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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
20-F
| ☐ |
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
|
OR
| ☒ |
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the fiscal year ended December 31, 2020
OR
| ☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
OR
| ☐ |
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
Commission file number
001-38209
Despegar.com, Corp.
(Exact Name of Registrant as Specified in its charter)
N/A
(Translation of Registrant’s name into English)
British Virgin Islands
(Jurisdiction of Incorporation or Organization)
Juana Manso 1069, Floor 5
Ciudad Autónoma de Buenos Aires, Argentina C1107CBU
Telephone: +54 11 4894-3500
(Address of principal executive offices)
Mariano Scagliarini, General Counsel
Juana Manso 1069, Floor 5
Ciudad Autónoma de Buenos Aires, Argentina C1107CBU
Telephone: +54 11 4894-3500
(Name, Telephone,
E-mail
and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
|
Title of each class
|
Trading
Symbol
|
Name of each exchange
on which registered
|
||
|
Ordinary Shares, no par value
|
DESP
|
The New York Stock Exchange
|
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the Annual Report:
|
At December 31, 2020
|
70,099,328 ordinary shares
|
Indicate by check mark if the registrant is a well-known seasoned issuer , as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ☐ No ☒
Note- Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule
12b-2
of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☒ | |||
| Non-accelerated filer | ☐ | Emerging growth company | ☒ | |||
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☒
| † |
The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
|
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
| U.S. GAAP ☒ | International Financial Reporting Standards as issued | Other ☐ | ||||||
| by the International Accounting Standards Board | ☐ |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ☐ Item 18 ☐
If this is an Annual Report, indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act). Yes ☐ No ☒
TABLE OF CONTENTS
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Page
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| 1 | ||||||
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ITEM 1
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4 | |||||
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ITEM 2
|
4 | |||||
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ITEM 3
|
4 | |||||
|
ITEM 4
|
39 | |||||
|
ITEM 4A.
|
64 | |||||
|
ITEM 5
|
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i
PART I.
INTRODUCTION
Unless the context suggests otherwise, references in this Annual Report to “Despegar,” the “Company,” “we” “us” and “our” are to Despegar.com, Corp., a business company incorporated in the British Virgin Islands (“BVI”), and its consolidated subsidiaries. Unless the context suggests otherwise, references to “Latin America” are to South America, Mexico, Central America and the Caribbean.
We were formed as a business company in BVI on February 10, 2017. On May 3, 2017, the stockholders of our predecessor, Decolar.com, Inc., a Delaware corporation, exchanged their shares of Decolar.com, Inc. for ordinary shares of Despegar.com, Corp. to create a BVI holding company. Following the exchange, our shareholders own shares of Despegar.com, Corp. and Decolar.com, Inc. is a wholly-owned subsidiary of Despegar.com, Corp.
Financial Statements
Our consolidated financial information contained in this Annual Report derives from our audited consolidated financial statements as of December 31, 2020 and 2019 and for the fiscal years ended December 31, 2020, 2019 and 2018 included in this Annual Report. Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and presented in U.S. dollars.
Adjusted Segment EBITDA
This Annual Report includes certain references to Adjusted Segment EBITDA for each of our segments (Air; and Packages, Hotels and Other Travel Products). We use Adjusted Segment EBITDA for purposes of making decisions about allocating resources to our segments and to internally evaluate their financial performance because we believe Adjusted Segment EBITDA reflects current core operating performance of each segment and provides an indicator of each segment’s ability to generate cash. For 2020, we have changed our definition of Adjusted Segment EBITDA reported internally to exclude restructuring charges and acquisition costs. We have effected this change retroactively to all years presented in this Annual Report. However, we did not have restructuring charges in either 2019 or 2018 and we did not consummate any acquisitions in 2018.
Adjusted Segment EBITDA is calculated, with respect to each segment, as our net loss for the year exclusive of financial income / (expense), income tax, depreciation, amortization, impairment charges, stock-based compensation expense, restructuring charges and acquisition costs. See note 20 to our audited consolidated financial statements for our Adjusted Segment EBITDA and segment information.
Non-GAAP
Financial Information
Consolidated Adjusted EBITDA
This Annual Report includes certain references to Consolidated Adjusted EBITDA, a
non-GAAP
financial measure. For 2020, we have changed our definition of Consolidated Adjusted EBITDA to exclude restructuring charges and acquisition costs. We have effected this change retroactively to all years presented in this Annual Report. However, we did not have restructuring charges in either 2019 or 2018 and we did not consummate any acquisitions 2018.
We define Consolidated Adjusted EBITDA as net loss for the year exclusive of financial income / (expense), income tax, depreciation, amortization, impairment charges of long-lived assets, stock-based compensation expense, restructuring charges and acquisition costs. See “Item 5. Operating and Financial Review and Prospects—A. Operating Results — Key Business Metrics” for a reconciliation of Consolidated Adjusted EBITDA to net income / (loss). Consolidated Adjusted EBITDA is not prepared in accordance with U.S. GAAP. Accordingly, you are cautioned not to place undue reliance on this information and should note that Consolidated Adjusted EBITDA, as calculated by us, may differ materially from similarly titled measures reported by other companies, including our competitors.
1
Market Data
This Annual Report includes industry, market and competitive position data that we have derived from independent consultant reports, publicly available information, industry publications, official government information and other third-party sources, as well as our internal data and estimates. Independent consultant reports, industry publications and other published sources generally indicate that the information contained therein was obtained from sources believed to be reliable. Although we believe that this information is reliable, the information has not been independently verified by us.
Certain Operating Measures
This Annual Report includes certain references to number of transactions and gross bookings, both operating measures. Number of transactions is the total number of travel customer orders completed on our platform during a given period. Gross bookings is the aggregate purchase price of all travel products booked by our travel customers through our platform during a given period. For more information, see “Item 5. Operating and Financial Review and Prospects—A. Operating Results — Key Business Metrics.”
Currency Presentation
In this Annual Report, references to “dollars” and “$” are to the currency of the United States, references to “Brazilian real,” “Brazilian
” and “R$” are to the currency of Brazil, references to “Argentine pesos” and “AR$” are to the currency of Argentina and references to “Mexican peso” and “MX$” are to the currency of Mexico.
reais
Rounding
Certain figures included in this Annual Report have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be exact arithmetic aggregations or percentages of the figures that precede them.
Trademarks
Our key trademarks are “Despegar,” “Despegar.com,” “Decolar” and “Decolar.com.” The key trademarks of Viajes Beda S.A. de C.V. (“Viajes Beda”) and Transporturist S.A. de C.V. (“Transporturist” and, together with Viajes Beda, “Best Day”), which we acquired on October 1, 2020, are “Best Day”, “BD Experience” and “HotelDo.” Other trademarks or service marks appearing in this Annual Report are the property of their respective holders. Solely for the convenience of the reader, we refer to our brands in this Annual Report without the
®
symbol, but these references are not intended to indicate in any way that we will not assert our rights to these brands to the fullest extent permitted by law.
Forward-Looking Statements and Risk Factor Summary
This Annual Report includes forward-looking statements, principally under the captions “Item 3. Key Information,” “Item 4. Information on the Company––Business Overview” and “Item 5. Operating and Financial Review and Prospects.” We have based these forward-looking statements largely on our current beliefs, expectations and projections about future events and financial trends affecting our business and our market. Many important factors, in addition to those discussed elsewhere in this Annual Report, could cause our actual results to differ substantially from those anticipated in our forward-looking statements.
We operate in a competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Annual Report. The words “believe,” “may,” “should,” “aim,” “estimate,” “continue,” “anticipate,” “intend,” “will,” “expect” and similar words are intended to identify forward-looking statements. Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies, capital expenditures, financing plans, competitive position, industry environment,
2
potential growth opportunities, the effects of future regulation and the effects of competition. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update publicly or to revise any forward-looking statements after we distribute this Annual Report because of new information, future events or other factors. These statements are intended to qualify for the safe harbors from liability provided by Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. In light of the risks and uncertainties described above, the future events and circumstances discussed in this Annual Report might not occur or come into existence and forward-looking statements are thus not guarantees of future performance. In particular, the
COVID-19
pandemic, and governments’ extraordinary measures to limit the spread of the virus, are disrupting the global economy and the travel industry, and consequently adversely affecting our business, results of operation and cash flows and, as conditions are recent, uncertain and changing rapidly, it is difficult to predict the full extent of the impact that the pandemic will have. Considering these limitations, you should not make any investment decision in reliance on forward-looking statements contained in this Annual Report. In evaluating forward-looking statements, current and prospective shareholders should specifically consider various factors, including the risks listed below and those discussed under the caption “Item 3. Key Information—D. Risk Factors” in this Annual Report.
We are providing the following summary of the risk factors contained in this Annual Report to enhance the readability and accessibility of our risk factor disclosures. We encourage you to carefully review the full risk factors contained in this Annual Report in their entirety for additional information regarding the material factors that make an investment in our securities speculative or risky. Some of the factors, risks and uncertainties that might materially affect the forward-looking statements contained herein and may make an investment in our securities speculative or risky include, but are not limited to, the following:
| • |
the
ongoing COVID-19 pandemic
is disrupting the global economy and the travel industry, and consequently adversely affecting our business, results of operations and cash flows, and it is difficult to predict the full extent of the impact that the pandemic will have on our Company;
|
| • |
we are subject to the risks generally associated with doing business in Latin America and risks associated with our business concentration within this region;
|
| • |
general declines or disruptions in the travel industry may adversely affect our business and results of operations;
|
| • |
our business and results of operations may be adversely affected by macroeconomic conditions;
|
| • |
we are exposed to fluctuations in currency exchange rates;
|
| • |
if we are unable to maintain or increase consumer traffic to our sites and our conversion rates, our business and results of operations may be harmed;
|
| • |
our business could be negatively affected by changes in search engine algorithms and dynamics or other traffic-generating arrangements;
|
| • |
we operate in a highly competitive and evolving market, and pressure from existing and new companies, as well as consolidation within the industry, may adversely affect our business and results of operations;
|
| • |
if we are unable to maintain existing, and establish new, arrangements with travel suppliers, our business may be adversely affected;
|
| • |
we rely on the value of our brands, and any failure to maintain or enhance consumer awareness of our brands could adversely affect our business and results of operations;
|
3
| • |
we rely on information technology, including third-party technology, to operate our business and maintain our competitiveness, and any failure to adapt to technological developments or industry trends, including third-party technology, could adversely affect our business;
|
| • |
we are subject to payments-related fraud risk;
|
| • |
any system interruption, security breaches or lack of sufficient redundancy in our information systems may harm our business;
|
| • |
our ability to attract, train and retain executives and other qualified employees, particularly highly-skilled IT professionals, is critical to our business and future growth;
|
| • |
our business depends on the availability of credit cards and financing options for consumers;
|
| • |
internet regulation in the countries where we operate is scarce, and several legal issues related to the internet are uncertain;
|
| • |
acquisitions could present risks and disrupt our ongoing business;
|
| • |
we may not be able to consummate acquisitions or other strategic opportunities in the future;
|
| • |
we are a foreign private issuer under U.S. securities regulations and, as a result, we will not be subject to U.S. proxy rules and will be subject to Exchange Act reporting obligations that, to some extent, are more lenient and less frequent than those of a U.S. issuer; and
|
| • |
the strategic interests of our significant shareholders may, from time to time, differ from and conflict with our interests and the interests of our other shareholders.
|
These cautionary statements should not be construed by you to be exhaustive and are made only as of the date hereof. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
Additional Information
Our principal website addresses are
and
The information on our websites should not be deemed to be part of this Annual Report. SEC also maintains a website at
that contains reports, proxy and information statements, and other information regarding registrants that make electronic filings with SEC using its EDGAR system.
www.despegar.com
www.decolar.com.
www.sec.gov
|
ITEM 1
|
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
|
Not applicable.
|
ITEM 2
|
OFFER STATISTICS AND EXPECTED TIMETABLE
|
Not applicable.
|
ITEM 3
|
KEY INFORMATION
|
|
A.
|
Removed and Reserved.
|
The selected financial data previously required by Item 3.A of Form
.
20-F
has been omitted in reliance on SEC Release No.
33-10890,
Management’s Discussion and Analysis, Selected Financial Data and Supplementary Financial Information
4
|
B.
|
Capitalization and Indebtedness
|
Not applicable.
|
C.
|
Reasons for the Offer and Use of Proceeds
|
Not applicable.
|
D.
|
Risk Factors
|
You should carefully consider the risks described below, in addition to the other information contained in this Annual Report. We also may face additional risks and uncertainties that are not presently known to us, or that as of the date of this Annual Report we deem immaterial, which may impair our business, financial condition and results of operations. If any of these events occur, the trading price of our ordinary shares could decline. In general, you take more risk when you invest in the securities of issuers with operations in emerging markets such as Latin American countries than when you invest in the securities of issuers in the United States and other developed markets. The information in this Risk Factors section includes forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of numerous factors, including those described in “Forward-Looking Statements.”
Risks Related to Our Business
The ongoing
COVID-19
pandemic has had, and is expected to continue to have, a material adverse impact on the global economy, travel industry, and consequently our business, results of operations, cash flows and liquidity.
The outbreak of
COVID-19
rapidly spread across the globe in 2020 and is continuing to disrupt worldwide economic activity and –in particular– the travel industry. Countries around the world, including across Latin America, have adopted extraordinary measures to limit the spread of
COVID-19,
including imposing travel restrictions and bans, closing borders, establishing restrictions on public gatherings, instructing residents to practice social distancing, requiring closures of
non-essential
businesses, issuing stay at home advisories and orders, implementing quarantines and similar actions. The degree of containment of the virus, and the recovery in travel, has varied country by country. During the recovery period, there have been instances where cases of
COVID-19
have started to increase again after a period of decline, which in some cases impacted the recovery of travel in certain countries. While many countries have begun the process of vaccinating their residents against
COVID-19, the
large scale and challenging logistics of distributing the vaccines, as well as uncertainty over the efficacy of the vaccine against new variants of the virus, may contribute to delays in economic recovery.
COVID-19
has also had broader economic impacts, including an increase in unemployment levels and reduction in economic activity, which could lead to recession and further reduction in consumer or business spending on travel activities, which may negatively impact the timing and level of a recovery in travel demand.
Demand for travel began showing early signs of weakness by the beginning of March 2020. Within a matter of days, with more news of the potentially extensive spreading of the virus to other parts of the world, travel demand began to decline significantly, and then the decline accelerated precipitously as governments implemented strict measures to limit the spread of the virus. During the nine-month period ended December 31, 2020, our gross bookings declined by 83% as compared to the corresponding nine-month period of 2019. During the second quarter of 2020, our gross bookings declined by 94% compared to the first quarter of 2020. During the third quarter of 2020, our gross bookings increased by 238% compared to the second quarter of 2020 and during the fourth quarter of 2020, our gross bookings increased by 143% compared to the third quarter of 2020. In addition, we have incurred additional customer service costs in connection with servicing travelers affected by the outbreak, which also has a negative impact on our results of operations.
As an intermediary in the travel industry, a significant portion of our revenue is affected by the operations of our travel suppliers. The effects of the pandemic and governments’ measures have forced many travel suppliers to reduce operations and to seek government support in order to maintain their businesses. The suspension or termination of services by major travel suppliers, in particular airlines, negatively impacts the products we can offer to our travel customers.
5
The pandemic has impeded global economic activity for an extended period and could continue to do so, even as restrictions are lifted, leading to a continuation of the already significant decrease in per capita income and disposable income, increased and sustained unemployment or a decline in consumer confidence, all of which could significantly reduce discretionary spending by individuals and businesses on travel. In turn, that could have a negative impact on demand for our services and could lead our partners, or us, to reduce prices or offer incentives to attract travelers. We also cannot predict the long-term effects of the
COVID-19
pandemic on our partners and their business and operations or the ways that the pandemic may fundamentally alter the travel industry. In particular, we may need to adjust to a travel industry with fewer and different suppliers as well as structural changes to certain types of travel.
While we have undertaken certain actions to attempt to mitigate the effects of
COVID-19
on our business, our cost-savings activities may lead to disruptions in our business, inability to enhance or preserve our brand awareness, reduced employee morale and productivity, increased attrition, and problems retaining existing and recruiting future employees, all of which could have a material adverse impact on our business, financial condition, results of operations and cash flows.
For the reasons set forth above and other reasons that may come to light as the
COVID-19
pandemic and containment measures evolve over time, it is difficult to estimate with accuracy the impact to our future revenues, results of operations, cash flows, liquidity or financial condition, but such impacts have been and will continue to be significant and could continue to have a material adverse effect on our business, financial condition, results of operations, cash flows and liquidity position for the foreseeable future.
We are subject to the risks generally associated with doing business in Latin America.
Our business serves the Latin American travel industry and substantially all of our revenue is derived from Latin American countries. Substantially all of our operations are located in Latin America. Moreover, we have a significant number of transactions from Brazil, Mexico and Argentina as well as other Latin American countries. In 2020 and 2019, Brazil accounted for 47% and 39% of our transactions and Argentina accounted for 11% and 22% of our transactions. In addition, on October 1, 2020 we completed our acquisition of Best Day, increasing significantly our exposure to Mexico. In 2020 and in 2019, Mexico accounted for 20% and 14% of our transactions.
