are, for example, engaging in increased scrutiny of the way in which digital marketplaces operate and provide services to their business users and end customers. Our business partnerships or agreements or arrangements with customers or other third-parties could give rise to regulatory action or private antitrust litigation. Regulators may perceive our business differently such that otherwise uncontroversial business practices could be deemed anticompetitive. Certain competition authorities have conducted market studies of industries in which we are active. Such studies, investigations or potential claims, even if without foundation, may be very expensive to defend, involve negative publicity and substantial diversion of management time and effort and could result in significant judgments against us or require us to change our business practices.
Fluctuations in exchange rates may adversely affect our results of operations.
Our financial information is presented in U.S. dollars, which differs from the underlying functional currencies of certain of our subsidiaries (including New Guards whose functional currency is the euro), exposing us to foreign exchange translation risk on consolidation. This risk is currently not hedged and therefore our results of operations have in the past, and will in the future, fluctuate due to movements in exchange rates when currencies are translated into U.S. dollars. Macroeconomic factors, including geopolitical uncertainty could lead to increased volatility in the currency markets, which would exacerbate such fluctuations. At a subsidiary level we are exposed to transactional foreign exchange risk because we earn revenues and incur expenses in a number of different foreign currencies relative to the relevant subsidiary’s functional currency, mainly the pound sterling and the euro. Movements in exchange rates therefore impact our subsidiaries and thus, our consolidated results and cash flows. We hedge a portion of our core transactional exposures using forward foreign exchange contracts and foreign exchange option contracts; however, we are exposed to fluctuations in exchange rates on the unhedged portion of the exposures that could harm our business, results of operations, financial condition and prospects. In addition, as our operational and financial forecasts drive our hedging program, should our results of operations differ materially from those forecasts, our hedging program may not be sufficient to adequately mitigate the exposure to currency risk across a given period.
Our consumer concentration may materially adversely affect our financial condition and results of operations.
For the year ended December 31, 2021, the top 1% of our consumers accounted for 27.5% of our Digital Platform GMV. Accordingly, our revenue, financial condition or results of operations may be unduly affected by fluctuations in the buying patterns of these consumers. If we were to lose the business of some or all of these consumers, it could materially adversely affect our business, results of operations, financial condition and prospects.
We may not accurately forecast income and appropriately plan our expenses.
We base our current and future expense levels on our operating forecasts and estimates of future income. Income and operating results are difficult to forecast because they generally depend on the volume and timing of the
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orders we receive, which are uncertain, especially in light of the COVID-19 pandemic, and our business is affected by general economic and business conditions around the world. A softening in income, whether caused by changes in consumer preferences or a weakening in global economies, may result in decreased revenue levels, and we may be unable to adjust our spending in a timely manner to compensate for any unexpected shortfall in income. Similarly our expense levels may be impacted by external factors which are uncertain, including the cost of carriers, duty costs or cost inflation related to global shipping which may lead to variations in our planned levels of expenditure. This inability could cause our (loss)/income after tax in a given quarter to be (higher)/lower than expected. Further, our operating results may be impacted by changes in (losses)/gains on items held at fair value and by fluctuations in our share price, which we are unable to forecast. We also make certain assumptions when forecasting the amount of expense we expect related to our share based payments, which includes the expected volatility of our share price, the expected life of share options granted and the expected rate of share option forfeitures. These assumptions are partly based on historical results. If actual results differ from our estimates, our net income in a given quarter may be lower than expected.
Our operating results are subject to seasonal and quarterly variations in our revenue and operating income, and as a result, our quarterly results may fluctuate and could be below expectations.
Our business is seasonal and historically we have realized a disproportionate amount of our revenue and earnings for the year in the fourth quarter as a result of local lawsthe holiday season and lack of precedent.
The United Kingdom’sseasonal promotions, and we expect this to continue in the future, while our Brand Platform operates to a wholesale cycle with a different seasonal cadence. If we experience lower than expected withdrawal from the European Unionrevenue during any fourth quarter, it may have a negativedisproportionately large impact on our operating results and financial condition for that year. Any factors that harm our fourth quarter operating results, including disruptions in our brands’ or retailers’ supply chains or unfavorable economic conditions, including as a result of the COVID-19 pandemic, could have a disproportionate effect on global economic conditions,our results of operations for our entire fiscal year.
In anticipation of increased sales activity during the fourth quarter, we may incur significant additional expenses, including additional marketing and additional staffing in our customer support operations. We also may experience an increase in our net shipping costs due to complimentary upgrades, split-shipments, and additional long-zone shipments necessary to ensure timely delivery for the holiday season. At peak periods, there could also be further delays by our luxury sellers in processing orders, which could leave us unable to fulfill consumer orders due to “no stock,” or in packaging a consumer’s order once received, which could lead to lower consumer satisfaction. In the future, our seasonal sales patterns may become more pronounced, may strain our personnel and production activities and may cause a shortfall in net sales as compared with expenses in a given period, which could substantially harm our business, results of operations, financial marketscondition and prospects.
Our quarterly results of operations may fluctuate significantly as a result of a variety of factors, including those described above. As a result, historical period-to-period comparisons of our business.sales and operating results are not necessarily indicative of future period-to-period results. You should not rely on the results of a single fiscal quarter as an indication of our annual results or our future performance.
We are a multinational companyinvolved in and may pursue additional strategic relationships. We may have limited control over such relationships, and these relationships may not provide the anticipated benefits.
We are involved in various strategic relationships, including with worldwide operations, including significant business operations in Europe. The United Kingdom is due to leave the European Union on March 29, 2019. Negotiations between the United KingdomAlibaba, Richemont and the European Union remain ongoing andChalhoub Group (all of which are complex, and there can be no assurance regardingalso involved in the terms (if any)sale of luxury goods) to enable or timing of any resulting agreement. The withdrawal process has created significant uncertainty about the future relationship between the United Kingdomenhance access to geographic markets such as China and the European Union,Middle East. For example, under our strategic partnership with Alibaba and this may have political consequences not onlyRichemont, our shopping channel is available on Alibaba’s e-commerce platform, which is intended to provide us access to Alibaba’s consumers, increase our potential addressable market and give us enhanced access to the China market. Following the completion of their combined strategic investments of $500 million ($250 million each) in August 2021, Alibaba and Richemont hold an initial combined 25% equity stake in the United Kingdom,joint venture, Farfetch China. We also may pursue and enter into strategic relationships in the future. Such relationships involve risks, including but also innot limited to: maintaining good working relationships with the other European Union member states.party; any economic or business interests of the other party that are inconsistent with ours; the other party’s failure to fund its share of capital for operations or to fulfill its other commitments, including providing accurate and timely accounting and financial information to us, which could negatively impact our operating results; loss of key personnel; actions taken by our strategic partners
Although the terms upon which the United Kingdom is expected33
that may not be compliant with applicable rules, regulations and laws; reputational concerns regarding our partners or our leadership; bankruptcy, requiring us to withdraw from the European Union are still being negotiated, it is possible that such withdrawal could lead to greater restrictions on the free movement of goods, services, peopleassume all risks and capital and increased regulatory complexities. As we are headquartered in the United Kingdom, any such restrictions on the movement of goods and services could have a material adverse effect on our operations. Increased complexitiesrequirements related to the importrelationship, and export of products, imposition of duties, transfers of personal data and changes in item pricing maythe related bankruptcy proceedings could have an adverse impact our consumer experience and have a material adverse effect on our business and results of operations. In addition, a possible restriction on the free movementrelationship; and any actions arising out of people between the United Kingdomrelationship that may result in reputational harm or legal exposure to us. Further, certain of these relationships in the past have not delivered; and current and future such relationships may not deliver the European Union could have a material adverse effect on us, since we compete in these jurisdictions for well qualified employees in all aspects of our business, including software engineers and other technology professionals. Any impact on our ability to attract new employees and to retain existing employees in their current jurisdictions could decrease our competitiveness and have a material adverse effect on our business and results of operations.
These developments, and their potential consequences, have had and may continue to have a material adverse effect on global economic conditions and the stability of global financial markets and could significantly reduce global market liquidity and restrict the ability of key market participants to operate in certain financial markets. Additionally, asset valuations, currency exchange rates and credit ratings have been and may continue to be
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subject to increased market volatility. Lack of clarity about future UK laws and regulations, including financial laws and regulations, tax and free trade agreements, immigration and employment laws, could increase costs, depress economic activity, impair our ability to attract and retain qualified personnel and have other adverse consequences.benefits that were originally anticipated. Any of these factors may have a material adverse effect on our business, results of operations, financial condition and prospects.
We have acquired, and may continue to acquire, other companies or technologies, which could divert management’s attention and otherwise disrupt our operations and harm our operating results. We may fail to acquire companies whose market power or technology could be important to the future success of our business.
We have acquired and may in the future seek to acquire, collaborate with or invest in other companies or technologies that we believe could complement or expand our brand and products, enhance our technical capabilities, or otherwise offer growth opportunities. As part of our business, we consider potential strategic transactions, any of which could impact our near-term profitability. Pursuit of future potential acquisitions or investments may divert the attention of management and cause us to incur various expenses in identifying, investigating, pursuing and seeking to obtain regulatory approval for suitable acquisitions or investments, whether or not they are consummated. In addition, we may fail to acquire companies whose market power or technology could be important to the future success of our business, or we may be unsuccessful in integrating our acquired businesses or any additional business we may acquire in the future. For example, we acquired Browns in 2015, Fashion Concierge and Style.com in 2017, Stadium Goods, CuriosityChina, Toplife and New Guards in 2019, Luxclusif, Jetti, Allure and a majority interest in Palm Angels in 2021 and Violet Grey in 2022. In November 2021, we announced that we were in discussions with Richemont in respect of a number of possible options, including the leveraging of FPS to power Richemont’s maisons and Yoox Net-a-Porter, the participation of Richemont’s maisons in the Farfetch Marketplace and a minority investment in Yoox Net-a-Porter by Farfetch. As noted at the time, there is no guarantee that we will be able to reach an agreement.
We also may not achieve the anticipated benefits from any acquired business, investment, joint venture or collaboration due to a number of factors, including:
• | unanticipated and substantial costs or liabilities associated with the acquisition, investment, joint venture or collaboration, including: (a) unasserted claims or assessments that we failed to, or were unable to, identify; (b) costs or liabilities arising from the acquired company’s or counterparty’s failure to comply with intellectual property laws, tax laws, laws governing the regulation of online platforms and the licensing obligations to which they are subject, data privacy laws or other relevant laws and regulations; or (c) costs or liabilities associated with any other litigious matters, including potential intellectual property litigation, that could be expensive and time consuming and, if resolved adversely, could harm our business; |
• | incurrence of acquisition or deal-related costs; |
• | synergies attributable to the acquisition may vary from expectations; |
• | diversion of management’s attention from other business concerns; |
• | regulatory uncertainties (e.g., deriving from obligations under various laws or from any conditions placed upon regulatory approval that could delay integration, or otherwise restrict our ability to realize the expected goals of an acquisition); |
• | harm to our existing business relationships with our luxury sellers as a result of the acquisition, joint venture or collaboration; |
• | harm to our brand and reputation, including as a result of actions of our collaborators; |
• | the potential loss of key employees or challenges associated with integrating employees from the acquired company into our business culture; |
• | use of resources that are needed in other parts of our business; |
• | challenges in incorporating multiple acquired businesses, investments, or joint ventures into our business; |
• | failure to implement or remediate controls, procedures or policies appropriate for a public company at an acquired company; |
• | failure to realize anticipated synergies in the timeframe or in the full amount expected; |
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• | failure to transition targets onto our existing platforms and systems; |
• | failure to integrate operations across different cultures and languages and to address the particular risks associated with acquisitions in specific jurisdictions; and |
• | use of substantial portions of our available cash to consummate the acquisition. |
In addition, a significant portion of the purchase price of companies we acquire may be allocated to acquired goodwill, which must be assessed for impairment at least annually. In the future, if our acquisitions do not yield expected returns, we may be required to take charges to our operating results based on this impairment assessment process. Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our operating results. For example, half of the consideration we paid in 2019 in connection with the New Guards acquisition was paid in the form of shares, resulting in our issuance of 27.5 million Class A ordinary shares or 9% of the Class A ordinary shares outstanding immediately prior to the acquisition. In addition, if an acquired business fails to meet our expectations, this may have a material adverse effect on our business, results of operations, financial condition and prospects.
If we are unable to successfully launch and monetize new and innovative technology, our growth and profitability could be adversely affected.
We are constantly developing new and innovative strategies, initiatives and technologies, such as our connected retail technologies which form a part of our LNR initiative. Our ability to bring a product to market in a timely manner or at all, our ability to monetize these technologies and other new business lines in a timely manner and operate them profitably and our ability to leverage these technologies to drive customer engagement, depends on a number of factors, many of which are beyond our control, including:
• | our ability to develop fast enough to meet the changing needs and expectations of consumers or FPS clients; |
• | our ability to manage the financial and operational aspects of developing and launching new technology, including making appropriate investments in our software systems, information technologies and operational infrastructure; |
• | our ability to secure required governmental permits and approvals; |
• | the level of commitment and interest from our actual and potential third-party innovators; |
• | the ability of our technology and platform to adapt and scale quickly to support and deliver on innovation; |
• | our ability to maintain our market position in the face of increased adoption of open innovation strategies and luxury startup-focused M&A activity by our competitors; |
• | competition for certain products, including products from Chinese technology companies, and our competitors’ (including existing luxury sellers who may launch competing technologies) development and implementation of similar or better technology; |
• | our ability to effectively secure intellectual property rights to protect our technology and brands and to manage any third-party challenges to the intellectual property that underpins our technology; |
• | our ability to continue to comply with applicable laws and regulations, including new laws and regulations relating to the operation of our technologies and platforms; |
• | our ability to attract and retain staff with the skills to deliver technical innovation; |
• | our ability to collect, combine and leverage data about our consumers collected online and through our new technology in compliance with data protection laws; and |
• | general economic and business conditions affecting consumer confidence and spending, including the impact of the COVID-19 pandemic, and the overall strength of our business. |
We may not be able to grow our new technologies or business lines or operate them profitability, and these new and innovative technology initiatives may never generate material revenue. In addition, the substantial management time and resources that our technology development requires may result in disruption to our existing business operations and adversely affect our financial condition, which may decrease our profitability and growth.
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We may become subject to risks related to accepting cryptocurrencies as a form of payment, building or exchanging non-fungible tokens, or collaborating in the metaverse.
As part of our business strategy and LNR vision we plan to continue to innovate to meet the changing and future needs of consumers. Such innovation may include providing consumers the opportunity to transact in cryptocurrencies (either in-store or online), building or exchanging non-fungible tokens (“NFTs”) or collaborating in the metaverse through new and emerging digital environments. We may incur significant costs in pursuing such innovation initiatives, they may not develop in accordance with our expectations, and market acceptance of features, products, or services we build for use with cryptocurrencies, NFTs or the metaverse is uncertain.
Cryptocurrencies are not considered legal tender or backed by most governments, and have experienced technological glitches and various law enforcement and regulatory interventions. The use of cryptocurrency, such as bitcoin, has been prohibited or effectively prohibited in some countries. If we fail to comply with any such prohibitions that may be applicable to us, we could face regulatory or other enforcement actions and potential fines or other consequences.
Cryptocurrencies have in the past and may in the future experience periods of extreme price volatility. Fluctuations in the value of any cryptocurrencies or other digital assets that we might hold would also lead to volatility in our financial results and could have an adverse impact on our business. In addition, there is substantial uncertainty regarding the future legal and regulatory requirements relating to cryptocurrency, transactions utilizing cryptocurrency, NFTs and metaverse-related products and features. Compliance with any such regulations may be complex and costly. For example, currently there are no specific standards under IFRS regarding the accounting for cryptocurrencies, NFTs and similar instruments. In the event that the IASB issues new standards or amendments to existing standards in respect of these instruments, the accounting treatment may differ from the market practice applied by companies under existing accounting standards and guidance. In addition, governments could choose to curtail or outlaw the acquisition, use or redemption of cryptocurrency. In such a case, ownership of, holding or trading in cryptocurrency would be considered illegal and subject to sanction. These uncertainties, as well as future accounting and tax developments, or other requirements relating to cryptocurrency, NFTs and the metaverse could expose us to litigation, regulatory action or possible liability, and have an adverse effect on our business.
Governmental control of currency conversion may limit our ability to utilize our cash balances effectively in the future.
We are subject to governmental regulation of currency conversion and transfers, which may particularly affect our subsidiaries in certain jurisdictions. For example, the Chinese government imposes controls on the convertibility of the RMB into other currencies and, in certain cases, the remittance of currency out of China. Earnings from our Chinese subsidiaries could therefore be impacted. Shortages in the availability of foreign currency may restrict the ability of our Chinese operations to remit sufficient foreign currency to pay dividends or to make other payments to us, or otherwise to satisfy their foreign currency-denominated obligations. Under existing Chinese foreign exchange regulations, payments of current account items, including dividend payments, interest payments, payments under service agreements or sales of goods and purchase agreements, as well as expenditures from trade-related transactions, can be made in foreign currencies without prior approval from China’s State Administration of Foreign Exchange (“SAFE”) by complying with certain procedural requirements. However, for any Chinese company, dividends can be declared and paid only out of the retained earnings of that company. Under Chinese laws, rules and regulations, each of our subsidiaries incorporated in China is required to set aside at least 10% of its net income each year to fund certain statutory reserves until the cumulative amount of such reserves reaches 50% of its registered capital. These reserves, together with the registered capital, are not distributable as cash dividends. As a result of these laws, rules and regulations, our subsidiaries incorporated in China are restricted in their ability to transfer a portion of their respective net assets to their shareholders as dividends, loans or advances.
Furthermore, approval from SAFE or its local branch is required for conversion of RMB into other currencies and remittance out of China to pay capital expenses, such as for repayment of loans denominated in other currencies. Without a prior approval from SAFE, cash generated from our operations in China may not be used to pay off debt in a currency other than the RMB owed by entities within China to entities outside China, or to make other capital expenditures outside of China in a currency other than the RMB.
Application of existing tax laws, rules or regulations are subject to interpretation by tax authorities.
The application of the tax laws of various jurisdictions to our international business activities is subject to interpretation. The tax authorities of the jurisdictions in which we operate have challenged and may continue to challenge our methodologies for valuing developed technology or intercompany arrangements, including our transfer pricing, or determine that the manner in which we operate our business does not result in the expected tax consequences, which could increase our worldwide effective tax rate and adversely affect our financial position and results of operations.
Significant judgment and estimation is required in determining our worldwide tax liabilities. In the ordinary course of our business, there are transactions and calculations, including intercompany transactions, royalty payments and cross-jurisdictional transfer pricing, for which the ultimate tax determination is uncertain or otherwise subject to interpretation. Tax authorities in any of the countries in which we operate have disagreed and may in the future disagree with our intercompany charges, including the amount of, or basis for, such charges, withholding taxes, cross-jurisdictional transfer pricing, indirect tax liabilities and reclaims or other matters such as the allocation of certain interest expenses and other tax items, and may assess additional taxes.
As we operate in numerous tax jurisdictions, the application of tax laws can be subject to diverging and sometimes conflicting interpretations by the tax authorities of these jurisdictions. It is not uncommon for tax authorities in different countries to have conflicting views, for instance, with respect to, among other things, whether a permanent establishment exists in a particular jurisdiction, the manner in which the arm’s length standard is applied for transfer pricing purposes, or with respect to the valuation of intellectual property. For example, Italian authorities are currently reviewing the activities of one of our subsidiaries for the years 2015 through 2020, including whether that subsidiary had a permanent establishment in Italy and our transfer pricing policies. We are cooperating with the investigation, but intend to contest any allegation that we have a permanent establishment in Italy or that our transfer pricing policies were inappropriate. The Italian tax authorities have not issued any assessments on us or our subsidiaries. However, the matter remains ongoing and if a tax authority in one country where we operate were to reallocate income from another country where we operate, and the tax authority in the second country did not agree with the reallocation asserted by the first country, we could become subject to tax on the same income in both countries, resulting in double taxation. If tax authorities were to allocate income to a higher tax jurisdiction, subject our income to double taxation or assess interest and penalties, it could increase our tax liability, which could adversely affect our financial position and results of operations.
Although we believe our tax estimates and methodologies are reasonable, a tax authority’s final determination in the event of a tax audit could materially differ from our historical corporate income tax provisions and accruals and/or indirect tax and customs duty liabilities and claims, in which case we may be subject to additional tax liabilities, possibly including interest and penalties, which could have a material adverse effect on our cash flows, results of operations, financial condition and prospects. Furthermore, tax authorities have become more aggressive in their interpretation and enforcement of such laws, rules and regulations over time, as governments are increasingly focused on ways to increase revenues. This has contributed to an increase in audit activity and more stringent approaches by tax authorities. Even where we believe our historical tax position to be consistent with applicable law, we may from time to time enter into agreements with tax authorities or resolve claims regarding tax matters where we determine that it is in our best interest to do so given the costs and uncertainties inherent in any litigation or administrative proceeding, including potential proceedings to challenge a tax assessment with which we disagree. As such, additional taxes or other assessments may be in excess of our current tax reserves or may require us to modify our business practices to reduce our exposure to additional taxes going forward, any of which may have a material adverse effect on our business, results of operations, financial condition and prospects.
This risk and the likelihood of a more aggressive approach by tax authorities may be exacerbated by the COVID-19 pandemic. Across the globe, governments have responded to the COVID-19 pandemic with large public expenditures; and governments may be considering plans to increase their collection of revenues through a more stringent approach to the taxation of digital businesses.
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Amendments to existing tax laws, rules or regulations or enactment of new unfavorable tax laws, rules or regulations could have an adverse effect on our business and financial performance.
Many of the underlying laws, rules or regulations imposing taxes and other obligations were established before the growth of the internet and e-commerce. Tax authorities in non-U.S. jurisdictions and at the U.S. federal, state and local levels are currently reviewing the appropriate treatment of companies engaged in digital activity and are considering changes to existing tax or other laws that could result in income, consumption, use or other taxes relating to our activities, and/or impose obligations on us to collect such taxes.
The OECD/G20 Inclusive Framework on Base Erosion and Profit Sharing (“BEPS”) adopted a Programme of Work to Develop a Consensus Solution to the Tax Challenges arising from the Digitalization of the Economy (the “Programme of Work”). The purpose of the Programme of Work is to develop international corporate tax reform proposals, building on two pillars: Pillar One involves revised profit allocation and nexus rules to reallocate taxing rights to market jurisdictions; and Pillar Two involves rules to ensure a minimum level of effective taxation to address remaining BEPS concerns. Finally, other reporting obligations have been enacted that may impact the Group’s processes, such as new mandatory automatic exchange of information rules for digital platforms, country-by-country reporting and mandatory disclosure rules.
OECD Pillar One and Pillar Two and Digital Services Taxes
On October 8, 2021, most OECD members reached a political agreement regarding a Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalization of the Economy. The Pillar One and Pillar Two proposals would introduce significant changes to the international tax rules, affecting the allocation of tax rights across countries and impacting Multinational Groups of Entities (“MNE”).
Amount A of Pillar One, which is aimed to address solutions for the taxation of certain businesses on revenue streams where there is a market presence including an online presence, involves the creation of a new tax right and the reallocation to market jurisdictions of a share of residual profit determined at the MNE group level, based on a formulaic approach. Pillar One is not expected to impact our business in the medium-term, since the threshold for the application of Pillar One is annual revenue in excess of twenty billion euros. Pillar Two addresses remaining BEPS challenges and is designed to ensure that large international businesses pay a minimum level of tax regardless of where they are headquartered or the jurisdictions in which they operate.
At the end of 2021 the OECD published Pillar Two model rules for the implementation of a global minimum tax rate, however, a number of details remain to be addressed and a detailed implementation framework is still to be published.
While Pillar One and Pillar Two discussions were ongoing, a number of jurisdictions enacted or maintained unilateral digital services taxes (“DST”) or similar measures applying to online marketplaces, including the United Kingdom, Italy, France, Spain, Austria, India and Turkey.
Each DST is calculated differently, although they are generally charged on marketplace revenues without relief for input costs or expenses. Based on the current law and information released by the local tax authorities, we were subject to the Italian and Spanish DSTs in the year ended December 31, 2021. These unilateral measures are likely to be abandoned once the OECD agreement is implemented, which is expected to occur in 2023. We incurred the full cost of the new DSTs in the year ended December 31, 2021, which is reflected in the audited Consolidated financial statements included elsewhere in this Annual Report. However, we anticipate that the costs arising from DSTs will be partially shared with the brands and boutiques for which we have intermediated operations in those countries.
In 2020, the U.S. Trade Representative launched a “Section 301” investigation into whether certain DSTs are unreasonable or discriminatory; and whether they burden or restrict commerce in the United States. Included in the political agreement to implement the OECD’s two-pillar solution to tax the digitalized economy was a confirmation that unilateral DSTs would be abolished, following which the United Kingdom, Italy, France, Spain, Austria, India and Turkey have agreed to a transitional approach with the United States, whereby their DST measures will remain in effect until Pillar One takes effect. To the extent that taxes from the unilateral measures
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accruing to one of these countries in the period before Pillar One takes effect exceeds an amount equivalent to the tax due under Amount A of Pillar One, the excess will be creditable against the Amount A liability in that country. In return, the United States has committed to terminate proposed trade actions (and not to impose further trade actions) against these countries with respect to their existing DST regimes.
In light of the changing regulatory environment, there could be different interpretations of these unilateral laws that currently remain in effect. We take a conservative approach to tax issues and consult with specialist external advisors. We cannot, however, anticipate the likelihood, timing or impact of any new regulations, guidance, laws or interpretations of such regulations, guidance or laws. If such tax or other laws, rules or regulations were amended, or if new unfavorable laws, rules or regulations were enacted, the new legislation could increase our tax payments or other obligations, prospectively or retrospectively, subject us to interest and penalties, decrease the demand for our services if we passed on such additional costs to the consumer, result in increased costs to update or expand our technical or administrative infrastructure, or effectively limit the scope of our business activities if we decided not to conduct business in particular jurisdictions. As a result, these changes may have a material adverse effect on our business, results of operations, financial condition and prospects.
New Mandatory Automatic Exchange of Information Rules for Digital Platforms
The Directive on Administrative Cooperation in the Field of Taxation (the “DAC7”) will allow member states’ tax authorities to collect and automatically exchange information on income earned by sellers on digital platforms beginning in 2023.
Operators falling within the scope of DAC7 will be required to collect and verify in-line with due diligence procedures information from sellers/providers on their online platform. Subsequently, certain information will be reported to the sellers/providers and to the relevant tax authority. Such information includes, inter alia, an overview of amounts paid to sellers from the reportable activities and platform fees and commissions incurred.
DAC7 was formally adopted on March 22, 2021. Member states of the European Union were required to publish any domestic law, regulation, and administrative provisions necessary to comply with the directive by January 31, 2022, and such rules will apply from January 1, 2023.
We are taking the necessary steps to prepare our information systems to comply with the rules anticipated to take effect in 2023. Any penalty for non-compliance will be determined by the member state and is not possible to accurately anticipate at this time; but any such penalty and its costs of implementation could negatively impact our profitability.
Others
In addition, various governments and intergovernmental organizations could introduce proposals for tax legislation, or adopt tax laws, particularly with regards to online marketplaces, that may have a significant adverse effect on our worldwide effective tax rate, or increase our tax liabilities, the carrying value of deferred tax assets, or our deferred tax liabilities. The OECD continuously monitors key areas of action and publishes reports and guidance on implementation of the BEPS recommendations. Multiple jurisdictions, including some of the countries in which we operate, have implemented recommended changes aimed at addressing perceived issues within their respective tax systems that may lead to reduced tax liabilities among multinational companies. However, other jurisdictions in which we operate or do business could react to the BEPS initiative or their own concerns by enacting tax legislation that could adversely affect us through increasing our tax liabilities.
Changes in U.S. tax legislation, regulation and government policy may impact our future financial position and results of operations.
The U.S. presidential administration and members of the U.S. Congress have proposed significant changes in U.S. federal income tax law, which could affect us and our business. These proposals include, among others, an increase in the corporate income tax rate from a fixed 21% to graduated rates of up to 28% and the imposition of minimum taxes or surtaxes on certain types of income. These proposals are being considered by the U.S. Congress, but the likelihood of these or other changes being enacted or implemented is unclear. We are currently unable to
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predict whether these or other changes will occur and, if so, the ultimate impact on our business. Accordingly, such changes may have a negative impact on us, our suppliers or our consumers, including as a result of related uncertainty, and may materially and adversely impact our business, financial condition, results of operations and cash flow.
The application of a value-added tax (or similar taxes) and the impact of managing our business model transition to a commissionaire structure could adversely affect our business and results of operations.
The application of a value added tax (or similar taxes such as a sales and use tax, provincial tax, or goods and services tax), business tax and gross receipt tax, to our business and to our luxury sellers is a complex and evolving issue. Significant judgment is required to evaluate applicable tax obligations. As a result, amounts recorded may be subject to adjustments by the relevant tax authorities. In many cases, the ultimate tax determination is uncertain because it is not clear how new and existing statutes might apply to our business or to the businesses of our luxury sellers. A number of jurisdictions globally have introduced (or are considering the introduction of) additional reporting, record-keeping or value-added tax (or similar taxes) calculation, collection and remittance obligations on businesses like ours that facilitate or perform e-commerce. Such obligations could require us or our luxury sellers to incur substantial costs in order to comply, including costs associated with legal advice, local compliance, tax calculation, collection, remittance and audit requirements, which could make selling in such markets less attractive and could adversely affect our business.
For example, in certain jurisdictions, rules have already been introduced to hold the online facilitator of sales of goods and services jointly and severally liable for any under or non-accounted value added tax (or similar taxes) by the sellers. Such joint and several liability provisions may significantly impact our business where our luxury sellers have not complied with the local provisions. In addition, new rules for retail and e-commerce sales are being introduced. For example, across the European Union from July 2021, online marketplaces have been, in certain situations (where certain thresholds are met), deemed to be the supplier of goods for value-added tax purposes, which will require them to collect and pay a value-added tax on sales via their platform. Further, in the United States, states are able to tax their residents on remote sales. Following the U.S. Supreme Court’s decision in 2018 in South Dakota v. Wayfair, a U.S. state may require by way of economic nexus laws an online retailer to collect sales taxes imposed by that state, even if the retailer has no physical presence in that state, thus permitting a wider enforcement of such sales tax collection requirements against non-U.S. companies that have historically not been responsible for state or local tax collection unless they had physical presence in the U.S. customer’s state.
Given the current complexities for online marketplaces, inconsistencies in interpretation and implementation of local tax rules, we have transitioned our key business model to one in which we act as an “undisclosed agent” or “commissionaire” of our luxury sellers. Under this model, for the purposes of calculating value-added tax, our end consumers will contract with and be invoiced by us and there will be a supply for VAT purposes by us to the end consumer of goods and other related services, although the legal sale of goods will continue to be between our luxury sellers and the end consumer. Our transition is intended to simplify and provide greater certainty to our value added tax accounting position without materially increasing our overall value-added tax liabilities.
Our ability to achieve our business and financial objectives is subject to risks and uncertainties. Implementing our business model requires a considerable investment of technical, financial and legal resources. If we are unable to successfully establish our business model, our business, results of operations, financial condition and prospects could be negatively impacted.
We may be subject to general litigation, regulatory disputes and government inquiries.
As a growing company with expanding operations, including in the highly regulated product categories of beauty and kidswear, we have in the past faced and may in the future increasingly face the risk of claims, lawsuits, government investigations, and other proceedings involving competition and antitrust, intellectual and other proprietary rights and property, privacy, product safety, consumer protection, accessibility claims (including those relating to our compliance with the Americans with Disabilities Act of 1990), securities, tax, labor and employment, commercial disputes, services and other matters. The number and significance of these disputes and inquiries have increased as the political and regulatory landscape changes, and as we have grown larger and expanded in scope and
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geographic reach, and as our services have increased in complexity. Refer to Item 8. “Financial Information —A. Consolidated Statements and Other Financial Information — Legal and Arbitration Proceedings.”
We cannot predict the outcome of such disputes and inquiries with certainty. Regardless of the outcome, these matters can have an adverse impact on us because of legal costs, diversion of management resources, and other factors. Determining reserves for any litigation is a complex and fact‑intensivefact-intensive process that is subject to judgment calls. It is possible that a resolution of one or more such proceedings could require us to make substantial payments to satisfy judgments, fines or penalties or to settle claims or proceedings, any of which could harm our business. These proceedings could also result in reputational harm, criminal sanctions, consent decrees or orders preventing us from offering certain products, or services, or requiring a change in our business practices in costly ways or requiring development of non‑infringingnon-infringing or otherwise altered products or technologies. Litigation and other claims and regulatory proceedings against us could result in unexpected expenses and liabilities, which could have a material adverse effect on our business, results of operations, financial condition and prospects.
The profitability of our Browns, Stadium Goods and New Guards businesses depends on our ability to manage inventory levels and, if not managed successfully, our business and results of operations could be adversely affected.
Browns and Stadium Goods purchase merchandise wholesale which they then sell via our Marketplaces or in-store. In addition, New Guards produces merchandise which it then sells via our Marketplaces, its brands’ websites or to retailers. As a result, our profitability depends on our ability to manage these businesses’ inventory levels and respond to shifts in consumer demand patterns. Overestimating consumer demand for merchandise may result in Browns, Stadium Goods or New Guards holding unsold inventory, which would likely result in the need to rely on markdowns or promotional sales to dispose of excess inventory, which could have an adverse effect on our gross margins and results of operations. Conversely, if Browns, Stadium Goods or New Guards underestimate consumer demand for merchandise that could lead to inventory shortages, lost sales opportunities or negative consumer experiences that could adversely affect consumer relationships and our ability to grow in the future. In the event that New Guards’ business, which was primarily wholesale-focused prior to our acquisition, significantly grows its e-concession and direct-to-consumer business, this may result in substantially increasing its exposure to such inventory risks having only had limited prior experience managing such risks. The COVID-19 pandemic may increase the complexity of forecasting consumer demand and/or impact our ability to source inventory to meet demand, both of which could adversely affect our operations. Any delays in deliveries of merchandise due to production slowdowns or other distribution disruptions caused by the pandemic could impact our inventory levels.
Browns, Stadium Goods and New Guards rely on various processes and systems for forecasting, merchandise planning, inventory management, procurement, allocation and fulfilment capabilities. Our ability to continue to successfully execute our strategies for these businesses or evolve such strategies with changes in the retail environment could be adversely affected if such processes and systems are not effectively managed and maintained.
If any of our inventory management systems were to fail, or if our physical inventory is inaccurate for any reason, we may not derive the expected sales and profitability of our Browns, Stadium Goods or New Guards businesses, or we may incur increased costs relative to our current expectations which could adversely affect our business, financial condition, results of operations and prospects.
The United Kingdom’s withdrawal from the European Union and, in particular, the implementation of the EU-UK Trade and Cooperation Agreement (“TCA”), or any ancillary arrangements, may have a negative effect on global economic conditions, financial markets and our business.
We are a multinational company headquartered in the United Kingdom with worldwide operations, including significant business operations in the European Union. Following a national referendum and enactment of legislation by the government of the United Kingdom (“Brexit”), the United Kingdom formally withdrew from the European Union on January 31, 2020, and entered into a transition period. On December 24, 2020, the United Kingdom and the European Union announced that they had concluded their negotiations relating to the future trading relationship between the parties. The agreed terms are contained in the TCA, which became binding on both the European Union and the United Kingdom on January 1, 2021.
While agreement on the terms of the TCA avoided a “no deal” Brexit scenario, and provided in principle for quota and tariff-free trading of goods, it is nevertheless expected that the TCA will result in the creation of non-tariff barriers (such as increased shipping and regulatory costs and complexities) to the trade in goods between the United Kingdom and the European Union. Further, the TCA does not provide for the continued free movement of services between the United Kingdom and the European Union. The full impact of such arrangements, on both our existing processes and our ability to adjust our business and operations to operate successfully in the United Kingdom and the European Union, as well as more broadly on UK-EU cross-border trade, are expected to become clearer over the course of 2022. In particular, it remains to be seen whether the initial implementation of, and adjustment of UK-EU trading processes for, the TCA could disrupt or otherwise negatively impact our business and operations.
Any resulting restrictions on the movement of goods or services could have a material adverse effect on our operations. For example, we saw production delays from the ongoing effects of the United Kingdom’s withdrawal from the European Union, and if such delays were to re-appear they could have an adverse effect on our results of operations. In addition, we may need to alter the geographic locations of, or jurisdiction of entities responsible for, certain fulfilment, delivery and warehouse services to adjust to the new legal and regulatory landscape resulting from the implementation of the TCA, which would require time and resources and could negatively affect our business. To meet these potential increased regulatory complexities, since early 2021 we have migrated Fulfilment by Farfetch volumes from the United Kingdom to a third-party operated fulfilment warehouse in continental Europe, but such migration may not adequately address future regulatory developments. These increased regulatory complexities related to the import and export of products or changes in item pricing may impact the consumer experience, result in increased costs and have a material adverse effect on our business and results of operations.
The TCA also grants each of the United Kingdom and the European Union the ability, in certain circumstances, to unilaterally impose tariffs on one another. In the event of such an imposition, any additional tariffs may have a material adverse impact on us as well as the stability of UK-EU trade more generally. Any uncertainty as to UK or EU government policy and, in particular, whether any such policy may result in the imposition of reciprocal tariffs, may depress economic activity or have an adverse impact on our business and operations. Consumer activity may be further depressed should the costs of purchasing goods increase for consumers in the United Kingdom or European Union as a result of Brexit, for example, due to higher interchange or other fees levied by payment processors.
In addition, the TCA has imposed additional restrictions on the free movement of people between the United Kingdom and the European Union, which could have a material adverse effect on us, since we compete in these jurisdictions for well-qualified employees in all aspects of our business, including software engineers and other technology professionals. Any impact on our ability to attract new employees and to retain existing employees in their current jurisdictions could decrease our competitiveness and have a material adverse effect on our business and results of operations.
General economic factors, natural disasters, pandemics or other unexpected events may adversely affect our business, financial performance and results of operations.
Our business, financial performance and results of operations depend significantly on worldwide macroeconomic conditions and their impact on consumer spending. Luxury products are discretionary purchases for consumers. Recessionary economic cycles, higher interest rates, volatile fuel and energy costs, inflation, levels of unemployment, conditions in the residential real estate and mortgage markets, access to credit, consumer debt levels, unsettled financial markets and other economic factors that may affect consumer spending or buying habits could materially and adversely affect demand for our products. In addition, volatility in the financial markets has had and may continue to have a negative impact on consumer spending patterns. A reduction in consumer spending or disposable income may affect us more significantly than companies in other industries and companies with a more diversified product offering. In addition, negative national or global economic conditions may materially and adversely affect our suppliers’ financial performance, liquidity and access to capital. This may affect their ability to maintain their inventories, production levels and/or product quality and could cause them to raise prices, lower production levels or cease their operations.
Economic factors such as increased commodity prices, shipping costs, inflation, higher costs of labor, insurance and healthcare, and changes in or interpretations of other laws, regulations and taxes may also increase our
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cost of sales and our selling, general and administrative expenses, and otherwise adversely affect our financial condition and results of operations. Any significant increases in costs may affect our business disproportionately compared to our competitors. Changes in trade policies, increases in tariffs and the imposition of retaliatory tariffs, including those implemented by the United States, China and Europe, may have a material adverse effect on global economic conditions and the stability of global financial markets and may reduce international trade. Moreover, government consumption or socio-economic policies or objectives pursued by countries in which we do business could potentially impact the demand for our goods and services in certain countries. Natural disasters and other adverse weather and climate conditions, public health crises, political crises, such as terrorist attacks, war, political instability, labor or trade disputes or other unexpected events, could disrupt our operations, internet or mobile networks or the operations of one or more of our third-party service providers. For example, the vast majority of our production processes take place at our facility in Guimarães, Portugal. If any such disaster were to impact this facility, our operations would be disrupted.
In addition, rising global average temperatures due to the increased concentrations of carbon dioxide and other greenhouse gases in the atmosphere are causing significant changes in weather patterns around the globe and an increase in the frequency and severity of certain natural disasters. Changes in weather patterns and the increased frequency, intensity and duration of extreme weather events (e.g., floods, droughts and severe storms) could, among other things, disrupt our logistics operations and our ability to source and distribute products in a timely manner, impact the operation of our New Guards business’ supply chain, disrupt our brick-and-mortar retail operations, increase our product costs and impact the types of fashion products that consumers purchase. As a result, the effects of climate change could have short-and long-term impacts on our business and operations.
We sell certain merchandise via third-party platforms, and our inability to access consumers via these platforms could adversely affect our business.
We sell certain merchandise via third-party platforms, including, for example, on Tmall Luxury Pavilion in China. We are subject to, regulatory activity and antitrust litigation under competition laws.
We are subjectmust comply with, such platforms’ respective terms and conditions for merchants and their terms of service for consumer rights protection. Such third-party platforms retain the right to scrutiny by various government agencies, including competition authorities. Some jurisdictions also provide privateremove our merchandise from their platform or halt our sales on their platform if they believe we have violated their terms and conditions, the law or the intellectual property rights of actionother parties, including, but not limited to, allegations that any goods we offer for competitorssale are counterfeit. Such platforms can halt sales or consumers to assert claims of anti‑competitive conduct. Other companies or government agencies have in the past and may in the future allege thatremove our actions violate the antitrust or competition lawsmerchandise at their complete discretion irrespective of the European Commission or other countries or otherwise constitute unfair competition. We do not controlvalidity of any claims made against us. Should such third-party platforms exercise such discretion in a market where we are substantially reliant on the pricing strategiesrelevant platform it could negatively impact our business and results of operations in that market, which could have a material adverse effect on our retailersbusiness, results of operations, financial condition and prospects. Further, should such third-party platforms’ actions become public it could impact our business and could substantially harm our reputation and adversely impact our efforts to develop our brands, (other than Browns), and such pricing strategiesirrespective of the validity of the claims.
We may be subject to challengesclaims that items listed on our website, or their descriptions, are counterfeit, infringing or illegal.
We occasionally receive communications alleging that items listed on our Marketplaces infringe third-party copyrights, trademarks or other proprietary rights. We have intellectual property complaint and take-down procedures in place to address these communications. We follow these procedures to review complaints and relevant facts to determine the appropriate action, which may include removal of the item from various government agencies including competition authorities. An increasing numberour website and, in certain cases, discontinuing our relationship with a retailer, brand or other seller who repeatedly violates our policies. However, such procedures may be subject to error or enforcement failures, may not be adequately staffed and may not be enough for us to avoid liability under applicable laws and regulations. We also may be subject to erroneous or fraudulent demands to remove content, and actions we take based on such demands could negatively impact our relationships with our luxury sellers who were affected. Our success as an online luxury retailer depends on our ability to accurately and cost-effectively determine whether an item offered for sale or submitted for a return is an authentic product. While we reject any merchandise we believe to be counterfeit, we cannot be certain that we will identify every counterfeit item delivered or returned to us. As the sophistication of governments are regulating competition law activities, including increased scrutinycounterfeiters increases, it may be increasingly difficult to identify counterfeit products. The sale or return of any counterfeit goods may damage our reputation as a trusted online luxury retailer, which may adversely affect our reputation, customer acceptance and relationships with brand partners.
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The legal framework in large marketsthis area is developing and could move towards an increase in the scope of direct liability for online platforms and e-commerce marketplaces such as China. Our business partnerships or agreements or arrangements with customers or other companies could give rise to regulatory action or antitrust litigation.ours. In July 2017, Carré Couture, a small European competitor, which was declared bankrupt in May 2018, filed a complaint with the European Commission claiming that our retailer partnership agreements restrict competition becauseparticular, we ask retailers to commit to the relationship and list their inventory with us and not on competing platforms. We have responded to the allegations, and the complaint is pending. Complaints often remain open for a considerable period of time for procedural reasons. The European Commission is under a legal obligation to assess complaints, and unless a complaint is withdrawn, it must reject it by a formal decision where it takes the view that there are no grounds for action. Due to this process, complaints often remain open for several years. Some regulators may perceive our business to be used so broadly that otherwise uncontroversial business practices could be deemed anticompetitive. Certain competition authorities have conducted market studies of our industries. Such claims and investigations, even if without foundation, may be very expensivesubject to civil or criminal liability for activities carried out, including products listed, by our luxury sellers on our platform. While we aim to remain informed of the latest legal developments and review our procedures accordingly, those procedures may not effectively reduce or eliminate our liability.
Regardless of the validity of any claims made against us, we may incur significant costs and efforts to defend involveagainst or settle them and such claims could lead to negative publicity and damage to our reputation. If a governmental authority determines that we have aided and abetted the infringement on or sale of counterfeit goods, we could face regulatory, civil or criminal penalties. For example, in China, listing an untrue or inconsistent product description or information, including the listing of counterfeit goods, is considered “false advertising” under the PRC Advertising Law, subject to an administrative fine up to RMB one million. Furthermore, consumers in China who purchase items on our Marketplaces may bring a “fraud” claim against us, and if successful they would be entitled to three times the price of the item as penalty compensation pursuant to PRC law; and for those who purchase items on our Tmall Luxury Pavilion flagship store and successfully claim with sufficient evidence that a product is counterfeit, such consumers could be entitled to nine times the price of the item as liquidated damages, pursuant to the more onerous Tmall Luxury Pavilion rules that apply to our sales through this channel.
Successful claims by third-party rights owners could require us to pay substantial diversiondamages or refrain from permitting any further listing of management time and effort andthe relevant items (or similar items from the same source). These types of claims could force us to modify our business practices, which could affect our revenue, increase our costs or make our Marketplaces less user friendly. Moreover, public perception that counterfeit or other unauthorized items are common on our Marketplaces, even if factually incorrect, could result in significant judgments against usnegative publicity and damage to our reputation.
If our luxury sellers experience any recalls, product liability claims, or require usgovernment, customer or consumer concerns about product safety with respect to changeproducts sold on our Marketplaces, our reputation and sales could be harmed.
Our luxury sellers, including the brands in the New Guards portfolio, and the brands selling kidswear products, are subject to regulation by the U.S. Consumer Product Safety Commission and similar state and international regulatory authorities, and their products sold on our platform could be subject to involuntary recalls and other actions by these authorities. Concerns about product safety, including concerns about the safety of products manufactured in developing countries, and those that are part of highly regulated product categories such as kidswear and beauty, could lead our luxury sellers to recall selected products sold on our Marketplaces. Recalls and government, customer or consumer concerns about product safety could harm our reputation and reduce sales, either of which could have a material adverse effect on our business, practices.results of operations, financial condition and prospects. If any New Guards regulated product becomes subject to a recall or government, customer or consumer safety concerns, we could experience significant adverse effects or reputational harm, face product liability litigation and governmental investigations and incur costs associated with any remediation actions.
Risks Relating to our Intellectual Property
Failure to adequately protect, maintain or enforce our intellectual property rights could substantially harm our business and results of operations.
We rely on a combination of trademark, copyright, confidential information, trade secrets and patent law, and contractual restrictions to protect our intellectual property. The protection offered by these has its limitations.
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Despite our efforts to protect and enforce our proprietary rights, unauthorized parties have used, and may in the future use, our trademarks or similar trademarks, copy aspects of our website images, features, compilation and functionality or obtain and use information that we consider as proprietary, such as the technology used to operate our website or our content.
We do not have comprehensive registered protection for all of our brands in all jurisdictions around the world. There is no guarantee that our pending trademark applications for any brand will proceed to registration, and even those trademarks that are registered could be challenged by a third party including by way of revocation or invalidity actions. Our competitors have adopted, and other competitors may adopt, service names similar to ours, thereby impeding our ability to build brand identity and possibly diluting our brand and leading to brand dilution or consumer confusion. In addition, there could be potential trade name or trademark ownership or infringement claims brought by owners of other rights, including registered trademarks, in our marks or marks similar to ours, including FARFETCH and BROWNS. Any such claims, brand dilution or consumer confusion related to our brands (including our trademarks) could damage our reputation and brand identity and substantially harm our business and results of operations.
In addition to our registered trademark protection, we have several published and unpublished patent applications in the United Kingdom, Europe and internationally, for aspects of our proprietary technology and we may file further patent applications in the future. There is no guarantee that these will result in issued patents, and even if these proceed to grant, they could be vulnerable to challenge by third parties, or their claims could be narrowed in scope by the issuing patent office such that they no longer adequately protect our proprietary technology. Further, we may decide not to pursue a patent application for an innovation due to the high costs, diversion of management time, and publication of the underlying innovation that arises from an application. The loss of our material intellectual property as a result of any claims or challenges, or the natural expiry of our intellectual property registrations, could have a material adverse effect on our business, results of operations, financial condition and prospects.
Domain names generally are regulated by internet regulatory bodies, and the regulation of domain names is subject to change. Regulatory bodies have and may continue to establish additional top‑level domains, appoint additional domain name registrars or modify the requirements for holding domain names. We may not be able to, or it may not be cost effective to, acquire or maintain all domain names that utilize the name “Farfetch” or other business brands in all of the countries in which we currently conduct or intend to conduct business. If we lose the ability to use a domain name, we could incur significant additional expenses to market our products within that country, including the development of new branding. This could substantially harm our business, results of operations, financial condition and prospects.
We rely on multiple software programmers (as employees or independent consultants) to design our proprietary technologies and photographers (as employees or independent consultants) to capture the products sold on our platform. Although we make every effort to ensure appropriate and comprehensive assignment or license terms are included in the contracts with such third parties, we cannot guarantee that we own or are properly licensed to use all of the intellectual property in such software or images. If we do not have, or lose our ability to use, such software or images, we could incur significant additional expense to remove such assets from our platform or re‑engineer a portion of our technologies.
Litigation or similar proceedings have been necessary in the past and may be necessary in the future to protect, register and enforce our intellectual property rights, to protect our trade secrets and domain names and to determine the validity and scope of the proprietary rights of others. Further, any changes in law or interpretation of any such laws, particularly intellectual property laws, may impact our ability to protect, register or enforce our intellectual property rights. Any litigation or adverse priority proceeding could result in substantial costs and diversion of resources and could substantially harm our business, results of operations, financial condition and prospects.
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Assertions by third partiesthird-parties of infringement or misappropriation by us of their intellectual property rights or confidential know how could result in significant costs and substantially harm our business and results of operations.
Third parties
Third-parties have asserted, and may in the future assert, that we (including New Guards and the brands in its portfolio) have infringed or misappropriated their trademarks, copyrights, confidential know how, trade secrets, patents or other intellectual property or proprietary rights. Intellectual property disputes can be costly to defend and may cause our business, operating results and financial condition to suffer. As the global digital luxury market expands, the risk increases that there may be patents granted to third-parties that relate to our products and technology of which we are not aware or that we must challenge to continue our operations as currently contemplated. From time to time, we face allegations, whether merited or not, that we or our partners have infringed or otherwise violated the patents, trademarks, copyrights or other intellectual property rights of third-parties. Such claims have been, and in the future may be, made by competitors seeking to obtain a competitive advantage or by
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other parties, including, most recently, third-parties seeking to use their registered intellectual property rights aggressively as a form of income stream. We may also face allegations that our employees have misappropriated the intellectual property or proprietary rights of their former employers or other third-parties. When such claims and allegations arise, it may be necessary for us to initiate litigation to defend ourselves in order to determine the scope, enforceability and validity of third-party intellectual property or proprietary rights, or to establish our respective rights. Regardless of whether claims that we are infringing patents or other intellectual property rights have merit, such claims can be time-consuming, divert management’s attention and financial resources and can be costly to evaluate and defend. Results of any such claims or litigation are difficult to predict and may require us to stop using our products or technology, obtain licenses, modify our services and technology while we develop non-infringing substitutes or incur substantial damages, settlement costs or face a temporary or permanent injunction prohibiting us from marketing or providing the affected products and services. We may also have to redesign our products or services so they do not infringe third-party intellectual property or proprietary rights, which may not be possible or may require substantial monetary expenditures and time, during which our technology and products may not be available for commercialization or use.
We cannot predict whether any such assertions or claims arising from such assertions will substantially harm our business and results of operations, whether or not they are successful. If we are forced to defend against any infringement or other claims relating to the trademarks, copyright, confidential know how, trade secrets, patents or other intellectual property or proprietary rights of third parties,third-parties, whether they are with or without merit or are determined in our favor, we may face costly litigation or the diversion of technical and management personnel. Furthermore, the outcome of a dispute may be that we would needmight require us to cease use of some portion of our technology, develop non‑non-infringing technology, recall or modify infringing technology,merchandise, pay damages, costs or monetary settlements or enter into royalty or licensing agreements. Royalty or licensing agreements, if required, may be unavailable on terms acceptable to us, or at all. Any such assertions or litigation could materially adversely affect our business, results of operations, financial condition and prospects.
In 2008 and 2009, a party related to Farfetch founder José Neves (the “Related Party”) executed two agreements (the “KH Licenses”) purporting to license certain know how (the “Know How”) from the Related Party to two third‑partythird-party LLPs (the “LLPs”). The Know How was a high level explanation of the Farfetch platform and business model. The 2008 KH License expired in April 2018, and the 2009 KH License expiresexpired in April 2019. The KH Licenses did not include a license of any software code. The LLPs granted intra‑group sub‑licensesintra-group sub-licenses of the collective Know How under the KH Licenses, which was then further sub‑licensedsub-licensed under two direct “Product and Development and Marketing Support Agreements” with Farfetch in 2008 and 2009, respectively (the “Direct Agreements”), in order for Farfetch to, among other services, develop the code, website architecture and brand that comprised the original Farfetch offering (the “Developed IP”). Under the terms of the Direct Agreements, the third party,third-party, rather than Farfetch, owned the Developed IP. In 2011, the licensing structure was amended and the intra‑group sub‑licensesintra-group sub-licenses from the LLPs were superseded by licenses of the Know How granted by each of the LLPs to Mr. Neves, who licensed such Know How (by way of a sub‑sub‑license)sub-sub-license) to Farfetch. Finally, in 2011, the Direct Agreements were terminated, and the Developed IP was assigned from the third‑partythird-party group to Farfetch.
In 2013, the Related Party executed a “Declaration regarding copyrights and intellectual property rights” (the “Declaration”), which declared that, among other things, between the period November 16, 1996 to February 27, 2010, the Related Party hashad not created any works or done anything which could originate intellectual property rights (defined to include know how) in connection with any of the entities in the original license chain (including Farfetch); any unknown intellectual property generated by the Related Party and used, licensed or in any other way exploited by those entities (including Farfetch) iswas transferred in full to Mr. Neves; and the Related Party agreesagreed that any intellectual property in use by the above entities that were to becomebe recognized by a court as belonging to the Related Party shallwould be transferred to Mr. Neves for €500. On April 29, 2014, Mr. Neves assigned all of his intellectual property rights and know how (including that obtained under the Declaration) to Farfetch.com. While seemingly conclusive, it is possible that the Declaration could be challenged. Although we do not expect our right to use the Know How to be successfully challenged, any such challenge could give rise to: (1) temporary injunctive relief which could restrict the use of such Know How by Farfetch and therefore operations of our business; (2) reputational damage; and/or (3) damages payable by Farfetch to the Related Party for any period of unauthorized use of the Know How following expirythe expiration of the KH License(s),Licenses, any of which could have a material adverse effect on our business, results of operations, financial condition and prospects.
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Our use of open source software may pose particular risks to our proprietary software and systems.
We use open source software in our proprietary software and systems and will use open source software in the future. The licenses applicable to our use of open source software may require that source code that is developed using open source software be made available to the public and that any modifications or derivative works to certain open source software continue to be licensed under open source licenses. From time to time, we may face claims from third partiesthird-parties claiming infringement of their intellectual property rights, or demanding the release or license of the open source software or derivative works that we developed using such software (which could include our proprietary source code) or otherwise seeking to enforce the terms of the applicable open source license. These claims could result in litigation and could require us to purchase a costly license, publicly release the affected
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portions of our source code, be limited inlimit the use of, or cease using, the implicated software unless and until we can re‑engineerre-engineer such software to avoid infringement or change the use of, or remove, the implicated open source software. In addition to risks related to license requirements, use of certain open source software can lead to greater risks than use of third‑partythird-party commercial software, as open source licensors generally do not provide warranties, indemnities or other contractual protections with respect to the software (for example, non‑infringementnon-infringement or functionality). Our use of open source software may also present additional security risks because the source code for open source software is publicly available, which may make it easier for hackers and other third partiesthird-parties to determine how to breach our website and systems that rely on open source software. Any of these risks could be difficult to eliminate or manage, and, if not addressed, could have a material adverse effect on our business, results of operations, financial condition and prospects.
Failure to adequately protect, maintain or enforce our intellectual property rights could substantially harm our business and results of operations.
We rely on a combination of trademark, copyright, confidential information, trade secrets and patent law, and contractual restrictions to protect our intellectual property and other proprietary information. The protection offered by these has its limitations. Despite our efforts to protect and enforce our proprietary rights and information, unauthorized parties have used, and may in the future use, our trademarks or similar trademarks, including those of the brands in the New Guards portfolio (including in the form of counterfeit goods), copy aspects of our website images, features, compilation and functionality or obtain and use information that we consider as proprietary, such as the technology used to operate our website or our content.
We do not have comprehensive registered protection for all of our brands, including the brands in the New Guards portfolio, in all jurisdictions around the world. There is no guarantee that we will be the first to submit trademark applications in all territories and/or classes for our brands and we have in the past experienced professional “trademark squatters” actively registering our brands’ marks before we are able to in certain markets, including China. We cannot guarantee that we will be able to preempt or successfully challenge such bad faith actors in the future, and we may incur costs in challenging their marks or putting in place preventative measures. In addition, there is no guarantee that our pending trademark applications for any brand will proceed to registration, and even those trademarks that are registered could be challenged by a third-party, including by way of revocation or invalidity actions. Our competitors have adopted, and other competitors may adopt, service, business or trading names or brands similar to ours, thereby impeding our ability to build brand identity and possibly diluting our brand or leading to consumer confusion. In addition, there could be potential trade name or trademark ownership or infringement claims brought by owners of other rights, including registered trademarks, in our marks or marks similar to ours, including FARFETCH, BROWNS, STADIUM GOODS and marks relating to brands in the New Guards portfolio and certain intellectual property in China, Macau, Hong Kong and Taiwan relating to the Farfetch word mark. In addition, we license-in, rather than own, certain intellectual property related to certain brands within the New Guards portfolio. Any claims of infringement, brand dilution or consumer confusion related to our brands (including our trademarks) or any failure to renew key license agreements on acceptable terms could damage our reputation and brand identity and substantially harm our business and results of operations.
In addition to our registered trademark protection we have several granted patents in the United Kingdom, Europe and the United States. We also have several published and unpublished patent applications in the United Kingdom, Europe and internationally, for aspects of our proprietary technology, and we may file further patent applications in the future. There is no guarantee that these will result in issued patents, and even if these proceed to grant, they and our granted patents could be vulnerable to challenge by third-parties, or their claims could be
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narrowed in scope by the issuing patent office such that they no longer adequately protect our proprietary technology. Further, we may decide not to pursue a patent application for an innovation due to the high costs, diversion of management time, and publication of the underlying innovation that arises from an application. The loss of our material intellectual property as a result of any claims or challenges, or the natural expiration of our intellectual property registrations, could have a material adverse effect on our business, results of operations, financial condition and prospects.
Domain names generally are regulated by internet regulatory bodies, and the regulation of domain names is subject to change. Regulatory bodies have and may continue to establish additional top-level domains, appoint additional domain name registrars or modify the requirements for holding domain names. We may not be able to, or it may not be cost effective to, acquire or maintain all domain names that utilize the name “Farfetch” or other business brands in all of the countries in which we currently conduct or intend to conduct business. If we lose the ability to use a domain name, we could incur significant additional expenses to market our products within that country, including the development of new branding. This could substantially harm our business, results of operations, financial condition and prospects.
We rely on multiple software programmers (as employees or independent consultants and third-parties) to design our proprietary technologies, designers (as employees or independent consultants) to create the products sold by the New Guards portfolio of brands and photographers (as employees or independent consultants) to capture the products sold on our platform. Although we make every effort to ensure appropriate and comprehensive assignment or license terms are included in the contracts with such third-parties, we cannot guarantee that we own or are properly licensed to use all of the intellectual property in such software, products or images. If we do not have, or lose our ability to use, such software, products or images, we could incur significant additional expense to remove such assets from our platform or re-engineer a portion of our technologies.
Litigation or similar proceedings have been necessary in the past and may be necessary in the future to protect, register and enforce our intellectual property rights, to protect our trade secrets and domain names and to determine the validity and scope of the proprietary rights of others. Any litigation or adverse priority proceeding could result in substantial costs and diversion of resources and could substantially harm our business, results of operations, financial condition and prospects.
We may be required to protect our intellectual property in an increasing number of jurisdictions, a process that is expensive and may not be successful, or which we may not pursue in every location. In addition, effective intellectual property protection may not be available to us in every country, and the laws of some jurisdictions may not adequately protect our intellectual property rights. Additional uncertainty may result from changes to intellectual property legislation, and from interpretations of intellectual property laws by applicable courts and agencies. Accordingly, despite our efforts, we may be unable to obtain and maintain the intellectual property rights necessary to provide us with a competitive advantage. Our failure to obtain, maintain and enforce our intellectual property rights could therefore have a material adverse effect on our business, financial condition and results of operations.
Risks Relating to our New Guards Business
Our New Guards business is dependent on its production, inventory management and fulfilment processes and systems, which could adversely affect its business if not successfully executed.
New Guards relies on various processes and systems for merchandise planning, inventory management, procurement, allocation and fulfilment capabilities. If any such systems were to fail or experience disruptions, including as a result of the COVID-19 pandemic, we may not derive the expected benefits to New Guards’ sales and profitability, or may incur increased costs relative to our current expectations, which could adversely affect our business, financial condition, results of operations and prospects. Refer to “Risks Relating to our Business and Industry—The profitability of our Browns, Stadium Goods and New Guards businesses depends on our ability to manage inventory levels and, if not managed successfully, our business and results of operations could be adversely affected.”
