Docoh
Loading...

MELI MercadoLibre

Filed: 6 May 21, 4:23pm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x

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

For the quarterly period ended March 31, 2021

-OR-

¨

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

For the transition period from _________ to _________

Commission file number 001-33647

MercadoLibre, Inc.

(Exact name of Registrant as specified in its Charter)

Delaware

 

98-0212790

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

Pasaje Posta 4789, 6th Floor

Buenos Aires, Argentina, C1430EKG

(Address of registrant’s principal executive offices)

(+5411) 4640-8000

(Registrant’s telephone number, including area code)

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

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.001 par value per share

MELI

  Nasdaq Global Select Market  

2.375% Sustainability Notes due 2026

MELI26

The Nasdaq Stock Market LLC

3.125% Notes due 2031

MELI31

The Nasdaq Stock Market LLC

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   x     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   x     No   ¨

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

Large accelerated filer

x

Accelerated filer

¨

Non-accelerated filer

¨  

Smaller reporting company

¨

Emerging growth company

¨

If an emerging growth company, 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. ¨

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

49,852,319 shares of the issuer’s common stock, $0.001 par value, outstanding as of May 4, 2021.

MERCADOLIBRE, INC.

INDEX TO FORM 10-Q

 

 

MercadoLibre, Inc.

Interim Condensed Consolidated Balance Sheets

As of March 31, 2021 and December 31, 2020

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

(Unaudited)

March 31,

December 31,

2021

2020

Assets

Current assets:

Cash and cash equivalents

$                          862,720

$                    1,856,394

Restricted cash and cash equivalents

325,636

651,830

Short-term investments (634,067 and 636,949 held in guarantee - see Note 4)

980,076

1,241,306

Accounts receivable, net

64,815

49,691

Credit cards receivable and other means of payments, net

883,670

863,073

Loans receivable, net

416,600

385,036

Prepaid expenses

43,291

28,378

Inventory

131,460

118,140

Other assets

191,923

152,959

Total current assets

3,900,191

5,346,807

Non-current assets:

Long-term investments

175,601

166,111

Loans receivable, net

18,849

16,619

Property and equipment, net

458,640

391,684

Operating lease right-of-use assets

345,313

303,214

Goodwill

82,830

85,211

Intangible assets, net

20,271

14,155

Deferred tax assets

124,272

134,916

Other assets

71,888

67,615

Total non-current assets

1,297,664

1,179,525

Total assets

$                       5,197,855

$                    6,526,332

Liabilities

Current liabilities:

Accounts payable and accrued expenses

$                          612,206

$                       767,336

Funds payable to customers and amounts due to merchants

1,527,971

1,733,095

Salaries and social security payable

193,166

207,358

Taxes payable

240,167

215,918

Loans payable and other financial liabilities

514,540

548,393

Operating lease liabilities

67,264

55,246

Other liabilities

49,635

108,534

Total current liabilities

3,204,949

3,635,880

Non-current liabilities:

Salaries and social security payable

20,695

49,852

Loans payable and other financial liabilities

1,659,898

860,876

Operating lease liabilities

277,264

243,601

Deferred tax liabilities

41,233

64,354

Other liabilities

24,220

20,191

Total non-current liabilities

2,023,310

1,238,874

Total liabilities

$                       5,228,259

$                    4,874,754

Commitments and Contingencies (Note 9)

 

 

Equity

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

49,852,319 and 49,869,727 shares issued and outstanding at March 31,

2021 and December 31, 2020

$                                   50

$                                50

Additional paid-in capital

275,632

1,860,502

Treasury stock

(80,126)

(54,805)

Retained earnings

280,103

314,115

Accumulated other comprehensive loss

(506,063)

(468,284)

Total Equity

(30,404)

1,651,578

Total Liabilities and Equity

$                       5,197,855

$                    6,526,332

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

MercadoLibre, Inc.

Interim Condensed Consolidated Statements of Income

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

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

(Unaudited)

Three Months Ended March 31,

2021

2020

Net service revenues

$              1,230,904

$                 639,892

Net product revenues

147,537

12,199

Net revenues

1,378,441

652,091

Cost of net revenues

(787,064)

(339,277)

Gross profit

591,377

312,814

Operating expenses:

Product and technology development

(126,035)

(73,435)

Sales and marketing

(288,159)

(206,507)

General and administrative

(86,339)

(62,566)

Total operating expenses

(500,533)

(342,508)

Income (loss) from operations

90,844

(29,694)

Other income (expenses):

Interest income and other financial gains

25,071

36,784

Interest expense and other financial losses (*)

(91,289)

(23,584)

Foreign currency losses

(15,089)

(186)

Net income (loss) before income tax expense

9,537

(16,680)

Income tax expense

(43,549)

(4,429)

Net loss

$                  (34,012)

$                  (21,109)

(*)

Includes $49,247 thousands of loss on debt extinguishment and premium related to the 2028 Notes repurchase. See Note 11 to these unaudited interim condensed consolidated financial statements for further detail on 2028 Notes repurchase.   

Three Months Ended March 31,

2021

2020

Basic EPS

Basic net loss

Available to shareholders per common share

$                     (0.68)

$                     (0.44)

Weighted average of outstanding common shares

49,867,625

49,709,955

Diluted EPS

Diluted net loss

Available to shareholders per common share

$                     (0.68)

$                     (0.44)

Weighted average of outstanding common shares

49,867,625

49,709,955

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

 

MercadoLibre, Inc.

Interim Condensed Consolidated Statements of Comprehensive Income

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

(In thousands of U.S. dollars)

(Unaudited)

Three Months Ended March 31,

2021

2020

Net loss

$                 (34,012)

$                 (21,109)

Other comprehensive loss, net of income tax:

Currency translation adjustment

(41,869)

(94,597)

Unrealized gains on hedging activities

3,670

3,981

Unrealized net gains on available for sale investments

2,268

Less: Reclassification adjustment for gains from accumulated other comprehensive loss

(420)

1,705

Net change in accumulated other comprehensive loss, net of income tax

(37,779)

(90,053)

Total Comprehensive loss

$                 (71,791)

$               (111,162)

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

 


MercadoLibre, Inc.

Interim Condensed Consolidated Statements of Equity

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

(In thousands of U.S. dollars)

(Unaudited)

Accumulated

Additional

other

Common stock

paid-in

Treasury

Retained

comprehensive

Total

Shares

Amount

capital

Stock

Earnings

loss

Equity(*)

Balance as of December 31, 2020

49,870

$

50

$

1,860,502

$

(54,805)

$

314,115

$

(468,284)

$

1,651,578

Stock-based compensation — restricted shares issued

178

178

Capped Call

(100,769)

(100,769)

Repurchase of 2028 Notes Conversion Option

(1,484,279)

(1,484,279)

Common Stock repurchased

(18)

(25,321)

(25,321)

Net loss

(34,012)

(34,012)

Other comprehensive loss

(37,779)

(37,779)

Balance as of March 31, 2021

49,852

$

50

$

275,632

$

(80,126)

$

280,103

$

(506,063)

$

(30,404)

(*) The Total Equity of the Company as of March 31, 2021 decreased from $1,651,578 thousands to $(30,404) thousands, mainly, due to the impact of 2028 Notes repurchased. See Note 11 to these unaudited interim condensed consolidated financial statements for further detail on 2028 Notes repurchase transaction.

Accumulated

Additional

other

Common stock

paid-in

Treasury

Retained

comprehensive

Total

Shares

Amount

capital

Stock

Earnings

loss

Equity

Balance as of December 31, 2019

49,710

$

50

$

2,067,869

$

(720)

$

322,592

$

(406,671)

$

1,983,120

Changes in accounting standards

(4,570)

(4,570)

Balance as of December 31, 2019 Restated

49,710

$

50

$

2,067,869

$

(720)

$

318,022

$

(406,671)

$

1,978,550

Stock-based compensation — restricted shares issued

179

179

Net loss

(21,109)

(21,109)

Redeemable convertible preferred stock dividend distribution ($9.99 per share)

(1,000)

(1,000)

Other comprehensive loss

(90,053)

(90,053)

Balance as of March 31, 2020

49,710

$

50

$

2,068,048

$

(720)

$

295,913

$

(496,724)

$

1,866,567

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

MercadoLibre, Inc.

Interim Condensed Consolidated Statements of Cash Flows

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

(In thousands of U.S. dollars)

(Unaudited)

Three Months Ended March 31,

2021

2020

Cash flows from operations:

Net loss

$                 (34,012)

$                 (21,109)

Adjustments to reconcile net loss to net cash used in operating activities:

Unrealized devaluation loss, net

24,772

18,505

Depreciation and amortization

38,416

21,550

Accrued interest

(4,045)

(22,352)

Non cash interest, convertible notes amortization of debt discount and amortization of debt issuance costs and other charges

34,137

(3,632)

Bad debt charges

83,829

24,419

Financial results on derivative instruments

(18,989)

(16,767)

Stock-based compensation expense — restricted shares

178

179

LTRP accrued compensation

22,916

15,664

Deferred income taxes

3,988

(4,199)

Changes in assets and liabilities:

Accounts receivable

21,064

19,748

Credit cards receivables and other means of payments

(62,274)

(33,303)

Prepaid expenses

(15,218)

8,560

Inventory

(18,958)

(5,272)

Other assets

(34,882)

(5,796)

Payables and accrued expenses

(143,763)

(43,101)

Funds payable to customers and amounts due to merchants

(106,866)

(21,344)

Other liabilities

(62,768)

(32,206)

Interest received from investments

9,478

14,805

Net cash used in operating activities

(262,997)

(85,651)

Cash flows from investing activities:

Purchase of investments

(2,415,091)

(1,323,631)

Proceeds from sale and maturity of investments

2,588,681

1,249,960

Receipts from settlements of derivative instruments

1,585

3,668

Payment for acquired businesses, net of cash acquired

0

(7,561)

Payment from settlements of derivative instruments

(3,897)

0

Purchases of intangible assets

(7,805)

(93)

Changes in principal of loans receivable, net

(148,734)

(27,250)

Purchases of property and equipment

(112,672)

(45,175)

Net cash used in investing activities

(97,933)

(150,082)

Cash flows from financing activities:

Proceeds from loans payable and other financial liabilities

1,839,617

749,617

Payments on loans payable and other financial liabilities

(704,307)

(593,497)

Payments on repurchase of the 2028 Notes

(1,865,076)

0

Payment of finance lease obligations

(3,863)

(564)

Purchase of convertible note capped call

(100,769)

0

Dividends paid of preferred stock

0

(1,000)

Common Stock repurchased

(25,321)

0

Net cash (used in) provided by financing activities

(859,719)

154,556

Effect of exchange rate changes on cash, cash equivalents, restricted cash and cash equivalents

(99,219)

(104,864)

Net decrease in cash, cash equivalents, restricted cash and cash equivalents

(1,319,868)

(186,041)

Cash, cash equivalents, restricted cash and cash equivalents, beginning of the period

$             2,508,224

$             1,451,424

Cash, cash equivalents, restricted cash and cash equivalents, end of the period

$             1,188,356

$             1,265,383

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

1. Nature of Business

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

The Company enables commerce through its marketplace platform, which allows users to buy and sell in most of Latin America. Through Mercado Pago, the fintech solution, MercadoLibre enables individuals and businesses to send and receive digital payments; through Mercado Envios, MercadoLibre facilitates the shipping of goods from the Company and sellers to buyers; through the advertising products, MercadoLibre facilitates advertising services for large retailers and brands to promote their product and services on the web; through Mercado Shops, MercadoLibre allows users to set-up, manage, and promote their own on-line web-stores under a subscription-based business model; through Mercado Credito, MercadoLibre extends loans to certain merchants and consumers; and through Mercado Fondo, MercadoLibre allows users to invest funds deposited in their Mercado Pago accounts.

As of March 31, 2021, MercadoLibre, through its wholly-owned subsidiaries, operated online e-commerce platforms directed towards Argentina, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Peru, Mexico, Panama, Honduras, Nicaragua, El Salvador, Uruguay, Bolivia, Guatemala, Paraguay and Venezuela. Additionally, MercadoLibre operates its FinTech solution in Argentina, Brazil, Mexico, Colombia, Chile, Peru and Uruguay, and extends loans through Mercado Credito in Argentina, Brazil and Mexico. It also offers a shipping solution directed towards Argentina, Brazil, Mexico, Colombia, Chile and Uruguay.

2. Summary of significant accounting policies

Basis of presentation

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

Substantially all net revenues, cost of net revenues and operating expenses are generated in the Company’s foreign operations. Long-lived assets, intangible assets and goodwill located in the foreign jurisdictions totaled $552,837 thousands and $490,464 thousands as of March 31, 2021 and December 31, 2020, respectively.