As a result, we are subject to the risks generally associated with doing business in the region, including:
| • |
political, social and macroeconomic instability;
|
| • |
cycles of severe economic downturns;
|
| • |
currency devaluations and fluctuations;
|
| • |
periods of high inflation;
|
| • |
availability, quality and level of usage of the internet and
e-commerce;
|
| • |
high levels of credit risk and fraud;
|
| • |
uncertainty or changes in governmental regulation, including applicable to travel services operations and internet and
e-commerce
services;
|
| • |
uncertainty or changes in tax laws and regulations;
|
| • |
limited access to financing, both for companies and for consumers;
|
6
| • |
exchange and capital controls;
|
| • |
limited infrastructure, including in the travel and technology sectors;
|
| • |
adverse labor conditions and difficulties in hiring, training and retaining qualified personnel;
|
| • |
the challenges of doing business across a region with multiple languages, different currencies and regulatory regimes that varies from country to country; and
|
| • |
the impact of adverse global conditions in the region.
|
Any of these risks could have a material adverse effect on our business, financial condition and results of operations. For more information, see “—Risks Related to Latin America.”
General declines or disruptions in the travel industry may adversely affect our business and results of operations.
Our business is significantly affected by the trends that occur in the travel industry. As the travel industry is highly sensitive to business and personal discretionary spending levels, it tends to decline during general economic downturns. Trends or events that tend to reduce travel and are likely to reduce our revenue include:
| • |
health-related risks, such as the ongoing
COVID-19
pandemic, or future outbreaks of Zika virus, H1N1 influenza, Ebola virus, yellow fever, avian flu, or any other serious contagious diseases;
|
| • |
terrorist attacks or threats of terrorist attacks or wars;
|
| • |
fluctuations in currency exchange rates;
|
| • |
increased prices in the airline ticketing, hotel, or other travel-related sectors;
|
| • |
significant changes in oil prices;
|
| • |
travel-related strikes or labor unrest, bankruptcies or liquidations;
|
| • |
travel-related accidents or the grounding of aircraft due to safety or other concerns;
|
| • |
political unrest;
|
| • |
high levels of crime;
|
| • |
natural disasters or severe weather conditions, including volcanic eruptions, hurricanes, flooding or earthquakes;
|
| • |
changes in immigration policy; and
|
| • |
travel restrictions or other security procedures implemented in connection with any major events, particularly those that affect travel by Latin Americans within their respective countries, across the region and outbound from the region to the rest of the world.
|
We could be severely and adversely affected by declines or disruptions in the travel industry and, in many cases, have little or no control over the occurrence of such events. Such events could result in a decrease in demand for our travel services. Any decrease in demand, depending on the scope and duration, could significantly and adversely affect our business and financial performance over the short and long term.
7
Our business and results of operations are adversely affected by macroeconomic conditions.
Consumer purchases of discretionary items generally decline during periods of recession and other periods in which disposable income is adversely affected. As a substantial portion of travel expenditure, for both business and leisure, is discretionary, the travel industry tends to experience weak or reduced demand during economic downturns.
General adverse economic conditions, including the possibility of recessionary conditions in Latin America or a worldwide economic slowdown, would adversely impact our business, financial condition and results of operations. Past weakness and uncertainty in the global economy and in Latin America have negatively impacted consumer spending patterns and demand for travel services and may continue to do so in the future.
As an intermediary in the travel industry, a significant portion of our revenue is affected by prices charged by our travel suppliers. During periods of poor economic conditions, airlines and hotels tend to reduce rates or offer discounted sales to stimulate demand, thereby reducing our commission-based income. A slowdown in economic conditions may also result in a decrease in transaction volumes and adversely affect our revenue, including our consumer
fee-based
income. It is difficult to predict the effects of the uncertainty in global economic conditions. If economic conditions decline globally or in Latin America, our business, financial condition and results of operations could be adversely impacted.
Moreover, the ongoing
COVID-19
pandemic has significantly increased economic uncertainty and resulted in a global recession, which may continue to adversely affect consumer spending and travel demand even after the health concerns of the virus have subsided.
We are exposed to fluctuations in currency exchange rates.
Because we conduct our business outside the United States and receive almost all of our revenue in currencies other than the dollar, but report our results in dollars, we face exposure to adverse movements in currency exchange rates. The currencies of certain countries where we operate, including Brazil and Argentina, have historically experienced significant devaluations.
The Brazilian real depreciated 17%, 4% and 29% during 2018, 2019 and 2020, respectively; the Argentine peso depreciated 51%, 59% and 40.5% during 2018, 2019 and 2020, respectively and the Mexican peso depreciated 0.25% during 2018, appreciated 4.17% during 2019 and depreciated 5.5% during 2020. The results of operations in the countries where we operate are exposed to foreign exchange rate fluctuations as the financial results of the applicable subsidiaries are translated from the local currency into dollars upon consolidation. If the dollar weakens against foreign currencies, the translation of these foreign-currency-denominated transactions will typically result in increased revenue and operating expenses, and our revenue and operating expenses will typically decrease if the dollar strengthens. Moreover, if the dollar strengthens against the foreign currencies of countries in which we operate, the purchasing power of our travel customers from those countries could be negatively affected by potentially increased prices in local currencies, and we could experience a reduction in the demand for our travel services.
Additionally, foreign exchange exposure also arises from
pre-pay
transactions, where we accept upfront payments for bookings in the travel customer’s home currency, but payment to the hotel is not due until after the travel customer checks out, and is paid by us in the hotel’s home currency. We are therefore exposed to foreign exchange risk between the time of the initial reservation and the time when the hotel is paid.
We minimize our foreign currency exposures by managing natural hedges, netting our current assets and current liabilities in the same foreign currencies, and managing short term loans and investments for hedging purposes. Additionally, from time to time we enter into derivative transactions. However, depending on the size of the exposures and the relative movements of exchange rates, if we choose not to hedge or fail to hedge effectively our exposure, we could experience a material adverse effect on our financial condition and results of operations.
8
We incurred net losses, operating losses and negative operating cash flows in 2020 and may experience earnings declines or net losses in the future.
In 2020, we incurred a net loss of $142.6 million, operating losses of $177.2 million and negative operating cash flows of $118.3 million. We cannot assure you that we can sustain profitability or avoid net losses in the future. Our ability to remain profitable depends on various factors, including our ability to generate additional transaction volume and revenue and control our costs and expenses. We may incur significant losses in the future for a number of reasons, including the other risks described in this Annual Report, and we may further encounter unforeseen expenses, difficulties, complications, delays and other unknown events. If our costs and expenses increase at a more rapid rate than our revenue, we may not be able to sustain profitability and may incur losses.
If we are unable to maintain or increase consumer traffic to our sites and our conversion rates, our business and results of operations would be harmed.
Our ability to generate revenue depends, in part, on our ability to attract consumers to our platform. If we fail to maintain or increase consumer traffic and our conversion rates, our ability to grow our revenue could be negatively affected. We expect that our efforts to maintain or increase traffic are likely to include, among other things, significant increases to our marketing expenditures. We cannot assure you that any increases in our expenses will be successful in generating additional consumer traffic.
There are many factors that could negatively affect user retention, growth, and engagement, including if:
| • |
we fail to offer compelling products;
|
| • |
users increasingly engage with competing products instead of ours;
|
| • |
we fail to introduce new and exciting products and services or those we introduce are poorly received;
|
| • |
our websites or mobile apps fail to operate effectively on the iOS and Android mobile operating systems;
|
| • |
we do not provide a compelling user experience;
|
| • |
we are unable to combat spam or other hostile or inappropriate usage on our products, or if our anti-fraud measures are too conservative and we reject too many bona fide transactions;
|
| • |
there are changes in user sentiment about the quality or usefulness of our existing products;
|
| • |
there are concerns about the privacy implications, safety, or security of our products;
|
| • |
our suppliers decide to discontinue the offering of their products through our platform;
|
| • |
technical or other problems frustrate the user experience, particularly if those problems prevent us from delivering our products in a fast and reliable manner;
|
| • |
we fail to provide adequate service to our travel customers and travel suppliers;
|
| • |
we or other companies in our industry are the subject of adverse media reports or other negative publicity; or
|
| • |
we do not maintain our brand image or our reputation is damaged.
|
Any decrease to user retention, growth, or engagement could render our products less attractive to consumers and would seriously harm our business.
9
We operate in a highly competitive and evolving market, and pressure from existing and new companies may adversely affect our business and results of operations.
The travel market in Latin America and worldwide is intensely competitive and rapidly evolving. Factors affecting our competitive success include, among other things, price, availability and breadth of choice of travel services and products, brand recognition, customer service, fees charged to travelers, ease of use, accessibility, consumer payment options and reliability. We currently compete with both established and emerging providers of travel services and products, including regional offline travel agency chains and tour operators, global OTAs with presence in Latin America and smaller, country-specific online and offline travel agencies and tour operators. In addition, our travel customers have the option to book travel directly with airlines, hotels and other travel service providers who are increasingly focused on further refining their online offerings. Large, established internet search engines have also launched applications offering travel itineraries in destinations around the world, and meta-search companies who can aggregate travel search results also compete against us for travel customers. We also face competition from Airbnb and other providers acting in the alternative accommodations space. In addition, we face price competition from new entrants that offer discounted rates and other incentives from time to time, as well as social media channels that market travel products and experiences. Some of our competitors have significantly greater financial and other resources than us. From time to time we may be required to reduce service fees and revenue margins in order to compete effectively and maintain or gain travel customers, brand awareness and supplier relationships.
Further, we may also face increased competition from new entrants in our industry. We cannot assure you that we will be able to successfully compete against existing or new competitors. If we are not able to compete effectively, our business, financial condition and results of operations may be adversely affected.
Some travel suppliers are seeking to decrease their reliance on distribution intermediaries like us by promoting direct distribution channels. Many airlines, hotels, car rental companies and tour operators have call centers and have established their own travel distribution websites and mobile applications. From time to time, travel suppliers offer advantages, such as bonus loyalty awards and lower transaction fees or discounted prices, when their services and products are purchased from supplier-related channels. We also compete with competitors which may offer less content, functionality and marketing reach but at a relatively lower cost to suppliers. If our access to supplier-provided content or features were to be diminished either relative to our competitors or in absolute terms or if we are unable to compete effectively with travel supplier-related channels or other competitors, our business could be materially and adversely affected.
If we are unable to maintain existing, and establish new, arrangements with travel suppliers, our business may be adversely affected.
Our business is dependent on our ability to maintain our relationships and arrangements with existing suppliers, such as airlines, global distribution system (GDS), service providers, hotels, hotel consolidators and destination services companies, car rental companies, bus operators, cruise companies and travel assistance providers, as well as our ability to establish and maintain relationships with new travel suppliers. In addition, the hotel and other lodging products that we offer through our platform for all countries outside Latin America are provided to us substantially all by affiliates of Expedia, and Expedia is the preferred provider to us of hotel and other lodging products in Latin America, pursuant to a lodging outsourcing agreement (the “Expedia Outsourcing Agreement”). In the event the Expedia Outsourcing Agreement is terminated, we may be required to pay a $125.0 million termination fee. For more information on our relationships with Expedia, see “Item 7. Major Shareholders and Related Party Transactions — B. Related Party — Relationship with Expedia.” Adverse changes in key arrangements with our suppliers, including an inability of any key travel supplier to fulfill its payment obligation to us in a timely manner, increasing industry consolidation or our inability to enter into or renew arrangements with these parties on favorable terms, if at all, could reduce the amount, quality, pricing and breadth of the travel services and products that we are able to offer, which could adversely affect our business, financial condition and results of operations.
In addition, adverse economic developments affecting the travel industry could also adversely impact our ability to maintain our existing relationships and arrangements with one or more of our suppliers. We cannot assure you that our agreements or arrangements with our travel suppliers or travel-related service providers will continue or that our travel suppliers or travel-related service providers will not further reduce commissions, terminate our contracts,
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make their products or services unavailable to us as part of exclusive arrangements with our competitors or default on or dispute their payment or other obligations towards us, any of which could reduce our revenue and margins or may require us to initiate legal or arbitral proceedings to enforce their contractual payment obligations, which may adversely affect our business, financial condition and results of operations.
We rely on the value of our brands, and any failure to maintain or enhance consumer awareness of our brands could adversely affect our business and results of operations.
We believe continued investment in our brand is critical to retain and expand our business. The travel customers’ awareness of our brand, which we foster via our online and offline marketing throughout our target markets in Latin America, has become one of the most important drivers of growth in our travel customer base, and we believe that our brands are well recognized in the Latin American travel market. We have invested in developing and promoting our brand since our inception and expect to continue to spend on maintaining the value of our brands to enable us to compete against increased spending by competitors and to allow us to expand into new services or increase our penetration in certain markets where our brands are less well known.
We cannot assure you that we will be able to successfully maintain or enhance consumer awareness of our brands. Even if we are successful in our branding efforts, such efforts may not be cost-effective. Our marketing costs may also increase as a result of inflation in media pricing. If we are unable to maintain or enhance consumer awareness of our brands and generate demand in a cost-effective manner, it would negatively impact our ability to compete in the travel industry and would have a material adverse effect on our business, financial condition and results of operations.
We rely on information technology to operate our business and maintain our competitiveness, and any failure to adapt to technological developments or industry trends could adversely affect our business.
We depend on the use of sophisticated information technology and systems, for search and reservation for airline tickets, hotels, and any of the other products that we offer on our platform, as well as payments, refunds, customer relationship management, communications and administration. As our operations grow in both size and scope, we must continuously improve and upgrade our systems and infrastructure to improve services, features and functionality, while maintaining the reliability and integrity of our systems and infrastructure in a cost-effective manner. Our future success also depends on our ability to upgrade our services and infrastructure ahead of rapidly evolving consumer demands while continuing to improve the performance, features and reliability of our service in response to competitive offerings.
We may not be able to maintain or replace our existing systems or introduce new technologies and systems as quickly as our competitors, in a cost-effective manner or at all. We may also be unable to devote adequate financial resources to develop or acquire new technologies and systems in the future.
We may not be able to use new technologies effectively, or we may fail to adapt our websites, mobile apps, transaction processing systems and network infrastructure to meet consumer requirements or emerging industry standards, comply with government regulation or prevent fraud or security breaches. If we face material delays in introducing new or enhanced solutions, our travel customers may forego the use of our services in favor of those of our competitors. Any of these events could have a material adverse effect on our business, financial condition and results of operations.
Some of our airline suppliers (including our GDS service providers) may reduce or eliminate the commission and other compensation they pay to us for the sale of airline tickets and this could adversely affect our business and results of operations.
In our air business, we generate revenue through commissions and incentive payments from airline suppliers (including our GDS service providers) and service fees charged to our travel customers. Our airline suppliers (including our GDS service providers) may reduce or eliminate the commissions, incentive payments or other compensation they pay to us. To the extent any of our airline suppliers (including our GDS service providers) reduce or eliminate the commissions, incentive payments or other compensation they pay to us, our revenue may be
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reduced unless we are able to adequately mitigate such reduction by increasing the service fee we charge to our travel customers or increasing our transaction volume in a sustainable manner. However, any increase in service fees may also result in a loss of potential travel customers. In addition, our arrangement with the airlines that supply airline tickets to us may limit the amount of service fee that we are able to charge our travel customers. Our business would also be negatively impacted if competition or regulation in the Latin American travel industry causes us to have to reduce or eliminate our service fees.
Our business and results of operations could be adversely affected when one or more of our major travel suppliers suffers a deterioration in its financial condition or restructures its operations.
As we are an intermediary in the travel industry, a substantial portion of our revenue is affected by the prices charged by our suppliers, including airlines, GDS service providers, hotels, destination service providers, car rental suppliers, tour operators, supply aggregators (such as other OTAs), cruise operators, bus service providers and travel assistance providers, and the volume of products offered by our suppliers. As a result, if one or more of our major suppliers suffers a deterioration in its financial condition or restructures its operations, it could adversely affect our business, financial condition and results of operations. Accordingly, our business may be negatively affected by adverse changes in the markets in which our suppliers operate.
In particular, as a substantial portion of our revenue depends on our sales of airline flights, we could be adversely affected by changes in the airline industry, including consolidation or bankruptcies and liquidations, and in many cases, we will have no control over such changes. Any consolidation in the airline industry in the future would result in fewer airlines with potentially more bargaining power with respect to the commissions and incentive payments or other fees they pay to intermediaries. Events or weaknesses specific to the airline industry that could negatively affect our business include air fare fluctuations, airport, airspace and landing fee increases, seat capacity constraints, removal of destinations or flight routes, travel-related strikes or labor unrest, imposition of taxes or surcharges by regulatory authorities and fuel price volatility.
In the past, major airlines have filed for bankruptcy, exited bankruptcy, or discussed publicly the risk of bankruptcy. In addition, some of these and other airlines have merged, or discussed merging, with other airlines. If one of our major airline suppliers merges or consolidates with, or is acquired by, another company that either does not participate in the GDS systems we use, or that participates in such systems but at substantially lower levels, the surviving company may elect not to make supply available to us or may elect to do so at lower levels than the previous supplier. Similarly, in the event that one of our major airline suppliers voluntarily or involuntarily declares bankruptcy and is subsequently unable to successfully emerge from bankruptcy, and we are unable to replace such supplier, our business would be adversely affected. In addition, in certain of the countries in which we operate, we may be liable to claims from customers for suspension or termination of services in the event an airline files for bankruptcy. Further consolidation of one or more of the major airlines could result in further capacity reductions, a reduction in the number of airline tickets available for booking on our website and increased air fares, which may have a negative impact on demand for travel products.
The
COVID-19
pandemic and the extraordinary measures adopted by the governments have disrupted the global economy and the travel industry in particular, and the business, results of operations and financial condition of many of our suppliers have been adversely affected, and may be further affected, as the disruption to the economy and the industry continues. We cannot predict whether any of our suppliers will continue to significantly reduce or terminate their operations and product offerings. The effects of the pandemic and governments’ measures have forced many travel suppliers to reduce operations and to seek government support in order to maintain their businesses. The suspension or termination of services by major travel suppliers, in particular airlines, has adversely affected and may continue to affect the products we can offer to our travel customers. It has also adversely affected, and may continue to adversely affect, our Company’s ability to benefit from advance payments that we have made to these suppliers and could result in complaints or claims against us by travel customers seeking refunds for suspended or terminated bookings. While we believe such claims would be without merit in most of the countries in which we operate, we cannot assure that we will prevail in any such complaints or claims. Furthermore, in certain of the countries in which we operate, we could potentially be liable for suspended or terminated bookings in the event of bankruptcy by the airline or other travel service provider.