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Our New Guards business relies on contract manufacturing of its products. Our inability to secure production sources meeting our quality, cost, working conditions and other requirements, or failures by our contract manufacturers to perform, could harm our business and reputation.
In the year ended December 31, 2021, New Guards sourced all of its products from independent contract manufacturers who purchase fabric and make its products and may also provide design and development services. As a result, New Guards must locate and secure production capacity. We depend on contract manufacturers to maintain adequate financial resources, including access to sufficient credit, secure a sufficient supply of raw materials, and maintain sufficient development and manufacturing capacity in line with our asset light production model and in an environment characterized by continuing cost pressure and demands for product innovation and speed-to-market. In addition, we currently do not have any material long-term contracts with any of New Guards’ contract manufacturers. Significant difficulties or failures to perform by our contract manufacturers, including as a result of the COVID-19 pandemic, could cause delays in product shipments or otherwise negatively affect our results of operations. As of December 31, 2021, New Guards had relationships with approximately ninety-five manufacturers in over ten countries. If we decide to consolidate our production in the future, we could incur additional costs and such consolidation could increase our reliance on a smaller number of contract manufacturers.
Using contract manufacturers means we incur certain costs. Depending on the particular contract manufacturer, we may be responsible for paying the customs duties when shipping merchandise from its location of manufacture. Further, the prices we pay our contract manufacturers for our products are dependent in part on the market price for raw materials used to produce them, primarily cotton.The price and availability of raw materials may fluctuate substantially depending on a variety of factors, including demand, acreage devoted to cotton crops and crop yields, weather, supply conditions, transportation costs, warehouse management, energy prices, work stoppages, due to the COVID-19 pandemic or otherwise, government regulation and policy, economic conditions, market speculation and other unpredictable factors. Any and all of these factors may be exacerbated by global climate change.
A contract manufacturer’s failure to ship products to us in a timely manner or to meet our quality standards, or interference with our ability to receive shipments due to factors such as port or transportation conditions, security incidents or as a result of the COVID-19 pandemic or related responsive measures, could cause us to miss the delivery date requirements of our consumers on the Farfetch Marketplace or of our retail and wholesale customers on our Brand Platform. Failing to make timely deliveries may cause our consumers or customers to cancel orders, refuse to accept deliveries, impose non-compliance charges, demand reduced prices, or reduce future orders, any of which could harm our sales and margins. If we need to replace any contract manufacturer, we may be unable to locate additional contract manufacturers on terms that are acceptable to us, or at all, or we may be unable to locate additional contract manufacturers with sufficient capacity to meet our requirements or to fill our orders in a timely manner.
We require contract manufacturers to meet our standards in terms of working conditions, environmental protection, raw materials, facility safety, security and other matters before we are willing to conduct business with them. As such, we may decide to pursue less cost-efficient production to ensure we are meeting our sustainability objectives. We may also encounter delays in production and added costs as a result of the time it takes to train our contract manufacturers in our methods, products and quality control standards. In addition, the labor and business practices of apparel manufacturers and their suppliers have received increased attention from the media, non-governmental organizations, consumers and governmental agencies in recent years. Failures by our contract manufacturers or their suppliers or subcontractors to adhere to labor or other laws, appropriate labor or business practices, safety, structural or environmental standards, and the potential litigation, negative publicity and political pressure relating to any of these events, could harm our business and reputation.
New Guards may not be successful in discovering, promoting and sustaining the reputation of its brands.
New Guards is known for the brands in its portfolio, and the reputation of such brands relies on the quality and exclusiveness of New Guards’ products, its distribution networks, as well as the promotional and marketing strategies applied. Products or marketing strategies not in-line with brand objectives, inappropriate behavior by brand ambassadors, New Guards’ employees, distributors or suppliers, or detrimental information circulating in the media may endanger the reputation of such brands and may adversely impact sales.
The growth of our New Guards business depends in part on our ability to discover, attract and acquire new brands for its portfolio. Our ability to do so depends on our ability to identify the right designers, creators and brands with potential and offer them a compelling proposition, including attractive commercial terms when New Guards acquires existing brands or their intellectual property assets.
If New Guards grows its portfolio through brand collaborations or acquisitions, we may not be successful in integrating new brands into the New Guards systems and strategy; and we may not achieve the anticipated benefits from any such collaboration or acquisition. To the extent such collaborations are with third-party licensors, New Guards may not control the distribution, design and development services, supply chain manufacturing capacity or timely shipments for any given licensed brand’s merchandise, and as a result may not have access to merchandise produced by those licensors at our desired volumes or on a timely basis, which could have an adverse effect on our business and results of operations. For example, in February 2022 New Guards formed a long-term strategic partnership with Reebok which (i) names New Guards as the core operating partner for Reebok across Europe; and (ii) appoints New Guards as the exclusive partner to create, curate and bring-to-market luxury collaborations and distribute premium Reebok products in over fifty countries. New Guards will not have control of the supply chain lifecycle of the products it distributes as Reebok’s core operating partner in Europe.
The majority of New Guards’ sales are from carefully selected third-party distributors. The reputation of New Guards’ brands’ products thus rests in part on compliance by all distributors with such brands’ requirements in terms of their approach to the handling and presentation of products, marketing and communications policies and with respect to brand image. New Guards’, or third-party distributors’, failure to provide consumers with high-quality products and high-quality consumer experiences for any reason could substantially harm the reputation of its brands, which could have a material adverse effect on our business, results of operations, financial condition and prospects.
New Guards’ brands or products could be counterfeited or copied, which could have a material adverse effect on its business.
New Guards’ brands, expertise and production methods could be counterfeited or copied. Its products may be distributed in parallel retail networks, including online sales networks, without our consent.
Counterfeiting and parallel distribution have an immediate adverse effect on revenue and profit. Activities in these or other illegitimate channels may damage the brand image of the relevant products over time and may also lower consumer confidence, which could have a material adverse effect on our business, results of operations, financial condition and prospects.
New Guards licenses, rather than owns, certain intellectual property related to certain brands within its brand portfolio and it may not be successful in maintaining such intellectual property rights.
New Guards licenses, rather than owns, certain intellectual property related to certain brands within its brand portfolio, and such licenses generally include expiration dates and termination provisions. For example, New Guards’ license of the trademarks of the Off-White brand, which accounted for a majority of our Brand Platform GMV in the year ended December 31, 2021, expires in 2035 and includes a right for either party to opt out of the agreement effective as of January 1, 2026, subject to notice provisions. The agreement is also subject to standard termination rights related to unremedied material breaches of the license agreement and insolvency events.
Any failure to maintain or renew key license agreements on acceptable terms could damage our reputation and brand identity and could have a material adverse effect on our business, results of operations, financial condition and prospects.
Our New Guards business may be unable to maintain or increase sales through physical distribution channels.
Revenue attributable to our Brand Platform, which accounted for 20.7% of our total revenue in the year ended December 31, 2021, is primarily derived from the wholesale distribution of brands in the New Guards
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portfolio to carefully selected third-party distributors. We may be unable to maintain or increase sales of New Guards’ brands’ merchandise through these distribution channels for several reasons, including the following:
• | we may be unable to maintain the popularity of the brands in the New Guards portfolio or discover, attract and acquire new popular brands; |
• | the distributors may change their apparel strategies in a way that shifts focus away from luxury streetwear and related categories or away from New Guards’ brands’ typical consumers; or |
• | the distributors, including retailers, may experience competitive pressure, a decrease in orders, financial difficulties or bankruptcy as a result of the COVID-19 pandemic or the secular shift of consumers’ luxury fashion purchases to other channels, such as e-commerce sites (including the Farfetch Marketplace); or |
• | the distributors may experience disruptions, delays, slowdowns or other difficulties as a result of the COVID-19 pandemic and related response measures. |
In addition, decisions we make with regard to our distribution strategy may impact our ability to retain or gain new distributors. For example, we intend to continue to reduce wholesale distribution of brands in the New Guards portfolio and restrict the geographic distribution by other online retailers to the extent permitted by applicable regulation, as we move to favor our own direct-to-consumer channels, which could impact our relationship with existing or future distributors.
If New Guards is unable to maintain or increase sales through its customary wholesale distribution channels, it could have a material adverse effect on our business, results of operations, financial condition and prospects.
Risks Relating to our Retail Stores
The operation of retail stores subjects us to numerous risks, some of which are beyond our control.
As of December 31, 2021, Browns operated two retail stores, Stadium Goods operated two retail stores and New Guards operated twelve Off-White stores as well as three Ambush stores, two Palm Angels stores and three Off-White outlets. In addition, New Guards has over sixty franchised retail stores and four seasonal stores across its various brands, and anticipates opening additional mono-brand stores in the short-to-medium term.
The operating costs of our retail stores could increase, or stores or facilities may be impacted by changes in the real estate market, demographic trends, site competition, dependence on third-party performance or the overall economic environment. In addition, as a result of the COVID-19 pandemic and related government orders we may be required to, or determine it is necessary to, temporarily close our Browns, Stadium Goods or New Guards brands’ retail stores, as we did at certain points in 2020. Public concern regarding the risk of contracting COVID-19 may itself materially and adversely affect our business, as consumers may be unwilling to visit many of the high-traffic locations in which we operate our stores for fear of being exposed to COVID-19. Reduced international travel stemming from travel restrictions and other measures implemented by governments around the world to reduce the spread of the COVID-19 pandemic could also diminish consumer traffic at our retail locations.
The success of New Guards’ business is dependent on its ability to develop and execute its growth strategies, which include the successful development, opening, franchising and operation of new retail stores for brands in the New Guards portfolio. Successful execution of this strategy, and the success of the retail store operations across our businesses more generally, depends upon a number of factors, including our ability (and in certain cases the ability of the New Guards’ franchisees) to identify suitable sites for new stores, negotiate and execute leases on acceptable terms, construct, furnish and supply a store in a timely and cost effective manner, accurately assess the demographic or retail environment at a given location, hire and train qualified personnel, obtain necessary permits and zoning approvals, integrate new store distribution networks and build consumer awareness and loyalty. Construction, development or refurbishment costs may exceed original estimates due to increases in the cost of materials, labor or other items, and we may experience permitting or construction delays, which may further increase project costs and delay projected sales. These risks may be exacerbated to the extent we engage third-party developers or contractors in connection with such projects or are subject to approvals from regulatory bodies to complete the projects. As each new store represents a significant investment of capital, time and other resources, delays or failures in opening new stores, or achieving lower than expected sales in new stores, could materially and adversely affect our growth and results of operations.
Furthermore, New Guards’ Stadium Goods’ and Browns’ respective growth strategies may involve expansion into additional geographic markets in the future. Additional geographic markets may have different competitive conditions, consumer trends and discretionary spending patterns than the markets in which New Guards, Stadium Goods and Browns currently operate retail stores, which may cause their operations in these markets to be less successful than operations in existing markets.
Leasing real estate exposes us to possible liabilities and losses.
Our Browns, Stadium Goods and New Guards businesses lease retail properties including for existing and under-development retail and consignment spaces. In connection with these properties, we are subject to all of the risks associated with leasing real estate. In particular, the value of the assets could decrease, operating costs could increase, or a store may not be opened as planned due to changes in the real estate market, demographic trends, site competition, dependence on third-party performance, the overall economic environment or may be closed again as a result of the COVID-19 pandemic. Additionally, we are subject to potential liability for environmental conditions, exit costs associated with the disposal of a store and commitments to pay base rent for the entire lease term or operate a store for the duration of an operating covenant.
In addition, we lease office space in twelve countries and territories, and at considerable cost, which we may be unable to fully utilize, as a result of the COVID-19 pandemic. If we are unable to negotiate changes to the lease agreements on commercially acceptable terms, if at all, we would remain responsible for the lease obligations and incur costs with little benefit to us.
New Guards’ franchise business is subject to certain risks not directly within our control that could impair the value of our brands. New Guards enters into franchise agreements with unaffiliated franchisees to operate various brand stores in Asia, the Middle East, Australia, Canada, Italy and Greece. Under these agreements, third-parties operate, or will operate, stores that sell apparel and related products under various brand names. New Guards may enter into similar agreements in other countries or with regard to other brands in its portfolio in the future. The effect of these arrangements on New Guards’ business and results of operations is uncertain and will depend on various factors, including the demand for these products in new markets internationally and New Guards’ ability to successfully identify appropriate third-parties to act as franchisees, distributors, or in a similar capacity. In addition, certain aspects of these arrangements are not directly within New Guards’ control, such as franchisee financial stability and the ability of these third-parties to meet their projections regarding store locations, store openings, and sales. Other risks that may affect these third-parties include general economic conditions in specific countries or markets, foreign exchange rates, changes in diplomatic and trade relationships, restrictions on the transfer of funds, and political instability. Moreover, while the agreements we have entered into and plan to enter into in the future provide us with certain termination rights, the value of the brands in the New Guards portfolio could be impaired to the extent that these third-parties do not operate their stores in a manner consistent with New Guards’ requirements regarding its brand identity and consumer experience standards. Failure to protect the value of New Guards’ brands, or any other harmful acts or omissions by a franchisee, could have an adverse effect on our results of operations and our reputation.
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Risks Relating to Ownership of our Class A Ordinary Shares
Our operating results and Class A ordinary share price may be volatile, and the market price of our Class A ordinary shares may drop below the price you pay.
Our quarterly operating results are likely to fluctuate in the future in response to numerous factors, many of which are beyond our control, including each of the factors set forth above.
In addition, securities markets worldwide have experienced, and are likely to continue to experience, significant price and volume fluctuations. This market volatility, as well as general economic, market or political conditions, could subject the market price of our Class A ordinary shares to wide price fluctuations regardless of our operating performance. Our operating results and the trading price of our Class A ordinary shares may fluctuate in response to various factors, including the risks described above.
These and other factors, many of which are beyond our control, may cause our operating results and the market price and demand for our Class A ordinary shares to fluctuate substantially. Fluctuations in our quarterly operating results could limit or prevent investors from readily selling their Class A ordinary shares and may otherwise negatively affect the market price and liquidity of Class A ordinary shares. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have sometimes instituted securities class action litigation against the company that issued the shares. If any of our shareholders bring a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management from our business, which could significantly harm our profitability and reputation.
Our chief executive officer,Chief Executive Officer, José Neves, has considerable influence over important corporate matters due to his ownership of us. Our dual‑classdual-class voting structure will limit your ability to influence corporate matters and could discourage others from pursuing any change of control transactions that holders of our Class A ordinary shares may view as beneficial.
Our chief executive officer,Chief Executive Officer, Mr. Neves, has considerable influence over important corporate matters due to his ownership of us. Our ordinary shares are divided into Class A ordinary shares and Class B ordinary shares. Holders of Class A ordinary shares are entitled to one vote per share in respect of matters requiring the votes of shareholders, while holders of Class B ordinary shares are entitled to 20twenty votes per share, subject to certain exceptions. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof, while Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Upon any transfer of Class B ordinary shares by a holder thereof to any person or other entity, other than an affiliate of Mr. Neves, such Class B ordinary shares will be automatically and immediately converted into the equal number of Class A ordinary shares. Due to the disparate voting powers associated with our two classes of ordinary shares, Mr. Neves holds approximately 76.6% 71.8%of the aggregate voting power of our company. As a result, Mr. Neves has considerable influence over matters such as electing or removing directors, approving any amendments to our Articles and approving material mergers, acquisitions or other business combination transactions. In addition, under our Articles, our boardBoard of directors (“Board”)Directors will not be able to form a quorum without Mr. Neves for so long as Mr. Neves remains a director. This concentrated control will limit your ability to influence corporate matters and could also discourage others from pursuing any potential merger, takeover or other change of control transactions, which could have the effect of depriving the holders of our Class A ordinary shares of the opportunity to sell their shares at a premium over the prevailing market price.
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WeAs a public company, we are eligiblerequired to report, among other things, control deficiencies that constitute a “material weakness” or changes in internal controls that, or that are reasonably likely to, materially affect internal control over financial reporting. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim Consolidated financial statements will not be treated as an emerging growth company, as definedprevented or detected on a timely basis.
In our Annual Report on Form 20-F for the fiscal year ended December 31, 2020 (the “2020 Annual Report”), we reported two material weaknesses in the Securities Act,design and operation of our internal control over financial reporting that constituted material weaknesses. The control deficiencies resulted from (1) the operation of effective controls over information technology systems, including access over those systems, managing system changes and testing of system generated reports used in the execution of key manual controls; and (2) the implementation and documentation of internal control over financial reporting at the New Guards business. During the year ended December 31, 2021, management remediated the material weakness relating to the operation of effective controls over information systems. Refer to Item 15. “Controls and Procedures” for additional information.
As further described under Item 15. “Controls and Procedures,” management determined that we cannot be certain ifhad one material weaknesses at December 31, 2021, relating to the reducedoperation of internal control over financial reporting at the New Guards business (Item (2) described above).
If we are unable to remediate our material weakness, our remediation efforts will take longer to remedy, as we identify new material weaknesses or we are otherwise unable to implement and maintain effective internal control over financial reporting and effective disclosure controls and procedures and satisfy other requirements applicable to emerging growth companies will make our Class A ordinary shares less attractive to investors because we may rely on these exemptions.
We are eligible to be treated as an emerging growtha public company, as defined in Section 2(a) ofincluding the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2002, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including presenting only limited selected financial data and not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes‑Oxley Act. Sarbanes-Oxley Act, and we may be unable to accurately report our financial results, or report them within the timeframes required by the SEC.
As we continue to evaluate and work to improve our internal control over financial reporting, management may determine whether to take additional measures, or modify the remediation plan described above or identify additional control deficiencies or material weaknesses. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can
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occur because of a result,simple error or mistake. Due to these inherent limitations in control systems, misstatements due to error or fraud may occur and not be detected. We cannot assure you that our shareholdersremediation plan will be sufficient to prevent future material weaknesses from occurring. There is no assurance that we will not identify additional material weaknesses or deficiencies in our internal control over financial reporting in the future.
As our senior management is unable to conclude that we have effective internal control over financial reporting or to certify the effectiveness of such controls, and as our independent registered public accounting firm cannot render an unqualified opinion on our internal control over financial reporting and, to the extent that additional material weaknesses or deficiencies in our internal controls are identified, we could be subject to sanctions or investigations by the New York Stock Exchange (“NYSE”), the SEC or other regulatory authorities, investors may not havelose confidence in the accuracy and completeness of our financial reports, we may face restricted access to certain information that they may deem important. We could be an emerging growth company for up to five years, although circumstances could cause us to lose that status earlier, including if our total annual gross revenue exceeds $1.07 billion, if we issue more than $1.00 billion in non‑convertible debt securities during any three‑year period, or if we are a large accelerated filer and the market value of our Class A ordinary shares held by non‑affiliates exceeds $700 million as of the end of any second quarter before that time. We cannot predict if investors will find our Class A ordinary shares less attractive because we may rely on these exemptions. If some investors find our Class A ordinary shares less attractive as a result, there may be a less active trading market for our Class A ordinary sharescapital markets and our share price may be more volatile.adversely affected.
We qualify as a foreign private issuer and, as a result, we are not subject to U.S. proxy rules and are subject to Exchange Act reporting obligations that, to some extent, are more lenient and less frequent than those of a U.S. domestic public company.
We report under the Securities Exchange Act of 1934, as amendmentamended (“Exchange Act”) as a non‑U.S. company with foreign private issuer status. Because we qualify as a foreign private issuer under the Exchange Act and although we are subject to Cayman laws and regulations with regard to such matters and intend to furnish quarterly financial information to the SEC, we are exempt from certain provisions of the Exchange Act that are applicable to U.S. domestic public companies, including (1) the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act, (2) the sections of the Exchange Act requiring insiders to file public reports of their share ownership and trading activities and liability for insiders who profit from trades made in a short period of time and (3) the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10‑Q containing unaudited financial and other specified information, although we intend to provide selected quarterly information on Form 6‑K. In addition, foreign private issuers are not required to file their annual report on Form 20‑F until 120 days after the end of each fiscal year, while U.S. domestic issuers that are accelerated filers are required to file their annual report on Form 10‑K within 75seventy-five days after the end of each fiscal year and U.S. domestic issuers that are large accelerated filers are required to file their annual report on Form 10‑K within 60sixty days after the end of each fiscal year. Foreign private issuers are also exempt from Regulation FD, which is intended to prevent issuers from making selective disclosures of material information. As a result of all of the above, you may not have the same protections afforded to shareholders of a company that is not a foreign private issuer.
We may lose our foreign private issuer status in the future, which could result in significant additional costs and expenses.
As discussed above, we are a foreign private issuer, and therefore, we are not required to comply with all of the periodic disclosure and current reporting requirements of the Exchange Act. The determination of foreign private issuer status is made annually on the last business day of an issuer’s most recently completed second fiscal quarter, and, accordingly, the next determination will be made with respect to us on June 30, 2019.2022. In the future, we would lose our foreign private issuer status if (1) more than 50% of our outstanding voting securities are owned by U.S. residents and (2) a majority of our directors or executive officers are U.S. citizens or residents, or we fail to meet additional requirements necessary to avoid loss of foreign private issuer status. If we lose our foreign private issuer status, we willwould be required to file with the SEC periodic reports and registration statements on U.S. domestic issuer forms, which are more detailed and extensive than the forms available to a foreign private issuer. We willwould also have to mandatorily comply with U.S. federal proxy requirements, and our officers, directors and principal shareholders willwould become subject to the short‑swing profit disclosure and recovery provisions of Section 16 of the Exchange Act. In addition, we willwould lose our ability to rely upon exemptions from certain corporate governance requirements under the listing rules of the New York Stock Exchange (“NYSE”).NYSE. As a U.S. listed public company that is not a foreign
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private issuer, we willwould incur significant additional legal, accounting and other expenses that we will not incur as a foreign private issuer, and accounting, reporting and other expenses in order to maintain a listing on a U.S. securities exchange. These expenses willwould relate to, among other things, the obligation to present our financial information in accordance with U.S. GAAP in the future.
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As we are a foreign private issuer and intend to follow certain home country corporate governance practices, our shareholders may not have the same protections afforded to shareholders of companies that are subject to all NYSE corporate governance requirements.
As a foreign private issuer, we have the option to follow certain home country corporate governance practices rather than those of the NYSE, provided that we disclose the requirements we are not following and describe the home country practices we are following. Wefollowing, and we intend to rely on this “foreign private issuer exemption” with respectregard to the NYSE requirements to have the audit committee appoint our external auditors,certain matters. Specifically, the NYSE rules forrequire, in certain circumstances, shareholder meeting quorums and record dates and the NYSE rules requiring shareholders to approveapproval for equity compensation plans, and material revisions thereto. to those plans and equity issuances above specified amounts and/or to specified persons, which is not required under Cayman Islands law. We intend to follow home country law in determining whether shareholder approval is required. We may in the future elect to follow home country practices with regard to other matters. As a result, our shareholders maydo not have the same protections afforded to shareholders of companies that are subject to all NYSE corporate governance standards and shareholder approval requirements. Refer to Item 16G. “Corporate Governance.”
As a public reporting company, we are subject to rules and regulations established from time to time by the SEC regarding our internal control over financial reporting. If we fail to put in place appropriate and effective internal controlscontrol over financial reporting and disclosure controls and procedures, we may not be able to accurately report our financial results, or report them in a timely manner, which may adversely affect investor confidence in us and, as a result, the value of our Class A ordinary shares.
As a public company, we will be required to report, among other things, control deficiencies that constitute a “material weakness” or changes in internal controls that, or that are reasonably likely to, materially affect internal controls over financial reporting. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
In connection with the audit of the financial year ended December 31, 2017, we identified certain control deficiencies in the design and operation of our internal controls over our financial reporting that constituted material weaknesses. The control deficiencies resulted from (1) our technology access and change control environment not supporting an efficient or effective internal control framework and (2) reliance on manual processes.
Following the identification of these material weaknesses, we have taken steps to address these control deficiencies and continue to implement our remediation plan, which we believe will address their underlying causes. We are executing on our remediation plan for these material weaknesses by establishing more robust processes supporting internal control over financial reporting, implementing formal access and change controls to our systems, and automation of a number of system interfaces to improve our information technology systems. In addition, we have hired and will continue to hire additional accounting, finance and technology personnel. However, these material weaknesses may not be fully remediated until we have operated our business with these controls in place for a sufficient period of time. See Item 15. “Controls and Procedures” for additional information of the identified material weaknesses and related remediation plan.
If we are unable to remediate our material weaknesses and implement and maintain effective internal control over information technology and financial reporting and effective disclosure controls and procedures, or if we fail to meet the other demands that will be placed upon us as a public company, including the requirements of Section 404 of the Sarbanes‑Oxley Act, we may be unable to accurately report our financial results, or report them within the timeframes required by the SEC.
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As we continue to evaluate and work to improve our internal control over financial reporting, management may determine to take additional measures, modify the remediation plan described above or identify additional control deficiencies or material weaknesses. We cannot assure you that our remediation plan will be sufficient to prevent future material weaknesses from occurring. There is no assurance that we will not identify additional material weaknesses or deficiencies in our internal control over financial reporting in the future.
If our senior management is unable to conclude that we have effective internal control over financial reporting, or to certify the effectiveness of such controls, or if our independent registered public accounting firm cannot render an unqualified opinion on our internal control over financial reporting, when required, or if additional material weaknesses or deficiencies in our internal controls are identified, we could be subject to sanctions or investigations by the NYSE, the SEC or other regulatory authorities, investors may lose confidence in the accuracy and completeness of our financial reports, we may face restricted access to the capital markets and our share price may be adversely affected.
We will continue to incur increased costs as a result of operating as a public company, and our management will be required to continue to devote substantial time to new compliance initiatives and corporate governance practices.
As a public company, and particularly after we are no longer an emerging growth company, we will continue to incur to significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes‑Oxley Act, the Dodd‑Frank Wall Street Reform and Consumer Protection Act, the listing requirements of the NYSE and other applicable securities rules and regulations impose various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Our management and other personnel will need to continue to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations will continue to increase our legal and financial compliance costs and will make some activities more time‑consuming and costly. For example, we expect that these rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance, and could also make it more difficult for us to attract and retain qualified members of our Board.
We are continuing to evaluate these rules and regulations and cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. These rules and regulations are often subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.
As a publicly traded company, we will be required to comply with the SEC’s rules implementing Sections 302 and 404 of the Sarbanes‑Oxley Act, which will require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of control over financial reporting. Though we are required to disclose material changes in internal control over financial reporting on an annual basis, as a company in transition we will only be required to make our first annual assessment of our internal control over financial reporting pursuant to Section 404 for fiscal year 2019, and management’s report related to such assessment will be included in our Annual Report on Form 20-F for the fiscal year ended December 31, 2019 to be filed in 2020. Additionally, while we remain an emerging growth company, we will not be required to include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. To achieve compliance with Section 404 within the prescribed period, we will be engaged in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants and adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. We currently have limited accounting personnel and we have begun the process of evaluating the adequacy of our accounting personnel staffing level and other matters related to our internal control over financial reporting. Despite our efforts, there is a risk that we will not be able to conclude, within the prescribed timeframe or at all, that our internal control over financial reporting is effective as required by Section 404. If we identify one or more material weaknesses, it could result in an adverse reaction in the financial
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markets due to a loss of confidence in the reliability of our financial statements. As a result, the market price of our Class A ordinary shares could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the SEC or other regulatory authorities, which could require additional financial and management resources.
We may not pay dividends on our Class A ordinary shares in the future and, consequently, your ability to achieve a return on your investment will depend on the appreciation in the price of our Class A ordinary shares.
We may not pay any cash dividends on our Class A ordinary shares in the future. Any decision to declare and pay dividends in the future will be made at the discretion of our Board and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions and other factors that our Board may deem relevant. In addition, our ability to pay dividends is, and may be, limited by covenants of existing and any future outstanding indebtedness we or our subsidiaries incur. Therefore, any return on investment in our Class A ordinary shares is solely dependent upon the appreciation of the price of our Class A ordinary shares on the open market, which may not occur. See Item 8. “Consolidated Statements and Other Financial Information – Dividend Policy.”
Our shareholders may face difficulties in protecting their interests because we are a Cayman Islands exempted company.
Our corporate affairs are governed by our Articles, the Companies LawAct and the common law of the Cayman Islands. The rights of shareholders to take legal action against our directorsDirectors and us, actions by minority shareholders and the fiduciary responsibilities of our directorsDirectors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from judicial precedent in the Cayman Islands as well as from English common law, which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directorsDirectors under the laws of the Cayman Islands are not as clearly defined as under statutes or judicial precedent in existence in jurisdictions in the United States. Therefore, you may have more difficulty protecting your interests than would shareholders of a corporation incorporated in a jurisdiction in the United States, due to the comparatively less well‑developedwell-developed Cayman Islands law in this area.
A merger or consolidation may proceed under Cayman Islands law in one of two ways: by a court‑sanctioned scheme of arrangement or by a statutory merger: Whilemerger. If a merger is effected by way of a Cayman Islands law allows a shareholder objecting to a court‑sanctioned scheme of arrangement, to express a view that suchshareholders who voted at the scheme meeting(s) (convened by way of an order of the Grand Court of the Cayman Islands the (“Grand Court”)) may attend and raise objections at the sanction hearing in respect of the scheme of arrangement, would not provide fair value forwhere the shareholder’s shares, Cayman Islands statutory and common law in respect of schemesGrand Court will consider, amongst other things, whether to sanction the scheme of arrangement does not specifically provideincluding whether the terms and conditions of the proposed scheme of arrangement are fair to all affected shareholders. While shareholders may file an objection to the scheme of arrangement with the Grand Court against the sanctioning of the scheme of arrangement at the sanction hearing, no appraisal or dissenting rights are available to such holders relating to the value of their shares or payment for shareholder appraisal rightsthem in connection with the scheme of arrangement.
If a merger or consolidation effected by a scheme of arrangement of a company that has otherwise received the prescribed shareholder approval. This may make it more difficult for you to assess the value of any consideration you may receive in a merger or consolidation effected by a scheme of arrangement or to require that the acquirer gives you additional consideration if you believe the consideration offered is insufficient. However, in the event of a merger or consolidation consummatedeffected under the statutory merger regime, Cayman Islands law does provide a mechanism for a dissenting shareholdershareholders who dissent from the merger or consolidation will have limited appraisal rights, namely the right to require us to apply toreceive payment of the “fair value” of their shares as determined by the Grand Court for a determinationin accordance with Section 238 of the Companies Act if the merger or consolidation is completed, but only if they deliver, before the vote to authorize and approve the merger or consolidation is taken at a general meeting, a written objection to the merger and subsequently comply with all procedures and requirements of Section 238 of the Companies Act for the exercise of dissenters’ rights. The fair value of each of their shares as determined by the dissenter’s sharesGrand Court under the Companies Act could be more than, the same as, or less than, the per share merger consideration they would receive pursuant to the merger agreement if itthey do not exercise dissenters’ rights with respect to their shares. Appraisal rights are ordinarily available where the consideration offered under the merger is not possible forpayable in cash or, in some instances, the company and the dissenter to agree onunlisted securities of a fair price within the time limits prescribed.third-
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party. Shareholders of Cayman Islands exempted companies, such as ours, have no general rights under Cayman Islands law to inspect corporate records and accounts or to obtain copies of lists of shareholders. Our directorsDirectors have discretion under our Articles to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.
It should be noted that the Cayman Islands law has no legislation specifically dedicated to the rights of investors in securities, and thus no statutorily defined private causes of action to investors in securities such as those found under the Securities Act of 1933, as amended (the “Securities Act”) or the Exchange Act in the United States. Subject to limited exceptions, under Cayman Islands law, a shareholder may not bring a derivative action against the board of directors. Class actions are
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not recognized in the Cayman Islands, but groups of shareholders with identical interests may bring representative proceedings, which are similar.
As a result of all of the above, our public shareholders may have more difficulty in protecting their interests in the face of actions taken by our management or members of our Board than they would as public shareholders of a company incorporated in the United States.
Anti‑takeover provisions in our organizational documents may discourage or prevent a change of control, even if an acquisition would be beneficial to our shareholders, which could depress the price of our Class A ordinary shares and prevent attempts by our shareholders to replace or remove our current management.
Our Articles contain provisions that may discourage unsolicited takeover proposals that shareholders may consider to be in their best interests. Our Board may be removed by an ordinary resolution of our shareholders. In addition, Board vacancies may be filled by an affirmative vote of the remaining Board members. FollowingIn the event of a conversion of the Class B ordinary shares, the directors shallBoard of Directors would be divided into three classes designated as Class I, Class II and Class III, respectively, as determined by the chairmanChairman of our Board at the relevant time, and directors will generally be elected to serve staggered three yearthree-year terms. These provisions may make it more difficult to remove management.
Our Board has the ability to designate the terms of and issue preferred shares without shareholder approval.
Our Articles contain a prohibition on business combinations with any “interested” shareholder for a period of three years after such person becomes an interested shareholder unlessunless: (1) there is advance approval of our Board of the proposed business combination prior to the shareholder becoming an interested shareholder; (2) the interested shareholder owns at least 85% of our voting shares at the time the business combination commencescommences; or (3) the combination is approved by shareholders holding at least two‑thirds of the votes attaching to the ordinary shares that are not held by the interested shareholder.
Taken together, these provisions may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our Class A ordinary shares.
There may be difficulties in enforcing foreign judgments against us, our directors or our management, as well as against the selling shareholders.management.
Certain of our directorsDirectors and management and certain of the other parties named in this annual reportAnnual Report reside outside of the United States. Most of our assets and such persons’ assets are located outside the United States. As a result, it may be difficult or impossible for investors to effect service of process upon us within the United States or other jurisdictions, including judgments predicated upon the civil liability provisions of the U.S. federal securities laws.
In particular, investors should be aware that there is uncertainty as to whether the courts of the Cayman Islands or any other applicable jurisdictions would recognize and enforce judgments of U.S. courts obtained against us or our directorsDirectors or our management as well as against the selling shareholders predicated upon the civil liability provisions of the securities laws of the United States, or any state in the United States or entertain original actions brought in the Cayman Islands or any
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other applicable jurisdictions courts against us, our directorsDirectors or our management as well as against the selling shareholdersthat are predicated upon the securities laws of the United States or any state in the United States.
Farfetch Limited is a holding company with no operations of its own and, as such, it depends on its subsidiaries for cash to fund its operations and expenses, including future dividend payments, if any.
As a holding company, our principal source of cash flow will beis distributions or payments from our operating subsidiaries. Therefore, our ability to fund and conduct our business, service our debt and pay dividends, if any, in the future will depend on the ability of our subsidiaries and intermediate holding companies to make upstream cash distributions or payments to us, which may be impacted, for example, by their ability to generate sufficient cash flow or limitations on the ability to repatriate funds whether as a result of currency liquidity
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restrictions, monetary or exchange controls or otherwise. Our operating subsidiaries and intermediate holding companies are separate legal entities, and although they are directly or indirectly wholly owned and controlled by us, they have no obligation to make any funds available to us, whether in the form of loans, dividends or otherwise. To the extent the ability of any of our subsidiaries to distribute dividends or other payments to us is limited in any way, our ability to fund and conduct our business, service our debt and pay dividends, if any, could be harmed.
If securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or if they change their recommendations regarding our Class A ordinary shares adversely, our share price and trading volume of our Class A ordinary shares could decline.
The trading market for our Class A ordinary shares is influenced by the research and reports that industry or securities analysts publish about us, our business, our market or our competitors. If any of the securities or industry analysts who cover us or may cover us in the future change their recommendation regarding our Class A ordinary shares adversely, or provide more favorable relative recommendations about our competitors, the price of our Class A ordinary shares would likely decline. If any securities or industry analyst who covers us or may cover us in the future were to cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our share price or trading volume of our Class A ordinary shares to decline.
We may be treated as a passive foreign investment company, which could result in material adverse tax consequences for investors in theour Class A ordinary shares subject to U.S. federal income tax.
We would be classified as a passive foreign investment company (“PFIC”) for any taxable year if, after the application of certain look‑through rules, either: (1) 75% or more of our gross income for such year is “passive income” as defined in the relevant provisions of the Internal Revenue Code of 1986, as amended (the “Code”), or (2) 50% or more of the value of our assets, determined on the basis of a quarterly average, during such year is attributable to assets that produce or are held for the production of passive income. Based on the currently anticipatedour market capitalization, and composition of our income, assets and operations, we do not expect to be treated asbelieve we were a PFIC for the taxable year that ended on December 31, 2018, or2021, and we do not expect to be treated as a PFIC in the foreseeable future. However, our status as a PFIC in any taxable year requires a factual determination that depends on, among other things, the composition of our income, assets, and activities in each year, and can only be made annually after the close of each taxable year. Therefore, there can be no assurance that we will not be classified as a PFIC for the current taxable year or for any future taxable year. If we are treated as a PFIC for any taxable year during which a U.S. Holder (as defined in “U.S.Item 10. “Additional Information – E. Taxation – U.S. Federal Income Tax Considerations”) holds theour Class A ordinary shares, the U.S. Holder may be subject to material adverse tax consequences upon a sale, exchange, or other disposition of theour Class A ordinary shares, or upon the receipt of distributions in respect of theour Class A ordinary shares. We cannot provide any assurances that we will assist investors in determining whether we or any of our non‑U.S. subsidiaries are a PFIC for any taxable year. U.S. Holders should consult their tax advisors about the potential application of the PFIC rules to their investment in theour Class A ordinary shares. For further discussion, see “U.S.refer to Item 10. “Additional Information – E. Taxation – U.S. Federal Income Tax Considerations.”
If a United StatesU.S. person is treated as owning at least 10% of our shares, such holder may be subject to adverse U.S. federal income tax consequences.
Depending upon the aggregate value and voting power of our shares that U.S. persons are treated as owning (directly, indirectly, or constructively), we could be treated as a controlled foreign corporation (“CFC”). Additionally, because our groupGroup consists of one or more U.S. subsidiaries, under recently-enacted rules, certain of our non‑U.S. subsidiaries couldwill be treated as CFCs, regardless of whether or not we are treated as a CFC (although there is currently a pending legislative proposal to significantly limit the application of these rules). If a U.S. person is treated as owning (directly, indirectly or constructively) at least 10% of the value or voting power of our shares, such person may be treated as a “U.S. shareholder” with respect to each CFC in our groupGroup (if any), which may subject such person to adverse U.S. federal income tax consequences. Specifically, a U.S. shareholder of a CFC may be required to annually report and include in its U.S. taxable income its pro rata share of each CFC’s “Subpart F income,” “global intangible low‑taxed income” and investments in U.S. property, whether or not we make any distributions of profits or income of a CFC to such U.S. shareholder. If you are treated as a U.S. shareholder of a CFC, failure to comply with these reporting obligations may subject you to significant monetary penalties and may
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prevent the statute of limitations with respect to your U.S. federal income tax return for the year for which reporting was due from
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starting. Additionally, a U.S. shareholder that is an individual would generally be denied certain tax deductions or indirect foreign tax credits that may otherwise be allowable to a U.S. shareholder that is a U.S. corporation. We cannot provide any assurances that we will assist investors in determining whether we or any of our non‑U.S. subsidiaries are treated as CFCs or whether any investor is treated as a U.S. shareholder with respect to any of such CFC,CFCs, nor do we expect to furnish to any U.S. shareholders information that may be necessary to comply with the aforementioned reporting and tax paying obligations. The IRS has provided limited guidance on situations in which investors may rely on publicly available alternative information to comply with their reporting and tax paying obligations with respect to foreign-controlled CFCs. U.S. investors should consult their own advisors regarding the potential application of these rules to their investment in the Class A ordinary shares.
Risks Related to our Indebtedness
Our indebtedness could adversely affect our financial health and competitive position.
Our indebtedness increases the risk that we may be unable to generate cash sufficient to pay amounts due in respect of our indebtedness. It could also have effects on our business. For example, it could:
limit our ability to pay dividends;
increase our vulnerability to general adverse economic and industry conditions;
require us to dedicate a material portion of our cash flow from operations to make payments on our indebtedness, thereby reducing the availability of our cash flow for working capital, capital expenditures and other general corporate purposes;
limit our flexibility in planning for, or reacting to, changes in our business and in the fashion industry; and
limit our ability to borrow additional funds.
Any agreements evidencing or governing other future indebtedness may contain certain restrictive covenants that could limit our ability to engage in certain activities that are in our best interest.
To service our indebtedness, we require cash, and our ability to generate cash is subject to many factors beyond our control.
Our ability to make payments on and to refinance our existing and any future indebtedness, including our 5.00% convertible senior notes due 2025 (the “February 2020 Notes”), 3.75% convertible senior notes due 2027 (the “April 2020 Notes”) and 0.00% convertible senior notes due 2030 (the “November 2020 Notes”) (collectively, the “Notes”), and to fund planned capital expenditures will depend on our ability to generate cash in the future. This is subject, to a certain extent, to general economic, financial, competitive, regulatory and other factors that are beyond our control.
We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness on or before maturity, and we cannot assure you that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all. Failure to refinance our indebtedness on terms we believe to be acceptable could have a material adverse effect on our business, financial condition, results of operations and cash flow.
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General Risk Factors
Our operating results and Class A ordinary share price may be volatile, and the market price of our Class A ordinary shares may drop below the price you pay.
Our quarterly operating results are likely to fluctuate in the future in response to numerous factors, many of which are beyond our control, including each of the factors set forth above. In addition, securities markets worldwide have experienced, and are likely to continue to experience, significant price and volume fluctuations. This market volatility, as well as general economic, market or political conditions, could subject the market price of our Class A ordinary shares to wide price fluctuations regardless of our operating performance. Our operating results and the trading price of our Class A ordinary shares may fluctuate in response to various factors, including the risks described above.
These and other factors, many of which are beyond our control, may cause our operating results and the market price and demand for our Class A ordinary shares to fluctuate substantially. In addition, if any of the securities or industry analysts who cover us or may cover us in the future change their recommendation regarding our Class A ordinary shares adversely, or provide more favorable recommendations about our competitors, the price of our Class A ordinary shares would likely decline. Fluctuations in our quarterly operating results could limit or prevent investors from readily selling their Class A ordinary shares and may otherwise negatively affect the market price and liquidity of our Class A ordinary shares. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have sometimes instituted securities class action litigation against the company that issued the shares. If any of our shareholders bring a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management from our business, which could significantly harm our profitability and reputation.
We have incurred and expect to continue to incur costs as a result of operating as a public company, and our management will be required to continue to devote substantial time to new compliance initiatives and corporate governance practices.
As a public company we incur significant legal, accounting, insurance and other expenses. The Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of the NYSE and other applicable securities rules and regulations impose various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Our management and other personnel devote a substantial amount of time to ensure that we comply with all of these reporting requirements, rules and regulations, and such requirements, rules and regulations increase our legal and financial compliance costs and make certain activities more time consuming and costly. In addition, these laws, rules and regulations also make it more difficult and more expensive for us to obtain certain types of insurance, including director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These factors could also make it more difficult for us to attract and retain qualified persons to serve on our Board of Directors, the committees of our Board of Directors or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to the delisting of our common stock, fines, sanctions and other regulatory action and potentially civil litigation.
Furthermore, as a publicly traded company, we are required to comply with the SEC’s rules implementing Sections 302 and 404 of the Sarbanes-Oxley Act, which require management to certify financial and other information in our annual reports and provide an annual management report on the effectiveness of control over financial reporting. We are required to disclose material changes in internal control over financial reporting on an annual basis and are also required to complete an annual assessment of our internal control over financial reporting pursuant to Section 404, and management’s report related to such assessment must be included in our annual reports on Form 20-F. Additionally, we are required to include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm.
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To achieve compliance with Section 404 and as part of our efforts to remediate any material weaknesses identified, we have had to engage in a process to document and evaluate our internal control over financial reporting, which has been both costly and challenging. In this regard, we have had to continue to dedicate internal resources and adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. If we are unable to remediate any existing material weakness and/or identify additional material weaknesses, it could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our consolidated financial statements. As a result, the market price of our Class A ordinary shares could be negatively affected, and we could become subject to investigations by the NYSE, the SEC or other regulatory authorities, which could require additional financial and management resources.
We may not pay dividends on our Class A ordinary shares in the future and, consequently, your ability to achieve a return on your investment will depend on the appreciation in the price of our Class A ordinary shares.
We may not pay any cash dividends on our Class A ordinary shares in the future. Any decision to declare and pay dividends in the future will be made at the discretion of our Board of Directors and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions and other factors that our Board of Directors may deem relevant. In addition, our ability to pay dividends may be limited by covenants of any future outstanding indebtedness we or our subsidiaries incur. Therefore, any return on investment in our Class A ordinary shares is solely dependent upon the appreciation of the price of our Class A ordinary shares on the open market, which may not occur. Refer to Item 8. “Financial Information – A. Consolidated Statements and Other Financial Information – Dividend Policy.”
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Item 4. Information on the Company
A. History and Development of the Company
Corporate Information
We were incorporated as Farfetch Limited in the Cayman Islands on May 15, 2018 as an exempted company with limited liability under the Companies Law.Act. Exempted companies are Cayman Islands companies whose operations are conducted mainly outside of the Cayman Islands. Our principal executive offices are located at The Bower, 211 Old Street, London EC1V 9NR, United Kingdom. Our telephone number at this address is +44 (0) 20 7549 5400. Prior to our incorporation in the Cayman Islands, we conducted our business through Farfetch.com Limited, incorporated with limited liability under the laws of the Isle of Man with registered number 000657V, and its subsidiaries.
For a discussion of our principal capital expenditures, refer to Item 5. “Operating and Financial Review and Prospects — B. Liquidity and Capital Resources,” Item 4. “Information on the Company — D. Property, Plant and Equipment” and Note 17, Property, plant and equipment, within our Consolidated financial statements included elsewhere in this Annual Report.
Our agent for service of process in the United States is CT Corporation, whose address is 28 Liberty Street, New York, New York 10005.
The Reorganization TransactionsSEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers, such as us, that file electronically with the SEC at www.sec.gov. Our website address is www.farfetchinvestors.com. The information contained on our website is not incorporated by reference in this Annual Report.
Palm Angels
On July 20, 2021, New Guards completed the acquisition of 60% of the outstanding equity interests of Palm Angels S.r.l. (“Palm Angels”), the owner of the Palm Angels trademarks. In addition, New Guards agreed to a put and call option with the remaining shareholders of Palm Angels, which would require New Guards to purchase the remaining 40% of outstanding equity interests of Palm Angels in 2026, to the extent either the put or call option was exercised. In conjunction with this transaction, New Guards also increased its total ownership of Venice S.r.l (“Venice”), the operating company of the Palm Angels brand, to 100% through the acquisition of the remaining 31% of the outstanding equity interests of Venice.
Farfetch China
In connectionNovember 2020, we announced a partnership with Alibaba and Richemont to make available our IPO,luxury shopping channel on Alibaba’s e-commerce platform, Tmall Luxury Pavilion. We refer to the joint venture entity that conducts our Farfetch Marketplace operations in the China region as “Farfetch China.” As part of this partnership, on November 17, 2020 we formedissued to Alibaba and Richemont an aggregate of $600 million ($300 million each) of the November 2020 Notes, and they agreed to make a strategic investment in Farfetch LimitedChina. In August 2021, together Alibaba and effected a reorganization, whereby all holdersRichemont completed their combined strategic investment of warrants over Farfetch.com shares, except a holder of 189,995 warrants that remain outstanding, exercised their warrants into the applicable class of shares, and the outstanding shares of Farfetch.com were exchanged for shares of Farfetch Limited with equivalent rights. Following this exchange, the ordinary shares, the restricted linked ordinary shares and the preference shares held by the shareholders of Farfetch Limited were converted into ordinary shares of Farfetch Limited and subsequently converted into for Class A ordinary shares and Class B ordinary shares, as applicable. Outstanding options of Farfetch.com were also released$500 million ($250 million each) in exchange for a combined 25% ownership (12.5% each) in Farfetch China and its subsidiaries, the grant of options with equivalent rights over Class A ordinary sharesgroup through which Farfetch Marketplace operations in the China region, including its operations on Tmall Luxury Pavilion, are conducted.
In addition, under certain specified circumstances Alibaba and Richemont have an option to purchase a further combined 24% of Farfetch Limited. As a result of these transactions our business is now conducted through Farfetch Limited and its subsidiaries. We refer to all of these events as the “Reorganization Transactions.”
Private Placement
On June 21, 2017, Kadi Group Holding Limited (“Kadi Group”), a wholly owned subsidiary of JD.com Inc. (“JD.com”), completed the purchase of an equity interest in Farfetch.com. In connection with Kadi Group’s purchase of shares in Farfetch.com, Kadi Group and Farfetch.com enteredChina or convert their existing 25% into a forward purchase agreement, as amended, pursuant to which, subject to certain conditions, we agreed to issue and Kadi Group agreed to subscribe for one‑third of such number of shares (at a price per share equal to the initial public offering price per share) that would result in Kadi Group maintaining its percentage holding, or 13.94%, of our issued and outstanding share capital on a fully diluted basis immediately following our IPO. Kadi Group has agreed not to sell or transfer any of our Class A ordinary shares, it held immediately prior to our IPO during the two‑year period commencingin each case, from the consummation of our IPO, subject to limited exceptions. We referthird to the foregoing asfifth year of the “concurrent private placement.” See Item 7. “Major Shareholdersjoint venture’s formation. Also, under certain specified circumstances, we can require the conversion of Alibaba and Related Party Transactions—B. Related Party Transactions—Relationships with Kadi Group Holding Limited.”Richemont’s joint shareholding in Farfetch China into our Class A ordinary shares, in which case Alibaba and Richemont would retain their right to acquire the aforementioned additional shares in Farfetch China. In addition to the above, from the first to the tenth year anniversary of the joint venture’s formation, Alibaba and Richemont will have the further right to convert some or all of their joint
shareholding in Farfetch China into our Class A ordinary shares on the occurrence of certain customary events, including without limitation a change of control or an event of default.
B. Business Overview
Our Mission
Farfetch exists for the love of fashion. We believe in empowering individuality. Our mission is to be the leading global technology platform for the luxury fashion,industry, connecting creators, curators and consumers.
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Founded in 2007 by José Neves and launched in 2008, Farfetch is the leading technology platform for the global luxury fashion industry. We operate the only truly global luxury digital marketplace at scale, seamlessly connecting brands, retailers and consumers. We are redefining how fashion is bought and sold through technology, data and innovation. We were founded ten years ago, and through significant investments in technology, infrastructure, people and relationships, we have become a trusted partner to luxury brands and retailers alike.
The global market for personal luxury goods was estimated to be worth $307 billion in 2018 and is expected to reach $446 billion by 2025, according to Bain, and is largely characterized by family‑controlled companies, brand integrity, longstanding relationships and fragmented supply. In addition, luxury sellers require a high‑quality environment in which to sell their merchandise. As a result, these sellers have been cautious in their adoption of emerging commerce technologies.
The global luxury market is evolving, driven by an accelerating shift of consumers to online discovery and purchase, the increasing importance of Millennials and the growth of luxury consumption in China and other emerging markets. We connect a global consumer base to the highly fragmented global supply of luxury fashion, and we have established ourselves as the innovation partner to the luxury industry.
We are a technology company at our core and have created a purpose‑built platform for the luxury fashion industry. Our platform consistsbusinesses include:
• | The Farfetch Marketplace – the largest global digital luxury fashion marketplace at scale connecting, as of December 31, 2021, consumers in over 190 countries and territories with merchandise in more than 50 countries from over 1,400 brands, boutiques and department stores, delivering a unique shopping experience and access to the most extensive selection of luxury at a single destination. |
• | Farfetch Platform Solutions – our white-label enterprise offering to the luxury industry, which builds and operates e-commerce and technology solutions for luxury brands and retailers, utilizing the proprietary Farfetch platform. FPS also offers our luxury sellers ancillary services, including digital marketing, production, and customer service. FPS operates as the enabler of our LNR vision, facilitating the digitization of enterprise clients’ businesses, in addition to commercializing and scaling solutions developed by Farfetch Future Retail, including Connected Retail, which was previously called Store of the Future. |
• | Farfetch Future Retail – the retail innovation arm of our LNR vision, which is focused on creating the customer experience of the future, and develops and implements technology solutions to support luxury sellers’ retail visions of creating new luxury experiences by seamlessly connecting the digital, physical and virtual realms with the consumer at the center. |
• | Browns – an iconic British fashion and luxury goods retailer. Browns leverages our digital platform applications by selling through the Farfetch Marketplace, the Browns website and iOS app, which are powered and operated by FPS. Browns also operates two physical stores in London, pioneering Farfetch Future Retail innovations, such as connected retail products, developed in conjunction with our LNR vision and implemented by FPS. |
• | Stadium Goods – a premium sneaker and streetwear marketplace and retailer connecting sneakerheads around the world with merchandise primarily supplied by consigners. |
• | New Guards – a platform that uses a single common infrastructure and model to incubate and grow emerging talent into highly sought-after brands. New Guards designs, manufactures and distributes sought-after luxury fashion brands including Off-White, Palm Angels, Ambush, and Heron Preston, among others. |
We organize and report our business in three main components:
Applications. The Farfetch Marketplace is the primary application on our platform. In addition, we continue to build other offerings under our Farfetchreportable operating segments: Digital Platform, Solutions banner, including Farfetch Black & White SolutionsBrand Platform and Farfetch Store of the Future.In-Store.
Services. We have invested in and developed an integrated service offering, including content creation and end‑to‑end logistics. This enables us to offer the high‑quality environment required by the luxury ecosystem.
Data. We use our rich data sets and proprietary algorithms to deliver an enhanced consumer experience and create better businesses for retailers and brands. Our data insights drive operational efficiencies that create value for all partners on our platform.
The Farfetch Marketplace is the first and largest application built on our platform and is currently the source of over 90% of our revenue. We operate the largest digital luxury marketplace in the world. As of December 31, 2018,Digital Platform segment activities include the Farfetch Marketplace, connected over 2.8 million Marketplace consumers in 190 countries to over 1,000 luxury sellers. For consumers, we provide curated access toFPS, BrownsFashion.com, StadiumGoods.com, Farfetch Future Retail, and any other online sales channel operated by the highly fragmented supply of luxury merchandise. For luxury sellers, which includes 640 retailers and 382 brands who sell directly on the Farfetch Marketplace, we facilitate connection to the deepest pool of luxury consumers across the world. Aggregating a large number of luxury sellers requires long and careful relationship building and acts as a significant barrier to entry. We have carefully nurtured these relationships for a decade. Our Marketplace model allows us to offer the broadest and deepest selection of luxury fashion available online globally, while incurring minimal inventory risk and without capital‑intensive retail operations.
We are reinventing how consumers discover and engage with luxury fashion. We facilitate the discovery of new brands, provide tools to allow consumers to find the items they are looking for and inspire lovers of fashion around the world. We provide a unique, personalized experience based on our deep understanding of our consumers. Consumers choose our Marketplace because they trust we will deliver a consistent, high‑quality experience from start to finish, while being able to access over 3,200 different brands as of December 31, 2018. The luxury merchandise on our Marketplace is curated in three phases: (1) our rigorous selection of luxury sellers; (2) the expert buying decisions of our retailers,Group, including the individual perspective and combined buying expertise of over 630 boutiques and (3) our optimization of our product mix using data insights and knowledgerespective websites of the luxury market. We believe that people who love fashion, love Farfetch.
We are redefining commerce for luxury sellers. With access to a global consumer base, combined with an integrated marketing approach, we drive demand for our luxury sellers. Luxurybrands in the New Guards portfolio. It derives its revenues mostly from transactions between sellers gain deep data insights and
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real‑time feedback that are valuable in their decision making. They choose our platform because we help them grow their businesses with an enhanced online presence, powerful tools and superior economics, all while retaining control, which is critical to them. By providing a digital storefront, inventory management, a global logistics solution and other tools to help manage their businesses, we are embedding ourselves as both a commerce enabler and an innovation partner. Access to over 2.8 million Marketplace consumers of which over 1.4 million were Active Consumers as of December 31, 2018, through the Farfetch Marketplace allows luxury sellers to instantly significantly increase their consumer reach, and our platform allows us to be their trusted innovation partner for the future.
We generate income from transactionsor customers conducted on our platform, which, together with In-Store Revenue, represents our GMV. Wetechnology platforms, and primarily operateoperates a revenue‑revenue share model where we retain commissions and related income from these transactions. The Digital Platform segment also includes direct-to-consumer sales of owned product, referred to as “first-party sales,” which include “first-party original” product developed by brands in the New Guards portfolio, through the Farfetch Marketplace and New Guards’ brands’ owned e-commerce websites, for which we retain the full amount of the sale.
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The Brand Platform segment is comprised of production and wholesale distribution of brands owned and licensed by New Guards, and includes franchised store operations.
The In-Store segment covers the activities of stores we operate, including Browns, Stadium Goods and certain brands in the New Guards portfolio. Revenues are derived from sales made in these physical stores.
We are the leading global platform for the luxury fashion industry, and we take an integrated approach to operating our businesses across the digital, physical and virtual realms to serve our mission to connect the world's creators, curators and consumers. These businesses are reflected in our three reporting segments as follows:
Our business has grown significantly, as evidenced by the following:
As of December 31, 2018, we had 1,353,400 Active Consumers, up 44.6% since December 31, 2017. As of December 31, 2017, we had 935,772 Active Consumers, up 43.6% since December 31, 2016.
Our GMV was $1,407.7 million in 2018, up 54.7% over 2017, and was $909.8 million in 2017, up 55.3% from 2016.
Our revenue was $602.4 million in 2018, up 56.1% over 2017, and was $386.0 million in 2017, up 59.4% from 2016.
Our Platform Services Revenue was $489.0 million in 2018, up 65.0% over 2017, and was $296.4 million in 2017, up 63.8% from 2016.
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We operate a modular end‑to‑end technology platform purpose built to connect the luxury fashion ecosystem worldwide. Our vision was to create a single operating system that could address the complex demands of consumers and luxury sellers alike. Our platform is designed to deliver the future of luxury retail by addressing the unique challenges faced by each participant in the ecosystem and to offer a transformative luxury experience across both offline and online channels. Our platform is built on an API‑enabled proprietary technology stack, which provides the foundation for the three main components: applications, services and data, as illustrated below.
Applications
Farfetch Marketplace. The Farfetch Marketplace is the first and largest application built on our platform and is currently the source of over 90% of our revenue. Our Marketplace connects the two sides of the luxury fashion market: consumers from 190 countries and luxury sellers from 53 countries.
Farfetch Black & White Solutions. Our modular, white‑label e-commerce offering provides retailers and brands with platform services ranging from individual off‑the‑shelf elements to a full‑service branded e-commerce solution. Farfetch Black & White Solutions powers the online shopping experiences of global brands such as JW Anderson, Christopher Kane, Proenza Schouler and Thom Browne.
Farfetch Store of the Future. We believe the future of luxury fashion retail will be defined by the reinvention of the consumer experience by connecting the online and offline retail worlds. We have developed, and continue to evolve, a suite of connected in‑store technologies to provide a digitally enabled, personalized physical shopping experience.
Seller Tools. We have created powerful operational tools that help drive efficiencies for our luxury sellers. These include STORM, an integrated operating tool that enables end‑to‑end management of the online selling experience for our luxury sellers, and FFLINK, an integration platform built to provide a seamless connected retail solution for our luxury sellers.
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We have invested in and developed an integrated service approach that enables us to offer a consistent luxury environment for all of our platform partners. We achieve this through free and fast content creation to achieve a luxury product presentation, demand generation through our marketing services, secure multi‑currency payment processing and smart supply chain management. We provide consumers with a localized luxury experience, including after‑care in the form of multilingual customer service and free returns processing.
Data
Through our multiple interactions with our luxury sellers and consumers, we develop rich data sets and proprietary algorithms that drive operational efficiencies to create value for all participants on our platform. Our data science capabilities automate decision making through the application of machine learning to guide merchandizing, targeting, curation and feedback. As of December 31, 2018, we had 866 engineers and data scientists developing and enhancing the data interactions on our platform. These insights allow us to deliver an enhanced consumer experience and create operational efficiencies for our platform partners.
Our Strengths
We believe that the following strengths contribute to our success and are differentiating factors:
Visionary, founder‑led management team. We are led by our founder, José Neves, who has a unique combination of knowledge of and passion for the fashion industry and a deep understanding of technology. Our management team’s clear sense of mission, long‑term focus, commitment to our core cultural values and focus on transforming the luxury industry through technology are central to our success. Members of our team have created and grown leading luxury, fashion and technology businesses globally, and they retain a strong entrepreneurial spirit.
Scalable proprietary technology. We have built a scalable proprietary technology platform, which enables us to grow the reach of our Marketplace efficiently, while supporting the creation and development of new applications. This benefits both the sophistication of the applications we develop, as well as the speed with which we are able to deploy them.
Unique data capabilities. Our business model allows us to collate large volumes of unique data from touch points throughout the luxury fashion ecosystem. We believe this gives us unparalleled, multi‑dimensional insight into the entire luxury ecosystem. Our team of data scientists and specialist engineers utilize the data to feed our proprietary algorithms to enhance our platform and benefit all platform participants.
Established partner relationships. We are the partner of choice for the world’s leading brands, boutiques and department stores. These relationships cannot easily be replicated and represent a high barrier to entry. As of December 31, 2018, we partnered with 640 of the world’s leading luxury retailers and 382 brands. These relationships enable us to give our consumers access to unique and scarce inventory, in addition to the widest selection and variety. Our platform relationships extend beyond our Marketplace and include, for example, our multi‑year global innovation partnership with CHANEL.
The world’s largest selection of luxury. We operate the only luxury digital marketplace at scale. We offer ten times more stock keeping units than the closest competitor to our Marketplace. We achieve this by aggregating supply from a large number of globally distributed sources, offering consumers both breadth and depth of luxury merchandise.