These interim condensed consolidated financial statements reflect the Company’s consolidated financial position as of March 31, 2021 and December 31, 2020. These consolidated financial statements include the Company’s consolidated statements of income, comprehensive income, equity and cash flows for the three-month periods ended March 31, 2021. These interim condensed consolidated financial statements include all normal recurring adjustments that Management believes are necessary to fairly state the Company’s financial position, operating results and cash flows.

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

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


Revenue recognition

Revenue recognition criteria for the services provided and goods sold by the Company are described in note 2 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

Contract Balances

Timing of revenue recognition may differ from the timing of invoicing to customers. Receivables represent amounts invoiced and revenue recognized prior to invoicing when the Company has satisfied the performance obligation and has the unconditional right to payment. Receivables are presented net of allowance for doubtful accounts, loans receivable and chargebacks of $176,912 thousands and $126,661 thousands as of March 31, 2021 and December 31, 2020, respectively.

Deferred revenue consists of fees received related to unsatisfied performance obligations at the end of the period in accordance with ASC 606. Due to the generally short-term duration of contracts, the majority of the performance obligations are satisfied in the following reporting period. Deferred revenue as of December 31, 2020 and 2019 was $32,519 thousands and $16,590 thousands, respectively, of which $9,413 thousands and $5,562 thousands were recognized as revenue during the three-month periods ended March 31, 2021 and 2020, respectively.

As of March 31, 2021, total deferred revenue was $18,556 thousands, mainly due to fees related to listing and optional feature services billed and loyalty programs that are expected to be recognized as revenue in the coming months.

Digital Assets

During the first quarter of 2021, the Company purchased an aggregate amount of $7,800 thousands in bitcoins. The Company accounts for its digital assets—bitcoins— as indefinite-lived intangible assets, in accordance with Accounting Standards Codification (“ASC”) 350, Intangibles—Goodwill and Other. The Company has ownership of and control over its digital assets and uses third-party custodial services to store its digital assets. The Company’s digital assets are initially recorded at cost. Subsequently, they are measured at cost, net of any impairment losses incurred since acquisition.

The Company performs an analysis each quarter to identify whether events or changes in circumstances, principally decreases in the quoted prices on the active exchange, indicate that any decrease in the fair values of the digital assets below the carrying values for such assets subsequent to their acquisition will result in a recognition of impairment charges. The Company determines the fair value of its digital assets in accordance with ASC 820, Fair Value Measurement.

Impairment losses are recognized in the period in which the impairment is identified. The impaired digital assets are written down to their fair value at the time of impairment and this new cost basis will not be adjusted upward for any subsequent increase in fair value. Gains (if any) are not recorded until realized upon sale. In determining the gain to be recognized upon sale, the Company calculates the difference between the sales price and carrying value of the digital assets sold immediately prior to sale. 

Repurchase of 2.00% Convertible Senior Notes due 2028 - Extinguishment of debt

The derecognition of a convertible debt is based on the principle that an entity is extinguishing the liability component and reacquiring the equity component that was recognized at issuance. This approach is applied whether the debt was settled in cash, shares, other assets (or any combination), or at maturity upon conversion or upon early extinguishment. The settlement consideration is first allocated to the extinguishment of the liability component equal to the fair value of that component immediately prior to extinguishment. Any difference between that allocated amount and the net carrying amount of the liability component and unamortized debt issuance costs should be recognized as a gain or loss on debt extinguishment. Any remaining consideration is allocated to the reacquisition of the equity component and recognized as a reduction of stockholders’ equity. Any paid premium included in the repurchase price should be recognized as a loss when the debt is extinguished.

Foreign currency translation

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

Argentine currency status

As of July 1, 2018, the Company transitioned its Argentinian operations to highly inflationary status in accordance with U.S. GAAP, and changed the functional currency for Argentine subsidiaries from Argentine Pesos to U.S. dollars, which is the functional currency of their immediate parent company.

Since the second half of 2019, the Argentine government instituted certain foreign currency exchange controls, which may restrict or partially restrict access to foreign currency, like the US dollar, to make payments abroad, either for foreign debt or the importation of goods or services, dividend payments and others, without prior authorization. Those regulations have continued to evolve, sometimes making them more or less stringent depending on the Argentine government´s perception of availability of sufficient national foreign currency reserves. The above has led to the existence of an informal foreign currency market where foreign currencies quote at levels significantly higher than the official exchange rate. However, the only exchange rate available for external commerce and financial payments is the official exchange rate, which as of March 31, 2021 was 92.0.

The Company uses Argentina’s official exchange rate to record the accounts of Argentine subsidiaries. The following table sets forth the assets, liabilities and net assets of the Company’s Argentine subsidiaries and consolidated VIEs, before intercompany eliminations, as of March 31, 2021 and December 31, 2020:

March 31,

December 31,

2021

2020

(In thousands)

Assets

$              1,493,608

$              1,470,885

Liabilities

1,154,563

1,230,326

Net Assets

$                 339,045

$                 240,559

Income taxes

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

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

On June 10, 2019, the Argentine government enacted Law No. 27,506 (knowledge-based economy promotional regime), which established a regime that provides certain tax benefits for companies that meet specific criteria, such as companies that derive at least 70% of their revenues from certain specified activities related to the knowledge-based economy. The regime was suspended on January 20, 2020 until new rules for the application of the knowledge-based economy promotional regime were issued.

On June 25, 2020, the Chamber of Deputies passed changes to the knowledge-based economy promotional regime. The Chamber of Senates proposed further amendments, which were returned to the Chamber of Deputies and finally approved on October 7, 2020. The approved regime is effective as of January 1, 2020 until December 31, 2029.

Based on the amended promotional regime, companies that meet new specified criteria shall be entitled to: i) a reduction of the income tax burden of 60% (60% for micro and small enterprises, 40% for medium-sized enterprises and 20% for large enterprises) over the promoted activities for each fiscal year, applicable to both Argentine source income and foreign source income, ii) stability of the benefits established by the knowledge-based economy promotional regime (as long as the beneficiary is registered and in good standing), iii) a non-transferable tax credit bond amounting to 70% (which can be up to 80% in certain specific cases) of the Company’s contribution to the social security regime of every employee whose job is related to the promoted activities (caps on the number of employees are applicable). Such bonds can be used within 24 months from their issue date (which period can be extended for an additional 12 months in certain cases) to offset certain federal taxes, such as value-added tax, but they cannot be used to offset income tax.

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

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

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

Fair value option applied to certain financial instruments

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

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

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

Accumulated other comprehensive loss

The following table sets forth the Company’s accumulated other comprehensive loss as of March 31, 2021 and December 31, 2020:

March 31,

December 31,

2021

2020

(In thousands)

Accumulated other comprehensive loss:

Foreign currency translation

$                           (508,438)

$                   (466,569)

Unrealized gains (losses) on hedging activities

3,728

(2,469)

Estimated tax (expense) benefit on unrealized gains (losses)

(1,353)

754

$                           (506,063)

$                   (468,284)


The following tables summarize the changes in accumulated balances of other comprehensive loss for the three-months ended March 31, 2021:

Unrealized

Foreign

Estimated tax

(Losses) Gains on

Currency

benefit

hedging activities, net

Translation

(expense)

Total

(In thousands)

Balances as of December 31, 2020

$                              (2,469)

$                   (466,569)

$                   754

$                (468,284)

Other comprehensive income (loss) before reclassifications

5,561

(41,869)

(1,891)

(38,199)

Amount of (gain) loss reclassified from accumulated other comprehensive loss

636

(216)

420

Net current period other comprehensive income (loss)

6,197

(41,869)

(2,107)

(37,779)

Ending balance

$                                3,728

$                   (508,438)

$               (1,353)

$                (506,063)

Amount of (Loss) Gain

Reclassified from

Details about Accumulated

Accumulated Other

Other Comprehensive Loss

Comprehensive

Affected Line Item

Components

Loss

in the Statement of Income

(In thousands)

Unrealized losses on hedging activities

$                                 (636)

Cost of net revenues

Estimated tax benefit on unrealized gains

216

Income tax expense

Total reclassifications for the period

$                                 (420)

Total, net of income taxes

Use of estimates

The preparation of interim condensed consolidated financial statements in conformity with U.S. GAAP requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are used for, but not limited to, accounting for allowances for doubtful accounts and chargeback provisions, allowance for loans receivables, inventories valuation reserves, recoverability of goodwill, intangible assets with indefinite useful lives and deferred tax assets, impairment of short-term and long-term investments, impairment of long-lived assets, compensation costs relating to the Company’s long term retention plan, fair value of convertible debt, fair value of investments, fair value of derivative instruments, income taxes and contingencies and determination of the incremental borrowing rate at commencement date of lease operating agreements. Actual results could differ from those estimates.

Recently Adopted Accounting Standards

On December 18, 2019 the FASB issued the ASU 2019-12 “Income taxes (Topic 740)—Simplifying the accounting for income taxes”. The amendments in this update simplify the accounting for income taxes by removing certain exceptions to the general principles and also improve consistent application by clarifying and amending existing guidance, such as franchise taxes and interim recognition of enactment of tax laws or rate changes. The amendments in this update are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The adoption of this standard did not have a material impact on the Company´s financial statements.

Recently issued accounting pronouncements not yet adopted

On August 5, 2020 the FASB issued the ASU 2020-06 “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40)”. The amendments in this update address issues identified as a result of the complexity associated with applying generally accepted accounting principles for certain financial instruments with characteristics of liabilities and equity. For convertible instruments, accounting models for specific features are removed and amendments to the disclosure requirements are included. For contracts in an entity’s own equity, simplifies the settlement assessment by removing some requirements. Additionally, the amendments in this update affect the diluted EPS calculation for instruments that may be settled in cash or shares and for convertible instruments. The amendments in this update are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. The Company is assessing the effects that the adoption of this accounting pronouncement may have on its financial statements.

 

3. Net loss per share

Basic earnings per share for the Company’s common stock is computed by dividing, net loss available to common shareholders attributable to common stock for the period by the weighted average number of common shares outstanding during the period.

On August 24, 2018 and August 31, 2018 the Company issued an aggregate principal amount of $880 million of 2.00% Convertible Senior Notes due 2028 (see Note 11 to these interim condensed consolidated financial statements). The conversion of these notes are included in the calculation for diluted earnings per share utilizing the “if converted” method. Accordingly, conversion of these Notes is not assumed for purposes of computing diluted earnings per share if the effect is antidilutive. Additionally, on March 29, 2019 the Company issued Preferred Stock. The conversion of Preferred Stock was included in the calculation for diluted earnings per share utilizing the “if converted” method. Accordingly, conversion of the redeemable convertible preferred stock is not assumed for purposes of computing diluted earnings per share if the effect is antidilutive.

The denominator for diluted net loss per share for the three-month periods ended March 31, 2021 and 2020 does not include any effect from the 2028 Notes Capped Call Transactions (as defined in Note 11) because it would be antidilutive. In the event of conversion of any or all of the 2028 Notes, the shares that would be delivered to the Company under the Capped Call Transactions (as defined in Note 11) are designed to partially neutralize the dilutive effect of the shares that the Company would issue under the Notes. See Note 11 to these interim condensed consolidated financial statements and Note 16 to the financial statements for the year ended December 31, 2020, contained in the Company’s Annual Report on Form 10-K filed with the SEC for more details. For the three-month periods ended March 31, 2021 and 2020, the effects of the conversion of the Notes and the redeemable convertible preferred stock would have been antidilutive and, as a consequence, they were not factored into the calculation of diluted earnings per share.

Net loss per share of common stock is as follows for the three-month periods ended March 31, 2021 and 2020:

Three Months Ended March 31,

2021

2020

(In thousands)

Basic

Diluted

Basic

Diluted

Net loss per common share

$                     (0.68)

$                     (0.68)

$                     (0.44)

$                     (0.44)

Numerator:

Net loss

$                 (34,012)

$                 (34,012)

$                 (21,109)

$                 (21,109)

Dividends on preferred stock

(1,000)

(1,000)

Net loss corresponding to common stock

$                 (34,012)

$                 (34,012)

$                 (22,109)

$                 (22,109)

Denominator:

Weighted average of common stock outstanding for Basic earnings per share

49,867,625

49,709,955

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

49,867,625

49,709,955


4. Cash, cash equivalents, restricted cash and cash equivalent and investments

The composition of cash, cash equivalents, restricted cash and cash equivalents, short-term and long-term investments is as follows:

March 31,

December 31,

2021

2020

(In thousands)

Cash and cash equivalents

$                       862,720

$                    1,856,394

Restricted cash and cash equivalents

Securitization Transactions

$                       100,758

$                       249,872

Sovereign Debt Securities (Central Bank of Brazil Mandatory Guarantee)

144,249

Bank account (Argentine Central Bank regulation)

185,560

237,511

Bank collateral account (Secured lines of credit guarantee)

574

574

Money Market Funds (Secured lines of credit guarantee)

38,586

19,469

Cash in bank account

158

155

Total restricted cash and cash equivalents

$                       325,636

$                       651,830

Total cash, cash equivalents, restricted cash and cash equivalents (*)

$                    1,188,356

$                    2,508,224

Short-term investments

Time Deposits

$                       305,746

$                       158,818

Sovereign Debt Securities (Central Bank of Brazil Mandatory Guarantee)

562,797

565,705

Sovereign Debt Securities (Secured lines of credit guarantee)

71,270

71,244

Sovereign Debt Securities

40,263

445,539

Total short-term investments

$                       980,076

$                    1,241,306

Long-term investments

Sovereign Debt Securities

$                       157,023

$                       150,054

Securitization Transactions

1,596

Other Investments

16,982

16,057

Total long-term investments

$                       175,601

$                       166,111

(*) Cash, cash equivalents, restricted cash and cash equivalents as reported in the consolidated statements of cash flow.