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Governments are approving large stimulus packages to mitigate the effects of the sudden decline in economic activity caused by the pandemic; however, we cannot predict the extent to which these measures will be sufficient to restore or sustain the business and financial condition of companies in the travel industry. Moreover, Latin America-based airlines may have more limited access to government stimulus packages to the extent Latin American governments have less resources to support local economies.
We are subject to payments-related fraud risks.
We are held liable for accepting fraudulent bookings on our platform and other bookings for which payment is successfully disputed by the cardholder, both of which lead to the reversal of payments received by us for such bookings (referred to as a “chargeback”). Our results of operations may be negatively affected by our acceptance of fraudulent bookings made using credit cards. Our ability to detect and combat fraud, which has become increasingly common and sophisticated, may be negatively impacted by the adoption of new payment methods, the emergence and innovation of new technology platforms, including smartphones, tablets and other mobile devices, and our expansion, including into geographies with a history of elevated fraudulent activity. If we are unable to effectively combat fraud on our platform or if we otherwise experience increased levels of chargebacks, our results of operations could be materially adversely affected.
We have agreements with companies that process travel customers’ credit and debit card transactions for the facilitation of travel customer bookings of travel services from our travel suppliers. These agreements allow these processing companies, under certain conditions, to hold an amount of our cash (referred to as a “holdback”) or require us to otherwise post security equal to a portion of bookings that have been processed by such companies. These processing companies may be entitled to a holdback or suspension of processing services upon the occurrence of specified events, including material adverse changes in our financial condition. Moreover, there can be no assurances that the rates we pay for the processing of travel customer’s credit and debit card transactions will not increase, which could reduce our revenue thereby adversely affecting our business and financial performance.
Moreover, credit card networks, such as Visa and MasterCard, have adopted rules and regulations that apply to all merchants which process and accept credit cards and include the Payment Card Industry Data Security Standards (“PCI DSS”). Under these rules, we are required to adopt and implement internal controls over the use, storage and security of card data. We are currently PCI DSS certified and in compliance with PCI DSS. We assess our compliance with PCI DSS rules on a periodic basis and make necessary improvements to our internal controls as needed. Failure to comply may prevent us from processing or accepting credit cards.
In addition, when onboarding suppliers to our platform, we may fail to identify falsified or stolen supplier credentials, which may result in fraudulent bookings or unauthorized access to personal or confidential information of users of our websites and mobile applications. A fraudulent supplier scheme could also result in negative publicity and damage to our reputation and could cause users of our websites and mobile applications to lose confidence in the quality of our services. Any of these events would have a negative effect on the value of our brands, which could have an adverse impact on our financial performance.
Any system interruption, security breaches or lack of sufficient redundancy in our information systems may harm our businesses.
We rely on information technology systems, including the internet and third-party hosted services, to support a variety of business processes including booking transactions, and activities and to store sensitive data, including our proprietary business information and that of our suppliers, personally identifiable information and other information of our travel customers and employees and data with respect to invoicing and the collection of payments, accounting and procurement activities. In addition, we rely on our information technology systems to process financial information and results of operations for internal reporting purposes and to comply with financial reporting, legal, and tax requirements. The risk of a cybersecurity-related attack, intrusion, or disruption, including by criminal organizations, hacktivists, foreign governments, and terrorists, is persistent. We have experienced and may in the future experience system interruptions that make some or all of these systems unavailable or prevent us from efficiently fulfilling orders or providing services to third parties. Interruptions of this nature could include security intrusions and attacks on our systems for fraud or service interruption. Significant interruptions, outages or delays in our internal systems, or systems of third parties that we rely upon—including multiple
co-location
providers for data
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centers, cloud computing providers for application hosting, and network access providers—and network access, or deterioration in the performance of such systems, would impair our ability to process transactions, decrease our quality of service that we can offer to our travel customers, damage our reputation and brands, increase our costs and/or cause losses.
Potential security breaches to our systems or the systems of our service providers, whether resulting from internal or external sources, could significantly harm our business. We devote significant resources to network security, monitoring and testing, employee training, and other security measures, but we cannot assure you that these measures will prevent all possible security breaches or attacks. A party, whether internal or external, that is able to circumvent our security systems could misappropriate travel customers’ or employees’ information, proprietary information or other business and financial data or cause significant interruptions in our operations. We may need to expend significant resources to protect against security breaches or to address problems caused by breaches, and reductions in website availability could cause a loss of substantial business volume during the occurrence of any such incident. Because the techniques used to sabotage security change frequently, often are not recognized until launched against a target and may originate from less regulated and remote areas around the world, we may be unable to proactively address these techniques or to implement adequate preventive measures. We have obtained cyber insurance, however we cannot assure you that our insurance will be sufficient to protect against our losses or will cover all potential incidents. Moreover, security breaches could result in negative publicity and damage to our reputation, exposure to risk of loss or litigation and possible liability due to regulatory penalties and sanctions or pursuant to our contractual arrangements with payment card processors for associated expenses and penalties. Security breaches could also cause travel customers and potential users and our suppliers to lose confidence in our security, which would have a negative effect on the value of our brands. Failure to adequately protect against attacks or intrusions, whether for our own systems or those of our suppliers, could expose us to security breaches that could have an adverse impact on our financial performance.
In addition, we cannot assure you that our backup systems or contingency plans will sustain critical aspects of our operations or business processes in all circumstances, many other systems are not fully redundant and our disaster recovery or business continuity planning may not be sufficient. Fire, flood, power loss, telecommunications failure,
break-ins,
earthquakes, acts of war or terrorism, acts of God, computer viruses, electronic intrusion attempts from both external and internal sources and similar events or disruptions may damage or impact or interrupt computer or communications systems or business processes at any time. Although we have put measures in place to protect certain portions of our facilities and assets, any of these events could cause system interruption, delays and loss of critical data, and could prevent us from providing services to our travel customers and/or third parties for a significant period of time. Remediation may be costly and we may not have adequate insurance to cover such costs. Moreover, the costs of enhancing infrastructure to attain improved stability and redundancy may be time consuming and expensive and may require resources and expertise that are difficult to obtain.
Our ability to attract, train and retain executives and other qualified employees, particularly highly-skilled IT professionals, is critical to our business and future growth.
Our business and future success is substantially dependent on the continued services and performance of our key executives, senior management and skilled personnel, particularly personnel with experience in our industry and our information technology and systems. Any of these individuals may choose to terminate their employment with us at any time and we cannot assure you that we will be able to retain these employees or find adequate replacements, if at all. The specialized skills we require can be difficult, time-consuming and expensive to acquire and/or develop and, as a result, these skills are often in short supply. A lengthy period of time may be required to hire and train replacement personnel when skilled personnel depart our company. Our ability to compete effectively depends on our ability to attract new employees and to retain and motivate our existing employees. We may be required to increase our levels of employee compensation more rapidly than in the past to remain competitive in attracting the quality of employees that our business requires. Competition for these personnel is intense, and we cannot assure you that we will be able to successfully attract, integrate, train, retain, motivate and manage sufficiently qualified personnel. If we do not succeed in attracting well-qualified employees or retaining or motivating existing employees, our business and prospects for growth could be adversely affected.
In addition, we compete for talented individuals not only with other companies in our industry but also with companies in other industries, such as software services, engineering services and financial services companies,
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among others, and there is a limited pool of individuals who have the skills and training needed to help us grow our company. High attrition rates of qualified personnel could have an adverse effect on our ability to expand our business, as well as cause us to incur greater personnel expenses and training costs.
Moreover, while we sometimes require our senior management to sign
non-compete
agreements, typically for a period of one year following termination, we cannot assure you that our former employees will not compete with us in the future. In addition, these
non-compete
agreements may be difficult to enforce in certain Latin-American jurisdictions.
We rely on third-party systems and service providers and any disruption or adverse change in their businesses could have a material adverse effect on our business.
We currently rely on a variety of third-party systems, service providers and software companies, including the GDS and other electronic central reservation systems used by airlines, various channel managing systems and reservation systems used by other suppliers, as well as other technologies used by payment gateway providers. In particular, we rely on third parties for:
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the hosting of our websites;
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certain software underlying our technology platform;
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transportation ticketing agencies to issue transportation tickets and travel assistance products, confirmations and deliveries;
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third-party local tour operators to deliver
on-site
services to our packaged-tour customers;
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assistance in conducting searches for airfares and process air ticket bookings;
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processing hotel reservations for hotels not connected to our management system;
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processing credit card, debit card and banking payments;
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providing computer infrastructure critical to our business; and
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providing customer relationship management (CRM) services.
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Any interruption or deterioration in performance of these third-party systems and services could have a material adverse effect on our business. Further, the information provided to us by certain of these third-party systems may not always be accurate due to either technical glitches or human error, and we may incur monetary and/or reputational loss as a result.
Our success is also dependent on our ability to maintain our relationships with these third-party systems and service providers. In the event our arrangements with any of these third parties are impaired or terminated, we may not be able to find an adequate alternative source of systems support on a timely basis or on commercially reasonable terms, which could result in significant additional costs or disruptions to our business. Any security breach at one of these companies could also affect our travel customers and harm our business.
We rely on banks or payment processors to collect payments from travel customers and facilitate payments to suppliers, and changes to credit card association fees, rules or practices may adversely affect our business.
We rely on banks or payment processors to process collections and payments, and we pay a fee for this service. In the countries where we operate, the number of processors is limited so there is little or no competition among processors. From time to time, credit card associations may increase the interchange fees that they charge for each transaction using one of their cards.
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For certain payment methods, including credit cards, we pay transaction and other fees, which may increase over time and raise our operating costs, lowering profitability. We rely on third parties to provide payment processing services and it could disrupt our business if these companies become unwilling or unable to provide these services to us. If we fail to comply with these third-party servicers’ rules or requirements, or if our data security systems are breached or compromised, we may be liable for chargebacks, credit card issuing banks’ costs, fines and higher transaction fees and we may lose our ability to accept credit card payments from our travel customers, process electronic funds transfers, or facilitate other types of online payments. If any of these situations were to occur, our business and results of operations could be adversely affected.
Our business depends on the availability of credit cards and financing options for consumers.
Our business is highly dependent on the availability of credit cards and financing options for consumers. In 2020, 2019 and 2018, substantially all our net sales were derived from payments effected through credit cards. Moreover, approximately 56%, 57%, 57% of transactions in 2020, 2019 and 2018 were paid by installments through bank financing options, respectively. As a result, the continued growth of our business is also partially dependent on the expansion of credit card penetration in Latin America, which may never reach a percentage similar to more developed countries for reasons that are beyond our control, such as low credit availability for a significant portion of the population in such countries. The provision of credit cards and other consumer financing depends on the product offerings at local and regional banks operating in the countries we serve. In the past, banking systems in Latin America have suffered disruptions and significantly limited availability and increased cost of consumer credit. Banks may also change their product offerings that they provide to consumers or may change the availability or costs of such products, due to credit, regulations or other reasons beyond our control.
We rely on various banks to provide financing to our travel customers who elect to use an installment plan payment option. Under our agreements with local and regional banks, we offer consumers the possibility of financing their purchases under installment plans established, offered and administered by the credit card holders’ issuing banks. Under these agreements, the banks provide the financing arrangements to the consumers and they assume the risk of any potential payment default or delinquency by consumers. Some of our competitors also offer installment plans and may offer installment plans with more attractive terms. If we are not able to offer a competitive selection of installment plan financing at competitive rates, our business and results of operations could be adversely affected. Moreover, our agreements with local banks allow us to offer installment payment plans without assuming collection risk from the travel customer and receive payment in full (provided we choose not to factor such installment payments). We cannot assure you that local banks will not change their credit practices in the future. If our arrangements with local banks are impaired or terminated, our business and results of operations could be adversely affected.
Furthermore, as secure methods of payment for
e-commerce
transactions have not been widely adopted in certain emerging markets, consumers and other merchants may have relatively low confidence in the integrity of
e-commerce
transactions and remote payment mechanisms, which may have a material and adverse effect on our business prospects or limit our growth.
Our business could be negatively affected by changes in search engine algorithms and dynamics or other traffic-generating arrangements.
We utilize internet search engines such as Google, principally through the purchase of travel-related keywords, to generate a significant portion of the traffic to our websites. Search engines frequently update and change the algorithms that determine the placement and display of results of a user’s search. It is possible that any such update could negatively affect us or may negatively affect us relative to our competitors. We have developed search engine management tools that are designed to bid more efficiently on portfolios of travel-related keywords and we have a search engine management team dedicated to reviewing the return of investment of all biddings. We cannot assure you that these tools will be effective over the long term, as the search engine sector is dynamic and rapidly changing.
In addition, a significant amount of traffic is directed to our websites through participation in
and display advertising campaigns on search engines, including Google, and travel metasearch engines, including TripAdvisor and Trivago. A search or metasearch engine could, for competitive or other purposes, adopt emerging
pay-per-click
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technologies, such as voice, or alter its search algorithms or results, any of which could cause us to place lower in search query results, or exclude our website from the search query results. If a major search engine changes its algorithms or results in a manner that negatively affects the search engine ranking, paid or unpaid, of our websites, or if competitive dynamics impact the costs or effectiveness of search engine optimization, search engine marketing or other traffic-generating arrangements in a negative manner, this may have a material and adverse effect on our business and financial performance. In addition, certain metasearch engines have added or may add various forms of direct or assisted booking functionality to their sites. To the extent such functionality is promoted at the expense of traditional paid listings, this may reduce the amount of traffic to our websites or those of our affiliates.
Changes in internet browser functionality could result in a decrease in our overall revenue.
Some of our services and marketing activities rely on cookies, which are placed on individual browsers when users visit websites. We use these cookies to optimize our marketing campaigns, to better understand our users’ preferences and to detect and prevent fraudulent activity. Users can block or delete cookies through their browsers or “adblocking” software or apps. The most common internet browsers allow users to modify their browser settings to prevent cookies from being accepted by their browsers, or are set to block third-party cookies by default. Increased use of methods, software or apps that block cookies, or diminished interest of users resulting from our use of such marketing activities, may adversely affect our business, financial condition and results of operations.
Our business depends on the continued growth of
e-commerce
and the availability and reliability of the internet in Latin America.
The market for
e-commerce
is developing in Latin America. Our future revenue depends substantially on Latin American consumers’ widespread acceptance and use of the internet as a way to conduct commerce. The use of and interest in the internet (particularly as a way to conduct commerce) has grown rapidly since our inception and we cannot assure you that this acceptance, interest and use will continue in the regions we target. For us to grow our user base successfully, more consumers in our markets must accept and use new ways of conducting business and exchanging information.
The price of personal computers and/or mobile devices and internet access may limit our potential growth in countries with low levels of internet penetration and/or high levels of poverty. In addition, the infrastructure for the internet may not be able to support continued growth in the number of internet users, their frequency of use or their bandwidth requirements.
The internet could lose its viability in our target markets due to delays in telecommunications technological developments, or due to increased government regulation. If telecommunications services change or are not sufficiently available to support the internet, response times would be slower, which would adversely affect use of the internet and our service in particular. Moreover, lack of investment in mobile infrastructure in Latin America may limit the expansion of our mobile offerings, which is one of our key growth strategies.
Growth of
e-commerce
transactions in Latin America may be impeded by the lack of secure payment methods.
As secure methods of payment for
e-commerce
transactions have not been widely adopted in Latin America, both consumers and merchants may have a relatively low confidence level in the integrity of
e-commerce
transactions. Consumer confidence can be adversely affected by incidents of fraud and security breaches, including generally in the marketplace, which is beyond our control. Moreover, although we are PCI DSS certified, most of our suppliers with which we share information are not. The continued growth of
e-commerce
in the region will depend on consumers’ confidence in the safety of online payment methods.
Our future success depends on our ability to expand and adapt our operations in a cost-effective and timely manner.
We plan to continue to expand our operations by developing and promoting new and complementary services and increasing our penetration in our markets. Moreover, we seek to expand our travel customer base as income levels and access to internet and banking services, such as credit card issuances, increase in Latin America. We may not
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succeed at expanding our operations in a cost-effective or timely manner, and our expansion efforts may not have the same or greater overall market acceptance as our current services. Furthermore, any new service that we launch that is not favorably received by consumers could damage our reputation and diminish the value of our brands. To expand our operations, we will also need to spend significant amounts on development, operations and other resources, and this may place a strain on our management, financial and operational resources. Similarly, a lack of market acceptance of these services or our inability to generate satisfactory revenue from any expanded services to offset their cost could have a material adverse effect on our business, financial condition and results of operations.
We may not be successful in implementing our long-term growth strategies.
Our long term growth strategies involve expanding our service and product offerings, enhancing our service platforms and potentially pursuing acquisitions or other strategic opportunities.
Our success in implementing our growth strategies could be affected by:
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our ability to attract travel customers in a cost-effective manner, including in markets where we have lower brand awareness or operational history;
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our ability to improve the competitiveness of our product offerings including by expanding the number of suppliers and negotiating fares and rates with existing and potential suppliers;
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our ability to market and cross-sell our travel services and products to facilitate the expansion of our business;
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our ability to compete effectively with existing and new entrants to the Latin American travel industry;
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our ability to expand and promote our mobile platform and make it user-friendly;
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our ability to build required technology;
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our ability to expand our businesses through strategic acquisitions and successfully integrate such acquisitions;
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the general condition of the global economy (particularly in Latin America) and continued growth in demand for travel services, particularly online;
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the growth of the internet and mobile technology as a medium for commerce in Latin America; and
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changes in the regulatory environments where we operate.