• | As of December 31, 2021, we had 3,687,000 Active Consumers, up 22% since December 31, 2020. As of December 31, 2020, we had 3,024,000, up 46% since December 31, 2019. |
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| • |
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• | Our Digital Platform Services Revenue for 2021 was $1,386 million, up 34% over 2020, and was $1,033 million in 2020, up 47% over 2019. |
For geographical and segmental revenue, see Note 6, Segmental and geographical information included within our Consolidated financial statements elsewhere in this Annual Report.
Seasonality
Our marketplace business model. Our model allows us to offer the broadestis seasonal in nature. Historically, our business has realized a disproportionate share of our revenue and deepest selection of luxury fashion available online globally, while incurring minimal inventory risk and without capital‑intensive retail operations. This allowsearnings for low capital expenditures, favorable working capital dynamics, minimal inventory holding and an ability to drive stronger future margins than traditional inventory‑taking business models. For the year ended December 31, 2018, our Average Order Value was $618.6, and we had a 32.0% Third‑Party Take Rate.
Powerful network effects. Interactions among our consumers and luxury sellers on our Marketplace generate strong network effects. More brands, boutiques and department stores on our Marketplace increasesin the choices availablefourth quarter, attributable primarily to consumers, and more consumers on our Marketplace increases the potential sales for our luxury sellers through a self‑reinforcing, mutually beneficial network effect.
Culture of innovation. Innovation is intrinsic to Farfetch. For a decade, we have redefined how the luxury industry engages with consumers and technology. We believe that technology will continue to enable a better luxury ecosystem, and we will continue to pioneer innovation, for example by executing our vision for Augmented Retail, including Farfetch Storeimpact of the Future. year-end holiday season and seasonal promotions. Our Brand Platform segment operates to a wholesale cycle which has traditionally seen higher levels of sales in the first and third quarters of the year as compared to the second and fourth quarters of the year. However during 2021 the business moved to the more consistent drop strategy that has flattened the phasing across the year.
In addition,2021, our open architecture allows other innovatorsrevenues in the first, second, third and fourth quarters represented 22%, 23%, 26% and 29%, respectively, of our total revenues for the year. This is compared to build on our platform. 20%, 22%, 26% and 32%, respectively, in 2020.
As a result of these factors, our investment and reputation, we expectfinancial results for any single quarter or for periods of less than one year are not necessarily indicative of the results that third parties will continue to seek out Farfetch as their innovation partner, providing us with further opportunity to extend our platform.may be achieved for a full fiscal year.
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Our Growth Strategies
The key elements of our growth strategies include:
• | Strengthening and expanding our luxury partnerships |
Adding new luxury sellers and increasing products offered by existing ones. We intend to capitalize on luxury brands and retailers’ increasing adoption of online channels. As our new and existing brand partners have taken actions to tilt their distribution strategy away from wholesale towards direct-to-consumer, our strategy includes continuing to evolve our value proposition and focusing on delivering full-price sales to further increase the attractiveness of Farfetch’s multi-brand e-concession model. We expect these strategies will result in more brands, boutiques and department stores and new types of retailers joining the Farfetch Marketplace, and expanded breadth and depth of supply from our existing luxury seller base. We have also been able to establish and strengthen our relationships with brands through Browns, which has a legacy of supporting new talent and works closely with brands through collaborations. In addition, we plan to launch beauty as a category in 2022, which we expect will further deepen and expand our relationships with luxury sellers by providing a direct-to-consumer online channel for their beauty offerings. In January 2022, we announced the acquisition of luxury beauty retailer, Violet Grey, ahead of the anticipated beauty launch.
Partnering and expanding enterprise relationships with luxury sellers. We plan to continue to grow our enterprise offerings to luxury brands and retailers as they increasingly prioritize online channels. Beyond selling products via the Farfetch Marketplace, partnering with Farfetch also enables the digitization of brands and retailers, powering their own sites, stores and fulfilment operations with our platform and Luxury New Retail proposition. We will increasingly encourage luxury sellers to utilize our Platform capabilities, such as Media Solutions and Fulfilment by Farfetch. Media Solutions allows luxury brands to leverage our highly relevant luxury audience and first-party data to pursue marketing opportunities on the Farfetch Marketplace, and Fulfilment by Farfetch leverages Farfetch’s logistics and data capabilities to offer fulfilment solutions for luxury partners. As a step forward for our Fulfilment by Farfetch initiative, we announced in November 2021 the plan to form a joint venture with Clipper Logistics.
• | Capturing opportunities in China |
ImprovingAttracting the Chinese luxury consumer. Over the next five years, mainland China is expected to become the largest luxury market and represent more than $100 billion in annual luxury sales by 2025. This represents a significant opportunity for us, and we have invested in people and technology, centrally and locally, to support our continued growth. With mainland China as the second largest market by GMV for the Farfetch Marketplace for the year ended December 31, 2021, we are one of a limited number of Western e-commerce companies which has demonstrated success in penetrating China. We have achieved this in part by investing in localization, including a localized website and apps, our storefront on Tmall Luxury Pavilion, WeChat stores and WeChat Mini programs, private client stylists, customer service teams, locally preferred payment methods, and a cross-border customs clearance solution. We intend to continue to build on this success by investing to build our audience as well as increase our overall brand awareness in China in all channels, including our own apps where most of our business is conducted. We also plan to invest in innovative new features, pursue exclusive partnerships with luxury brands in China and further tailor our offering for the Chinese consumer, economicsincluding bringing products closer to consumers by leveraging our Fulfilment by Farfetch capabilities in the region.
Establishing partnerships. In August 2021, we announced the completion of the Farfetch China joint venture, in partnership with Alibaba and Richemont, which includes Farfetch Marketplace operations in the China region, as well as our operations on Tmall Luxury Pavilion which was launched in March 2021. This channel is intended to drive awareness of the Farfetch brand in China and expand the reach of our global luxury platform to Alibaba’s Tmall Luxury Pavilion consumers, offering luxury brands an opportunity to also elevate their brand awareness with Chinese consumers, while also significantly
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expanding their addressable market of luxury consumers through their participation on the Farfetch Marketplace.
• | Pursuing the platform and Luxury New Retail vision |
Accelerating the digitization of the global luxury industry. Luxury New Retail is our overarching strategy aiming to redefine the future of luxury retail for Farfetch and the luxury industry at-large. This strategy is activated via our Farfetch Platform Solutions business unit which offers a full scale of enterprise solutions including our connected retail suite of products and other emerging technologies powered by the Farfetch platform. These solutions are aimed at serving both mono-brand and multi-brand distribution strategies for luxury brands and retailers, including fully connected e-commerce websites and apps, connected retail technology, and access to the Farfetch and Tmall Luxury Pavilion marketplaces via a single integration with our platform. Farfetch Platform Solutions works as our implementation arm of these solutions, commercializing and enabling these for luxury industry partners. To help advance the LNR vision, we have formed a steering group comprised of our founder and Chief Executive Officer, José Neves, Alibaba Chairman and Chief Executive Officer, Daniel Zhang, Richemont Chairman, Johann Rupert and Artemis Chairman, François-Henri Pinault. With LNR, our aim is to position ourselves as a digital enabler of brand and retail partners to enable us to not only serve the online luxury market, but to also address the digital strategies of our enterprise partners’ physical, digital and virtual channels, and therefore, the wider global luxury industry.
Driving interactions in our platform ecosystem. Initially built for the Farfetch Marketplace, our platform, consisting of data, technology and operations infrastructure, is now also utilized by Browns, Stadium Goods and the New Guards portfolio of brands, as well as our FPS partners (as our enterprise solutions are built on our platform) and underpins our LNR vision. We continue to drive interactions between our business units to leverage our platform including optimizing our global logistical and operational capabilities, which include our Fulfilment by Farfetch initiative, which offers fulfilment solutions for luxury partners. We expect to continue to invest in people, product and infrastructure to drive innovation and scale, and continue to add platform features to allow brands and retailers that use our platform (as luxury sellers on the Farfetch Marketplace and as FPS partners) to create and tailor their own digital experiences online and offline. A key benefit of our platform approach is that new features developed for our direct-to-consumer channels, including the Farfetch Marketplace and existing FPS partners can become available to existing and future platform clients. To further strengthen our platform ecosystem, we also intend to partner with other innovative companies.
• | Building the Farfetch brand |
Increasing brand awareness.We are building a unique brand with strong cultural relevance by focusing our messaging on our “only on Farfetch” proposition while also providing our consumers with the most widely available range of selection. While we have established a significant position in the luxury industry, we believe we have an opportunity to further increase our market share by growing our brand awareness. During the year ended December 31, 2021, we launched upper-funnel brand activations in key luxury markets focused on building brand love and an emotional connection with consumers, with the intention to build brand awareness, preference, and an emotional connection with our brand. We believe that with continued investment in brand marketing, data-led insights and effective consumer basetargeting, we can expand and strengthen our reach, and we intend to continue a “full-funnel” approach to marketing to continue to build our brand and capture consumer intent through digital channels.
Increasing
Growing New Guards. New Guards’ brands bring cultural relevance to the lifetime valueFarfetch brand by providing sought-after products and exclusive access to merchandise, which can drive significant visibility and consumer engagement with limited marketing investment. We will continue our initiative to increase the mix of existing consumers.higher-margin direct-to-consumer revenue across New Guards’ brand portfolio by enabling multi-brand sales via the Farfetch Marketplace, and mono-brand sales via their direct-to-consumer channels hosted by FPS, in addition to leveraging our Fulfilment by Farfetch facilities. We have cultivatedseen these efforts significantly increase the mix of online direct-to-consumer revenue from 2% of
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New Guards’ revenue for the twelve months prior to the acquisition in August 2019 to 18% for the year ended December 31, 2021. We see an opportunity to continue to increase this mix by further leveraging New Guards’ merchandising approach in combination with the digital capabilities of our consumer baseplatform. As part of this strategy, we also launched Tmall Luxury Pavilion stores for Off-White, Palm Angels and have strong consumer loyalty. We are committedAmbush in January 2022. In addition, we plan to continue to grow our Brand Platform segment, which remains profitable and helps expand the relevance of the New Guards brands, while continuing to implement a thoughtful approach to distribution, including proactively reducing or eliminating product allocations to non-strategic online wholesale partners in our effort to prioritize long-term brand value over short-term revenues. In February 2022, New Guards further expanded its portfolio of brands with the signing of agreements with Authentic Brands Group to become the exclusive partner to curate, create
and bring to market Reebok’s luxury collaborations, as well as a core operating partner for the brand across Europe and distributor of premium Reebok products in the United States, Canada, Europe and certain other key markets.
• | Delivering an unrivaled global customer experience |
Attracting and retaining consumers. Our strategy is to leverage the acceleration of what we believe to be the sustained adoption of online channels by luxury consumers, to retain our consumers and attract new ones. This includes ensuring that through the breadth and depth of our curated supply, which is enhanced by first-party supply from New Guards, Browns and Stadium Goods, as well as our comprehensive approach to data and analytics, we are able to offer our existing consumers more of the merchandise that they want. We will seek to continue to leverage our vast data resources and refine our approach to data analytics, allowing us to further optimize and improve our marketing approach and create a more relevant, personalized consumer experience, so thatwith the objectives of bringing new consumers to our direct-to-consumer channels and motivating existing consumers to visit the Farfetch Marketplaceour apps and sites more often, converttransact more efficiently and have higher Average Order Values.increase their order values. We will further focus on consumer retention by optimizing our ACCESS loyalty program to increase awareness of the program and the benefits to consumers of returning to Farfetch for their luxury purchases. Our strategy also includes specific activities to attract and retain our private clients, our most valuable consumers.
Attracting new consumers. We are focused on growing our consumer base in all markets, with a particular emphasis on emerging markets including China, the Middle East, Latin America and Eastern Europe. Our expansion strategy includes offering consumers global access to luxury products that are tailored to local market trends and tastes, along with localized interfaces. For example, the rapidly growing luxury industry in China represents a major opportunity for us, and we have invested locally to support growth. As of December 31, 2018, we had 209 Farfetchers in Shanghai and Hong Kong, and our platform was able to deliver local language and payment systems. We are currently one of a small number of global technology platforms to have full access to the Chinese market, which is predicted to represent 46% of personal luxury goods sales in 2025, according to Bain. As another example, we have a strategic partnership with the Chalhoub Group in the Middle East to further our expansion in that region.
Increasing product supply and our luxury seller base
Increasing supply from existing luxury sellers. We can further increase the depth of our supply from our existing luxury seller base. We believe sellers will sell more of their inventory on our platform if we continue to offer a compelling value proposition, such as data‑led insights, access to relevant demand and technological innovation, and we aim to continue developing these offerings.
Adding brands, boutiques, department stores and other partners. We plan to further increase the number of luxury sellers in order to expand the assortment and availability of merchandise on our Marketplace. In addition to adding brands and boutiques, we plan to continue to add department stores and new types of retailers to participate on our Marketplace.
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Expanding into new categories and offerings. We aim to enhanceexpand our product offering for consumers on our direct-to-consumer channels and create additional opportunities for luxury sellers on our platformthe Farfetch Marketplace by expanding into other luxury categories and offerings, such asofferings. We will continue to invest in new categories attractive to our luxury consumers. This includes beauty, which we intend to launch on the expansion of our offeringFarfetch Marketplace in 2022 in a manner that enables beauty brands to include watches and fine jewelry in 2018 and our investment in the streetwear categorylaunch their products on Farfetch via our acquisition of Stadium Goods in January 2019. Streetwear has been one ofe-concession model and benefit from the fastest growing categorieshigher margins that entails. We also intend to expand on our Marketplace and Stadium Goods,successes with kidswear, a player in the $70 billion premium sportswear market, is largely incremental to our business. Our ability to expand into adjacent categories within the personal luxury goods market will enable us to increase our penetration of a large and robust total addressable market.
Buildingcategory that saw faster GMV growth than the Farfetch brand. While we have established a significant positionMarketplace in the fashion industry, we have an opportunity to increase market share by growing our brand awareness. We believe that with continued investment in brand marketing, data‑led insights and effective consumer targeting, we can expand and strengthen our reach.
We aspire to build technology products that meet the varied and evolving needs and wants of luxury consumers, retailers and brands.
The Farfetch Marketplace—Farfetch.com and our iOS and Android apps
We have a global consumer base that expects a seamless user experience. Consumers are able to engage with us across our website and mobile apps for both iOS and Android devices, including on our iOS app developed specifically for our consumers in China. Our Marketplace is supported by 21 localized sites in 14 local languages, offering features such as a user-friendly home page, browse function, product detail, wishlist and consumer account management.
We have a multi-disciplinary search team including data scientists and machine-learning engineers who work to better understand intent, leveraging these insights to identify the type of merchandise that is most meaningful to our consumers, and consequently strengthening our proprietary metadata. The browsing function is underpinned by a real-time stock management system, filling search results with higher volume stock to ensure availability. In addition, we are developing visual merchandising tools to train the algorithms used by our merchandising team, so our system becomes more intelligent and our processes become more scalable, trending toward an increasingly personalized experience.
Our consumers are driven by a desire to discover new products and trends. We have a “New In” section of our site, that provide consumers with access to products that just went live on our Marketplace. Our recommendation engine applies strategies ranging from look-alike algorithms on out of stock pages to collaborative filtering options to surface what similar consumers are viewing throughout our catalog.
The objective of our app is to enable our global consumers to shop effortlessly using their mobile devices, wherever, whenever. Our app, available in 14 languages on iOS and Android, enables consumers to search by designer, category or keyword, shop via daily new arrivals or discover products through highly personalized and dynamic recommendations. We regularly improve our app user experience, adding features such as: personalization; “Shop the Look;” new payment methods, including Apple Pay and WeChat Pay; touch ID and Facebook Connect for easy login; order tracking; geo-targeted shipping services; enhanced search with suggestions and personalized
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search recommendations; in-app messaging capabilities and push notifications. In addition, the Farfetch Private Client app offers certain consumers bespoke functionality and exclusive access to fashion products and services. We believe that the increase in popularity of our app demonstrates the changing dynamics of consumers’ shopping behavior. For the year ended December 31, 2018, our app accounted for 23% of total visits2021, and watches and fine jewelry, which has particular appeal to our Marketplace.
high-value private clients and grew faster than Farfetch Platform Solutions
Marketplace in the year ended December 31, 2021. We also expect to continue to invest in expanding our pre-owned offering category as we amplify our Positively Farfetch sustainability proposition. In February 2019,our aim to become the leading global platform for pre-owned luxury, in December 2021, we announced thatacquired Luxclusif, a business-to-business service provider with a successful turnkey solution enabling the acquisition, authentication and sale of second-hand luxury goods, which we were unitingbelieve will allow us to significantly accelerate our portfoliopre-owned capabilities through the development of business-to-business platform productskey technology and services, under the banner Farfetch Platform Solutions. Farfetch Platform Solutions will incorporate Black & White Solutions, Farfetch Store of the Futureservice features. Where new categories and CuriosityChina, to simplify our enterprise offering to the luxury industry.
Farfetch Platform Solutions’ mission is to offer luxury brands and retailers a suite of products and services leveraging the Farfetch platform ecosystem to build their own branded digital businesses.
Farfetch Black & White Solutions
Farfetch Black & White Solutions is our package of white-label solutions for luxury fashion brands and retailers. We deliver a global, multi-channel e-commerce offering that enables retailers and brands to seamlessly transact online with their consumers, while also allowing them to focus on the creative aspects of their businesses. These solutions are built onofferings require innovation within our platform, providing the same capabilities and scale aswe will aim to make such innovations available to our Marketplace, and benefitting from the improvements to and the innovation of our platform. We enable the specific business goals of our partners by creating a modular package of solutions from which they can choose from specific bundles of products and services or a full end-to-end e-commerce experience.FPS partners.
By building on our fully API-enabled platform, Farfetch Black & White Solutions allows for a flexible front-end suite of products, comprised of global websites and apps. Our back-end infrastructure allows retailers and brands to synchronize their websites with in-store and warehouse inventory, both from mono-brand stores and other suppliers in their distribution network, and facilitate in-store pick-up and consumer returns. Farfetch Black & White Solutions seamlessly facilitates payments and enables cross-border and international shipping to customers. Our modular approach provides retailers and brands the optionality of a more flexible solution depending on their e-commerce goals. A retailer or brand could select all of our front-end suite of products or a combination of our integrated solutions, all powered by our back-end infrastructure. In addition, we offer services, which include, among others, digital marketing, consulting, localization, production and warehousing. All of these are modular services that can complement the front-end suite of products or can stand alone. Monetization of individual products and services is negotiated and may include any combination of build fees, revenue share, agency fees or consultancy fees.Luxury New Retail Vision
In February 2019, we announced a strategic partnership with Harrods to provide global e-commerce platform. The partnership will see Harrods use and benefit from all of the core components of Farfetch Black & White Solutions, including e-commerce management, operations support, international logistics support, and technical support.
Augmented Retail and Farfetch Store of the Future
We believe the future of luxury fashion retail will be defined by the reinvention of the consumercustomer experience, through online and offline integrations. Originally, we coined the term ‘Augmented Retail’ to describe our vision for bringing the online and offline luxury worlds together. We callunveiled this vision of Augmented Retail, taking the magic of the physical store experience and bringing it together with the advantages of the online and digital experience, underpinned by the use of data.data, in 2017. LNR represents the evolution of this vision. The LNR vision, announced in November 2020, is our overarching strategy aiming to redefine the future of luxury retail for
Our Augmented Retail vision begins with the consumer in mind. Consumers enjoy the experience of being in store, building a relationship with the sales associate65
Farfetch and experiencing merchandise in the luxury store setting, yet technology has meant that consumers now expect ultra-personalized experiences, bothindustry at-large. This strategy is activated via our Farfetch Platform Solutions business unit which offers a full scale of enterprise solutions including our connected retail suite of products and other emerging technologies powered by the Farfetch platform.
The LNR vision seeks to enable the digitization of the luxury industry and how customers will shop for luxury in their real and digital lives, and expect those worlds to be seamlessly connected. Our Augmented Retail vision reflects the retail experience of the future by giving retailers visibility of their consumers’ preferences, both in storeleveraging Farfetch’s platform elements including our Marketplaces, Farfetch Platform Solutions, New Guards and online, enabling them toour stores.
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enhance
The Farfetch Marketplace
The Farfetch Marketplace is the services they can offer. With this in mind, we have developed a range of services and technologies to progress innovationlargest digital luxury marketplace in the luxury industry.
In April 2017, we unveiled our Augmented Retail vision and launched Farfetch Storeworld, connecting two sides of the Future,luxury fashion market: consumers from over 190 countries and territories and luxury sellers in over 50 countries.
For consumers, we provide curated access to, as of December 31, 2021, over 3,400 different brands from over 1,400 luxury sellers, including over 820 of the world’s leading luxury retailers and 590 brands. Our marketplace model allows us to aggregate supply from a technology-poweredlarge number of globally distributed sources, offering consumers both breadth and depth of luxury merchandise while incurring minimal inventory risk and without capital intensive retail operating system. This suiteoperations. Consumers are able to engage with us across our website and iOS and Android apps, including our apps developed specifically for our consumers in China, as well as on our Tmall Luxury Pavilion storefront launched in March 2021.
For luxury sellers we facilitate the connection to over three million Active Consumers, as of technologies aimsDecember 31, 2021. The Farfetch Marketplace is a global multi-brand luxury platform that offers brands direct-to-consumer distribution via an e-concession model. The proposition for brands includes full control over merchandising and pricing together with competitive margins vis-à-vis wholesale distribution. In our marketplace model, more brands, boutiques and department stores on the Farfetch Marketplace increases the choices available to improve retail productivity by capturing consumer data and enhancing interactions between consumers, and more consumers on the Farfetch Marketplace increases the potential sales associates, both in store and when the consumer interacts with the retailer or brand online. The open innovation approach to our operating system means that retailers and brands can also use third-party technologies on our platform. This allows for a uniquely tailored offering to each brand or retailer in keeping with their in-store and online strategy. Our Farfetch Store of the Future technology launched in Thom Browne’s London and New York stores in February and March 2018, respectively, and in Browns East in May 2018. In February 2018, we announced a multi-year global innovation partnership with CHANEL, through which we will work together to develop a range of digital initiatives to deliver a superior consumer experience both online and offline.
Management Tools for Luxury Sellers
We provide tools and solutions that enable our luxury sellers, with New Guards giving us the ability to maximize their businesses onoffer the broadest selection of, and exclusive access to, merchandise from the New Guards portfolio of brands further enriching our offering to consumers.
The Farfetch Marketplace and provide real-time visibility of inventory. These tools include:
STORM. STORMalso provides integrated, end-to-end services for luxury sellers, with a number of capabilities designed to drive their success on our Marketplace, including data management, inventory management, analyticscontent creation and key performance indicators, order managementend-to-end logistics and fulfilment, consumer profiles and omnichannel fulfilment.
FFLINK. FFLINK is the API layer that allows our partners to integrate our platform with their own systems or other third-party e-commerce solutions, such as Magento, Shopify, Cegid, Teamwork Retail, Lightspeed and Retail Pro.
Our Technology
Technology is at the core of our strategy, powering our operational capabilities and the sustainable scalability of our platform. We believe that continuous investment in our technology has given us a competitive advantage and enabled fast innovation.
While building, maintaining and optimizing our platform, we apply the following key principles:
API-first design. All the complexity of our business logic is accessible via a variety of APIs. When addressing a new functionality, we consider the questions and actions our platform should address and the most intuitive API design. Only after this assessment do we execute implementation details. This approach focuses our team on delivering the most sustainable solution with the best business outcome.
Multi-tenancy. Our platform is built for multi-tenancy and multi-client use. This allows the same infrastructure and services architecture to support both our Marketplace and other applications, such as Farfetch Black & White Solutions and Farfetch Store of the Future. The architecture design provides security, data isolation and support for individual tenant configurations.
Modularity. Our platform’s internal services have a modular design, allowing us to evolve individual system boundaries independently or replace components via integration with external modules.
Flexibility. The ability to integrate with other platforms is key to our design. Our platform has the flexibility to either be part of other systems or allow other systems to be part of ours.
Our platform architecture enables the following:
Cross-device experiences. By making features available through our platform API rather than on a specific device, we enable the possibility of sharing experiences across multiple devices, allowing, for example, consumers to start browsing and adding items to their “Shopping Bag” on a laptop and complete checkout on a mobile device. Maintenance of features is also done on the platform level, which maximizes efficiency.
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Innovation velocity. By having our business logic available via a centralized API-enabled platform, we can quickly make new platform innovations available to all applications and explore new scenarios at the consumer experience level, leveraging past learnings and experience embedded into our platform.
Provider agnostic. We designed our platform to be independent of any specific infrastructure provider, allowing us to scale across multiple cloud providers or self-managed data centers. We can also run scenarios under containerization, which allows us to run applications within a contained environment or in one operating system but in isolation from one another, or non-containerization, where each application can run within its own or multiple containers and each application runs simultaneously on the same computer. Making such options available as part of our design allows us to manage infrastructure costs.
Open Source Technologies
We use open source technologies and continuously assess existing and proven open source frameworks that can be used to accelerate our deliveries and focus on the added value to the business. We license technology, content and other intellectual property from technology providers and partners when a commercial license and support are available, which can provide added value and operating efficiencies to our business and integrate through our API enabled platform.
Open Innovation Framework
We have developed a robust framework around innovation as a way to prioritize our efforts and focus on potential opportunities that are consistent with our mission:
Our innovation. Our teams innovate on a daily basis, and we provide an environment that inspires and encourages ideas from all Farfetchers to ensure the best are elevated and come to fruition.
Corporate development. We routinely evaluate acquisitions and collaboration opportunities that will expand our business and further our strategic objectives and mission.
Platform engagement. We enable external businesses to build on our platform in order to offer complementary products and services to our consumers and platform partners. These businesses engage with us via our API and make use of the modular services we offer to grow their own businesses.
Dream Assembly. This is our accelerator program that provides commerce technology startups with access to our mentorship, networking and support. It is designed to accelerate the growth of these startups and enhance the luxury ecosystem.
Browns
Browns is an iconic British fashion and luxury goods retailer with a heritage of introducing new fashion labels and pioneering luxury fashion since the 1970s. As an example of its ability to identify new fashion talent, Browns purchased the entire design school graduation collection of then unknown designer John Galliano, championed other young designers such as Hussein Chalayan and Alexander McQueen from the outset of their careers and, more recently, was the first to stock Christopher Kane.
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Browns operates two retail stores in London and also leverages our platform applications. Ownership of Browns enables us to understand the fashion ecosystem through the lens of a boutique. In addition to enhancing our credibility in fashion, Browns also serves the critical mission of pioneering innovations developed under our Augmented Retail strategy, including providing a luxury fashion boutique environment to test Farfetch Store of the Future technology.
Our Global End-to-End Operations
We provide consumers with a localized luxury experience. Our core operations areas are smart supply chain managementexperience and luxury customer care.
Smart Supply Chain Management
Content Creation. The first step in our supply chain operations is content creation.care for Farfetch Marketplace consumers. In-house content creation allows us to achieve a luxury product presentation with a consistent look and feel, with short lead times and low cost. Our content creation process includes styling, photographing, photo-editing and content management. Our studios are the heart of the process, where teams of professional stylists, models and photographers create product images. We also develop original content, including tailored merchandise descriptions, convenient size and fit information and detailed measurements information to provide the best consumer experience, maximize sales and minimize returns.
We operate four strategically located production centers in Guimarães (Portugal), Los Angeles, São Paulo and Hong Kong, processing over 578,000 products and producing approximately 3.1 million unique luxury images during 2018. As of the third quarter 2018, our largest production center can process over 5,000 items per day at peak times.
Fulfilment. We have invested significant resources in developing our fully integrated logistics network. We have developed smart supply chain algorithms that are built around deep information sharing and aligned through shared incentives,analytics which make our supply chain scalable, capital efficient and highly agile.
Fulfilment is executed These algorithms are developed at a platform level and therefore can also be utilized by our FPS clients. In addition, through our Fulfilment by Farfetch proposition we offer logistics solutions tailored to the luxury industry with our third-party logistics warehouses.
The Farfetch Marketplace is built on our modular end-to-end digital platform, which is built on an API-enabled proprietary technology stack. Our digital platform is built for multi-tenancy and multi-client use. This allows the same infrastructure and services architecture to support each of our Marketplaces, FPS and Farfetch Future Retail, as well as the tools we offer to our luxury sellers.
Browns provides a good example of our omni-channel approach in practice. Ownership of Browns has enabled us to understand the fashion ecosystem through the lens of a boutique. Browns leverages our digital platform applications by selling through the Farfetch Marketplace, the Browns website and the iOS apps, which are powered and operated by FPS, as well as operating stores with connected retail technology, developed by Farfetch Future Retail.
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Farfetch Media Solutions and Partnerships
Farfetch Media Solutions and Partnerships operates at the intersection of luxury e-commerce and advertising. Through this service we provide luxury sellers advertising products and includes pickingcreative solutions to maintain authority and packingbuild credibility within an elevated, luxury e-commerce environment; drive awareness and engagement among the merchandise in Farfetch-branded packaging and booking the pick-up for onward delivery to the consumer. We prioritize effective fulfilment to 190 countries, building a robust process enabled by technology and strong collaboration among our internal teams, our luxury sellers and our distribution delivery carriers.
Once an order is packed, the merchandise is distributed to our consumers. We have the global expertise to handle the complexity of a vast network of routes and we have extensive knowledge of how to manage and optimize the complexities and intricacies of each country combination, including duties and bureaucracies.
We offer a number of delivery options including: standard and premium delivery; click and collect, which allows consumers to receive their shipment at their choice of local boutique or pick-up point; same-day delivery from selected luxury sellers in 18 of our largest cities globally; and F90 store to door delivery in 90 minutes from a numbernext generation of luxury sellersshoppers while in Berlin, Dubai, Hong Kong, London, Los Angeles, Madrid, Miami, Milan, New York, Paris, São Paulothe digital aisle; and Tokyo. We also offercreate meaningful connections with customers through unique owned and operated partnerships that align with brand values and drive transactions. In the year ended December 31, 2021, Farfetch Media Solutions served campaigns for a free returns service on all our orders from a placediverse mix of over 85 partners.
Performance Marketing and at a time selected by our consumer.Consumer Acquisition
Sales and Marketing
Our integrated marketing framework represents a core competency that we regard as essential to the success of our Marketplace model. We are focused on continuing to build brand recognition and a demand generation engine that connects our consumers with the world’s bestour luxury sellers. Through driving high consumer demand, we aim to create a better proposition for our luxury sellers.
Over the last three years, we have invested heavily in building a talented in‑house marketing team, while also developing proprietary technologies that enable us to build data‑driven and highly‑personalized campaigns that can scale globally.
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Data‑Driven Approach
We collect and utilize a broad range of data from multiple touch points in the luxury fashion ecosystem. This allows us to identify audience segments that are highly engaged in the luxury fashion category, which enables us to focus both brand and performance marketing campaigns on those we believe have a high propensity to purchase. Marketing costs are allocated across our global digital media portfolio using advanced internal bidding algorithms, which are tuned to optimize return on investment.
We employ a scientific approach to marketing. We use our data insights to continuously optimize and improve our marketing and product experiences to be responsive to our consumers’ needs and provide them with a great consumer experience. Our relentless focus on data‑driven testing enables us to innovate and optimize at a fast pace.
We have an audience‑focused, rather than channel‑focused, approach to both brand and performance marketing, which we manage as one integrated program. We use our rich audience insights to identify prospective consumers who we believe have an interest in, and a propensity to buy, luxury fashion. We have built our own marketing technology platform to deploy integrated campaigns that span the entire communications funnel, from awareness to consideration to purchase and retention. We leverage the audience targeting capabilities provided by our online media partners and other non‑online sources, and we carefully monitor campaign reach based on propensity to buy and overall engagement with the category. The efficiencies gained from effective audience targeting allow us to build high frequency campaigns that drive awareness of our brand proposition.
We use sophisticated media mix measurement and modelling techniques to evaluate marketing performance, and we match our investment in audience and media to the predicted lifetime value that we believe each segment will generate, optimizing on a market‑by‑market basis.
Global Scale
Our marketing team is comprised of a broad range of capabilities and disciplines and is responsible for the development of all global performance and brand marketing campaigns. From a demand generation perspective, we manage active marketing campaigns across 190 countries and utilize a hub and spoke operating model that enables us to scale and rapidly deploy new campaigns across all markets, while also localizing messaging and creative assets.
Our global approach enables us to make faster decisions as we can run more tests at scale and determine outcomes faster. In addition, our local teams in Brazil, China, Japan, Russia, the United Arab Emirates and the United States are responsible for working with local media channels and partners and localizing global creative concepts while also running local initiatives that bring our brand personality to life.
Consumer Acquisition
We principally acquire consumers through online channels, including paid and organic search, metasearch, affiliate partnerships, display advertising and social channels. We have channel experts who work with dedicated analysts, data scientistscan also use promotions to drive consumer acquisition (or retention) and engineers. Wesales on the Farfetch Marketplace. In addition, we have invested significant resources to establish systems that optimize paid search, and our team is highly skilledhighly-skilled at developing programs and algorithms to maximize our returnreturns.
In 2021 we continued to invest in driving Farfetch app installs on paid search.new consumer mobile smartphones – via both the Apple IOS app store and the Android app store, which we believe drives the efficient growth of our luxury consumer base. Consumers who purchase through the app have historically had a higher lifetime value, on average, than consumers who purchase through other mediums.
Brand Marketing
We see a significant opportunity ahead in building awareness of, and engagement with, our brand. During the year ended December 31, 2021 we continued to build on the efforts initiated on September 2020, with our re-branding and first global brand campaign, through brand campaigns focused in China, the United Kingdom, the United States and the Middle East. The focus of these activations was the value of choice and personalization we offer to consumers and were launched across different channels, both online and offline, with the intention to build brand awareness, preference, and an emotional connection with our brand. We intend to continue a “full-funnel” approach to marketing in 2022 for the purpose of continuing to build our brand and develop consumer intent, leveraging innovation, content, and editorial features, as well as our partnerships with luxury brands.
Retention and Loyalty
We focus on building continuous dialogue with our consumers given their levels of engagement with luxury shopping. We do this by creating inspiring content and developing personalized and tailored product recommendations, which we distribute via email, push notifications, social media, display advertising and directly on the Farfetch Marketplace.
In 2021, we continued to build membership and awareness in our platform. We launched ACCESS Farfetch’s new loyalty program for a limited global test group and for customers in the UK in the third and fourth quarter of 2018, respectively. ACCESSwhich provides customersconsumers with
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benefits and rewards based on their annual spend on ourthe Farfetch Marketplace. We planBased on the success of ACCESS, we have continued to rollinvest in the program, out in additional countries in the first halfincluding enhanced features to increase awareness of 2019.program benefits.
Farfetch Private Client
Farfetch Private Client caters to some of our most importantvaluable and highest spending consumers. Our Private Client proposition is to make our MarketplaceFarfetch the only place these valuable consumers need to go to for all of their luxury fashion needs.
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We offer high‑endhigh-end services such as a dedicated personal shopper, priority access to a customer service line and Fashion Concierge services. Fashion Concierge allows Farfetch Private Client consumers to access exclusive merchandise and to source productsmerchandise from non‑sellers not on the Farfetch sellersMarketplace via theirour stylists. We also provide Farfetch Private Client consumers with exclusive benefits, such as pre‑order options, access to special items, events and experiences, early access to coveted items and sales, free shipping and a Farfetch Private Client app.
Stadium Goods Marketplace
Stadium Goods is a premium sneaker and streetwear marketplace specializing in new, never worn, merchandise for resale. Farfetch acquired Stadium Goods in January 2019 and it continues to operate as a standalone brand, increasingly leveraging Farfetch’s digital platform and expertise in technology, logistics, data, brand, marketing and geographic reach.
Stadium Goods operates an online marketplace (stadiumgoods.com) and iOS and Android apps. Stadium Goods’ stock is also available through third-party platforms, including Amazon.com, and is fully integrated into and available on the Farfetch Marketplace in all geographies. Stadium Goods has brick-and-mortar retail stores in the heart of New York City’s Soho neighborhood and in the Gold Coast neighborhood of Chicago. Additionally, Stadium Goods operates consignment intake centers in Soho, New York and the Bucktown neighborhood in Chicago.
Our Enterprise Solutions
Farfetch Platform Solutions
FPS is our enterprise offering to the luxury fashion industry, offering a modular suite of white-label technology solutions and services for luxury sellers. FPS delivers global, multi-channel e-commerce solutions that enable our brand and retailer partners to drive growth and innovation, seamlessly interact with their customers and build stronger and closer relationships, while allowing them to focus on the creative aspects of their businesses. In addition, FPS works as our implementation arm for products developed under Farfetch Future Retail, commercializing and bringing these solutions to luxury industry partners.
These solutions are built on our digital platform, providing the same capabilities and reach as the Farfetch Marketplace, and benefitting from innovations and product developments on our digital platform. FPS partners can choose from specific features or bundles of products and services or a full end-to-end e-commerce experience, tailored to their customer and business requirements. For our FPS enterprise offering, we have built a team of channel experts who work with dedicated analysts, data scientists and engineers to manage the full end-to-end digital marketing strategy for luxury fashion brands and retailers.
Because our FPS offering is built on our fully API-enabled digital platform, partnering with FPS allows for a flexible front-end suite of products, consisting of global websites, apps, WeChat stores and an in-store app, which helps in-store staff manage global inventory to enhance in-store engagements. Our back-end infrastructure allows our brand and free shippingretailer partners to synchronize their websites in real time with in-store and warehouse inventory, both from mono-brand stores and other suppliers in their distribution networks, and to facilitate customer-friendly services such as in-store pick-up and returns.
FPS currently works with a number of brands and retailers across the luxury fashion industry. In 2020, FPS launched a new global e-commerce platform for Harrods. Our strategic partnership allows Harrods to use and benefit from all of FPS’s core components, including e-commerce management, operations, international logistics and technical support. In addition, the e-commerce channels for Browns and a number of brands in the New Guards portfolio are powered and operated by FPS.
In China, our CuriosityChina business focuses on amplifying premium and luxury brands across digital platforms in China. CuriosityChina augments the FPS proposition to include plug-and-play access for luxury brands to expand rapidly in China via web, app, WeChat Store and WeChat Mini programs.
In 2022, we are planning to further modularize our FPS offering, being able to offer standalone modules such as global payments and logistics and e-concessions as a service to luxury industry partners. We believe this will allow us to broaden our enterprise clients base, as we continue to enable the digitization of the luxury industry.
Farfetch Future Retail
We believe that consumers are channel agnostic, and will increasingly seek ultra-personalized experiences across physical, online and digital channels, expecting those worlds to be seamlessly connected. Our LNR vision reflects the retail experience of the future by giving retailers visibility to their customers’ preferences, both in-store and online, enabling them to enhance the services they can offer. Consistent with this vision, we have developed a range of services and technologies to progress innovation in the luxury industry. For example, during 2021 we launched new products and services through our open innovation strategy, which uses a partnership model to deliver new commercially successful experiences. In 2021 these included an expansion of our virtual try on and our Second Life service, and new connected retail initiatives. In 2022 we intend to continue to expand our open innovation strategy to deliver a new wave of digital luxury experiences.
Farfetch Future Retail is our retail innovation arm focused on creating the new customer experience of the future. We seek to create and initiate new technology solutions that support the transformation of the entire luxury industry. For example, Farfetch Future Retail has developed technologies designed to merge online, offline and virtual experiences.
Browns also serves as an incubation space for the Farfetch Future Retail, testing and showcasing innovative solutions to meet the needs of the multichannel, luxury consumer. Browns opened a new flagship store in London’s Mayfair in 2021. The new store, which replaced Browns’ previous store in Mayfair, will continue to pioneer innovations developed under our LNR initiative, including the connected retail solutions (previously called Farfetch Store of the Future). These solutions are also currently leveraged by CHANEL on its flagship boutique at 19 rue Cambon, Paris and three other CHANEL boutiques in Paris and Monaco, and by Thom Browne, which utilizes our in-store app.
New Guards
In August 2019, we acquired New Guards. New Guards operates as a platform that uses a single common infrastructure model to incubate and grow emerging talent into highly sought-after brands. New Guards designs, manufactures and distributes luxury brands including Off-White, Palm Angels, Ambush and Heron Preston, among others, through a shared services model. New Guards sources all items.of its merchandise from independent contract manufacturers, and, as a result, New Guards is inventory light relative to the scale of its business.
New Guards has the capability to bring creative visionaries’ and designers’ ideas to fruition by offering infrastructure, including strategy development, design studio, sourcing and production, industrial capabilities, global distribution channels, merchandising, licensing, marketing and growth planning. We seek to help existing and future portfolio brands maximize their potential by opening new e-concessions on the Farfetch Marketplace and powering portfolio brands’ own e-commerce sites and other digital channels through FPS.
New Guards gives us the opportunity to develop and introduce new and highly attractive brands to the Farfetch Marketplace, along with exclusive capsule collections and collaborations to further enrich the customer experience and boost consumer engagement with our brand. New Guards continues to elevate our brand and increase organic traffic and consumer engagement with the Farfetch Marketplace, which we believe will continue to make Farfetch an even more attractive channel not just for consumers, but also for our brand partners.
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Other Services
Fulfilment by Farfetch
We offer a luxury logistics solution with our third-party logistics warehouses in Italy, the Netherlands, the United Kingdom, the United States and China, with a new warehouse in Hong Kong to become operational in 2022, which handle our first-party stock and luxury sellers can utilize to handle their fulfilment and allocate stock closer to consumers. We use proprietary data insights to predict where the product should be sitting with stock stored in strategically placed locations. This allows us to service consumers more efficiently, limits the distance our product travels in carrier networks, provides advantages for consumers, and removes friction from the growth of supply for our luxury sellers.
Our Stores
While the proportion of luxury sales through e-commerce continues to increase, physical retail remains a crucial part of the sales journey for the luxury customer. According to Bain, in both 2020 and 2021 approximately 78% of personal luxury goods were bought in physical stores. Bain estimates that approximately 70% of personal luxury goods will be bought in physical stores in 2025.
We are taking advantage of the power of the physical realm, including leveraging the brand-building and marketing opportunities afforded by a well-placed and well-presented store, with a number of our businesses, including Browns, Stadium Goods, Off-White and Palm Angels, operating physical retail locations.
Environmental, Social and Governance – Positively Farfetch
Farfetch aims to be the premier platform for good in luxury fashion, while empowering everyone we work with to think, act and choose positively. This mission drives our Environmental, Social and Governance (“ESG”) initiatives. “Positively Farfetch” is the strategy that seeks to embed this mission - through initiatives and a focus on environmental impact reduction, diversity and inclusion, positive social impact and governance in and across our business. The strategy has been supported by the findings of a materiality assessment carried out by Farfetch in collaboration with our internal and external stakeholders.
The Positively Farfetch strategy includes four key pillars, each of which aligns with our core business drivers. For each strategic pillar we have a clear, long-term, and ambitious goal for 2030 (the “2030 Goals”).
Positively Cleaner is focused on environmental impact reduction and, with a significant need to drive supply chain efficiency to achieve this, is expected to help us become a more cost-efficient business. Farfetch continues to work together with other global businesses to help find solutions to tackle climate change, biodiversity and ocean health as a signatory of both the G7 Fashion Pact and the UN Fashion Industry Charter. We continued to offset carbon emissions associated with all deliveries and returns related to orders from the Farfetch Marketplace and Browns. This is communicated to consumers as our Climate Conscious Delivery promise. In addition, we continued to implement various packaging and logistics efficiency projects and increased our use of sustainably sourced and fully recyclable packaging globally. Under the 2030 Goals, we are seeking to achieve net zero through a reduction in our emissions in line with Science Based Targets, by achieving 100% renewable energy use in our scopes 1 and 2 emissions, driving efficiencies in our scope 3 emissions by collaborating with our suppliers, and offsetting unavoidable emissions through verified offset projects. We are also supporting our wider value chain, outside our footprint boundary, to reduce their emissions.
Positively Conscious is focused on helping our consumers to make positive choices that consider the impact on the environment, society and animal welfare, and helping us become the global destination for more conscious fashion consumers. We have outlined clear independently backed, “Sustainability Criteria” for what qualifies as a Conscious product. These are set out publicly on our website and updated to reflect developments in the industry. As part of this we continue to work with Good on You, an independent agency that rates the sustainability of fashion brands, and as of December 2021 over 1,000 brands on our marketplace had been rated by Good on You. Both through the Farfetch Marketplace and Browns we continue to market “Conscious Collections” for women, men and kids and place “Conscious” labels and information on merchandise, We are also working with
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the New Guards’ group of brands to increase the proportion of products produced with materials that meet our Group “Sustainability Criteria”. In June 2021, we launched a dedicated 360 Positively Farfetch Campaign for the Farfetch Marketplace, which highlighted both our Conscious and pre-owned product selections and the different “Circular” services available to our consumers such as Second Life, Farfetch Donate and Farfetch Fix. This work is aimed at helping our consumers make socially and environmentally informed decisions about their purchases. Under the 2030 Goals, we are seeking to achieve 100% of our revenues from products that are independently recognized as being better for people, the planet or animals and from services that enable positive change. To encourage the broader industry with this, in April 2021, we published our first Conscious Luxury Trends Report, highlighting how consumers are engaging with sustainable ways of shopping and how the industry is responding.
Positively Circular is focused on growing new services that help extend the life of clothes and also help us drive business growth and consumer retention. For example, we are growing Farfetch Second Life, a service that enables consumers in over 30 countries across the United States, Europe and the Middle East to trade-in their pre-owned designer bags for Farfetch Marketplace credit. In addition, our Farfetch Donate service, powered by our partners Thrift+ in the United Kingdom and ThredUp in the United States, allows consumers to donate used clothes that are then sold, with either a portion or all proceeds from the sale (after partner fees) donated to the consumer’s chosen charity. The consumer can choose to receive any remaining portion as Farfetch Marketplace credit. Browns launched a service with Thrift+ that operates in the same way, and both Browns and the Marketplace partner with the Luxury Aftercare provider The Restory to offer repairs and cleaning services. Browns has also enabled a number of “Circular” collaborations with designers that specialize in upcycling and pre-owned products. Further, alongside our in-season selection on the Farfetch Marketplace, we have an extensive pre-owned selection. In December 2021, we acquired Luxclusif, a business-to-business service provider with a successful turnkey solution enabling the acquisition, authentication, and sale of second-hand luxury goods, which we believe will allow us to significantly accelerate our pre-owned capabilities through the development of key technology and service features. Under our 2030 Goals, we are seeking to sell more circular products and uses of circular services, than those made in traditional, linear ways. We determine whether items we sell or service are circular if they are (i) pre-owned, (ii) made from recycled material, or (iii) re-sold, donated, repaired, or otherwise have their utilization increased through our services. In 2021 we continued to increase the number of circular items sold or serviced on the Farfetch Marketplace, Browns and Stadium Goods.
Positively Inclusive is focused on anticipating and meeting the needs of our diverse community of creators, curators and consumers that we work with, represent and champion. A critical part of successfully delivering this is having a diverse and inclusive workplace. We have been driving a number of initiatives to help all Farfetchers to thrive in a culture of conscious inclusion. This includes supporting our growing number of global People Communities (Employee Resource Groups), such as our Black Employee Network, Disability Network, FarOut (LGBTQIA+ Network), FarSan (South Asian Network), Jewish Network, FarLAN (Latinx Network), Farfetch East Network, Parents Network, Race on the Agenda at Browns and Women in Business Network. We have partnered with over 50 diversity and inclusion organizations and charities that work to increase diverse representation in the fashion and technology industry, as well as uplifting and empowering underrepresented communities. Under the 2030 Goals, we aim to be a leader in diversity and inclusion in our workplace and in the global fashion community.
Underpinning our Positively Farfetch pillars is our approach to governance and engagement. Our governance structure led by our Board of Directors, and supported by its four standing Committees, plays an essential part in embedding our Positively Farfetch strategy our aim to deliver long-term value. Business ethics, data privacy, cyber security, risk management, and tax strategy are core elements of our governance framework. Our policies and management systems set the base for addressing compliance and integrity, as we seek to address risks across our organization.
The Environmental, Social and Governance Committee of our Board of Directors (the “ESG Committee”) was formed in 2020. The ESG Committee oversees the development of our Positively Farfetch strategy, ensuring it takes into account the evolving priorities of our stakeholders. The ESG Committee’s mission is to assist the Board in leading on issues pertaining to the environment, health and safety, staff development and engagement, ethics, philanthropy, diversity, equity and inclusion and social justice, and governance amongst other public policy matters relevant to Farfetch. Our leadership team sets out the strategy and ambitious commitments, and implements best practices within the Company. The majority of our leadership team have Positively Farfetch related “objectives and key results (‘OKRs’)”, the accomplishment of which is a factor in determining their respective overall performance
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and thus compensation. These OKRs are then cascaded through the organization, which results in embedding Positively Farfetch in objectives of their teams across the business.
Through effective stakeholder engagement on ESG we seek to influence positive change in our value chains and across the fashion industry through clear standard setting and strategic partnerships. We expect our suppliers to meet our ethical standards, which are outlined in our Vendor Code of Conduct and Ethical Sourcing Policy. Our engagement strategy includes our public reporting on ESG matters. In 2021 we published our first ESG report, and we began the process of further developing our ESG program by introducing third-party assurance of certain metrics tracking our progress in relation to our 2030 Goals.
Security and Data Protection
We are committed to the security and privacy of our consumers’ experience with Farfetch. We undertake administrative and technical measures to protect our systems and the consumer data that those systems process and store. We have developed policies and procedures designed to manage data security risks. We employ technical security defenses, we monitor our servers and systems, and we useemploy technical security measures such as data encryption. We also use third partiesthird-parties to assist in our security practices and prevent and detect fraud. Our consumers’ privacy expectations are very important to us and we have a team tasked with responding to our consumer inquiries regarding their personal data.
As our business is global in nature and we operate in different countries, we are subject to complex and evolving laws and regulations around the world. In order to allow us to navigate through such a diverse landscape, which includes, but is not limited to, the GDPR, CCPA, the PRC Data Security Law and PIPL, we have adopted GDPR as a baseline framework to govern our internal security and data protection practices and procedures, while complying with specific local law requirements, such as data localization, where applicable.
Competition
We operate in aan intensely competitive industry andin which consumers have the option to purchase both online and offline. While we believeWe compete with other marketplaces and platforms, technology enablement companies and luxury sellers, including larger competitors with extensive resources that we do not have any direct competition with our Marketplace, we have indirect competitorsare seeking to establish an online presence in two primary categories:luxury fashion:
Technology enablement companies:companies:
• | Technology companies that may attract sellers by enabling commerce, such as Shopify Inc., Block, Inc., Mirakl SAS or Global-E Online Ltd.; and |
Technology companies that may attract sellers by enabling commerce, such as Shopify or Square; and
White‑label service providers, which offer end‑to‑end solutions.
• | White-label service providers, which offer end-to-end solutions. |
Luxury sellers:sellers:
• | Online luxury retailers that buy and hold inventory and typically ship from a small number of centralized warehouses; |
• | Multichannel players, including retailers and brands that have developed an online channel following the success of their physical retail operations; |
• | Niche multi-brand and streetwear sites; |
• | Luxury department stores; and |
• | Luxury brand stores. |
In addition, the brands in the New Guards portfolio of brands face competition from a small number of centralized warehouses;
Multichannel players, which are independent retailers that developed their online channel following the success of their physical retail operations;
Niche multi‑brandmany different luxury and streetwear sites;
Luxury department stores; and
Luxury brand stores.
Our Strategy in China and Relationship with JD.com
The rapidly growing luxury industry in China represents a major opportunity for us, and we have invested locally to support growth. As of December 31, 2018, we had 209 Farfetchers in Shanghai and Hong Kong, and our platform was able to deliver local language and payment systems. To further expand our presence in the luxury industry in China, in July 2018 we entered into an agreement for the acquisition of CuriosityChina, a domestic technology company with particular expertise in social customer relationship management and digital marketing for luxury fashion brands.
On June 21, 2017, we entered into a strategic partnership with JD.com. As part of this relationship, Farfetch leverages JD.com’s local logistics network, consumer payment solutions, technology capabilities, and its marketing
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resources, including its WeChat partnership. We believe that this relationship will give us valuable insight into the Chinese market, while reinforcing our position as a global market leader in this region.
In February 2019, we expanded our strategic partnership with JD.com in order to provide the ‘Premier Luxury Gateway to China’ for luxury brands. As part of this transaction, JD.com’s luxury e-commerce platform, Toplife, will merge into Farfetch China. In addition, Farfetch will gain a ‘Level 1’ entry point on the JD.com app, providing JD.com’s customers with access to Farfetch’s network of more than 1,000 luxury brand and boutique partners.
Our Intellectual Property
Our intellectual property, including copyrights and trademarks, is an important component of our business. We have registered trademarks in various international jurisdictions for “FARFETCH”FARFETCH, BROWNS and “BROWNS,”STADIUM GOODS, and the marks for the brands in the New Guards portfolio, among other brands. Our intellectual property portfolio includes numerous domain names for websites that we use in our business. We have several granted patents in the United Kingdom, Europe and the United States. We also have several published and unpublished patent applications in the United Kingdom, Europe and internationally, which, if issued,granted, would cover aspects of our proprietary technology, and thetechnology. The software code underlying our proprietary technology is also likely protected by copyright.
New Guards owns, or is the exclusive licensee of, various intellectual property rights in the brands that form the New Guards brand portfolio. The existing license agreements, for those intellectual property rights that are licensed to New Guards, permit New Guards to, among other things, manufacture, distribute, advertise and sell merchandise of the relevant brand in exchange for the payment of royalties. These existing license agreements include exclusive, worldwide licenses granted to New Guards for the use of the Off-White, Palm Angels and Marcelo Burlon County of Milan trademarks. The license for the OFF-WHITE trademark expires in 2035 and includes a right for either party to opt-out of the agreement effective as of January 1, 2026, subject to notice provisions. In 2021, New Guards completed the acquisition of 60% of the outstanding equity interests of Palm Angels S.r.l, the owner of the Palm Angels trademark. Also in 2021, New Guards launched its first private label, There Was One, which is available exclusively on the Farfetch platform.
As part of our arrangement with Alibaba, we have assigned certain People’s Republic of China, Hong Kong, Taiwan and Macau-registered and unregistered intellectual property rights to Farfetch China, including the Farfetch trademarks, the Chinese transliterations of the Farfetch word mark, certain regional domain names and the stylized “F” logo. The registration of certain of these assignments is still pending. Farfetch China has granted to those members of the Group who are not part of the joint venture a license to continue to use such intellectual property rights in the relevant regions.
We control access to, use and distribution of our intellectual property through license agreements, confidentiality procedures, non‑disclosure agreements with third partiesthird-parties and our employment and contractor agreements. We rely on contractual provisions with suppliers and luxury sellers to protect our proprietary technology, brands and creative assets. We use a third‑partythird-party enforcement tool to monitor online image copyright and trademark infringement across domains, social media and mobile applications, including for “BROWNS”BROWNS, FARFETCH and “FARFETCH.” We also useSTADIUM GOODS and the brands in the New Guards portfolio, as well as a trademark watch service, for the “FARFETCH” and “BROWNS” marks, which notifies us of potentially conflicting trademark applications,applications. We have also registered FARFETCH and we have registered “FARFETCH” and “BROWNSFASHIONSTORE”BROWNSFASHIONSTORE with a global domain name watch service and various domain name protected lists to alert us to third partythird-party domain name registrations that could potentially be infringing or cybersquatting.
Government Regulation
We use consumer data to perform the services available on our platform and conduct marketing activities, which may involve sharing consumer information with a third party,third-parties, such as advertisers. Our activities involving the use of consumer data are subject to consumer protection, data protection and unfair and deceptive practices laws in jurisdictions in which we operate. In addition, as we accept credit cardscard transactions, we must comply with the Payment Card Industry Data Security Standards. The United States, and European Union and China, as well as other countriesjurisdictions in which we operate, are increasingly regulating certain activities on the internet and e-commerce, including the use of information retrieved from or transmitted over the internet, and are increasingly focused on ensuring user privacy and information security, which will potentially limit behavioral targeting and online advertising,advertising; and are imposing new or additional rules regarding the taxation of internet products and services, the quality of products and services as well as the liability for third‑party activities. Moreover, the applicability to the internet of existing laws governing issues such as intellectual property ownership and infringement is uncertain and evolving.
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In particular, we are subject to an evolving set of data privacy laws in the United States, European Union, United Kingdom, Brazil, China, the Middle East and other jurisdictions. As of May 25, 2018, the new EU data protection regime became applicablejurisdictions and regions where we operate. To this effect, GDPR provides for a number of changes to the previous regime, including more onerous requirements on companies that process personal data, including, for example, expanded disclosures to tell our consumers about how personal information is to be used, and increased rights for consumers to access, control the use of and delete their data and object to marketing and profiling. Certain breaches of the new regimeGDPR may impose fines up to the greater of €20 million or 4% of the global turnover on a groupGroup basis. In addition, specific EU legislation regulating privacy online, including the use of cookies and similar technologies and online targeted advertising, is also under reform. Regulatory scrutiny is increasing in this area, where we have seen fines increasing in the advertising space in relation to the use of cookies against the consent requirements of GDPR.
In the United States, in June 2018, California enacted the federal government and various state governments have adopted, or are considering adopting laws, guidelines or rules for the collection, distribution, use and storage of information collected from our consumers or their devices. The, CCPA, which is presently going into effect on January 1, 2020. Unless amended or pre-empted by federal law, when effective, the new law will,for example, requires, among other things, require new disclosures to California consumers, affordaffords consumers new abilities to opt outopt-out of certain disclosures of personal information and new rights of data access and deletions, and imposeimposes significant fines and penalties for violations of privacy or data security provisions. In November 2020, California voters passed the CPRA, which further expands the CCPA with additional data privacy compliance requirements and rights of California consumers effective January 1, 2023, and establishes a regulatory agency dedicated to enforcing those requirements. Other U.S. states are considering enacting stricter data privacy laws, some modeled on the GDPR, some modeled on the CCPA, and others potentially imposing completely distinct requirements.
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In Brazil, LGPD became enforceable on August 1, 2021. LGPD increases the requirements on companies that process personal data in a manner similar to its European counterpart, the GDPR.
In China, the PIPL went into effect in November 2021. Although it aligns with several principles of the GDPR, including in relation to consent and data subject rights, the PIPL deviates substantially from the GDPR in several important areas, including on cross-border transfers, which are subject to a security assessment and requirements that differ from GDPR.
As a result of Brexit, we are subject to two different statutory regimes in Europe, namely the UK GDPR for the processing of personal data of UK-based individuals, and the GDPR for the processing of personal data of EU-based individuals.
China
Our operation of the Farfetch.cn website and the Farfetch China apps in mainland China is subject to a value-added telecommunication license, which we first obtained in December 2016 and then renewed in December 2019 for another three years. Our value-added telecommunication license is issued by the Shanghai Communications Administration, which has its approval power delegated from the Ministry of Industry and Information Technology. Farfetch does not operate in an industry that prohibits or restricts foreign investment under applicable Chinese laws and the equity interests in all our subsidiaries in the PRC are ultimately owned by Farfetch Limited without engaging in any variable interest entity (“VIE”) structure.
The Standing Committee of the National People’s Congress (“SCNPC”) of the PRC promulgated the PIPL on August 20, 2021, which became effective on November 1, 2021. Pursuant to the Data Security Law and the PIPL, we have updated the relevant privacy policies and user interaction experiences on our China website and apps, and completed the data security internal assessment to comply with the latest regulatory requirements on the collection, processing and sharing of personal information and business data.
The Cyberspace Administration of China (“CAC”), the central internet regulator, issued draft Measures for the Security Assessment of Outbound Data (the “Draft Measures”) on October 29, 2021, soliciting public comments by November 28, 2021. Once the Draft Measures are finalized and implemented, we would be required to conduct a self-risk assessment with respect to risks associated with cross-border data transfer and such assessment will be subject to security assessment and approval by CAC. We will continue to conduct compliance self-review, upgrade our security capabilities, and implement robust privacy protection mechanisms to reflect the Chinese regulatory authority’s guidance and the latest regulatory requirements under the applicable laws.
Many governmental authorities in the markets in which we operate are also considering alternative legislative and regulatory proposals that would increase the regulation onof internet advertising. It is impossible to predict whether new taxes or regulations will be imposed on our business and whether or how we might be affected.
In many jurisdictions in which we operate, operational licenses are required. In certain jurisdictions, including China, these licenses must be reviewed annually.
C. Organizational structureStructure
Please referRefer to note 20 toNote 32, Group Information, within our audited consolidatedConsolidated financial statements for the years ended December 31, 2018, 2017 and 2016 included elsewhere in this Annual Report for a listing of the company’s significantour subsidiaries, including legal name, country of incorporation, and proportion of ownership interest.
D. Property, Plant and Equipment
Our Facilities
As of December 31, 2018, we had
We have offices in Braga, Dubai, Hong Kong, Lisbon, London, Los Angeles, Milan, Moscow, New Delhi, New York, Porto, São Paulo, Shanghai, Beijing and Tokyo and production centers in Guimarães, Porto, Hong Kong, Los Angeles and São Paulo and Hong Kong.Paulo. In addition, Browns leases retail properties in London.London, Stadium Goods leases retail properties in Chicago and New York and New Guards leases retail properties in Las Vegas, London (including its Bicester Outlet), Miami, New York, Paris, Milan and Tokyo.
Our London office is our corporate headquarters, housing our central support functions, and is leased for a term of 12twelve years expiring in December 2027. ItThe lease covers an aggregate of approximately 36,000 square feet, divided over threesix floors. In addition, we recently leased
Our two Porto offices together house our largest employee population, including finance, customer and partner support, operations, and technology. The two offices cover an aggregate of approximately 30,000235,000 square feet and are leased for periods of office spaceseven to eleven years, expiring in London, adjacent2025.