Regulation issued by Central Bank of Argentina (“CBA”)

a)In January 2020, the CBA enacted regulations related to payment service providers that applies to Fintech companies that are not financial institutions, but nevertheless provide payment services in at least one of the processes of the payments system. On July 7, 2020, the CBA approved the registration of the Argentine subsidiary in the registry for payment service providers. These regulations sets forth certain rules that require payment services providers to, among other things, (i) deposit and maintain users’ funds in specific banks’ accounts, payable on demand; (ii) implement a monthly reporting regime with the CBA; (iii) segregate information related to users’ investments funds; (iv) maintain different bank accounts to segregate the Company’s funds from users’ funds; and (v) introduce clarifications on advertising and documents about the standard terms and conditions of the payment service provider. As of March 31, 2021, in accordance with the regulation, the Company held $185,560 thousands in a bank account, payable on demand.

b)In October 2020, the CBA issued a regulation that applies to non-financial loan providers. In accordance with this regulation, the Company was registered in the "Registry of other non-financial loan providers" on December 1, 2020 and complied with a periodic information report within the framework of a monthly information regime as from March 1, 2021. In turn, the CBA established that the Company must comply with the obligations established by CBA rules, regarding, among other things: (i) interest rates in loan operations; (ii) protection of users of financial services; (iii) communication by electronic means for the care of the environment.

Sovereign Debt Securities (Central Bank of Brazil Mandatory Guarantee)

On November 1, 2018, the Company obtained approval from the Central Bank of Brazil to operate as an authorized payment institution. With this authorization, Mercado Pago in Brazil is subject to the supervision of the Central Bank of Brazil and must fully comply with all obligations established by current regulations. Among other obligations, the regulations require authorized payment institutions to hold any electronic balance in a payment institution account in either a specific account of the Central Bank of Brazil that does not pay interest or Brazilian federal government bonds registered with the “Sistema Especial de Liquidacao e Custodia.” 100% of electronic funds were required to be deposited as of March 31, 2021 and December 31, 2020, respectively. As of March 31, 2021 and December 31, 2020, in accordance with the regulation, the Company held $562,797 thousands and $709,954 thousands deposited in Brazilian federal government bonds, respectively, as a mandatory guarantee (the “Central Bank of Brazil Mandatory Guarantee”).

5. Loans receivable, net

The Company manages loans receivable as “On-line merchant”, “Consumer” and “In-store merchant”. As of March 31, 2021 and December 31, 2020, Loans receivable, net were as follows:

March 31,

December 31,

2021

2020

(In thousands)

On-line merchant

$

202,146

$

180,063

Consumer

296,457

237,956

In-store merchant

77,273

61,452

Loans receivable

575,876

479,471

Allowance for uncollectible accounts

(140,427)

(77,816)

Loans receivable, net

$

435,449

$

401,655

The credit quality analysis of loans receivable was as follows:

March 31,

December 31,

2021

2020

(In thousands)

1-30 days past due

$

45,623

$

34,706

31-60 days past due

28,644

16,977

61 -90 days past due

27,412

13,239

91 -120 days past due

19,763

10,632

121 -150 days past due

16,381

5,315

151 -180 days past due

11,684

3,649

Total past due

149,507

84,518

To become due

426,369

394,953

Total

$

575,876

$

479,471

The following table summarizes the allowance for uncollectible accounts activity during the three-month period ended March 31, 2021 and 2020:

March 31,

2021

2020

(In thousands)

Balance at beginning of year

$

77,816

$

20,444

Adoption of ASC 326 (1)

-

4,977

Charged/credited to Net loss

85,997

24,419

Charges/Utilized /Currency translation adjustments/Write-offs

(23,386)

(19,477)

Balance at end of period

$

140,427

$

30,363

(1)

Cumulative pre-tax adjustments recorded to retained earnings as of January 1, 2020. 

6. Business combinations, goodwill and intangible assets

Business combinations

Acquisition of a software development company

In March 2020, the Company, through its subsidiary Meli Participaciones S.L., completed the acquisition of 100% of the equity interest of Kiserty S.A. and its subsidiaries, which is a software development company located and organized under the law of Uruguay. The objective of the acquisition was to enhance the capabilities of the Company in terms of software development.

The aggregate purchase price for the acquisition was $10,899 thousands, measured at its fair value amount, which included: (i) the total cash payment of $8,500 thousands at the time of closing; (ii) an escrow of $225 thousands and (iii) a contingent additional cash consideration up to $2,174 thousands.

The Company’s consolidated statement of income includes the results of operations of the acquired business as from March 9, 2020. The net income before intercompany eliminations of the acquired Company included in the Company’s consolidated statement of income amounted to $2,061 thousands for the period ended March 31, 2021.

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

The purchase price was allocated based on the measurement of the fair value of assets acquired and liabilities assumed considering the information available as of the initial accounting date. The valuation of identifiable intangible assets acquired reflects Management’s estimates based on the use of established valuation methods.

The Company recognized goodwill for this acquisition based on Management’s expectation that the acquired business will improve the Company’s business. Arising goodwill was allocated to each of the segments identified by the Company’s Management, considering the synergies expected from this acquisition and it is expected that the acquisition will contribute to the earnings generation process of such segments. Goodwill arising from this acquisition is not deductible for tax purposes.

The results of operations for periods prior to the acquisitions, individually and in the aggregate, were not material to the Company’s consolidated statements of income and, accordingly, pro forma information has not been presented.

Goodwill and intangible assets

The composition of goodwill and intangible assets is as follows:

March 31,

December 31,

2021

2020

(In thousands)

Goodwill

$                         82,830

$                         85,211

Intangible assets with indefinite lives

- Trademarks

7,628

7,751

- Digital assets

7,588

Amortizable intangible assets

- Licenses and others

4,797

4,932

- Non-compete agreement

3,356

3,426

- Customer list

13,635

14,010

- Trademarks

7,808

7,879

Total intangible assets

$                         44,812

$                         37,998

Accumulated amortization

(24,541)

(23,843)

Total intangible assets, net

$                         20,271

$                         14,155


Goodwill

The changes in the carrying amount of goodwill for the three-month period ended March 31, 2021 and the year ended December 31, 2020 are as follows:

Three Months Ended March 31, 2021

Brazil

Argentina

Mexico

Chile

Colombia

Other Countries

Total

(In thousands)

Balance, beginning of the period

$                          19,762 

$                          10,594 

$                          31,697 

$                          16,996 

$                            4,390 

$                            1,772 

$                          85,211 

Effect of exchange rates changes

(1,360)

(522)

(170)

(295)

(34)

(2,381)

Balance, end of the period

$                          18,402 

$                          10,594 

$                          31,175 

$                          16,826 

$                            4,095 

$                            1,738 

$                          82,830 

Year Ended December 31, 2020

Brazil

Argentina

Mexico

Chile

Colombia

Other Countries

Total

(In thousands)

Balance, beginning of the year

$                          29,072 

$                            6,991 

$                          32,196 

$                          14,872 

$                            3,312 

$                            1,166 

$                          87,609 

Business Acquisitions

3,603 

1,062 

1,241 

1,246 

748 

7,900 

Disposals

(3,480)

(3,480)

Effect of exchange rates changes

(5,830)

(1,561)

883 

(168)

(142)

(6,818)

Balance, end of the year

$                          19,762 

$                          10,594 

$                          31,697 

$                          16,996 

$                            4,390 

$                            1,772 

$                          85,211 

Intangible assets with definite useful life

Intangible assets with definite useful life are comprised of customer lists, non-compete and non-solicitation agreements, acquired software licenses and other acquired intangible assets including developed technologies and trademarks. Aggregate amortization expense for intangible assets totaled $1,318 thousands and $808 thousands for the three-month periods ended March 31, 2021 and 2020, respectively.

The following table summarizes the remaining amortization of intangible assets (in thousands of U.S. dollars) with definite useful life as of March 31, 2021:

For year ended 12/31/2021

$                          2,450

For year ended 12/31/2022

1,242

For year ended 12/31/2023

973

For year ended 12/31/2024

341

Thereafter

49

$                          5,055


7. Segment reporting

Reporting segments are based upon the Company’s internal organizational structure, the manner in which the Company’s operations are managed and resources are assigned, the criteria used by Management to evaluate the Company’s performance, the availability of separate financial information and overall materiality considerations.

Segment reporting is based on geography as the main basis of segment breakdown in accordance with the criteria, as determined by Management, used to evaluate the Company’s performance. The Company’s segments include Brazil, Argentina, Mexico and other countries (which includes Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Honduras, Nicaragua, El Salvador, Bolivia, Guatemala, Panama, Paraguay, Peru, Uruguay and the United States of America).

Direct contribution consists of net revenues from external customers less direct costs, which include costs of net revenues, product and technology development expenses, sales and marketing expenses and general and administrative expenses over which segment managers have direct discretionary control, such as advertising and marketing programs, customer support expenses, allowances for doubtful accounts, payroll and third-party fees. All corporate related costs have been excluded from the Company’s direct contribution.

Expenses over which segment managers do not currently have discretionary control, such as certain technology and general and administrative costs are monitored by Management through shared cost centers and are not evaluated in the measurement of segment performance.

The following tables summarize the financial performance of the Company’s reporting segments:

Three Months Ended March 31, 2021

Brazil

Argentina

Mexico

Other Countries

Total

(In thousands)

Net revenues

$                        768,723 

$                        297,236 

$                        230,497 

$                          81,985 

$                     1,378,441 

Direct costs

(618,037)

(188,969)

(220,906)

(64,310)

(1,092,222)

Direct contribution

150,686

108,267

9,591

17,675

286,219

Operating expenses and indirect costs of net revenues

(195,375)

Income from operations

90,844

Other income (expenses):

Interest income and other financial gains

25,071

Interest expense and other financial losses

(91,289)

Foreign currency losses

(15,089)

Net income before income tax expense

$                            9,537 


Three Months Ended March 31, 2020

Brazil

Argentina

Mexico

Other Countries

Total

(In thousands)

Net revenues

$                        397,447 

$                        132,875 

$                          94,753 

$                          27,016 

$                        652,091 

Direct costs

(322,628)

(101,025)

(114,762)

(27,604)

(566,019)

Direct contribution

74,819

31,850

(20,009)

(588)

86,072

Operating expenses and indirect costs of net revenues

(115,766)

Loss from operations

(29,694)

Other income (expenses):

Interest income and other financial gains

36,784

Interest expense and other financial losses

(23,584)

Foreign currency losses

(186)

Net loss before income tax expense

$                       (16,680)

The following table summarizes the allocation of property and equipment, net based on geography:

March 31,

December 31,

2021

2020

(In thousands)

US property and equipment, net

$                          1,316

$                             586

Other countries

Argentina

137,270

123,589

Brazil

187,668

171,409

Mexico

102,135

73,315

Other countries

30,251

22,785

$                      457,324

$                      391,098

Total property and equipment, net

$                      458,640

$                      391,684

The following table summarizes the allocation of the goodwill and intangible assets based on geography:

March 31,

December 31,

2021

2020

(In thousands)

US intangible assets

$                          7,588

$                               —

Other countries goodwill and intangible assets

Argentina

12,022

12,617

Brazil

18,523

19,958

Mexico

34,579

35,338

Chile

23,713

24,707

Other countries

6,676

6,746

$                        95,513

$                        99,366

Total goodwill and intangible assets

$                      103,101

$                        99,366

Consolidated net revenues by similar products and services for the three-month periods ended March 31, 2021 and 2020 were as follows:

Three Months Ended March 31,

Consolidated Net Revenues

2021

2020

(In thousands)

Commerce

$                      910,624

$                      380,710

Fintech

467,817

271,381

Total

$                   1,378,441

$                      652,091


8. Fair value measurement of assets and liabilities

The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2021 and December 31, 2020:

Quoted Prices in

Quoted Prices in

Balances as of

active markets for

Significant other

Unobservable

Balances as of

active markets for

Significant other

Unobservable

March 31,

identical Assets

observable inputs

inputs

December 31,

identical Assets

observable inputs

inputs

Description

2021

(Level 1)

(Level 2)

(Level 3)

2020

(Level 1)

(Level 2)

(Level 3)

(In thousands)

Assets

Cash and Cash Equivalents:

Money Market Funds

$                        166,133 

$                        166,133 

$                                 — 

$                                 — 

$                        166,483 

$                        166,483 

$                                 — 

$                                 — 

Sovereign Debt Securities

37,654 

37,654 

Restricted Cash and cash equivalents:

Money Market Funds

130,886 

130,886 

257,695 

257,695 

Sovereign Debt Securities (Central Bank of Brazil Mandatory Guarantee)

144,249 

144,249 

Investments:

Sovereign Debt Securities (Central Bank of Brazil Mandatory Guarantee)

562,797 

562,797 

565,705 

565,705 

Sovereign Debt Securities

270,152 

270,152 

666,837 

666,837 

Other Assets:

Derivative Instruments

17,477 

17,477 

199 

199 

Total Financial Assets

$                     1,147,445 

$                     1,129,968 

$                                 — 

$                          17,477 

$                     1,838,822 

$                     1,838,623 

$              ��                  — 

$                               199 

Liabilities:

Contingent considerations

$                            4,684 

$                                 — 

$                                 — 

$                            4,684 

$                            4,622 

$                                 — 

$                                 — 

$                            4,622 

Long-term retention plan

69,331 

69,331 

136,816 

136,816 

Derivative Instruments

3,708 

3,708 

13,964 

13,964 

Total Financial Liabilities

$                          77,723 

$                                 — 

$                          69,331 

$                            8,392 

$                        155,402 

$                                 — 

$                        136,816 

$                          18,586 

As of March 31, 2021 and December 31, 2020, the Company’s financial assets valued at fair value consisted of assets valued using i) Level 1 inputs: unadjusted quoted prices in active markets (Level 1 instrument valuations are obtained from observable inputs that reflect quoted prices (unadjusted) for identical assets in active markets); ii) Level 2 inputs: obtained from readily-available pricing sources for comparable instruments as well as instruments with inactive markets at the measurement date; and iii) Level 3 inputs: valuations based on unobservable inputs reflecting Company assumptions. Fair value of derivative instruments are determined considering the prevailing risk free interest rate and spot exchange rate.


As of March 31, 2021 and December 31, 2020, the Company’s liabilities were valued at fair value using Level 2 inputs and Level 3 inputs (valuations based on unobservable inputs reflecting Company assumptions). Fair value of contingent considerations are determined based on the probability of achievement of the performance targets arising from each acquisition, as well as the Company’s historical experience with similar arrangements. Fair value of derivative instruments are determined considering the prevailing risk free interest rate and spot exchange rate.

As of March 31, 2021 and December 31, 2020, the carrying value of the Company’s financial assets and liabilities measured at amortized cost approximated their fair value mainly because of their short-term maturity. These assets and liabilities included cash, cash equivalents, restricted cash and cash equivalents and short-term investments (excluding money markets funds and debt securities), accounts receivable, credit cards receivable and other means of payment, loans receivable, funds payable to customers and amounts due to merchants, other assets (excluding derivative instruments), accounts payable, salaries and social security payable (excluding variable LTRP), taxes payable, provisions and other liabilities (excluding contingent considerations and derivative instruments). As of March 31, 2021 and December 31, 2020, the estimated fair value of the 2028 Notes (liability component), which is based on Level 2 inputs, is $333,759 thousands and $672,345 thousands, respectively, and were determined based on market interest rates. The rest of the loans payable and other financial liabilities approximate their fair value because the effective interest rates are not materially different from market interest rates.

The following table summarizes the fair value level for those financial assets and liabilities of the Company measured at amortized cost as of March 31, 2021 and December 31, 2020:

Balances as of

Significant other

Balances as of

Significant other

March 31,

observable inputs

December 31,

observable inputs

2021

(Level 2)

2020

(Level 2)

(In thousands)

Assets

Time Deposits

$                 305,746

$                 305,746

$                 158,818

$                 158,818

Accounts receivable, net

64,815

64,815

49,691

49,691

Credit Cards receivable and other means of payment, net

883,670

883,670

863,073

863,073

Loans receivable, net

435,449

435,449

401,655

401,655

Other assets

263,316

263,316

236,432

236,432

Total Assets

$              1,952,996

$              1,952,996

$              1,709,669

$              1,709,669

Liabilities

Accounts payable and accrued expenses

$                 612,206

$                 612,206

$                 767,336

$                 767,336

Funds payable to customers and amounts due to merchants

1,527,971

1,527,971

1,733,095

1,733,095

Salaries and social security payable

144,530

144,530

120,394

120,394

Taxes payable

240,167

240,167

215,918

215,918

Loans payable and other financial liabilities (*)

2,174,438

2,205,705

1,409,269

1,479,165

Other liabilities

65,463

65,463

110,139

110,139

Total Liabilities

$              4,764,775

$              4,796,042

$              4,356,151

$              4,426,047

(*) The fair value of the 2028 Notes (including the equity component) is disclosed in Note 11.

As of March 31, 2021 and December 31, 2020, the Company held 0 direct investments in auction rate securities and does 0t have any non-financial assets or liabilities measured at fair value.


As of March 31, 2021 and December 31, 2020, the fair value of money market funds and sovereign debt securities classified as available for sale securities are as follows:

March 31, 2021

Cost

Financial Gains

Financial Losses

Estimated Fair Value

(In thousands)

Cash and cash equivalents

Money Market Funds

$                  166,133

$                         —

$                         —

$                  166,133

Total Cash and cash equivalents

$                  166,133

$                         —

$                         —

$                  166,133

Restricted cash and cash equivalents

Money Market Funds

$                  130,886

$                         —

$                         —

$                  130,886

Total Restricted cash and cash equivalents

$                  130,886

$                         —

$                         —

$                  130,886

Short-term investments

Sovereign Debt Securities (Central Bank of Brazil Mandatory Guarantee) (1)

$                  561,606

$                    1,192

$                          (1)

$                  562,797

Sovereign Debt Securities (1)

111,111

422

111,533

Total Short-term investments

$                  672,717

$                    1,614

$                          (1)

$                  674,330

Long-term investments

Sovereign Debt Securities (1)

$                  159,059

$                         86

$                      (526)

$                  158,619

Total Long-term investments

$                  159,059

$                         86

$                      (526)

$                  158,619

Total

$               1,128,795

$                    1,700

$                      (527)

$               1,129,968

(1) Measured at fair value with impact on the consolidated statement of income for the application of the fair value option. (See Note 2 – Fair value option applied to certain financial instruments.)

December 31, 2020

Cost

Financial Gains

Estimated Fair Value

(In thousands)

Cash and cash equivalents

Money Market Funds

$                 166,483

$                          —

$                 166,483

Sovereign Debt Securities (1)

37,595

59

37,654

Total Cash and cash equivalents

$                 204,078

$                          59

$                 204,137

Restricted Cash and cash equivalents

Money Market Funds

$                 257,695

$                          —

$                 257,695

Sovereign Debt Securities (1)

144,098

151

144,249

Total Restricted Cash and cash equivalents

$                 401,793

$                        151

$                 401,944

Short-term investments

Sovereign Debt Securities (Central Bank of Brazil Mandatory Guarantee)(1)

$                 559,487

$                     6,218

$                 565,705

Sovereign Debt Securities (1)

514,894

1,889

516,783

Total Short-term investments

$              1,074,381

$                     8,107

$              1,082,488

Long-term investments

Sovereign Debt Securities (1)

$                 149,938

$                        116

$                 150,054

Total Long-term investments

$                 149,938

$                        116

$                 150,054

Total

$              1,830,190

$                     8,433

$              1,838,623

(1)Measured at fair value with impact on the consolidated statement of income for the application of the fair value option. (See Note 2 – Fair value option applied to certain financial instruments.).

As of March 31, 2021, the estimated fair values (in thousands of U.S. dollars) of money market funds and sovereign debt securities classified by their effective maturities are as follows:

One year or less

971,349

One year to two years

149,989

Two years to three years

563

Three years to four years

7,592

More than five years

475

Total

$              1,129,968

9. Commitments and Contingencies

Litigation and Other Legal Matters

The Company is subject to certain contingent liabilities with respect to existing or potential claims, lawsuits and other proceedings. The Company accrues liabilities when it considers probable that future costs will be incurred and such costs can be reasonably estimated. Proceeding-related liabilities are based on developments to date and historical information related to actions filed against the Company. As of March 31, 2021, the Company had accounted for estimated liabilities involving proceeding-related contingencies and other estimated contingencies of $8,726 thousands to cover legal actions against the Company in which its Management has assessed the likelihood of a final adverse outcome as probable. Expected legal costs related to litigations are accrued when the legal service is actually provided.

In addition, as of March 31, 2021, the Company and its subsidiaries are subject to certain legal actions considered by the Company’s Management and its legal counsels to be reasonably possible for an estimated aggregate amount up to $55,699 thousands. NaN loss amounts have been accrued for such reasonably possible legal actions.

Brazilian preliminary injunction against the Brazilian tax authorities

On November 6, 2014, the Brazilian subsidiaries, Mercadolivre.com Atividades de Internet Ltda., Ebazar.com.br Ltda., Mercado Pago.com Representações Ltda. and the Argentine subsidiary, Mercado Libre S.R.L., filed a writ of mandamus and requested a preliminary injunction with the Federal Court of Osasco against the federal tax authority to avoid the IR (income tax) withholding over payments remitted by the Brazilian subsidiaries to MercadoLibre S.R.L. for the provision of IT support and assistance services by the latter, and requested reimbursement of the amounts improperly withheld over the course of the preceding five (5) years. The preliminary injunction was granted on the grounds that such withholding violated the convention signed between Brazil and Argentina that prevents double taxation. In August 2015, the injunction was revoked by the first instance judge in an award favorable to the federal tax authority. The Company appealed the decision and deposited with the court the disputed amounts. As of March 31, 2021 the total amount of the deposits were $65,563 thousands (which includes $5,918 thousands of interest). Such amounts are included in non-current other assets of the consolidated balance sheet. In June 2020, the Company’s appeal was dismissed. The Company submitted a new remedy before the same court in July 2020, which was dismissed on February 17, 2021. On March 18, 2021 the Company filed an appeal with the superior courts, which is now pending. Management’s opinion, based on the opinion of external legal counsel, is that the risk of losing the case is reasonably possible but not probable based on the technical merits of the Company’s tax position and the existence of favorable decisions issued by the Federal Regional Courts. For that reason, the Company has not recorded any expense or liability for the disputed amounts.

Other third parties have from time to time claimed, and others may claim in the future, that the Company was responsible for fraud committed against them, or that the Company has infringed their intellectual property rights. The underlying laws with respect to the potential liability of online intermediaries like the Company are unclear in the jurisdictions where the Company operates. Management believes that additional lawsuits alleging that the Company has violated copyright or trademark laws will be filed against the Company in the future.

Intellectual property and regulatory claims, whether meritorious or not, are time consuming and costly to resolve, require significant amounts of management time, could require expensive changes in the Company’s methods of doing business, or could require the Company to enter into costly royalty or licensing agreements. The Company may be subject to patent disputes, and be subject to patent infringement claims as the Company’s services expand in scope and complexity. In particular, the Company may face additional patent infringement claims involving various aspects of the payments businesses.

From time to time, the Company is involved in other disputes or regulatory inquiries that arise in the ordinary course of business. The number and significance of these disputes and inquiries are increasing as the Company’s business expands and the Company grows larger.

Buyer protection program

The Company provides consumers with a buyer protection program (“BPP”) for all transactions completed through the Company’s online payment solution (“Mercado Pago”). This program is designed to protect buyers in the Marketplace from losses due primarily to fraud or counterparty non-performance. The Company’s BPP provides protection to consumers by reimbursing them for the total value of a purchased item and the value of any shipping service paid if it does not arrive or does not match the seller’s description. The Company is entitled to recover from the third-party carrier companies performing the shipping service certain amounts paid under the BPP. Furthermore, in some specific circumstances (i.e. Black Friday, Hot Sale), the Company enters into insurance contracts with third-party insurance companies in order to cover contingencies that may arise from the BPP.

The maximum potential exposure under this program is estimated to be the volume of payments on the Marketplace, for which claims may be made under the terms and conditions of the Company’s BPP. Based on historical losses to date, the Company does not believe that the maximum potential exposure is representative of the actual potential exposure. The Company records a liability with respect to losses under this program when they are probable and the amount can be reasonably estimated.