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Many of these factors are beyond our control and we cannot assure you that we will succeed in implementing our strategies. Even if we are successful in executing our growth strategies, our different businesses may not grow at the same rate or with a uniform effect on our revenue and profitability.
Acquisitions could present risks and disrupt our ongoing business.
We consider and evaluate acquisitions of, or significant investments in, complementary businesses as part of our business strategy. Acquisitions involve numerous risks, and any acquisition could have a material adverse effect on our business, results of operations and financial condition. In June and July
2019, we completed the acquisition of the Viajes Falabella travel companies in Chile, Argentina, Peru and Colombia (together, “Viajes Falabella”). On October 1, 2020, we completed the acquisition of Best Day, a leading travel agency in Mexico, with business in Argentina, Colombia, Chile, Brazil, Uruguay, the Dominican Republic and the United States.
On August 20, 2020, we acquired an 84% equity stake in Koin Administradora de Cartões e Meios de Pagamentos S.A. (“Koin”), a Brazilian online payment platform. The former owners remained as
non-controlling
shareholders of a 16% equity interest in Koin.
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The consummation of the Best Day acquisition considerably increased our business and operations in Mexico. As a result, our business and results of operations may be more affected by economic, political and social conditions in Mexico, including the country’s economy, fluctuations in the value of the Mexican peso, exchange control policies, inflation, interest rates, regulation, taxation, social instability, weather conditions and natural disasters, drug-related and other serious crime, and other developments in or affecting Mexico over which we have no control. In the past, Mexico has experienced several periods of slow or negative economic growth, high inflation, high interest rates, currency devaluation and other economic and social problems. These problems may worsen or reemerge in the future and could adversely affect our business and results of operations.
We may seek to undertake additional strategic acquisitions in the future. We cannot assure you that we will be successful in identifying opportunities and consummating acquisitions on favorable terms or at all. Depending on the size and timing of an acquisition, we may be required to raise future financing to consummate the acquisition.
Moreover, even if we are able to consummate a transaction, acquisitions may involve significant risks and uncertainties, which risks may include: distraction of management and other employees from our
operations and the development of new business opportunities; difficulties in integrating the operations of the acquired business and technology with our existing business and technology; greater than expected costs, liabilities, expenses and working capital requirements; challenges retaining travel customers or suppliers of acquired businesses; regulatory restrictions that prevent us from achieving the expected benefits of the acquisition; we may not derive the benefits such as operational or administrative synergies we expect from acquisitions, which may result in us committing capital resources and not receiving the expected returns; difficulties in modifying accounting standards rapidly; challenges in the ability to properly access and maintain an effective internal control environment over an acquired company to comply with public reporting requirements; problems assimilating or retaining employees; and other unidentified issues or contingencies not discovered in our
day-to-day
pre-acquisition
investigations and evaluations of those strategies and acquisitions.
We are subject to potential tax, labor and social security contingencies and tax liabilities related to uncertain tax positions.
We may subject to potential contingencies related to tax, labor and social security matters. We have reserved amounts based on the likelihood of an obligation in accordance with accounting guidance for probable loss contingencies. Loss contingency provisions are recorded for probable losses at management’s best estimate of a loss, or when a best estimate cannot be made, a minimum loss contingency amount is recorded. As of December 31, 2020, we have provided an amount of $23.4 million related to labor, social security and tax contingencies. While we believe that the assumptions and estimates used to determine contingent liabilities are reasonable, the ultimate outcome of these matters cannot presently be determined.
We evaluate our tax positions and establish liabilities for uncertain tax positions that may be challenged by local authorities and may not be fully sustained, despite our belief that the underlying tax positions are fully supportable. Uncertain tax positions are reviewed on an ongoing basis and are adjusted in light of changing facts and circumstances, including progress of tax audits, developments in case law, and closing of statute of limitations. Such adjustments are reflected in the income tax provision as appropriate.
Our estimate of the potential outcome for any uncertain tax issue is highly judgmental. Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given with respect to the final outcome of these matters.
As of December 31, 2020, we had $32.9 million of gross unrecognized tax benefits which, if recognized, would affect our effective tax rate. As of December 31, 2020, total gross interest and penalties accrued was $18.9 million. We recognized interest expense of $1.1 million in 2020 in connection with our unrecognized tax benefits.
We are routinely audited by U.S. federal and foreign income tax authorities. At any point in time, we may have tax audits underway at various stages of completion. These audits include questioning the timing and the amount of income and deductions, and the allocation of income and deductions among various tax jurisdictions.
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The Mexican Tax Authority is currently examining the income tax returns for the 2014, 2015 and 2017 fiscal years of our subsidiary, Viajes Beda. We received an examination report (
) from the Mexican Tax Authority in connection with the 2014 income tax return of Viajes Beda, and have filed a settlement request (
) before the Mexican Taxpayer Ombudsman (
) in order to settle the dispute with the Mexican Tax Authority. As of the day of this Annual Report we are awaiting response from the Mexican Taxpayer Ombudsman.
oficio de observaciones
acuerdo conclusivo
Procuraduría de la Defensa del Contribuyente
Internet regulation in the countries where we operate is scarce, and several legal issues related to the internet are uncertain.
Most of the countries where we operate do not have specific laws governing the liability of
e-commerce
business intermediaries, such as ourselves, for fraud, intellectual property infringement or other illegal activities committed by individual users or third-party infringing content hosted on a provider’s servers. This legal uncertainty allows for different judges or courts to decide very similar claims in different ways and establish contradictory case law.
In addition, we are subject to a variety of laws, decrees and regulations across the countries where we operate that affect
e-commerce,
electronic or mobile payments, tourism, data collection, data protection, privacy, anti-money laundering, taxation (including VAT or sales tax collection obligations), obligations to provide certain information to certain authorities about transactions which are processed through our platforms or about our users and those regulations applicable to consumer protection and businesses in general. However, it is not clear how existing laws governing issues such as general commercial activities, property ownership, copyrights and other intellectual property issues, taxation (including tax laws that require us to provide certain information about transactions consummated through our platforms or about our users) and personal privacy apply to online businesses. Many of these laws were adopted before the internet was available and, as a result, do not contemplate or address the unique issues of the internet.
Moreover, due to these areas of legal uncertainty, and the increasing popularity and use of the internet and other online services, it is possible that new laws and regulations will be adopted with respect to the internet or other online services. If laws relating to these issues are enacted, they may have a material adverse effect on our business, results of operations and financial condition.
We are subject to laws relating to the collection, use, storage and transfer of personally identifiable information about our users, especially financial information. Several jurisdictions have regulations in this area, and other jurisdictions are considering imposing additional restrictions or regulations. For example, in August 2018, Brazil approved its first comprehensive data protection law (
or “LGPD”), which became effective beginning August 2020. If we fail to comply with these laws, which in many cases apply not only to third-party transactions but also to international transfers of information or transfers of information to third parties with which we have commercial relations, we could be subject to significant penalties and negative publicity, which would adversely affect us. As of the date of this Annual Report, we continue working on the implementation of all necessary measures to comply with such data protection law.
Lei Geral de Proteção de Dados Pessoais
Because our services are accessible worldwide, other foreign jurisdictions may claim that we are required to comply with their laws. Laws regulating internet companies outside of the Latin American jurisdictions where we operate may be more restrictive to us than those in Latin America. In order to comply with these laws, we may have to change our business practices or restrict our services. We could be subject to penalties ranging from criminal prosecution, significant fines or outright bans on our services for failure to comply with foreign laws.
We process, store and use personal information, card payment information and other consumer data, which subjects us to risks stemming from possible failure to comply with governmental regulation and other legal obligations.
In our business, we use personal information, card payment information and other consumer data from users of our website and mobile applications. There are numerous laws regarding privacy and the storing, sharing, use, processing, transfer, disclosure and protection of personal information, card payment information and other consumer data, the scope of which are changing, subject to differing interpretations, and may be inconsistent between countries or conflict with other rules. We strive to comply with all applicable laws, policies, legal
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obligations and industry codes of conduct relating to privacy and data protection. It is possible, however, that these obligations may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or the practices of the company. Any failure or perceived failure by us, or our service providers, to comply with the privacy policies, privacy-related obligations to users or other third parties, or privacy related legal obligations, or any compromise of security that results in the unauthorized release or transfer of personally identifiable information, payment card information or other consumer data, may result in governmental enforcement actions, litigation or public statements against the Company by consumer advocacy groups or others and could cause our travel customers and members to lose trust in our Company, as well as subject us to bank fines, penalties or increased transaction costs, all of which could have an adverse effect on our business.
The regulatory framework for privacy issues is currently in flux and is likely to remain so for the foreseeable future. Practices regarding the collection, use, storage, transmission and security of personal information by companies operating over the internet have recently come under increased public scrutiny. Countries in Latin America are increasingly implementing new privacy regulations, resulting in additional compliance burdens and uncertainty as to how some of these laws will be interpreted.
Application of existing tax laws or regulations are subject to interpretation by taxing authorities.
The application of income and
non-income
tax laws and regulations to our products and services is subject to interpretation by the applicable taxing authorities across the multiple jurisdictions in which we operate our business. For example, in Brazil we are subject to corporate income tax (IRPJ), social contribution on net profits (CSLL), social contribution on total revenue (PIS and COFINS), withholding taxes, and a municipal tax on services (ISS). In Argentina, we are subject to income tax, value added tax, turnover tax and a 30% reverse withholding tax (Tax for an Inclusive and Solidarity Argentina (PAIS for its acronym in Spanish)) on purchases made in foreign currencies.
In both countries, we are subject to transfer pricing rules applicable to cross-border operations with related parties or parties in tax havens or subject to privileged fiscal regimes. These taxing authorities may become more aggressive in their interpretation and/or enforcement of such laws and regulations over time, as governments are increasingly focused on ways to increase revenue. This may contribute to an increase in audit activity and harsher stances by tax authorities. As such, additional taxes or other assessments may be in excess of our current tax reserves or may require us to modify our business practices to reduce our exposure to additional taxes going forward, any of which could have a material adverse effect on our business, financial condition and results of operations.
While we believe we currently comply in all material respects with applicable tax laws and regulations in the jurisdictions in which we operate, tax authorities may determine that we owe additional taxes. Moreover, we may have historical tax contingencies across multiple jurisdictions, and while we have made provisions for those contingencies which we considered probable, the amount of total contingencies may exceed our provisions. In addition, in accordance with U.S. GAAP, we record provisions for contingencies based on probable loss or when otherwise required under accounting rules, but we do not record provisions for possible and remote losses.
Significant judgment and estimation is required in determining our tax liabilities. In the ordinary course of our business, there are transactions and calculations, including intercompany transactions and cross-jurisdictional transfer pricing, for which the ultimate tax determination may be uncertain or otherwise subject to interpretation. Tax authorities may disagree with our intercompany charges, including the amount of or basis for such charges, cross-jurisdictional transfer pricing or other matters, and assess additional taxes. Although we believe our tax estimates are reasonable, the final determination of tax audits could be materially different from our historical income tax provisions and accruals, in which case we may be subject to additional tax liabilities, possibly including interest and penalties, which could have a material adverse effect on our cash flows and results of operations. Moreover, we have in the past and may in the future be required in certain jurisdictions to pay any such tax assessments prior to contesting their validity, which payments may be substantial.
Amendment to existing tax laws or regulations or enactment of new unfavorable tax laws or regulations could adversely affect our business and results of operations.
Many of the underlying laws or regulations imposing taxes and other obligations were established before the growth of the internet and
e-commerce.
If the tax or other laws or regulations were amended, or if new unfavorable laws or
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regulations were enacted, our tax payments or other obligations could increase, prospectively or retrospectively, which may subject us to interest and penalties, decrease the demand for our products and services if we pass on such costs to our travel customers, result in increased costs to update or expand our technical or administrative infrastructure or effectively limit the scope of our business activities if we decided not to conduct business in particular jurisdictions. As a result, these changes could have an adverse effect on our business, financial condition or results of operations.
Governments could adopt tax laws that increase our tax rate or tax liabilities or affect the carrying value of deferred tax assets or liabilities, including the termination of
tax-free
incentives or termination of treaties for the avoidance of double taxation. Any changes to tax laws could impact the tax treatment of our earnings and adversely affect our profitability. Our effective tax rate in the future could also be adversely affected by changes to our operating structure, changes in the mix of earnings in countries with differing statutory tax rates, or changes in the valuation of deferred tax assets and liabilities.
In addition, we have benefited from, and continue to benefit from, certain tax exemptions and incentive programs in various jurisdictions in which we have operations. When any of our tax exemptions or incentive programs expire or terminate, or if the applicable government withdraws or reduces the benefits of a tax exemption or incentive that we enjoy, our tax expense may materially increase and this increase may have a material impact on our results of operations. The applicable tax authorities may also disallow deductions claimed by us and assess additional taxable income on us in connection with their review of our tax returns. See “Item 4. Information on the Company — B. Business Overview — Regulation — Regulations Related to Taxation.”
Laws and regulations in the BVI may subject us to potential liability.
On 1 January 2019 the Economic Substance (Companies and Limited Partnerships) Act, 2018 (the “
”) came into force in the British Virgin Islands. The ES Act was enacted in direct response to a scoping paper issued by the European Union’s Code of Conduct Group (Business Taxation) in June 2018. The scoping paper (a) expressed concerns regarding
ES Act
so-called
harmful tax competition and the potential “misuse” of offshore entities for profit-shifting; and (b) set out requirements that certain jurisdictions outside the European Union must adopt in order for the jurisdiction to avoid being “blacklisted” by the European Union.
Under the ES Act and related regulations and guidelines, companies incorporated in the BVI that are not tax resident in another jurisdiction and which carry on certain specified activities must establish and maintain ‘economic substance’ in the BVI. As we are tax resident in the United States, we believe these substance requirements are not applicable to our Company.
We are subject to anti-corruption and economic sanctions laws and regulations in the jurisdictions in which we operate, including the U.S. Foreign Corrupt Practices Act and regulations administered and enforced by the U.S. Treasury Department’s Office of Foreign Assets Control. Failure to comply with these laws and regulations could negatively impact our business, our results of operations, and our financial condition.
We are subject to a number of anti-corruption and economic sanctions laws and regulations, including the U.S. Foreign Corrupt Practices Act (“FCPA”) and regulations administered and enforced by the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”). Failure to comply with these laws and regulations could negatively impact our business, our results of operations, and our financial condition.
The FCPA and similar anti-bribery laws generally prohibit companies and their intermediaries from making improper payments or improperly providing anything of value to foreign officials, directly or indirectly, for the purpose of obtaining or keeping business and/or other benefits. The FCPA also requires maintenance of adequate record-keeping and internal accounting practices to accurately reflect transactions. Under the FCPA, companies operating in the United States may be held liable for actions taken by their strategic or local partners or representatives. Other jurisdictions in which we operate have adopted similar anti-corruption, anti-bribery and anti-kickback laws to which we are subject.
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Economic sanctions and embargo laws and regulations, such as those administered and enforced by OFAC, vary in their application, as they do not all apply to the same covered persons or proscribe the same activities, and such sanctions and embargo laws and regulations may be amended or strengthened over time. Although we believe that we are in compliance with all applicable sanctions and embargo laws and regulations, and intend to maintain such compliance, there can be no assurance that we will be in compliance in the future, particularly as the scope of certain laws may be unclear and may be subject to changing interpretations.
Civil and criminal penalties may be imposed for violations of these laws. We operate in some countries which are viewed as high risk for corruption and/or economic sanctions issues. Despite our ongoing efforts to ensure compliance with the FCPA and similar laws, and economic sanctions laws and regulations, there can be no assurance that our directors, officers, employees, agents, and third-party intermediaries will comply with those laws and our policies, and we may be ultimately held responsible for any such
non-compliance.
If we or our directors or officers violate such laws or other similar laws governing the conduct of our business (including local laws), we or our directors or officers may be subject to criminal and civil penalties or other remedial measures, which could harm our reputation and have a material adverse impact on our business, financial condition, and results of operations. Any investigation of any actual or alleged violations of such laws could also harm our reputation or have an adverse impact on our business, financial condition, and results of operations.
We are, and may be in the future, involved in various legal proceedings, the outcomes of which could adversely affect our business and results of operations.
We are, and may be in the future, involved in various legal proceedings relating to allegations of our failure to comply with consumer protection, labor, tax or antitrust regulations, that could involve claims or sanctions for substantial amounts of money or for other relief or that might necessitate changes to our business or operations.
Our websites contain information about hotels, flights, popular vacation destinations and other travel-related topics. It is possible that if any information, accessible on our websites, contains errors or false or misleading information, third parties could take action against us for losses incurred in connection with the use of such information. In addition, because consumer protection laws in many of our markets provide for joint liability, travel customers may bring claims against us for a failure or deficiencies in the provision of a travel product or service by one of our suppliers that is outside of our control.
The defense of any of these actions is, and may continue to be, both time-consuming and expensive. We cannot assure you that we will prevail in these legal proceedings or in any future legal proceedings and if such disputes were to result in an unfavorable outcome, it could result in reputational damage and have a material adverse effect on our business, financial condition and results of operations. For a discussion of certain key legal proceedings relating to us, see “Item 4. Information on the Company — Business Overview — Legal Proceedings.”
We may not be able to adequately protect and enforce our intellectual property rights; and we could potentially face claims alleging that our technologies infringe the property rights of others.