On April 8, 2019, Farfetch Portugal – Unipessoal, Lda, one of our subsidiaries, acquired approximately 70,000 square meters of land in Matosinhos, Portugal from Medida Gabarito, Lda. We intend to use this land to build a campus for our London headquarters, pursuantemployees based in Porto, to a lease that expires in 2027.support our technology, operational and support functions. The total cost of the purchase was $18 million including taxes and fees. As of December 31, 2021, we had incurred additional expenditures of approximately $2.7 million on the campus. Our efforts on this project are ongoing and we continue to make progress on the planning, project design and preparation of the construction plan, and continue to evaluate the most effective funding structure before proceeding with further significant expenditures.
Item 4A. Unresolved Staff Comments
None.
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Item 5. Operating and FinancialFinancial Review and Prospects
You should read the following discussion in conjunction with the section entitled “Selectedour Consolidated Financial and Operating Data,” our historical consolidated financial statements and the related notes included elsewhere in this Annual Report. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in Item 3. “Key Information—Selected Financial Data.Information — D. Risk Factors.” Actual results could differ materially from those contained in any forward-looking statements.
On May 15, 2018, Farfetch Limited was incorporated under the laws of the Cayman Islands to become the holding company of Farfetch.com Limited and its subsidiaries pursuant to the Reorganization Transactions. Farfetch Limited has engaged solely in operations and activities incidental to its formation, the Reorganization Transactions and the initial public offering of our Class A ordinary shares. Accordingly, financial information for Farfetch Limited and a discussion and analysis of its results of operations and financial condition for the period of its operations prior to the Reorganization Transactions would not be meaningful and are not presented. Following the Reorganization Transactions, the historical consolidated financial statements of Farfetch Limited will include the historical consolidated financial results of Farfetch Limited and its consolidated subsidiaries for all periods presented.subsidiaries. When we refer to the “Consolidated Group” or “Group,”“Group” we are referring to Farfetch Limited and its consolidated subsidiaries.
Business Overview
Our Business Modelmission is to be the leading global platform for the luxury industry, connecting creators, curators and consumers. Refer to Item 4.B “Business Overview” included elsewhere in this Annual Report for additional information.
We generateOur core business is focused on generating income from transactions between sellers and consumers conducted on our platform. Transactions generate GMV, which we collect and remit to sellers after deducting our commission, fulfilment and other related income, which is based on a revenue-share model. This representsSince the majorityacquisition of New Guards in August 2019, a portion of our income.income has been generated from business-to-business transactions with retailers. A smaller portion of our income is generated from sales made in physical stores that we operate. All these activities enable us to operate across the global luxury ecosystem.
Our revenue isBusiness Highlights
On July 20, 2021, New Guards completed the combinationacquisition of three streams:
Platform Services Revenue,60% of the outstanding equity interests of Palm Angels, the owner of the Palm Angels trademark. In addition, New Guards agreed to a put and call option with the remaining shareholders of Palm Angels, which primarily includes commissions based on Third-Party Take Rate. To a lesser extent, we generate revenue fromwould require New Guards to purchase the saleremaining 40% of inventory on the platform that is directly purchased by our Browns boutiques and sold online where revenue is equaloutstanding equity interests of Palm Angels in 2026, to the GMVextent either the put or call option was exercised. In conjunction with this transaction, New Guards also increased total ownership of such sales.Palm Angels’ operating company to 100% through the acquisition of the remaining 31% of the outstanding equity interests of Venice.
Platform Fulfilment Revenue, which comes from shippingOn November 5, 2020, we formed a global strategic partnership with Alibaba and customs clearing services that weRichemont to provide luxury brands with enhanced access to the China market as well as accelerate the digitization of the global luxury industry. Leveraging each company’s respective expertise and extensive reach, the aim of the partnership is to bring luxury retail to the next generation by seamlessly integrating the digital and physical realms. Alibaba and Richemont each purchased $300 million of the November 2020 Notes for total gross proceeds of $600 million. The additional capital will support our consumers in relation to fulfilling transactions onlong-term strategy of delivering a global technology platform for the luxury industry and facilitate our platform, net of consumer promotional incentives, such as free shipping and promotional codes, against this revenue.
In-Store Revenue, which is the revenue generated in Browns retail stores.
Wecontinued focus on Platform Services Revenue, as we think this best representsexecuting our growth plans and driving towards operational profitability. Additionally, Artemis purchased 1,889,338 of our Class A ordinary shares for total gross proceeds of $50 million. Alibaba and Richemont also invested in Farfetch China, taking a combined 25% stake in a new joint venture that includes Farfetch Marketplace operations in the economic value being generated by the platform.
ForChina region for an aggregate $500 million ($250 million each). During the year ended December 31, 2018, our revenue was $602.42021, the investments by Alibaba and Richemont in Farfetch China resulted in the creation of a joint venture.
On February 5, 2020, we issued $250.0 million being:
$489.0convertible senior notes paying 5.00% interest due December 31, 2025 (“February 2020 Notes”) in a private placement to private investors. On April 30, 2020, we issued $400.0 million convertible senior notes paying 3.75% interest due May 1, 2027 (“April 2020 Notes”) in a private placement to qualified institutional investors pursuant to Rule 144A of the Securities Act. On November 17, 2020, we issued $600.0 million convertible senior notes paying 0.00% interest due November 15, 2030 (“November 2020 Notes”) to Alibaba and Richemont. The total aggregate net proceeds from these offerings were $1,240.4 million, after deducting $9.6 million of Platform Services Revenue;debt issuance costs in connection with these notes. For further information, refer to Note 23, Borrowings, within our Consolidated financial statements included elsewhere in this Annual Report.
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Sources of Revenue
Our revenue is derived from four streams:
• | Digital Platform Services Revenue, which primarily includes commissions and related income from third-party sales and to a lesser extent revenue from first-party sales. The revenue realized from first-party sales is equal to the GMV of such sales because we act as principal in these transactions, and thus related sales are not commission based. Digital Platform Services Revenue is included in our Digital Platform segment. Digital Platform Services Revenue was referred to as Adjusted Platform Revenue or Platform Services Revenue in previous filings with the SEC. |
• | Digital Platform Fulfilment Revenue, which is revenue from shipping and customs clearing services that we provide to our digital consumers, net of consumer promotional incentives, such as free shipping and promotional codes. Digital Platform Fulfilment Revenue is included in our Digital Platform segment. Digital Platform Fulfilment Revenue was referred to as Platform Fulfilment Revenue in previous filings with the SEC. |
• | Brand Platform Revenue, which is revenue relating to the New Guards operations less revenue from New Guards’: (i) owned e-commerce websites, (ii) direct-to-consumer channel via our Marketplaces and (iii) directly operated stores. Revenue relating to its owned e-commerce websites and its direct-to-consumer channel are recognized as Digital Platform Services Revenue and revenue relating to its directly operated stores is recognized as In-Store Revenue. Revenue realized from Brand Platform is equal to GMV as such sales are on a first-party basis and are not commission based. |
• | In-Store Revenue, which is revenue generated in our retail stores which include Browns, Stadium Goods and New Guards’ directly operated stores. Revenue realized from In-Store sales is equal to GMV of such sales because such sales are not commission based. |
$97.8 millionRefer to “Key Operating and Financial Metrics” below for a discussion of Platform Fulfilment Revenue;the key operating and
$15.6 million financial metrics we use and “Operating Results by Segment” for a discussion of In-Store Revenue.
Platform Gross Profit represents Platform Services Revenuesegmental performance and Platform Fulfilment Revenue less our cost of revenue, which is transaction processing fees, customs duties, shipping costs, packaging and other direct order related costs. Platform Gross Profit as a percentage of Platform Services Revenue reflectsrevenues by segment for the value of platform transactions before demand generation expense.
For the yearyears ended December 31, 2018, Platform GMV was $1,392.1 million, including $97.8 million of Platform Fulfilment Revenue.2019, 2020 and 2021.
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Platform GMV is generated by the Farfetch Marketplace, which contributed over 90% of Platform GMV for the year ended December 31, 2018. Platform GMV is also generated by Farfetch Black & White Solutions,our modular white-label e-commerce solution that provides brands and retailers with services ranging from a full-service branded e-commerce solution to individual off-the-shelf components.
Browns is an iconic British fashion and luxury goods boutique. Browns operates two retail stores in London and also leverages applicationsFor further information on our platform. Ownershipprincipal sources of Browns enables usrevenue and how the different types of revenue are classified in our consolidated statement of operations refer to understand the fashion ecosystem through the lensNote 2.3 (e), Summary of a boutique. In additionsignificant accounting policies - Revenue recognition, within our Consolidated financial statements included elsewhere in this Annual Report.
For further information on our revenues by geography, refer to enhancingNote 6, Segmental and geographical information, within our credibilityConsolidated financial statements included elsewhere in fashion, Browns also serves the critical mission of pioneering innovations developed under our Augmented Retail strategy, including providing a luxury fashion boutique environment to test our Farfetch Store of the Future technology. For the year ended December 31, 2018, Browns generated $15.6 million of In-Store Revenue.
Over time, we plan to monetize other aspects of our platform. The first example of our Augmented Retail strategy is Farfetch Store of the Future, a suite of technologies that aims to improve retail productivity by capturing consumer data and enhancing interactions between consumers and sales associates, both in store and when the consumer interacts with the retailer or brand offline. We believe the future of luxury fashion retail will be defined by the reinvention of the consumer experience through online and offline integrations, and we are investing in innovation to achieve this vision.Annual Report.
Factors Affecting our Financial Condition and Results of Operations
Ourfinancial condition and results of operations have been, and will continue to be, affected by a number of important factors, including the following:
Growth, Engagement and Retention of Our Consumer Base
Digital Platform
Digital Platform GMV and revenue from our marketplaces primarily grow as a result of acquiring and retaining Active Consumers, increasing Third-Party Take Rate, increasing the AOV and the volume of orders. At the onset of the COVID-19 pandemic in 2020, there was an acceleration in the shift of consumer demand to online, from which we partially benefited. During 2021, we have continued to grow our customer base and. as of December 31, 2021, we had 3,687,000 Active Consumers, up from 3,024,000 as of December 31, 2020.
GMV and revenue also grows when we acquire and retain new FPS partners, as they did in the year ended December 31, 2021. In 2022, we expect to continue investing in the acquisition of new FPS partners.
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During 2021, we continued to invest in our loyalty program ACCESS which we believe has the potential to increase consumer engagement and ‘spend per consumer’. This has been a key investment in our loyal consumers, but we believe will deliver significant returns in the medium-term by differentiating Farfetch as the preferred destination for luxury fashion online. In addition to driving online adoption by acquiring new consumers via our performance-marketing led efforts, and retaining them through more personalized experiences and enrolment in our ACCESS loyalty program, among other actions we also continue to make meaningful investments in brand marketing to drive brand awareness, and ultimately increase organic engagement.
We expect to continue to invest in our highest-value consumers. During 2021, we expanded our resources to serve this fast growing and highly valuable consumer, to now have 201 stylists servicing our Private Clients in twenty cities around the world, compared to 146 stylists in twenty-nine cities in 2020. In 2021, the top 1% of our consumers represented 27.5% of our revenue.
We have been able to grow Digital Platform GMV from both new and existing consumers since launching the Farfetch Marketplace in 2008. While we continue to acquire new consumers, the share of Digital Platform GMV from existing consumers has also continued to increase over time, indicating we have retained existing consumers.
We define new consumers as those who placed their first order on the Farfetch Marketplace in the stated reporting period.
Brand Platform and New Guards
Brand Platform
Brand Platform revenue growth occurs when there is an increase in popularity of the brands in the New Guards portfolio and an increase in retailers purchasing our products. During 2020, the COVID-19 pandemic impacted our Brand Platform customers by forcing many of them to close at various times.
Seasonality of our Brand Platform revenue is guided by timing of designer collections and shows. As described in Item 4.B, “Business Overview – Seasonality”, our business is seasonal in nature and ourBrand Platform segment operates to a wholesale cycle.
New Guards
New Guards, the business behind our Brand Platform, operates as a platform that uses a single common infrastructure and model including strategy development, design studio, sourcing and production, industrial capabilities, global distribution channels, merchandising, licensing, marketing and growth planning for brands in its portfolio. The success of our Brand Platform segment and of New Guards brands’ product on our direct-to-consumer channels is dependent on the popularity of the brands in the New Guards portfolio, and the incubation of new brands. During 2021, New Guardsincreased its ownership position of the Palm Angels operating company to 100%, and its interest in Palm Angels, the owner of the Palm Angels trademark to 60%, bringing New Guards majority ownership of its largest growth contributor.
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We have begun to take actions to reduce wholesale distribution of New Guards brands and restrict the geographic distribution by other online retailers, as we move to favor our own direct-to-consumer channels, similar to the broader industry.
Additionally, we have taken actions to expand New Guards distribution channels and in February 2022, New Guards entered into a significant commercial agreement with Authentic Brands Group LLC to operate Reebok’s branded retail stores and e-commerce operations and drive wholesale distribution for the brand across Europe. Refer to Note 34, Subsequent events, within our Consolidated financial statements included elsewhere in this Annual Report.
Growth and Quality of our Luxury Supply
Our marketplace business model allows us to offer consumers the broadesta broad and deepestdeep selection of luxury, with a high stock value while incurring minimal inventory risk, by combining supply from a large number of globally distributed luxury sellers. This distributed network of sellers ensured Farfetch Marketplace experienced minimal disruption to our consumer offer during the COVID-19 pandemic, because whilst individual stocking points were taken offline at the peak of the crisis, a significant majority of products on the Farfetch Marketplace were available from multiple sellers on the Farfetch platform and could be shipped from different locations, often from different countries. Our success depends on the participation of these luxury sellers on the Farfetch Marketplace,, their highly curated range of products and our ability to effectively sell these goods.goods effectively.
The breadth and depth of inventory available through the Farfetch Marketplace is reflected in our stock value. Brands and designers typically have two primary seasonal collections per year, spring/summer and fall/winter. We have a rigorous frameworkexpect to assess retailerscontinue to grow the stock value and brands. Boutique selection is based on their brand assortment, category focus, market reputation and strength of buying. Brand selection is based on demand and trends, so that we offer our consumers access to the best, most current and most desirable products.
As of December 31, 2018, we had 1,022 luxury sellersstock units on the Farfetch Marketplace of which 640 werefrom existing luxury sellers, adding luxury sellers from new geographies, large multi-brand retailers, new brands and 382 were brands who sell directly on our Marketplace.new categories. We have continued to see increases in stock value year-on-year, with the 2021 fourth quarter stock value 12% above the 2020 fourth quarter value after a 42% increase over the same period to fourth quarter 2020.
The selectionadoption of merchandise for sale onselective distribution by brands may reduce the Farfetch Marketplace must meet the needscatalogue available to consumers in particular markets and may, therefore lead to reduced supply and lost sales in key markets, and could negatively affect our business, results of constantly evolving consumer tastesoperations, financial condition and adaptprospects. However, we add value to rapidly changing fashion trends. Therefore, our success is also dependent on the ability of our luxury sellers to anticipate, identify and translate changing fashion trends and consumer demands into timely and appropriately curated product offerings. We constantly provideby providing our partners with fashion insight that comes from our analysis of browsing, sales and returns data trends across the Farfetch Marketplace, as well as the offline sales data points that come from our real-time integrations with our luxury sellers. This service helps us provide added value to our brand and boutique partners, enabling better retention.
The breadth and depthWe have seen luxury brands increasingly move to reduce wholesale in favor of inventory available through the Farfetch Marketplace is reflecteddirect-to-consumer distribution strategies. We believe that our e-concession model has resulted in our stock value. Brands and designers typically have two primary seasonal collections per year, spring/summer and fall/winter.
We expect to continue to growbeing the stock value and stock units on our Marketplace from existing luxury sellers, adding luxury sellers from new geographies, large multi-brand retailers and new brands.
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Growth, Engagement and Retentiondigital partner of Our Active Consumers
Platform GMV and revenue grow as a result of acquiring and retaining Active Consumers, increasing the Number of Orders.
As of December 31, 2018, we had 1,353,400 Active Consumers, up from 935,772 as of December 31, 2017. The Number of Orders forchoice. In the year ended December 31, 2018 was 2.9 million, up from 1.9 million for2021 compared to the year ended December 31, 2017.2020, we increased our number of e-concessions 5% to 590 at year-end.
We have been able to grow Platform GMV from both new and existing consumers since launchingAs of December 31, 2021, we had more than 1,400 luxury sellers on the Farfetch Marketplace, in 2008. Whileof which over 820 were retailers and 590 were brands who sell directly on the Farfetch Marketplace. As of December 31, 2020, we continue to acquire new consumers,had more than 1,350 luxury sellers on the shareFarfetch Marketplace, of Platform GMVwhich just under 800 were retailers and more than 560 were brands who sell directly on the Farfetch Marketplace. Both the mix of sales from existing consumers has also increased over time, indicatingbrands versus retailers and the mix of first-party sales versus third-party sales can impact our ability to retain existing consumers.
We define new consumersresults of operations as those who placed their first order on our Marketplace.each attracts different margins.
We expect growth in new consumers to be driven by further penetration of the luxury consumer market, including growing our business in emerging markets, such as China, the Middle East, Latin America and Eastern Europe.
Cost of Consumer Acquisition and Engagement
Our Digital Platform financial performance also depends on the expenses we incur to attract and retain consumers.
Demand generation expense consists primarily of fees that we pay our various media and affiliate partners. We will continue to invest in consumer acquisition and retention while the underlying consumer unit economics and
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consumer lifetime value indicate the return on investment is strong. WhileDuring 2021, we expectdid see an increase in these expenses, partially due to increase as we continue to grow,search engine marketing expense inflation. However, we expect such expenses to decrease as a percentage of Adjusted Revenue over time as we continue toincrease our share of Digital Platform revenue derived from Farfetch Platform Services and we improve the efficiency of our demand generation activities and the percentage of our business related to existing consumers increases. In particular, we continue to gainmaximize efficiencies in our performance marketing spend by leveraging the large volume of product performance data that we have available to enhance our media bidding decisions across paid search, meta-search and online display.
We also expandedare focusing on developing our network of active media partners, which extendedbrand to organically grow the traffic on our audienceMarketplaces. We believe that with continued investment in brand marketing, data-led insights and effective consumer targeting, we can expand and strengthen our reach, and further diversified its overall media mix.we intend to continue a “full-funnel” approach to marketing to continue to build our brand and capture consumer intent through multiple customer touchpoints.
Changes in our ability to access and process data in relation to our marketing activities have adversely impacted our ability to target and measure the effectiveness of our new consumer and retention marketing; and privacy measures by search engine companies could impact our ability to do so in the future, for example, recent updates implemented by Apple in relation to IDFA caused an increase in Demand Generation costs during 2021 driven by increased numbers of participants bidding for customers in certain ‘lower-funnel’ channels. To gain efficiencies in Demand Generation spend, we have implemented a full-funnel approach and focus on personalization and will continue to implement an underlying strategy of leveraging data insights to drive more targeted digital marketing, and visits from lower cost channels and from existing customers.
We also generate highly attractive consumer economics. While we are continuously focused on adding new Active Consumers to the Farfetch Marketplace, we are also focused on increasing their purchase frequency and Average Order Value AOV after their initial purchase, while lowering retention expenditure. AsIn 2021, we continued our focus on acquiring consumers on our app, as existing app consumers typically generate a result, our existing consumers have typically generated a higher Digital Platform Order Contribution Margin over time. We saw an increase in the Marketplace GMV from mobile purchases with a 5-percentage point increase year-over-year in share of GMV generated by mobile app to 58% in 2021.
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To facilitate and grow our platform,Digital Platform, we provide fulfilment services to Marketplace consumers and receive revenue from the provision of these services, which is by and large a pass-through cost with no economic benefit to us, and therefore we calculate our Adjusted Revenue excluding Digital Platform Fulfilment Revenue. We offer our platform partners access to a fully integrated logistics network, which enables them to ship to consumers in 190 countries.countries and territories. This is an essential part of the consumer and luxury seller proposition and provides an unparalleled luxury experience.
We have developed a comprehensive cross-border network for delivery, provided by leading third-party partners globally, which also provides the Farfetch Marketplace consumers with a free, simple and efficient returns process. Changes in the operations of these third-party partners due to the ongoing impacts of the COVID-19 pandemic, including global supply chain disruption, Brexit in the United Kingdom and Europe and the impact on supply and demand for delivery services as online adoption accelerates across industries has impacted our service levels and cost of revenue. However, we have adopted mitigating cost saving strategies to offset the impact of these factors during 2021 and will continue to do so in 2022. During 2021, our Digital Platform Fulfilment Revenue increased partially as a result of increased pass-through costs from higher duties due to the factors described above. Refer to Item 3. “Key Information — D. Risk Factors”, included elsewhere in this Annual Report.
Scaling our Global Platform
We will continue to invest in our smart supply chain management and luxury customer care to provide our consumers with a differentiated global product offering but localized consumercustomer experience. Our end-to-end operations include in-house content creation to achieve a luxury product presentation, localized interfaces, multilingual customer service, secure payment methods and seamless customs clearance and tariffs navigation. We will also continue to evolve our Fulfilment by Farfetch proposition with global distribution facilities located to optimize our cross-border network. While we expect our operational expenses to increase as we continue to grow,
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we expect such expenses to decrease as a percentage of Adjusted Revenue over time as we continue to achieve economies of scale and deliver operating leverage. However, we may experience an increase in certain unit costs of operating a global e-commerce business in the global retail industry increasingly adopting to e-commerce, creating an upward pressure on certain costs areas, as we experienced in 2021.
Investments in Technology
We will continue to invest in people, product and infrastructure to maintain and grow our platform. Our investment in our technology expense in the twelve monthsyear ended December 31, 20182021 was $68.2$250.1 million, up 115.8%22% from $31.6$204.5 million in the twelve monthsyear ended December 31, 2017.2020. Our technology expense has increased as we continue to recruit additional personnel and to develop our technology expertise across the full spectrum of engineering, architecture, infrastructure, data engineering, integrations, security, agile and project management, and information systems and planning. As of December 31, 2018,2021, we had 1,2412,086 full-time technology, data scientists, engineers and product employees, representing 38.4%32.3% of our total headcount. We have adjusted the pace of our increase in technology headcount, by using outsourcing to create a flexible and adaptable workforce to meet fluctuations in development needs. We expect to increase our total number of technology, data scientists and engineers,product headcount, to approximately 1,5002,350 people by the end of 2019. 2022 to address our roadmap of developments for known future programs and categories.
In 2019Promotional Activity
The luxury market is subject to promotional activity. Promotions can be company-funded, partner-funded or a mix of both. We use promotions to drive consumer acquisition, retention and sales. We may elect to engage in promotional activity at times and at price levels we announced a strategic partnership with Harrods partnership. We plandeem appropriate, or we may engage in promotional activity when we see market peers doing the same, and our performance may be impacted depending on the level of promotion and funding driven by Farfetch and the market condition.
When competitors increase promotional activity, we can react to spend an additional $10m on technologythose promotions symmetrically by increasing our promotional activity. Alternatively, we can decide not to accelerate the existing plansmatch competitors’ promotional activity, which we believe will allow us to continue to captureimproves our relationships with brands and, expandin turn, supply on the reachFarfetch Marketplace, as well as promoting the luxury nature of our platform and generate future growth driving technological innovationbrand. Promotional activity also has the potential to impact supply; if we decide not to incentivize promotional activity by our retailers by not funding, by reducing our funding, by requiring our retailers to fund promotions in whole or part, or if we increase the luxury industry.mix of partner-funded promotions, it could adversely impact our relationships with our retailers.
These investments will generate lossesFor these reasons outlined above, the level of promotional activity in which the near term and could therefore delay our abilityGroup engages is considered a lever that we can use to achieve overall profitability or reduce our profitabilitystrategy.
Investment in the near term.
60
Innovation and investmentProfitable Growth
We will continue to invest in sustainable growth as a priority over short term profitability where we see opportunities to advance our strategic objectives. These opportunities have and may includeobjectives, including acquisitions, investments in our customers,consumers, and investments to deliver Farfetch Platform Solutions including technology and other resources.
Whilst these investments present various levels of risk and may result in lower profitability through impacting our blended commission rates and incremental costs which may lower our EBTIDA margins,for Farfetch, we believe they will allow us to both widen and leverage our platform, and expand our customerconsumer base and offering.offering and capitalize on other longer term opportunities.
During 2018,In August 2021, we continuedestablished our joint venture with Alibaba and Richemont which had previously been announced in November 2020. Through this joint venture we operate the Farfetch Marketplace business in the China region, through our existing Farfetch platform, our Farfetch mobile app and through Alibaba’s Tmall Luxury Pavilion. At the same time we announced the LNR initiative aimed at leveraging our, and Alibaba’s, state-of-the-art omnichannel retail technologies to innovateserve the needs of luxury businesses, including a full suite of enterprise solutions powered by Farfetch. These solutions will serve both mono-brand and multi-brand distribution strategies for luxury brands, including fully-connected e-commerce websites and apps, omnichannel retail technology, and access to the Farfetch and Tmall Luxury Pavilion marketplaces via a single integration with our platform expertise.
We intend to invest in building our existing consumers launchingaudience in the Tmall Luxury Pavilion channel, as well as overall Farfetch brand awareness in China in all channels (including our loyalty program ACCESS whichown apps where most of our business is conducted), as we believe will increase consumer engagement and ‘spend per consumer”. Thisthis is athe time to invest in brand awareness in the market widely recognized as the key investment in our loyal consumers which
81
driver of growth for the luxury industry. Globally, we expect to impact our Contribution Margin, butinvest in building the Farfetch Brand and customer proposition, to drive customer growth and retention. We will also continue to invest in platform technology to deliver functionality to offer new categories, including beauty, and additional enterprise level platform functionality, particularly supporting the LNR vision.
We have made, and intend to continue to make, strategic acquisitions. During the year ended December 31, 2021, we believe will deliver significant returns inmade a number of acquisitions, comprising:
• September 2021: JBUX Limited, trading as “Jetti”, which provides marketplace technology to multi-vendor online businesses via a cloud-based Software as a Service (“SaaS”) platform;
• December 2021: Upteam Corporation Limited, trading under the medium-term by differentiating Farfetch as the preferred destination forname Luxclusif, a Business-to-Business (“B2B”) technology enabled seller of pre-owned luxury fashion online.goods; and
• December 2021: Allure Systems Corp uses artificial intelligence (“A.I.”) to create high-quality on-model images via 360 degrees renderings, allowing retailers and brands to scale quality imagery with automation.
In early 2022, we also completed the following acquisition:
• February 2019,2022: Violet Grey Inc., a luxury beauty retailer.
Our strategic acquisitions may affect our business growth and the comparability of our financial results. The effects that these acquisitions had on our overall revenue and profitability during 2021 were relatively small. When we announcedacquire new businesses, we are required to allocate the acquisitionconsideration payable to the assets acquired. Some of Toplife, JD.com’s luxury platform. As part ofthese assets, such as brand names and licenses, software and customer relationships, need to be amortized over their estimated useful lives and hence we record an expense to reflect this. This expense impacts our reported results and if we acquire more businesses, we would expect this agreement, Farfetch will gain ‘Level 1’ Access on the JD.com mobile app. Level 1 Access is a prominent entry-point button on the homescreen of the JD.com app. This will provide JD.com’s 300 million customers with instant accessexpense to more than 3,000 brands via Farfetch’s network of more than 1,000 luxury brand and boutique partners.
Previously,increase. Refer to Note 5, Business Combinations, included within our Consolidated financial statements elsewhere in 2018, Farfetch strengthened its China business through its agreement to acquire CuriosityChina, a leading integrated marketing and social commerce company. With the acquisitions of CuriosityChina and Toplife, Farfetch will now offer the full suite of Farfetch’s technology and logistics platform to brands wanting to reach luxury consumers in China.this report.
Other Factors Affecting Our Performance
Results of our operations are impacted by a number of other factors, including seasonality and foreign exchange fluctuations:
Seasonality. Our business is seasonal in nature, broadly reflecting traditional retail seasonality patterns through the calendar year. As such, GMV and revenue have been historically higher in the fourth calendar quarter of each year than in other quarters. We believe seasonality may continue to impact our quarterly results.
Foreign currency fluctuations.The global nature of our platform business means that we earn revenue and incur expenses in a number of different currencies. Movements in exchange rates therefore impact our results and cash flows. Foreign exchange exposure is created by the currency received, determined by the consumer’s location, and the currency we pay to the retailer and brand as determined by their location. This results in transactional foreign currency exposure. Our general policy is to hedge this transactional exposure using forward foreign exchange contracts and foreign exchange option contracts. We do not hedge translation risk.
61
Share price fluctuation. We hold multiple financial liabilities for which one of the valuation inputs is our share price value at period end. Fluctuations in our share price between period ends impact the valuation and as a result, our results of operations. See Note 28, Financial instruments and financial risk management,within our Consolidated financial statements include elsewhere in this Annual Report.
82
Key Operating and Financial Metrics
The key operating and financial metrics we use are set forth below. The following table sets forth our key performance indicators for the years ended December 31, 2016, 20172019, 2020 and 2018.2021.
|
| Year ended December 31, |
| |||||||||
|
| 2016 |
|
| 2017 |
|
| 2018 |
| |||
|
| (in thousands, unless stated otherwise) |
| |||||||||
Consolidated Group: |
|
|
|
|
|
|
|
|
|
|
|
|
GMV(1) |
| $ | 585,842 |
|
| $ | 909,826 |
|
| $ | 1,407,698 |
|
Revenue |
|
| 242,116 |
|
|
| 385,966 |
|
|
| 602,384 |
|
Adjusted Revenue(1) |
|
| 193,605 |
|
|
| 311,784 |
|
|
| 504,590 |
|
Technology Expense(2) |
|
| 12,269 |
|
|
| 31,611 |
|
|
| 68,224 |
|
Adjusted EBITDA(1) |
|
| (53,380 | ) |
|
| (58,079 | ) |
|
| (95,960 | ) |
Adjusted EBITDA Margin(1) |
| (27.6%) |
|
| (18.6%) |
|
| (19.0%) |
| |||
Platform: |
|
|
|
|
|
|
|
|
|
|
|
|
Platform GMV(1) |
| $ | 573,174 |
|
| $ | 894,392 |
|
| $ | 1,392,104 |
|
Platform Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Platform Services Revenue(1) |
|
| 180,937 |
|
|
| 296,350 |
|
|
| 488,995 |
|
Platform Fulfilment Revenue(1) |
|
| 48,511 |
|
|
| 74,182 |
|
|
| 97,794 |
|
Platform Gross Profit(1) |
|
| 111,762 |
|
|
| 196,581 |
|
|
| 291,706 |
|
Platform Order Contribution Margin(1) |
| 35.0% |
|
| 43.0% |
|
| 39.8% |
| |||
Third-Party Take Rate(3) |
| 31.3% |
|
| 32.9% |
|
|
| 32.0 | % | ||
Farfetch Marketplace: |
|
|
|
|
|
|
|
|
|
|
|
|
Active Consumers(3) |
|
| 651.7 |
|
|
| 935.8 |
|
|
| 1,353.4 |
|
Number of Orders(3) |
|
| 1,259.7 |
|
|
| 1,881.0 |
|
|
| 2,913.0 |
|
Average Order Value (actual)(3) |
| $ | 583.6 |
|
| $ | 620.0 |
|
| $ | 618.6 |
|
|
| Year ended December 31, |
| |||||||||
|
| 2019 (2) |
|
| 2020 (2) |
|
| 2021 |
| |||
| (in thousands, except per share data and AOV) |
| ||||||||||
Selected Other Data: |
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Group: |
|
|
|
|
|
|
|
|
|
|
|
|
GMV (1) |
| $ | 2,139,699 |
|
| $ | 3,187,014 |
|
| $ | 4,229,874 |
|
Revenue |
|
| 1,021,037 |
|
|
| 1,673,922 |
|
|
| 2,256,608 |
|
Adjusted Revenue (1) |
|
| 893,077 |
|
|
| 1,460,694 |
|
|
| 1,924,104 |
|
Gross Profit |
|
| 459,846 |
|
|
| 770,928 |
|
|
| 1,016,511 |
|
Gross Profit Margin |
| 45.0% |
|
| 46.1% |
|
| 45.0% |
| |||
(Loss)/Profit After Tax (2) |
| $ | (393,500 | ) |
| $ | (3,315,623 | ) |
| $ | 1,470,611 |
|
Adjusted EBITDA (1) |
|
| (121,376 | ) |
|
| (47,432 | ) |
|
| 1,638 |
|
Adjusted EBITDA Margin (1) |
| (13.6%) |
|
| (3.2%) |
|
| 0.1% |
| |||
Basic (Loss)/Earnings Per Share (“EPS”) (2) |
| $ | (1.27 | ) |
| $ | (9.69 | ) |
| $ | 4.02 |
|
Diluted EPS |
|
| (1.27 | ) |
|
| (9.69 | ) |
|
| (1.07 | ) |
Adjusted EPS (1) (2) |
|
| (0.56 | ) |
|
| (0.60 | ) |
|
| (0.55 | ) |
Digital Platform: |
|
|
|
|
|
|
|
|
|
|
|
|
Digital Platform GMV (1) |
| $ | 1,947,868 |
|
| $ | 2,759,476 |
|
| $ | 3,677,988 |
|
Digital Platform Services Revenue |
|
| 701,246 |
|
|
| 1,033,156 |
|
|
| 1,385,678 |
|
Digital Platform Gross Profit |
|
| 371,913 |
|
|
| 560,206 |
|
|
| 730,253 |
|
Digital Platform Gross Profit Margin |
| 53.0% |
|
| 54.2% |
|
| 52.7% |
| |||
Digital Platform Order Contribution (1) |
| $ | 220,563 |
|
| $ | 361,419 |
|
| $ | 438,432 |
|
Digital Platform Order Contribution Margin (1) |
| 31.5% |
|
| 35.0% |
|
| 31.6% |
| |||
Active Consumers (1) |
|
| 2,068 |
|
|
| 3,024 |
|
|
| 3,687 |
|
Average Order Value - Marketplace (1) |
| $ | 608 |
|
| $ | 568 |
|
| $ | 612 |
|
Average Order Value - Stadium Goods (1) |
|
| 315 |
|
|
| 316 |
|
|
| 308 |
|
Brand Platform: |
|
|
|
|
|
|
|
|
|
|
|
|
Brand Platform GMV (1) |
| $ | 164,210 |
|
| $ | 390,014 |
|
| $ | 467,505 |
|
Brand Platform Revenue |
|
| 164,210 |
|
|
| 390,014 |
|
|
| 467,505 |
|
Brand Platform Gross Profit |
|
| 75,007 |
|
|
| 190,804 |
|
|
| 241,516 |
|
Brand Platform Gross Profit Margin |
| 45.7% |
|
| 48.9% |
|
| 51.7% |
|
(1) | Refer to Item 1 – “PRESENTATION OF FINANCIAL AND OTHER INFORMATION - Defined Terms and Key Performance Indicators��� in this Annual Report for definitions of these measures. See Item |
(2) |
|
|
|
Components of our83
A. Operating Results of Operations
Revenue. We generate revenue through commissionsThis section on sales throughoperating results analyzes both the Farfetch Marketplaceconsolidated Group results and on services rendered to our consumersthe results by segment.
Key Operating Results and sellers, including those offered via our Marketplace and Farfetch Black & White Solutions. We also generate revenue through the sale of goods via Browns retail stores.
Our primary source of service revenue is from the provision of platform services. We act as an arranger through connecting sellers to consumers. We are also responsible for providing fulfilment services, which includes the provision of shipping services to the consumers and packaging materials and credit card processing to sellers. When we act as a commercial intermediary between sellers and final consumers, revenue recognized represents commission earned for operationOperating Metrics of the Farfetch Marketplace, including fulfilment services. The services rendered also include paymentGroup
Revisions to Previously Reported Financial Information
We have revised previously reported Finance cost, Loss after tax, Loss per share and other related services provided by us. Our commission generated on sales is based onNon-current borrowings for the contractual agreement we have with each seller, where we earn a percentage based on the value of sales conducted through the Farfetch Marketplace. Our commission is a blended commission because it is attributable to a mix of the different types of services that we provide. We recognize commissionsannual period ended December 31, 2020 and non-shipping service revenue when the goods are dispatched to the consumer by the sellers. A provision for expected returns is made against this. As we provide shipping services to the consumer, shipping revenue is recognized on delivery to the consumer. Promotional incentives may be periodically offered to consumers. When we bear the costs of promotional incentives, these costs are recognized as deductions to revenue.
62
Revenue from the sale of goods is net of returns and allowances, trade discounts and volume rebates. Revenue is recognized when the performance obligation is satisfied, which is when the goods are received by the consumer. Included within sales of goods is a provision for expected returns, discounts and rebates.
Cost of Revenue. Cost of revenueincludes shipping costs, duties, credit card fees and packaging. The components of cost of revenue are variable in nature and fluctuate with changes in revenue.
Selling, General and Administrative. Our selling, general andadministrativeexpenses primarily consist of demand generation, technology expense, salaries, bonuses, benefits and share based compensation for our employees, and outside consulting, legal and accounting services, as well as facilities and other overhead costs. Our demand generation expense consists primarily of fees that we pay for our various marketing channels such as search engine marketing, search engine optimization, display, digital advertising and affiliate marketing to drive consumer acquisition and retention. We expect that our selling, general and administrative expenses, will increaseLoss after tax, and Loss per share for the foreseeable future as we growannual period ended December 31, 2019. Refer to Note 2, Significant accounting policies, within our business.
Depreciation and Amortization. Depreciation and amortization includes the depreciation of property, plant and equipment, capitalized leasehold improvements and amortization of technology and other intangible assets, alongside any loss on the disposal of property, plant and equipment and any asset impairments.
Segment Reporting
We have determined our operating segments on the same basis that we use to evaluate performance internally. Our operating segments are: (1) Farfetch Marketplace, (2) Farfetch Black and White, (3) Farfetch Store of the Future and (4) Browns stores. Farfetch Marketplace represents over 90% of revenue; therefore, we are presenting only one reportable operating segment being the consolidated view of all operating segments noted above.
A. Operating ResultsConsolidated financial statements included elsewhere in this Annual Report for further information.
The following tables shows our consolidated results of operations for the years ended December 31, 2016, 20172019, 2020 and 20182021 and as a percentage of revenue.
|
| Year ended December 31, |
| |||||||||
|
| 2016 |
|
| 2017 |
|
| 2018 |
| |||
|
| (in thousands) |
| |||||||||
Revenue |
| $ | 242,116 |
|
| $ | 385,966 |
|
| $ | 602,384 |
|
Cost of revenue |
|
| (125,238 | ) |
|
| (181,200 | ) |
|
| (303,934 | ) |
Gross profit |
|
| 116,878 |
|
|
| 204,766 |
|
|
| 298,450 |
|
Selling, general and administrative |
|
| (205,558 | ) |
|
| (299,260 | ) |
|
| (471,766 | ) |
Share of profits of associates |
|
| 18 |
|
|
| 31 |
|
|
| 33 |
|
Operating loss |
|
| (88,662 | ) |
|
| (94,463 | ) |
|
| (173,283 | ) |
Net finance income/(costs) |
|
| 7,402 |
|
|
| (17,642 | ) |
|
| 19,866 |
|
Loss before tax |
|
| (81,260 | ) |
|
| (112,105 | ) |
|
| (153,417 | ) |
Income tax expense |
|
| (199 | ) |
|
| (170 | ) |
|
| (2,158 | ) |
Loss after tax |
| $ | (81,459 | ) |
| $ | (112,275 | ) |
| $ | (155,575 | ) |
|
| Year ended December 31, |
| |||||||||
|
| 2019 (1) |
|
| 2020 (1) |
|
| 2021 |
| |||
|
| (in thousands) |
| |||||||||
Revenue |
| $ | 1,021,037 |
|
| $ | 1,673,922 |
|
| $ | 2,256,608 |
|
Cost of revenue |
|
| (561,191 | ) |
|
| (902,994 | ) |
|
| (1,240,097 | ) |
Gross profit |
|
| 459,846 |
|
|
| 770,928 |
|
|
| 1,016,511 |
|
Selling, general and administrative expenses (1) |
|
| (889,421 | ) |
|
| (1,351,483 | ) |
|
| (1,480,968 | ) |
Impairment losses on tangible assets |
|
| - |
|
|
| (2,991 | ) |
|
| - |
|
Impairment losses on intangible assets |
|
| - |
|
|
| (36,269 | ) |
|
| (11,779 | ) |
Operating loss (1) |
|
| (429,575 | ) |
|
| (619,815 | ) |
|
| (476,236 | ) |
Gains/(losses) on items held at fair value and remeasurements |
|
| 21,721 |
|
|
| (2,643,573 | ) |
|
| 2,023,743 |
|
Share of profits of associates |
|
| 366 |
|
|
| (74 | ) |
|
| (52 | ) |
Finance income |
|
| 34,382 |
|
|
| 24,699 |
|
|
| 12,599 |
|
Finance costs (1) |
|
| (19,232 | ) |
|
| (91,294 | ) |
|
| (86,441 | ) |
(Loss)/profit before tax (1) |
|
| (392,338 | ) |
|
| (3,330,057 | ) |
|
| 1,473,613 |
|
Income tax (expense)/benefit |
|
| (1,162 | ) |
|
| 14,434 |
|
|
| (3,002 | ) |
(Loss)/profit after tax (1) |
| $ | (393,500 | ) |
| $ | (3,315,623 | ) |
| $ | 1,470,611 |
|
63
(1) Refer to Note 2, Significant accounting policies, within our Consolidated financial statements included elsewhere in this Annual Report for detail on the revision
of prior year comparatives.
|
| Year ended December 31, |
| |||||||||
|
| 2016 |
|
| 2017 |
|
| 2018 |
| |||
Revenue |
|
| 100.0 | % |
|
| 100.0 | % |
|
| 100.0 | % |
Cost of revenue |
|
| (51.7 | ) |
|
| (46.9 | ) |
|
| (50.5 | ) |
Gross profit |
|
| 48.3 |
|
|
| 53.1 |
|
|
| 49.5 |
|
Selling, general and administrative |
|
| (84.9 | ) |
|
| (77.4 | ) |
|
| (78.3 | ) |
Share of profits of associates |
|
| 0.0 |
|
|
| 0.0 |
|
|
| 0.0 |
|
Operating loss |
|
| (36.6 | ) |
|
| (24.3 | ) |
|
| (28.8 | ) |
Net finance income/(costs) |
|
| 3.1 |
|
|
| (4.6 | ) |
|
| 3.3 |
|
Loss before tax |
|
| (33.5 | ) |
|
| (28.9 | ) |
|
| (25.5 | ) |
Income tax expense |
|
| (0.1 | ) |
|
| (0.1 | ) |
|
| (0.4 | ) |
Loss after tax |
|
| (33.6 | %) |
|
| (29.0 | %) |
|
| (25.9 | %) |
|
| Year ended December 31, |
| |||||||||
|
| 2019 (1) |
|
| 2020 (1) |
|
| 2021 |
| |||
|
| (in percentages) |
| |||||||||
Revenue |
|
| 100.0 | % |
|
| 100.0 | % |
|
| 100.0 | % |
Cost of revenue |
|
| (55.0 | ) |
|
| (53.9 | ) |
|
| (55.0 | ) |
Gross profit |
|
| 45.0 |
|
|
| 46.1 |
|
|
| 45.0 |
|
Selling, general and administrative expenses (1) |
|
| (87.1 | ) |
|
| (80.7 | ) |
|
| (65.6 | ) |
Impairment losses on tangible assets |
|
| 0.0 |
|
|
| (0.2 | ) |
|
| 0.0 |
|
Impairment losses on intangible assets |
|
| 0.0 |
|
|
| (2.2 | ) |
|
| (0.5 | ) |
Operating loss (1) |
|
| (42.1 | ) |
|
| (37.0 | ) |
|
| (21.1 | ) |
Gains/(losses) on items held at fair value and remeasurements |
|
| 2.1 |
|
|
| (157.9 | ) |
|
| 89.7 |
|
Share of profits of associates |
|
| - |
|
|
| 0.0 |
|
|
| - |
|
Finance income |
|
| 3.4 |
|
|
| 1.5 |
|
|
| 0.6 |
|
Finance costs (1) |
|
| (1.9 | ) |
|
| (5.5 | ) |
|
| (3.8 | ) |
(Loss)/profit before tax (1) |
|
| (38.5 | ) |
|
| (198.9 | ) |
|
| 65.4 |
|
Income tax (expense)/benefit |
|
| (0.1 | ) |
|
| 0.9 |
|
|
| (0.1 | ) |
(Loss)/profit after tax (1) |
|
| (38.6 | %) |
|
| (198.0 | %) |
|
| 65.3 | % |
(1) Refer to Note 2, Significant accounting policies, within our Consolidated financial statements included elsewhere in this Annual Report for detail on the revision of prior year comparatives.
Comparison of YearYears Ended December 31, 20172020 and 20182021
Revenue
|
| Year ended December 31, |
|
|
|
|
|
|
|
|
|
| Year ended December 31, |
|
|
|
|
|
|
|
|
| ||||||||||
|
| 2017 |
|
| 2018 |
|
| $ Change |
|
| % Change |
|
| 2020 |
|
| 2021 |
|
| $ Change |
|
| % Change |
| ||||||||
|
| (in thousands) |
|
|
|
|
|
|
|
|
|
| (in thousands) |
|
|
|
|
|
|
|
|
| ||||||||||
Revenue |
| $ | 385,966 |
|
| $ | 602,384 |
|
| $ | 216,418 |
|
|
| 56.1 | % |
| $ | 1,673,922 |
|
| $ | 2,256,608 |
|
| $ | 582,686 |
|
|
| 34.8 | % |
Less: Platform Fulfilment Revenue |
|
| (74,182 | ) |
|
| (97,794 | ) |
|
| (23,612 | ) |
|
| (31.8 | %) | ||||||||||||||||
Less: Digital Platform Fulfilment Revenue |
|
| (213,228 | ) |
|
| (332,504 | ) |
|
| (119,276 | ) |
|
| 55.9 | % | ||||||||||||||||
Adjusted Revenue |
| $ | 311,784 |
|
| $ | 504,590 |
|
| $ | 192,806 |
|
|
| 61.8 | % |
| $ | 1,460,694 |
|
| $ | 1,924,104 |
|
| $ | 463,410 |
|
|
| 31.7 | % |
Revenue by type of good or service consisted of the following components:
|
| Year ended December 31, |
|
|
|
|
|
|
|
|
| |||||
|
| 2020 |
|
| 2021 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands) |
|
|
|
|
|
|
|
|
| |||||
Digital Platform Services third-party revenue |
| $ | 637,568 |
|
| $ | 845,941 |
|
| $ | 208,373 |
|
|
| 32.7 | % |
Digital Platform Services first-party revenue |
|
| 395,588 |
|
|
| 539,737 |
|
|
| 144,149 |
|
|
| 36.4 | % |
Digital Platform Services Revenue |
|
| 1,033,156 |
|
|
| 1,385,678 |
|
|
| 352,522 |
|
|
| 34.1 | % |
Digital Platform Fulfilment Revenue |
|
| 213,228 |
|
|
| 332,504 |
|
|
| 119,276 |
|
|
| 55.9 | % |
Brand Platform Revenue |
|
| 390,014 |
|
|
| 467,505 |
|
|
| 77,491 |
|
|
| 19.9 | % |
In-Store Revenue |
|
| 37,524 |
|
|
| 70,921 |
|
|
| 33,397 |
|
|
| 89.0 | % |
Revenue |
| $ | 1,673,922 |
|
| $ | 2,256,608 |
|
| $ | 582,686 |
|
|
| 34.8 | % |
Revenue for the year ended December 31, 20182021 increased by $216.4$582.7 million, or 56.1%34.8%, compared to the year ended December 31, 2017. Adjusted2020. The increase was driven by 34.1% growth in Digital Platform Services Revenue to $1,385.7 million and the 55.9% growth in Digital Platform Fulfilment Revenue to $332.5 million. Revenue was further increased by Brand Platform and In-Store Revenue which increased by 19.9% and 89.0% to $467.5 million and $70.9 million, respectively.
The increase in Digital Platform Services Revenue of 34.1% was primarily driven by 33.3% growth in Digital Platform GMV, including growth in first-party Digital Platform GMV, which is included in Digital Platform Services Revenue at 100% of the GMV. The increase in Digital Platform GMV was driven by a 21.9% increase in Active Consumers, from 3,024,200 at December 31, 2020, to 3,686,800 at December 31, 2021, and a strong full price performance. In addition, we benefited from year-over-year growth in transactions through websites managed by FPS. Digital Platform Services Revenue was further augmented by growth in first-party Digital Platform, where we saw strong performance of Browns’ products on the Platform. Digital Platform Third-Party take rate has increased slightly from 29.6% for the year ended December 31, 2018 increased by $192.8 million, or 61.8%, compared2020 to 30.2% for the year ended December 31, 2017. This was a function2021 reflecting measures implemented to share incremental costs with our partners.
Digital Platform Fulfilment Revenue represents the pass-through to consumers of growth in GMVdelivery and duties charges incurred by our global logistics solutions, net of 54.7% partially offset by a decrease in Third-Party Take Rate from 32.9% to 32.0% driven by changes in mix of supply between sellers with differing take-rates. Growth in GMV was primarily driven by the Number of Orders increasing by 54.9% to approximately 2.9 million. This was driven by growth in Active Consumers from 935,772 to 1,353,400 (an increase of 44.6%) over the same period, which reflects our marketing efforts to generate continued growth in demand from existing consumers across international markets together with an increase in newany Farfetch-funded consumer orders. AOV decreased by only 0.2%promotions, subsidized shipping and has therefore had a minimal impact. We also had an increase in supply as the number of luxury sellers grew significantly during 2018. In-Store Revenue also increased from $15.4 million to $15.6 million, an increase of 1.3%.incentives. Digital Platform Fulfilment Revenue accounted for 16.2%14.7% of revenue in 2018, down2021, an increase from 19.2%12.7% in 2017.2020. While Digital Platform Fulfilment Revenue would be expected to grow in line with the cost of delivery and duties, which increase as Digital Platform GMV and order volumes grow, variations in the level of Farfetch funded promotions and incentives will impact Digital Platform Fulfilment Revenue, as Digital Platform Fulfilment Revenue is recorded net of such promotions. Digital Platform Fulfilment Revenue increased 55.9%, a higher rate as compared to Digital Platform Services Revenue growth driven by higher duties due to the regional mix of sales and impacts of Brexit, as well as an increased pass-through of these costs to consumers towards the end of the year.
85
Cost of revenue, gross profit and gross profit margin
|
| Year ended December 31, |
|
|
|
|
|
|
|
|
|
| Year ended December 31, |
|
|
|
|
|
|
|
|
| ||||||||||
|
| 2017 |
|
| 2018 |
|
| $ Change |
|
| % Change |
|
| 2020 |
|
| 2021 |
|
| $ Change |
|
| % Change |
| ||||||||
|
| (in thousands) |
|
|
|
|
|
|
|
|
|
| (in thousands) |
|
|
|
|
|
|
|
|
| ||||||||||
Cost of revenue |
| $ | (181,200 | ) |
| $ | (303,934 | ) |
| $ | (122,734 | ) |
|
| (67.7 | %) |
| $ | (902,994 | ) |
| $ | (1,240,097 | ) |
| $ | (337,103 | ) |
|
| (37.3 | %) |
Gross profit |
|
| 204,766 |
|
|
| 298,450 |
|
|
| 93,684 |
|
|
| 45.8 | % |
|
| 770,928 |
|
|
| 1,016,511 |
|
|
| 245,583 |
|
|
| 31.9 | % |
Gross profit margin |
|
| 53.1 | % |
|
| 49.5 | % |
|
|
|
|
|
|
|
|
|
| 46.1 | % |
|
| 45.0 | % |
|
|
|
|
|
|
|
|
Cost of revenue for the year ended December 31, 20182021 increased by $122.7$337.1 million, or (67.7%)37.3%, compared to the year ended December 31, 2017, which2020, ahead of revenue growth. The increase was primarily driven by Digital Platform with Brand Platform and In-Store also contributing to the increasesincrease in cost of goods associated with first-party sales, as well as the increase in delivery, packaging and transaction processing expenditures as a result of the increased Number of Orders.revenue.
64
Our gross profit margin decreased from 53.1% to 49.5%46.1% for the year ended December 31, 20172020 to 45.0% for the year ended December 31, 2018, which2021. This was driven by ana decrease in Digital Platform Gross Profit Margin from 54.2% to 52.7%, partially offset by Brand Platform Gross Profit Margin which increased from 48.9% to 51.7%, driven by a favorable change in product and customer mix.
Within Digital Platform, we saw a year-over-year decrease in Gross Profit Margins driven by the increase in mix of first-party sales,Digital Platform Fulfilment Revenue, which haveis a differentflow through generating no gross profit margin, profile than our third-party business; and the impact of retail pricing and inventory optimization on first-party gross margin.plus an increase in promotional activity.
Selling, general and administrative expenses
Selling,The following tables shows our selling, general and administrative expenses consistedfor the years ended December 31, 2019, 2020 and 2021 and as a percentage of the following components:adjusted revenue:
|
| Year ended December 31, |
|
|
|
|
|
| % of Adjusted Revenue |
|
| Year ended December 31, |
|
| 2019 vs. 2020 |
|
| 2020 vs. 2021 |
| |||||||||||||||||||||
|
| 2017 |
|
| 2018 |
|
| % Change |
|
| 2017 |
|
| 2018 |
|
| 2019 (1) |
|
| 2020 |
|
| 2021 |
|
| % Change |
|
| % Change |
| ||||||||||
|
| (in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (in thousands) |
|
|
|
|
|
|
|
|
| ||||||||||||||
Demand generation expense |
| $ | (69,202 | ) |
| $ | (97,295 | ) |
|
| (40.6 | %) |
|
| (22.2 | %) |
|
| (19.3 | %) |
| $ | (151,350 | ) |
| $ | (198,787 | ) |
| $ | (291,821 | ) |
|
| (31.3 | %) |
|
| (46.8 | %) |
Technology expense |
|
| (31,611 | ) |
|
| (68,224 | ) |
|
| (115.8 | ) |
|
| (10.1 | ) |
|
| (13.5 | ) |
|
| (84,207 | ) |
|
| (115,227 | ) |
|
| (131,408 | ) |
|
| (36.8 | %) |
|
| (14.0 | %) |
Share-based payments (1) |
|
| (178,234 | ) |
|
| (291,633 | ) |
|
| (196,167 | ) |
|
| (63.6 | %) |
|
| 32.7 | % | ||||||||||||||||||||
Depreciation and amortization |
|
| (10,980 | ) |
|
| (23,537 | ) |
|
| (114.4 | ) |
|
| (3.5 | ) |
|
| (4.7 | ) |
|
| (113,591 | ) |
|
| (217,223 | ) |
|
| (251,198 | ) |
|
| (91.2 | %) |
|
| (15.6 | %) |
Share based payments |
|
| (21,486 | ) |
|
| (53,819 | ) |
|
| (150.5 | ) |
|
| (6.9 | ) |
|
| (10.7 | ) | ||||||||||||||||||||
General and administrative |
|
| (165,981 | ) |
|
| (228,891 | ) |
|
| (37.9 | ) |
|
| (53.2 | ) |
|
| (45.4 | ) |
|
| (345,665 | ) |
|
| (504,346 | ) |
|
| (591,644 | ) |
|
| (45.9 | %) |
|
| (17.3 | %) |
Total |
| $ | (299,260 | ) |
| $ | (471,766 | ) |
|
| (57.6 | %) |
|
| (96.0 | %) |
|
| (93.5 | %) | ||||||||||||||||||||
Other items |
|
| (16,374 | ) |
|
| (24,267 | ) |
|
| (18,730 | ) |
|
| (48.2 | %) |
|
| 22.8 | % | ||||||||||||||||||||
Selling, general and administrative expenses |
| $ | (889,421 | ) |
| $ | (1,351,483 | ) |
| $ | (1,480,968 | ) |
|
| (52.0 | %) |
|
| (9.6 | %) |
(1) | Refer to Note 2, Significant accounting policies, within our Consolidated financial statements included elsewhere in this Annual Report for detail on the revision of prior year comparatives. |
|
| % of Adjusted Revenue |
| |||||||||
|
| 2019 (1) |
|
| 2020 |
|
| 2021 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand generation expense |
|
| (16.9 | %) |
|
| (13.6 | %) |
|
| (15.2 | %) |
Technology expense |
|
| (9.4 | %) |
|
| (7.9 | %) |
|
| (6.8 | %) |
Share-based payments (1) |
|
| (20.0 | %) |
|
| (20.0 | %) |
|
| (10.2 | %) |
Depreciation and amortization |
|
| (12.7 | %) |
|
| (14.9 | %) |
|
| (13.1 | %) |
General and administrative |
|
| (38.7 | %) |
|
| (34.5 | %) |
|
| (30.7 | %) |
Other items |
|
| (1.8 | %) |
|
| (1.7 | %) |
|
| (1.0 | %) |
Selling, general and administrative expenses |
|
| (99.6 | %) |
|
| (92.5 | %) |
|
| (77.0 | %) |
(1) | Refer to Note 2, Significant accounting policies, within our Consolidated financial statements included elsewhere in this Annual Report for detail on the revision of prior year comparatives. |
Demand generation expense
|
| Year ended December 31, |
|
|
|
|
|
|
|
|
| |||||
|
| 2017 |
|
| 2018 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands) |
|
|
|
|
|
|
|
|
| |||||
Demand generation expense |
| $ | (69,202 | ) |
| $ | (97,295 | ) |
| $ | (28,093 | ) |
|
| (40.6 | %) |
|
| Year ended December 31, |
|
|
|
|
|
|
|
|
| |||||
|
| 2020 |
|
| 2021 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands) |
|
|
|
|
|
|
|
|
| |||||
Demand generation expense |
| $ | (198,787 | ) |
| $ | (291,821 | ) |
| $ | (93,034 | ) |
|
| (46.8 | %) |
Demand generation expense consists primarily of fees that we pay to various media and affiliate partners. Demand generation expense for the year ended December 31, 20182021 increased by $28.1$93.0 million, or (40.6%)46.8%, compared to the year ended December 31, 2017. The expenditures related to existing markets and our continued international expansion into emerging markets across all channels. Whilst we continue to invest in consumer engagement, we have gained efficiencies in our demand generation spend by leveraging data insights to be more targeted in our digital marketing approach, together with scaling marketing operations across the 200 countries in which we have consumers. We have also automated campaign management and set-up, thereby reducing the amount of time it takes to promote new products added to the platform.2020. Demand generation expense declinedincreased as a percentage of AdjustedDigital Platform Services Revenue from (22.2%)(19.2)% in 20172020 to (19.3%)(21.1)% in 2018. Although demand generation expense2021, as a percentagewe saw more competitive market conditions and the impacts of Adjusted Revenue declined, Platform Order Contribution Margin fell over the same period, from 43.0% in 2017Apple’s privacy policy leading to 39.8% in 2018 due to the shift in mix towards first-party Platform GMV and lower first-party Platform gross profit margins.higher costs.
Technology expense
|
| Year ended December 31, |
|
|
|
|
|
|
|
|
|
| Year ended December 31, |
|
|
|
|
|
|
|
|
| ||||||||||
|
| 2017 |
|
| 2018 |
|
| $ Change |
|
| % Change |
|
| 2020 |
|
| 2021 |
|
| $ Change |
|
| % Change |
| ||||||||
|
| (in thousands) |
|
|
|
|
|
|
|
|
|
| (in thousands) |
|
|
|
|
|
|
|
|
| ||||||||||
Technology expense |
| $ | (31,611 | ) |
| $ | (68,224 | ) |
| $ | (36,613 | ) |
|
| (115.8 | %) |
| $ | (115,227 | ) |
| $ | (131,408 | ) |
| $ | (16,181 | ) |
|
| (14.0 | %) |
Capitalized development costs |
|
| (18,997 | ) |
|
| (50,978 | ) |
|
| (31,981 | ) |
|
| (168.3 | %) |
|
| (89,282 | ) |
|
| (118,661 | ) |
|
| (29,379 | ) |
|
| (32.9 | %) |
Total cash investment in technology |
| $ | (50,608 | ) |
| $ | (119,202 | ) |
| $ | (68,594 | ) |
|
| (135.5 | %) | ||||||||||||||||
Total investment in technology |
| $ | (204,509 | ) |
| $ | (250,069 | ) |
| $ | (45,560 | ) |
|
| (22.3 | %) |
Technology expense consists of technology research and of development, staffing costs and other IT costs, including software licensing and hosting. Technology expense for the year ended December 31, 20182021 increased by $36.6$16.2 million, or 14.0% compared to the year ended December 31, 2017, which2020. This was primarily driven by ana 18% increase in technology staff headcount from 8021,772 to 1,2412,086 during 2018,2021, alongside annualization of headcount recruited in 2020, as we continued to develop new technologies and enhance our platform. digital platform features and services, as well as increased software, hosting and infrastructure expenses, to support the continued growth of the business. We continue to operate three globally distributed data centers, which support the processing of our growing base of transactions, including one in Shanghai dedicated to serving our Chinese consumers. Technology expense as a percentage of adjusted revenue decreased from (7.9)% in 2020 to (6.8)% in 2021.
Total cash spend
65
investment in technology amounted to $119.2$250.1 million during 2018, $51.02020, $118.7 million of which was capitalized as compared to a total of $50.6$204.5 million during 2017, $19.02020, $89.3 million of which was capitalized.