As of March 31, 2021 and December 31, 2020, Management’s estimate of the maximum potential exposure related to the Company’s buyer protection program is $2,283,252 thousands and $2,535,041 thousands, respectively, for which the Company recorded an allowance of $7,384 thousands and $8,364 thousands, respectively.

Commitments

The Company entered into a purchase commitment with 2 U.S. suppliers in relation to the purchase of cloud platform services as follows:

a)for a total amount of $240,500 thousands to be fully paid off between June 1, 2020 and May 31, 2024. As of March 31, 2021, the Company paid $62,860 thousands in relation thereto; and

b)for a total amount of $30,000 thousands to be fully paid off between November 24, 2019 and March 23, 2023. As of March 31, 2021, the Company paid $7,670 thousands in relation thereto.

10. Long term retention program (“LTRP”)

The following table summarizes the 2012, 2014, 2015, 2016, 2017, 2018, 2019, 2020 and 2021 long term retention program accrued compensation expense for the three-month periods ended March 31, 2021 and 2020, which are payable in cash according to the decisions made by the Board of Directors:

Three Months Ended March 31,

2021

2020

(In thousands)

LTRP 2012

69

LTRP 2014

126

LTRP 2015

178

1,272

LTRP 2016

(538)

2,435

LTRP 2017

(708)

2,706

LTRP 2018

(210)

1,556

LTRP 2019

8,376

3,663

LTRP 2020

9,652

3,837

LTRP 2021

6,166

Total LTRP

$

22,916

$

15,664


11. Loans payable and other financial liabilities

The following table summarizes the Company’s Loans payable and other financial liabilities as of March 31, 2021 and December 31, 2020:

Book value as of

Type of instrument

Currency

Interest

Weighted Average Interest
Rate

Maturity

March 31, 2021

December 31, 2020

(In thousands)

Current loans payable and other financial liabilities:

Loans from banks

Chilean Subsidiary

Chilean Pesos

Fixed

1.44 

%

April 2021

$

45,044 

$

92,895 

Brazilian Subsidiary

Brazilian Reais

%

70,267 

Brazilian Subsidiary

Brazilian Reais

Variable

CDI + 3.25

%

May 2021

39,478 

42,693 

Brazilian Subsidiary

Brazilian Reais

Variable

CDI + 2.10

%

June 2021

26,920 

29,218 

Mexican Subsidiary

Mexican Peso

Variable

TIIE + 2.20

%

April 2021

17,945 

18,418 

Argentine Subsidiary

Argentine Pesos

Fixed

37.75 

%

May 2021

13,185 

14,400 

Uruguayan Subsidiary

Uruguayan Pesos

Fixed

6.25 

%

September 2021

7,921 

Uruguayan Subsidiary

Uruguayan Pesos

Fixed

5.37 

%

April 2021

4,793 

13,406 

Secured lines of credit

Argentine Subsidiary

Argentine Pesos

Fixed

31.76 

%

April 2021

37,178 

18,311 

Argentine Subsidiary

Argentine Pesos

Fixed

34.84 

%

April 2021

5,977 

Brazilian Subsidiary (*)

Brazilian Reais

Variable

CDI + 0.55

%

July 2021

52,978 

58,437 

Unsecured lines of credit

Uruguayan Subsidiary

Uruguayan Pesos

Fixed

6.46 

%

April 2021

20,808 

20,055 

Argentine Subsidiary

Argentine Pesos

Fixed

39.21 

%

April - May 2021

124,376 

116,140 

Deposit Certificates

Brazilian Subsidiary

Brazilian Reais

Variable

CDI + 0.52 to 0.80

%

June 2021

22,854 

Brazilian Subsidiary

Brazilian Reais

Variable

107% to 122% of CDI

January - March 2022

43,460 

2028 Notes

1,124 

6,649 

2026 Sustainability Notes

2,006 

2031 Notes

4,618 

Finance lease obligations

6,251 

7,394 

Credit card collateralized debt

11,842 

12,920 

Collateralized debt

25,782 

25,342 

Other lines of credit

1,848 

$

514,540 

$

548,393 

Non Current loans payable and other financial liabilities:

2028 Notes

301,368 

595,800 

2026 Sustainability Notes

396,282 

2031 Notes

693,347 

Finance lease obligations

18,050 

16,261 

Collateralized debt

250,851 

248,815 

$

1,659,898 

$

860,876 

(*)

Under the terms of the loan agreement, the Company transferred U.S. treasury notes to an account owned by the Company but under the sole control and dominion of the escrow agent as collateral. This collateral is accounted for in short-term investments and its coupon payment is accounted for in Restricted cash and cash equivalents of the consolidated balance sheet.

See Notes 12 and 13 to these interim condensed consolidated financial statements for details regarding the Company’s collateralized debt securitization transactions and finance lease obligations, respectively.

2.375% Sustainability Senior Notes Due 2026 and 3.125% Senior Notes Due 2031

On January 14, 2021, the Company closed a public offering of $400,000 thousands aggregate principal amount of 2.375% Sustainability Notes due 2026 (the “2026 Sustainability Notes”) and $700,000 thousands aggregate principal amount of 3.125% Notes due 2031 (the “2031 Notes”, and together with the 2026 Sustainability Notes, the “Notes”). The Company will pay interest on the Notes on January 14 and July 14 of each year, beginning on July 14, 2021. The 2026 Sustainability Notes will mature on January 14, 2026, and the 2031 Notes will mature on January 14, 2031. In connection with the Notes, the Company capitalized $10,647 thousands of debt issuance costs, which are amortized during the term of the Notes.

Certain of the Companys subsidiaries (the “Subsidiary Guarantors”) fully and unconditionally guarantee the payment of principal, premium, if any, interest, and all other amounts in respect of each of the Notes (the “Subsidiary Guarantees”). The initial Subsidiary Guarantors are MercadoLibre S.R.L., Ibazar.com Atividades de Internet Ltda., eBazar.com.br Ltda., Mercado Envios Servicos de Logistica Ltda., MercadoPago.com Representações Ltda., MercadoLibre Chile Ltda., MercadoLibre, S. de R.L. de C.V., DeRemate.com de México, S. de R.L. de C.V. and MercadoLibre Colombia Ltda.

The Notes rank equally in right of payment with all of the Companys other existing and future senior unsecured debt obligations from time to time outstanding. Each Subsidiary Guarantee will rank equally in right of payment with all of the Subsidiary Guarantor’s other existing and future senior unsecured debt obligations from time to time outstanding, except for statutory priorities under applicable local law.

2.00% Convertible Senior Notes Due 2028

On August 24, 2018, the Company issued $800,000 thousands of 2.00% Convertible Senior Notes due 2028 and issued an additional $80,000 thousands of notes on August 31, 2018 pursuant to the partial exercise of the initial purchasers’ option to purchase such additional notes, for an aggregate principal amount of $880,000 thousands of 2.00% Convertible Senior Notes due 2028 (collectively, the “2028 Notes”). The 2028 Notes are unsecured, unsubordinated obligations of the Company, which pay interest in cash semi-annually, on February 15 and August 15 of each year, at a rate of 2.00% per annum. The 2028 Notes will mature on August 15, 2028 unless earlier redeemed, repurchased or converted in accordance with their terms prior to such date. The 2028 Notes may be converted, under specific conditions, based on an initial conversion rate of 2.2553 shares of common stock per $1,000 principal amount of the 2028 Notes (equivalent to an initial conversion price of $443.40 per share of common stock), subject to adjustment as described in the indenture governing the 2028 Notes. For additional information regarding the 2028 Notes please refer to Note 2 and Note 16 to the audited consolidated financial statements for the year ended December 31, 2020, contained in the Company’s Annual Report on Form 10-K filed with the SEC.

During the three-month period ended March 31, 2021, one Note was converted, for a total amount of $1 thousand. Additionally, during the first quarter of 2021, the conversion threshold was met and the Notes become convertible between April 1, 2021 and June 30, 2021. As of the date of issuance of these interim condensed consolidated financial statements, the Company received additional requests for conversion of $900 thousands. The determination of whether or not the Notes are convertible must continue to be performed on a quarterly basis. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election.

In connection with the issuance of the 2028 Notes, the Company paid $91,784 thousands, $11,472 thousands, $88,362 thousands, $104,095 thousands, $82,682 thousands, $120,012 thousands and $100,769 thousands (including transaction expenses) in August 2018, November 2018, June 2019, June 2020, August 2020, November 2020 and January 2021, respectively, to enter into capped call transactions with respect to shares of the common stock with certain financial institutions (the “2028 Notes Capped Call Transactions”). In addition, the Company paid $8,005 thousands in November 2019 to amend the strike and cap prices of the capped call transaction purchased in November 2018. The 2028 Notes Capped Call Transactions are expected generally to reduce the potential dilution upon conversion of the 2028 Notes in the event that the market price of the Company’s common stock is greater than the strike price and lower than the cap price of the 2028 Notes Capped Call Transactions. The cost of the 2028 Notes Capped Call Transactions is included as a net reduction to additional paid-in capital in the stockholders’ equity section of the consolidated balance sheets.

In January 2021, the Company repurchased $440,000 thousands principal amount of the outstanding of the 2028 Notes. The total amount paid amounted to $1,865,076 thousands, which includes principal, interest accrued and premium. As a result, $439,992 thousands of the principal amount of the 2028 Notes remains outstanding as of March 31, 2021. The settlement consideration was first allocated to the extinguishment of the liability component of the 2028 Notes repurchased. The difference of $29,953 thousands between the fair value of the liability component and the net carrying amount of the liability component and unamortized debt issuance costs was recognized as a loss on debt extinguishment; in addition, $19,294 thousands paid as a premium was recognized as a loss in Interest expense and other financial losses line in the consolidated statement of income for the three-month period ended March 31, 2021. The remaining consideration of $1,484,279 thousands (net of income tax effects) was allocated to the reacquisition of the equity component and recognized as a reduction of stockholders’ equity.

The total estimated fair value of the 2028 Notes was $1,465,869 thousands and $3,416,819 thousands as of March 31, 2021 and December 31, 2020, respectively. The fair value was determined based on the closing trading price per $100 principal amount of the 2028 Notes as of the last day of trading for the period. The Company considered the fair value of the 2028 Notes as of March 31, 2021 and December 31, 2020 to be a Level 2 measurement. The fair value of the 2028 Notes is primarily affected by the trading price of the Company’s common stock and market interest rates. Based on the $1,472.14 closing price of the Company’s common stock on March 31, 2021, the if-converted value of the 2028 Notes exceeded their principal amount by $1,020,833 thousands.

The following table presents the carrying amounts of the liability and equity components related to the 2028 Notes as of March 31, 2021 and December 31, 2020:

March 31, 2021

December 31, 2020

(In thousands)

Amount of the equity component (1)

$

163,653

$

327,305

2.00% Convertible Senior Notes due 2028

$

439,992

$

879,993

Unamortized debt discount (2)

(134,257)

(275,299)

Unamortized transaction costs related to the debt component

(4,367)

(8,894)

Contractual coupon interest accrual

44,244

41,409

Contractual coupon interest payment

(43,120)

(34,760)

Net carrying amount

$

302,492

$

602,449

(1)Net of $3,082 thousands of transaction costs related to the equity component of the 2028 Notes.

(2)As of March 31, 2021, the remaining period over which the unamortized debt discount will be amortized is 7.5 years.

The following table presents the interest expense for the contractual interest, the accretion of debt discount and the amortization of debt issuance costs:

Three month periods ended March 31,

2021

2020

(In thousands)

Contractual coupon interest expense

$

2,836

$

4,400

Amortization of debt discount

4,355

6,307

Amortization of debt issuance costs

102

135

Total interest expense related to the 2028 Notes

$

7,293

$

10,842

12. Securitization Transactions

The process of securitization consists of the issuance of securities collateralized by a pool of assets through a special purpose entity, often under a VIE.

The Company securitizes financial assets associated with its credit cards and loans receivable portfolio. The Company’s securitization transactions typically involve the legal transfer of financial assets to bankruptcy remote special purpose entities (“SPEs”) or the acquisition of loans receivable portfolios through SPEs. The Company generally retains economic interests in the collateralized securitization transactions, which are retained in the form of subordinated interests. For accounting purposes, the Company is precluded from recording the transfers of assets in securitization transactions as sales or is required to consolidate the SPE.

The Company securitizes certain credit cards receivable related to user’s purchases through Argentine SPEs. According to the SPE contracts, the Company has determined that it has no obligation to absorb losses or the right to receive benefits of the SPE that could be significant because it does not retain any equity certificate of participation or subordinated interest in the SPEs. As the Company does not control the vehicle, its assets, liabilities, and related results are not consolidated in the Company’s financial statements.