Our websites and mobile applications rely on brands, domain names, technology and content. We protect our brands and domain names by relying on trademark and domain name registration in accordance with laws in Latin America. We have also entered into confidentiality and invention assignment agreements with our employees and certain contractors, as well as confidentiality agreements with certain suppliers and strategic partners, in order to protect our technology and content. We own our technology platform, which is comprised of applications that we develop
in-house
using primarily open source software. We have not registered our technology, however, because we believe it would be difficult to replicate and that it is adequately protected by the agreements we have in place. Additionally, our technology is constantly evolving and any registration may run the risk of protecting outdated technology. Even with these precautions, it may be possible for another party to copy or otherwise obtain and use our intellectual property without our authorization or to develop similar intellectual property independently. Effective trademark protection may not be available in every jurisdiction in which our services are made available, and policing unauthorized use of our intellectual property is difficult and expensive. Any misappropriation or violation of our rights could have a material adverse effect on our business. Furthermore, we may need to go to court or other tribunals to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. These proceedings might result in substantial costs and diversion of resources and management attention.
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We currently license from third parties some of the technologies, trademarks and content incorporated into our websites. As we continue to introduce new services that incorporate new technologies, third parties’ trademarks and content, we may be required to license additional technologies, third parties’ trademarks and content. We cannot be sure that such technologies and content licenses will be available on commercially reasonable terms, if at all.
Third parties may assert that our services, products and technology, including software and processes, violate their intellectual property rights. As competition in our industry increases and the functionality of technology offerings further overlaps, such claims and counterclaims could increase. We cannot assure you that we do not or will not inadvertently infringe on the intellectual property rights of third parties. Any intellectual property claim against us, regardless of its merit, could have an adverse effect on our business, financial condition and results of operations and could be expensive and time consuming to defend. Our failure to prevail in such matters could result in loss of intellectual property rights, judgments awarding substantial damages and injunctive or other equitable relief against us, or require us to delay or cease offering services or reduce features in our services.
Increased labor costs, compliance with labor laws and regulations and failure to maintain good relations with labor unions may adversely affect our results of operations.
We are required to comply with extensive labor regulations in each of the countries in which we have employees, including with respect to wages, social security benefits and termination payments. If we fail to comply with these regulations we may face labor claims and government fines.
In the past, governments from certain countries in which we operate, including Argentina, have adopted laws, regulations and other measures requiring companies in the private sector to increase wages and provide specified benefits to employees. We cannot assure you that these governments will not do so again in the future. On December 13, 2019, the Argentine administration enacted Decree No. 34/2019 (extended by Decree No. 39/2021) that duplicates the amount of the statutory severance payments payable to employees hired before December 13, 2019 and fired between December 13, 2019 and December June 13, 2021. Also, by Decrees Nos. 329/20, 487/20, 624/20, 761/20, 891/20 and 39/21, all termination without cause is forbidden until December 31, 2021.
In addition, some of our employees in Argentina, Brazil and certain other countries are currently represented by labor unions. We may face pressure from our labor unions or otherwise to increase salaries. In Argentina, for example, employers in both the public and private sectors have historically experienced, and are currently experiencing, significant pressure from unions and their employees to further increase salaries due to the devaluation of the peso and high inflation. According to the data published by the Instituto Nacional de Estadística y Censos (National Statistics Institute or “INDEC”) regarding the evolution of salaries in the private and public sectors in Argentina, salary increases in both sectors have been of approximately 44.5% and 42.2% for 2019 and 28% and 24.2%, for 2020, respectively.
Due to high levels of inflation and full employment in the tech industry, we expect to continue to raise salaries. If future salary increases in the Argentine peso or the currencies of other countries in which we have employees exceed the pace of the devaluation of those currencies, such salary increases could adversely affect our business, results of operations and financial condition.
Moreover, while we have enjoyed satisfactory relationships with labor unions that represent our employees, labor-related disputes may still arise. Labor disputes that result in strikes or other disruptions could adversely affect our business, financial condition and result of operations.
A failure to comply with current laws, rules and regulations or changes to such laws, rules and regulations and other legal uncertainties may adversely affect our business, results of operations or business growth.
We have been subject, and we will likely be subject in the future, to inquiries from time to time from regulatory bodies concerning compliance with consumer protection, tax, labor, antitrust and travel industry-specific laws and regulations.
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Such inquiries have included investigations and legal proceedings relating to the travel industry and, in particular, parity provisions in contracts between hotels and travel companies, including us, as well as allegations of “geopricing” or “geoblocking practices.” See Item 4. “Business—Legal and Regulatory—Legal Proceedings” for more information. Parity provisions are significant to our business model, and their removal or modification may adversely affect our business, financial condition and results of operations. We are unable at this time to predict the timing or outcome of these various investigations and lawsuits, or similar future investigations or lawsuits, and their impact, if any, on our business and results of operations.
The failure of our businesses to comply with these laws and regulations could result in fines and/or proceedings against us by governmental agencies and/or consumers, which if material, could adversely affect our business, financial condition and results of operations. Further, if such laws and regulations are not enforced equally against other competitors in a particular market, our compliance with such laws may put us at a competitive disadvantage
competitors which do not comply with such requirements.
vis-à-vis
Complaints from travel customers or negative publicity about our services can diminish consumer confidence and adversely affect our business.
In the past, government and consumer protection agencies have received a substantial number of complaints about our products, which represent a small percentage of our total transactions but could increase in the future. Many of these claims are related to the behavior of our suppliers. From time to time, we are involved in disputes or regulatory inquiries that arise in the ordinary course of business. The number and significance of these disputes and inquiries have increased as our business has expanded. We have responded to inquiries from regulatory agencies; however, we are likely to receive inquiries in the future, which may lead to actions against us. If during these inquiries we were found to violate any laws or to constitute unfair business practices, we could be subject to civil damages, enforcement actions, fines or penalties. Such actions or fines could require us to restructure our business processes in ways that would harm our business and cause us to incur substantial costs.
Because volume and growth in the number of new travel customers are key drivers of our revenue and profitability, travel customer’s complaints or negative publicity about our customer service could severely diminish consumer confidence and use of our services. Measures we sometimes take to combat risks of fraud and breaches of privacy and security can damage relations with our travel customers. To maintain good customer relations, we need prompt and accurate customer service to resolve irregularities and disputes. Effective customer service requires significant personnel expense and investment in developing programs and technology infrastructure to help customer service representatives carry out their functions. These expenses, if not managed properly, could significantly impact our profitability. Failure to manage or train our customer service representatives properly, could compromise our ability to handle our travel customer’s complaints effectively. In addition, beginning in March 2020 we experienced an increase in complaints from travel customers in connection with requests for cancellation and reimbursement of bookings due to the
orders and other business interruptions and the increase in cancellation requests, the ability of our customer service team to ensure prompt and accurate resolution to requests, irregularities and disputes was affected. If we do not handle travel customer complaints effectively, our reputation and brand may suffer and we may lose our travel customers confidence.
COVID-19
pandemic. In light of government
stay-at-home
Consumer adoption and use of mobile devices creates new challenges.
Widespread adoption of mobile devices, coupled with the web browsing functionality and development of apps available on these devices, is driving substantial online traffic and commerce to mobile platforms. We have experienced a significant shift of business to mobile platforms and our suppliers are also seeing a rapid shift of traffic to mobile platforms. Many of our competitors and new market entrants are offering mobile apps for travel products and other functionality, including proprietary last-minute discounts for accommodation reservations. Advertising and distribution opportunities may be more limited on mobile devices given their smaller screen sizes. The average price of travel products purchased in mobile transactions may be less than a typical desktop transaction due to different consumer purchasing patterns. Further, given the device sizes and technical limitations of tablets and smartphones, mobile consumers may not be willing to download multiple apps from multiple companies providing a similar service and instead prefer to use one or a limited number of apps for their mobile travel activity. As a result, the consumer experience with mobile apps as well as brand recognition and loyalty are likely to become increasingly important. Our mobile offerings drive a material and increasing share of our business. We believe that mobile
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bookings present an opportunity for growth and are necessary to maintain and grow our business as consumers increasingly turn to mobile devices instead of a desktop computer. As a result, it is increasingly important for us to develop and maintain effective mobile apps and websites optimized for mobile devices to provide consumers with an appealing,
mobile experience. If we are unable to continue to innovate rapidly and create new, user-friendly and differentiated mobile offerings and advertise and distribute on these platforms efficiently and effectively, or if our mobile offerings are not used by consumers, we could lose considerable market share to existing competitors or new entrants and our business, financial condition and results of operations could be adversely affected.
easy-to-use
Moreover, we are dependent on the compatibility of our app with popular mobile operating systems that we do not control, such as Android and iOS, and any changes in such systems that degrade our products’ functionality or give preferential treatment to competitive products could adversely affect the usage of our app on mobile devices. Additionally, in order to deliver high quality mobile products, it is important that our products work well with a range of mobile technologies, systems, networks, and standards that we do not control. We may not be successful in developing relationships with key participants in the mobile industry or in developing products that operate effectively with these technologies, systems, networks, or standards. In the event that it is more difficult for our users to access and use our app on their mobile devices, or if our users choose not to access or use our app on their mobile devices or use mobile products that do not offer access to our app, our user growth and user engagement could be harmed.
We rely on Expedia for substantially all of the hotel and other lodging products that we offer for all countries outside Latin America.
Substantially all hotel and other lodging products that we offer through our platform for all countries outside Latin America are provided to us by affiliates of Expedia pursuant to the Expedia Outsourcing Agreement. In addition, Expedia is the preferred provider to us of hotel and other lodging products in Latin America. For more information on our relationships with Expedia, see “Item 7. Major Shareholders and Related Party Transactions — B. Related Party — Relationship with Expedia.”
If Expedia’s affiliates cease to provide us with their hotel and other lodging products, we may be unable to offer these products to our users for some time and it might be difficult for us to replace this supply in the short term, which would negatively affect our business, financial condition and results of operations.
Pursuant to the Expedia Outsourcing Agreement, Expedia pays monthly marketing fees to us, which are calculated as a percentage of the gross booking value of the bookings that we sourced through Expedia during that month. We are required to maintain a level of bookings through Expedia such that those marketing fees equal at least $5.0 million in a
six-month
period; otherwise, Expedia may require us to pay a $125.0 million termination fee. On August 20, 2020, we entered into an amendment with respect to the Expedia Outsourcing Agreement, whereby the parties have agreed, among other things, to waive Expedia’s termination rights under the agreement relating to minimum bookings requirements during the ongoing pandemic through December 31, 2021, subject to certain conditions.
In addition, the agreement was amended and restated on November 14, 2019 in order to, among other things, allow us to source a limited percentage of our hotel bookings outside of Latin America without Expedia and from certain
pre-agreed
properties. However, if such transactions exceed the agreed percentage threshold during a
six-month
period, we may be required to pay Expedia compensation; and if our
non-Expedia
sourced bookings outside of Latin America exceed the agreed percentage of gross bookings outside of Latin America for two consecutive quarters, or a higher agreed percentage threshold in one quarter, Expedia may elect to become our exclusive provider outside of Latin America once again. If such transactions exceed the agreed percentage of the minimum bookings set forth therein for any three consecutive months or any three months within a
six-month
period, then Expedia may require us to pay a $125.0 million termination fee. The Expedia Outsourcing Agreement may also be terminated by Expedia, and we may be required to pay the termination payment, if the termination by Expedia is for our material breach of certain terms under the agreement or our Shareholder Agreements. In addition, Expedia may unilaterally terminate the Expedia Outsourcing Agreement in the event of a change of control of our Company. Moreover, if the hotel and other lodging products provided by Expedia were to suffer a deterioration in scale or quality, or if their pricing were not attractive, the products and services that we offer to our users would be adversely affected. The
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Expedia Outsourcing Agreement may be terminated by us unilaterally beginning from March 6, 2022 upon payment of a $125.0 million termination payment to Expedia. Consequently, if a deterioration in the scale or quality of the products and services provided exclusively to us by affiliates of Expedia were to occur, or if their pricing were not attractive, it could be difficult for us to terminate the Expedia Outsourcing Agreement.
We may experience constraints in our liquidity and may be unable to access capital when necessary or desirable, either of which could adversely affect our financial condition.
Although we believe we have a sufficient level of cash and cash equivalents to cover our working capital needs in the ordinary course of business, we may, from time to time, explore additional financing sources and means to improve our liquidity and lower our cost of capital, which could include equity, equity-linked and debt financing and factoring activities. In addition, from time to time, we review acquisition and investment opportunities to further implement our business strategy and may fund these investments with bank financing, the issuance of debt or equity or a combination thereof.
The availability of financing depends in significant measure on capital markets and liquidity factors over which we exert no control. In light of periodic uncertainty in the capital and credit markets, we can provide no assurance that sufficient financing will be available on desirable or even any terms to improve our liquidity, fund investments, acquisitions or extraordinary actions or that our counterparties in any such financings would honor their contractual commitments, which in turn could negatively affect our business, results of operations and financial condition. In addition, if we raise funding through the issuance of new equity or equity-linked securities, it would dilute the percentage ownership of our then existing shareholders.
The ongoing
COVID-19
pandemic has adversely affected our liquidity. We are currently taking additional actions to improve our liquidity during the crisis, which include expense reductions and preserving and raising cash. In order to improve our liquidity, in September 2020 we raise $200 million in gross proceeds in a private placement of shares of newly created series of preferred stock and warrants to purchase our common stock. As conditions are uncertain and changing rapidly, we cannot assure you that our business will not require additional funds for operating activities in the future, particularly if the effects of the pandemic persist, nor we can assure you that we will be able to access new funding on favorable terms or at all.
Our business experiences seasonal fluctuations and
comparisons of our results may not be meaningful.
quarter-to-quarter
Our business experiences fluctuations, reflecting seasonal variations in demand for travel services. We generally experience seasonal fluctuations in the demand for our travel services. Our most significant market, Brazil, and the rest of South America were we operate, are located in the Southern hemisphere where summer runs from December through February and winter runs from June through August. Our most significant market in the Northern hemisphere is Mexico where summer runs from June through August and winter runs from December through February. Accordingly, traditional leisure travel bookings in the Southern hemisphere are generally the highest in the second, third and fourth quarters of the year as travelers plan and book their winter and summer holiday travel. The number of bookings typically decreases in the first quarter of the year. In the Northern hemisphere, bookings are generally the highest in the first three quarters as travelers plan and book their spring, summer and winter holiday travel. The seasonal revenue impact is exacerbated with respect to income by the nature of variable cost of revenue and direct sales and marketing costs, which is typically realized in closer alignment to booking volumes, and the more stable nature of fixed costs.
The continued growth of international operations or a change in product mix may influence the typical trend of the seasonality in the future, and there may also be business or market driven dynamics that result in short-term impacts to revenue or profitability that differ from the typical seasonal trends.
Due to
COVID-19,
which led to significant cancellations for future travel during the first half of the year and has impacted new travel bookings for the majority of 2020, we have not experienced our typical seasonal pattern for
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bookings, revenue and profit during 2020. In addition, with the lower new bookings and elevated cancellations in the merchant business model, our typical, seasonal working capital source of cash has been significantly disrupted resulting in unfavorable working capital trends and material negative cash flow since the second quarter of 2020 when we typically generate significant positive cash flow. Seasonal trends were more normalized during the fourth quarter, but it is difficult to forecast the seasonality for the upcoming quarters, given the uncertainty related to the duration of the impact from
COVID-19
and the shape and timing of any sustained recovery. In addition, we are experiencing much shorter booking windows, which could also impact the seasonality of our working capital and cash flow.
As a result,
comparisons of our results may not be meaningful. Moreover, seasonal fluctuations in our results of operations could result in declines in our share price that are not related to the overall performance and prospects of our business.
quarter-to-quarter
The use of derivative financial instruments may adversely affect our results of operations, particularly in a volatile and uncertain market.
From time to time, we enter into derivative transactions to manage our risks associated with currency exchange rates and interest rates. Significant changes may occur in our portfolio of derivative instruments due to increasing volatility and the fluctuation of the currencies of certain countries where we operate, including Brazil, Mexico and Argentina, against the dollar and volatility in the relevant interest rates, and we may incur net losses from our derivative financial instruments. The fair value of the derivative instruments fluctuates over time as a result of the effects of future interest rates and exchange rates. These values must be analyzed in connection with the underlying transactions and as a part of our total average exposure to interest rate and exchange rate fluctuations. It is difficult to predict the magnitude of the risk resulting from derivative instruments because the appreciation is imprecise and variable. We may be adversely affected by our derivative financial positions.
Risks Related to Latin America
Latin American countries are subject to political and social instability.
Political and social developments in Latin America, including government deadlock, instability, civil strife, terrorism, high levels of crime, expropriations and other risks of doing business in Latin America could impact our business, financial condition and results of operations.
For example, in Brazil, as a result of the ongoing Operation Car Wash (
investigation), a number of senior politicians have resigned or been arrested and other senior elected officials and public officials are being investigated for allegations of corruption. In 2016 the Brazilian Senate impeached President Rousseff for violations of fiscal responsibility laws, and the then Vice-President Michel Temer assumed office to complete the remainder of the presidential mandate. In July 2017, former President Luiz Inácio Lula da Silva was convicted of corruption and money laundering by a federal court in the State of Paraná in connection with the Operation Car Wash (
). After Mr. Temer’s mandate as President ceased in the beginning of 2019, he was arrested in the context of the corruption investigation on a warrant issued by the federal justice, making him the second former president (following Luiz Inácio Lula da Silva) arrested as part of Operation Car Wash (
). Jair Bolsonaro was elected as the new President of Brazil in October 2018, and took office in January 2019. His election led to a market recovery and the recovery of the value of local stock and the Brazilian real, however we cannot assure that this confidence in the market will continue. While the potential outcome of these and other investigations is uncertain, they have already had a material adverse effect on the image and reputation of the companies involved, as well as the market’s overall perception of the Brazilian economy. There can be no guarantee that investigations will not lead to greater political and economic instability or whether new allegations against government employees and officials and/or private companies will arise in the future.