Depreciation and amortization
|
| Year ended December 31, |
|
|
|
|
|
|
|
|
| |||||
|
| 2017 |
|
| 2018 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands) |
|
|
|
|
|
|
|
|
| |||||
Depreciation and amortization |
| $ | (10,980 | ) |
| $ | (23,537 | ) |
| $ | (12,557 | ) |
|
| (114.4 | %) |
|
| Year ended December 31, |
|
|
|
|
|
|
|
|
| |||||
|
| 2020 |
|
| 2021 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands) |
|
|
|
|
|
|
|
|
| |||||
Depreciation and amortization |
| $ | (217,223 | ) |
| $ | (251,198 | ) |
| $ | (33,975 | ) |
|
| (15.6 | %) |
Depreciation and amortization expense for the year ended December 31, 20182021, increased by $12.6$34.0 million, or (114.4%)15.6%, compared to the year ended December 31, 2017, which was2020, primarily driven by ana $23.7 million increase in our amortization expenses.expenses from $177.9 million to $201.6 million year-over-year. Amortization expense increased because of ourprincipally due to continued technology investment, in which we capitalizeinvestments, where qualifying technology development costs are capitalized and amortize themamortized over a three-year period. Theperiod, which contributed $14.7 million to the increase in depreciationamortization expense year-over-year. Depreciation expense increased by $10.2 million, primarily related todriven by new leases being entered into in the depreciationsecond half of leasehold improvements to our offices.2020 and during 2021.
Share based87
Share-based payments
|
| Year ended December 31, |
|
|
|
|
|
|
|
|
| |||||
|
| 2017 |
|
| 2018 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands) |
|
|
|
|
|
|
|
|
| |||||
Share based payments |
| $ | (21,486 | ) |
| $ | (53,819 | ) |
| $ | (32,333 | ) |
|
| (150.5 | %) |
|
| Year ended December 31, |
|
| 2019 vs. 2020 |
|
| 2020 vs. 2021 |
| |||||||||||||||||||
|
| 2019 (1) |
|
| 2020 |
|
| 2021 |
|
| $ Change |
|
| % Change |
|
| $ Change |
|
| % Change |
| |||||||
|
|
|
|
|
| (in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Share-based payments (1) |
| $ | (178,234 | ) |
| $ | (291,633 | ) |
| $ | (196,167 | ) |
| $ | 113,399 |
|
|
| (63.6 | %) |
| $ | 95,466 |
|
|
| 32.7 | % |
Share based(1) Refer to Note 2, Significant accounting policies, within our Consolidated financial statements included elsewhere in this Annual Report for detail on the revision of prior year comparatives.
Share-based payments for the year ended December 31, 2018 increased2021 decreased by $32.3$95.5 million, or (150.5%)32.7%, compared to the year ended December 31, 2017, which2020, due to the decrease in cost on employment related taxes and cash-settled awards primarily as a result of the share price movement and quarterly revaluation. This was partially offset by an increase on equity-settled awards due to fully vested granted tranches, including the performance-based restricted share unit ("PSU") award granted to the Company's Founder, Chairman and CEO, José Neves.
Share-based payments for the year ended December 31, 2020 increased by $113.4 million, or 63.6%, compared to the year ended December 31, 2019, primarily driven bydue to a significant increase in the share price during 2020. Employment related taxes and the cost of cash-settled awards contributed to an increase primarily as a result of the change in share price following the IPO in September 2018 and the associated impact on cash settled share options and provisions for employment related taxes. These are remeasured at each reporting date whereas the equity settled plans are measured at the grant date. The movement year on year is driven by the remeasurementquarterly revaluation. New grants of cash settled options from the share price as at December 31, 2017equity-settled awards also contributed to the share price as at December 31, 2018. Other contributing factors include an increase in headcount and grants made at IPO.year-over-year increase.
General and administrative expense
|
| Year ended December 31, |
|
|
|
|
|
|
|
|
| |||||
|
| 2017 |
|
| 2018 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands) |
|
|
|
|
|
|
|
|
| |||||
General and administrative |
| $ | (165,981 | ) |
| $ | (228,891 | ) |
| $ | (62,910 | ) |
|
| (37.9 | %) |
|
| Year ended December 31, |
|
|
|
|
|
|
|
|
| |||||
|
| 2020 |
|
| 2021 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands) |
|
|
|
|
|
|
|
|
| |||||
General and administrative |
| $ | (504,346 | ) |
| $ | (591,644 | ) |
| $ | (87,298 | ) |
|
| (17.3 | %) |
General and administrative expense for the year ended December 31, 20182021 increased by $62.9$87.3 million, or (37.9%)17.3%, compared to the year ended December 31, 2017,2020, which was primarily driven by additional expenses to support the growth of the business, and an increase in headcount, excluding technology staff whichwho are included in the technology expense above, from 1,3673,669 to 1,991,4,378, an increase of 45.6%19.3%. We increased non-technology headcount across a number of areas to support the growth and infrastructure of the business. In addition, we continued to expand geographically, increasing our global workforce across 12 office locations during 2018. Other increases were due to facilities and office costs and other fixed overhead costs. During 2018, we also continued to invest more in Farfetch brand building activities. General and administrative costs as a percentage of Adjusted Revenue decreased from (53.2%)(34.5)% to (45.4%)(30.7)% as we leveraged the benefits from prior year investmentcontinued to supportleverage our growth.operations base to efficiently grow Adjusted Revenue.
66
|
| Year ended December 31, |
|
|
|
|
|
|
|
|
| |||||
|
| 2017 |
|
| 2018 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands) |
|
|
|
|
|
|
|
|
| |||||
Adjusted EBITDA |
| $ | (58,079 | ) |
| $ | (95,960 | ) |
| $ | (37,881 | ) |
|
| (65.2 | %) |
% of Adjusted Revenue |
|
| (18.6 | %) |
|
| (19.0 | %) |
|
|
|
|
|
|
|
|
|
| Year ended December 31, |
|
|
|
|
|
|
|
|
| |||||
|
| 2020 |
|
| 2021 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands) |
|
|
|
|
|
|
|
|
| |||||
Transaction-related legal and advisory expenses |
| $ | (24,598 | ) |
| $ | (18,596 | ) |
| $ | 6,002 |
|
|
| 24.4 | % |
Loss on impairment of investments carried at fair value |
|
| (235 | ) |
|
| (134 | ) |
|
| 101 |
|
|
| 43.0 | % |
Other |
|
| 566 |
|
|
| - |
|
|
| (566 | ) |
| n/a |
| |
Other items |
| $ | (24,267 | ) |
| $ | (18,730 | ) |
| $ | 5,537 |
|
|
| 22.8 | % |
Adjusted EBITDAOther items represent items outside the normal scope of our ordinary business activities and non-cash items. Other items totaled $18.7 million for the year ended December 31, 2021, primarily consisting of transaction-related legal and advisory expenses that were incurred as a result of the strategic agreement with Alibaba and Richemont. The December 31, 2020 other items totaled $24.3 million and consisted of transaction-related legal and advisory expenses that were incurred mainly due to the issuance of the February 2020, April 2020 and November 2020 Notes
88
Impairment losses on tangible and intangible assets
|
| Year ended December 31, |
|
|
|
|
|
|
|
|
| |||||
|
| 2020 |
|
| 2021 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands) |
|
|
|
|
|
|
|
|
| |||||
Impairment losses on right-of-use asset |
| $ | (2,234 | ) |
| $ | - |
|
| $ | 2,234 |
|
| n/a |
| |
Impairment losses on property, plant and equipment |
|
| (757 | ) |
|
| - |
|
|
| 757 |
|
| n/a |
| |
Impairment losses on tangible assets |
| $ | (2,991 | ) |
| $ | - |
|
| $ | 2,991 |
|
| n/a |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment losses on intangible assets |
| $ | (36,269 | ) |
| $ | (11,779 | ) |
| $ | 24,490 |
|
|
| 67.5 | % |
Impairment losses on intangible assets |
| $ | (36,269 | ) |
| $ | (11,779 | ) |
| $ | 24,490 |
|
|
| 67.5 | % |
The impairment charge of $11.8 million on intangible assets for the year ended December 31, 2021, is comprised of a charge related to a reduction in the carrying value of one of the smaller intangible brand assets within New Guards portfolio.
The impairment charge of $36.3 million on intangible assets for the year ended December 31, 2020, is primarily comprised of a $30.5 million charge related to a reduction in the carrying value of one of the smaller intangible brand assets within New Guards portfolio. The remaining $5.8 million impairment charge on intangible assets related to the closure of our direct consumer-facing channels on JD.com and the associated intangible asset held for the Farfetch Level 1 access button.
Impairment losses on tangible assets of $3.0 million for the year ended December 31, 2020, primarily related to one of our smaller retail locations and comprised a reduction in the carrying value of the right-of-use asset by $1.5 million, and property, plant and equipment by $0.8 million. The remaining $0.7 million impairment charge on tangible assets related to the reduction in the carrying value of the corporate right-of-use assets associated with the impairment of a smaller intangible brand asset within the New Guards portfolio. There were no impairment losses on tangible assets for the year ended December 31, 2021.
The above resulted from our annual considerations of potential impairment of assets, including our intangible assets, whereby indicators of impairment were present.
Gains/(losses) on items held at fair value and remeasurements
|
| Year ended December 31, |
|
|
|
|
|
|
|
|
| |||||
|
| 2020 |
|
| 2021 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands) |
|
|
|
|
|
|
|
|
| |||||
Remeasurement (losses)/gains on put and call option and contingent consideration liabilities |
| $ | (288,853 | ) |
| $ | 384,122 |
|
| $ | 672,975 |
|
|
| 233.0 | % |
Fair value (losses)/gains of convertible note embedded derivatives |
|
| (2,354,720 | ) |
|
| 1,638,837 |
|
|
| 3,993,557 |
|
|
| 169.6 | % |
Fair value remeasurement of previously held equity interest |
|
| - |
|
|
| 784 |
|
|
| 784 |
|
| n/a |
| |
(Losses)/gains on items held at fair value and remeasurements |
| $ | (2,643,573 | ) |
| $ | 2,023,743 |
|
| $ | 4,667,316 |
|
|
| 176.6 | % |
Gains on items held at fair value and remeasurements totaled $2,023.7 million. This was primarily due to a $1,638.8 million fair value gain on revaluation of the embedded derivatives relating to our February 2020 Notes, April 2020 Notes and November 2020 Notes compared to a $2,354.7 million fair value loss on revaluation for the year ended December 31, 2020. In addition, we recorded a $384.1million present value remeasurement gain for the year ended December 31, 2021, compared to a $288.9 million loss for the year ended December 31, 20182020. In the year ended December 31, 2021, this primarily relates to Chalhoub Group’s put option over their non-controlling interest in Farfetch International Limited and the put-call option associated with the strategic agreement with
89
Alibaba and Richemont. In the year ended December 31, 2020 this relates solely to Chalhoub Group’s put option over their non-controlling interest in Farfetch International Limited. We also recorded a $0.8 million fair value remeasurement gain of previously held equity interest, related to our step acquisition of Alanui. There was no change in the fair value remeasurement of previously held equity interest for the year ended December 31, 2020.
Finance income and cost
|
| Year ended December 31, |
|
| 2019 vs. 2020 |
|
| 2020 vs. 2021 |
| |||||||||||||||||||
|
| 2019 |
|
| 2020 (1) |
|
| 2021 |
|
| $ Change |
|
| % Change |
|
| $ Change |
|
| % Change |
| |||||||
|
| (in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Unrealized exchange gains |
| $ | 22,856 |
|
| $ | 19,729 |
|
| $ | 9,289 |
|
| $ | (3,127 | ) |
|
| 13.7 | % |
| $ | (10,440 | ) |
|
| 52.9 | % |
Interest on cash and cash equivalents and short-term deposits |
|
| 11,526 |
|
|
| 4,970 |
|
|
| 3,310 |
|
|
| (6,556 | ) |
|
| 56.9 | % |
|
| (1,660 | ) |
|
| 33.4 | % |
Finance income |
|
| 34,382 |
|
|
| 24,699 |
|
|
| 12,599 |
|
|
| (9,683 | ) |
|
| 28.2 | % |
|
| (12,100 | ) |
|
| 49.0 | % |
Unrealized exchange losses |
|
| (10,977 | ) |
|
| (39,940 | ) |
|
| (9,135 | ) |
|
| (28,963 | ) |
|
| (263.9 | %) |
|
| 30,805 |
|
|
| 77.1 | % |
Lease interest |
|
| (3,472 | ) |
|
| (6,684 | ) |
|
| (9,137 | ) |
|
| (3,212 | ) |
|
| (92.5 | %) |
|
| (2,453 | ) |
|
| (36.7 | %) |
Convertible note interest |
|
| - |
|
|
| (41,851 | ) |
|
| (67,638 | ) |
|
| (41,851 | ) |
| n/a |
|
|
| (25,787 | ) |
|
| (61.6 | %) | |
Other interest expense |
|
| (4,783 | ) |
|
| (2,819 | ) |
|
| (531 | ) |
|
| 1,964 |
|
|
| 41.1 | % |
|
| 2,288 |
|
|
| 81.2 | % |
Finance costs (1) |
|
| (19,232 | ) |
|
| (91,294 | ) |
|
| (86,441 | ) |
|
| (72,062 | ) |
|
| (374.7 | %) |
|
| 4,853 |
|
|
| 5.3 | % |
Net finance income/(costs) |
| $ | 15,150 |
|
| $ | (66,595 | ) |
| $ | (73,842 | ) |
| $ | (81,745 | ) |
|
| 539.6 | % |
| $ | (7,247 | ) |
|
| (10.9 | %) |
((1) Refer to Note 2, Significant accounting policies, within our Consolidated financial statements included elsewhere in this Annual Report for detail on the revision of prior year comparatives.
Unrealized exchange gains and losses fluctuate given the global nature of our business, where we earn revenue and incur expenses in a number of different currencies. For our accounting policy for foreign currency translations and how these are classified in our consolidated statement of operations, refer to Note 2.3(h) Summary of significant accounting policies - Foreign currency translation within our Consolidated financial statements included elsewhere in this Annual Report.
Net unrealized exchange gains for the year ended December 31, 2021 were $0.2 million. This comprised of gains of $9.3 million and losses of $9.1 million. The net gains were primarily driven by movements in the exchange rates of EUR, BRL, USD and GBP verses functional currency on intercompany, trading and cash balances not in the functional currency of the main operating entities.
Interest on cash and cash equivalents and short-term deposits for the year ended December 31, 2021 decreased by $1.7 million compared to the year ended December 31, 2020, primarily driven by lower interest rates offset by higher average cash balances.
Lease interest expense for the year ended December 31, 2021 increased by $37.9$2.5 million to $9.1 million, primarily driven by new leases starting in the year ended December 31, 2021.
Convertible note interest for the year ended December 31, 2021 increased by $25.8 million to $67.6 million, primarily due to incurring a full year of interest on our April 2020 and November 2020 notes.
Other interest expense for the year ended December 31, 2021 decreased by $2.3 million to $0.5 million primarily driven by lower interest rates.
Net unrealized exchange losses for the year ended December 31, 2020 were $20.2 million. This comprised of gains of $19.7 million and losses of $39.9 million. The net losses were primarily driven by movements in the exchange rates of EUR, BRL, RUB and GBP verses functional currency on intercompany, trading and cash balances not in the functional currency of the main operating entities.
90
Interest on cash and cash equivalents and short-term deposits for the year ended December 31, 2020 decreased by $6.6 million compared to the year ended December 31, 2019, primarily driven by lower interest rates offset by higher average cash balances.
Lease interest expense for the year ended December 31, 2020 increased by $3.2 million to $6.7 million, driven by new leases starting in the year ended December 31, 2020.
Convertible note interest for the year ended December 31, 2020 amounted to $41.9 million primarily due to the effective interest on our convertible notes issued in February 2020, April 2020 and November 2020. There were none for the year 2019.
Other interest expense for the year ended December 31, 2020 decreased by $2.0 million to $2.8 million, primarily driven by lower interest rates
(Loss)/profit after tax
|
| Year ended December 31, |
|
| 2019 vs. 2020 |
|
| 2020 vs. 2021 | ||||||||||||||||||
|
| 2019 (1) |
|
| 2020 (1) |
|
| 2021 |
|
| $ Change |
|
| % Change |
|
| $ Change |
|
| % Change (2) | ||||||
|
|
|
|
|
| (in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
(Loss)/profit after tax (1) |
| $ | (393,500 | ) |
| $ | (3,315,623 | ) |
| $ | 1,470,611 |
|
| $ | (2,922,123 | ) |
|
| 742.6 | % |
| $ | 4,786,234 |
|
| n.m. |
% of Adjusted Revenue |
|
| (44.1 | %) |
|
| (227.0 | %) |
|
| 76.4 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Refer to Note 2, Significant accounting policies, within our Consolidated financial statements included elsewhere in this Annual Report for detail on the revision of prior year comparatives. |
(2) | n.m. = number is not meaningful. |
Profit after tax for the year ended December 31, 2021 was $1,470.6 million, up by $4,786.2 million, compared to the year ended December 31, 2020. The increase was primarily driven by gains on items held at fair value and remeasurements, which increased $4,667.4 million year-over-year as well as the increase in gross profit partially offset by an increase in Selling, general and administrative expenses, as explained above.
Loss after tax for the year ended December 31, 2020, increased by $2,922.1 million, or (65.2%)742.6%, compared to the year ended December 31, 2017. This2019. The increase was primarily driven by losses on items held at fair value and remeasurements, which increased investment in demand generation and technology expenses to support continued growth in GMV and Adjusted Revenue. There was also an increase$2,665.3 million year-over-year as well as increases in general and administrative expenses, as we continued to scale our business.
Comparison of Year Ended December 31, 2016 and 2017
Revenue
|
| Year ended December 31, |
|
|
|
|
|
|
|
|
| |||||
|
| 2016 |
|
| 2017 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands) |
|
|
|
|
|
|
|
|
| |||||
Revenue |
| $ | 242,116 |
|
| $ | 385,966 |
|
| $ | 143,850 |
|
|
| 59.4 | % |
Less: Platform Fulfilment Revenue |
|
| (48,511 | ) |
|
| (74,182 | ) |
|
| (25,671 | ) |
|
| (52.9 | ) |
Adjusted Revenue |
| $ | 193,605 |
|
| $ | 311,784 |
|
| $ | 118,179 |
|
|
| 61.0 | % |
Revenue for the year ended December 31, 2017 increased by $143.9 million, or 59.4%, compared to the year ended December 31, 2016. Adjusted Revenue for the year ended December 31, 2017 increased by $118.2 million, or 61.0%, compared to the year ended December 31, 2016. This was a function of growth in GMV of 55.3% and increased Third-Party Take Rate from 31.3% to 32.9%. Growth in GMV was primarily driven by the Number of Orders increasing by 49.3% to approximately 1.9 million. This was driven by growth in Active Consumers from 651,674 to 935,772 (an increase of 43.6%) over the same period, which was due to continued growth in demand from existing consumers across international markets together with an increase in new consumer orders.
We also had an increase in supply as the number of luxury sellers grew significantly during 2017. Growth in Third-Party Take Rate was a result of improved commercial terms with our platform partners. In addition to the growth in the number of consumers, AOV grew by 6.2% to $620.0. In-Store Revenue also increased from $12.7 million to $15.4 million, an increase of 21.3%, due to strong consumer engagement and new incentives for sales associates. Platform Fulfilment Revenue accounted for 19.2% of revenue in 2017, down from 20.0% in 2016.
Cost of revenue, gross profit and gross profit margin
|
| Year ended December 31, |
|
|
|
|
|
|
|
|
| |||||
|
| 2016 |
|
| 2017 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands) |
|
|
|
|
|
|
|
|
| |||||
Cost of revenue |
| $ | (125,238 | ) |
| $ | (181,200 | ) |
| $ | (55,962 | ) |
|
| (44.7 | %) |
Gross profit |
|
| 116,878 |
|
|
| 204,766 |
|
|
| 87,888 |
|
|
| 75.2 |
|
Gross profit margin |
|
| 48.3 | % |
|
| 53.1 | % |
|
|
|
|
|
|
|
|
Cost of revenue for the year ended December 31, 2017 increased by $56.0 million, or (44.7%), compared to the year ended December 31, 2016, which was primarily driven by the increase in delivery, packaging and transaction processing expenditures as a result of the increased Number of Orders.
67
Our gross profit margin improved from 48.3% to 53.1% for the year ended December 31, 2016 to the year ended December 31, 2017, which was primarily drivenpartially offset by an increase in blended commissions on sales generated through our Marketplace and scale efficiencies of fulfilment expenditures.
Selling, general and administrative expenses
Selling, general and administrative expenses consisted of the following components:
|
| Year ended December 31, |
|
|
|
|
|
| % of Adjusted Revenue |
| ||||||||||
|
| 2016 |
|
| 2017 |
|
| % Change |
|
| 2016 |
|
| 2017 |
| |||||
|
| (in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Demand generation expense |
| $ | (48,381 | ) |
| $ | (69,202 | ) |
|
| (43.0 | %) |
|
| (25.0 | %) |
|
| (22.2 | %) |
Technology expense |
|
| (12,269 | ) |
|
| (31,611 | ) |
|
| (157.6 | ) |
|
| (6.3 | ) |
|
| (10.1 | ) |
Depreciation and amortization |
|
| (6,897 | ) |
|
| (10,980 | ) |
|
| (59.2 | ) |
|
| (3.6 | ) |
|
| (3.5 | ) |
Share based payments |
|
| (19,848 | ) |
|
| (21,486 | ) |
|
| (8.3 | ) |
|
| (10.3 | ) |
|
| (6.9 | ) |
General and administrative |
|
| (118,163 | ) |
|
| (165,981 | ) |
|
| (40.5 | ) |
|
| (61.0 | ) |
|
| (53.2 | ) |
Total |
| $ | (205,558 | ) |
| $ | (299,260 | ) |
|
| (45.6 | %) |
|
| (106.2 | %) |
|
| (96.0 | %) |
Demand generation expense
|
| Year ended December 31, |
|
|
|
|
|
|
|
|
| |||||
|
| 2016 |
|
| 2017 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands) |
|
|
|
|
|
|
|
|
| |||||
Demand generation expense |
| $ | (48,381 | ) |
| $ | (69,202 | ) |
| $ | (20,821 | ) |
|
| (43.0 | %) |
Demand generation expense for the year ended December 31, 2017 increased by $20.8 million, or (43.0%), compared to the year ended December 31, 2016. The expenditures related to existing markets and our continued international expansion into emerging markets across all channels. We gained efficiencies in our demand generation spend by scaling marketing operations across the 190 markets in which we have consumers and by automating campaign management and set up, thereby reducing the amount of time it takes to promote new products added to the platform. Demand generation expense declinedgross profit, as a percentage of Adjusted Revenue, from (25.0%) in 2016 to (22.2%) in 2017, resulting in an increase in Platform Order Contribution Margin over the same period, from 35.0% in 2016 to 43.0% in 2017.explained above.
Technology expense
|
| Year ended December 31, |
|
|
|
|
|
|
|
|
| |||||
|
| 2016 |
|
| 2017 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands) |
|
|
|
|
|
|
|
|
| |||||
Technology expense |
| $ | (12,269 | ) |
| $ | (31,611 | ) |
| $ | (19,342 | ) |
|
| (157.6 | %) |
Capitalized development costs |
|
| (12,586 | ) |
|
| (18,997 | ) |
|
| (6,411 | ) |
|
| (50.9 | ) |
Total cash investment in technology |
| $ | (24,855 | ) |
| $ | (50,608 | ) |
| $ | (25,753 | ) |
|
| (103.6 | %) |
Technology expense for the year ended December 31, 2017 increased by $19.3 million, compared to the year ended December 31, 2016, which was primarily driven by an increase in technology staff headcount from 494 to 802 during 2017, as we continued to develop new technologies and maintain and improve our platform. Total cash spend amounted to $50.6 million during 2017, $19.0 million of which was capitalized, as compared to a total of $24.9 million during 2016, $12.6 million of which was capitalized.
68
|
| Year ended December 31, |
|
|
|
|
|
|
|
|
| |||||
|
| 2016 |
|
| 2017 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands) |
|
|
|
|
|
|
|
|
| |||||
Depreciation and amortization |
| $ | (6,897 | ) |
| $ | (10,980 | ) |
| $ | (4,083 | ) |
|
| (59.2 | %) |
Depreciation and amortization expense for the year ended December 31, 2017 increased by $4.1 million, or (59.2%), compared to the year ended December 31, 2016, which was primarily driven by an increase in our amortization expenses. Amortization increased because of our continued technology investment, in which we capitalize qualifying technology development costs and amortize them over a three-year period. The increase in depreciation primarily related to the depreciation of leasehold improvements to our offices.
Share based payments
|
| Year ended December 31, |
|
|
|
|
|
|
|
|
| |||||
|
| 2016 |
|
| 2017 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands) |
|
|
|
|
|
|
|
|
| |||||
Share based payments |
| $ | (19,848 | ) |
| $ | (21,486 | ) |
| $ | (1,638 | ) |
|
| (8.3 | %) |
Share based payments for the year ended December 31, 2017 increased by $1.6 million, or (8.3%), compared to December 31, 2016, which was primarily driven by an increase in the number of options granted because of an increased headcount.
General and administrative expense
|
| Year ended December 31, |
|
|
|
|
|
|
|
|
| |||||
|
| 2016 |
|
| 2017 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands) |
|
|
|
|
|
|
|
|
| |||||
General and administrative |
| $ | (118,163 | ) |
| $ | (165,981 | ) |
| $ | (47,818 | ) |
|
| (40.5 | %) |
General and administrative expense for the year ended December 31, 2017 increased by $47.8 million, or (40.5%), compared to the year ended December 31, 2016, which was primarily driven by an increase in headcount, excluding technology staff which are included in the technology expense above, from 906 to 1,367, an increase of 50.9%. We increased non-technology headcount across a number of areas to support the growth of the business. In addition, we continued to expand geographically, increasing our global workforce across 12 office locations during 2017. Other increases were due to facilities and office costs and other fixed overhead costs. During 2017, we also invested more in Farfetch brand building activities. General and administrative costs as a percentage of Adjusted Revenue decreased from (61.0%) to (53.2%) as we leveraged the benefits from prior year investment to support our growth.
Adjusted EBITDA
|
| Year ended December 31, |
|
|
|
|
|
|
|
|
|
| Year ended December 31, |
|
|
|
|
|
|
|
|
| ||||||||||
|
| 2016 |
|
| 2017 |
|
| $ Change |
|
| % Change |
|
| 2020 |
|
| 2021 |
|
| $ Change |
|
| % Change |
| ||||||||
|
| (in thousands) |
|
|
|
|
|
|
|
|
|
| (in thousands) |
|
|
|
|
|
|
|
|
| ||||||||||
Adjusted EBITDA |
| $ | (53,380 | ) |
| $ | (58,079 | ) |
| $ | (4,699 | ) |
|
| (8.8 | %) |
| $ | (47,432 | ) |
| $ | 1,638 |
|
| $ | 49,070 |
|
|
| 103.5 | % |
% of Adjusted Revenue |
|
| (27.6 | %) |
|
| (18.6 | %) |
|
|
|
|
|
|
|
|
|
| (3.2 | %) |
|
| 0.1 | % |
|
|
|
|
|
|
|
|
6991
Adjusted EBITDA loss for the year ended December 31, 20172021, increased by $4.7$49.1 million, or (8.8%)103.5%, compared to the year ended December 31, 2016.2020. This was primarily driven bydue to the increase in revenue, as described above. Adjusted EBITDA as a percentage of Adjusted Revenue increased investment in demand generation and technology expensesfrom (3.2)% to support continued growth in GMV and Adjusted Revenue. There was also an increase0.1%, primarily due to the decline in general and administrative expenses as a percentage of Adjusted Revenue, as described above.
Comparison of Year Ended December 31, 2019 and 2020
For a comparison of our consolidated results of operations for the years ended December 31, 2019 and 2020, refer to pages 87 through 93 of our Annual Report on Form 20-F for the fiscal year ended December 31, 2020 filed with the SEC on March 4, 2021, as supplemented by the revisions described above under “—Revisions to Previously Reported Financial Information”.
Operating Results by Segment
Digital Platform
The Digital Platform segment activities include the Farfetch Marketplace, Farfetch Platforms Solutions, StadiumGoods.com, Farfetch Future Retail, and any other online sales channel operated by the Group, including the respective websites of the smaller brands in the New Guards portfolio which are not yet operated through Farfetch Platforms Solutions. It derives its revenues mostly from transactions between sellers and consumers conducted on our technology platforms. During 2019 we acquired New Guards, which contributed to the continued scale and growth of our Digital Platform in 2021.
Brand Platform
The Brand Platform segment is comprised of business-to-business activities of the brands in the New Guards portfolio. It includes design, production, brand development and wholesale distribution of brands owned and licensed by New Guards, including the franchised store operations.
In-Store
The In-Store segment covers the activities of Group-operated stores including Browns, Stadium Goods and stores for brands in the New Guards portfolio. Revenues are derived from sales made in the physical stores.
There are no intersegment transactions that require elimination. Order Contribution is used to assess the performance and allocate resources between the segments. The operating segment disclosures required under IFRS 8 are provided in Note 6, Segmental and geographical information, to our Consolidated financial statements included elsewhere in this Annual Report.
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The tables and discussion below set forth financial information and analysis of our three reportable operating segments for the years ended December 31, 2019, 2020 and 2021:
Digital Platform:
|
| Year ended December 31, |
| |||||||||
|
| 2019 |
|
| 2020 |
|
| 2021 |
| |||
Digital Platform: |
| (in thousands) |
| |||||||||
Services third-party revenue |
| $ | 496,040 |
|
| $ | 637,568 |
|
| $ | 845,941 |
|
Services first-party revenue |
|
| 205,206 |
|
|
| 395,588 |
|
|
| 539,737 |
|
Services Revenue |
|
| 701,246 |
|
|
| 1,033,156 |
|
|
| 1,385,678 |
|
Fulfilment Revenue |
|
| 127,960 |
|
|
| 213,228 |
|
|
| 332,504 |
|
Revenue |
|
| 829,206 |
|
|
| 1,246,384 |
|
|
| 1,718,182 |
|
Less: Cost of revenue |
|
| (457,293 | ) |
|
| (686,178 | ) |
|
| (987,929 | ) |
Gross profit |
|
| 371,913 |
|
|
| 560,206 |
|
|
| 730,253 |
|
Less: Demand generation expense |
|
| (151,350 | ) |
|
| (198,787 | ) |
|
| (291,821 | ) |
Order contribution |
| $ | 220,563 |
|
| $ | 361,419 |
|
| $ | 438,432 |
|
Digital Platform performance reflects the increased scale of our global business, both from a supply and demand perspective. There has been significant organic growth as we continued to expand our share of the online luxury market, further supplemented by our continued marketing efforts, which generated growth in new consumers and demand growth from existing consumers across international markets. During 2019, we acquired New Guards which contributed to the continued scale and growth of our business. Although thereDigital Platform in 2020.
The increase in Digital Platform Services Revenue of 34.1% was primarily driven by 33.3% growth in Digital Platform GMV, including growth in first-party Digital Platform GMV, which is included in Digital Platform Services Revenue at 100% of the GMV. The increase in Digital Platform GMV was driven by a 21.9% increase in Active Consumers, from 3,024,200 at December 31, 2020, to 3,686,800 at December 31, 2021, and a strong full price performance. In addition, we benefited from year-over-year growth in transactions through websites managed by FPS. Digital Platform Services Revenue was further augmented by growth in first-party Digital Platform, where we saw strong performance of Browns’ products on the Platform. Digital Platform Third-Party take rate has increased slightly from 29.6% for the year ended December 31, 2020 to 30.2% for the year ended December 31, 2021 reflecting measures implemented to share incremental costs with our partners.
Digital Platform Fulfilment Revenue represents the pass-through to consumers of delivery and duties charges incurred by our global logistics solutions, net of any Farfetch-funded consumer promotions, subsidized shipping and incentives. Digital Platform Fulfilment Revenue accounted for 14.7% of revenue in 2021, an increase from 12.7% in 2020. While Digital Platform Fulfilment Revenue would be expected to grow in line with the cost of delivery and duties, which increase as Digital Platform GMV and order volumes grow, variations in the level of Farfetch funded promotions and incentives will impact Digital Platform Fulfilment Revenue, as Digital Platform Fulfilment Revenue is recorded net of such promotions. Digital Platform Fulfilment Revenue increased 55.9%, a higher rate as compared to Digital Platform Services Revenue growth driven by higher duties due to the regional mix of sales and impacts of Brexit, as well as an increased Adjusted EBITDA losspass-through of these costs to consumers towards the end of the year.
Cost of revenue for the year ended December 31, 2021 increased by $301.8 million, or 44.0%, compared to the year ended December 31,2016, we have leveraged operational synergies where our selling, general and administrative expenses have grown at a slower rate than Adjusted Revenue. This is demonstrated31, 2020, primarily driven by the reduction in Adjusted EBITDA loss as a percentage of AdjustedDigital Platform Revenue growth.
Our Digital Platform Gross Profit Margin decreased from (27.6%)54.2% for the year ended December 31, 2016 compared2020 to (18.6%) to52.7% for the year ended December 31, 2017.2021. The decrease was driven by the increasing mix of Digital Platform Fulfilment Revenue, which is a flow through generating no Gross Profit Margin, plus an increase in promotional activity.
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Demand generation expense consists primarily of fees that we pay to various media and affiliate partners. Demand generation expense for the year ended December 31, 2021 increased by $93.0 million, or 46.8%, compared to the year ended December 31, 2020. Demand generation expense increased as a percentage of Digital Platform Services Revenue from 19.2% in 2020 to 21.0% in 2021, as we saw more competitive market conditions and the impacts of Apple’s privacy policy leading to higher costs.
Digital Platform Order Contribution Margin decreased from 35.0% in 2020 to 31.6% in 2021 as a result of increased promotional activity and higher demand generation costs
Brand Platform:
|
| Year ended December 31, |
| |||||||||
|
| 2019 |
|
| 2020 |
|
| 2021 |
| |||
Brand Platform: |
| (in thousands) |
| |||||||||
Revenue |
| $ | 164,210 |
|
| $ | 390,014 |
|
| $ | 467,505 |
|
Less: Cost of revenue |
|
| (89,203 | ) |
|
| (199,208 | ) |
|
| (225,989 | ) |
Gross profit or order contribution |
| $ | 75,007 |
|
| $ | 190,806 |
|
| $ | 241,516 |
|
Brand Platform contributed $467.5 million of Revenue and $241.5 million of gross profit for the year ended December 21, 2021 compared to $390.0 million of Revenue and $190.8 million of gross profit for the year ended December 31, 2020. We continue to see strong demand for products within New Guards brand portfolio, of which a new permanent collection launched in the last quarter of the year.
In-Store:
|
| Year ended December 31, |
| |||||||||
|
| 2019 |
|
| 2020 |
|
| 2021 |
| |||
In-Store: |
| (in thousands) |
| |||||||||
Revenue |
| $ | 27,621 |
|
| $ | 37,524 |
|
| $ | 70,921 |
|
Less: Cost of revenue |
|
| (14,695 | ) |
|
| (17,608 | ) |
|
| (26,179 | ) |
Gross profit or order contribution |
| $ | 12,926 |
|
| $ | 19,916 |
|
| $ | 44,742 |
|
In-Store Revenue increased 89.0% to $70.9 million in the period ended 2021. Growth is primarily due to additional New Guards’ stores opened in the last twelve months as well as growth from existing stores.
Changes in Accounting Policies and Disclosures
Amendments to Standards That Are Mandatorily EffectiveThere have been no significant new accounting standards or amendments that have a material impact on the results in the current year. During the year, as a result of the first conversions of the February 2020 Notes, we implemented a new accounting policy in respect of how we account for the Current Yearconversion of convertible notes. New accounting policies have also been implemented for short-term investments, the acquisition of Palm Angels and the accounting for the investment by Alibaba and Richemont into Farfetch China Holdings Ltd and its subsidiaries. All transactions referred to above are new in the current year ended December 31, 2021. For further details, refer to Note 2.4, Changes in accounting policies and disclosures, within our Consolidated financial statements included elsewhere in this Annual Report.
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B. Liquidity and Capital Resources
The following historical consolidated financial data as of and for the years ended December 31, 2019, 2020 and 2021 has been derived from our audited Consolidated financial statements and the notes thereto. Our historical results for any prior period are not necessarily indicative of results expected in any future period.
|
| Year ended December 31, |
| |||||||||
|
| 2019 |
|
| 2020 |
|
| 2021 |
| |||
|
| (in thousands, except share and per share data) |
| |||||||||
Consolidated Statement of Cash Flow Data: |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (outflow)/inflow from operating activities |
| $ | (126,642 | ) |
| $ | 116,315 |
|
| $ | (282,154 | ) |
Net cash outflow from investing activities |
|
| (583,503 | ) |
|
| (132,641 | ) |
|
| (330,656 | ) |
Net cash (outflow)/inflow from financing activities |
|
| (15,249 | ) |
|
| 1,261,040 |
|
|
| 405,142 |
|
|
| As of December 31, |
| |||||||||
|
| 2019 (1) |
|
| 2020 (1) |
|
| 2021 |
| |||
|
| (in thousands) |
| |||||||||
Consolidated Statement of Financial Position Data: |
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
| $ | 645,330 |
|
| $ | 1,961,000 |
|
| $ | 2,111,680 |
|
Non-current assets |
|
| 1,582,549 |
|
|
| 1,629,871 |
|
|
| 1,714,834 |
|
Total assets |
|
| 2,227,879 |
|
|
| 3,590,871 |
|
|
| 3,826,514 |
|
Current liabilities (1) |
|
| 467,998 |
|
|
| 778,747 |
|
|
| 907,257 |
|
Non-current liabilities |
|
| 422,049 |
|
|
| 4,470,766 |
|
|
| 2,648,641 |
|
Total liabilities |
|
| 890,047 |
|
|
| 5,249,513 |
|
|
| 3,555,898 |
|
Share capital and premium |
|
| 891,591 |
|
|
| 942,099 |
|
|
| 1,656,905 |
|
Total equity/(deficit) (1) |
| $ | 1,337,832 |
|
| $ | (1,658,642 | ) |
| $ | 270,616 |
|
(1) Refer to Note 2, Significant accounting policies, within our Consolidated financial statements included elsewhere in this Annual Report for detail on the revision of prior year comparatives.
General
As of December 31, 2021, we had cash and cash equivalents of $1,363.1 million. Our cash and cash equivalents consist primarily of cash in bank accounts and short-term deposits in money market funds.
Since our inception, we have financed our operations primarily through equity and debt issuances, and cash generated from our operating activities. Our primary requirements for liquidity and capital are to finance working capital, capital expenditures, business combinations and general corporate purposes.
Our total equity increased from a deficit of $(1,658.6) million as at December 31, 2020 to equity of $270.6 million as at December 31, 2021 primarily due to the gains on items held at fair value and remeasurements during the year. The gains on items held at fair value and remeasurements during the year is primarily driven by the year end revaluation of the embedded derivatives relating to the convertible senior notes discussed below. Unless earlier converted, redeemed or repurchased in accordance with their terms, the notes may be settled, at Farfetch’s election and subject to certain exceptions and conditions, in Class A ordinary shares of Farfetch, cash, or a combination of cash and Class A ordinary shares of Farfetch. The other significant driver of the gains on items held at fair value and remeasurements during the year is the put and call option liabilities related to non-controlling interests arising from the strategic agreement with Alibaba and Richemont.See Note 28, Financial instruments and financial risk management, within our Consolidated financial statements included elsewhere in this Annual Report.
On February 5, 2020, we completed the private placement of convertible senior notes to Tencent and Dragoneer, pursuant to which we received $250 million and issued the notes to the purchasers. The notes will mature on December 31, 2025, unless earlier converted, redeemed or repurchased in accordance with their terms. On April 30, 2020, we completed the private offering of $400 million in aggregate principal amount of convertible senior notes for net proceeds of $390 million. The notes will mature on May 1, 2027, unless earlier converted,
95
redeemed or repurchased in accordance with their terms. The notes will bear interest at a rate of 3.75% per year payable semi-annually in arrears on May 1 and November 1 of each year, beginning on November 1, 2020. On November 15, 2020, we completed the offering of $600 million in aggregate principal amount of convertible senior notes. The notes will mature on November 15, 2030, unless earlier converted, redeemed or repurchased in accordance with their terms. The notes will not bear any interest.
We believe that our sources of liquidity and capital will be sufficient to meet our business needs for at least the next twelve months. Our capital expenditures consist primarily of technology development costs, computer equipment and the fit out and improvements to our offices.
The following table shows summary consolidated cash flow information for the periods presented.
| Year ended December 31, |
| ||||||
|
| 2020 |
|
| 2021 |
| ||
| (in thousands) |
| ||||||
Net cash inflow/(outflow) from operating activities |
| $ | 116,315 |
|
| $ | (282,154 | ) |
Net cash outflow from investing activities |
|
| (132,641 | ) |
|
| (330,656 | ) |
Net cash inflow from financing activities |
|
| 1,261,040 |
|
|
| 405,142 |
|
Net increase/(decrease) in cash and cash equivalents |
| $ | 1,244,714 |
|
| $ | (207,668 | ) |
Net cash (outflow)/inflow from operating activities
Net cash outflow from operating activities increased by $398.5 million to $282.2 million in the year ended December 31, 2021 compared to a $116.3 million cash inflow from operating activities in the year ended December 31, 2020. The increase is primarily due to a working capital deficit of $154.5 million, an increase of $402.7 million as compared to the working capital benefit of $248.2 million for the year ended December 31, 2020. This primarily reflects an increase in sales tax receivables (refer to Note 15, Trade and other receivables, within our Consolidated financial statements included elsewhere in this Annual Report), as well as higher inventory levels to support the growth in the business.
Net cash outflow from investing activities
Net cash outflow from investing activities increased to $330.7 million in the year ended December 31, 2021, an increase of $198.0 million. The increase was primarily due to the purchase of a $100.0 million short-term variable Net Asset Value investments and an increase in acquisitions of intangible assets in the year ended December 31, 2021.
Net cash (outflow)/inflow from financing activities
Net cash inflow from financing activities decreased $855.9 million to $405.1 million in the year ended December 31, 2021. During the year ended December 31, 2018,2021, Net cash inflow from financing activities primarily related to the Groupcash proceeds of $500.0 million from the investment in Farfetch China by Alibaba and Richemont during the year. During the year ended December 31, 2020, Net cash inflow from financing activities primarily related to the cash proceeds from the issuance of three convertible senior notes during the year for total aggregate principal amounts of $250 million, $400 million and $600 million.
Indebtedness
On February 5, 2020, we completed the private placement of convertible senior notes to Tencent and Dragoneer (together, the “Purchasers”), pursuant to which we received $250 million and issued the February 2020 Notes to the Purchasers. The February 2020 Notes will mature on December 31, 2025, unless earlier converted, redeemed or repurchased in accordance with their terms. The February 2020 Notes are our senior, unsecured obligations and bear interest at a rate of 5% per year, payable quarterly in arrears on March 31, June 30, September
96
30, and December 31 of each year, commencing on March 31, 2020. The February 2020 Notes may be converted at any time until the close of business on the second scheduled trading day immediately before the maturity date, at an initial conversion price of $12.25. Upon conversion, the February 2020 Notes will be settled, at our election, in our Class A ordinary shares, cash, or a combination of cash and Class A ordinary shares (subject to certain exceptions set forth in the Indenture). Holders of the February 2020 Notes will have the right to require us to repurchase all or some of their February 2020 Notes for cash at 100% (or 150%, in the event of a change in control, as defined in the Indenture) of their principal amount, plus all accrued and unpaid interest to, and including, the maturity date, upon the occurrence of certain corporate events, subject to certain conditions.
We may not redeem the February 2020 Notes prior to the fourth anniversary of the closing date, unless certain changes in tax law or other related events occur. We may redeem all, but not less than all, of the February 2020 Notes, at our option, four years after the closing date, but on or before the 35th scheduled trading day immediately preceding the maturity date, at a redemption price equal to 165% of the principal amount of the February Notes to be redeemed, plus accrued and unpaid interest to, and excluding, the redemption date.
On April 30, 2020, we completed the private placement of convertible senior notes to qualified institutional buyers, pursuant to which we received $390 million net proceeds and issued the April 2020 Notes to the institutional buyers. The April 2020 Notes will mature on May 1, 2027 unless earlier converted, redeemed or repurchased in accordance with their terms. The April 2020 Notes are our senior, unsecured obligations and bear interest at a rate of 3.75% per year, payable semi-annually in arrears on May 1 and November 1 of each year, commencing on 1 November 1, 2020. The April 2020 Notes may be converted at an initial conversion price of $16.13 per share. The April 2020 Notes may only be converted under the following circumstances; (i) during any calendar quarter commencing after the calendar quarter ending on September 30, 2020 (and only during such quarter), if the last reported sale price per ordinary share exceeds 130% of the conversion price for each of at least twenty trading days (whether or not consecutive) during the thirty consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter; and (ii) during the five days immediately after any ten-day period in which the trading price per $1,000 principal of notes each day was less than 98% of the product of the last reported share price on such day and the conversion rate. Upon conversion, the April 2020 Notes will be settled, at our election, in our Class A ordinary shares, cash, or a combination of cash and Class A ordinary shares (subject to certain exceptions set forth in the Indenture). Holders of the April 2020 Notes will have the right to require us to repurchase all or some of their April 2020 Notes for cash at 100% of their principal amount, plus all accrued and unpaid interest to, and including, the maturity date, upon the occurrence of certain corporate events, subject to certain conditions.
Farfetch may redeem the April 2020 Notes for cash at any time prior to maturity, if certain tax-related events occur on or after May 6, 2024 and on or before the 35th scheduled trading day before the maturity date, at its option, if the last reported sale of Farfetch’s Class A ordinary shares exceeds 130% of the conversion price for a specified period of time. The redemption price will equal the principal amount of the notes to be redeemed, plus accrued and unpaid interest.
On November 17, 2020, we completed the placement of convertible senior notes to Alibaba and Richemont for total gross proceeds of $600 million. The November 2020 Notes will mature on November 15, 2030 unless earlier converted, redeemed or repurchased in accordance with their terms. The November 2020 Notes will not bear regular interest, and the principal amount of the November 2020 Notes will not accrete. At any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date, a holder may convert the November 2020 Notes at its option at an initial conversion price of approximately $32.29, which reflects a 22% premium to the volume-weighted average price over the trailing 30 trading-day period ended on October 30, 2020. Upon conversion, the November 2020 Notes will be settled in Class A ordinary shares of Farfetch (with our right, in certain circumstances, to settle the November 2020 Notes in its Class A ordinary shares, cash or a combination thereof, at Farfetch’s election). If certain events occur that constitute a “fundamental change” (as defined in the indenture governing the terms of the November 2020 Notes), holders of the November 2020 Notes will have the right to require the Company to repurchase all or some of their November 2020 Notes for cash at a repurchase price equal to 100% of their principal amount, plus all accrued and unpaid special interest, if any, to, and including, the maturity date. Farfetch will, under certain circumstances, increase the conversion rate for holders who convert the November 2020 Notes in connection with a fundamental change.
97
Alibaba and Richemont may require us to repurchase all or part of their respective November 2020 Notes on June 30, 2026 at a repurchase price equal to 100% of the principal amount of the November 2020 Notes to be repurchased, plus accrued and unpaid special interest, if any, to, but excluding, such repurchase date.
We will not be able to redeem the November 2020 Notes prior to November 15, 2023, except in the event of certain tax law changes. On or after November 15, 2023, we may redeem, for cash, all or part of the relevant November 2020 Notes if the last reported sale price of its Class A ordinary shares has appliedbeen at least 130% (or 200%, if over 5% of the below amendmentsrelevant November 2020 Notes are held at the time by Alibaba or Richemont) of the conversion price then in effect for at least twenty trading days (whether or not consecutive) during any thirty consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide notice of the redemption, at a redemption price equal to IFRSs100% of the principal amount of the November 2020 Notes to be redeemed, plus accrued and unpaid special interest, if any, to, but excluding, the redemption date.
On May 17, 2021, a total of 3,190,345 shares were issued on conversion of $39.1 million principal amount of February 2020 Notes. No gain or loss was recognized on conversion. On conversion, non-current borrowings with a carrying value of $28.4 million and non-current derivative financial liabilities with a fair value of $90.6 million were reclassified to equity. The increase in equity resulted in an increase to share capital of $0.1 million and to share premium of $118.9 million.
On August 6, 2021, a total of 7,013,405 shares were issued on conversion of $85.9 million principal amount of February 2020 Notes. No gain or loss was recognized on conversion. On conversion, non-current borrowings with a carrying value of $63.1 million and non-current derivative financial liabilities with a fair value of $241.6 million were reclassified to equity. The increase in equity resulted in an increase to share capital of $0.3 million and to share premium of $304.4 million.
On October 1, 2021, a total of 6,122,250 shares were issued on conversion of $75.0 million principal amount of February 2020 Notes. No gain or loss was recognized on conversion. On conversion, non-current borrowings with a carrying value of $55.2 million and non-current derivative financial liabilities with a fair value of $152.8 million were reclassified to equity. The increase in equity resulted in an increase to share capital of $0.2 million and to share premium of $207.7 million.
Share-Based Payments
Employees receive remuneration in the form of share-based payments in the form of either equity or cash settled depending on the scheme. For further details, refer to Note 2.3 (p), Summary of significant accounting policies – Share-based payments, within our Consolidated financial statements included elsewhere in this Annual Report.
Off-Balance Sheet Arrangements
In the ordinary course of business, we enter into lease commitments and capital commitments. These transactions are recognized in the Consolidated financial statements in accordance with IFRS, as issued by the IASB, thatand are mandatorily effective for an accounting period that began on or after January 1, 2018. Their adoption has not had any material impact on the disclosures or on the amounts reported in these financial statements.more fully disclosed therein.
IFRS 9 Financial Instruments (effective January 1, 2018)
IFRS 2 (amendments) Classification and MeasurementAs of Share based Payment Transactions (effective January 1, 2018)
The adoption of IFRS 9 and IFRS 2 (amendments) did notDecember 31, 2021, there were no off-balance sheet arrangements reasonably likely to have a material impact on our reported assets and liabilities and profit or loss.
IFRS 15 was early adopted by the Group on January 1, 2017.
New and Revised Standards in Issue But Not Yet Effective
At the date of authorization of the financial statements, we have not applied the following new and revised standards that have been issued but are not yet effective:
IFRS 16 Leases (effective January 1, 2019)
IFRS 16 will require lease liabilities and right of use assets for leases to be recognizedeffect on the Statement of Financial Position. We have completed an impact assessment. This assessment indicates that there will be a significant impact on the value of non-current assets and lease liabilities as the leases for office, production and retail space are currently accounted for as operating leases. For the current level of operating lease commitments refer to theGroup.
98
Contractual obligations
The following table sets forth our contractual obligations table above. There will be an immaterial impact on the reported results for the year.as of December 31, 2021:
| Payments due by period |
| ||||||||||||||
Contractual Obligations |
| Less than one year |
|
| One to three years |
|
| Three to five years |
|
| More than five years |
| ||||
| (in thousands) |
| ||||||||||||||
Long term debt |
| $ | - |
|
| $ | - |
|
| $ | 50,000 |
|
| $ | 1,000,000 |
|
Put and call option liabilities |
|
| 8,321 |
|
|
| 188,261 |
|
|
| 656,640 |
|
|
| - |
|
Finance leases |
|
| 54,216 |
|
|
| 73,685 |
|
|
| 51,124 |
|
|
| 90,801 |
|
Purchase Obligations |
|
| 168,019 |
|
|
| - |
|
|
| - |
|
|
| - |
|
Total |
| $ | 230,556 |
|
| $ | 261,946 |
|
| $ | 757,764 |
|
| $ | 1,090,801 |
|
Contractual obligations relate primarily to marketing, consulting, maintenance, license agreements, cloud services, and other third-party agreements.
C. Research and Development, Patents and Licenses, etc.
See Note 2.4 to11, Material gain or loss, within our consolidatedConsolidated financial statements includedinclude elsewhere in this Annual Report.
D. Trend Information
Other than as disclosed elsewhere in this Annual Report, we are not aware of any trends, uncertainties, demands, commitments or events since December 31, 2021 that are reasonably likely to have a material adverse effect on our revenues, income, profitability, liquidity or capital resources, or that would cause the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.
E. Critical Accounting Estimates and Judgments
Our consolidatedConsolidated financial statements are prepared in conformityaccordance with IFRS, as issued by the IASB. In preparing our audited consolidatedConsolidated financial statements, we make assumptions, judgments and estimates that can have a significant impact on amounts reported in our consolidated financial statements. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. We regularly reevaluatere-evaluate our assumptions, judgments and estimates. Our critical accounting estimates and judgments are described in Note 3, toCritical accounting judgments and key sources of estimation uncertainty, within our audited consolidatedConsolidated financial statements included elsewhere in this Annual Report.
70Reconciliations of Non-IFRS and Other Financial and Operating Metrics
We have included in this Annual Report certain financial measures not based on IFRS, including Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted EPS, Adjusted Revenue, Digital Platform Order Contribution and Digital Platform Order Contribution Margin (together, the “Non-IFRS Measures”), as well as operating metrics, including GMV, Digital Platform GMV, Brand Platform GMV, In-Store GMV, Active Consumers and AOV. See the definitions set forth below for a further explanation of these terms.
Management uses the Non-IFRS Measures:
• | as measurements of operating performance because they assist us in comparing our operating performance on a consistent basis, as they remove the impact of items not directly resulting from our core operations; |
99
• | for planning purposes, including the preparation of our internal annual operating budget and financial projections; |
• | to evaluate the performance and effectiveness of our strategic initiatives; and |
• | to evaluate our capacity to fund capital expenditures and expand our business. |
B. LiquidityThe Non-IFRS Measures may not be comparable to similar measures disclosed by other companies because not all companies and Capital Resourcesanalysts calculate these measures in the same manner. We present the Non-IFRS Measures because we consider them to be important supplemental measures of our performance, and we believe they are frequently used by securities analysts, investors and other interested parties in the evaluation of companies. Management believes that investors’ understanding of our performance is enhanced by including the Non-IFRS Measures as a reasonable basis for comparing our ongoing results of operations. Many investors are interested in understanding the performance of our business by comparing our results from ongoing operations period over period and would ordinarily add back non-cash expenses such as depreciation, amortization and items that are not part of normal day-to-day operations of our business. By providing the Non-IFRS Measures, together with reconciliations to IFRS, we believe we are enhancing investors’ understanding of our business and our results of operations, as well as assisting investors in evaluating how well we are executing our strategic initiatives.
GeneralItems excluded from the Non-IFRS Measures are significant components in understanding and assessing financial performance. The Non-IFRS Measures have limitations as analytical tools and should not be considered in isolation, or as an alternative to, or a substitute for profit/(loss) after tax, revenue or other financial statement data presented in our Consolidated financial statements as indicators of financial performance. Some of the limitations are:
• | such measures do not reflect revenue related to fulfilment, which is necessary to the operation of our business; |
• | such measures do not reflect our expenditures, or future requirements for capital expenditures or contractual commitments; |
• | such measures do not reflect changes in our working capital needs; |
• | such measures do not reflect our share-based payments, income tax benefit/(expense) or the amounts necessary to pay our taxes; |
• | although depreciation and amortization are not included in the calculation of Adjusted EBITDA, the assets being depreciated and amortized will often have to be replaced in the future and such measures do not reflect any costs for such replacements; and |
• | other companies may calculate such measures differently than we do, limiting their usefulness as comparative measures. |
Due to these limitations, Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted Revenue should not be considered as measures of discretionary cash available to us to invest in the growth of our business and are in addition to, not a substitute for or superior to, measures of financial performance prepared in accordance with IFRS. In addition, the Non-IFRS Measures we use may differ from the non-IFRS financial measures used by other companies and are not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with IFRS. Furthermore, not all companies or analysts may calculate similarly titled measures in the same manner. We compensate for these limitations by relying primarily on our IFRS results and using the Non-IFRS Measures only as supplemental measures.
AsDigital Platform Order Contribution and Digital Platform Order Contribution Margin are not measurements of December 31, 2018, we had cashour financial performance under IFRS and cash equivalents of $1,044.8 million. Our cash and cash equivalents consist primarily of cashdo not purport to be alternatives to gross profit or profit/(loss) after tax derived in bank accounts and deposits in money market funds.
Since our inception, we have financed our operations primarily through equity issuances and cash generated from our operating activities. Our primary requirements for liquidity and capital are to finance working capital, capital expenditures and general corporate purposes.accordance with IFRS. We believe that Digital Platform Order Contribution and Digital Platform Order Contribution Margin are useful measures in evaluating our sourcesoperating performance within our industry because they permit the evaluation of liquidityour digital platform productivity, efficiency and capital will be sufficientperformance. We also believe that Digital Platform Order Contribution and Digital Platform Order Contribution Margin are useful measures in evaluating our
100
operating performance because they take into account demand generation expense and are used by management to meetanalyze the operating performance of our business needs indigital platform for the next 12 months. Our capital expenditure consists primarily of technology development costs, computer equipment and the fit out and improvements to our offices.periods presented.
The following table shows summary consolidated cash flow information forreconciles Adjusted EBITDA and Adjusted EBITDA Margin to the periods presented.most directly comparable IFRS financial measures, which are (loss)/profit after tax and (loss)/profit after tax margin:
|
| Year ended December 31, |
| |||||||||
|
| 2016 |
|
| 2017 |
|
| 2018 |
| |||
|
| (in thousands) |
| |||||||||
Net cash outflow from operating activities |
| $ | (47,079 | ) |
| $ | (59,320 | ) |
| $ | (116,205 | ) |
Net cash outflow from investing activities |
|
| (16,961 | ) |
|
| (28,863 | ) |
|
| (63,538 | ) |
Net cash inflow from financing activities |
|
| 161,173 |
|
|
| 300,142 |
|
|
| 859,526 |
|
Net increase in cash and cash equivalents |
| $ | 97,133 |
|
| $ | 211,959 |
|
| $ | 679,783 |
|
|
| Year Ended December 31, |
| |||||||||
|
| 2019 (1) |
|
| 2020 (1) |
|
| 2021 |
| |||
|
| (in thousands) |
| |||||||||
(Loss)/profit after tax (1) |
| $ | (393,500 | ) |
| $ | (3,315,623 | ) |
| $ | 1,470,611 |
|
Net finance (income)/expense (1) |
|
| (15,150 | ) |
|
| 66,595 |
|
|
| 73,842 |
|
Income tax expense/(benefit) |
|
| 1,162 |
|
|
| (14,434 | ) |
|
| 3,002 |
|
Depreciation and amortization |
|
| 113,591 |
|
|
| 217,223 |
|
|
| 251,198 |
|
Share-based payments (1) (2) |
|
| 178,234 |
|
|
| 291,633 |
|
|
| 196,167 |
|
(Gains)/losses on items held at fair value and remeasurements (3) |
|
| (21,721 | ) |
|
| 2,643,573 |
|
|
| (2,023,743 | ) |
Other items (4) |
|
| 16,374 |
|
|
| 24,267 |
|
|
| 18,730 |
|
Impairment losses on tangible assets |
|
| - |
|
|
| 2,991 |
|
|
| - |
|
Impairment losses on intangible assets |
|
| - |
|
|
| 36,269 |
|
|
| 11,779 |
|
Share of results of associates |
|
| (366 | ) |
|
| 74 |
|
|
| 52 |
|
Adjusted EBITDA |
| $ | (121,376 | ) |
| $ | (47,432 | ) |
| $ | 1,638 |
|
Revenue |
| $ | 1,021,037 |
|
| $ | 1,673,922 |
|
| $ | 2,256,608 |
|
(Loss)/profit after tax margin (1) |
|
| (38.5 | %) |
| (198.1)% |
|
| 65.2% |
| ||
Adjusted Revenue |
| $ | 893,077 |
|
| $ | 1,460,694 |
|
| $ | 1,924,104 |
|
Adjusted EBITDA Margin |
| (13.6)% |
|
| (3.2)% |
|
| 0.1% |
|
(1) | Refer to Note 2, Significant accounting policies, within our Consolidated financial statements included elsewhere in this Annual Report for detail on the revision of prior year comparatives. |
(2) | Represents share-based payment expense. |
(3) | Represents losses/(gains) on items held at fair value and remeasurements. See “gains/(losses) on items held at fair value and remeasurements” below for a breakdown of these items. |
(4) | Represents other items, which are outside the normal scope of our ordinary activities. See “other items” below for a breakdown of these items. Other items is included within selling, general and administrative expenses. |
The following table reconciles Adjusted Revenue to the most directly comparable IFRS financial performance measure, which is revenue:
|
| Year ended December 31, |
| |||||||||
|
| 2019 |
|
| 2020 |
|
| 2021 |
| |||
|
| (in thousands) |
| |||||||||
Revenue |
| $ | 1,021,037 |
|
| $ | 1,673,922 |
|
| $ | 2,256,608 |
|
Less: Digital Platform Fulfilment Revenue |
|
| (127,960 | ) |
|
| (213,228 | ) |
|
| (332,504 | ) |
Adjusted Revenue |
| $ | 893,077 |
|
| $ | 1,460,694 |
|
| $ | 1,924,104 |
|
Net Cash Outflow From Operating Activities101
Net cash outflow from operating activities increased to $116.2 million in the year ended December 31, 2018 from $59.3 million in the year ended December 31, 2017, an increase of $56.9 million, or 96.0%. The increase was primarily due to an increase in the loss after tax from $112.3 million to $155.6 million.