Additionally, the Company intends to securitize certain credit cards receivable related to user’s purchases through Brazilian SPE. According to the SPE contract in place, the Company has determined that it has the obligation to absorb losses or the right to receive benefits of the SPE that could be significant because it retains subordinated interest in the SPEs. As the Company controls the vehicle, the assets, liabilities, and related results are consolidated in its financial statements.

The Company securitizes certain loans receivable through Brazilian, Argentine and Mexican SPEs, formed to securitize loans receivable provided by the Company to its users or purchased from financial institutions that grant loans to the Company’s users through Mercado Pago. According to the SPE contracts, the Company has determined that it has both the power to direct the activities of the entity that most significantly impact the entity’s performance and the obligation to absorb losses or the right to receive benefits of the entity that could be significant because it retains the equity certificates of participation, and would therefore also be consolidated. When the Company controls the vehicle, it accounts the securitization transactions as if they were secured financing and therefore the assets, liabilities, and related results are consolidated in its financial statements.

The following table summarizes the Company’s collateralized debt as of March 31, 2021:

SPEs

Collateralized debt as of March 31, 2021

Interest rate

Currency

Maturity

Mercado Crédito Merchant Fundo de Investimento em Direitos Creditórios

1,769

DI plus 3.5%

Brazilian Reais

June 2021

Mercado Crédito I Brasil Fundo de Investimento Em Direitos Creditórios Não Padronizados

51,364

DI plus 2.5%

Brazilian Reais

November 2023

Fundo de Investimento Em DireitosCreditórios Arandu

173,713

DI plus 1.75%

Brazilian Reais

June 2023

Mercado Crédito Consumo II

5,478

Badlar rates plus 200 basis points with a min 27% and a max 37%

Argentine Pesos

July 2021

Mercado Crédito VIII

2,726

Badlar rates plus 200 basis points with a min 29% and a max 39%

Argentine Pesos

July 2021

Mercado Crédito Consumo III

6,325

Badlar rates plus 200 basis points with a min 29% and a max 41%

Argentine Pesos

August 2021

Mercado Crédito IX

9,202

Badlar rates plus 200 basis points with a min 30% and a max 44%

Argentine Pesos

February 2022

Fideicomiso de administración y fuente de pago CIB/3369

26,056

The equilibrium interbank interest rate published by Banco de Mexico in the Diario Oficial plus 3.34%

Mexican Pesos

November 2022

This secured debt is issued by the SPEs and includes collateralized securities used to fund Mercado Credito business. The third-party investors in the securitization transactions have legal recourse only to the assets securing the debt and do not have recourse to the Company. Additionally, the cash flows generated by the SPEs are restricted to the payment of amounts due to third-party investors, but the Company retains the right to residual cash flows.

The assets and liabilities of the SPEs are included in the Company’s interim condensed consolidated financial statements as of March 31, 2021 and December 31, 2020 as follows:

March 31,

December 31,

2021

2020

Assets

(In thousands)

Current assets:

Restricted cash and cash equivalents

$

100,758

$

249,872

Credit cards receivable and other means of payments, net

136,693

Loans receivable, net

133,588

113,846

Total current assets

371,039

363,718

Non-current assets:

Long-term investments

1,596

Loans receivable, net

10,106

9,581

Total non-current assets

11,702

9,581

Total assets

$

382,741

$

373,299

Liabilities

Current liabilities:

Accounts payable and accrued expenses

$

136

$

100

Loans payable and other financial liabilities

25,782

25,342

Total current liabilities

25,918

25,442

Non-current liabilities:

Loans payable and other financial liabilities

250,851

248,815

Total non-current liabilities

250,851

248,815

Total liabilities

$

276,769

$

274,257

13. Leases

The Company leases certain fulfillment, cross-docking and services centers, office space and vehicles in the various countries in which it operates. The lease agreements do not contain any residual value guarantees or material restrictive covenants.

Supplemental balance sheet information related to leases was as follows:

March 31,

December 31,

2021

2020

Operating Leases

(In thousands)

Operating lease right-of-use assets

$

345,313

$

303,214

Operating lease liabilities

$

344,528

$

298,847

Finance Leases

Property and equipment, at cost

34,994

29,798

Accumulated depreciation

(5,730)

(4,086)

Property and equipment, net

$

29,264

$

25,712

Loans payable and other financial liabilities

$

24,301

$

23,655


The following table summarizes the weighted average remaining lease term and the weighted average incremental borrowing rate for operating leases and the weighted average discount rate for finance leases at March 31, 2021:

Weighted average remaining lease term

Operating leases

7

Years

Finance leases

4

Years

Weighted average discount rate (*)

Operating leases

8

%

Finance leases

13

%

(*) Includes discount rates of leases in local currency and U.S dollar.

The components of lease expense were as follows:

Three months ended March 31,

2021

2020

(In thousands)

Operating lease cost

$

16,105

$

9,051

Finance lease cost:

Depreciation of property and equipment

1,324

512

Interest on lease liabilities

837

508

Total finance lease cost

$

2,161

$

1,020

Supplemental cash flow information related to leases was as follows:

Three months ended March 31,

2021

2020

Cash paid for amounts included in the measurement of lease liabilities:

(In thousands)

Operating cash flows from operating leases

$

14,779

$

8,590

Financing cash flows from finance leases

3,863

564

Right-of-use assets obtained in exchange for lease obligations:

Operating leases

$

65,394

$

14,580

Finance leases

6,197

663

The following table summarizes the fixed, future minimum rental payments, excluding variable costs, which are discounted by the Company’s incremental borrowing rates to calculate the lease liabilities for the operating and finance leases:

Period Ending March 31, 2021

Operating Leases

Finance Leases

(In thousands)

One year or less

$

69,830

$

8,522

One year to two years

68,741

8,522

Two years to three years

65,053

7,405

Three years to four years

61,152

4,657

Four years to five years

49,032

1,642

Thereafter

126,023

Total lease payments

$

439,831

$

30,748

Less imputed interest

(95,303)

(6,447)

Total

$

344,528

$

24,301


14. Derivative instruments

The Company designates certain derivatives as hedges of particular risks associated with forecasted purchases. These transactions, mainly currency forward contracts, are classified as cash flow hedges.

As of March 31, 2021 the Company used foreign currency exchange contracts to hedge the foreign currency effects related to the forecasted purchase of MPOS devices in U.S. dollars owed by a Brazilian subsidiary whose functional currency is the Brazilian Reais. Pursuant to these contracts, the Company will buy a notional amount of $10,005 thousands in April 2021, $10,589 thousands in May 2021, $10,749 thousands in June 2021, $8,490 thousands in July 2021, $8,659 thousands in August 2021, $8,755 thousands in September 2021, $4,326 thousands in October 2021, $7,724 thousands in November 2021, $5,960 thousands in December 2021, $2,337 thousands in January 2022, $2,175 thousands in February 2022 and $2,675 thousands in March 2022 at fixed currency rates. The Company designated the foreign currency exchange contracts as cash flow hedges, the derivative’s gain or loss is initially reported as a component of accumulated other comprehensive income and subsequently reclassified into earnings in the same period the forecasted transaction affects earnings. As of March 31, 2021, the Company estimated that the whole amount of net derivative gains related to its cash flow hedges included in accumulated other comprehensive income will be reclassified into earnings within the next 12 months.

In addition, as of March 31, 2021, the Company entered into certain foreign currency exchange contracts to hedge the foreign currency fluctuations related to certain transactions denominated in U.S. dollars of a Brazilian subsidiary, whose functional currency is the Brazilian Reais, which were not designated as hedges for accounting purposes. Pursuant to these contracts, the Company will buy a notional amount of $60,000 thousands in April 2021, $52,000 thousands in May 2021, $39,000 thousands in June 2021, $30,000 thousands in July 2021 and $24,000 thousands in August 2021 at fixed currency rates.

Finally, the Company entered into certain foreign currency exchange contracts to hedge the foreign currency fluctuations related to certain transactions denominated in U.S. dollars of a Mexican subsidiary, whose functional currency is the Mexican Peso, which were not designated as hedges for accounting purposes. Pursuant to these contracts, the Company will buy a notional amount of $66,470 thousands in April 2021, $20,349 thousands in May in 2021, $27,000 thousands in June 2021 and $15,000 thousands in July 2021, at fixed currency rates.

Foreign exchange contracts

The fair values of the Company’s outstanding derivative instruments as of March 31, 2021 and December 31, 2020 were as follows:

March 31,

December 31,

Balance sheet location

2021

2020

(In thousands)

Derivatives

Foreign exchange contracts not designated as hedging instruments

Other current assets

$

14,008

$

199

Foreign exchange contracts designated as cash flow hedges

Other current assets

3,469

Foreign exchange contracts not designated as hedging instruments

Other current liabilities

3,708

11,106

Foreign exchange contracts designated as cash flow hedges

Other current liabilities

2,858

The effects of derivative contracts on unaudited interim condensed consolidated of comprehensive income as of March 31, 2021 were as follows:

Amount of

Amount of (gain) loss reclassified

December 31,

Gain (Loss) recognized

from accumulated

March 31,

2020

in other comprehensive loss

other comprehensive loss

2021

(In thousands)

Foreign exchange contracts designated as cash flow hedges

$                   (2,469)

$                    5,561

$                                                    636

$                        3,728


The effects of derivative contracts on unaudited interim condensed consolidated statement of income for the three-month periods ended March 31, 2021 and 2020 were as follows:

Three Months Ended March 31,

2021

2020

(In thousands)

Foreign exchange contracts not designated as hedging instruments

$

18,989

$

16,767

15. Share repurchase program

On August 30, 2020, the Board of Directors of MercadoLibre authorized the Company to repurchase shares of the Company’s common stock, par value $0.001 per share, for aggregate consideration of up to $350,000 thousands.

The Company expects to purchase shares at any time and from time to time, in compliance with applicable federal securities laws, through open-market purchases, block trades, derivatives, trading plans established in accordance with SEC rules, or privately negotiated transactions. The timing of repurchases will depend on factors including market conditions and prices, the Company’s liquidity requirements and alternative uses of capital. The share repurchase program expires on August 31, 2021 and may be suspended from time to time or discontinued, and there is no assurance as to the number of shares that will be repurchased under the program or that there will be any repurchases.

As of March 31, 2021, the Company acquired 66,096 shares under the share repurchase program. The shares were acquired in the Argentine market and paid for in Argentine pesos at a price that reflects the additional cost of accessing US dollars through an indirect mechanism, because of restrictions imposed by the Argentine government for buying US dollars at the official exchange rate in Argentina. As a result, the Company recognized a foreign currency loss of $18,280 thousands for the three-month period ended March 31, 2021.

16. Impact of COVID-19 pandemic

In March 2020, the outbreak of a novel strain of the coronavirus, COVID-19 was recognized as a pandemic by the World Health Organization, and the outbreak has become increasingly widespread around the world. Government-imposed total or partial lockdowns or curfews instituted throughout Latin America since March 2020, some of which have been subsequently extended, modified or rescinded, have led to a weakening of the macroeconomic environment, generating recession conditions and a devaluation of the local currencies in the countries in which the Company operates.

The Company has thus far not been required to suspend its operations in any country, but the Company’s business was, and may in the future again be, negatively affected by the pandemic in terms of operations, consumer buying trends, and consequently, net revenues.

Management believes that, given the uncertainty with respect to how long the pandemic will persist, what additional measures may be introduced by governments or private parties, what effect any such additional measures may have on our business or the macroeconomic impact of the pandemic in the countries where the Company operates, it is not possible to have certainty around business development and its cash generation until the outbreak of COVID-19 can be definitively contained. In terms of liquidity and cash management, relevant funding sources remain available at the geographical segment level and guaranteed senior notes were issued in January 2021 in an aggregate amount of $1,100,000 thousands.

As of March 31, 2021, the Company’s main source of liquidity was $1,208,729 thousands of cash and cash equivalents and short-term investments, which excludes a $562,797 thousands investment related to the Central Bank of Brazil Mandatory Guarantee and a $71,270 thousands investment related to a guarantee for a secured line of credit in Brazil.

Lastly, the revenues sources of the Company’s subsidiaries are denominated in local currency. As a result, the current weak macro-economic environment in certain countries in which the Company operates coupled with the devaluations of certain local currencies in those countries against the U.S. dollar could cause a decline in year-over-year net revenues as measured in U.S. dollars.

Management has made its best estimation of the potential scenarios for 2021. However it is not possible to predict at this time with certainty the impact that COVID-19 could have and its effects, including its impact on the economies of the countries in which the Company operates, and therefore the extent of the impact on the Company’s financial condition and results of operations if conditions persist or materially deviate from those currently used in its estimates.