Lava Jato
Lava Jato
Lava Jato
In October 2019, Argentine presidential, legislative and certain provincial and municipal governments elections were held and Alberto Fernández was elected president. The new administration took office on December 10, 2019. Certain members of the current government coalition, including president Alberto Fernández and vice president Cristina Fernández de Kirchner, were part of administrations which in the past were characterized by high levels of government intervention and policies at times disadvantageous to investors and the private sector. On December 23,
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2019, the new Argentine government passed a law granting emergency powers to the executive branch, among other measures. We cannot predict what policies the new Argentine government will implement under these emergency powers, nor their impact in the Argentine economy.
Although political and social conditions in one country may differ significantly from another country, events in any of our key markets could adversely affect our business, financial conditions or results of operations.
Latin American countries have experienced periods of adverse macroeconomic conditions.
Our business is dependent upon economic conditions prevalent in Latin America. Latin American countries have historically experienced economic instability, including uneven periods of economic growth as well as significant downturns. As a consequence of economic conditions in global markets and lower commodity prices and demand for commodities, many of the economies of Latin American countries have recently slowed their rates of growth, and some have entered recessions.
For example, according to the Brazilian Institute for Geography and Statistics (Instituto Brasileiro de Geografia e Estadística, or “IBGE”), Brazil real GDP increased 1.1% in 2018, and 1.1% in 2019 and in 2020 its been forecasted to decrease 4.1%. In addition, the credit rating of the Brazilian federal government was downgraded in 2015 and 2016 by all major credit rating agencies and is no longer investment grade.
According to the Mexican National Institute for Statistics and Geography (Instituto Nacional de Estadística y Geografía or “INEGI”), Mexico’s real GDP increased 2.20% in 2018 and decreased 0.3% in 2019. For 2020, the INEGI has preliminarily estimated a decrease in real GDP of approximately 10.0%.
The Argentine economy has experienced significant volatility, including multiple periods of low or negative growth and high levels of inflation and currency depreciation. According to restated information released by INDEC, Argentina’s real GDP decreased by 2.5% in 2018 and decreased 2.1% in 2019. For 2020, the INDEC has preliminarily estimated a decrease in real GDP of 11.8%.
Since our business is dependent on discretionary consumer spending, which is influenced by general economic conditions, any prolonged economic downturn in any of our key markets could have adverse effects on our business, financial condition and results of operations.
Latin American governments have exercised and continue to exercise significant influence over their economies.
Governments in Latin America frequently intervene in the economies of their respective countries and occasionally make significant changes in policy and regulations. Governmental actions have often involved, among other measures, nationalizations and expropriations, price controls, currency devaluations, mandatory increases on wages and employee benefits, capital controls and limits on imports.
Our business, financial condition and results of operations may be adversely affected by changes in government policies or regulations, including such factors as exchange rates and exchange control policies; inflation control policies; price control policies; consumer protection policies; import duties and restrictions; liquidity of domestic capital and lending markets; electricity rationing; tax policies, including tax increases and retroactive tax claims; and other political, diplomatic, social and economic developments in or affecting the countries where we operate.
In the future, the level of intervention by Latin American governments may continue or increase. We cannot assure you that these or other measures will not have a material adverse effect on the economy of each respective country and, consequently, will not adversely affect our business, financial condition and results of operations.
Inflation, and government measures to curb inflation, may adversely affect Latin American economies.
Many of the countries in which we operate have experienced, or are currently experiencing, high rates of inflation. For example, the inflation rate in Brazil, as reflected by the Broad Consumer Price Index (
, or “IPCA”), published by the IBGE, was 3.8% in 2018, 4.3% in 2019 and 4.52% in 2020. In
Índice Nacional de Preços ao Consumidor Amplo
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the past, Brazil has recorded high inflation rates, which, combined with other measures taken by the Brazilian government to fight inflation and speculation on what measures would be taken, has materially adversely affected the Brazilian economy and contributed to economic uncertainty in Brazil, which increases volatility in the Brazilian capital markets and may materially adversely affect us.
In Mexico, the inflation published by the INEGI was 4.83%, 2.83% and 3.15% in 2018, 2019 and 2020 respectively.
In Argentina, inflation has materially undermined the Argentine economy and the government’s ability to foster conditions that permit stable growth. According to measurements from INDEC of the national consumer price index, cumulative consumer price inflation
for 2018 was 47.6%, for 2019 was 59.8% and for 2020 was 36.1%.
(Inflacion Acumulada de Precios al Consumo)
Inflation in Mexico and Argentina could increase our costs of operations and impact our financial condition and results of operations. Inflation rates may continue to increase in the future, and the government measures to control inflation, adopted presently or in the future, remain uncertain. Measures taken by the governments of these countries to control inflation have often included maintaining a tight monetary policy with high interest rates, thereby restricting the availability of credit and retarding economic growth. Inflation, measures to combat inflation and public speculation about possible additional actions have contributed materially to economic uncertainty in many of these countries.
Exchange rate fluctuations against the dollar in the countries in which we operate could negatively affect our results of operations.
Local currencies used in the conduct of our business are subject to depreciation and volatility. The currencies of many countries in Latin America have experienced significant volatility in the past, particularly against the dollar.
For example, the Brazilian real has historically experienced frequent, sometimes significant, fluctuations relative to the dollar. The real depreciated 17%, 4% and 29% in 2018, 2019 and 2020, respectively, based on official exchange rates as reported by the Brazilian Central Bank. A devaluation of the Brazilian real relative to the dollar could create inflationary pressures in Brazil and cause the Brazilian government to, among other measures, increase interest rates. Any depreciation of the Brazilian real may generally restrict access to the international capital markets, and would also reduce the dollar value of our results of operations. Restrictive macroeconomic policies could reduce the stability of the Brazilian economy and harm our results of operations and profitability. In addition, domestic and international reactions to restrictive economic policies could have a negative impact on the Brazilian economy.
In Mexico, the peso depreciated 0.25% during 2018, appreciated 4% during 2019 and depreciated 5% during 2020, in each case, with respect to the dollar.
Fluctuations in the value of the Argentine peso continue to affect the Argentine economy. During the years 2018, 2019 and 2020, the Argentine peso depreciated 51%, 59% and 40%, respectively, with respect to the dollar. As a result of the greater volatility of the Peso, the former government announced several measures to restore market’s confidence and stabilize the value of the Argentine peso. During 2019, with the intention to reduce the amount of Argentine pesos available in the market and reduce the demand for foreign currency, the government established a new regime for a stricter control of the local monetary base, which would initially remain in place until December 2019, and was further complemented by the reinstatement of foreign currency controls on September 2019.
We are subject to foreign currency exchange controls in certain countries in which we operate.
Certain Latin American economies have experienced shortages in foreign currency reserves and their respective governments have adopted restrictions on the ability to transfer funds out of the country and convert local currencies into dollars.
For example, Brazilian law provides that whenever there is a serious imbalance in Brazil’s balance of payments or reason to foresee a serious imbalance, the Brazilian government may impose temporary restrictions on the remittance to foreign investors of the proceeds of their investments in Brazil.
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In the case of Argentina, in 2001 and 2002 imposed exchange controls and transfer restrictions substantially limiting the ability of companies to make payments abroad. During 2019, the Argentine government established a new regime for a stricter control of the local monetary base, which was meant to initially remain in place until December 2019, in an attempt to reduce the amount of Argentine pesos available in the market and reduce the demand for foreign currency. Complementing these measures, on September 2019, foreign currency controls were reinstated in Argentina. For further information on this topic, see Item 10. “Additional Information – Exchange Controls”.
Under current Argentine law, we are restricted from accessing the official foreign exchange market to make dividend payments to us from our Argentine subsidiaries without prior approval from the Argentine Central Bank. In addition, Argentina recently enforced some measures that control and restrict the capacity of individuals and companies to exchange Argentine pesos for foreign currencies, conditioned to prior approval from the Argentine Central Bank, which could eventually restrict the ability to exchange Argentine pesos for other currencies, such as dollars. Restrictions currently apply to dollar purchases via bank account and in cash. In December 2019, the Argentine government implemented a new reverse withholding tax PAIS, with a rate of 30% on transactions involving –among others– the acquisition by Argentine residents of foreign currency; foreign services through credit and debit cards; services to be provided abroad, contracted through Argentine travel and tourism agencies –wholesale or retailers–; and international passenger transport services (by land, air, aquatic and road). In addition the Argentine Federal Tax Authorities (AFIP) issued on September 16, 2020 General Resolution No. 4815/2020, which imposes an additional 35% reverse withholding tax applicable on same transactions by Argentine residents.
We cannot assure you that foreign exchange controls in Brazil, Argentina or any other country where we operate, may not reemerge or worsen in the future to prevent capital flight, counter a significant depreciation of the Brazilian real, Argentine peso or other currency, or address other unforeseen circumstances. Additional controls could have a negative effect on the ability of our operating entities in the affected country to access the international credit or capital markets.
Any shortages or restrictions on the transfer of funds from abroad may impede our ability to convert these currencies into dollars and to transfer funds, including for the payment of dividends or debt. Moreover, such restrictions limit our ability to use funds for operating purposes in other countries. Consequently, if we are prohibited from transferring funds out of the countries in which we operate, our business, financial condition and results of operations could be adversely affected. For a discussion of certain foreign exchange regulations applicable to us, see “Item 10. Additional Information — Exchange Controls.”
Those kinds of exchange controls could have a material adverse impact on our operations, business, financial condition and results of operations. It is uncertain whether the Brazilian and/or Argentine governments will or will not increase such controls or restraints which could affect the ability to make payments to foreign creditors or suppliers, and dividend payments to shareholders.
Developments in other markets may affect Latin America.
The market value of companies like us may be, to varying degrees, affected by economic and market conditions in other global markets. Various Latin American economies have been adversely impacted by the political and economic events that occurred in several emerging economies in recent times, including Mexico in 1994, the collapse of several Asian economies between 1997 and 1998, the economic crisis in Russia in 1998, the Brazilian devaluations in January of 1999 and 2002 and the Argentine crisis of 2001 and 2002. In addition, Latin American economies have been adversely affected by events in developed countries, such as the 2008 and 2009 global financial crisis that arose in the United States, and the current
COVID-19
pandemic in 2020 and 2021.
As of the date of this Annual Report, recent global developments have occurred in the world which could impact the economies of the Latin American countries in which we operate and consequently have an adverse effect on our business, financial condition and results of operations, such as any new restrictions on travel, immigration or trade.
Developments of a similar magnitude to the international markets in the future can be expected to adversely affect the economies of Latin American countries and, therefore, us.
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Risks Related to our Ordinary Shares
The strategic interests of our significant shareholders may, from time to time, differ from, and conflict with, our interests and the interests of our other shareholders.
As of March 31 2021, funds affiliated with L. Catterton held warrants exercisable for 13.58% of our outstanding ordinary shares, Expedia held 11.84% of our outstanding ordinary shares, Tiger Global held 11.71% of our outstanding ordinary shares, Waha Capital held Series B Preferred Shares convertible into 7.2% of our outstanding ordinary shares, Dorsey Asset Management LLC (“Dorsey”) held 5.95% of our outstanding ordinary shares and Arisaig Global Emerging Markets Consumer Fund (Singapore) Pte Ltd (“Arisaig”) held 5.51% of our outstanding ordinary shares. If L. Catterton, Expedia, Tiger Global, Waha Capital, Dorsey, Arisaig or other investors acquire or continue to own and control, directly or indirectly, a significant portion of our voting share capital, even if their respective interests represent less than a majority of our total voting share capital, such shareholders may be able to exert influence over decisions at both the shareholder and board level of our Company. For more information, see “Item 7. Major Shareholders and Related Party Transactions.”
The strategic interests of our significant shareholders may differ from, and conflict with, our interests and the interests of our other shareholders in material respects. In addition, our memorandum and articles of association provides that Expedia and any of our directors affiliated with Expedia do not have any duty to refrain from engaging, directly or indirectly, in the same business activities or similar business activities or lines of business in which we operate.
Expedia also competes in the global travel industry, and also acts as a supplier to us and certain of our competitors. For a further description of our relationship with Expedia, see “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions,” “—Risks Related to our Business—We rely exclusively on Expedia for the hotel and other lodging products that we offer for all countries outside Latin America,” and “Item 16G. Corporate Governance—Differences in Corporate Law—Conflict of Interest.”
We cannot assure you that the actions of Expedia and other significant shareholders, will not conflict with our interests or the interests of our other shareholders.
We are a foreign private issuer under U.S. securities regulations and, as a result, we are not subject to U.S. proxy rules and we are subject to Exchange Act reporting obligations that, to some extent, are more lenient and less frequent than those of a U.S. issuer.
We report under the Exchange Act as a
non-U.S.
company and a “foreign private issuer,” as such term is defined under U.S. securities regulations. Because we qualify as a foreign private issuer, we are exempt from certain provisions of the Exchange Act that are applicable to U.S. public companies, including (1) the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act; (2) the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and (3) the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form
10-Q
containing unaudited financial and other specified information, or current reports on Form
8-K
upon the occurrence of specified events. In addition, we are not required to file our Annual Report on Form
20-F
until 120 days after the end of each fiscal year, while U.S. domestic issuers that are accelerated filers are required to file their Annual Report on Form
10-K
within 75 days after the end of each fiscal year. Foreign private issuers are also exempt from Regulation Fair Disclosure, aimed at preventing issuers from making selective disclosures of material information. As a result of the above, even though we are required to furnish reports on Form
6-K
disclosing whatever information we have made or are required to make public pursuant to BVI law or distribute to our shareholders and that is material to our Company, you may not have the same protections afforded to shareholders of companies that are not foreign private issuers.
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We are exempt from certain corporate governance requirements of the New York Stock Exchange.
We are exempt from certain corporate governance requirements of the New York Stock Exchange, by virtue of being a foreign private issuer. The standards applicable to us are considerably different than the standards applied to U.S. domestic issuers. For instance, we are not required to:
| • |
have a majority of our board of directors be independent;
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have a compensation committee or a nominating or corporate governance committee;
|
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have regularly scheduled executive sessions with only
non-management
directors;
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have an executive session of solely independent directors each year; or
|
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adopt and disclose a code of business conduct and ethics for directors, officers and employees.
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For more information, see “Item 6. Directors, Senior Management and Employees — A. Directors and Senior Management.” We have relied on and intend to continue to rely on some of these exemptions. As a result, you may not be provided with the benefits and protections of certain corporate governance requirements of the New York Stock Exchange.
We are an “emerging growth company” and the reduced disclosure and attestation requirements applicable to emerging growth companies could make our ordinary shares less attractive to investors.
We are an “emerging growth company” (an “EGC”), as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”), and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not EGCs, including not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act for up to five fiscal years after our initial public offering in September 2017. Section 404(b) of the Sarbanes-Oxley Act would otherwise require our independent registered public accounting firm to attest to and report on the effectiveness our internal control structure and procedures for financial reporting.
In addition, Section 107 of the JOBS Act also provides that an EGC may take advantage of the extended transition period provided in Section 13(a) of the Exchange Act for complying with new or revised accounting standards. In other words, an EGC may delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected not to take advantage of the benefits of this extended transition period and, therefore, are subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. This election is irrevocable.
We will cease to be an EGC upon the earliest of: (1) the last day of the fiscal year during which we have revenue of $1.07 billion or more, (2) the last day of the fiscal year following the fifth anniversary of our initial public offering in September 2017, (3) the date on which we have issued more than $1 billion in
non-convertible
debt during the previous three-year period, or (4) when we become a “large accelerated filer,” as defined in Rule
12b-2
under the Exchange Act. We currently expect to cease being an EGC on December 31, 2021.
The requirements of being a public company may strain our resources and distract our management.
As a public company, we are subject to the reporting requirements of the Exchange Act and requirements of the Sarbanes-Oxley Act applicable to a foreign private issuer and EGC. These requirements may place a strain on our systems and resources. The Exchange Act requires that we file annual and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal controls over financial reporting. To maintain and improve the effectiveness of our disclosure and internal controls and procedures, we need to commit significant resources, potentially hire additional staff and provide additional management oversight. We have implemented additional procedures and processes for the purpose of addressing the standards and requirements applicable to public companies. In addition, sustaining our
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growth also will require us to commit additional management, operational and financial resources to identify new professionals to join our Company and to maintain appropriate operational and financial systems to adequately support expansion. These activities may divert management’s attention from other business concerns, which could have a material adverse effect on our business, financial condition and results of operations.
We may lose our foreign private issuer status in the future, which could result in significant additional costs and expenses.
We are a “foreign private issuer,” as such term is defined under the Securities Act, and, therefore, we are not required to comply with all the periodic disclosure and current reporting requirements of the Exchange Act and related rules and regulations. Under the Securities Act, the determination of foreign private issuer status is made annually on the last business day of an issuer’s most recently completed second fiscal quarter and, accordingly, the next determination will be made with respect to us on June 30, 2021.
In the future, we would lose our foreign private issuer status if a majority of our shareholders, directors or management are U.S. citizens or residents and we fail to meet additional requirements necessary to avoid loss of foreign private issuer status. Although we have elected to comply with certain U.S. regulatory provisions, our loss of foreign private issuer status would make such provisions mandatory. If we are not a foreign private issuer, we will be required to file periodic reports and registration statements on U.S. domestic issuer forms with the SEC, which are more detailed and extensive than the forms available to a foreign private issuer. For example, the Annual Report on Form
10-K
requires domestic issuers to disclose executive compensation information on an individual basis with specific disclosure regarding the domestic compensation philosophy, objectives, annual total compensation (base salary, bonus and equity compensation) and potential payments in connection with change in control, retirement, death or disability, while the Annual Report on Form
20-F
permits foreign private issuers to disclose compensation information on an aggregate basis. We will also have to mandatorily comply with U.S. federal proxy requirements, and our executive officers, directors and principal shareholders will become subject to the short-swing profit disclosure and recovery provisions of Section 16 of the Exchange Act. We may also be required to modify certain of our policies to comply with good governance practices associated with U.S. domestic issuers. In addition, we may lose our ability to rely upon exemptions from certain corporate governance requirements on U.S. stock exchanges that are available to foreign private issuers. Such transition and modifications will involve additional costs and may divert our management’s attention from other business concerns, which could have a material adverse effect on our business, financial condition and results of operations.