Net cash outflow from operating activities increased to $59.3 million in the year ended December 31, 2017 from $47.1 million in the year ended December 31, 2016, an increase of $12.2 million, or 26.0%, primarily due to an increase in the loss after tax from $81.5 million to $112.3 million, which was partially offset by favorable net working capitalfollowing tables reconcile Digital Platform Order Contribution and foreign exchange movements. Favorable working capital movements are a function of our business model, in which we collect cash from consumers on average 45 days before we remitDigital Platform Order Contribution Margin to the sellers.most directly comparable IFRS financial performance measures, which are Digital Platform Gross Profit and Digital Platform Gross Profit Margin:
Net Cash Outflow From Investing Activities
| Year ended December 31, |
| ||||||||||
|
| 2019 |
|
| 2020 |
|
| 2021 |
| |||
|
| (in thousands) |
| |||||||||
Digital Platform Gross Profit |
| $ | 371,913 |
|
| $ | 560,206 |
|
| $ | 730,253 |
|
Less: Demand generation expense |
|
| (151,350 | ) |
|
| (198,787 | ) |
|
| (291,821 | ) |
Digital Platform Order Contribution |
| $ | 220,563 |
|
| $ | 361,419 |
|
| $ | 438,432 |
|
Digital Platform Services Revenue |
| $ | 701,246 |
|
| $ | 1,033,156 |
|
| $ | 1,385,678 |
|
Digital Platform Gross Profit Margin |
| 53.0% |
|
| 54.2% |
|
| 52.7% |
| |||
Digital Platform Order Contribution Margin |
| 31.5% |
|
| 35.0% |
|
| 31.6% |
|
Net cash outflow from investing activities increased to $63.5 million in the year ended December 31, 2018, from $28.9 million in the year ended December 31, 2017, an increase of $34.6 million, or 119.7%. The increase was primarily due to our continued investment in technology development (increasing from $19.0 million to 51.0 million over the period) as discussed above. In line with headcount growth, we have increased investments in office facilities and computer equipment spend, increasing from $12.6 million to $21.1 million over the line period.
Net cash outflow from investing activities increased to $28.9 million in the year ended December 31, 2017, from $17.0 million in the year ended December 31, 2016, an increase of $11.9 million, or 70.2%, primarily due to our continued investment in technology development (increasing from $12.6 million to $19.0 million over the period) as discussed above. In line with headcount growth, we have increased investments in office facilities and computer equipment spend, increasing from $6.0 million to $12.6 million over the period.
Net Cash Inflow From Financing Activities
The increase in cash from financing activities was primarily driven by our IPO in the third fiscal quarter of 2018 which raised $775.7 million, net of issue costs. Other contributing factors include the series G funding round follow-on where the company raised $82.3 million, net of issue costs.
71
Employees receive remuneration in the form of share based payments in the from either equity or cash settled depending on the scheme. For further details, See Note 2.3 (o), “Summary of significant accounting policies” to our audited consolidated financial statements included elsewhere in this Annual Report for further detail.
C. Research and Development, Patents and Licenses, etc.
See Note 10 to our consolidated financial statements included in this Annual Report.
Other than as disclosed elsewhere in this Annual Report, we are not aware of any trends, uncertainties, demands, commitments or events since December 31, 2018 that are reasonably likely to have a material adverse effect on our revenues, income, profitability, liquidity or capital resources, or that would cause the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.
E. Off-Balance Sheet Arrangements
In the ordinary course of business, we enter into operating lease commitments and capital commitments. These transactions are recognized in the consolidated financial statements in accordance with IFRS, as issued by the IASB, and are more fully disclosed therein.
As of December 31, 2018, we had not entered into any other off-balance sheet transactions.
F. Tabular Disclosure of Contractual Obligations
The following table sets forth our contractual obligations as of December 31, 2018:reconciles Adjusted EPS to the most directly comparable IFRS financial performance measure, which is Earnings per share:
|
| Payments due by period |
| |||||||||||||||||
Contractual Obligations |
| Total |
|
| Less than 1 year |
|
| 1-3 years |
|
| 3-5 years |
|
| more than 5 years |
| |||||
Operating Lease Obligations |
| $ | 103,034 |
|
| $ | 15,820 |
|
| $ | 26,599 |
|
| $ | 22,584 |
|
| $ | 38,031 |
|
Total |
| $ | 103,034 |
|
| $ | 15,820 |
|
| $ | 26,599 |
|
| $ | 22,584 |
|
| $ | 38,031 |
|
| Year ended December 31, |
| ||||||||||
|
| 2019 (1) |
|
| 2020 (1) |
|
| 2021 |
| |||
|
|
|
| |||||||||
Basic (loss)/earnings per share (1) |
| $ | (1.27 | ) |
| $ | (9.69 | ) |
| $ | 4.02 |
|
Share-based payments (1) (2) |
|
| 0.56 |
|
|
| 0.85 |
|
|
| 0.54 |
|
Amortization of acquired intangible assets |
|
| 0.17 |
|
|
| 0.36 |
|
|
| 0.36 |
|
(Gains)/losses on items held at fair value and remeasurements (3) |
|
| (0.07 | ) |
|
| 7.69 |
|
|
| (5.55 | ) |
Other items (4) |
|
| 0.05 |
|
|
| 0.07 |
|
|
| 0.05 |
|
Impairment losses on tangible assets |
|
| - |
|
|
| 0.01 |
|
|
| - |
|
Impairment losses on intangible assets |
|
| - |
|
|
| 0.11 |
|
|
| 0.03 |
|
Share of results of associates |
|
| - |
|
|
| 0.0 |
|
|
| - |
|
Adjusted (loss)/earnings per share |
| $ | (0.56 | ) |
| $ | (0.60 | ) |
| $ | (0.55 | ) |
(1) | Refer to Note 2, Significant accounting policies, within our Consolidated financial statements included elsewhere in this Annual Report for detail on the revision of prior year comparatives. |
(2) | Represents share-based payment expense on a per share basis. |
(3) | Represents losses/(gains) on items held at fair value and remeasurements on a per share basis. See “gains/(losses) on items held at fair value and remeasurements” below for a breakdown of these items. |
(4) | Represents other items, which are outside the normal scope of our ordinary activities on a per share basis. See “other items” below for a breakdown of these items. Other items is included within Selling, general and administrative expenses. |
See the section entitled "Cautionary Statement Regarding Forward-Looking Statements" at the beginning of this Annual Report.
72102
ItemThe following table represents gains/(losses) on items held at fair value and remeasurements:
| Year ended December 31, |
| ||||||||||
|
| 2019 |
|
| 2020 |
|
| 2021 |
| |||
| (in thousands) |
| ||||||||||
Fair value remeasurements: |
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued as part of New Guards acquisition |
| $ | (21,526.00 | ) |
| $ | - |
|
| $ | - |
|
$250 million 5.00% Notes due 2025 embedded derivative |
|
| - |
|
|
| (978,254 | ) |
|
| 484,529 |
|
$400 million 3.75% Notes due 2027 embedded derivative |
|
| - |
|
|
| (1,103,944 | ) |
|
| 724,690 |
|
$600 million 0.00% Notes due 2030 embedded derivative |
|
| - |
|
|
| (272,522 | ) |
|
| 429,618 |
|
Fair value remeasurement of previously held equity interest |
|
| - |
|
|
| - |
|
|
| 784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value remeasurements: |
|
|
|
|
|
|
|
|
|
|
|
|
Chalhoub put option |
|
| 44,853 |
|
|
| (287,927 | ) |
|
| 156,072 |
|
CuriosityChina call option |
|
| (1,606 | ) |
|
| (926 | ) |
|
| - |
|
Palm Angels put call option and earn-out |
|
| - |
|
|
| - |
|
|
| (14,190 | ) |
Alibaba and Richemont put option |
|
| - |
|
|
| - |
|
|
| 246,105 |
|
Alanui put option |
|
| - |
|
|
| - |
|
|
| (3,865 | ) |
Gains/(losses) on items held at fair value and remeasurements |
| $ | 21,721 |
|
| $ | (2,643,573 | ) |
| $ | 2,023,743 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farfetch share price (end of day) |
| $ | 10.35 |
|
| $ | 63.81 |
|
| $ | 33.43 |
|
The following table represents other items:
| Year ended December 31, |
| ||||||||||
|
| 2019 |
|
| 2020 |
|
| 2021 |
| |||
|
| (in thousands) |
| |||||||||
Transaction-related legal and advisory expenses |
| $ | (15,374 | ) |
| $ | (24,598 | ) |
| $ | (18,596 | ) |
Release of tax provisions |
|
| 4,000 |
|
|
| - |
|
|
| - |
|
Loss on impairment of investments carried at fair value |
|
| (5,000 | ) |
|
| (235 | ) |
|
| (134 | ) |
Other |
|
| - |
|
|
| 566 |
|
|
| - |
|
Other items |
| $ | (16,374 | ) |
| $ | (24,267 | ) |
| $ | (18,730 | ) |
103
Item 6. Directors, Senior Management and Employees
A. Directors and Senior Management
Executive Officers and Board Members
The following table presents information about our current executive officers and members of our Board of Directors, including their ages as of February 28, 2019:January 31, 2022:
Name |
| Age |
| Position |
Executive Officers |
|
|
|
|
José Neves (4) |
|
|
| Chief Executive Officer and |
Elliot Jordan |
|
|
| Chief Financial Officer |
|
|
|
| Chief |
Board Members |
|
|
|
|
|
|
|
| Board Member |
|
|
|
| Board Member |
|
|
| ||
|
|
| ||
|
|
| ||
|
|
| ||
|
|
| ||
|
| 50 |
| Board Member |
|
|
| Board Member | |
Victor Luís (1)(3) | 55 | Board Member | ||
David Rosenblatt (2)(3) | 53 | Board Member | ||
Gillian Tans (1)(2) | 51 |
| Board Member |
(1) | Member of the |
(2) | Member of the |
(3) | Member of the |
(4) |
|
The current business addressesaddress for our executive officers and members of our Board of Directors is c/o Farfetch Limited, The Bower, 211 Old Street, London EC1V 9NR, United Kingdom.
Executive Officers
José Neves is our founder and has served as our Chief Executive Officer since 2008. He is also Co-ChairChairman of our Board. Mr. Neves has been involved in luxury fashion since the mid-1990s when he launched the footwear business SWEAR. Mr. Neves later founded SIX London, and in 2001, Mr. Neves opened the B-Store, which won the British Fashion Award for Retailer of the Year in 2006. Mr. Neves served on the British Fashion Council boardBoard from 2016 to 2018. Mr. Neves currently serves on the boardsBoard of Directors of several private companies. Mr. Neves studied Economics at the Universidade do Porto in Portugal.
Elliot Jordan has served as our Chief Financial Officer since 2015. Prior to joining us, Mr. Jordan was Director of Finance at ASOS.com, before which he held various senior finance roles at J Sainsbury plc. Mr. Jordan is a non-executive Board Member and Chair of the Audit Committee at HM Land Registry. Mr. Jordan holds a degree from the University of Waikato and is a qualified chartered accountant with the Chartered Accountants of Australia and New Zealand.
Andrew Robb
Stephanie Phair has served as our Chief OperatingCustomer Officer since 2010, beforeAugust 2019, prior to which heshe had served as our Chief Strategy Officer since November 2016. Ms. Phair was previously founder and President of TheOutnet.com and was part of the Managing DirectorExecutive team of Cocosa.com. Priorthe Net-a-Porter Group from 2009 to that, Mr. Robb held management positions2015. She has more than twenty years of luxury and e-commerce experience, having worked for Issey Miyake, American Vogue and at eBayPortero in New York. Most recently, she has consulted with a number of start-ups in the digital space and Peoplesound.com. Mr. Robbadvised private equity firms on investments. She is also an advisor for venture capital firm Felix Capital and sits on the Board of Moncler SpA. In May 2018, Ms. Phair was appointed as Chairman of the British Fashion Council. Ms. Phair holds a degreean MA in Politics, Philosophy and Economics from theOxford University of Oxford and an MBA from INSEAD.speaks four languages.
104
Board Members
Frederic CourtBiographical information for José Neves, our Chief Executive Officer and Chairman of the Board of Directors, may be found above in the section entitled “Executive Officers.”
Dana Evan has served as a non-executive director since April 2010. Mr. Court is the founder and managing partner of Felix Capital, a venture capital firm he launched in 2015. Mr. Court also has been a General Partner at Advent Ventures since 2001 with a global focus on investment opportunities in consumer internet, mobile and software. Mr. Court brings over 20 years’ experience in entrepreneurial investment in the technology industry.
73
Mr. Court currently serves on the boards of several private companies. Mr. Court holds a degree from ESSEC Business School in Paris.
Dana Evan has served as a non-executive directorDirector since April 2015. Ms. Evan is a venture partner at Icon Ventures and has invested in and served on the boardsBoards of companies in the internet, technology and media sectors since 2007. Between 1996 and 2007, Ms. Evan served as Chief Financial Officer of VeriSign, Inc. Between 2013 and 2020, Ms. Evan served as a venture partner at Icon Ventures. Ms. Evan brings over 25twenty-five years of executive leadership experience in global finance and operations management in the technology and media sectors. Ms. Evan currently serves on the boardsBoards and audit committees of Momentive Inc. (f/k/a Survey Monkey Inc.), Domo Inc., and Box, Inc. and Proofpoint, Inc. Ms. Evan also serves on the boards of several private technology companies. Ms. Evan has alsopreviously served on the boardBoard of directorsDirectors of Proofpoint, Inc. from 2008 until it was acquired by Thoma Bravo in September 2021, Criteo S.A. from 2013 to until July 2017, Fusion-IO, Inc. from 2011 tountil it was acquired by SanDisk in August 2014, Everyday Health Inc. until it was acquired by Ziff Davis, LLC in December 2016, Fusion-IO, Inc., which was acquired by SanDisk in August 2014 and Omniture, Inc., until it was acquired by Adobe Systems Inc. in 2009. In 2019, Ms. Evan was selected as the Director of the Year by the National Association of Corporate Directors. Ms. Evan holds a B.S. degree in Commerce from the University of Santa Clara and is a Certified Public Accountant (inactive).
Jon Kamaluddin
J. Michael Evans has served as a non-executive directorDirector since June 2015.December 2020. Mr. Kamaluddin brings over 16 yearsEvans has been the President of executive experienceAlibaba since September 2015 and has served on its Board of Directors since September 2014. Prior to this, Mr. Evans served as Vice Chairman of the Goldman Sachs Group, Inc. from February 2008 until his retirement in creative consumer brandsDecember 2013. From 2004 to 2013, Mr. Evans served as Godman Sachs Chairman of Asia Operations and related enabling-technologies investment, e-commercewas its Global Head of Growth Markets from January 2011 to December 2013. He also Co-Chaired the Business Standards Committee of Goldman Sachs from 2010 to 2013. Mr. Evans joined Goldman Sachs in 1993, became a Partner of the firm in 1994 and technology. Mr. Kamaluddin served asheld various leadership positions within the firm’s securities business while based in New York and London, including Global Head of Equity Capital Markets and Global Co-Head of the Equities Division, and Global Co-Head of the securities business. He is a Board Member of City Harvest, a Trustee of the Asia Society, a member of the boardAdvisory Council for the Bendheim Center for Finance at Princeton University, and in August 2014, he joined the Board of ASOS PLC between 2004Barrick Gold Corporation. Mr. Evans received his bachelor’s degree in politics from Princeton University in 1981.
Stephanie Horton has served as a non-executive Director since August 2020. A twenty-five-year veteran of the luxury fashion and 2013, while spending five yearsmarketing communities, Ms. Horton brings extensive experience in delivering creative marketing solutions for global brands. Ms. Horton has served as the Financial Director of Marketing for Google Shopping since August 2020. Previously, Ms. Horton served as a consultant Chief Executive Officer at Hemp Tailor, a designer of sustainable hemp clothing. From October 2017 to December 2019, Ms. Horton served as Chief Strategy Officer at Alexander Wang, where she was responsible for building international strategic partnerships for business growth opportunities as well as overseeing a range of strategic global functions. Prior to this, Ms. Horton served as Chief Marketing Officer at Farfetch from 2013 to 2017. Ms. Horton also served as the Head of Global Communications and the company Secretary before movingBrand Marketing at Shopbop.com from 2011 to the International2013 and served as Executive Director position. Mr. Kamaluddinof Creative Services at Vogue Magazine from 2006 to 2011 and as Director, Marketing Services at The New York Times, from 2001 to 2005. Ms. Horton also currently serves on the board of BCA Marketplace Plc, where he also serves as Chairman of the audit committee, and serves on the boardsBoard of several private companies as well. Hecompanies. Ms. Horton is also Chairmanthe joint co-founder of Fashion Tech Connects, an initiative created to increase the boardnumber of a private company. Mr. Kamaluddinwomen of color in fashion and tech positions. Ms. Horton holds a degree from the University of Bristol. Mr. Kamaluddin is a FellowMichigan and an MBA from DePaul University Kellstadt Graduate School of the Institute of Chartered Accountants in England and Wales.Business.
Dr. Jon Jainwen Liao, Ph.D.
Diane M. Irvinehas served as a non-executive directorDirector since February 2019. Dr. Liao isAugust 2020. Ms. Irvine previously served as Chief StrategyExecutive Officer of JD.comBlue Nile, Inc., an online retailer of diamonds and oversees the development of JD’s global strategy, innovation,fine jewelry, from 2008 to 2011, and corporate development. Prioras President from 2007 to joining JD.com in April 2017, Dr. Liao2008. Ms. Irvine also served as Professorthe Chief Financial Officer of StrategyBlue Nile from 1999 to 2007. Between 1994 and Innovation1999, Ms. Irvine served as Vice President and Associate DeanChief Financial Officer of Plum Creek Timber Company, Inc. and, from 1981 to 1994, Ms. Irvine served in various capacities, most recently as a Partner, at Cheung Kong Graduate SchoolCoopers & Lybrand LLP. Ms. Irvine has also previously served on the Boards of Business. Dr. LiaoDirectors of the XO Group, Inc. until its merger with WeddingWire in 2018 and Casper Sleep Inc. until it was acquired by Durational Capital Management, LP in January 2022. Ms. Irvine currently serves on the boardBoards and Audit Committees of Yelp Inc. and Funko, Inc. Ms. Irvine also serves on the Boards of several companies, including 361 Degrees International Limited, China United Network Communications Limited and Yonghui Superstores Co., Ltd., among others. Dr. Liaoprivate companies. Ms. Irvine holds a Ph.D.B.S. in Business Administration
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Accounting from Southern Illinois State University a master of artsand an M.S. in Foreign Economics and Management from Renmin University of ChinaTaxation and a bachelorDoctor of science in Industrial EngineeringHumane Letters from NortheasternGolden Gate University.
Dame Natalie Massenet, DBE
Victor Luís has served as a non-executive director and Co-Chair ofDirector since August 2020. Mr. Luís brings extensive luxury fashion experience to our Board, since February 2017. Ms. Massenet is currentlywith prior roles in luxury companies in key regions, including Asia-Pacific, particularly China and Japan, and North America. From January 2014 to September 2019, Mr. Luís served as the Co-Managing PartnerChief Executive Officer and on the Board of Imaginary Ventures, whose portfolio companies include Everlane, Reformation and Good American. In 2000, Ms. Massenet founded and launched her e-commerce venture, Net-A-Porter,Directors of Tapestry, Inc. (formerly known as Coach, Inc.), a multinational luxury fashion online retailer. Ms. Massenetcompany, where he led the transformation into Tapestry Inc., a New York-based house of modern luxury brands including Coach, Kate Spade and Stuart Weitzman. Previously, Mr. Luís served in a variety of leadership roles with increasing responsibility at Coach, Inc., beginning as President and Chief Executive Chairman until September 2015, when she stepped down followingOfficer of Coach Japan in 2006, and rapidly assumed additional leadership responsibilities globally, progressing to President and Chief Commercial Officer of Coach, Inc. in 2013. Prior to joining Coach, Inc., from 2002 to 2006, Mr. Luís was President and Chief Executive Officer of Baccarat, Inc., where he ran the YOOXNorth American operation of the French luxury brand. Mr. Luís joined the Moët-Hennessy Louis Vuitton Group in 1995, ultimately advancing to President and Net-a-Porter merger. Ms. MassenetChief Executive Officer of its subsidiary, Givenchy Japan Incorporated, before leaving in 2002. Mr. Luís currently serves on the boardBoard and Compensation Committee of Mothers for MothersDeckers Outdoor Corporation and previously served on the British Fashion Council as Chairman from 2012is an investor in and advisor to 2017. In 2009, Ms. Massenet was awarded an MBE and, in January 2016, she was made a Dame Commander of the Order of the British Empire. Both awards were in recognition of her contributions to the United Kingdom fashion and retail industries. Ms. Massenet holds a degree from University of California, Los Angeles.
Jonathan Newhouse has served as a non-executive director since July 2017. Mr. Newhouse has been Chairman of Condé Nast International, a media holding company, since 1991 and serves on the management board of Condé Nast U.S. Mr. Newhouse currently serves on the boards and committees of numerous Condé Nast International’s group and publication companies, including Tatler Publishing Company Limited and Interculture Communications Inc. Mr. Newhouse previously served as Executive Vice President of The New Yorker in the mid-1980s and then publisher of Details Magazine. Mr. Newhouse is also a founder and director of Child Priority Foundation, an Italy-based charitable organization, which was started in 2001. Mr. Newhouse was honored as Officer in the Order of Arts and Letters of France in 2008, and in 2017 was granted an honorary fellowship from Shenkar College in Tel Aviv, honoring him for his achievements and contribution to the fashion and publishing industries. Mr. Newhouse attended Yale College.
Danny Rimer has served as an observer since 2011 and as a non-executive director since February 2015. Mr. Rimer has been a general partner at Index Ventures, a venture capital firm, since 2002. Mr. Rimer currently serves as non-executive director on the boards of several private companies. From 2008 to 2015, Mr. Rimer served
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on the boards of Boku and British Sky Broadcasting Group plc, and from 2012 to 2015, he served on the board of Etsy Inc. Mr. Rimer also previously held board positions with Betfair, Dropbox and Skype. He was appointed an Officer of the Order of the British Empire (OBE) in 2017 for services to business and charity. Mr. RimerLuís holds a degree from Harvard University.
Michael A. Risman has served as a non-executive director since April 2014. Mr. Risman is Managing Partner and a founding member of Vitruvian Partners, having co-founded the firm in 2006. Prior to Vitruvian, Mr. Risman spent ten years at Apax Partners where he was a Global Equity Partner and led their Information Technology Investment Team in Europe. Between 2012 and 2016, Mr. Risman served as a non-executive director of Just Eat plc, and he previously served on the board of Dialog Semiconductor Plc. Mr. Risman currently serves on the boards of several private companies as non-executive director. Mr. Risman has aB.A. degree from the UniversityCollege of Cambridgethe Holy Cross in Massachusetts and an MBAM.A. in International Economics from Harvard Business School.Durham University.
David Rosenblatt has served as non-executive directorDirector since May 2017. Since 2011, Mr. Rosenblatt has served as the Chief Executive Officer of 1stdibs.com and also serves on their boardits Board of directors.Directors. From 2004 through 2008, Mr. Rosenblatt served as the Chief Executive Officer of DoubleClick. Following Mr. Rosenblatt’s sale of DoubleClick to Google in 2007, he served as Google’s President of Display Advertising until 2009. Mr. Rosenblatt currently serves on the boardsBoard of Twitter, where he serves on the Compensation and Nominating and Governance Committees, and on the Board of IAC/InterActive Corp, where he also serves on the Compensation Committee. He has previously served on the boardBoard of Narrative Science, Inc. and was Chairman and co-founder of Group Commerce, Inc.GSI Commerce. Mr. Rosenblatt has a degree from Yale University and an MBA from the Stanford University Graduate School of Business.
Gillian Tans has served as a non-executive Director since August 2020. Ms. Tans served as Chairwoman of Booking.com, an online worldwide travel agency and the largest brand of Booking Holdings Inc., from June 2019 to July 2021. Previously, Ms. Tans served as the President and Chief Executive Officer of Booking.com, where she was responsible for overseeing all of Booking.com’s functional departments and operations, from January 2015 and April 2016, respectively, until June 2019. Ms. Tans served as Booking.com’s Chief Operating Officer from September 2011 to April 2016 and as Booking.com’s Director of Hotels & Content from 2002 to 2011. Before joining Booking.com, Ms. Tans served in a variety of roles with increasing responsibility at the Golden Tulip Worldwide hotel group, where she served as Product Manager, Marketing Manager and Director of Sales. Ms. Tans has also worked for the Intercontinental Hotel Group and with a number of independent hotels. Ms. Tans began her career at Hershey Entertainment and Resorts. Ms. Tans also serves on the Boards of multiple private companies.
Director Nomination and Appointment Rights
In connection with Kadi Group’sAlibaba’s purchase of shares of Farfetch.com, Kadi Groupthe November 2020 Notes, Alibaba nominated J. Michael Evans, Alibaba’s President, to serve on our Board, and Alibaba and José Neves, amongst others, entered into a commitment agreement, as amended, pursuant to which Mr. Neves agreed to exercise all voting rights held directly or indirectly by him in favor of any shareholder resolution proposing to appoint Mr. Liu, the Chairman and Chief Executive Officer and controlling shareholder of JD.com, a former director on our Board, as a director of the Company and to use all reasonable endeavors to seek commitment from certain other investors to support Mr. Liu remaining as a director of the Company. In February 2019, the parties entered into an amended and restated commitment agreement providing that Dr. LiaoEvans, or another senior executive of JD.com designated by JD.com serve on our board, provided that Dr. Liao or such other JD.com designee be recommended for such Board service by our nominating and corporate governance committee. The amended and restated commitment agreement is otherwise substantively similar to the original commitment agreement and provides that Mr. Neves will exercise all voting rights held by him in favor of any shareholder resolution proposing to appoint Dr. Liao, or other designated JD.comAlibaba senior executive as a director of the Company and to use all reasonable endeavors to seek commitment from certain other investors to support Dr. Liao remaining as a director of the Company.Director on our Board. This obligation is conditional on JD.com holding noAlibaba continuing to hold not less than 33,658,328 Class A ordinary shares (subject to appropriate adjustment for any share split, consolidation or similar event). See Item 7. “Major Shareholders75% (based on its aggregate interest in us and Related Party Transactions—B. Related party transactions.”Farfetch China) of its initial interest in us immediately following completion of the Farfetch China joint venture.
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B. Compensation
Compensation
We set out below the amount of compensation paid and benefits in kind provided by us or our subsidiaries to our executive officers and members of our Board of Directors for services in all capacities to us or our subsidiaries for the year ended December 31, 2018,2021, as well as the amount contributed by us or our subsidiaries to retirement benefit plans for our executive officers and members of our Board.Board of Directors.
Executive Officer and Board Member Compensation
The compensation for each of our executive officers is comprised of the following elements: base salary, an annual incentive tied to achievement of companyCompany and individual performance, contractual benefits, and pension contributions.contributions; except that our Chief Executive Officer does not receive a base salary. Total cash compensation paid and benefits in kind provided to our executive officers and members of our Board of Directors for the year ended December 31, 20182021 was $1.5 million.$2,491,865. In addition, excluding the CEO PSU Grant (defined below), our executive officers and members
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of our Board of Directors were granted an aggregate of 8,445,0009,072,806 shares (equivalent to a value of $115,511,850, based on the accounting fair value as of the grant date), comprised of restricted stock units and shares subject to stock options, in the year ended December 31, 2018.
At the time of our IPO, we granted restricted stock units (A)2021 pursuant to be settled in 875,000 and 89,015 Class A ordinary shares to José Neves and David Rosenblatt, respectively, and (B) to be settled in 10,000 Class A ordinary shares to each of Dana Evan and Jon Kamaluddin, in each case under the 2018 Farfetch Employee Equity Plan (as defined below). The exercise price of the stock options granted to our executive officers and members of our Board of Directors during the year ended December 31, 2021 was $61.27. These grants vest in installments over time,stock options are subject to continued employment or service, as applicable.varying vesting schedules over a multi-year period.
Executive Officer Employment Agreements
In addition, in May 2021 Mr. Neves was granted a long-term incentive grant of performance-based restricted stock units which vest over an eight-year period based on the achievement of certain stock price hurdles (the “CEO PSU Grant”). The grant was for 8,440,000 performance-based restricted stock units and Board Member Service Agreementshada fair value upon grant of $99 million.
Our
As of December 31, 2021, excluding the CEO PSU grant, our executive officers each currently have an employment agreement providing for employment for an indefinite periodand members of time, subjectour Board of Directors held 5,048,463 stock options on the Company’s Class A ordinary shares; with exercise prices ranging from $3.60 to a six‑month (in$61.27 and expiration dates ranging from May 2026 to January 2031. These options were granted by the case of Mr. JordanCompany pursuant to the 2015 LTIP and Mr. Robb) or twelve‑month (in the case of Mr. Neves) notice period upon termination of employment by either the executive or us, other than terminations for gross misconduct.
We have also entered into written service agreements with each of Dana Evan, Jonathan Kamaluddin, David Rosenblatt and Natalie Massenet, providing for an indefinite period of service and the grant of equity awards. These agreements provide for a three‑month notice period upon termination of service by either party (other than terminations for misconduct), but do not provide for any other benefits upon a termination of service.2018 Plan (each defined below). We have not entered into written employmentset aside or service agreements withaccrued any amounts to provide pension, retirement or similar benefits to our executive officers or members of our other non‑employee directors in connection with such person’s service in such capacity. However, we may in the future enter into employment or service agreements with such individuals, the termsBoard of which may provide for, among other things, cash or equity based compensation and benefits.Directors.
Long-Term Incentive Plans
Farfetch.com Limited Enterprise Management Incentive Scheme
The Farfetch.com Limited Enterprise Management Incentive Scheme (the “EMI Plan”) allows for the grant of options to purchase Farfetch.com ordinary shares to eligible directors or employees of Farfetch.com or its subsidiaries. The EMI Plan is administered by our Board whose decisions on all disputes and matters concerning the interpretation of the rules are final. Options granted under the EMI Plan are governed by the rules of the EMI Plan, an option agreement entered into with each participant, and Schedule 5 of the Income Tax (Earnings and Pensions) Act 2003. Each of the options granted under the EMI Plan is fully vested and we expect the grants to be exercised prior to completion of this offering. The EMI Plan is closed to any new grants.
Farfetch.com Limited Share Option Scheme
The Farfetch.com Limited Share Option Scheme (the “Share Option Plan”) allows for the grant of options to purchase Farfetch.comClass A ordinary shares to eligible directorsDirectors or employees of Farfetch.com or our subsidiaries.employees. The Share Option Plan is administered by our Board of Directors whose decisions on all disputes and matters concerning the interpretation of the rules are final. Options granted under the Share Option Plan are governed by the rules of the Share Option Plan and an option agreement entered into with each participant. The options generally vest over four years from the date of grant of the option, subject to the participant’s continued employment by us. The Share Option Plan is closed to any new grants.
Farfetch.com Limited 2015 Long-Term Incentive Plan
The Farfetch.com Limited 2015 Long-Term Incentive Plan (the “LTIP”) allows for the grant of options to purchase Farfetch.comClass A ordinary shares, restricted shares and linked awards to eligible directorsDirectors or employees of usFarfetch or ourits subsidiaries. The LTIP is administered by our Board of Directors whose decisions on all disputes and matters concerning the interpretation of the rules are final. No restricted shares have been granted under the LTIP. Options granted pursuant to the LTIP vest over four years subject to the participant’s continued employment by us. The LTIP is closed to any new grants.
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Pursuant to the LTIP, we entered into linked award deeds (the “Linked Award Deeds”) with certain employees, which provide the employee with the simultaneous award of an option to purchase ordinary shares and
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the issuance of restricted linked Class A ordinary shares (together, a “Linked Award”). The restricted linked Class A ordinary shares are not transferable.
The restricted linked ordinary shares held by an employee converted into restricted Class A ordinary shares immediately prior to the Initial Public Offeringour initial public offering (“IPO”) in September 2018. On each occasion that thean employee proposes to realize the Linked Awards, a formula (as set out in the applicable Linked Award Deed) is applied to calculate how many linked shares will cease to be subject to restrictions on transfer to deliver to the employee the “in-the-money value” of the Linked Award (i.e., the market value of our Class A ordinary shares less the exercise price). If the in-the-money value of the vested Linked Award is delivered by the release of linked shares, the options purported to be exercised will lapse. To the extent thean employee does not hold a sufficient number of linked shares to deliver the in-the-money value of the Linked Award being exercised, then the remaining option will be exercised over Class A ordinary shares. As at December 31, 2018, there were 9,128,689 restricted linked Class A ordinary shares.
Additional Individual Option Schemes
We havepreviously entered into letter agreements with certain employees in connection with the recent acquisition of Fashion Concierge UK Limited (“the Fashion Concierge”Concierge letter agreements”). on October 31, 2017, as subsequently amended in August 2019. Pursuant to such letter agreements, certain employees will receivereceived a grant of our shares. No further shares if they (1) are employed (and have not yet served or been served a notice of termination) on the third anniversary of their employment commencement date with us or (2) cease employment priorwill be issued pursuant to the third anniversary of their employment commencement date with us due to a good leaver termination. The employees receive an additional grant of shares pursuant to such letter agreements, (the “Conditional Share Issuance”) if (1) they are employed (and have not yet served or been served a notice of termination) on December 31, 2020, or prior to this date, ceased to be employed due to a good leaver termination and (2) for the 2020 financial year a minimum weighted average commission of 7% has been achieved by Fashion Concierge. The number of shares issued under the Conditional Share Issuance varies depending on the net transaction value achieved by Fashion Concierge for the 2020 financial year.letter agreements.
2018 Farfetch Employee Equity Plan
We have adopted the 2018 Farfetch Employee Equity Plan (the “2018 Plan”), under which we may grant cash and equity-based incentive awards in order to attract, motivate and retain the talent for which we compete. The material terms of the 2018 Plan, are summarized below.
Eligibility and Administration. Ourour eligible employees, consultants and directors, are eligible to receive awards under the 2018 Plan.directors. The 2018 Plan is administered by our Board of Directors with respect to awards to non-employee directorsDirectors and by the compensation committeeCompensation Committee with respect to other participants, each of which may delegate its duties and responsibilities to committees of our directorsDirectors and/or officers (referred to collectively as the plan administrator“Plan Administrator,” below), subject to certain limitations that may be imposed under stock exchange rules. The plan administrator has the authority to make all determinations and interpretations under, prescribe all forms for use with, and adopt rules for the administration of, the 2018 Plan, subject to its express terms and conditions. The plan administrator also sets the terms and conditions of all awards under the 2018 Plan, including any vesting and vesting acceleration conditions.
Limitation on Awards and Shares Available. The aggregate number of our Class A ordinary shares that is available for issuance under awards granted pursuant to the 2018 Plan is equal to the sum of (i) 27,500,112 Class A ordinary shares and (ii) an annual increase on the first day of each year beginning in 2019 and ending in 2028, equal to the lesser of (A) 5% of the Class A ordinary shares outstanding (on an as-converted basis) on the last day of the immediately preceding fiscal year and (B) such smaller number of Class A ordinary shares as determined by our Board, provided, however, no more than 98,209,661 shares may be issued upon the exercise of incentive share options. The shares may be authorized but unissued shares, or shares purchased in the open market. If an award under the 2018 Plan is forfeited, expires or is settled for cash, any shares subject to such award may, to the extent of such forfeiture, expiration or cash settlement, be used again for new grants under the 2018 Plan. However, the following shares may not be used again for grant under the 2018 Plan: (1) shares tendered or withheld to satisfy grant or exercise price or tax withholding obligations associated with an award; (2) shares subject to a share
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appreciation right, or SAR, that are not issued in connection with the share settlement of the SAR on its exercise; and (3) shares purchased on the open market with the cash proceeds from the exercise of options.
Awards granted under the 2018 Plan upon the assumption of, or in substitution for, awards authorized or outstanding under a qualifying equity plan maintained by an entity with which we enter into a merger or similar corporate transaction will not reduce the shares available for grant under the 2018 Plan. The maximum amount of the grant date fair value of equity-based awards and the amount of any cash-based awards granted to a non-employee director pursuant to the 2018 Plan during any calendar year will be $1,000,000, increased to $1,500,000 in the fiscal year of his or her initial service as a non-employee director.
Awards. The 2018 Plan provides for the grant of share options, including incentive share options (“ISOs”) and nonqualified share options (“NSOs”) restricted shares, dividend equivalents, share payments, restricted share units (“RSUs”), performance shares, other incentive awards, share appreciation rights (“SARs”) and cash awards. No determination has been made as to the types or amounts of awards that will be granted to specific individuals pursuant to the 2018 Plan. Certain awards under the 2018 Plan may constitute or provide for a deferral of compensation, subject to Section 409A of the Code, which may impose additional requirements on the terms and conditions of such awards. All awards under the 2018 Plan will be set forth in award agreements, which will detail all terms and conditions of the awards, including any applicable vesting and payment terms and post- terminationpost-termination exercise limitations. Awards other than cash awards generally will be settled in Class A ordinary shares, but the plan administratorPlan Administrator may provide for cash settlement of any award.
Certain Transactions. The plan administrator has broad discretion to take action under the 2018 Plan, as well as make adjustments to the terms and conditions of existing and future awards, to prevent the dilution or enlargement of intended benefits and facilitate necessary or desirable changes in the event of certain transactions and events affecting our Class A ordinary shares, such as share dividends, share splits, mergers, acquisitions, consolidations and other corporate transactions. In addition, in the event of certain non-reciprocal transactions with our shareholders known as “equity restructurings,” the plan administrator will make equitable adjustments to the 2018 Plan and outstanding awards. In the event of a change in control of our Company (as defined in the 2018 Plan), to the extent that the surviving entity declines to continue, convert, assume or replace outstanding awards, then all such awards will become fully vested and exercisable in connection with the transaction. Upon or in anticipation of a change of control, the plan administrator may cause any outstanding awards to terminate at a specified time in the future and give the participant the right to exercise such awards during a period of time determined by the plan administrator in its sole discretion. Individual award agreements may also provide for additional accelerated vesting and payment provisions.
Non-U.S. Participants. The plan administrator may modify award terms, establish subplans and/or adjust other terms and conditions of awards, subject to the share limits described above, in order to facilitate grants of awards subject to the laws and/or stock exchange rules of countries outside of the United States.
Claw-Back Provisions, Transferability, and Participant Payments. All awards will be subject to the provisions of any claw- backclaw-back policy implemented by us to the extent set forth in such claw-back policy and/or in the applicable award agreement. With limited exceptions
UK Sub-plan
The Farfetch Employee Equity Sub-plan for estate planning, domestic relations orders, certain beneficiary designations and the laws of descent and distribution, awards under the 2018 Plan are generally non-transferable prior to vesting, and are exercisable only by the participant. With regard to tax withholding, exercise price and purchase price obligations arising in connection with awards under the 2018 Plan, the plan administrator may, in its discretion, accept cash or check, our Class A ordinary shares that meet specified conditions,United Kingdom employees (the “UK Sub-plan”) is a “market sell order” or such other consideration as it deems suitable.
Plan Amendment and Termination. Our Board may amend or terminate the 2018 Plan at any time; except in connection with certain changes in our capital structure. No award may be granted pursuantsub-plan to the 2018 Plan after the tenth anniversaryfor employees who are residents of the date on which our Board adoptsUnited Kingdom. The UK Sub-plan does not increase the share reserve under the 2018 Plan.
Section 162(m) Reliance Period. French Sub-plan
Our Compensation Committee approved the 2018 Farfetch Employee Equity Plan French Sub-plan for French employees on December 21, 2021 (the “French Sub-plan”). The 2018 Plan provides that to the maximum extent permitted under applicable law, all awards granted pursuantFrench Sub-plan is a sub-plan to the 2018 Plan shall be interpretedwhich allows for the grant of restricted share unit awards in a tax-efficient manner to qualify for any post-public offering reliance period deduction limit exception set forth in U.S. Treasury Regulation 1.162-27(f) (or any successor thereto). Under current law, for newly public companies, Section 162(m) offers a transition relief period during which time the $1,000,000 deduction limitationemployees who are residents of France. The French Sub-plan does not apply to certain plans or arrangements that existed
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beforeincrease the Company became publicly held. A company may generally rely on this transition relief period until the earliest of (i) the expiration of the plan; (ii) the material modification of the plan; (iii) the issuance of all employer share and other compensation allocatedreserve under the plan; or (iv) the first meeting of shareholders at which directors are to be elected that occurs after the close of the third calendar year following the calendar year in which the initial public offering occurs or, in the case of a private company that becomes publicly held without an initial public offering, the first calendar year following the calendar year in which the company becomes publicly held.2018 Plan.
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Indemnification
Our executive officers and Board members have the benefit of indemnification provisions in our Articles. These provisions giveOur Articles provide that our executiveBoard and officers shall be indemnified from and Board members the right, to the fullest extent permitted by law, to recover from us amounts, including but not limited to litigation expenses, and any damagesagainst all liability which they are ordered to pay,incur in relation to acts or omissions in the performanceexecution of their duties.duties in their respective offices, except liability incurred by reason of such Director’s or officer’s dishonesty, willful default or fraud.
Insofar as indemnification of liabilities arising under the Securities Act may be permitted to executive officers and Board members or persons controlling us pursuant to the foregoing provisions, we have been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
Board of Directors
We currently have ten directors, eight Directors, all of whom, other than Mr. Neves and Mr. Evans, have been determined by the Board to qualify as “independent” pursuant to the rules of the NYSE.Mr. Neves and Ms. Massenet areserves as the Co-ChairsChairman of our Board. Directors can be appointed and removed and/or replaced by an ordinary resolution of the shareholders. In addition, directorsDirectors may be appointed either to fill a vacancy arising from the resignation of a former directorDirector or as an addition to the existing Board by the affirmative vote of a simple majority of the directorsDirectors present and voting at a Board meeting, which shall include the affirmative vote of Mr. Neves for as long as he is a director. A director may also be removed by notice fromDirector. Until all of the other directors, which shall require the affirmative vote of Mr. Neves for as long as he is a director. Eachour Class B ordinary shares are converted into Class A ordinary shares, each of our directorsDirectors holds office until hehis or she resigns, retires by rotationher successor has been duly elected and qualified or is recused from office.until his or her earlier death, resignation or removal. Following such conversion, the Board of Directors will be divided into three classes, with those serving as Class I, Class II and Class III serving for terms expiring at the first, second and third annual general meetings, respectively, and thereafter for three-year terms, in each case, until his or her successor has been duly elected and qualified or until his or her earlier death, resignation or removal.
Board Committee Composition
The Board has established an audit committee;Audit Committee, a compensation committee;Compensation Committee, a Nominating and Corporate Governance Committee and an Environmental, Social and Governance Committee. Each of these committees is governed by a nominating and corporate governance committee.charter that is available on our website at www.farfetchinvestors.com. The information contained on our website is not incorporated by reference in this Annual Report.
Audit Committee
The audit committeeAudit Committee currently consists of Jon Kamaluddin, DanaMs. Evan, Ms. Irvine, Mr. Luís and Mike Risman,Ms. Tans, with Jon KamaluddinMs. Irvine serving as Chair. The audit committee consistAudit Committee consists exclusively of members of our Board of Directors who are financially literate, and each of Mr. Kamaluddin, Ms. Evan, Ms. Irvine and Mr. RismanLuís has been determined to qualify as an “audit committee financial expert” as defined by the SEC.applicable SEC rules. Our Board has determined that Mr. Kamaluddin , Ms. Evan, Ms. Irvine, Mr. Luís and Mr. RismanMs. Tans each satisfysatisfies the “independence” requirements set forth in Rule 10A-3 under the Exchange Act and has determined that the simultaneous service by Ms. Evan on the audit committeeAudit Committees of fourthree other public companies would not impair her ability to effectively serve on our audit committee. The audit committee is governed by a charter that complies with NYSE rules.Audit Committee.
The audit committeeAudit Committee is responsible for:
recommending the appointment of the independent auditor to the general meeting of shareholders;
the appointment, compensation, retention and oversight of any accounting firm engaged for, the purpose of preparing or issuing an audit report or performingamong other audit services;things:
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• | pre-approving the audit services and non-audit services to be provided by our independent |
evaluating the independent auditor’s qualifications, performance and independence on at least an annual basis;
| • | evaluating the independent registered public accounting firm’s qualifications, performance and independence on at least an annual basis; |
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• | reviewing and discussing with the Board and the independent |
reviewing our compliance with laws and regulations, including any initiatives or major litigation or investigations against us that may have a material impact on our financial statements, and assessing our risk management, compliance procedures and hiring of independent auditor employees; and
• | reviewing our compliance with laws and regulations, including any initiatives or major litigation or investigations against us that may have a material impact on our Consolidated financial statements, and assessing our risk management, compliance procedures and hiring of independent registered public accounting firm employees; |
• | approving or ratifying any related party transaction (as defined in our Related Parties Policy) in accordance with our Related Parties Policy; and |
approving or ratifying any related person transaction (as defined in our related person transaction policy) in accordance with our related person transaction policy.
• | reviewing with management and the independent registered public accounting firm, at least annually, our Code of Business Conduct and Ethics and reviewing and reassessing the adequacy of the procedures in place to enforce the Code of Business Conduct and Ethics. |
The audit committeeAudit Committee meets as often as one or more members of the audit committee deemAudit Committee deems necessary, but in any event meets at least four times per year.once during each fiscal quarter. The audit committeeAudit Committee meets at least once per year with our independent registered public accounting firm, without our executive officers being present.
Compensation Committee
The compensation committeeCompensation Committee currently consists of DanaMs. Evan, Danny Rimer, Frederic CourtMr. Rosenblatt and David RosenblattMs. Tans, with DanaMs. Evan serving as Chair. Under applicable SEC and NYSE rules, there are heightened independence standards for members of the compensation committee, including a prohibition against the receipt of any compensation from us other than standard Board fees.Compensation Committee. All of the members of our compensation committee membersCompensation Committee meet thisthese heightened standard.standards.
The compensation committeeCompensation Committee is responsible for:for, among other things:
identifying, reviewing and approving corporate goals and objectives relevant to executive officer compensation;
• | reviewing and approving corporate goals and objectives relevant to the compensation of our Chief Executive Officer and evaluating the Chief Executive Officer’s performance in light of these objectives and goals; |
analyzing the possible outcomes of the variable remuneration components and how they may affect the remuneration of our executive officers;
• | reviewing and setting compensation for our other executive officers and members of our executive team; |
evaluating each executive officer’s performance in light of such goals and objectives and determining each executive officer’s compensation based on such evaluation;
• | making recommendations to the Board in connection with the long-term incentive component of our management’s compensation in line with the remuneration policy and reviewing our management’s compensation and benefits policies generally; |
determining any long-term incentive component of each executive officer’s compensation in line with the remuneration policy and reviewing our executive officer compensation and benefits policies generally; and
• | reviewing and making recommendations to the Board of Directors regarding Director compensation; and |
reviewing and assessing risks arising from our compensation policies and practices for our employees and whether any such risks are reasonably likely to have a material adverse effect on us.
• | reviewing and assessing risks arising from our compensation policies and practices for our employees and whether any such risks are reasonably likely to have a material adverse effect on us. |
Nominating and Corporate Governance Committee
The nominatingNominating and corporate governance committeeCorporate Governance Committee currently consists of Natalie Massenet, DavidMs. Irvine, Mr. Luís and Mr. Rosenblatt, and Danny Rimer with Natalie MassenetMr. Luís serving as Chair.
The nominatingNominating and corporate governance committeeCorporate Governance Committee is responsible for:for, among other things:
identifying individuals qualified to become members of the Board and ensuring these individuals have the requisite expertise with sufficiently diverse and independent backgrounds;
• | identifying individuals qualified to become members of the Board of Directors and ensuring these individuals have the requisite expertise with sufficiently diverse and independent backgrounds; |
reviewing and evaluating the composition, function and duties of our Board;
• | reviewing and evaluating the composition, function and duties of our Board of Directors; |
recommending nominees for selection to our Board and its corresponding committees;
• | recommending nominees for selection to our Board of Directors and its corresponding committees; |
80110
| • | making recommendations to the |
• | leading the Board of Directors in a self-evaluation, at least annually, to determine whether it and its committees are functioning effectively; and |
• | developing and recommending to the Board of Directors our Corporate Governance Guidelines and reviewing and reassessing the adequacy of such Corporate Governance Guidelines and recommending any proposed changes to the Board of Directors. |
Environmental, Social and its committees are functioning effectively;Governance Committee
The Environmental, Social and Governance Committee currently consists of Ms. Evan, Ms. Horton and Mr. Neves, with Ms. Horton serving as Chair.
The Environmental, Social and Governance Committee is responsible for, among other things:
• | making recommendations to the Board of Directors for our general strategy, and overseeing our policies practices and performance, with regard to environmental, social and governance matters; |
overseeing and recommending for adoption by the general meeting of shareholders the compensation for our Board members; and
• | overseeing our reporting standards in relation to environmental, social and governance matters; and |
• | advising the Board of Directors on shareholder proposals and other significant stakeholder concerns relating to environmental, social and governance matters. |
developing and recommending to the Board our rules governing the Board and code of business conduct and ethics and reviewing and reassessing the adequacy of such rules governing the Board and Code of Business Conduct and Ethics and recommending any proposed changes to the Board.
Duties of Board Members and Conflicts of Interest
Under Cayman Islands law, our directorsDirectors have a duty to act in good faith and in what they consider to be in theour best interests of the Company.interests. Our directorsDirectors are required to exhibit, in the performance of their duties, both the degree of skill that may reasonably be expected to have from a subjective perspective determined by reference to each such director’sDirector’s knowledge and experience, and the skill and care objectively to be expected from a person occupying office as a director.Director. In fulfilling their duty of care to the Company,Farfetch, our directorsDirectors must ensure compliance with our Articles. In certain limited circumstances, a shareholder has the right to seek damages if a duty owed by our directorsDirectors is breached.
Under our Articles, directorsDirectors who are in any way, whether directly or indirectly, interested in a contract or proposed contract with our Companyus must declare the nature of their interest at a meeting of the Board of Directors or by notice in writing to the members of the Board.Board of Directors. If the majority of the Board of Directors determines that there is a conflict of any directorDirector (or theirher affiliates) with theour general business, of the Company, then the Board of Directors may determine to exclude such directorDirector from all further discussions of the Board of Directors and receipt of information, until such time as it is determined by the Board of Directors that the directorDirector is no longer in such conflict. Subject to the foregoing, a directorDirector may vote in respect of any contract or proposed contract notwithstanding hisher interest; provided that, in exercising any such vote, such director’sDirector’s duties remain as described above.
Executive Officer Employment Agreements and Board Member Service Agreements
Each of our executive officers currently has an employment agreement providing for employment for an indefinite period of time, subject to a six-month (in the case of Ms. Phair and Mr. Jordan) or twelve‑month (in the case of Mr. Neves) notice period upon termination of employment by either the executive or by us, other than terminations for gross misconduct.
In connection with the CEO PSU Grant, Mr. Neves also entered into a letter agreement pursuant to which he agreed to waive any cash and equity incentive compensation (other than the CEO PSU Grant) from 2021 through December 31, 2028.
We have entered into written service agreements with Ms. Evan and Mr. Rosenblatt, each of whom serves as a Director on our Board, providing for an indefinite period of service and the grant of equity awards. These agreements provide for a three-month notice period upon termination of service by either party (other than terminations for gross misconduct), but do not provide for any other benefits upon a termination of service. We have
111
entered into written offer letters with Mr. Evans, Ms. Horton, Ms. Irvine, Mr. Luís and Ms. Tans, each of whom serves as a Director on our Board, providing for an indefinite period of service, and with the exception of Mr. Evans, cash and equity-based remuneration. These offer letters provide for termination of service in accordance with our Articles, but do not provide for any other benefits upon a termination of service.
Alternate Directors
Our Articles provide, as allowed by the Companies Act, that any Director may, with the prior consent of the Board of Directors, subject to the conditions set thereto, appoint a person as an alternate to act in his or her place. Unless the appointing Director limits the time or scope of the appointment of the Alternate Director, the appointment is effective for all purposes until the appointing Director ceases to be a Director or the appointing Director removes the Alternate Director.
D. Employees
As of December 31, 2018,2021, we had a total of 3,232 Farfetchers, which included 1776,464 employees, including 321 Browns, 258 Stadium Goods and 600 New Guards employees and we had anexcluding additional 343 people working pursuant to freelance and consultancy contracts. Our Farfetchersemployees are based in 13nineteen countries and 47% territories, and 53%of our employees were female and 53% 47%were male as of December 31, 2018.2021. The table below sets out the number of Farfetchers excluding Browns employees by geography:geography.
Geography |
| As of December 31, |
| |
|
|
|
| |
Portugal |
|
|
|
|
United Kingdom |
|
|
|
|
United States of America |
|
|
|
|
|
|
|
| |
Italy | 510 |
| ||
Brazil |
|
|
| |
Russian Federation | 86 |
| ||
Japan |
|
|
| |
|
|
| ||
Hong Kong |
|
|
|
|
United Arab Emirates |
|
|
|
|
India |
|
|
|
|
|
|
|
|
|
Mexico |
|
|
| |
Canada | 2 | |||
Switzerland | 4 | |||
Saudi Arabia | 2 |
| ||
Australia |
|
| 1 |
|
Total |
|
|
|
|
81112
As of December 31, 2018,2021, approximately 38% 32%of our workforce consisted of technology and product specialists. The remainder was focused on all other business areas, including marketing, operations, production and other commercial and support functions. The table below sets out the number of employees, by category, as of December 31, 2018, 20172021, 2020 and 2016:2019:
Department |
| As of December 31, |
|
| As of December 31, |
|
| As of December 31, |
|
| As of December 31, |
|
| As of December 31, |
|
| As of December 31, |
| ||||||
|
| 2016 |
|
| 2017 |
|
| 2018 |
|
| 2019 |
|
| 2020 |
|
| 2021 |
| ||||||
Technology and Product |
|
| 494 |
|
|
| 802 |
|
|
| 1,241 |
|
|
| 1,465 |
|
|
| 1,629 |
|
|
| 1,912 |
|
Operations |
|
| 487 |
|
|
| 759 |
|
|
| 1,017 |
|
|
| 1,801 |
|
|
| 2,197 |
|
|
| 2,554 |
|
Browns |
|
| - |
|
|
| 133 |
|
|
| 177 |
| ||||||||||||
Marketing |
|
| 159 |
|
|
| 157 |
|
|
| 207 |
|
|
| 222 |
|
|
| 345 |
|
|
| 445 |
|
Commercial |
|
| 93 |
|
|
| 114 |
|
|
| 146 |
|
|
| 213 |
|
|
| 285 |
|
|
| 306 |
|
People |
|
| 50 |
|
|
| 100 |
|
|
| 125 |
|
|
| 184 |
|
|
| 197 |
|
|
| 245 |
|
Finance and Legal |
|
| 62 |
|
|
| 95 |
|
|
| 130 |
|
|
| 233 |
|
|
| 288 |
|
|
| 356 |
|
Data Department |
|
| 92 |
|
|
| 143 |
|
|
| 176 |
| ||||||||||||
Other |
|
| 47 |
|
|
| 127 |
|
|
| 189 |
|
|
| 322 |
|
|
| 357 |
|
|
| 470 |
|
Total |
|
| 1,392 |
|
|
| 2,287 |
|
|
| 3,232 |
|
|
| 4,532 |
|
|
| 5,441 |
|
|
| 6,464 |
|
We believe that we maintain a good working relationship with our people,employees, and we have not experienced any significant labor disputes or any difficulty in recruiting staff for our operations. Our employees are not represented by any collective bargaining agreements or labor unions, other than our employees in Italy and France, where collective bargaining agreements are mandatory, and in Brazil who are represented by two state-level labor unions, as required by law.
For information regarding the share ownership of directorsDirectors and officers, see “Itemrefer to Item 7. Major“Major Shareholders and Related Party Transactions – A. Major Shareholders.” For information as toregarding our equity incentive plans, see “Itemrefer to Item 6. Director,“Directors, Senior Management and Employees – B. Compensation – Long-Term Incentive Plans.”
Item 7. Major Shareholders and Related Party Transactions
The following table sets forth information relating to the beneficial ownership of our Class A ordinary shares and Class B ordinary shares as of January 31, 2019,February 14, 2022, for:
| (a) | each person, or group of affiliated persons, known by us to beneficially own 5% or more of our outstanding Class A ordinary shares or Class B ordinary shares; |
| (b) | each of our current executive officers and our |
| (c) | all of our current executive officers and our |
For further information regarding material transactions between us and principal shareholders, see “Related party transactions”Party Transactions” below.
The number of Class A ordinary shares and/or Class B ordinary shares beneficially owned by each entity, person, executive officer or Board member is determined in accordance with the rules of the SEC, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares over which the individual has sole or shared voting power or investment power as well as any shares that the individual has the right to acquire within 60sixty days of January 31, 2019February 14, 2022 through the exercise of any option, warrant or other right and the vesting of restricted linked ordinary shares.right. Except as otherwise indicated, and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all Class A ordinary shares or Class B ordinary shares held by that person. As of February 14, 2022, there were 338,457,816 Class A ordinary shares outstanding and 42,858,080 Class B ordinary shares outstanding.
82113
Unless otherwise indicated below, the address for each beneficial owner listed is c/o Farfetch Limited, The Bower, 211 Old Street, London EC1V 9NR, United Kingdom.
|
| Class A ordinary shares |
|
| Class B ordinary shares |
|
| Combined |
| |||||||||||
Name of beneficial owner |
| Number |
|
| Percent |
|
| Number |
|
| Percent |
|
| voting power (1) |
| |||||
Holders of 5% or Greater |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kadi Group Holding Limited(2) |
|
| 42,366,665 |
|
|
| 16.0 | % |
| - |
|
| - |
|
|
| 3.8 | % | ||
Index Ventures V (Jersey), L.P.(3) |
|
| 28,359,930 |
|
|
| 10.7 | % |
| - |
|
| - |
|
|
| 2.5 | % | ||
Advent Private Equity Fund(4) |
|
| 24,559,309 |
|
|
| 9.3 | % |
| - |
|
| - |
|
|
| 2.2 | % | ||
Farhold (Luxembourg)(5) |
|
| 22,047,241 |
|
|
| 8.3 | % |
| - |
|
| - |
|
|
| 2.0 | % | ||
Advance Publications(6) |
|
| 14,838,410 |
|
|
| 5.6 | % |
| - |
|
| - |
|
|
| 1.3 | % | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive Officers and Directors |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
José Neves(7) |
|
| 1,696,377 |
|
| * |
|
|
| 42,858,080 |
|
|
| 100 | % |
|
| 76.6 | % | |
Elliot Jordan(8) |
|
| 733,435 |
|
| * |
|
| - |
|
| - |
|
| * |
| ||||
Andrew Robb(9) |
|
| 1,812,910 |
|
| * |
|
| - |
|
| - |
|
| * |
| ||||
Frederic Court(10) |
|
| - |
|
| * |
|
| - |
|
| - |
|
| * |
| ||||
Dana Evan |
|
| 634,570 |
|
| * |
|
| - |
|
| - |
|
| * |
| ||||
Jon Kamaluddin(11) |
|
| 445,390 |
|
| * |
|
| - |
|
| - |
|
| * |
| ||||
Dr. Jon Jainwen Liao, Ph.D.(12) |
|
| - |
|
| * |
|
| - |
|
| - |
|
| * |
| ||||
Natalie Massenet(13) |
|
| 775,635 |
|
| * |
|
| - |
|
| - |
|
| * |
| ||||
Jonathan Newhouse(14) |
|
| - |
|
| * |
|
| - |
|
| - |
|
| * |
| ||||
Danny Rimer(15) |
|
| - |
|
| * |
|
| - |
|
| - |
|
| * |
| ||||
Mike Risman(16) |
|
| - |
|
| * |
|
| - |
|
| - |
|
| * |
| ||||
David Rosenblatt |
|
| 122,750 |
|
| * |
|
| - |
|
| - |
|
| * |
| ||||
Executive officers and directors as a group (12 persons)(17) |
|
| 6,221,067 |
|
|
| 2.4 | % |
|
| 42,858,080 |
|
|
| 100 | % |
|
| 77.0 | % |
|
| Class A ordinary shares |
|
| Class B ordinary shares (1) |
|
|
|
|
| ||||||||||
Name of beneficial owner |
| Number |
|
| Percent |
|
| Number |
|
| Percent |
|
| Combined voting power (2) |
| |||||
Holders of 5% or Greater |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
T. Rowe Price Associates (3) |
|
| 35,110,450 |
|
|
| 10.4 | % |
| - |
|
| - |
|
|
| 2.9 | % | ||
Baillie Gifford (4) |
|
| 30,400,596 |
|
|
| 9.0 | % |
| - |
|
| - |
|
|
| 2.5 | % | ||
Morgan Stanley (5) |
|
| 30,171,050 |
|
|
| 8.9 | % |
| - |
|
| - |
|
|
| 2.5 | % | ||
Lone Pine Capital LLC (6) |
|
| 24,439,933 |
|
|
| 7.2 | % |
| - |
|
| - |
|
|
| 2.0 | % | ||
Invesco Ltd (7) |
|
| 20,763,328 |
|
|
| 6.1 | % |
| - |
|
| - |
|
|
| 1.7 | % | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive Officers and Directors |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
José Neves (8) |
|
| 4,638,857 |
|
|
| 1.4 | % |
|
| 42,858,080 |
|
|
| 100 | % |
|
| 71.8 | % |
Elliot Jordan (9) |
|
| 930,183 |
|
| * |
|
| - |
|
| - |
|
| * |
| ||||
Stephanie Phair (10) |
|
| 767,301 |
|
| * |
|
| - |
|
| - |
|
| * |
| ||||
Dana Evan (11) |
|
| 609,008 |
|
| * |
|
| - |
|
| - |
|
| * |
| ||||
J. Michael Evans |
| - |
|
| * |
|
| - |
|
| - |
|
| * |
| |||||
Stephanie Horton |
|
| 9,005 |
|
| * |
|
| - |
|
| - |
|
| * |
| ||||
Diane Irvine |
|
| 6,557 |
|
| * |
|
| - |
|
| - |
|
| * |
| ||||
Victor Luís |
|
| 6,557 |
|
| * |
|
| - |
|
| - |
|
| * |
| ||||
Gillian Tans |
|
| 6,557 |
|
| * |
|
| - |
|
| - |
|
| * |
| ||||
David Rosenblatt (12) |
|
| 899,283 |
|
| * |
|
| - |
|
| - |
|
| * |
| ||||
Officers and directors as a group (10 persons) (13) |
|
| 7,873,308 |
|
|
| 2.3 | % |
|
| 42,858,080 |
|
|
| 100.0 | % |
|
| 71.9 | % |
* | Indicates beneficial ownership of less than 1% of the total outstanding Class A ordinary shares. |
(1) | The Class B ordinary shares are exchangeable for Class A ordinary shares on a one-for-one basis, subject to customary conversion rate adjustments for share splits, share dividends and reclassifications. Beneficial ownership of Class B ordinary shares reflected in this table has not also been reflected as beneficial ownership of Class A ordinary shares for which such Class B ordinary shares may be exchanged. |
(2) | The percentage reported under |
| Based on information reported on a Schedule |
| Based on information reported on a Schedule 13G |
| Based on information reported on a Schedule |
| Based on information reported on a Schedule |
| Based on information reported on a Schedule 13G filed on February |
(8) | As to the number and |
|
|
| Represents for Mr. Jordan |
83
|
|
|
|
|
|
|
|
| Represents for Ms. |
| Represents for Mr. |
|
|
|
|
|
|
(13) | Includes 7,251,335 Class A ordinary shares underlying options, RSUs and PSUs that are, as applicable, currently vested and exercisable or that vest within sixty days of February 14, 2022. |
Significant Changes
To our knowledge, other than as provided in the table above, our other filings with the SEC, public disclosure and this Annual Report, there has been no significant change in the percentage ownership held by any other major shareholder since January 1, 2019.