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

Cautionary Statement Regarding Forward-Looking Statements

Any statements made or implied in this report that are not statements of historical fact, including statements about our beliefs and expectations, are forward-looking statements within the meaning of Section 27 A of the Securities Act of 1933, as amended, (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and should be evaluated as such. The words “anticipate,” “believe,” “expect,” “intend,” “plan,” “estimate,” “target,” “project,” “should,” “may,” “could,” “will” and similar words and expressions are intended to identify forward-looking statements. Forward-looking statements generally relate to information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment, potential growth opportunities, future economic, political and social conditions in the countries in which we operate and their possible impact on our business, and the effects of future regulation and the effects of competition. Such forward-looking statements reflect, among other things, our current expectations, plans, projections and strategies, anticipated financial results, future events and financial trends affecting our business, all of which are subject to known and unknown risks, uncertainties and other important factors (in addition to those discussed elsewhere in this report) that may cause our actual results to differ materially from those expressed or implied by these forward-looking statements. These risks and uncertainties include, among other things:

our expectations regarding the continued growth of e-commerce and Internet usage in Latin America;

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

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

the impact of government and central bank regulations on our business;

litigation and legal liability;

systems interruptions or failures;

our ability to attract and retain qualified personnel;

consumer trends;

security breaches and illegal uses of our services;

competition;

reliance on third-party service providers;

enforcement of intellectual property rights;

seasonal fluctuations;

political, social and economic conditions in Latin America;

the expected timing and amount of MercadoLibre’s share repurchases;

our long-term sustainability goals; and

the current and potential impact of COVID-19 on our net revenues, gross profit margins, operating margins and liquidity due to future disruptions in operations as well as the macroeconomic instability caused by the pandemic.

Many of these risks are beyond our ability to control or predict. New risk factors emerge from time to time and it is not possible for Management to predict all such risk factors, nor can it assess the impact of all such risk factors on our company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

These statements are based on currently available information and our current assumptions, expectations and projections about future events. While we believe that our assumptions, expectations and projections are reasonable in view of the currently available information, you are cautioned not to place undue reliance on our forward-looking statements. These statements are not guarantees of future performance. They are subject to future events, risks and uncertainties–many of which are beyond our control– as well as potentially inaccurate assumptions that could cause actual results to differ materially from our expectations and projections. Some of the material risks and uncertainties that could cause actual results to differ materially from our expectations and projections are described in “Item 1A — Risk Factors” in Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 filed with the Securities and Exchange Commission (“SEC”) on March 1, 2021, as updated by those described in “Item 1A — Risk Factors” in Part II of our report on this Form 10-Q for the quarter ended March 31, 2021 and in other reports we file from time to time with the SEC.

You should read that information in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2 of Part I of this report, our unaudited interim condensed consolidated financial statements and related notes in Item 1 of Part I of this report and our audited consolidated financial statements and related notes in Item 8 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2020. We note such information for investors as permitted by the Private Securities Litigation Reform Act of 1995. There also may be other factors that we cannot anticipate or that are not described in this report, generally because they are unknown to us or we do not perceive them to be material that could cause results to differ materially from our expectations.

Forward-looking statements speak only as of the date they are made, and we do not undertake to update these forward-looking statements except as may be required by law. You are advised, however, to review any further disclosures we make on related subjects in our periodic filings with the SEC.

The discussion and analysis of our financial condition and results of operations has been organized to present the following:

a brief overview of our company;

a review of our financial presentation and accounting policies, including our critical accounting policies;

a discussion of our principal trends and results of operations for the three-month periods ended March 31, 2021 and 2020;

a discussion of the principal factors that influence our results of operations, financial condition and liquidity;

a discussion of our liquidity and capital resources and a discussion of our capital expenditures; and 

a description of our non-GAAP financial measures.

Other Information

We routinely post important information for investors on our Investor Relations website, http://investor.mercadolibre.com. We use this website as a means of disclosing material, non-public information and for complying with our disclosure obligations under SEC Regulation FD (Fair Disclosure). Accordingly, investors should monitor our Investor Relations website, in addition to following our press releases, SEC filings, public conference calls and webcasts. The information contained on, or that may be accessed through, our website is not incorporated by reference into, and is not a part of, this report.

Business Overview

We are the largest online commerce ecosystem in Latin America based on unique active users, and we are present in 18 countries: Brazil, Argentina, Mexico, Chile, Colombia, Peru, Uruguay, Venezuela, Bolivia, Costa Rica, Dominican Republic, Ecuador, Guatemala, Honduras, Nicaragua, Panama, Paraguay and El Salvador. Our platform is designed to provide users with a complete portfolio of services to facilitate commercial transactions both digitally and offline.

Through our e-commerce platform, we provide buyers and sellers with a robust and safe environment that fosters the development of a large e-commerce community in Latin America, a region with a population of over 646 million people and with one of the fastest-growing Internet penetration and e-commerce growth rates in the world. We believe that we offer world-class technological and commercial solutions that address the distinctive cultural and geographic challenges of operating a digital commerce platform in Latin America.

We offer our users an ecosystem of six integrated e-commerce services: the Mercado Libre Marketplace, the Mercado Pago FinTech solution, the Mercado Envios logistics service, the Mercado Libre Ads solution, the Mercado Libre Classifieds service and the Mercado Shops online storefronts solution.

The Mercado Libre Marketplace, which we sometimes refer to as our marketplace, is a fully-automated, topically-arranged and user-friendly online commerce platform, which can be accessed through our website and mobile app. This platform enables both businesses and individuals to list merchandise and conduct sales and purchases digitally.

To complement the Mercado Libre Marketplace and also to enhance the user experience for our buyers and sellers, we developed Mercado Pago, an integrated digital payments solution. Initially designed to facilitate transactions on Mercado Libre’s Marketplaces by providing a mechanism that allowed our users to securely, easily and promptly send and receive payments, it is now a full ecosystem of Financial Technology solutions both in the digital and physical world. Our digital payments solution enables any MercadoLibre registered user to securely and easily send and receive digital payments and to pay for purchases made on any of MercadoLibre’s Marketplaces. Currently, Mercado Pago processes and settles all transactions on our Marketplaces in Brazil, Argentina, Mexico, Chile, Colombia and Uruguay, and is also available for our buyers and sellers in Peru. In addition, Mercado Pago grants through our Mercado Credito solution, loans to sellers and buyers in Argentina, Brazil and Mexico.

The Mercado Envios logistics solution enables sellers on our platform to utilize third-party carriers and other logistics service providers, while also providing them with fulfillment and warehousing services. The logistics services we offer are an integral part of our value proposition, as they reduce friction between buyers and sellers, and allow us to have greater control over the full experience. As of March 31, 2021, we also offer free shipping to buyers in Brazil, Argentina, Mexico, Chile and Colombia.

Our advertising platform, Mercado Ads, enables businesses to promote their products and services on the Internet. Through our advertising platform, MercadoLibre’s brands and sellers are able to display ads on our webpages through product searches, banner ads, or suggested products. Our advertising platform enables merchants and brands to access the millions of consumers that are on our Marketplaces at any given time with the intent to purchase, which increases the likelihood of conversion.

Through Mercado Libre Classifieds, our online classified listing service, our users can also list and purchase motor vehicles, real estate and services in the countries where we operate. Classifieds listings differ from Marketplace listings as they only charge optional placement fees and not final value fees. Our classifieds pages are also a major source of traffic to our platform, benefitting both the Commerce and Fintech businesses.

We also offer our digital storefront solution, Mercado Shops, allows users to set-up, manage and promote their own digital stores. These stores are hosted by Mercado Libre and offer integration with the rest of our ecosystem, namely our Marketplaces, payment services and logistics services. Users can create a store at no cost, and can access additional functionalities and value added services on commission.

Reporting Segments and Geographic Information

Our segment reporting is based on geography, which is the criterion our Management currently uses to evaluate our segment performance. Our geographic segments are Brazil, Argentina, Mexico and Other Countries (including Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Panama, Peru, Bolivia, Honduras, Nicaragua, El Salvador, Guatemala, Paraguay, Uruguay and the United States of America). Although we discuss long-term trends in our business, it is our policy not to provide earnings guidance in the traditional sense. We believe that uncertain conditions make the forecasting of near-term results difficult. Further, we seek to make decisions focused primarily on the long-term welfare of our company and believe focusing on short-term earnings does not best serve the interests of our stockholders. We believe that execution of key strategic initiatives as well as our expectations for long-term growth in our markets will best create stockholder value. A long-term focus may make it more difficult for industry analysts and the market to evaluate the value of our Company, which could reduce the value of our common stock or permit competitors with short-term tactics to grow more rapidly than us. We, therefore, encourage potential investors to consider this strategy before making an investment in our common stock.

The following table sets forth the percentage of our consolidated net revenues by segment for the three-month periods ended March 31, 2021 and 2020:

Three-month Periods Ended

March 31,

(% of total consolidated net revenues) (*)

2021

2020

Brazil

55.8

%

60.9

%

Argentina

21.6

20.4

Mexico

16.7

14.5

Other Countries

5.9

4.1

(*) Percentages have been calculated using whole-dollar amounts rather than the rounded amounts that appear in the table. The table above may not total due to rounding.


The following table summarizes the changes in our net revenues by segment for the three-month periods ended March 31, 2021 and 2020:

Three-month Periods Ended

Change from 2020

March 31,

to 2021 (*)

2021

2020

in Dollars

in %

(in millions, except percentages)

Net Revenues:

Brazil

$

768.7

$

397.4

$

371.3

93.4

%

Argentina

297.2

132.9

164.4

123.7

Mexico

230.5

94.8

135.7

143.3

Other Countries

82.0

27.0

55.0

203.5

Total Net Revenues

$

1,378.4

$

652.1

$

726.3

111.4

%

(*) Percentages have been calculated using whole-dollar amounts rather than the rounded amounts that appear in the table. The table above may not total due to rounding.

Description of Line Items

Net revenues

We recognize revenues in each of our four geographical reporting segments. Within each of our segments, the services we provide and products we sale generally fall into two distinct revenue streams: “Commerce” and “Fintech.”

The following table summarizes our consolidated net revenues by revenue stream for the three-month periods ended March 31, 2021 and 2020:

Three-month Periods Ended

March 31, (*)

Consolidated net revenues by revenue stream

2021

2020

(in millions)

Commerce (**)

$

910.6

$

380.7

Fintech

467.8

271.4

Total

$

1,378.4

$

652.1

(*) The table above may not total due to rounding.

(**) Includes marketplace fees, shipping fees, sales of goods, ad sales, classified fees and other ancillary services.

Revenues from Commerce transactions are mainly generated from:

marketplace fees that include final value fees and flat fees for transactions below a certain merchandise value;

shipping fees, net of the third-party carrier costs (when we act as an agent);

classifieds fees;

ad sales up-front fees;

sales of goods; and

fees from other ancillary businesses.

Final value fees represent a percentage of the sale value that is charged to the seller once an item is successfully sold and flat fees represent a fixed charge for transactions below a certain merchandise value.

Shipping revenues are generated when a buyer elects to receive an item through our shipping service net of the third-party carrier costs.

Through our classifieds offerings in vehicles, real estate and services, we generate revenues from up-front fees. These fees are charged to sellers who opt to give their listings greater exposure throughout our websites.

Our Advertising revenues are generated by selling either display product and/or text link ads throughout our websites to interested advertisers.

Revenues from inventory sales are generated when control of the good is transferred, upon delivery to our customers.

Fintech revenues correspond to our Mercado Pago service, which are attributable to:

commissions representing a percentage of the payment volume processed that are charged to sellers in connection with off Marketplace-platform transactions;

commissions from additional fees we charge when a buyer elects to pay in installments through our Mercado Pago platform, for transactions that occur either on or off our Marketplace platform;

commissions from additional fees we charge when our sellers elect to withdraw cash;

interest, cash advances and fees from merchant and consumer credits granted under our Mercado Credito solution; and

revenues from the sale of mobile points of sale products.

Although we also process payments on the Marketplace, we do not charge sellers an added commission for this service, as it is already included in the Marketplace final value fee that we charge.

When more than one service is included in one single arrangement with the same customer, we recognize revenue according to multiple element arrangements accounting, distinguishing between each of the services provided and allocating revenues based on their respective estimated selling prices.

We have a highly fragmented customer revenue base given the large numbers of sellers and buyers who use our platforms. For the three-month periods ended March 31, 2021 and 2020, no single customer accounted for more than 5.0% of our net revenues.

Our Mercado Libre Marketplace is available in 18 countries (Argentina, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Mexico, Panama, Peru, Uruguay, Venezuela (deconsolidated as of December 1, 2017), Bolivia, Honduras, Nicaragua, El Salvador, Guatemala and Paraguay), and Mercado Pago is available in 7 countries (Argentina, Brazil, Chile, Peru, Colombia, Mexico and Uruguay). Additionally, Mercado Envios is available in 6 countries (Argentina, Brazil, Mexico, Colombia, Chile and Uruguay). The functional currency for each country’s operations is the country’s local currency, except for Argentina, where the functional currency is the U.S. dollar due to Argentina’s status as a highly inflationary economy. Our net revenues are generated in multiple foreign currencies and then translated into U.S. dollars at the average monthly exchange rate. Please refer to “Critical Accounting Policies and Estimates” in Note 2 of our unaudited interim condensed consolidated financial statements for further detail on foreign currency translation.