Any failure to maintain an effective system of internal controls may result in material misstatements of our consolidated financial statements or cause us to fail to meet our reporting obligations or fail to prevent fraud; and in that case, our shareholders could lose confidence in our financial reporting, which would harm our business and could negatively impact the price of our ordinary shares.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, we are required to furnish a report by our senior management on our internal control over financial reporting. However, while we remain an EGC we are not required to include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. We currently expect to cease being an EGC on December 31, 2021. In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants, adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate. Despite our efforts, there is a risk that we will not be able to conclude, within the prescribed timeframe or at all, that our internal control over financial reporting is effective as required by Section 404. If we identify one or more material weaknesses, it could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements. Management has excluded Koin and Best Day from its assessment of internal control over financial reporting as of December 31, 2020, because such entities were acquired in August 2020 and October 2020, respectively. When we include Best Day and Koin in our internal control over financial reporting as of December 31, 2021, such inclusion could result in the identification of one or more significant deficiencies or material weaknesses related to such businesses.
Effective internal controls are necessary for us to provide reliable and accurate financial reports on a timely basis and prevent fraud. If we fail to maintain an effective system of internal controls, we might not be able to report our financial results accurately or on a timely basis or prevent fraud; and in that case, our shareholders could lose
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confidence in our financial reporting or we could be sanctioned by the SEC, which would harm our business and could negatively impact the price of our ordinary shares. While we believe that we have sufficient personnel and review procedures to allow us to maintain an effective system of internal controls, we cannot provide assurance that we will not experience potential material weaknesses in our internal control. Even if we conclude that our internal control over financial reporting provides reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. GAAP, because of its inherent limitations, internal control over financial reporting may not prevent or detect fraud or misstatements. Failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our results of operations or cause us to fail to meet our future reporting obligations.
Future issuances of our ordinary or other classes of shares may cause a dilution in your shareholding.
We may raise additional funding to meet our working capital, capital expenditure requirements for our planned long-term capital needs, or to fund future acquisitions. If such funding is raised through issuance of new equity or equity-linked securities, it may cause a dilution in the percentage ownership of our then existing shareholders.
From time to time we may grant equity-based compensation to our management and employees, which may dilute the value of your ordinary shares.
Pursuant to the Amended and Restated 2016 Stock Incentive Plan, we may grant restricted stock units (“RSUs”) and stock options to our directors, officers and/or employees. As of December 31, 2020, we had 1,919,099 shares of common stock reserved for new stock-based awards under the Amended and Restated 2016 Stock Incentive Plan. We issue new shares to satisfy the exercise or release of stock-based awards.
During 2020, we started issuing RSUs as our primary form of stock-based compensation. During 2020 and 2019, we granted an aggregate of 1,409,680 and 340,565 RSUs to our employees, directors and management. During 2020, we did not grant any stock options while during 2019 we granted an aggregate of 225,903 stock options. For more information about our equity-based compensation, see “Item 6. Directors, Senior Management and Employees — B. Compensation.” If our board of directors approves the issuance of new equity incentive plans (or the issuance of additional shares under the existing equity incentive plans), the interests of other shareholders may be diluted.
If securities or industry research analysts do not publish or cease publishing research or reports about our business or if they issue unfavorable commentary or downgrade our ordinary shares, our stock price and trading volume could decline.
The trading market for our ordinary shares will rely in part on the research and reports that securities and industry research analysts publish about us, our industry and our business. We do not have any control over these analysts. Our stock price and trading volumes could decline if one or more securities or industry analysts downgrade our ordinary shares, issue unfavorable commentary about us, our industry or our business, cease to cover us or fail to regularly publish reports about us, our industry or our business.
Investors may have difficulty enforcing judgments against us, our directors and management.
We are incorporated under the laws of the BVI and many of our directors and officers reside outside the United States. Moreover, many of these persons do not have significant assets in the United States. As a result, it may be difficult or impossible to effect service of process within the United States upon these persons, or to recover against us or them on judgments of U.S. courts, including judgments predicated upon the civil liability provisions of the U.S. federal securities laws.
Furthermore, our memorandum and articles of association include an exclusive jurisdiction clause pursuant to which, to the fullest extent permitted by applicable law, (i) other than claims specified in clause (ii) below and except as may otherwise be expressly agreed between the Company and a shareholder or between two or more shareholders in relation to the Company, we and all our shareholders agree that the BVI courts shall have exclusive jurisdiction to hear and determine all disputes of any kind regarding us and shareholders’ respective investments in us, irrevocably submit to the jurisdiction of the BVI courts, irrevocably waive any objection to the BVI courts being
35
nominated as the forum to hear and determine any such dispute, and undertake and agree not to claim any such court is not a convenient or appropriate forum; and (ii) the federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act, in each case unless our board of directors consents in writing to the selection of an alternative forum.
An award of punitive damages under a U.S. court judgment based upon U.S. federal securities laws is likely to be construed by BVI courts to be penal in nature and therefore unenforceable in the BVI. Further, no claim may be brought in the BVI against us or our directors and officers in the first instance for violation of U.S. federal securities laws because these laws have no extraterritorial application under BVI law and do not have force of law in the BVI. However, a BVI court may impose civil liability, including the possibility of monetary damages, on us or our directors and officers if the facts alleged in a complaint constitute or give rise to a cause of action under BVI law. Moreover, it is unlikely that a court in the BVI would award damages on the same basis as a foreign court if an action were brought in the BVI or that a BVI court would enforce foreign judgments if it viewed the judgment as inconsistent with BVI practice or public policy.
The courts of the BVI would not automatically enforce judgments of U.S. courts obtained in actions against us or our directors and officers, or some of the experts named herein, predicated upon the civil liability provisions of the U.S. federal securities laws, or entertain actions brought in the BVI against us or such persons predicated solely upon U.S. federal securities laws. Further, there is no treaty in effect between the United States and the BVI providing for the enforcement of judgments of U.S. courts in civil and commercial matters, and there are grounds upon which BVI courts may decline to enforce the judgments of U.S. courts. Some remedies available under the laws of U.S. jurisdictions, including remedies available under the U.S. federal securities laws, may not be allowed in the BVI courts if contrary to public policy in the BVI. Because judgments of U.S. courts are not automatically enforceable in the BVI, it may be difficult for you to recover against us or our directors and officers based upon such judgments.
Certain types of class or derivative actions generally available under U.S. law may not be available as a result of the fact that we are incorporated in the BVI and the exclusive jurisdiction clause included in our memorandum and articles of association. As a result, the rights of shareholders may be limited.
Shareholders of BVI companies may not have standing to initiate a shareholder derivative action in a court of the United States. Furthermore, our memorandum and articles of association include an exclusive jurisdiction clause which, to the fullest extent permitted by applicable law, will act as a bar to any such action in a court of the United States. In any event, the circumstances in which any such action may be brought, if at all, and the procedures and defenses that may be available in respect to any such action, may result in the rights of shareholders of a BVI company being more limited than those of shareholders of a company organized in the United States. Accordingly, shareholders may have fewer alternatives available to them if they believe that corporate wrongdoing has occurred. The BVI courts are also unlikely to recognize or enforce against us judgments of courts in the United States based on certain liability provisions of U.S. securities law or to impose liabilities against us, in original actions brought in the BVI, based on certain liability provisions of U.S. securities laws that are penal in nature.
You may have more difficulty protecting your interests than you would as a shareholder of a U.S. corporation.
Our corporate affairs are governed by the provisions of our memorandum and articles of association, as amended and restated from time to time, and by the provisions of applicable BVI law. The rights of shareholders and the fiduciary responsibilities of our directors and officers under BVI law are not as clearly established as they would be under statutes or judicial precedents in some jurisdictions in the United States, and some states (such as Delaware) have more fully developed and judicially interpreted bodies of corporate law.
These rights and responsibilities are to a large extent governed by the BVI Business Companies Act, 2004 as amended from time to time (the “BVI Act”) and the common law of the BVI. The common law of the BVI is derived in part from judicial precedent in the BVI as well as from English common law, which has persuasive, but not binding, authority on a court in the BVI. In addition, BVI law does not make a distinction between public and private companies and some of the protections and safeguards (such as statutory
pre-emption
rights, save to the extent expressly provided for in the memorandum and articles of association) that investors may expect to find in relation to a public company are not provided for under BVI law.
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There may be less publicly available information about us than is regularly published by or about U.S. issuers. Also, the BVI regulations governing the securities of BVI companies may not be as extensive as those in effect in the United States, and the BVI law and regulations regarding corporate governance matters may not be as protective of minority shareholders as state corporation laws in the United States. Therefore, you may have more difficulty protecting your interests in connection with actions taken by our directors and officers or our principal shareholders than you would as a shareholder of a corporation incorporated in the United States.
The laws of BVI provide limited protections for minority shareholders, so minority shareholders will not have the same options as to recourse in comparison to the United States if the shareholders are dissatisfied with the conduct of our affairs.
Under the laws of the BVI there is limited statutory protection of minority shareholders other than the provisions of the BVI Act dealing with shareholder remedies. The principal protections under BVI statutory law are derivative actions, actions brought by one or more shareholders for relief from unfair prejudice, oppression and unfair discrimination and/or to enforce the BVI Act or the memorandum and articles of association. Shareholders are entitled to have the affairs of the company conducted in accordance with the BVI Act and the memorandum and articles of association and are entitled to payment of the fair value of their respective shares upon dissenting from certain enumerated corporate transactions. For more information, see “Item 10. Additional Information — Memorandum and Articles of Association” and “Item 16G. Corporate Governance — Differences in Corporate Law” below.
There are common law rights for the protection of shareholders that may be invoked, largely dependent on English company law, since the common law of the BVI is limited. Under the general rule pursuant to English company law known as the rule in Foss v. Harbottle, a court will generally refuse to interfere with the management of a company at the insistence of a minority of its shareholders who express dissatisfaction with the conduct of the company’s affairs by the majority or the board of directors. However, every shareholder is entitled to seek to have the affairs of the company conducted properly according to law and the constitutional documents of the company. As such, if those who control the company have persistently disregarded the requirements of company law or the provisions of the company’s memorandum and articles of association, then the courts may grant relief. Generally, the areas in which the courts will intervene are the following: (i) a company is acting or proposing to act illegally or beyond the scope of its authority; (ii) the act complained of, although not beyond the scope of the authority, could only be effected if duly authorized by more than the number of votes which have actually been obtained; (iii) the individual rights of the plaintiff shareholder have been infringed or are about to be infringed; or (iv) those who control the company are perpetrating a “fraud on the minority.”
These rights may be more limited than the rights afforded to minority shareholders under the laws of states in the United States.
We have no current plans to pay any cash dividends on our ordinary shares.
We currently intend to retain our future earnings, if any, to fund the development and growth of our business. As a result, capital appreciation, if any, of our ordinary shares are likely to be your sole source of gain for the foreseeable future. Consequently, in the foreseeable future, you will likely only experience a gain from your investment in our ordinary shares if the trading price of our ordinary shares increases. While pursuant to our memorandum and articles of association our Series A Preferred Shares and Series B Preferred Shares are entitled to semi-annual dividends and quarterly dividends, respectively, our memorandum and articles of association do not require us to pay any dividends on our ordinary shares. In December 2020 we paid $0.6 million in quarterly dividends to our Series B Preferred shareholders. In March 2021 we paid $0.5 in quarterly dividends to our Series B Preferred shareholders and $8.0 million in semi-annual dividends to our Series A Preferred shareholders
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Anti-takeover provisions in our memorandum and articles of association might discourage, delay or prevent acquisition or other change of control attempts for us that you and/or other of our shareholders might consider favorable.
Certain provisions of our memorandum and articles of association may discourage, delay or prevent a change in control of our Company or management that shareholders may consider favorable, including but not limited to the following provisions:
Pursuant to our memorandum and articles of association:
| • |
Our board of directors may without prior notice to shareholders, or obtaining any shareholder approval, amend our memorandum and articles of association to authorize and subsequently issue an unlimited number of preferred shares in one or more classes and series and designate the issue prices, rights, preferences, privileges, restrictions and terms of such preferred shares.
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| • |
Our board of directors is currently made up of eight directors divided into three classes, with each class having a three-year term. Class I’s, Class II’s and Class III’s terms will expire at the Company’s annual meetings in 2021, 2022 and 2023, respectively. The only circumstance in which shareholders can elect new directors is at an annual meeting and in respect of those board seats whose term is expiring at the annual meeting. Elections will take place by plurality voting. Shareholders do not have the power to increase or reduce the size of the board or fill a vacancy on the board, which matters are the exclusive authority of our board of directors.
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| • |
Our shareholders may only remove directors for cause and only by resolution approved by shareholders holding not less than
two-thirds
of the voting rights at a meeting of shareholders called for the stated purpose of removing the director.
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| • |
There are a number of restrictions, conditions and other requirements (including advance notice period requirements) that apply to our shareholders’ ability to (i) request special meetings of our shareholders; (ii) nominate persons for election as directors at annual meetings of our shareholders; and (iii) propose other items of business or other matters for consideration at any annual or special meetings of our shareholders.
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| • |
All resolutions of the shareholders must be adopted at a meeting of our shareholders convened in accordance with our memorandum and articles of association. Shareholders are prohibited from adopting resolutions by written consent.
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| • |
There are restrictions on amending our memorandum and articles of association. Certain provisions of our memorandum and articles of association (including many of the provisions described above) may only be amended with the approval of both our shareholders and our board of directors. Provisions that may be amended by the shareholders without board approval require the affirmative vote of holders of
two-thirds
of the shares entitled to vote on the resolution.
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For more information on our Shareholder Agreements, see “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions.” For more information on our memorandum and articles of association, see “Item 10. Additional Information—Memorandum and Articles of Association” and “Item 16G. Corporate Governance—Differences in Corporate Law.”
These provisions and other provisions under BVI law could discourage, delay or prevent potential takeover attempts and other transactions involving a change in control of our Company, including actions that our shareholders may deem advantageous. As such, these provisions may reduce the price that investors might be willing to pay for our ordinary shares in the future and negatively affect the trading price of our ordinary shares.
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General Risk Factors
An active or liquid trading market for our ordinary shares may not be maintained.
An active, liquid trading market for our ordinary shares may not be maintained in the long term. Loss of liquidity could increase the price volatility of our ordinary shares. Moreover, we cannot assure you that investors will be able to sell ordinary shares should they decide to do so.
The price of our ordinary shares may fluctuate significantly and your investment may decline in value.
The price of our ordinary shares may fluctuate significantly in response to factors, many of which are beyond our control, including those described above under “—Risks Related to our Business” and “—Risks Related to Latin America.” The stock markets in general, and the shares of emerging market and technology companies in particular, have experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the companies involved. We cannot assure you that any trading price or valuation will be sustained. These factors may materially and adversely affect the market price of our ordinary shares, which may limit or prevent investors from readily selling our ordinary shares and may otherwise affect liquidity, regardless of our operating performance. Market fluctuations, as well as general political and economic conditions in the markets in which we operate, such as recession or currency exchange rate fluctuations, may also adversely affect the market price of our ordinary shares. Following periods of volatility in the market price of a company’s securities, that company may often be subject to securities class-action litigation. This kind of litigation may result in substantial costs and a diversion of management’s attention and resources, which would have a material adverse effect on our business, financial condition and results of operation.
The sale or availability for sale of substantial amounts of our ordinary shares could adversely affect their market price.
Sales of substantial amounts of our ordinary shares in the public market, or the perception that such sales could occur, could adversely affect the market price of our ordinary shares, even if there is no relationship between such sales and the performance of our business.
A portion of our ordinary shares are currently held by affiliates, which means they may not be sold unless the sale is registered under the Securities Act, other than if an exemption from registration is available. Certain of our shareholders have demand and/or other piggyback registration rights which may enable them to sell some or all of their ordinary shares in a public offering in the United States registered under the Securities Act. For more information, see “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions.”
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ITEM 4
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INFORMATION ON THE COMPANY
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A.
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History and Development of the Company
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Despegar.com, Corp. was formed as a business company incorporated in the BVI on February 10, 2017. On May 3, 2017, the stockholders of our predecessor, Decolar.com, Inc., a Delaware corporation, exchanged their shares for ordinary shares of Despegar.com, Corp. to create a BVI holding company. Following the exchange, our shareholders own shares of Despegar.com, Corp., and Decolar.com, Inc. is a wholly-owned subsidiary of Despegar.com, Corp.
We are known by our two brands, Despegar, our global brand, and Decolar, our Brazilian brand. The key brands for Best Day, which we acquired in October 2020, are Best Day, BD Experience and HotelDo.
Our principal executive office is located at Juana Manso 1069, Floor 5, Ciudad Autónoma de Buenos Aires, Argentina C1107CBU, Telephone:
+54 11 5171-3500.
Our agent for service of process in the United States is Cogency Global Inc., located at 10 E. 40th Street, 10th Floor, New York, New York 10016.
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Our History and Development
Our business has grown substantially in revenue, products and geographic scope since launching in 1999. The following table shows the timeline of key milestones:
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1999
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• Launched site in Argentina.
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2000
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• Launched sites in Brazil, Chile, Colombia, Mexico and Uruguay.
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2001
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• Launched sites in the United States and Venezuela.
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2007
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• Launched site in Peru.