As of February 14, 2022, there were 338,457,816 of Class A ordinary shares outstanding. To our knowledge, 328,067,618 Class A ordinary shares, representing 96.9% of our total outstanding Class A ordinary shares, were held by 13 record shareholders with registered address in the United States.
We are not aware of any arrangement that may at a subsequent date result in a change of control of Farfetch.
B. Related Party Transactions
The following isincludes, among other information, a description of our related party transactions, as defined under Item 7.B of Form 20-F, since January 1, 2016.2021.
Registration Rights Agreement
On July 21, 2017, we entered into a Registration Rights Agreement with Kadi Group, Condé Nast International Ltd, Advance Magazine Publishers Inc., CN Commerce Ltd, Index Ventures V (Jersey), L.P., Index Ventures V Parallel Entrepreneur Fund (Jersey), L.P., Yucca (Jersey) SLP, Farhold (Luxembourg) S.A.R.L., DST Global IV, L.P., Sebatik Investments Limited, TGF Participations Limited, Republic Technologies Pte td,Ltd, Advent Private Equity Fund IV, Advent Industry L.P., Advent Management IV Limited Partnership, Newsight Investment Holdings I Ltd, Newsight Investment Holdings II Ltd and Legendre Holding 51 SAS, pursuant to which such investors havewere granted certain demand registration rights, short-form registration rights and piggyback registration rights in respect of any Class A ordinary shares and related indemnification rights from us, subject to customary restrictions and exceptions. All fees, costs and expenses of registrations,registration, other than underwriting discounts and commissions, are expected to be borne by us.
Relationship with Kadi Group Holding Limited and JD.com
On June 21, 2017, Kadi Group completed a purchase of 6,834,172 Series G Preferred Shares of Farfetch.com for approximately $330.8 million and 1,366,834 shares of various classes from our shareholders that There were re-designated into Series G Preferred Shares for approximately $66.2 million.
Kadi Group is a wholly owned subsidiary of JD.com. Mr. Liu, the Chairman and Chief Executive Officer and controlling shareholder of JD.com, previously served as one of our non-executive directors, and Dr. Liao is JD.com’s Chief Strategy Officer.
Forward Purchase Agreement
In connection with Kadi Group’s purchase of shares in Farfetch.com, Kadi Group and Farfetch.com entered into a forward purchaseno continuing obligations under this agreement as amended, pursuant to which we agreed to issue and Kadi Group agreed to subscribe for one-third of such number of shares upon our initial public offering (at a price per share equal to the initial price per share in this offering) that would result in Kadi Group maintaining its percentage holding of our issued and outstanding share capital on a fully diluted basis immediately following this offering. Kadi Group may assign this right to purchase to any of its affiliates.December 31, 2020.
84
On April 18, 2018, we entered into a Cross-Border Foreign Exchange Payment Agreement with Chinabank Payment Technology Co. Ltd. (“Chinabank Payment”) (the “Payment Processing Agreement”), pursuant to which Chinabank Payment provides cross-border payment collection services to Farfetch UK Limited on its Chinese e-commerce platforms of Farfetch.cn and Farfetch.com/cn. For providing such payment collection service, Chinabank Payment charges us a transaction fee. The Payment Processing Agreement has an initial term of 24 months and will automatically renew for successive 12-month terms unless either party has served a written notice 90 days prior to the other to terminate. The Payment Processing Agreement is terminable by either party if the other party breaches such agreement on at least five occasions in any three-month period.
Commitment Agreement
In connection with Kadi Group’s purchase of shares of Farfetch.com, Kadi Group and José Neves entered into a commitment agreement, as amended, pursuant to which Mr. Neves agreed to exercise all voting rights held directly or indirectly by him in favor of any shareholder resolution proposing to appoint Richard Liu as a director of the Company and to use all reasonable endeavors to seek commitment from certain other investors to support Mr. Liu remaining as a director of the Company. In February 2019, the parties amended and restated this commitment agreement to provide that Dr. Liao or another senior executive of JD.com designated by JD.com serve on our Board, provided that Dr. Liao or such other JD.com designee be recommended for such Board service by our nominating and corporate governance committee. The amended and restated commitment agreement is otherwise substantively similar to the original commitment agreement and provides that Mr. Neves will exercise all voting rights held by him in favor of any shareholder resolution proposing to appoint Dr. Liao as a director of the Company and to use all reasonable endeavors to seek commitment from certain other investors to support Dr. Liao remaining as a director of the Company. This obligation is conditional on JD.com holding no less than 33,658,328 Class A ordinary shares (subject to appropriate adjustment for any share split consolidation or similar event).
Asset Purchase Agreement and Merchant Agreement
On 26 February 2019, we entered into an Asset Purchase Agreement (the “APA”) with Shanghai Yuanmai Trading Co., Ltd. as the Seller and Beijing Jingdong Century Trade Co., Ltd. as the Guarantor, pursuant to which we agreed to purchase “Level 1 Access” to the JD.com app, Toplife customer data, certain intellectual property and certain fixed assets from the Seller in exchange for $50 million in cash. We are also responsible for certain costs associated with the Toplife business after deal closing, up to a cap of $3 million.
In connection with the purchase of the Toplife assets pursuant to the APA described above, on 26 February 2019, we also entered into a Merchant Agreement with JD.com International Limited (the “MA”), to create a flagship store operated by FF on the JD Haitun platform (a “FF JD Store”). JD.com International Limited has agreed to grant the FF JD Store “Level 1 Access” (i.e. a prominent position on the JD customer interface for specified categories of luxury goods) to the JD.com app with exposure to 3-4 million JD premium customers for a period of 4 years, subject to certain key performance indicators linked to gross value of sales.
Relationship with Condé Nast
On February 14, 2013, Condé Nast International Limited (“CNI”) completed the purchase of an 8.37% equity position of Farfetch.com for $11,999,996. On April 29, 2014 and February 13, 2015, CNI purchased further equity of Farfetch.com, resulting in an equity position of 8.18%. On June 13, 2017, Farfetch.com issued further equity to Advance Magazine Publishers Inc. (“Advance Magazine”) and CN Commerce Ltd (“CN Commerce,” together with CNI and Advance Magazine, “Conde Nast”) in connection with the Asset Purchase Agreement summarized below. Each of Advance Magazine and CN Commerce is an affiliate of CNI.
Asset Purchase Agreement
On June 12, 2017, we entered into an asset purchase agreement (as amended, the “Asset Purchase Agreement”), pursuant to which we purchased certain assets of the Style.com business (the “Style.com Assets”) from Advance Magazine and CN Commerce, including trademarks, domain names and a customer database. The
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consideration for the purchase of the Style.com Assets, which completed on June 13, 2017, was $12,411,000, which was satisfied by the issuance of shares in the capital of Farfetch.com at a price per share of $48.40. The Asset Purchase Agreement contains customary warranties in relation to the Style.com Assets from Advance Magazine and CN Commerce and an indemnity in our favor in respect of pre-completion liabilities with regards to the Style.com Assets and the business of Style.com.
Collaboration Agreement
In connection with the purchase of the Style.com Assets, we entered into a collaboration agreement with Advance Magazine dated June 13, 2017 (the “Collaboration Agreement”), to create a content-to-commerce solution by connecting Conde Nast, a provider of online and offline lifestyle content, to brands and retailers on the Farfetch Marketplace through an online affiliate program. Pursuant to the Collaboration Agreement, Advance Magazine provides us with certain services, including generation of promotional posts on social media networks and providing content for the purpose of referring customers to the Farfetch Marketplace. In consideration for such services, Advance Magazine earns a commission from the aggregate value of transactions concluded following the referral of a customer to the Farfetch Marketplace from any website run by Advance Magazine or its affiliate companies. The Collaboration Agreement has an initial term of five years.
Commercial Agreements
We currently have various commercial agreements with affiliate companies of Conde Nast in the ordinary course of our business, which are on customary terms and which enable us to advertise our business or gain further exposure through advertisements and content in publications produced by the Conde Nast group, such as Vogue magazine. These agreements are on arms’ length terms, for fixed short-term periods and/or one-off in nature.
Relationship with Platforme International Limited
Mr. Neves, the founder, Chief Executive Officer and a directorChairman of the Company,our Board of Directors, is also a directorDirector of, and holds a beneficial ownership interest in, Platforme International Limited (“Platforme”).
E-Commerce Services Agreements
In October 2015, we entered into a Farfetch Black & Whitean FPS e-commerce services agreement with Platforme for the development and hosting of the “Swear” branded website. Further, in the second quarter of 2017, we entered into several of our standard e-commerce services agreements with Platforme, pursuant to which we make available for sale on the Farfetch Marketplace, products from each of Platforme’s “Swear,” “MySwear” and “B Store” businesses. The agreements have all beenwere entered into on our standard terms.
Relationship with ASAP54.com LimitedAlanui
During the year ended December 31, 2021 up until March 16, 2021, Alanui S.r.L. (“Alanui”) was an associate (as defined under Item 7.B of Form 20-F) of our subsidiary New Guards, which owns a stake of 53% of Alanui. Alanui is one of the brands in the New Guards portfolio. New Guards owns the Alanui intellectual property, and produces and distributes Alanui merchandise. New Guards gained control over Alanui on March 16, 2021 following a change in the shareholder agreement. We recognized sales of $0.2 million to Alanui in the two months up until consolidation on March 16, 2021. We recognized sales of $1.1 million during the year ended December 31, 2020.
Agreements with Executive Officers and Directors
We have entered into service agreements or offer letters with our executive officers and Directors. Information about these agreements, including the CEO PSU Grant made to Mr. Neves holds a beneficial ownership interest in ASAP54.com Limited (“ASAP54”). Daniela Cecilio, Mr. Neves’ wife,May 2021, may be found in this Annual Report under Item 6. “Directors, Senior Management and Employees — B. Compensation” and is also a director of and holds a beneficial ownership interest in ASAP54.incorporated herein by reference.
Share Purchase AgreementIndemnification Agreements
On October 31, 2017, weWe have entered into an agreementindemnification agreements with ASAP54 for the purchase of the entire issued share capital of Fashion Concierge UK Limited (and its wholly owned subsidiary, Fashion Concierge, LDA), a company that runs an e-commerce solution, sourcing luxury items on behalf of Farfetch Private Client consumers (the “Share Purchase Agreement”). The consideration for the purchase was $2,183,000, which was satisfied through the issuance of shares of Farfetch.com at a price per share of $48.40. The Share Purchase Agreement contains customary warrantiesour Directors and indemnities in favor of Farfetch.
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Relationship with Daniela Cecilio
Consultancy Agreement
Following the purchase of Fashion Concierge UK Limited, we entered into a consultancy agreement with Ms. Cecilio, founder of the Fashion Concierge business, on December 21, 2017 (the “DC Consultancy Agreement”). Pursuant to the DC Consultancy Agreement, Ms. Cecilio will provide consultancy services. The DC Consultancy Agreement had a fixed term of 12 months, and was ended in line with late agreement on November 9, 2018.
Share Incentive Agreement
Pursuant to the DC Consultancy Agreement, we entered into a share incentive agreement with Ms. Cecilio on January 15, 2018 (the “Share Incentive Agreement”),executive officers pursuant to which Ms. Cecilio could earn upwe have agreed to 104,780 sharesindemnify them against a number of liabilities and expenses incurred by such persons in connection with claims made by reason of their serving as a Director or executive officer of Farfetch. A copy of the capitalForm of Farfetch Limited.
Relationship with Natalie Massenet
Natalie Massenet is a shareholder and a member of our Board.
Consultancy Agreement
We entered into a consultancy agreement with Natalie Massenet effective as of August 1, 2018, (the “NM Consultancy Agreement”). Pursuant to the NM Consultancy Agreement, Ms. Massenet provides consultancy services in relation to assisting with overall strategy, innovation initiatives, being a brand ambassador at specific events and liaising with the Chief Executive Officer and Chief Commercial Officer with brands specific to our initiatives. For providing such services, Ms. Massenet is eligible to receive an annual retainer of $120,000 under the NM Consultancy Agreement. The NM ConsultancyIndemnification Agreement is terminableincorporated by either party upon three months’ notice.reference as Exhibit 4.1 to this Annual Report. In addition to such indemnification, we provide our Board of Directors and executive officers with Directors’ and officers’ liability insurance.
Related Party TransactionParties Policy
Our Board of Directors has adopted a written related party transaction policyRelated Parties Policy to set forth the policies and procedures for the review and approval or ratification of related personparty transactions. This policy covers with certain exceptions set forth inmaterial transactions or loans reportable under this Item 404 of Regulation S-K under the Securities Act, any transaction, arrangement or relationship, or any series of similar transactions, arrangements or relationships, in which we were or are to be a participant, where the amount involved exceeds $120,000between Farfetch and a related person had or will have a direct or indirect material interest,party, including without limitation purchasesour Directors and senior management as well as their family members, and certain shareholders, and provides that such transactions be reviewed and approved or ratified by the Audit Committee. Such review shall assess if the transaction is on terms comparable to those that could be obtained in arm’s length dealings with an unrelated third-party, whether the transaction is inconsistent with the interest of goods or services by or fromthe Company and its shareholders, the extent of the related person or entitiesparty’s interest in which the related person has a materialtransaction, and shall also take into account the conflicts of interest indebtedness, guaranteesand corporate opportunity provisions of indebtedness and employment by us of a related person.our organizational documents.
C. Interests of Experts and Counsel
Not applicable.
Item 8. Financial Information
A. Consolidated Statements and Other Financial Information
Consolidated Financial Statementsfinancial statements
SeeRefer to Item 18. "Financial Statements."“Financial statements.”
Legal and Arbitration Proceedings
From time to time, we may be involved in various claims and legal proceedings relating to claims arising outin the course of our business and operations. We are not currently a party to any material legal proceedings (includingThe outcome of any such claims or proceedings, regardless of the merits, is inherently uncertain. For example, in September 2019, following periods of volatility in the market price of our Class A ordinary shares, two putative class action lawsuits were filed in the United States against us and certain of our Directors and officers, among others, under the U.S. federal securities laws. The lawsuits are captioned Omdahl v. Farfetch Limited et al and City of Coral Springs Police Officers’ Retirement Plan v. Farfetch Limited et al, both pending in the U.S. District Court for the Southern District of New York. On June 10, 2020, the court consolidated the two lawsuits. On August 10, 2020, plaintiffs filed an amended consolidated complaint, asserting violations of Sections 10(b), 20A and 20(a) of the Exchange Act, and Rule 10b-5 of the Exchange Act against us and certain of our current and former officers, as well as violations of Sections 11, 12, and 15 of the Securities Act against us, certain of our current and former officers and Directors, and the underwriters of our September 2018 initial public offering. The amended complaint seeks damages on behalf of a proposed class of all persons who purchased or otherwise acquired our common stock during the period of September 20, 2018 to August 8, 2019, purportedly caused by alleged materially misleading statements and/or material omissions by us and the individual officers regarding our business model, growth strategy, and supplemental financial metrics. On October 23, 2020 we filed a motion to dismiss the amended complaint and briefing on that are pendingmotion was completed on February 4, 2021. On September 29, 2021, the court granted our motion and dismissed all of plaintiffs’ claims with prejudice, finding that our disclosures were thorough and extensive, that no reasonable investor could have been misled by our disclosures, that none of Farfetch’s officers’ stock sales were suspicious or threatenedunusual and that plaintiffs did not otherwise plead that any Farfetch officers knew that any of the challenged statements were false. Plaintiffs filed a notice of appeal on October 29, 2021, and, on January 28, 2022 filed their appellate brief. Our responsive brief is due April 28, 2022.
In April 2020, a putative class action lawsuit, captioned Walter v. Farfetch.com US, LLC, was filed in the United States against Farfetch.com US, LLC alleging violations of Section 632.7 of the California Penal Code. The lawsuit was mediated on September 29, 2021 and the settlement agreement was fully executed as of January 4, 2022. The settlement remains subject to court approval, which we are aware).expect to be sought in early 2022. Under the terms of the settlement, we continue to deny any liability or wrongdoing and the significant majority of the payment will be funded by certain of our insurance carriers. We do not expect the payment to be made under this settlement to have a material impact on our financial position or results of operations.
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We have not previously paid dividends on our ordinary shares and do not anticipate paying any cash dividends on our ordinary shares in the foreseeable future. We intend to retain all available funds and any future earnings to fund the development and expansion of our business. However, if we do pay a cash dividend on our ordinary shares in the future, we will pay such dividend out of our profits or share premium (subject to solvency requirements)requirements and as permitted under Cayman Islands law.law).
The amount of any future dividend payments we may make will depend on, among other factors, our strategy, future earnings, financial condition, cash flow, working capital requirements, capital expenditures and applicable provisions of our Articles. Any profits or share premium we declare as dividends will not be available to be reinvested in our operations.
Moreover, we are a holding company that does not conduct any business operations of our own. As a result, we are dependent upon cash dividends, distributions and other transfers from our subsidiaries to make dividend payments.payments, which may be subject to withholding and other taxes.
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Any dividends we declare on our shares will be in respect of both our Class A ordinary shares and Class B ordinary shares and will be distributed such that a holder of one of our Class B ordinary shares will receive the same amount of the dividends that are received byas a holder of one of our Class A ordinary shares. We will not declare any dividend with respect to theour Class A ordinary shares without declaring a dividend on theour Class B ordinary shares, and vice versa.
We have not declared or paid dividends in the years ended December 31, 2016, 20172019, 2020 and 2018.2021.
None.Please refer to Note 34, Subsequent Events, within our Consolidated financial statements included elsewhere in this Annual Report for details regarding events subsequent to the reporting period.
Our Class A ordinary shares commenced trading on the NYSE on September 21, 2018.2018 under the symbol “FTCH.” Prior to this, no public market existed for our Class A ordinary shares. Our Class B ordinary shares are not listed to trade on any securities market.
Price History of Stock
Ordinary shares listed on the New York Stock Exchange
Our shares were approved for listing on the NYSE on September 21, 2018. Prior to this listing, no public market existed for our ordinary shares.
Not applicable.
Our Class A ordinary shares commenced trading on the NYSE on September 21, 2018 under the symbol “FTCH.”
Not Applicable.
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Not applicableapplicable.
Not applicable.
Item 10. Additional Information
Not applicable.
B. Memorandum and Articles of Association
A copy of our amended and restated memorandum and articles of associationArticles is attachedincorporated by reference as Exhibit 1.1 to this Annual Report. The information called for by this Item has been reported previouslyis set forth in our Registration Statement on Form F‑1 (File No. 333‑226929), filed with the SEC on August 20, 2018, as amended, under the heading “Description of Share Capital and Articles of Association,”Exhibit 2.2 to this Annual Report and is incorporated by reference into this Annual Report.
C. Material Contracts
Except as otherwise disclosed in this Annual Report (including the Exhibits), we are not currently, nor have we been for the past two years, party to any material contract, other than contracts entered into in the ordinary course of business.
There are currently no Cayman Islands exchange control regulations that would affect the import or export of capital or the remittance of dividends, interest or other payments to non-resident holders of our shares.
The following summary contains a description of certain of certain Cayman Islands, UK and U.S. federal income tax consequences of the acquisition, ownership and disposition of our Class A ordinary shares. The summary is based upon the tax laws of the Cayman Islands and regulations thereunder, on the tax laws of the United Kingdom and the regulations thereunder, and on the tax laws of the United States and regulations thereunder as of the date hereof, which are subject to change.change.
Cayman Islands Tax Considerations
The following discussion is a summary of the material Cayman Islands tax considerations relating to the purchase, ownership and disposition of our Class A ordinary shares. There is, at present, no direct taxation in the Cayman Islands and interest, dividends and gains payable to us will be received free of all Cayman Islands taxes. We have received an undertaking from the Governmentgovernment of the Cayman Islands to the effect that, for a period of thirty years from the date of the undertaking, no law that thereafter is enacted in the Cayman Islands imposing any tax or duty to be levied on profits, income or on gains or appreciation, or any tax in the nature of estate duty or inheritance tax, will apply to any property comprised in or any income arising under the Company,Farfetch, or to theour shareholders, thereof, in respect of any such property or income.
No stamp duty in the Cayman Islands is payable in respect of the issue of any Class A ordinary shares or an instrument of transfer in respect of aany Class A ordinary share.shares.
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United Kingdom Tax Considerations
The following discussion is a summary of the material United KingdomUK tax considerations relating to the purchase, ownership and disposition of our Class A ordinary shares.
The following statements are of a general nature and do not purport to be a complete analysis of all potential UK tax consequences of acquiring, holding andor disposing of our Class A ordinary shares. They are based on current UK tax law and on the current published practice of Her Majesty’s Revenue and Customs (“HMRC”) (which may not be binding on HMRC), as of the date of this Annual Report, all of which are subject to change, possibly with retrospective effect. They are intended to address only certain UK tax consequences for holders of our Class A ordinary shares who are tax resident in (and only in) the UK,United Kingdom, and in the case of individuals, domiciled in (and only in) the UKUnited Kingdom (except where expressly stated otherwise) who are the absolute beneficial owners of theour Class A ordinary shares and any dividends paid on them and who hold theour Class A ordinary shares as investments (other than in an individual savings account or a self-invested personal pension). They do not address the UK tax consequences which may be relevant to certain classes of holders of our Class A ordinary shares such as traders, brokers, dealers, banks, financial institutions, insurance companies, investment companies, collective investment schemes, tax-exempt organizations, trustees, persons connected with us, or our group, persons holding theirour Class A ordinary shares as part of hedging or conversion transactions, holders of Class A ordinary shares who have (or are deemed to have) acquired theirour Class A ordinary shares by virtue of an office or employment, and holders of Class A ordinary shares who are or have been our officers or employees or a company forming part of our group.Group. The statements do not apply to any holder of Class A ordinary shares who either directly or indirectly holds or controls 10% or more of our share capital (or class thereof), voting power or profits.
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The following is intended only as a general guide and is not intended to be, nor should it be considered to be, legal or tax advice to any particular prospective subscriber for, or purchaser of, our Class A ordinary shares. Accordingly, prospective subscribers for, or purchasers of, our Class A ordinary shares who are in any doubt as to their tax position regarding the acquisition, ownership and disposition of our Class A ordinary shares or who are subject to tax in a jurisdiction other than the UKUnited Kingdom should consult their own tax advisers.
The Company
It is the intention of the directorsour Board of Directors to conduct our affairs so that our central management and control is exercised in the UK.United Kingdom. As a result, we are expected to be treated as resident in the UKUnited Kingdom for UK tax purposes. Accordingly, we expect to be subject to UK taxation on our income and gains, except where an exemption applies.
Taxation of Dividends
Withholding Tax
We will not be required to withhold UK tax at its source when paying dividends. The amount of any liability to UK tax on dividends paid by us will depend on the individual circumstances of athe holder of our Class A ordinary shares.
Income Tax
An individual holder of our Class A ordinary shares who is resident for tax purposes in the UKUnited Kingdom may, depending on his or her particular circumstances, be subject to UK tax on dividends received from the Company.us. Dividend income is treated as the top slice of the total income chargeable to UK income tax. An individual holder of our Class A ordinary shares who is not resident for tax purposes in the UKUnited Kingdom should not be chargeable to UK income tax on dividends received from us unless he or she carries on (whether solely or in partnership) any trade, profession or vocation in the UKUnited Kingdom through a branch or agency to which the Class A ordinary shares are attributable. There are certain exceptions for trading in the UKUnited Kingdom through independent agents, such as somecertain brokers and investment managers.
All dividends received by a UK resident individual holder of our Class A ordinary shares from us or from other sources will form part of the holder’s total income for income tax purposes and will constitute the top slice of that income. A nil rate of income tax will apply to the first £2,000 of taxable dividend income received by the holder of
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our Class A ordinary shares in a given tax year. Income within the nil rate band will be taken into account in determining whether income in excess of the nil rate band falls within the basic rate, higher rate or additional rate tax bands. Where the dividend income is above the £2,000 dividend allowance, the first £2,000 of the dividend income will be charged at the nil rate and any excess amount will be taxed at 7.5% to the extent that the excess amount falls within the basic rate tax band, 32.5% to the extent that the excess amount falls within the higher rate tax band and 38.1% to the extent that the excess amount falls within the additional rate tax band. From April 6, 2022, these rates are expected to increase to 8.75%, 33.75% and 39.35%, respectively.
Corporation Tax
Corporate holders of our Class A ordinary shares whichwho are resident for tax purposes in the UKUnited Kingdom should not be subject to UK corporation tax on any dividend received from us so long as the dividends qualify for an exemption (as is likely) and certain conditions are met (including anti-avoidance conditions). Corporate holders of our Class A ordinary shares who are not resident in the UKUnited Kingdom will not generally be subject to UK corporation tax on dividends unless they are carrying on a trade, profession or vocation in the UKUnited Kingdom through a permanent establishment in connection with which theour Class A ordinary shares are used, held, or acquired.
A holder of our Class A ordinary shareshares who is resident outside the UKUnited Kingdom may be subject to non-UK taxation on dividend income under local law.
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Taxation of Capital Gains
UK Resident Holders of our Class A Ordinary Shares
A disposal or deemed disposal of our Class A ordinary shares by an individual or corporate holder of our Class A ordinary shares who is tax resident in the UKUnited Kingdom may, depending on the holder’s circumstances and subject to any available exemptions or reliefs,relief, give rise to a chargeable gain or allowable loss for the purposes of UK taxation of chargeable gains.
Any chargeable gain (or allowable loss) will generally be calculated by reference to the consideration received for the disposal of our Class A ordinary shares less the allowable cost to the holder of acquiring such Class A ordinary shares.
The applicable tax rates for individual holders of our Class A ordinary shares realizing a gain on the disposal of such Class A ordinary shares is, broadly, 10% for basic rate taxpayers and 20% for higher and additional rate taxpayers.
Non-UK Resident Holders of our Class A Ordinary Shares
Holders of our Class A ordinary shares who are not resident in the UKUnited Kingdom and, in the case of an individual holder, not temporarily non-resident, should not be liable for UK tax on capital gains realized on a sale or other disposal of our Class A ordinary shares unless (i) such shares are used, held or acquired for the purposes of a trade, profession or vocation carried on in the UKUnited Kingdom through a branch or agency or, in the case of a corporate holder, through a permanent establishment, or (ii) based on current draft legislation, in respect of disposals made on or after April 6, 2019, the Company deriveswhere certain other conditions are met, we derive 75% or more of itsour gross value from UK land. Holders of Class A ordinary shares who are not resident in the UKUnited Kingdom may be subject to non-UK taxation on any gain under local law.
Generally, an individual holder of our Class A ordinary shares who has ceased to be resident in the UKUnited Kingdom for tax purposes for a period of five years or less and who disposes of our Class A ordinary shares during that period may be liable on theirher return to the UKUnited Kingdom to UK taxation on any capital gain realized (subject to any available exemption or relief).
UK Stamp Duty (“stamp duty”Stamp Duty”) and UK Stamp Duty Reserve Tax (“SDRT”)
The following statements are intended as a general guide to the current position relating to stamp dutyStamp Duty and SDRT and apply to any holdersholder of our Class A ordinary shares irrespective of their place of tax residence.
No stamp dutyStamp Duty will be payable on the issueissuance of our Class A ordinary shares.
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Stamp dutyDuty will in principle be payable on any instrument of transfer of our Class A ordinary shares that is executed in the UKUnited Kingdom or that relates to any property situated, or to any matter or thing done or to be done, in the UK.United Kingdom. An exemption from stamp dutyStamp Duty is available on an instrument transferring our Class A ordinary shares where the amount or value of the consideration is £1,000 or less and it is certified on the instrument that the transaction effected by the instrument does not form part of a larger transaction or series of transactions in respect of which the aggregate amount or value of the consideration exceeds £1,000. Holders of our Class A ordinary shares should be aware that, even where an instrument of transfer is in principle subject to stamp duty, stamp dutyStamp Duty, Stamp Duty is not required to be paid unless it is necessary to rely on the instrument for legal purposes, for example to register a change of ownership or in litigation in a UK court.
Provided that our Class A ordinary shares are not registered in any register maintained in the UKUnited Kingdom by or on behalf of us and are not paired with any shares issued by a UK incorporated company, the issue or transfer of (or agreement to transfer) our Class A ordinary shares will not be subject to SDRT. We currently do not intend that any register of our Class A ordinary shares will be maintained in the UK.United Kingdom.
U.S. Federal Income Tax Considerations
The following general summary describes the material U.S. federal income tax consequences to U.S. Holders (defined below) of owning and disposing of our Class A ordinary shares. It does not purport to be a comprehensive discussion of all the tax considerations relevant to U.S. Holders.
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The discussion below applies only to U.S. Holders that hold theour Class A ordinary shares as capital assets within the meaning of Section 1221 of the U.S. Internal Revenue Code of 1986, as amended (the “Code”) (generally, property held for investment). The discussion below is based on the Code, existing and, in some cases, proposed U.S. Treasury Regulations, as well as judicial and administrative interpretations thereof, all as of the date of this Annual Report. All of the foregoing authorities are subject to change or differing interpretation, which change or differing interpretation could apply retroactively and could affect the tax consequences described below. This summary does not address any alternative minimum tax considerations, any estate or gift tax consequences or any state, local or non-U.S. tax consequences, nor does it address the Medicare contribution tax on net investment income.
The following discussion does not address the tax consequences to any particular investor and does not describe all of the tax consequences to persons in special tax situations such as, but not limited to:
banks;
• | banks; |
financial institutions;
regulated investment companies;
real estate investment trusts;
insurance companies;
broker-dealers;
traders that elect to use a mark to market method of accounting;
tax-exempt entities (including private foundations);
qualified retirement plans, individual retirement accounts and other tax-deferred accounts;
U.S. tax expatriates and certain former citizens and long-term residents of the United States;
persons holding Class A ordinary shares as part of a straddle, hedging, constructive sale, conversion or integrated transaction;
persons that directly, indirectly, or constructively own 10% or more of the total voting power or value of all of the Company’s outstanding stock;
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• | regulated investment companies; |
• | real estate investment trusts; |
• | insurance companies; |
• | broker-dealers; |
• | traders that elect to use a mark-to-market method of accounting; |
• | tax-exempt entities (including private foundations); |
• | qualified retirement plans, individual retirement accounts and other tax-deferred accounts; |
• | U.S. tax expatriates and certain former citizens and long-term residents of the United States; |
• | persons holding our Class A ordinary shares as part of a straddle, hedging, constructive sale, conversion or integrated transaction; |
• | persons that directly, indirectly, or constructively own 10% or more of the total voting power or value of all of our outstanding stock; |
• | persons that are resident or ordinarily resident in or have a permanent establishment in a jurisdiction outside the United States; |
persons who acquired Class A ordinary shares pursuant to the exercise of any employee share option or otherwise as compensation;
• | persons who acquired our Class A ordinary shares pursuant to the exercise of any employee share option or otherwise as compensation; |
persons subject to special tax accounting rules as a result of any item of gross income with respect to the Class A ordinary shares being taken into account in an applicable financial statement;
• | persons subject to special tax accounting rules as a result of any item of gross income with respect to our Class A ordinary shares being taken into account in an applicable financial statement; |
persons holding Class A ordinary shares through partnerships or other pass-through entities; or
• | persons holding our Class A ordinary shares through partnerships or other pass-through entities; or |
U.S. Holders whose “functional currency” is not the U.S. dollar.
• | U.S. Holders whose “functional currency” is not the U.S. dollar. |
THE SUMMARY OF U.S. FEDERAL INCOME TAX CONSEQUENCES SET OUT BELOW IS FOR GENERAL INFORMATION ONLY. PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR TAX ADVISORS ABOUT THE APPLICATION OF THE U.S. FEDERAL TAX RULES TO THEIR PARTICULAR CIRCUMSTANCES, AS WELL AS THE STATE, LOCAL AND NON-U.S. TAX CONSEQUENCES TO THEM OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR CLASS A ORDINARY SHARES.
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The discussion below of the U.S. federal income tax consequences to “U.S. Holders” applies to a holder that is a beneficial owner of theour Class A ordinary shares and is, for U.S. federal income tax purposes,
an individual who is a citizen or resident of the United States as determined under U.S. federal income tax rules
• | an individual who is a citizen or resident of the United States as determined under U.S. federal income tax rules; |
a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States, any State or the District of Columbia;
• | a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States, any state or the District of Columbia; |
an estate whose income is subject to U.S. federal income taxation regardless of its source; or
• | an estate whose income is subject to U.S. federal income taxation regardless of its source; or |
a trust that (1) is subject to the supervision of a court within the United States and the control of one or more U.S. persons or (2) has a valid election in effect under applicable U.S. Treasury Regulations to be treated as a U.S. person.
• | a trust that (1) is subject to the supervision of a court within the United States and the control of one or more U.S. persons or (2) has a valid election in effect under applicable U.S. Treasury Regulations to be treated as a U.S. person. |
The tax treatment of an entity or arrangement taxable as a partnership for U.S. federal income tax purposes that holds our Class A ordinary shares generally will depend on such partner’s status and the activities of the partnership. Prospective purchasers that are entities or arrangements treated as partnerships for U.S. federal income tax purposes, or partners in such partnerships, should consult their tax advisers concerning the U.S. federal income tax consequences to them and of the acquisition, ownership and disposition of our Class A ordinary shares by the partnership.
Dividends
Subject to the passive foreign investment company (“PFIC”)PFIC rules discussed below, the gross amount of distributions made by us with respect to theour Class A ordinary shares generally will be includable in a U.S. Holder’s gross income as foreign-source dividend income in the year actually or constructively received by such U.S. Holder, but only to the extent that such distributions are paid out of our current or accumulated earnings and profits as determined under U.S. federal income tax principles. Distributions to a U.S. Holder in excess of current and accumulated earnings and profits will be treated as a non-taxable return of capital to the extent of the U.S. Holder’s basis in thesuch Class A ordinary shares and thereafter as a capital gain. In the event we make distributions to U.S. Holders of ordinary shares, we may or may not calculate our earnings and profits under U.S. federal income tax principles. If we do not do so, any distribution may be required to be regarded as a dividend, even if that distribution would otherwise be treated as a non-taxable return of capital or as a capital gain. U.S. Holders should therefore assume that all cash distributions will be reported as ordinary dividend income. The amount of any distribution of property other than cash will be the fair market value of that property on the date of distribution. U.S. Holders should consult their own tax advisors to determine whether and to what extent they will be entitled to foreign tax credits in respect of any dividend income received.
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With respect to non-corporate U.S. Holders (including individuals, estates, and trusts), dividends received with respect to our Class A ordinary shares may be considered “qualified dividend income” subject to lower capital gains rates, provided that (1) the Class A ordinary shares are readily tradable on an established securities market in the United States, (2) we are not a PFIC (as discussed below) for either our taxable year in which the dividend was paid or the preceding taxable year and (3) certain holding period requirements are met. In this regard, theour Class A ordinary shares will generally be considered to be readily tradable on an established securities market in the United States if they are listed on the NYSE, as we intend theour Class A ordinary shares will be.currently are. U.S. Holders should consult their own tax advisors regarding the availability of the lower rate for the dividends paid with respect to theour Class A ordinary shares.
Dividends paid by us with respect to theour Class A ordinary shares will generally constitute foreign-source “passive category income” and will not be eligible for the dividends-received deduction generally allowed to corporate U.S. Holders in respect of dividends received from U.S. corporations.
Sale or Other Disposition of Shares
Subject to the PFIC rules discussed below, upon a sale or other disposition of theour Class A ordinary shares, a U.S. Holder generally will recognize a capital gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the amount realized and the U.S. Holder’s adjusted tax basis in such Class A ordinary
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shares. A U.S. Holder’s adjusted tax basis in shares generally will be such U.S. Holder’s purchase price for the shares, unless we make distributions in excess of its current and accumulated earnings and profits. Any such gain or loss generally will be a U.S.-source gain or loss and will be treated as a long-term capital gain or loss if the U.S. Holder’s holding period in thesuch Class A ordinary shares exceeds one year. Non-corporate U.S. Holders (including individuals) generally will be subject to U.S. federal income tax on long-term capital gaingains at preferential rates. The deductibility of capital losses is subject to significant limitations.
Passive Foreign Investment Company
We will be classified as a PFIC within the meaning of Section 1297 of the Code, for any taxable year if either: (1) at least 75% of theour gross income of the Company is “passive income” for purposes of the PFIC rules or (2) at least 50% of the value of our assets (determined on the basis of a quarterly average) produce or are held for the production of passive income. Passive income for this purpose generally includes dividends, interest, royalties, rents and gains from commodities and securities transactions. For this purpose, we will be treated as owning the proportionate share of the assets, and earning the proportionate share of the income, of any other corporation in which we own, directly or indirectly, 25% or more measured by the value of theits stock. Under the PFIC rules, if we were considered a PFIC at any time that a U.S. Holder holds our Class A ordinary shares, we would continue to be treated as a PFIC with respect to such holder’s investment unless (1) the Company ceaseswe cease to be a PFIC and (2) the U.S. Holder has made a “deemed sale” election under the PFIC rules.
Based on the currently anticipated market capitalization and composition of our income, assets, and operations, the Company doeswe do not expect to be treated asbelieve we were a PFIC for U.S. federal income tax purposes for the taxable year that ended on December 31, 2018 or2021, and do not expect to be treated as a PFIC in the foreseeable future. However, theour market capitalization and the expected income, assets and operations in the future could be significantly different from what is currently anticipated. In addition, the PFIC determination must be made annually after the close of each taxable year. Therefore, there can be no assurance that we will not be classified as a PFIC for the current taxable year or for any future taxable year.
If we are considered a PFIC for any taxable year that a U.S. Holder holds our Class A ordinary shares, any gain recognized by the U.S. Holder on a sale or other disposition of theour Class A ordinary shares, as well as the amount of any “excess distribution” (defined below) received by the U.S. Holder, would be allocated ratably over the U.S. Holder’s holding period for thesuch Class A ordinary shares. The amounts allocated to the taxable year of the sale or other disposition (or the taxable year of receipt, in the case of an excess distribution) and to any year before we became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or corporations, as appropriate, for that taxable year, and an interest charge would be imposed on the amount allocated to that taxable year. For the purposes of these rules, an excess distribution is the amount by which any distribution received by a U.S. Holder on itsour Class A ordinary shares
94
exceeds 125% of the average of the annual distributions on theour Class A ordinary shares received during the preceding three years or the U.S. Holder’s holding period, whichever is shorter. Additionally, dividends paid by us would not be eligible for the reduced rate of tax described above under “—Dividends” if we are a PFIC in itsthe taxable year in which the dividend issuch dividends are paid or the immediately preceding taxable year.
If we are treated as a PFIC with respect to a U.S. Holder for any taxable year, certain elections may be available to the U.S. Holder that would result in alternative treatments, such as mark-to-market treatment or treatment as a qualified electing fund (“QEF”), of theour Class A ordinary shares. However, we cannot provide any assurances that we will assist investors in determining whether we or any of our non-U.S. subsidiaries areis a PFIC for any taxable year, nor do we expect that we will prepare or provide to U.S. Holders a “PFIC annual information statement,” which would enable a U.S. Holder to make a QEF election.
If we are treated as a PFIC with respect to a U.S. Holder for any taxable year, the U.S. Holder will be deemed to own shares in any of our subsidiaries that are also PFICs and generally be subject to the treatment described above with respect to any distribution on or disposition of such shares. An election for mark-to-market treatment, however, would likely not be available with respect to any such subsidiaries.
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If we are considered a PFIC, a U.S. Holder will also be subject to information reporting requirements on an annual basis. U.S. Holders should consult their own tax advisors about the potential application of the PFIC rules to an investment in theour Class A ordinary shares.
U.S. Information Reporting and Backup Withholding
Dividend payments with respect to theour Class A ordinary shares and proceeds from the sale or other disposition of theour Class A ordinary shares may be subject to information reporting to the IRS. In addition, a U.S. Holder (other than exempt U.S. Holders who establish their exempt status, if required) may be subject to backup withholding, currently at a 24% rate, on dividend payments and proceeds from the sale or other taxable disposition of our Class A ordinary shares made within the United States or through certain U.S.-related financial intermediaries.
Backup withholding will not apply, however, to a U.S. Holder who furnishes a correct taxpayer identification number and makes any other required certification or who is otherwise exempt from backup withholding. U.S. Holders who are required to establish their exempt status may be required to provide such certification on IRS Form W-9. U.S. Holders should consult their tax advisors regarding the application of the U.S. information reporting and backup withholding rules.
Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against a U.S. Holder’s U.S. federal income tax liability, and such holder may obtain a refund of any excess amounts withheld under the backup withholding rules by timely filing the appropriate claim for refund with the IRS and furnishing any required information.
Information Reporting by U.S. Holders
Certain U.S. Holders who are individuals and certain entities holding specified foreign financial assets, including our Class A ordinary shares, with an aggregate value in excess of the applicable dollar threshold, may be required to report information relating to theour Class A ordinary shares, subject to certain exceptions (including an exception for Class A ordinary shares held in accounts maintained by certain U.S. financial institutions), for each year in which they hold such shares. U.S. Holders should consult their tax advisors regarding their reporting obligations with respect to their ownership and disposition of theour Class A ordinary shares.
FATCA
Provisions under Sections 1471 through 1474 of the Code and applicable U.S. Treasury Regulations commonly referred to as “FATCA” generally impose 30% withholding on certain “withholdable payments” and, subject to the proposed regulations discussed below, may impose such withholding on “foreign passthru payments” made by a “foreign financial institution” (each as defined in the Code) that has entered into an agreement with the U.S. Internal Revenue ServiceIRS to perform certain diligence and reporting obligations with respect to the foreign
95
financial institution’s U.S.-owned accounts. Under recently proposed regulations, any withholding on foreign passthru payments would apply to passthru payments made on or after the date that is two years after the date of publication in the Federal Register of applicable final regulations defining foreign passthru payments. Although these recent regulations are not final, taxpayers generally may rely on them until final regulations are issued.
The United States has entered into an intergovernmental agreement (“IGA”) with the Cayman Islands, which modifies the FATCA withholding regime described above. It is not yet clear how foreign passthru payments will be addressed under FATCA. The CompanyWe could be subject to these diligence, reporting and withholding obligations if it were treated as a financial institution under FATCA or the Cayman IGA. Prospective investors should consult their tax advisors regarding the potential impact of FATCA, the Cayman IGA and any non-U.S. legislation implementing FATCA, on their investment in theour Class A ordinary shares.
THE DISCUSSION ABOVE IS A GENERAL SUMMARY. IT DOES NOT COVER ALL TAX MATTERS THAT MAY BE IMPORTANT TO YOU. EACH PROSPECTIVE PURCHASER SHOULD CONSULT ITS OWN TAX ADVISOR ABOUT THE TAX CONSEQUENCES OF AN INVESTMENT IN OUR CLASS A ORDINARY SHARES UNDER THE INVESTOR’S OWN CIRCUMSTANCES.
F. Dividends and Paying Agents
Not applicableapplicable.
Not applicable.
We are required to make certain filings with the SEC. The SEC maintains an Internetinternet website that contains reports, proxy statements and other information about issuers, like us, that file electronically with the SEC. The address of that site is www.sec.gov.
We also make available on our website, free of charge, our annual reports on Form 20-F and the text of our reports on Form 6-K, including any amendments to these reports, as well as certain other SEC filings, as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. Our website address is www.farfetchinvestors.com. The information contained on our website is not incorporated by reference into this Annual Report.
References made in this document.Annual Report to any contract or certain other documents are not necessarily complete and you should refer to the exhibits attached or incorporated by reference into this Annual Report for copies of the actual contract or documents.
Not applicable.
Item 11. Quantitative and Qualitative Disclosures About Market Risk
Our operations are exposed to a variety of financial risks, including foreign exchange and liquidity risks. The Group has policies in place for managing these risks,which our finance department implements and periodically reviews. Refer to Note 28, Financial instruments and financial risk management, to our audited Consolidated financial statements included elsewhere in this Annual Report for a fuller quantitative and qualitative discussion on the financial risks to which we are subject and our policies with respect to managing those risks.
Market Risk
Our operations are exposed to a variety of financial risks that include foreign exchange and liquidity risk. We review and agree policies for managing these risks, which are then implemented by our finance department. Please refer to note 28 to our audited consolidated financial statements for the years ended 31 December 2018 and 2017 included elsewhere in this Annual Report for a fuller quantitative and qualitative discussion on the market risks to which we are subject and our policies with respect to managing those risks. The policies are summarized below:
The Group’s activities expose it primarily to the financial risk of changes in foreign currency exchange rates. The Group enters into derivative financial instruments to manage its exposure to foreign currency risk.
Foreign currency risk is the risk that the fair value or future cash flows of an exposure will fluctuate because of changes in foreign exchange rates.
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The Group uses forward foreign currency contracts and foreign currency option contracts to hedge its transactional foreign currency risks.Where the criteria for hedge accounting are not met, derivative financial instruments are initially recognized at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value with movements recorded to the statement of operations. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative. Where all relevant criteria are met, hedge accounting is applied to minimize earnings volatility.
The fluctuation in foreign currency exchange rates exposes the Group to foreign exchange translation risk on consolidation. This risk is currently not hedged and therefore, our results of operations have in the past, and will in the future, fluctuate due to movements in exchange rates when the currencies are translated into U.S. dollars.At a subsidiary level, we are exposed to transactional foreign exchange risk because we earn revenues and incur expenses
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in a number of different foreign currencies relative to the relevant subsidiary’s functional currency, mainly the pound sterling and the euro. Movements in exchange rates therefore impact our subsidiaries and thus, our consolidated results and cash flows.
Liquidity risk
The Group monitors its liquidity risk to maintain a balance between continuity of funding and flexibility. This helps the Group achieve timely fulfilment of its obligations while sustaining the growth of the business.
We believe that our cash and cash equivalents balance as at December 31, 2021 is sufficient to meet our operating financing needs for at least the next 12 months and will support debt repayments and our currently planned capital expenditure requirements over the near term and medium term.
Primarily as a result of the gains on items held at fair value and remeasurements during the year, the Company’s total equity increased from $(1,658.6) million as at December 31, 2020 to $270.6 million as at December 31, 2021. The gains on items held at fair value and remeasurements during the year were mainly driven by the year end revaluation of the embedded derivatives relating to the convertible senior notes discussed in Item 5. “Operating and Financial Review and Prospects — B. Liquidity and Capital Resources”. Unless earlier converted, redeemed or repurchased in accordance with their terms, the notes may be settled, at Farfetch’s election and subject to certain exceptions and conditions, in Class A ordinary shares of Farfetch, cash, or a combination of cash and Class A ordinary shares of Farfetch.
We continuously monitor funding options available in the capital markets and trends in the availability of funds, as well as the cost of such funding.
Item 12. Description of Securities Other than Equity Securities
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Item 13. Defaults, Dividend Arrearages and Delinquencies
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
On September 20, 2018, in connection withNovember 17, 2021, at our IPO, we amended2021 annual general meeting of shareholders, our shareholders approved the amendment and restatedrestatement of our memorandum and articles of association.Articles to, among other things, increase our authorized share capital. A copy of our amended and restated memorandum and articles of associationArticles is being filedincorporated by reference as Exhibit 1.1 to this Annual Report. SeeRefer to Item 10. “Additional Information—Information — B. Memorandum and Articles of Association.”
Use of Proceeds
On September 25, 2018, we completed an IPO of our Class A ordinary shares, in which we sold at an initial public offering price of $20.00 per share, 40,246,453 Class A ordinary shares (including 6,636,562 Class A ordinary shares that were subject to the underwriters’ option to purchase additional shares), and the selling shareholders sold 10,633,858 Class A ordinary shares (including 6,636,562 Class A ordinary shares that were subject to the underwriters’ option to purchase additional shares). The shares offered and sold in the IPO were registered under the Securities Act pursuant to our Registration Statement on Form F 1 (File No. 333 2226929), which was declared effective by the SEC on September 20, 2018.
The offering did not terminate until after the sale of all 50,880,311 Class A ordinary shares registered on the registration statement. The aggregate offering price for the shares registered and sold was approximately $1,017.6 million. Goldman Sachs & Co. LLC, J.P. Morgan Securities LLC, Allen & Company LLC and UBS Securities LLC acted as representatives of the several underwriters.
The IPO generated proceeds to us of approximately $758.6 million, net of underwriting discounts and commissions of approximately $46.3 million and other offering expenses of approximately $11.9 million. The IPO generated proceeds to the selling stockholders of approximately $200.4 million, net of underwriting discounts and commissions of approximately $12.2 million. We paid out of Company proceeds all of our and the selling shareholders’ fees, costs and expenses in connection with the IPO (excluding, in the case of the selling shareholders, underwriting discounts and commissions and similar brokers’ fees and transfer taxes).
No offering expenses were paid directly or indirectly to any of our directors or officers (or their associates), persons owning 10% or more of our ordinary shares or any other affiliates.
There has been no material change in the expected use of the net proceeds from our IPO as described in our final prospectus filed with the SEC on September 24, 2018 pursuant to Rule 424(b).
Item 15. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”))Act) that are designed to ensure that information required to be disclosed in the Company’sour reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2018.2021. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as a result of the material weaknessesweakness in our internal control over financial reporting described below, the design and operation of our disclosure controls and procedures were not effective as of December 31, 2018.2021.
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Management'sAs permitted by related SEC staff interpretive guidance for newly acquired businesses, the internal control over financial reporting of JBUX Limited (“Jetti”), Allure Systems Corp (“Allure”) and Upteam Corporation Limited (“Luxclusif”), acquired in purchase business combinations, and Alanui S.r.L. (“Alanui”), acquired and consolidated in a step acquisition, were excluded from the evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 2021. Jetti was acquired in September 2021, Allure and Luxclusif in December 2021, and Alanui in March 2021. Collectively, they represented less than 1% of our Group total assets and consolidated revenue as of and for the fiscal year ended December 31, 2021. Refer to Note 5, Business combinations, within our Consolidated financial statements included elsewhere in this Annual Report.
Management’s Report on Internal Control over Financial Reporting
This Annual Report does not include a report of management’s assessment regarding
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, due to a transition period established by rulesas such term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act. Our management conducted an assessment of the SEC for newly public companies. This Annual Report also does not include an attestation report of our independent registered public accounting firm due to a transition period established by rules of the SEC for newly public companies. Additionally, our independent registered public accounting firm will not be required to opine on the effectiveness of our internal control over financial reporting until we are no longer an emerging growth company.
Changesbased on the criteria set forth in Internal“Internal Control over Financial Reporting
Except as described below, there were no changes in our internal controls over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act) that occurred during the period covered by this Annual Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Ongoing Remediation of Material Weakness in Internal Control over Financial Reporting
As previously disclosed in our Registration Statement on Form F-1 (File No. 333-226929), which was declared effective- Integrated Framework (2013)” issued by the SEC on September 20, 2018, we identified certain control deficiencies inCommittee of Sponsoring Organizations of the design and operation of our internal control over financial reporting in connection with our 2017audit that constituted material weaknesses. The control deficiencies resulted from (1) our technology access and change control environment not supporting an efficient or effective internal control framework and (2) reliance on manual processes.Treadway Commission.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’sour annual or interim consolidated financial statements may not be prevented or detected on a timely basis.
Based on
As disclosed in our 2020 Annual Report, we identified two material weaknesses in the criteria established in Internal Control - Integrated Framework (2013) issued by the Committeedesign and operation of Sponsoring Organizations (COSO) of the Treadway Commission we have implemented and continue to implement control procedures to strengthen our internal control over financial reporting from (1) the operation of effective controls over information technology systems, including access over those systems, managing system changes and testing of system-generated reports used in the execution of manual controls; and (2) the implementation and documentation of internal control over financial reporting at the New Guards business.
During 2021, we made a significant effort to implement effective controls over information technology systems as required in (1) above. These controls have been embedded into the environment to confirm consistent and continued operation. The changes and updates to our controls included enhanced privileged user activity monitoring, user recertification supported by reliable and complete data sources, as well as stricter segregation of duties and monitoring around the change management of our core platform and corporate infrastructure. Management considers that an appropriate and robust framework of controls particularly around access to our core platform and corporate infrastructure has now been designed and implemented, and as a result of these actions, has concluded that all elements of (1) relating to the design and operation of effective controls over information technology systems have been remediated as of December 31, 2021, to the extent that they are no longer considered a material weakness.
The component material weakness reported in 2020 relating to the New Guards business covered both operational and IT general controls. During 2021, we took significant steps to improve the control environment within the New Guards business. For the operational control elements there has been a significant increase in awareness and implementation within the New Guards business regarding the standards required for effective internal control over financial reporting. Specifically,New roles, responsibilities and compensating controls have been implemented to reduce the risk created by limited segregation of duties in some areas. Additionally, the quality of management review controls has been strengthened and the standard and availability of supporting documentary evidence has been improved. Regarding information technology at the New Guards business, we have revisedmade significant progress during 2021 to implement a robust control environment. This has meant extensive work to reconfigure systems, introduce detailed user profiling, vendor access restrictions, adequate user access segregation and continue to revisemonitoring as well as incident and change management workflows. As a result, both operational and information technology controls covering identity service, changeare now considered to have been designed appropriately, but there remains a need for these controls to be operating effectively for a period of time for the material weakness to be remediated. Additionally, these deficiencies mean that the key reports generated by these systems and auditused in operational controls cannot be considered effective. Our expectation is that all controls will successfully test as effective in 2022.
As a result, as of December 31, 2021, management together withconcluded that we had one material weakness relating to the automationoperation of a number of previously manual processes. In addition,effective internal control over financial reporting at the New Guards business.
As permitted by related SEC staff interpretive guidance for newly acquired businesses, we have hiredexcluded from the scope of our assessment of internal control over financial reporting Jetti, Allure, Luxclusif and will continue to hire additional accounting, financeAlanui, collectively they represented less than 1% of our Group total assets and technology personnel.consolidated revenue as of and for the fiscal year ended December 31, 2021.
Although we have made enhancements to
Based upon the above evaluation, our control procedures in this area,Chief Executive Officer and Chief Financial Officer concluded that, as a result of the material weaknesses will not be remediated until the necessary controls have been fully implemented and operating effectively. See Item 3. “Key Information – D. Risk Factors — Risks Related to Ownership of our Class A Ordinary Shares — As a public reporting company, we are subject to rules and regulations established from time to time by the SEC regardingweakness described above, our internal control over financial reporting. If we fail to putreporting was not effective as of December 31, 2021.
Attestation Report of Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP, the independent registered public accounting firm that audited our consolidated financial statements included in place appropriate and effectivethis Annual Report, has audited our internal controlscontrol over financial reporting and disclosure controls and procedures, we may not be ableas of December 31, 2021, as stated in its report on page F-2.
Changes in Internal Control over Financial Reporting
Except for the remediation efforts described above taken to accurately reportaddress the material weaknesses, during the year ended December 31, 2021, there were no other changes in our internal control over financial results,reporting that occurred during the period covered by this Annual Report that have materially affected, or report them in a timely manner, which may adverselyare reasonably likely to materially affect, investor confidence in us and, as a result, the value of our Class A ordinary shares.”internal control over financial reporting.
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Item 16. [Reserved]Reserved
Item 16A. Audit Committee Financial Expert
Our Board of Directors has determined that Mr. Kamaluddin, Ms. Evan, Ms. Irvine, Mr. Luís and Mr. RismanMs. Tans each satisfysatisfies the “independence” requirements set forth in Rule 10A‑3 under the Exchange Act. Our boardBoard of directorsDirectors has also determined that each of Mr. Kamaluddin, Ms. Evan, Ms. Irvine and Mr. RismanLuís is considered an “audit committee financial expert” as defined in Item 16A of Form 20‑F under the Exchange Act.
99
We have adopted a Code of Business Conduct and Ethics (“Code of Conduct”) that applies to all our employees, officers and directors,Directors, including our principal executive, principal financial and principal accounting officers. Our Code of Conduct addresses, among other things, competition and fair dealing, conflicts of interest, financial matters and external reporting, companyour funds and assets, confidentiality, and corporate opportunity requirements, and the process for reporting violations of the Code of Conduct and employee misconduct, conflicts of interest or other violations.misconduct. Our Code of Conduct and Ethics is intended to meet the definition of "code“code of ethics"ethics” under Item 16B of Form 20-F under the Exchange Act.
We intend to disclose on our website any amendment to, or waiver from, a provision of our Code of Conduct that applies to our directorsDirectors or executive officers to the extent required under the rules of the SEC or the NYSE. Our Code of Conduct is available on our website at www.farfetchinvestors.com. The information contained on our website is not incorporated by reference in this Annual Report.
Item 16C. Principal Accounting Fees and Services
PricewaterhouseCoopers LLP ("PwC")(“PwC,” PCAOB ID 876) acted as our independent auditorregistered public accounting firm for the fiscal years ended December 31, 2018, 20172021 and 2016.2020. The table below sets out the total amount billed to us by PwC,incurred, for services performed in the years ended December 31, 2018, 20172021 and 2016,2020, and breaks down these amounts by category of service:
|
| 2016 |
|
| 2017 |
|
| 2018 |
| |||
|
| $'000 |
|
| $'000 |
|
| $'000 |
| |||
Audit Fees |
|
| 253 |
|
|
| 437 |
|
|
| 1,028 |
|
Audit Related Fees |
|
| - |
|
|
| 575 |
|
|
| 886 |
|
Tax Fees |
|
| 107 |
|
|
| 10 |
|
|
| 6 |
|
All Other Fees |
|
| 51 |
|
|
| 73 |
|
|
| 232 |
|
Total |
|
| 411 |
|
|
| 1,095 |
|
|
| 2,152 |
|
Audit Fees
Audit fees for the years ended December 31, 2018, 2017 and 2016 were related to the audit of our consolidated and subsidiary financial statements and other audit or interim review services provided in connection with statutory and regulatory filings or engagements.
Audit Related Fees
Audit related fees for the years ended December 31, 2017 and 2018 relate to services in connection with our IPO transaction.
|
| 2020 |
|
| 2021 |
| ||
|
| (in thousands) |
| |||||
Audit Fees |
| $ | 3,784 |
|
| $ | 4,003 |
|
Audit-Related Fees |
|
| 231 |
|
|
| - |
|
Tax Fees |
| - | - | |||||
All Other Fees |
| 7 | 31 | |||||
Total | $ | 4,022 | $ | 4,034 |
Audit Fees
Audit fees for the years ended December 31, 2021 and 2020 were related to the audit of our Consolidated financial statements and other audit or interim review services provided in connection with statutory and regulatory filings or engagements.
Audit-Related Fees
Audit-related fees for the year ended December 31, 2020 were related to services in connection with our financing activities.
Tax Fees
There were no tax fees for the years ended December 31, 2021 and 2020.
All Other Fees
All other fees in the years ended December 31, 2021 and 2020 were related to services in connection with non-audit compliance and review work.
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Pre-Approval Policies and Procedures
The advance approval of the Audit Committee or members thereof, to whom approval authority has been delegated, is required for all audit and non-audit services provided by our auditors.
All services provided by our auditors are approved in advance by either the Audit Committee or members thereof, to whom authority has been delegated, in accordance with the Audit Committee's pre-approval policy.
Item 16D. Exemptions from the Listing Standards for Audit Committees
Not applicable.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
Item 16F. Change in Registrant’s Certifying Accountant
None.
Item 16G. Corporate Governance
We are a “foreign private issuer” (as such term is defined in Rule 3b–4 under the Exchange Act), and our Class A ordinary shares are listed on the NYSE. We believe the following to be the significant differences between our corporate governance practices and those applicable to U.S. companies under the NYSE listing standards. Under the NYSE rules, NYSE-listed companies that are foreign private issuers are permitted to follow home country practice in-lieu of the corporate governance provisions specified by the NYSE, with limited exceptions. Accordingly, we follow certain corporate governance practices of our home country, the Cayman Islands, in-lieu of certain of the corporate governance requirements of the NYSE. In addition, under the NYSE rules, listed companies of which more than 50% of the voting power for the election of Directors is held by an individual, group or other entity are not required to have a majority of independent Directors, as defined by NYSE rules, or to comply with certain other requirements. Because Mr. Neves beneficially owns more than 50% of our voting power, we are a “controlled company” within the meaning of the rules of the NYSE.
Under the NYSE rules, U.S. domestic listed, non-controlled companies are required to have a majority independent board, which is not required under the Companies Act (as amended) of the Cayman Islands, our home country. In addition, the NYSE rules require U.S. domestic listed, non-controlled companies to have a Compensation Committee and a Nominating and Corporate Governance Committee, each composed entirely of independent Directors, which are not required under our home country laws.
We currently follow and intend to continue to follow the foregoing governance practices and not avail ourselves of the exemptions afforded to foreign private issuers or controlled companies under the NYSE rules. We may in the future, however, decide to use other foreign private issuer exemptions with respect to some or all of the other NYSE listing requirements. Following our home country governance practices may provide less protection than is accorded to investors under the NYSE listing requirements applicable to domestic issuers.