Our subsidiaries in Brazil, Argentina and Colombia are subject to certain taxes on revenues, which are classified as a cost of net revenues. These taxes represented 8.2% of net revenues for the three-month period ended March 31, 2021, as compared to 5.9% for the same period in 2020.

Cost of net revenues

Cost of net revenues primarily includes bank and credit card processing charges for transactions and fees paid with credit cards and other payment methods, shipping operation costs (including warehousing costs), carrier and other operating costs, cost of sales of goods, fraud prevention fees, certain taxes on revenues, certain taxes on bank transactions, hosting and site operation fees, compensation for customer support personnel, ISP connectivity charges and depreciation and amortization.

Product and technology development expenses

Our product and technology development related expenses consist primarily of compensation for our engineering and web-development staff, depreciation and amortization costs related to product and technology development, telecommunications costs and payments to third-party suppliers who provide technology maintenance services to us.

Sales and marketing expenses

Our sales and marketing expenses consist primarily of costs related to marketing our platforms through online and offline advertising and agreements with portals, search engines and other sales expenses related to strategic marketing initiatives, charges related to our buyer protection programs, the salaries of employees involved in these activities, chargebacks related to our Mercado Pago operations, bad debt charges, branding initiatives, marketing activities for our users and depreciation and amortization costs.

We carry out the majority of our marketing efforts on the Internet. We enter into agreements with portals, search engines, social networks, ad networks and other sites in order to attract Internet users to the Mercado Libre Marketplace and convert them into registered users and active traders on our platform.

We also work intensively on attracting, developing and growing our seller community through our customer support efforts. We have dedicated professionals in most of our operations that work with sellers through trade show participation, seminars and meetings to provide them with important tools and skills to become effective sellers on our platform.

General and administrative expenses

Our general and administrative expenses consist primarily of salaries for management and administrative staff, compensation of outside directors, long term retention program compensation, expenses for legal, audit and other professional services, insurance expenses, office space rental expenses, travel and business expenses, as well as depreciation and amortization costs. Our general and administrative expenses include the costs of the following areas: general management, finance, treasury, internal audit, administration, accounting, tax, legal and human resources.

Other income (expenses), net

Other income (expenses) consists primarily of interest income derived from our investments and cash equivalents, interest expense and other financial charges related to financial liabilities and foreign currency gains or losses.

Income tax

We are subject to federal and state taxes in the United States, as well as foreign taxes in the multiple jurisdictions where we operate. Our tax obligations consist of current and deferred income taxes incurred in these jurisdictions. We account for income taxes following the liability method of accounting. A valuation allowance is recorded when, based on the available evidence, it is more likely than not that all or a portion of our deferred tax assets will not be realized. Therefore, our income tax expense consists of taxes currently payable, if any (given that in certain jurisdictions we still have net operating loss carry-forwards), plus the change in our deferred tax assets and liabilities during each period. 

Critical Accounting Policies and Estimates

There have been no significant changes in our critical accounting policies, Management estimates or accounting policies since the year ended December 31, 2020 and disclosed in the Form 10-K, see “Critical Accounting Policies and Estimates”.

Results of operations for the three-month period ended March 31, 2021 compared to the three-month period ended March 31, 2020

The selected financial data for the three-month periods ended March 31, 2021 and 2020 discussed herein is derived from our unaudited interim condensed consolidated financial statements included in Item 1 of Part I of this report. These statements include all normal recurring adjustments that Management believes are necessary to fairly state our financial position, results of operations and cash flows. The results of operations for the three-month periods ended March 31, 2021 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2021 or for any other period.

Statement of income data

Three-months Periods Ended

March 31,

(In millions)

2021 (*)

2020 (*)

(Unaudited)

Net service revenues

$

1,230.9

$

639.9

Net product revenues

147.5

12.2

Net revenues

1,378.4

652.1

Cost of net revenues

(787.1)

(339.3)

Gross profit

591.4

312.8

Operating expenses:

Product and technology development

(126.0)

(73.4)

Sales and marketing

(288.2)

(206.5)

General and administrative

(86.3)

(62.6)

Total operating expenses

(500.5)

(342.5)

Income (loss) from operations

90.8

(29.7)

Other income (expenses):

Interest income and other financial gains

25.1

36.8

Interest expense and other financial losses (**)

(91.3)

(23.6)

Foreign currency losses

(15.1)

(0.2)

Net income (loss) before income tax expense

9.5

(16.7)

Income tax expense

(43.5)

(4.4)

Net loss

$

(34.0)

$

(21.1)

(*) The table above may not total due to rounding.

(**) Includes $49.2 million of loss on debt extinguishment and premium related to the 2028 Notes repurchase. See Note 11 of our unaudited interim condensed consolidated financial statements for further detail on 2028 Notes repurchase.

Principal trends in results of operations

Net revenues

Our net revenues maintained its growth trajectory during the first quarter of 2021, specifically related to the increase in our gross merchandise volume and the growth of our FinTech solution services (off-platform transactions through Mercado Pago, credits business, financing payment transactions, etc.). Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of operations— Net Revenues” section in the current document for further detail on net revenues trends for the three-month periods ended March 31, 2021 and 2020.

As a consequence of the COVID-19 pandemic which has affected many countries in Latin America, governments in the region imposed total or partial lockdowns and curfews in March 2020, some of which have been subsequently extended, modified or rescinded based on the evolution of the COVID-19 pandemic.

We are not able to predict any negative impacts that the COVID-19 pandemic may have on our business in the future. See Note 16 to our unaudited condensed consolidated financial statements .

Our sources of revenues are denominated in local currencies; therefore, the weak macro-economic environment in certain countries in which we operate, as a result of COVID-19, coupled with the devaluations of certain local currencies in those countries against the U.S. dollar, could cause a decline in year-over-year net revenues, measured in U.S. dollars.

We continue to monitor the progress of the COVID-19 pandemic and will take additional measures to comply with the rapidly changing regulations of the countries where we operate and the related macroeconomic instability. However, we may see lower net revenues growth until COVID-19 is contained in the countries where we operate.

Gross profit margins

Our gross profit margin is defined as total net revenues minus total cost of net revenues, as a percentage of net revenues.

Our gross profit trends are directly affected by our revenue, as stated above, and our cost of net revenues. In this sense, our main cost of net revenue are composed of bank and credit card processing charges for transactions and fees paid with credit cards and other payment methods, cost of products sold, fraud prevention fees, sales taxes, shipping operation costs (including warehousing costs), carrier and other operating costs, certain taxes on bank transactions, hosting and site operation fees, compensation for customer support personnel, ISP connectivity charges and depreciation and amortization. This cost structure is directly affected by the level of operations of our services, and our strategic plan on gross profit is built on factors such as an ample liquidity to fund expenses and investments and a cost-effective capital structure.

However, in the future, our gross profit margin could decline if we are not able to apply appropriate measures regarding our business to prevent potential negative impacts of the COVID-19 pandemic, if we fail to maintain an appropriate relationship between our cost of revenue structure and our net revenues trend and if we continue building up our logistics network and growing our sales of goods business, which has a lower pure product margin.

For the three-month periods ended March 31, 2021 and 2020, our gross profit margins were 42.9% and 48.0%, respectively. The decrease in our gross profit margin resulted primarily from an increase in cost of product sold, shipping operating costs and sales taxes, as a percentage of net revenues, partially offset by a decrease in collection fees, as a percentage of net revenues.

Operating margins

Our Operating margin is defined as total net revenues minus total cost of net revenues and total operating expenses, as a percentage of net revenues.

Our operating margin is affected by our operating expenses structure, which mainly consists of our employees’s salaries, our sales and marketing expenses related to those activities we incurred to promote our services, product development expenses, etc. As we continue to grow and focus on expanding our leadership in the region, we will continue to invest in product development, sales and marketing and human resources in order to promote our services and capture long-term business opportunities. As a result, we may experience decreases in our operating margins.

The COVID-19 pandemic and its potential negative impacts on our business could also have negative impacts on our operating margins if we fail to closely monitor operating expenses on demand patterns and expenses are not adjusted in order to maintain an appropriate balance of such expenses with our actual rate of business development.

For the three-month period ended March 31, 2021, as compared to the same period in 2020, our operating margin increased from a negative margin of 4.6% to a positive margin of 6.6%. This increase is primarily a consequence of the increase in net revenues explained above and also due to marketing expenditures efficiencies that we achieved as a result of the growth in organic demand brought about by the effects of the COVID-19 pandemic consumer behavior.

Other Data

The following table includes seven key performance indicators, which are calculated as defined in the footnotes to the table. Each of these indicators provide a different measure of the level of activity on our platform, and we use them to monitor the performance of the business. In light of the evolution of our business, as from January 1, 2021, we no longer disclose “Number of confirmed new registered users during period” since Management considers that this indicator is no longer relevant to measuring the level of activity on our Mercado Libre Marketplace platform.

  

Three-month Periods Ended
March 31,

(in millions)

  

2021

2020

  

  

Unique active users (1)

  

69.8 

  

43.2 

Gross merchandise volume (2)

  

$

6,057.2 

  

$

3,414.1 

Number of successful items sold (3)

  

222.0 

  

105.7 

Number of successful items shipped (4)

208.1 

90.2 

Total payment volume (5)

  

$

14,717.7 

  

$

8,094.5 

Total volume of payments on marketplace (6)

  

$

5,840.0 

  

$

3,203.3 

Total payment transactions (7)

630.1 

290.7 

Capital expenditures

  

$

112.7 

  

$

53.5 

Depreciation and amortization

  

$

38.4 

  

$

21.6 

(1)New or existing user who performed at least one of the following actions during the reported period: (1) made one purchase, or reservation, or asked one question or MercadoLibre Marketplace or Classified Marketplace (2) maintained an active listing on MercadoLibre Marketplace or Classified Marketplace (3) maintained an active account in Mercado Shops (4) made a payment, money transfer, collection and/or advance using Mercado Pago (5) maintained an outstanding credit line through Mercado Credito or (6) maintained a balance of more than $5 invested in a Mercado Fondo asset management account. Management uses this metric to evaluate the size of our community of users who interact with the ecosystem and of which we have the opportunity to generate further engagement. With the changes in our business we believe it provides a better indication of our active user base rather than a registration metric that does not reflect any sort of interaction.

(2)Measure of the total U.S. dollar sum of all transactions completed through the Mercado Libre Marketplace, excluding Classifieds transactions.

(3)Measure of the number of items that were sold/purchased through the Mercado Libre Marketplace, excluding Classifieds items.

(4)Measure of the number of items that were shipped through our shipping service.

(5)Measure of the total U.S. dollar sum of all transactions paid for using Mercado Pago, including marketplace and non-marketplace transactions.

(6)Measure of the total U.S. dollar sum of all marketplace transactions paid for using Mercado Pago, excluding shipping and financing fees.

(7)Measure of the number of all transactions paid for using Mercado Pago.

 

Net revenues

Three-month Periods Ended

Change from 2020

March 31,

to 2021 (*)

2021

2020

in Dollars

in %

(in millions, except percentages)

Total Net Revenues

$

1,378.4

$

652.1

$

726.3

111.4%

(*) Percentages have been calculated using whole-dollar amounts rather than rounded amounts that appear in the table. The table above may not total due to rounding.

Our net revenues grew 111.4% for the three-month period ended March 31, 2021, as compared to the same period in 2020. The increase in net revenues was primarily attributable to:

a)an increase of $529.9 million, or 139.2%, in Commerce revenues, for the three-month period ended March 31, 2021, as compared to the same period in 2020. This increase is mainly generated by a 77.4% increase in our gross merchandise volume, partially offset by an increase of $145.3 million in shipping carrier costs which are netted from revenues, from $174.6 million for the three-month period ended March 31, 2020 to $319.9 million for the three-month period ended March 31, 2021; and

b)an increase of 72.4% in FinTech revenues, from $271.4 million for the three-month period ended March 31, 2020 to $467.8 million for the three-month period ended March 31, 2021. This increase is mainly generated by an increase of a $88.0 million in credit business, and increases in off-platform transactions and financing mainly associated to an 81.8% increase in our total payment volume, for the three-month period ended March 31, 2021, as compared to the same period in 2020.


Three-month Periods Ended

Change from 2020

March 31,

to 2021 (*)

Consolidated Net Revenues by revenue stream

2021

2020

in Dollars

in %

(in millions, except percentages)

Brazil

Commerce

$

490.9 

$

214.6 

$

276.3 

128.8%

Fintech

277.8 

182.8