The NYSE also requires that a listed company obtain, in specified circumstances, (1) shareholder approval to adopt or materially revise equity compensation plans, as well as (2) shareholder approval prior to an issuance (a) of more than 1% of its common stock (including derivative securities thereof) in either number or voting power to related parties, (b) of more than 20% of its outstanding common stock (including derivative securities thereof) in either number or voting power or (c) that would result in a change of control, none of which require shareholder approval under Cayman Islands law. We intend to follow home country law in determining whether shareholder approval is required.
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Due to our status as a foreign private issuer and our intent to follow certain home country corporate governance practices, our shareholders do not have the same protections afforded to shareholders of companies that are subject to all the NYSE corporate governance standards and shareholder approval requirements.
Pre-Approval Policies and Procedures
The advance approval of the Audit Committee or members thereof, to whom approval authority has been delegated, is required for all audit and non-audit services provided by our auditors.
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All services provided by our auditors are approved in advance by either the Audit Committee or members thereof, to whom authority has been delegated, in accordance with the Audit Committee's pre-approval policy.
Item 16D. Exemptions from the Listing Standards for Audit Committees
Not applicable.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
Item 16F. Change in Registrant’s Certifying Accountant
None.
Item 16G. Corporate Governance
Our Class A ordinary shares are listed on the NYSE. We believe the following to be the significant differences between our corporate governance practices and those applicable to U.S. companies under the NYSE listing standards. In general, under the NYSE, foreign private issuers, as defined under the Exchange Act, are permitted to follow home country corporate governance practices instead of the corporate governance practices of the New York Stock Exchange. Accordingly, we follow certain corporate governance practices of our home country, the Cayman Islands, in lieu of certain of the corporate governance requirements of the NYSE.
We are a “foreign private issuer” (as such term is defined in Rule 3b–4 under the Exchange Act), and our Class A ordinary shares are listed on the NYSE. Under the NYSE rules, NYSE listed companies that are foreign private issuers are permitted to follow home country practice in lieu of the corporate governance provisions specified by the NYSE with limited exceptions. In addition, under the NYSE rules, listed companies of which more than 50% of the voting power for the election of directors is held by an individual, group or other entity are not required to have a majority of independent directors, as defined by NYSE rules, or to comply with certain other requirements. Because Mr. Neves beneficially owns more than 50% of the voting power of the Company, the Company is a “controlled company” within the meaning of the rules of the NYSE.
Under the NYSE rules, U.S. domestic listed, non-controlled companies are required to have a majority independent board, which is not required under the Companies Law of the Cayman Islands, our home country. In addition, the NYSE rules require U.S. domestic listed, non-controlled companies to have a compensation committee and a nominating and corporate governance committee, each composed entirely of independent directors, which are not required under our home country laws.
We currently follow and intend to continue to follow the foregoing governance practices and not avail ourselves of the exemptions afforded to foreign private issuers or controlled companies under the NYSE rules. We may in the future, however, decide to use other foreign private issuer exemptions with respect to some or all of the other NYSE listing requirements. Following our home country governance practices may provide less protection than is accorded to investors under the NYSE listing requirements applicable to domestic issuers.
The NYSE rules also require shareholder approval for certain matters, such the opportunity to vote on equity compensation plans and material revisions to those plans, which is not required under the Cayman Islands law. We intend to follow home country law in determining whether shareholder approval is required.
Item 16H. Mine Safety Disclosure
Not applicable.
101
We have provided financial statements pursuant to Item 18.
The audited consolidated financial statements as required under Item 18 are attached hereto starting on page F-1 of this Annual Report. The audit report of PricewaterhouseCoopers LLP, independent registered public accounting firm, is included herein preceding the audited consolidated financial statements.
102
List all exhibits filed as part of the registration statement or annual report, including exhibits incorporated by reference.
Item 16I. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
132
PART III
Item 17. Financial statements
We have provided Consolidated financial statements pursuant to Item 18.
Item 18. Financial statements
The audited Consolidated financial statements as required under Item 18 are attached hereto starting on page F-1 of this Annual Report. The audit report of PricewaterhouseCoopers LLP, independent registered public accounting firm, is included herein preceding the audited Consolidated financial statements.
133
Item 19. Exhibits
Exhibit No. |
| Description | Form | File No. | Exhibit No. | Filing Date | Filed/Furnished |
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1.1 |
| 6-K | 001-38655 | 99.1 | 11/18/2021 |
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2.1 |
| F-1 | 333-226929 | 4.1 | 8/20/2018 |
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2.2 |
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| * | |
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2.3 |
| F-1 | 333-226929 | 4.3 | 8/20/2018 |
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2.4 |
| 20-F | 001-38655 | 2.5 | 3/11/2020 |
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2.5 |
| 6-K | 001-38655 | 4.1 | 4/30/2020 |
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2.6 |
| 20-F | 001-38655 | 2.6 | 3/4/2021 |
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4.1† |
| 20-F | 001-38655 | 4.1 | 3/4/2021 |
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4.2† |
| F-1 | 333-226929 | 10.2 | 8/20/2018 |
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4.3† |
| Rules of the Farfetch.com Limited Share Option Scheme, adopted July 18, 2013. | F-1 | 333-226929 | 10.3 | 8/20/2018 |
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4.4† |
| Farfetch.com Limited 2015 Long-Term Incentive Plan, adopted February 13, 2015. | F-1 | 333-226929 | 10.4 | 8/20/2018 |
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4.5† |
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| * | |
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4.6† |
| 6-K | 001-38655 | 99.1 | 5/28/2021 |
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4.7 |
| Acquisition Agreement, dated as of December 12, 2018, between Stadium Goods and Farfetch Limited. | 20-F | 001-38655 | 4.14 | 3/1/2019 |
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4.8 |
| 20-F | 001-38655 | 4.15 | 3/11/2020 |
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8.1 |
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| * | |
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12.1 |
| Principal Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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| * |
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12.2 |
| Principal Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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| * |
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13.1 |
| Principal Executive Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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| ** |
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13.2 |
| Principal Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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| ** |
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15.1 |
| Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm. |
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| * |
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101.INS |
| Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. |
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| * |
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101.SCH |
| Inline XBRL Taxonomy Extension Schema Document. |
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| * |
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134
Exhibit No. | Description | Form | File No. | Exhibit No. | Filing Date | Filed/Furnished | |
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103101.CAL
| Inline XBRL Taxonomy Extension Calculation Linkbase Document. | * | |||||
101.DEF | Inline XBRL Taxonomy Definition Linkbase Document. | * | |||||
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. | * | |||||
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | * | |||||
104 | Cover Page Interactive Data File (embedded within the Inline XBRL document). | * | |||||
* | Filed herewith. | ||||||
** | Furnished herewith. |
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† This document has been identified as a management contract or compensatory plan or arrangement.
Certain agreements filed as exhibits to this report contain representations and warranties that the parties thereto made to each other. These representations and warranties have been made solely for the benefit of the other parties to such agreements and may have been qualified by certain information that has been disclosed to the other parties to such agreements and that may not be reflected in such agreements. In addition, these representations and warranties may be intended as a way of allocating risks among parties if the statements contained therein prove to be incorrect, rather than as actual statements of fact. Accordingly, there can be no reliance on any such representations and warranties as characterizations of the actual state of facts. Moreover, information concerning the subject matter of any such representations and warranties may have changed since the date of such agreements.
104
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
| |||
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† This document has been identified as a management contract or compensatory plan or arrangement.
Certain agreements filed as exhibits to this Annual Report contain representations and warranties that the parties thereto made to each other. These representations and warranties have been made solely for the benefit of the other parties to such agreements and may have been qualified by certain information that has been disclosed to the other parties to such agreements and that may not be reflected in such agreements. In addition, these representations and warranties may be intended as a way of allocating risks among parties if the statements contained therein prove to be incorrect, rather than as actual statements of fact. Accordingly, there can be no reliance on any such representations and warranties as characterizations of the actual state of facts. Moreover, information concerning the subject matter of any such representations and warranties may have changed since the date of such agreements.
135
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
Farfetch Limited | |||
Date: March 4, 2022 |
| By: | /s/ José Neves |
|
|
| José Neves |
|
|
| Chief Executive Officer |
105
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FARFETCH LIMITED AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-2 | |
|
|
Consolidated statement of operations for the | F- 6 |
F- 7 | |
|
|
| F- 8 |
F-9 | |
F- 10 | |
F-11 |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Farfetch Limited
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated statement of financial position of Farfetch Limited and its subsidiaries (the “Group”) as of December 31, 2021 and 2020, and the related consolidated statements of operations, comprehensive (loss)/income, changes in equity/(deficit) and cash flows for each of the three years in the period ended December 31, 2021, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Group’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Group as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. Also in our opinion, the Group did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO because a material weakness in internal control over financial reporting existed as of that date related to the implementation and consistent operation of internal control over financial reporting at the New Guards business.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness referred to above is described in Management’s Report on Internal Control over Financial Reporting appearing under Item 15. We considered this material weakness in determining the nature, timing, and extent of audit tests applied in our audit of the 2021 consolidated financial statements, and our opinion regarding the effectiveness of the Group’s internal control over financial reporting does not affect our opinion on those consolidated financial statements.
Basis for Opinions
The Group’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in management's report referred to above. Our responsibility is to express opinions on the Group’s consolidated financial statements and on the Group’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Group in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As described in Management’s Report on Internal Control over Financial Reporting, management has excluded JBUX Limited, Allure Systems Corp. and Upteam Corporation Limited from its assessment of internal control over financial reporting as of December 31, 2021, because they were acquired by the Group in purchase business combinations during 2021. Management has also excluded Alanui srl from its assessment of internal control over financial reporting as of December 31, 2021 as it was acquired by the Group in a step acquisition during 2021. We have also excluded JBUX Limited, Allure Systems Corp., Upteam Corporation Limited and Alanui srl from our audit of internal control over financial reporting. JBUX Limited, Allure Systems Corp., Upteam Corporation Limited and Alanui srl are subsidiaries whose total assets and total revenue excluded from management’s assessment and our audit of internal control over financial reporting collectively represent less than 1% of the related consolidated financial statement amounts as of and for the year ended December 31, 2021.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Accounting for the Strategic Investment in Farfetch China and Acquisition of Palm Angels
As described in Notes 3, 16, 28 and 33 to the consolidated financial statements, the Group signed an agreement to enter into a strategic arrangement with Taobao China Holding Limited (“Alibaba”) and Richemont International Holding S.A (“Richemont”) in 2021. As part of the arrangement, Alibaba and Richemont invested $500 million in return for a combined 25% stake in Farfetch China Holdings Limited and its subsidiaries. In 2021, the Group also completed the acquisition of 60% of Palm Angels S.r.l. for consideration of $131 million. As part of this agreement and this acquisition, the Group entered into option agreements over the non-controlling interests of 25% and 40% of the share capital of Farfetch China Holdings Limited and Palm Angels S.r.l., respectively. These option agreements are separately recognised as liabilities with a combined value of $648 million as of December 31, 2021. The valuation of these option agreements involves significant management assumptions. Management applied significant judgment in accounting for this agreement and this acquisition, which involved developing its accounting policies for (i) accounting for a non-controlling interest which is created through a transaction other than a business combination; and (ii) accounting for the initial recognition of a non-controlling interest arising from an asset
acquisition using the proportionate share method. Management also applied significant judgment in estimating the present value of the option agreements, which involved the use of complex modeling and significant assumptions with respect to the (i) risk free rate; (ii) credit spread and (iii) revenue compound annual growth rate.
The principal considerations for our determination that the accounting for the strategic investment in Farfetch China Holdings Limited and acquisition of Palm Angels S.r.l. is a critical audit matter are there was significant judgment and estimation by management in determining the appropriate accounting for the transactions and the methodology and valuation models to be used for each option agreement, including the related assumptions. This in turn resulted in a high degree of auditor judgment, subjectivity and effort in performing procedures to evaluate the accounting for the transactions and the methodology and valuation models to be used for each option agreement, including significant assumptions, specifically the risk free rate, credit spread and revenue compound annual growth rate.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included, among others, reading the related agreements; evaluating management’s assessment of the accounting for the strategic investment in Farfetch China Holdings Limited as a partial disposal of a subsidiary without a loss of control and the acquisition of 60% of Palm Angels S.r.l. as an asset acquisition; assessing the appropriateness of the methodologies used in the valuation models; agreeing relevant data used in the models to the executed agreements as applicable; assessing the reasonableness of significant assumptions used by management in the valuation models; and evaluating the sufficiency of the Group’s disclosures in the consolidated financial statements. Professionals with specialized skill and knowledge were used in assessing the appropriateness of the valuation models and the reasonableness of significant assumptions, including the risk free rate and expected volatility. In assessing the reasonableness of significant assumptions used by management, professionals with specialized skill and knowledge developed an independent range to value each option agreement and compared management’s estimate to the independently developed ranges.
Valuation of Embedded Derivatives
As described in Notes 3, 23 and 28 to the consolidated financial statements, the Group issued convertible senior notes amounting to $250.0 million, $400.0 million and $600.0 million on February 5, 2020, April 30, 2020 and November 17, 2020, respectively. Each arrangement contains certain conversion options which are bifurcated from the notes and separately valued. The embedded derivative liabilities are collectively valued at $872 million as of December 31, 2021. Management applied judgment in estimating the fair value of these embedded derivatives, which involved the use of complex modeling and significant assumptions with respect to the risk free rate and expected volatility.
The principal considerations for our determination that the valuation of the embedded derivative is a critical audit matter are there was significant judgment and estimation by management in determining the methodology and valuation models to be used for each instrument, including the related assumptions. This in turn resulted in a high degree of auditor judgment, subjectivity and effort in performing procedures to evaluate the methodology and valuation models and the significant assumptions, specifically the risk free rate and expected volatility.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included, among others, assessing the appropriateness of the methodologies used in the valuation models; agreeing relevant data used in the models to the executed agreements as applicable; and assessing the reasonableness of significant assumptions used by management. Professionals with specialized skill and knowledge were used in assessing the appropriateness of the valuation models and the reasonableness of significant assumptions, including the risk free rate and expected volatility. In assessing the reasonableness of significant assumptions used by management, professionals with specialized skill and knowledge developed an independent range to value each embedded derivative and compared management’s estimate to the independently developed ranges.
Capitalized Development Costs
As described in Notes 3 and 16 to the consolidated financial statements, the Group capitalizes costs relating to the development of internal software and the Farfetch websites. Management applied judgment in assessing whether the
assets met the required criteria for initial capitalization, including the assessment of expected future benefits from the projects to be capitalized, technical feasibility and commercial viability. The value of development costs capitalized during the year ended December 31, 2021 was $119 million.
The principal considerations for our determination that capitalized development costs is a critical audit matter are there was significant judgment by management in assessing whether the assets met the required criteria for initial capitalization, including assessment of expected future benefits from the projects to be capitalized, technical feasibility and commercial viability. This in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures to evaluate management’s judgment in assessing the capitalization criteria.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included, among others, (i) assessing whether the capitalization criteria, including expected future benefits and feasibility and viability of projects, had been met through review of project budgets and roadmaps, consideration of historic unsuccessful projects, corroborating information with the IT project leads and employees working on the projects, and interviewing project supervisors and development personnel on the nature of each project and the time spent on projects by development team members; and (ii) testing directly attributable costs to bring the asset to the condition necessary for it to be capable of operating in the manner intended by management.
/s/PricewaterhouseCoopers LLP
London, United Kingdom
March 4, 2022
We have served as the Group’s auditor since 2015.
FARFETCH LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
for the year ended December 31,
(in $ thousands, except share and per share data)
|
| Note |
| 2019 (1) |
|
| 2020 (1) |
|
| 2021 |
| |||
Revenue |
| 4 |
| $ | 1,021,037 |
|
| $ | 1,673,922 |
|
| $ | 2,256,608 |
|
Cost of revenue |
|
|
|
| (561,191 | ) |
|
| (902,994 | ) |
|
| (1,240,097 | ) |
Gross profit |
|
|
|
| 459,846 |
|
|
| 770,928 |
|
|
| 1,016,511 |
|
Selling, general and administrative expenses (1) |
| 8 |
|
| (889,421 | ) |
|
| (1,351,483 | ) |
|
| (1,480,968 | ) |
Impairment losses on tangible assets |
| 17,18 |
|
| 0 |
|
|
| (2,991 | ) |
|
| 0 |
|
Impairment losses on intangible assets |
| 16 |
|
| 0 |
|
|
| (36,269 | ) |
|
| (11,779 | ) |
Operating loss |
|
|
|
| (429,575 | ) |
|
| (619,815 | ) |
|
| (476,236 | ) |
Gain/(loss) on items held at fair value and remeasurements |
| 9,28 |
|
| 21,721 |
|
|
| (2,643,573 | ) |
|
| 2,023,743 |
|
Share of results of associates |
|
|
|
| 366 |
|
|
| (74 | ) |
|
| (52 | ) |
Finance income |
| 10 |
|
| 34,382 |
|
|
| 24,699 |
|
|
| 12,599 |
|
Finance costs (1) |
| 10 |
|
| (19,232 | ) |
|
| (91,294 | ) |
|
| (86,441 | ) |
(Loss)/profit before tax |
| 11 |
|
| (392,338 | ) |
|
| (3,330,057 | ) |
|
| 1,473,613 |
|
Income tax (expense)/benefit |
| 12 |
|
| (1,162 | ) |
|
| 14,434 |
|
|
| (3,002 | ) |
(Loss)/profit after tax |
|
|
|
| (393,500 | ) |
|
| (3,315,623 | ) |
|
| 1,470,611 |
|
(Loss)/profit after tax attributable to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity holders of the parent |
|
|
|
| (405,109 | ) |
|
| (3,333,171 | ) |
|
| 1,466,487 |
|
Non-controlling interests |
| 33 |
|
| 11,609 |
|
|
| 17,548 |
|
|
| 4,124 |
|
Net (loss)/profit |
|
|
| $ | (393,500 | ) |
| $ | (3,315,623 | ) |
| $ | 1,470,611 |
|
(Loss)/earnings per share attributable to owners of the parent |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| 13 |
|
| (1.27 | ) |
|
| (9.69 | ) |
|
| 4.02 |
|
Diluted |
| 13 |
|
| (1.27 | ) |
|
| (9.69 | ) |
|
| (1.07 | ) |
Weighted-average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| 13 |
|
| 318,843,239 |
|
|
| 343,829,481 |
|
|
| 364,696,712 |
|
Diluted |
| 13 |
|
| 318,843,239 |
|
|
| 343,829,481 |
|
|
| 472,357,995 |
|
(1) Refer to Note 2, Significant accounting policies, for detail on the revision of prior year comparatives.
The accompanying notes are an integral part of these Consolidated financial statements
FARFETCH LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE (LOSS)/INCOME
for the year ended December 31,
(in $ thousands)
|
| Note |
|
| 2019 (1) |
|
| 2020 (1) |
|
| 2021 |
| ||||
(Loss)/profit after tax for the year (1) |
|
|
|
|
| $ | (393,500 | ) |
| $ | (3,315,623 | ) |
| $ | 1,470,611 |
|
Other comprehensive (loss)/income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Items that may be subsequently reclassified to the consolidated statement of operations (net of tax): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange (loss)/gain on translation of foreign operations |
|
|
|
|
|
| (7,333 | ) |
|
| 23,903 |
|
|
| (20,017 | ) |
Loss on cash flow hedges recognized in equity |
|
|
|
|
|
| (11,863 | ) |
|
| (4,227 | ) |
|
| (12,825 | ) |
Loss/(gain) on cash flow hedges reclassified and reported in net (loss)/profit |
|
|
|
|
|
| 8,337 |
|
|
| 17,612 |
|
|
| (11,951 | ) |
Gain/(loss) on cash flow hedges recognized in equity - time value |
|
|
|
|
|
| - |
|
|
| 2,552 |
|
|
| (2,552 | ) |
Items that will not be subsequently reclassified to the consolidated statement of operations (net of tax): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment loss on investments |
|
|
|
|
|
| (100 | ) |
|
| - |
|
|
| - |
|
Remeasurement loss on severance plan |
|
|
|
|
|
| (58 | ) |
|
| (24 | ) |
|
| (77 | ) |
Other comprehensive (loss)/income for the year, net of tax |
|
|
|
|
|
| (11,017 | ) |
|
| 39,816 |
|
|
| (47,422 | ) |
Total comprehensive (loss)/income for the year, net of tax |
|
|
|
|
| $ | (404,517 | ) |
| $ | (3,275,807 | ) |
| $ | 1,423,189 |
|
Total comprehensive (loss)/income attributable to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity holders of the parent |
|
|
|
|
|
| (416,126 | ) |
|
| (3,293,687 | ) |
|
| 1,421,809 |
|
Non-controlling interests |
|
| 33 |
|
|
| 11,609 |
|
|
| 17,880 |
|
|
| 1,380 |
|
|
|
|
|
|
| $ | (404,517 | ) |
| $ | (3,275,807 | ) |
| $ | 1,423,189 |
|
(1) Refer to Note 2, Significant accounting policies, for detail on the revision of prior year comparatives.
The accompanying notes are an integral part of these Consolidated financial statements
FARFETCH LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(in $ thousands)
|
| Note |
|
| December 31, 2020 (1) |
|
| December 31, 2021 |
| |||
Non-current assets |
|
|
|
|
|
|
|
|
|
|
|
|
Other receivables |
|
| 15 |
|
| $ | 58,081 |
|
| $ | 31,225 |
|
Deferred tax assets |
|
| 26 |
|
|
| 13,556 |
|
|
| 13,334 |
|
Intangible assets |
|
| 16 |
|
|
| 1,279,328 |
|
|
| 1,359,657 |
|
Property, plant and equipment |
|
| 17 |
|
|
| 89,082 |
|
|
| 97,063 |
|
Right-of-use assets |
|
| 18 |
|
|
| 179,227 |
|
|
| 195,549 |
|
Investments |
|
| 19 |
|
|
| 8,278 |
|
|
| 17,937 |
|
Investments in associates |
|
| 19 |
|
|
| 2,319 |
|
|
| 69 |
|
Total non-current assets |
|
|
|
|
|
| 1,629,871 |
|
|
| 1,714,834 |
|
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
Inventories |
|
| 14 |
|
|
| 145,309 |
|
|
| 255,664 |
|
Trade and other receivables |
|
| 15 |
|
|
| 209,946 |
|
|
| 374,706 |
|
Current tax assets |
|
|
|
|
|
| 2,082 |
|
|
| 10,201 |
|
Short-term investments |
|
| 21 |
|
|
| - |
|
|
| 99,971 |
|
Derivative financial assets |
|
| 28 |
|
|
| 30,242 |
|
|
| 8,010 |
|
Cash and cash equivalents |
|
| 20 |
|
|
| 1,573,421 |
|
|
| 1,363,128 |
|
Total current assets |
|
|
|
|
|
| 1,961,000 |
|
|
| 2,111,680 |
|
Total assets |
|
|
|
|
|
| 3,590,871 |
|
|
| 3,826,514 |
|
Liabilities and (Deficit)/equity |
|
|
|
|
|
|
|
|
|
|
|
|
Non-current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Provisions |
|
| 24 |
|
|
| 129,113 |
|
|
| 60,545 |
|
Deferred tax liabilities |
|
| 26 |
|
|
| 182,463 |
|
|
| 156,025 |
|
Lease liabilities |
|
| 18 |
|
|
| 165,275 |
|
|
| 180,915 |
|
Employee benefit obligations |
|
| 29 |
|
|
| 26,116 |
|
|
| 12,948 |
|
Derivative financial liabilities |
| 23,28 |
|
|
| 2,996,220 |
|
|
| 872,428 |
| |
Borrowings (1) |
|
| 23 |
|
|
| 617,789 |
|
|
| 515,804 |
|
Put and call option liabilities |
|
| 28 |
|
|
| 348,937 |
|
|
| 836,609 |
|
Other financial liabilities |
|
|
|
|
|
| 4,853 |
|
|
| 13,367 |
|
Total non-current liabilities |
|
|
|
|
|
| 4,470,766 |
|
|
| 2,648,641 |
|
Current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Trade and other payables |
|
| 22 |
|
|
| 666,144 |
|
|
| 806,406 |
|
Provisions |
|
| 24 |
|
|
| 27,146 |
|
|
| 14,585 |
|
Current tax liability |
|
|
|
|
|
| 3,098 |
|
|
| 5,189 |
|
Lease liabilities |
|
| 18 |
|
|
| 26,128 |
|
|
| 33,594 |
|
Employee benefit obligations |
|
| 29 |
|
|
| 38,286 |
|
|
| 8,296 |
|
Derivative financial liabilities |
| 23,28 |
|
|
| 17,427 |
|
|
| 21,118 |
| |
Put and call option liabilities |
|
| 28 |
|
|
| - |
|
|
| 8,321 |
|
Other financial liabilities |
|
|
|
|
|
| 518 |
|
|
| 9,748 |
|
Total current liabilities |
|
|
|
|
|
| 778,747 |
|
|
| 907,257 |
|
Total liabilities |
|
|
|
|
|
| 5,249,513 |
|
|
| 3,555,898 |
|
(Deficit)/equity |
|
|
|
|
|
|
|
|
|
|
|
|
Share capital |
|
| 30 |
|
|
| 14,168 |
|
|
| 15,231 |
|
Share premium |
|
| 30 |
|
|
| 927,931 |
|
|
| 1,641,674 |
|
Merger reserve |
|
| 30 |
|
|
| 783,529 |
|
|
| 783,529 |
|
Foreign exchange reserve |
|
|
|
|
|
| (7,271 | ) |
|
| (24,544 | ) |
Other reserves (1) |
|
| 31 |
|
|
| 467,565 |
|
|
| 59,520 |
|
Accumulated losses (1) |
|
|
|
|
|
| (4,013,120 | ) |
|
| (2,386,802 | ) |
(Deficit)/equity attributable to owners of the parent |
|
|
|
|
|
| (1,827,198 | ) |
|
| 88,608 |
|
Non-controlling interests |
|
| 33 |
|
|
| 168,556 |
|
|
| 182,008 |
|
Total (deficit)/equity |
|
|
|
|
|
| (1,658,642 | ) |
|
| 270,616 |
|
Total (deficit)/equity and liabilities |
|
|
|
|
| $ | 3,590,871 |
|
| $ | 3,826,514 |
|
(1) Refer to Note 2, Significant accounting policies, for detail on the revision of prior year comparatives.
The accompanying notes are an integral part of these Consolidated financial statements
FARFETCH LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY/(DEFICIT) (in $ thousands)
|
| Share capital |
|
|
|
| Share premium |
|
|
|
| Merger reserve |
|
|
|
| Foreign exchange reserve |
|
|
|
| Other reserves (1) |
|
|
|
| Accumulated losses (1) |
|
| Equity/(deficit) attributable to owners of the parent |
|
| Non-controlling interest |
|
| Total equity/ (deficit) |
| |||||||||
Balance at December 31, 2018 |
| $ | 11,994 |
|
|
|
| $ | 772,300 |
|
|
|
| $ | 783,529 |
|
|
|
| $ | (23,509 | ) |
|
|
| $ | 67,474 |
|
|
|
| $ | (483,357 | ) |
| $ | 1,128,431 |
|
| $ | - |
|
| $ | 1,128,431 |
|
Changes in equity/(deficit) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/profit after tax for the year (1) |
|
| - |
|
|
|
|
| - |
|
|
|
|
| - |
|
|
|
|
| - |
|
|
|
|
| - |
|
|
|
|
| (405,109 | ) |
|
| (405,109 | ) |
|
| 11,609 |
|
|
| (393,500 | ) |
Other comprehensive loss |
|
| - |
|
|
|
|
| - |
|
|
|
|
| - |
|
|
|
|
| (7,333 | ) |
|
|
|
| (3,684 | ) |
|
|
|
| - |
|
|
| (11,017 | ) |
|
| - |
|
|
| (11,017 | ) |
Total comprehensive (loss)/income for the year, net of tax |
|
| - |
|
|
|
|
| - |
|
|
|
|
| - |
|
|
|
|
| (7,333 | ) |
|
|
|
| (3,684 | ) |
|
|
|
| (405,109 | ) |
|
| (416,126 | ) |
|
| 11,609 |
|
|
| (404,517 | ) |
Loss on cashflow hedge transferred to inventory |
|
| - |
|
|
|
|
| - |
|
|
|
|
| - |
|
|
|
|
| - |
|
|
|
|
| 142 |
|
|
|
|
| - |
|
|
| 142 |
|
|
| - |
|
|
| 142 |
|
Issue of share capital, net of transaction costs |
|
| 1,590 |
|
|
|
|
| 105,707 |
|
|
|
|
| - |
|
|
|
|
| - |
|
|
|
|
| 393,105 |
|
|
|
|
| - |
|
|
| 500,402 |
|
|
| - |
|
|
| 500,402 |
|
Share-based payment – equity-settled |
|
| - |
|
|
|
|
| - |
|
|
|
|
| - |
|
|
|
|
| - |
|
|
|
|
| 76,383 |
|
|
|
|
| 46,841 |
|
|
| 123,224 |
|
|
| - |
|
|
| 123,224 |
|
Share-based payment- reverse vesting shares (1) |
|
| - |
|
|
|
|
| - |
|
|
|
|
| - |
|
|
|
|
| - |
|
|
|
|
| (62,834 | ) |
|
|
|
| - |
|
|
| (62,834 | ) |
|
| - |
|
|
| (62,834 | ) |
Transaction with non-controlling interests |
|
| - |
|
|
|
|
| - |
|
|
|
|
| - |
|
|
|
|
| - |
|
|
|
|
| (101,311 | ) |
|
|
|
| - |
|
|
| (101,311 | ) |
|
| - |
|
|
| (101,311 | ) |
Non-controlling interest arising from a business combination |
|
| - |
|
|
|
|
| - |
|
|
|
|
| - |
|
|
|
|
| - |
|
|
|
|
| - |
|
|
|
|
| - |
|
|
| - |
|
|
| 158,617 |
|
|
| 158,617 |
|
Non-controlling interest call option |
|
| - |
|
|
|
|
| - |
|
|
|
|
| - |
|
|
|
|
| - |
|
|
|
|
| - |
|
|
|
|
| (4,322 | ) |
|
| (4,322 | ) |
|
| - |
|
|
| (4,322 | ) |
Balance at December 31, 2019 (1) |
|
| 13,584 |
|
|
|
|
| 878,007 |
|
|
|
|
| 783,529 |
|
|
|
|
| (30,842 | ) |
|
|
|
| 369,275 |
|
|
|
|
| (845,947 | ) |
|
| 1,167,606 |
|
|
| 170,226 |
|
|
| 1,337,832 |
|
Balance at December 31, 2019 (as previously reported) |
|
| 13,584 |
|
|
|
|
| 878,007 |
|
|
|
|
| 783,529 |
|
|
|
|
| (30,842 | ) |
|
|
|
| 349,463 |
|
|
|
|
| (826,135 | ) |
|
| 1,167,606 |
|
|
| 170,226 |
|
|
| 1,337,832 |
|
Correction of misstatement (1) |
|
| - |
|
|
|
|
| - |
|
|
|
|
| - |
|
|
|
|
| - |
|
|
|
|
| 19,812 |
|
|
|
|
| (19,812 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
Revised balance at December 31, 2019 |
|
| 13,584 |
|
|
|
|
| 878,007 |
|
|
|
|
| 783,529 |
|
|
|
|
| (30,842 | ) |
|
|
|
| 369,275 |
|
|
|
|
| (845,947 | ) |
|
| 1,167,606 |
|
|
| 170,226 |
|
|
| 1,337,832 |
|
Changes in equity/(deficit) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/profit after tax for the year (1) |
| - |
|
|
|
| - |
|
|
|
| - |
|
|
|
| - |
|
|
|
| - |
|
|
|
|
| (3,333,171 | ) |
|
| (3,333,171 | ) |
|
| 17,548 |
|
|
| (3,315,623 | ) | |||||
Other comprehensive income |
| - |
|
|
|
| - |
|
|
|
| - |
|
|
|
|
| 23,571 |
|
|
|
|
| 15,913 |
|
|
|
|
| - |
|
|
| 39,484 |
|
|
| 332 |
|
|
| 39,816 |
| |||
Total comprehensive income/(loss) for the year, net of tax |
|
| - |
|
|
|
|
| - |
|
|
|
|
| - |
|
|
|
|
| 23,571 |
|
|
|
|
| 15,913 |
|
|
|
|
| (3,333,171 | ) |
|
| (3,293,687 | ) |
|
| 17,880 |
|
|
| (3,275,807 | ) |
Gain on cashflow hedge transferred to inventory |
| - |
|
|
|
| - |
|
|
|
| - |
|
|
|
| - |
|
|
|
|
| (1,213 | ) |
|
|
| - |
|
|
| (1,213 | ) |
| - |
|
|
| (1,213 | ) | ||||||
Issue of share capital, net of transaction costs |
|
| 584 |
|
|
|
|
| 49,924 |
|
|
|
| - |
|
|
|
| - |
|
|
|
|
| 4,808 |
|
|
|
|
| - |
|
|
| 55,316 |
|
|
| - |
|
|
| 55,316 |
| ||
Share-based payment – equity-settled |
| - |
|
|
|
| - |
|
|
|
| - |
|
|
|
| - |
|
|
|
|
| 52,690 |
|
|
|
|
| 165,998 |
|
|
| 218,688 |
|
|
| - |
|
|
| 218,688 |
| ||||
Share-based payment- reverse vesting shares |
| - |
|
|
|
| - |
|
|
|
| - |
|
|
|
| - |
|
|
|
|
| 26,092 |
|
|
|
| - |
|
|
| 26,092 |
|
|
| - |
|
|
| 26,092 |
| |||||
Acquisition of non-controlling interest |
| - |
|
|
|
| - |
|
|
|
| - |
|
|
|
| - |
|
|
|
|
| - |
|
|
|
| - |
|
|
| - |
|
|
| 965 |
|
|
| 965 |
| |||||
Dividends paid to non-controlling interests |
| - |
|
|
|
| - |
|
|
|
| - |
|
|
|
| - |
|
|
|
|
| - |
|
|
|
| - |
|
|
| - |
|
|
| (20,515 | ) |
|
| (20,515 | ) | |||||
Balance at December 31, 2020 (1) |
|
| 14,168 |
|
|
|
|
| 927,931 |
|
|
|
|
| 783,529 |
|
|
|
|
| (7,271 | ) |
|
|
|
| 467,565 |
|
|
|
|
| (4,013,120 | ) |
|
| (1,827,198 | ) |
|
| 168,556 |
|
|
| (1,658,642 | ) |
Balance at December 31, 2020 (as previously reported) |
|
| 14,168 |
|
|
|
|
| 927,931 |
|
|
|
|
| 783,529 |
|
|
|
|
| (7,271 | ) |
|
|
|
| 447,753 |
|
|
|
|
| (4,010,756 | ) |
|
| (1,844,646 | ) |
|
| 168,556 |
|
|
| (1,676,090 | ) |
Correction of misstatements (1) |
|
| - |
|
|
|
|
| - |
|
|
|
|
| - |
|
|
|
|
| - |
|
|
|
|
| 19,812 |
|
|
|
|
| (2,364 | ) |
|
| 17,448 |
|
|
| - |
|
|
| 17,448 |
|
Revised balance at December 31, 2020 |
|
| 14,168 |
|
|
|
|
| 927,931 |
|
|
|
|
| 783,529 |
|
|
|
|
| (7,271 | ) |
|
|
|
| 467,565 |
|
|
|
|
| (4,013,120 | ) |
|
| (1,827,198 | ) |
|
| 168,556 |
|
|
| (1,658,642 | ) |
Changes in equity/(deficit) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit after tax for the year |
|
| - |
|
|
|
|
| - |
|
|
|
|
| - |
|
|
|
|
| - |
|
|
|
|
| - |
|
|
|
|
| 1,466,487 |
|
|
| 1,466,487 |
|
|
| 4,124 |
|
|
| 1,470,611 |
|
Other comprehensive loss |
|
| - |
|
|
|
|
| - |
|
|
|
|
| - |
|
|
|
|
| (17,273 | ) |
|
|
|
| (27,405 | ) |
|
|
|
| - |
|
|
| (44,678 | ) |
|
| (2,744 | ) |
|
| (47,422 | ) |
Total comprehensive (loss)/income for the year, net of tax |
|
| - |
|
|
|
|
| - |
|
|
|
|
| - |
|
|
|
|
| (17,273 | ) |
|
|
|
| (27,405 | ) |
|
|
|
| 1,466,487 |
|
|
| 1,421,809 |
|
|
| 1,380 |
|
|
| 1,423,189 |
|
Loss on cashflow hedge transferred to inventory |
| - |
|
|
|
| - |
|
|
|
| - |
|
|
|
| - |
|
|
|
|
| 2,066 |
|
|
|
| - |
|
|
| 2,066 |
|
|
| - |
|
|
| 2,066 |
| |||||
Issue of share capital, net of transaction costs |
|
| 333 |
|
|
|
| - |
|
|
|
| - |
|
|
|
| - |
|
|
|
| - |
|
|
|
| - |
|
|
| 333 |
|
|
| - |
|
|
| 333 |
| |||||
Early conversion of convertible loan notes |
|
| 653 |
|
|
|
|
| 630,976 |
|
|
|
|
| - |
|
|
|
|
| - |
|
|
|
|
| - |
|
|
|
|
| - |
|
|
| 631,629 |
|
|
| - |
|
|
| 631,629 |
|
Share-based payment – equity-settled |
| - |
|
|
|
| - |
|
|
|
| - |
|
|
|
| - |
|
|
|
|
| 61,282 |
|
|
|
|
| 159,831 |
|
|
| 221,113 |
|
|
| - |
|
|
| 221,113 |
| ||||
Share-based payment- reverse vesting shares |
|
| 51 |
|
|
|
|
| 54,626 |
|
|
|
| - |
|
|
|
| - |
|
|
|
|
| (24,486 | ) |
|
|
| - |
|
|
| 30,191 |
|
|
| - |
|
|
| 30,191 |
| |||
Acquisition of non-controlling interest |
| - |
|
|
|
| - |
|
|
|
| - |
|
|
|
| - |
|
|
|
|
| (11,613 | ) |
|
|
| - |
|
|
| (11,613 | ) |
|
| (6,901 | ) |
|
| (18,514 | ) | |||||
Dividends paid to non-controlling interests |
| - |
|
|
|
| - |
|
|
|
| - |
|
|
|
| - |
|
|
|
|
| - |
|
|
|
| - |
|
|
| - |
|
|
| (23,016 | ) |
|
| (23,016 | ) | |||||
Non-controlling interest arising on purchase of asset |
|
| 20 |
|
|
|
|
| 23,767 |
|
|
|
| - |
|
|
|
| - |
|
|
|
|
| - |
|
|
|
| - |
|
|
| 23,787 |
|
|
| 50,453 |
|
|
| 74,240 |
| |||
Share issued on purchase of subsidiary |
|
| 6 |
|
|
|
|
| 4,374 |
|
|
|
|
| - |
|
|
|
|
| - |
|
|
|
|
| - |
|
|
|
|
| - |
|
|
| 4,380 |
|
|
| - |
|
|
| 4,380 |
|
Step acquisition |
| - |
|
|
|
| - |
|
|
|
| - |
|
|
|
| - |
|
|
|
|
| - |
|
|
|
| - |
|
|
| - |
|
|
| 2,434 |
|
|
| 2,434 |
| |||||
Non-controlling interest put option |
| - |
|
|
|
| - |
|
|
|
| - |
|
|
|
| - |
|
|
|
|
| (150,070 | ) |
|
|
| - |
|
|
| (150,070 | ) |
|
| - |
|
|
| (150,070 | ) | |||||
Farfetch China Holdings Ltd put call option |
| - |
|
|
|
| - |
|
|
|
| - |
|
|
|
| - |
|
|
|
|
| (744,163 | ) |
|
|
| - |
|
|
| (744,163 | ) |
|
| - |
|
|
| (744,163 | ) | |||||
Capital contribution from non-controlling interests, net of transaction costs |
| - |
|
|
|
| - |
|
|
|
| - |
|
|
|
| - |
|
|
|
|
| 488,863 |
|
|
|
| - |
|
|
| 488,863 |
|
|
| (13,875 | ) |
|
| 474,988 |
| |||||
Other |
| - |
|
|
|
| - |
|
|
|
| - |
|
|
|
| - |
|
|
|
|
| (2,519 | ) |
|
|
|
| - |
|
|
| (2,519 | ) |
|
| 2,977 |
|
|
| 458 |
| ||||
Balance at December 31, 2021 |
| $ | 15,231 |
|
|
|
| $ | 1,641,674 |
|
|
|
| $ | 783,529 |
|
|
|
| $ | (24,544 | ) |
|
|
| $ | 59,520 |
|
|
|
| $ | (2,386,802 | ) |
| $ | 88,608 |
|
| $ | 182,008 |
|
| $ | 270,616 |
|
(1) | See Note 2, Significant Accounting Policies, for
|
FARFETCH LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
for the year ended December 31,
(in $ thousands)
|
| Note |
|
| 2019 |
|
| 2020 |
|
| 2021 |
| ||||
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss (1) |
|
|
|
|
| $ | (429,575 | ) |
| $ | (619,815 | ) |
| $ | (476,236 | ) |
Adjustments to reconcile operating loss to net cash (outflow)/inflow from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
| 17,18 |
|
|
| 28,536 |
|
|
| 39,366 |
|
|
| 49,564 |
| |
Amortization |
|
| 16 |
|
|
| 85,055 |
|
|
| 177,857 |
|
|
| 201,634 |
|
Non-cash employee benefits expense (1) |
|
|
|
|
|
| 158,007 |
|
|
| 168,347 |
|
|
| 219,932 |
|
Net gain on sale of non-current assets |
|
|
|
|
|
| (144 | ) |
|
| - |
|
|
| - |
|
Net exchange differences |
|
|
|
|
|
| (842 | ) |
|
| - |
|
|
| - |
|
Impairment losses on tangible assets |
| 17,18 |
|
|
| - |
|
|
| 2,991 |
|
|
| - |
| |
Impairment losses on intangible assets |
|
| 16 |
|
|
| - |
|
|
| 36,269 |
|
|
| 11,779 |
|
Impairment of investments |
|
|
|
|
|
| 5,000 |
|
|
| 235 |
|
|
| 134 |
|
Changes in working capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in receivables |
|
|
|
|
|
| (51,273 | ) |
|
| (15,833 | ) |
|
| (164,656 | ) |
Increase in inventories |
|
|
|
|
|
| (29,723 | ) |
|
| (16,471 | ) |
|
| (104,838 | ) |
Increase in payables |
|
|
|
|
|
| 113,716 |
|
|
| 280,454 |
|
|
| 115,025 |
|
Changes in other assets and liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease/(increase) in non-current receivables |
|
|
|
|
|
| 3,723 |
|
|
| (1,453 | ) |
|
| 13,551 |
|
Increase/(decrease) in other liabilities |
|
|
|
|
|
| 11,575 |
|
|
| 59,640 |
|
|
| (44,227 | ) |
(Decrease)/increase in provisions |
|
|
|
|
|
| (4,252 | ) |
|
| 85,001 |
|
|
| (68,128 | ) |
(Decrease)/increase in derivative financial instruments |
|
|
|
|
|
| (117 | ) |
|
| (15,052 | ) |
|
| 5,663 |
|
Income taxes paid |
|
|
|
|
|
| (16,328 | ) |
|
| (65,221 | ) |
|
| (41,351 | ) |
Net cash (outflow)/inflow from operating activities |
|
|
|
|
|
| (126,642 | ) |
|
| 116,315 |
|
|
| (282,154 | ) |
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of subsidiaries, net of cash acquired |
|
| 5 |
|
|
| (461,691 | ) |
|
| (12,016 | ) |
|
| (27,295 | ) |
Payments for property, plant and equipment |
|
| 17 |
|
|
| (39,512 | ) |
|
| (26,839 | ) |
|
| (28,854 | ) |
Proceeds on disposal of property, plant and equipment |
|
| 17 |
|
|
| 272 |
|
|
| - |
|
|
| - |
|
Payments for intangible assets |
|
| 16 |
|
|
| (72,985 | ) |
|
| (94,105 | ) |
|
| (167,707 | ) |
Interest received |
|
|
|
|
|
| 11,259 |
|
|
| 3,131 |
|
|
| 2,994 |
|
Investment in short-term investments |
|
| 21 |
|
|
| - |
|
|
| - |
|
|
| (100,000 | ) |
Dividends received from associate |
|
|
|
|
|
| - |
|
|
| 60 |
|
|
| - |
|
Payments for investments |
|
| 19 |
|
|
| (20,846 | ) |
|
| (2,872 | ) |
|
| (9,794 | ) |
Net cash outflow from investing activities |
|
|
|
|
|
| (583,503 | ) |
|
| (132,641 | ) |
|
| (330,656 | ) |
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issue of shares, net of issue costs |
|
|
|
|
|
| - |
|
|
| 50,000 |
|
|
| - |
|
Proceeds from exercise of employee share-based awards |
|
|
|
|
|
| 8,654 |
|
|
| 62,899 |
|
|
| 36,833 |
|
Transaction costs paid relating to capital contribution from non-controlling interest |
|
| 33 |
|
|
| - |
|
|
| - |
|
|
| (25,000 | ) |
Repayment of the principal elements of lease payments |
|
|
|
|
|
| (19,127 | ) |
|
| (19,051 | ) |
|
| (26,251 | ) |
Proceeds from borrowings, net of issue costs |
|
| 23 |
|
|
| - |
|
|
| 1,241,861 |
|
|
| - |
|
Dividends paid to holders of non-controlling interests |
|
| 33 |
|
|
| - |
|
|
| (20,515 | ) |
|
| (23,016 | ) |
Interest and fees paid on loans |
|
|
|
|
|
| (4,776 | ) |
|
| (54,154 | ) |
|
| (32,791 | ) |
Acquisition of non-controlling interests |
|
|
|
|
|
| - |
|
|
| - |
|
|
| (18,514 | ) |
Settlement of equity-based awards |
|
|
|
|
|
| - |
|
|
| - |
|
|
| (6,119 | ) |
Capital contribution from non-controlling interest |
|
| 33 |
|
|
| - |
|
|
| - |
|
|
| 500,000 |
|
Net cash (outflow)/inflow from financing activities |
|
|
|
|
|
| (15,249 | ) |
|
| 1,261,040 |
|
|
| 405,142 |
|
Net (decrease)/increase in cash and cash equivalents |
|
|
|
|
|
| (725,394 | ) |
|
| 1,244,714 |
|
|
| (207,668 | ) |
Cash and cash equivalents at the beginning of the year |
|
| 20 |
|
|
| 1,044,786 |
|
|
| 322,429 |
|
|
| 1,573,421 |
|
Effects of exchange rate changes on cash and cash equivalents |
|
|
|
|
|
| 3,037 |
|
|
| 6,278 |
|
|
| (2,625 | ) |
Cash and cash equivalents at end of year |
|
|
|
|
| $ | 322,429 |
|
| $ | 1,573,421 |
|
| $ | 1,363,128 |
|
(1) Refer to Note 2, Significant accounting policies, for detail on the revision of prior year comparatives.
The accompanying notes are an integral part of these Consolidated financial statements
Notes to the Consolidated financial statements
|
| Note |
|
| 2016 |
|
| 2017 |
|
| 2018 |
| ||||
Loss for the year |
|
|
|
|
|
| (81,459 | ) |
|
| (112,275 | ) |
|
| (155,575 | ) |
Other comprehensive (loss)/income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Items that may be subsequently reclassified to consolidated statement of operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange differences on translation of foreign operations |
|
|
|
|
|
| (27,322 | ) |
|
| 33,504 |
|
|
| (24,142 | ) |
Gains on cash flow hedges |
|
|
|
|
|
| - |
|
|
| - |
|
|
| 436 |
|
Other comprehensive (loss)/income for the year, net of tax |
|
|
|
|
|
| (27,322 | ) |
|
| 33,504 |
|
|
| (23,706 | ) |
Total comprehensive loss for the year, net of tax |
|
|
|
|
|
| (108,781 | ) |
|
| (78,771 | ) |
|
| (179,281 | ) |
Attributable to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity holders of the parent |
|
|
|
|
|
| (108,736 | ) |
|
| (78,771 | ) |
|
| (179,281 | ) |
Non-controlling interests |
|
| 21 |
|
|
| (45 | ) |
|
| - |
|
|
| - |
|
|
|
|
|
|
|
| (108,781 | ) |
|
| (78,771 | ) |
|
| (179,281 | ) |
1. |
|
Farfetch Limited (the “Company”) is an exempted company incorporated with limited liability under the Companies Act (as amended) of the Cayman Islands, as amended and restated from time to time (the “Companies Act”). The principal place of business is The Bower, 211 Old Street, London, EC1V 9NR, United Kingdom. Farfetch Limited and its subsidiary undertakings (the “Group”) is principally engaged in the following:
• | providing an online marketplace at Farfetch.com (and related suffixes) as well as the Farfetch app for retailers and brands to be able to offer their products for sale to the public (including associated services such as ‘production’, logistics, customer services and payment processing); |
• | web design, build, development and |
| • | operating the
|
| • | providing a
|
Effects of the COVID-19 pandemic
Since early 2020, the world has been, and continues to be, impacted by COVID-19 and its variants. The extent of these impacts on our financial and operating results will be dictated by the length of time that the pandemic and the related counter-measures continue for, in addition to individuals’ and companies’ risk tolerance regarding health matters going forward.
The impact of the COVID-19 pandemic and actions taken in response to it had varying effects on our 2020 operating results. Since the onset of the pandemic, there has been an acceleration in the shift of consumer demand to online, which the Group has partially benefited from. This has continued during the year ended December 31, 2021. In 2020, this also resulted in Digital Platform revenue growth. This growth in revenue was partially offset by the performance in Brand Platform revenue which has been impacted by Brand Platform customers having to close at various times during 2020.
In light of the COVID-19 pandemic, the Group has considered the impact on the Consolidated financial statements and where appropriate any impacts have been reflected in the financial statements.
These financial statements were authorized for issue by the Board on March 4, 2022.
2. | Significant accounting policies |
2.1. | Basis of
|
The Consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). These Consolidated financial statements have been prepared under the historical cost convention, except as modified by the revaluation of certain financial assets and financial liabilities at fair value through profit and loss and fair value through other comprehensive income.
The Directors have made an assessment of the Group’s ability to continue in operational existence for the foreseeable future and are satisfied that it is appropriate to continue to adopt the going concern basis of accounting in preparing the Consolidated financial statements.
The Consolidated financial statements are presented in U.S. dollars (“U.S. dollars” or “USD” or “$”). All values are rounded to the nearest 1,000 dollars, except where indicated. The tables in these notes are shown in USD thousands, except where indicated.
Effective January 1, 2019, we adopted the requirements of IFRS 16 - Leases (“IFRS 16”).
F-11
Notes to the Consolidated financial statements (continued)
Correction of a misstatement in calculating interest expense
During the preparation of the Group’s condensed Consolidated financial statements for the three months ended March 31, 2021, an overstatement of $17.4 million was identified in relation to the accounting for interest expense reported in our results for the year ended December 31, 2020, relating to a calculation error.
As compared to what was previously reported, the correction to reduce the Finance costs line item by $17.4 million also results in a $17.4 million decrease in loss after tax, and a decrease in the basic and diluted loss per share of $0.06 for the annual period ended December 31, 2020. The correction also resulted in the reduction by $17.4 million of the Non-current borrowings line in the Consolidated statement of financial position on December 31, 2020. The results for the year ended December 31, 2019 were not impacted by this correction.
This revision had no impact on gross profit or operating loss in the periods mentioned, and had no impact on total assets, total deficit and liabilities, or total cash flows in the periods mentioned. The Company evaluated these amounts and concluded that while they are immaterial to reissue the previously reported Consolidated financial statements, they should be corrected by revising the previously reported financial information when such amounts are presented for comparative purposes.
Correction of a misstatement in calculating share-based payment expense
During the preparation of the Group’s Consolidated financial statements for the year ended December 31, 2021, an understatement of $19.8 million was identified in relation to the accounting for share-based compensation expense reported in our results for the year ended December 31, 2019.
This non-cash equity-based compensation error related to the incorrect timing of recognition of expense for certain awards granted to Stadium Goods and NGG employees when those businesses were acquired. The expense was initially recognized on a straight-line attribution basis. Upon further review, management determined that the non-cash equity-based compensation expense for such awards should have been recognized on a tranche-by-tranche basis ("graded vesting model") because the awards can only be exercised at certain periods if the employee remains employed with the Company. The impact of correcting the attribution shifts the non-cash equity-based compensation expense to earlier reporting periods, while the total cumulative expense expected to be recognized over the service period will remain the same.
As compared to what was previously reported, the correction to increase share-based compensation expenses recorded within the Selling, general and administrative expenses line item by $19.8 million also results in a $19.8 million increase in operating loss, loss after tax, and an increase in the basic and diluted loss per share of $0.06 for the annual period ended December 31, 2019. The correction also resulted in offsetting increases by $19.8 million of both Other reserves and Accumulated losses within equity within the Consolidated statement of financial position on December 31, 2019. The impacts on the results for the years ended December 31, 2021 and 2020 were insignificant individually and in the aggregate for adjustment.
This revision had no impact on gross profit, total assets, total equity and liabilities, or total cash flows as of and for the years ended December 31, 2021, 2020, and 2019. The Company evaluated these amounts and concluded that while they are immaterial to reissue the previously reported Consolidated financial statements, they should be corrected by revising the previously reported financial information when such amounts are presented for comparative purposes.
The error has been corrected by revising each of the affected financial statement line items for the 2019 comparative periods presented.
F-12
Notes to the Consolidated financial statements (continued)
The tables below detail the impact of both revisions on the impacted financial statement line items for the comparative periods presented.
Year ended December 31, 2020
The impact on our Consolidated statement of financial position was as follows:
December 31, 2020 (as previously reported) Share Based Payment expense Adjustment Interest expense Adjustment December 31, 2020 (revised) Non-current liabilities Borrowings $ 635,237 $ - $ (17,448 ) $ 617,789 Total non-current liabilities 4,488,214 - (17,448 ) 4,470,766 Total liabilities 5,266,961 - (17,448 ) 5,249,513 Other reserves 447,753 19,812 - 467,565 Accumulated losses (4,010,756 ) (19,812 ) 17,448 (4,013,120 ) Total deficit (1,676,090 ) - 17,448 (1,658,642 ) Total deficit and liabilities $ 3,590,871 $ - $ - $ 3,590,871 The impact on our Consolidated statement of operations was as follows: |
|
|
|
Year ended December 31, 2020 (as previously reported) Share Based Payment expense Adjustment Interest expense Adjustment Year ended December 31, 2020 (revised) Finance costs $ (108,742 ) $ - $ 17,448 $ (91,294 ) Loss before tax (3,347,505 ) - 17,448 (3,330,057 ) Income tax benefit 14,434 - - 14,434 Loss after tax $ (3,333,071 ) $ - $ 17,448 $ (3,315,623 ) (Loss)/profit after tax attributable to: Equity holders of the parent (3,350,619 ) - 17,448 (3,333,171 ) Non-controlling interests $ 17,548 $ - $ - $ 17,548 The consolidated
The impact on our Basic and Diluted earnings per share was as follows:
|
| Year ended December 31, 2020 (as previously reported) |
|
| Share Based Payment expense Adjustment |
|
| Interest expense Adjustment |
|
| Year ended December 31, 2020 (revised) |
| ||||
Loss per share attributable to owners of the parent |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| (9.75 | ) |
|
| - |
|
|
| 0.06 |
|
|
| (9.69 | ) |
Diluted |
|
| (9.75 | ) |
|
| - |
|
|
| 0.06 |
|
|
| (9.69 | ) |
F-13
Notes to the Consolidated financial statements (continued)
Year ended December 31, 2019
The impact on our Consolidated statement of financial position was as follows:
|
| December 31, 2019 (as previously reported) |
|
| Share based Payment expense Adjustment |
|
| December 31, 2019 (revised) |
| |||
Total liabilities |
| $ | 890,047 |
|
| $ | - |
|
| $ | 890,047 |
|
Other reserves |
|
| 349,463 |
|
|
| 19,812 |
|
|
| 369,275 |
|
Accumulated losses |
|
| (826,135 | ) |
|
| (19,812 | ) |
|
| (845,947 | ) |
Total equity |
|
| 1,337,832 |
|
|
|
|
|
|
| 1,337,832 |
|
Total equity and liabilities |
| $ | 2,227,879 |
|
| $ | - |
|
| $ | 2,227,879 |
|
The impact on our Consolidated statement of operations was as follows:
|
| Year ended December 31, 2019 (as previously reported) |
|
| Share based Payment expense Adjustment |
|
| Year ended December 31, 2019 (revised) |
| |||
Selling, general and administrative expenses |
| $ | (869,609 | ) |
| $ | (19,812 | ) |
| $ | (889,421 | ) |
Loss before tax |
|
| (372,526 | ) |
|
| (19,812 | ) |
|
| (392,338 | ) |
Income tax benefit |
|
| (1,162 | ) |
|
| - |
|
|
| (1,162 | ) |
Loss after tax |
| $ | (373,688 | ) |
| $ | (19,812 | ) |
| $ | (393,500 | ) |
(Loss)/profit after tax attributable to: |
|
|
|
|
|
|
|
|
|
|
|
|
Equity holders of the parent |
|
| (385,297 | ) |
|
| (19,812 | ) |
|
| (405,109 | ) |
Non-controlling interests |
| $ | 11,609 |
|
| $ | - |
|
| $ | 11,609 |
|
The impact on our Basic and Diluted earnings per share was as follows:
|
| Year ended December 31, 2019 (as previously reported) |
|
| Share based Payment expense Adjustment |
|
| Year ended December 31, 2019 (revised) |
| |||
Loss per share attributable to owners of the parent |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| (1.21 | ) |
|
| (0.06 | ) |
|
| (1.27 | ) |
Diluted |
|
| (1.21 | ) |
|
| (0.06 | ) |
|
| (1.27 | ) |
2.2. | Basis of
|
The Consolidated financial statements comprise the Consolidated financial statements of the Group and its subsidiaries. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.
Generally, there is a presumption that a majority of voting rights results in control. To support this presumption and when the Group has less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including:
• | The contractual arrangement with the other vote holders of the investee; |
• | Rights arising from other contractual arrangements; and |
• | The Group’s voting rights and potential voting rights. |
F-14
Notes to the Consolidated financial statements (continued)
The Group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the Consolidated financial statements from the date the Group gains control until the date control ceases. Profit or loss and each component of other comprehensive income (“OCI”) are attributed to the equity holders of the parent of the Group and to the non-controlling interests. When necessary, adjustments are made to the consolidated financial statement of subsidiaries to bring their accounting policies into line with the Group’s accounting policies. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction.
Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred measured at acquisition date fair value and the amount of any non-controlling interests in the acquiree. For each business combination, the Group measures the non-controlling interests in the acquiree at the proportionate share of the acquiree’s identifiable net assets. When the Group acquires a business, it assesses the financial assets and liabilities assumed for classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. Any contingent consideration to be transferred by the Group is recognized at fair value at the acquisition date and is subsequently measured at fair value with changes in fair value recognized in profit or loss. Refer to Note 5, Business Combinations for additional information.
The Group recognizes an investment in associate when the Group has a significant influence over that entity. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control over those policies. The Group’s investments in its associates, Farfetch Finance Limited and Alanui S.r.l (“Alanui”) (up until March 1, 2021 – refer to Note 5. Business Combinations for additional information), are accounted for using the equity method. Under the equity method of accounting, the investments are initially recognized at cost and adjusted thereafter to recognize the Group’s share of the post-acquisition profits or losses of the investee in profit or loss, and the Group’s share of movements in other comprehensive income of the investee in other comprehensive income.
The Group presents assets and liabilities in the Consolidated statement of financial position based on current/non-current classification. An asset is current when it is:
F-15 Notes to the Consolidated financial statements (continued) All other assets are classified as non-current. A liability is current when:
The Group classifies all other liabilities as non-current.
Retailing of goods Revenue, where the Group acts as a principal, is recognized when the performance obligation is satisfied which is when the goods are received by the consumer. Included within sales of goods is a provision for expected returns, discounts and rebates. Where these are not known, the Group uses historical data and patterns to calculate an estimate. Rendering of services The Group primarily acts as a commercial intermediary between sellers, being the brands and retailers, and end consumers and earns a commission for this service. For these arrangements, the sellers determine the transaction price of the goods sold on the website, being the purchase price paid by the consumer, with the Group acting as an agent for the sellers and the related revenue is recognized on a net basis. The Group also charges fees to sellers for activities related to providing this service, such as packaging, credit card processing, settlement of duties, and other transaction processing activities. These activities are not considered separate promises to the consumer, and the related fees are therefore recognized concurrently with commissions at the time the performance obligation to facilitate the transaction between the seller and end consumer is satisfied, which is when the goods are dispatched to the end consumer by the seller. A provision is made for commissions that would be refunded if the end consumer returns the goods, and the Group uses historical data and patterns to estimate its return provision. There are no significant payment terms, with the Group taking payment in full from the consumer’s chosen payment method at the time the goods are ready for dispatch by the seller. The Group also provides delivery services to end consumers, with the Group setting the transaction price, being the price paid by the consumer for goods purchased on its platform. For these services, the Group acts as the principal and recognizes as revenue amounts charged to end consumers net of any promotional incentives and discounts. Revenue for these services is recognized on delivery of goods to the end consumer, which represents the point in time at which the Group’s performance obligation is satisfied. No provision for returns is made as delivery revenue is not subject to refund. Promotional incentives, which include basket promo-code discounts, may periodically be offered to end consumers. These are treated as a deduction to revenue. Cash is collected by the Group from the end consumer using payment service providers. Within two months of the transactions, this is remitted to the relevant seller (net of commission and recoveries). Such amounts are presented within trade and other payables, unless the relevant seller is in a net receivable position and is therefore classified within trade and other receivables.
|