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2009
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• Expanded our offering to include hotels.
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• Launched sites in Bolivia, Costa Rica, Dominican Republic, Ecuador, Guatemala, Nicaragua, Panama, Paraguay and Puerto Rico.
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2010
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• Launched sites in El Salvador and Honduras, reaching our 20th market.
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• Cumulative one million travel customers served.
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2012
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• Launched our mobile apps on Android and iOS.
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• Expanded offering to include packages, rental cars and cruise products.
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2013
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• Reached one million downloads of our mobile app.
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• Expanded our offering to include destination services.
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• Expanded hotel offering to include vacation rentals.
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2014
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• Cumulative 10 million travel customers served.
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• Our mobile app is included in the iTunes Store’s “Best of 2014”.
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• Launched travel affiliates program.
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• Expanded our offering to include travel insurance and travel assistance.
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2015
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• Reached 10 million downloads of our mobile app.
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• Deepened strategic partnership with Expedia, including its equity investment in our Company.
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2016
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• Awarded
“E-commerce
Leader in the Tourism Industry in LATAM” by the Latin American
E-Commerce
Institute.
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• Expanded our offering to include our bus product.
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• Expanded our destination services offering to include our local concierge product.
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2017
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• Initial public offering and listing on the New York Stock Exchange.
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2018
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• Launched sales call centers in Peru, Ecuador, Mexico, Chile, Colombia, Argentina and Brazil.
• Developed tour operation business.
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2019
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• Completed rebranding our core business, including logos, website and images in order to update our outward facing content.
• Acquired Viajes Falabella in Chile, Argentina, Peru and Colombia.
• Entered into an API connectivity agreement with CTrip International Travel (Hong Kong) Ltd., for the integration of Despegar direct lodging offering in Latin America with Ctrip’s platform.
• Entered into a
ten-year
exclusive agreement with Industrial and Commercial Bank of China Limited, to launch a
co-branded
credit card in Argentina in partnership with Mastercard.
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2020
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• Acquired Best Day, a leading travel agency in Mexico.
• Acquired Koin, an online payment platform in Brazil.
• Launched a
co-branded
credit card in Brazil jointly with Banco Santander.
• Entered into a
ten-year
commercial partnership agreement with Tarjeta Naranja, the leading branded proprietary credit card issuer in Argentina and a subsidiary of Grupo Financiero Galicia.
• Entered into an Investment Agreement for the issuance 150,000 Series A Preferred Shares of the Company and warrants to purchase 11,000,000 ordinary shares of the Company at an exercise price of $0.01 per share (the “Warrants”) with LCLA Daylight LP, an affiliate of L Catterton Latin America III, L.P.
• Entered into an Investment Agreement for the issuance of 50,000 Series B Preferred Shares to Waha LATAM Investments Limited, an affiliate of Waha Capital PJS.
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Capital Expenditures
See “Item 5. Operating and Financial Review and Prospects—C. Research and Development, Patents and Licenses.”
| B. |
Business Overview
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Overview
We are the leading online travel company in Latin America, mainly known by our two brands, Despegar, our global brand, and Decolar, our Brazilian brand. In Mexico we are best known by our brands Best Day, BD Experience and HotelDo, which we acquired in October 2020.
We have a comprehensive product offering, including airline tickets, packages, hotels and other travel-related products, which enables consumers to find, compare, plan and purchase travel products easily through our marketplace. We provide our network of travel suppliers a technology platform for managing the distribution of their travel products and access to our travel customers. We believe that our focus on the underpenetrated Latin American online travel market, our knowledge of the consumer and supplier landscape in the region and our ability to manage the business successfully through economic cycles will allow us to continue our industry leadership. In 2020, 2019 and 2018, we had approximately 2.5 million, 5.2 million and 5.3 million travel customers, generating $131.3 million, $524.9 million and $530.6 million in consolidated revenue, respectively. Our gross bookings were $1.4 billion, $4.7 billion and $4.7 billion during 2020, 2019 and 2018, respectively. Results for 2020 have been significantly impacted by
COVID-19’s
effects on global travel.
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Latin America online travel bookings are expected to continue growing in the coming years, once the effects of the
COVID-19
pandemic have subsided. Factors driving the growth in online travel bookings include the increase of internet penetration, further adoption of smartphones, tablets and other mobile devices and a growing middle class with greater access to banking services and credit products, together enabling a larger segment of the growing population to transact online or on mobile devices.
The Latin American travel industry is characterized by significant fragmentation in suppliers across airlines, hotels and other travel products. This fragmentation is compounded by regional complexities, including differences in language, local customs, travel preferences, currencies and regulatory regimes across the more than 40 countries in the region. These factors create challenges for suppliers to reach customers directly and, consequently, create a significant market opportunity for us.
We believe we have the broadest travel portfolio among OTAs in Latin America, with inventory from global suppliers, including over 238 airlines and over 660,000 hotels, as well as approximately 1,260 car rental agencies and approximately 800 destination services suppliers with more than 12,000 activities. Our business benefits from network effects: our large travel customer base helps us to attract additional travel suppliers and, in turn, a larger network of travel suppliers helps us to attract new travel customers by enhancing our product offering. Additionally, as we continue to grow our marketplace, we are increasingly able to offer more competitive pricing and product availability to our travel customers as well as enhance the effectiveness of our marketing strategy.
We launched our award-winning mobile travel app in 2012 and it is an increasingly important part of our business, as it allows consumers to access and browse our real-time inventory, compare prices and transact through their mobile devices quickly. As of December 31, 2020, our apps have approximately 60 million cumulative downloads from the iOS App Store and Google Play, 16.5 million of which were downloaded in the last two years, and we believe they are the most downloaded OTA apps in Latin America. During each of 2020 and 2019, mobile accounted for approximately 60% of all of our user visits, and approximately 46% and 39%, respectively, of our transactions were purchased on our mobile platform, complementing our desktop website traffic. As internet, smartphone and other mobile device penetration continue to increase, we believe that our strength in mobile will continue to be a strategic advantage.
Through mobile and online marketing, brand promotion and cross-marketing, we have created strong brand recognition among Latin America travelers, which we view as one of our key competitive advantages. To date, we have invested more than $1.5 billion in marketing and branding initiatives promoting our brand, which we believe, combined with the quality of the service we have delivered over the years, has made us a trusted brand with our travel customers. In 2020 and 2019, 65% and 64% of our travel customers had completed previous purchases on our platform, respectively.
Travel Market Opportunity in Latin America
Latin America is one of the largest and most diverse regions in the world. Comprised of over 40 countries with a total population of over 600 million, the region encompasses multiple languages, currencies and regulatory regimes. The travel market serving Latin American consumers presents a significant opportunity for us due to its large market size, highly fragmented base of travel suppliers and rapid growth in the adoption of technology-based solutions for consumers and travel suppliers. In addition, long-term favorable macroeconomic trends in the region have contributed to the expansion of the middle class and increased consumption in the region.
In the second quarter of 2020, the travel market in Latin America –as in other parts of the world– came to a complete halt as a consequence of the ongoing
COVID-19
pandemic and governments’ measures to limit the spread of the virus. Governments around the world, including in Latin America, have imposed travel restrictions and bans, closed borders, established restrictions on public gatherings, instructed residents to practice social distancing, required closure of
non-essential
businesses, issued stay at home advisories and orders, implemented quarantines and similar actions. The degree of containment of the virus, and the recovery in travel, has varied country by country. During the recovery period, there have been instances where cases of
COVID-19
have started to increase
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again after a period of decline, which in some cases impacted the recovery of travel in certain countries. While many countries have begun the process of vaccinating their residents against
COVID-19, the
large scale and challenging logistics of distributing the vaccines, as well as uncertainty over the efficacy of the vaccine against new variants of the virus, may contribute to delays in economic recovery.
COVID-19
has also had broader economic impacts, including an increase in unemployment levels and reduction in economic activity, which could lead to recession and further reduction in consumer or business spending on travel activities, which may negatively impact the timing and level of a recovery in travel demand.
While it is impossible to predict at this moment how the travel industry, globally and in Latin America, will ultimately be impacted, we believe that the Latin American travel industry will continue to grow, and the following trends will largely continue in the longer term, once the effects of
COVID-19
pandemic have subsided.
Overview of Suppliers in the Latin American Travel Industry
The Latin American travel industry is characterized by significant supplier fragmentation across airlines, hotels and other travel products. Regional complexities, including differences in language, local customs, travel preferences, currencies and regulatory regimes across the more than 40 countries in the region create challenges for travel suppliers to reach travel customers directly, at scale and across the region. Further driving this fragmentation is the growing number of smaller airlines, including
low-cost
airlines that have been commencing operation in recent years. Today, travel agencies are the leading distribution channel in the region for airlines, due to their ability to provide greater selection and scale across the region.
We believe that due to a lack of scale or unified brand, other travel services in Latin America tend to be even more fragmented, operating in specific cities or countries.
Trends Driving Online Travel and Our Growth
An expanding and evolving travel market, coupled with greater internet, smartphone and other mobile device penetration, is expected to drive robust growth in online travel bookings in Latin America. As consumers shift to researching and booking travel online, travel suppliers have adapted their offerings and deepened their relationships with online marketing and booking channels, such as OTAs, to generate revenue. OTAs provide travel suppliers with scale and distribution into new and existing markets and 24/7 customer service and localization services, including language and payment capabilities.
Factors driving the growth in online travel include:
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Increasing internet penetration
.
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| • |
Increasing adoption of mobile devices, including smartphones
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| • |
Superior user experience
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| • |
Growth in banked consumers and proliferation of credit products
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As the leading OTA in Latin America, we believe we are well positioned to succeed as consumers’ destination of choice for fast, easily searchable and more transparent travel research and shopping. As our market share grows, we are increasingly able to capture significant amounts of customer data including travel history and preferences and serve personalized recommendations to drive higher customer conversion. Additionally, we are able to provide better pricing through scale and by bundling multiple travel products together in a single offer.
Our Competitive Strengths
We are the leading OTA in Latin America, offering our travel customers a broad and diversified selection of travel products at attractive prices. Our leadership position is a result of our following core strengths:
Industry Leader in Latin America
With our launch in 1999, we have benefited from an early mover advantage in Latin America, which has allowed us to achieve significant scale and brand awareness. In 2020 and 2019, we had approximately 2.5 million and 5.2 million travel customers, respectively, primarily in Latin America, generating $131.3 million and $524.9 million in revenue and approximately $4.7 billion and 1.4 billion in gross bookings in 2019 and 2020.
We have established relationships with a large network of travel suppliers in Latin America and we have become the leading online air ticketing provider in Latin America, having sold approximately 19.6% and 18.9% of all airline tickets purchased through GDS in the region during 2020 and 2019, respectively, according to Amadeus. Additionally, we believe we provide our travel customers with the largest travel portfolio among Latin American OTAs, with access to over 238 global airlines and over 660,000 hotels globally as well as approximately 1,260 car rental agencies and approximately 800 destination services suppliers with more than 12,000 activities. Additionally, we have accumulated approximately 17.6 million user-generated reviews in total as of December 31, 2020, of which 0.4 million and 2.3 million were submitted in 2020 and 2019, respectively, which we believe drive user engagement. Our platform is also of increasing importance to airlines based outside of Latin America, which generally have a limited local presence in the region, and which account for over 68% of the outbound international travel booked on our platform. Such international travel is more attractive because of its price point and higher commission structure.
Our technology platform allows us to offer our travel customers the ability to create custom packages of two or more products, such as a combination of airfare and a hotel booking for a particular trip, allowing us to offer our travel customers lower combined prices that may not be available for individual products. We are also able to better cross-sell multiple travel products and provide travel customers with a comprehensive solution for their travel needs.
We benefit from network effects: our large travel customer base helps us to attract additional travel suppliers and, in turn, a larger network of travel suppliers helps us to attract new travel customers by enhancing our product offering. Furthermore, by growing our user base and aggregating different products from our supplier base, we are able to offer attractive pricing and availability of travel products to our travel customers as well as enhance the effectiveness of our marketing strategy.
Strong Brand Recognition and Awareness
Despegar, our global brand, and Decolar, our Brazilian brand, have leading brand awareness in online travel in key markets, including Brazil and Argentina. Best Day, which we acquired in October 2020, has a leading brand awareness in Mexico. According to search engine trend data that is based on the relative number of searches of brand related keywords on Google during 2020, we had an approximate 28% share (as compared with what we believe to be the next five largest competitors in the market) in Latin America.
Local Market Expertise and Leadership
We have a strong track record in Latin America, with a point of sale in 19 markets, representing 98% of the region’s population, and with a leading OTA presence in key markets such as Brazil, Mexico, Argentina, Chile, and Colombia. In our three largest markets, Brazil, Mexico and Argentina, we have operated for more than 20 years. Our knowledge of local consumers, and their buying patterns and travel preferences, as well as our ability to offer
44
financing through our relationships with financial institutions, have enabled us to serve our travel customers more effectively than global competitors from outside the region. Furthermore, our extensive supplier relationships allow us to offer a greater scale and breadth of offerings than smaller, local competitors. We understand the objectives of, and challenges faced by, Latin American travel suppliers and we are well-positioned to address those challenges by helping the travel suppliers grow their businesses, all to the benefit of travel customers who receive more choice at attractive pricing.
As the leading Latin American OTA, we have developed long-standing relationships with a wide range of local banks to offer installment payment plans to their credit card holders as an alternative purchase option. We believe that local banks look to partner with us because of our scale, access to our online audience and high transaction volume. We believe this differentiates us from other local and global travel agencies as those agencies either do not offer installment plans or offer installment plans from a more limited selection of financing providers or in a more limited selection of countries. We believe our portfolio of installment plans is a meaningful driver of traffic to our platform as well as conversion. Approximately 57% of our transactions in both 2019 and 2020 were paid in installments. Our agreements with local banks allow us to offer installment plans without assuming collection risk from the travel customer.
Leading Mobile Offering
Mobile is an increasingly important part of our business, as consumers are quickly able to access and browse our real-time travel offerings, compare prices and make purchases through their mobile devices. We launched our leading mobile travel apps in 2012. As of December 31, 2020, our mobile apps have more than 60.1 million cumulative downloads from the iOS App Store and Google Play (16.5 million of which were downloaded in the last two years). In addition, our iOS App Store and Google Play apps were rated 4.7 and 4.0 stars as of December 31, 2020. During each of 2020 and 2019, mobile, which includes both mobile web and our mobile apps, accounted for approximately 60% of all of our user visits, and approximately 45% and 39%, respectively, of our transactions. In addition, transactions via mobile decreased by approximately 50% in 2020 compared to 2019, mainly as a result of a general decrease in transactions as a result of the
COVID-19
pandemic. We continue to provide innovative features and functionality to consumers through our mobile apps, including push notifications, dynamic updates, inventory alerts and personalized promotions as well as
in-app
customer service. Our travel customers using mobile devices have historically made more repeat transactions than travel customers using desktop computers. Additionally, our mobile presence allows
in-destination
marketing, which facilitates cross-selling of additional travel products, such as rental cars and destination services to travel customers, after they have arrived at their destination.
Many of our travel customers use their mobile device to search for travel products but complete their transactions on their desktop. However, as mobile purchasing becomes increasingly prevalent in the region, we believe our award-winning mobile platform, coupled with the widespread adoption of our apps, positions us well for an increasingly mobile future.
Powerful Data and Analytics Platform
Our large web and mobile audience and transaction volume generate a significant amount of data that allows us to better understand our travel customers and provide personalized travel offerings and also helps us to drive our sales, marketing and operational strategy. To offer the most effective content and products for each travel customer, we extensively analyze the data we collect to identify and highlight the most valuable products and destinations in each travel customer interaction. By gathering and analyzing data in real-time, we are quickly able to assess and react to changes in travel customer behavior, market pricing and other market dynamics. Currently, the majority of visitors to our platform see a personalized landing page based on such factors as user account information, past search and purchasing history and geolocation. We believe that this personalization of the user experience increases engagement and likelihood of purchase.
Effective Marketing Capabilities
We have invested significant resources in our marketing team, which we believe is a significant driver of our business. Through our vertically-integrated,
in-house
marketing team, we are able to control all aspects of our
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budget, marketing campaigns and market analytics, without the need for agencies or external consultants. Our marketing team’s local knowledge and expertise in our key markets have allowed us to develop direct relationships with a broad range of local and regional media providers and purchase media directly, avoiding more costly intermediaries. We have invested in our own creative, production and media execution teams, who are quickly able to adapt our marketing strategy, while also leveraging our extensive data and analytics capabilities for more precise audience targeting. Furthermore, we have developed our own software platform for managing our search optimization capabilities, allowing us to tailor messages effectively for specific target markets and travel customers.
Proven and Experienced Team
Our management team has significant experience in the travel sector and across a variety of industries in Latin America. Members of our management team have worked at organizations such as LATAM Airlines, McKinsey, Morgan Stanley, PwC and Thales, among others. In addition to our management team, we have an extensive technology team including more than 650 developers and technology professionals. By fostering a distinctive, collaborative and high-performance working culture, we attract software developers with world-class talent and offer an engaging working environment for ongoing career development. We believe we are perceived as a top talent recruiter for IT professionals in Latin America, allowing us to attract the highest quality professionals and specialists dedicated to the enhancement of our platform.
Our Travel Customers
We had approximately 2.5 million and 5.2 million travel customers for 2020 and 2019, respectively, primarily in Latin America. Our travel customers are primarily from Latin America traveling domestically within their own country of origin, to other countries in the Latin American region, and outside of Latin America. Most of our travel customers are traveling for leisure, although we do have some independent business travelers as well.
Our Products
We offer a wide range of travel and travel-related products catering to the needs of Latin Americans traveling domestically within their own country of origin, to other countries in the Latin American region and outside of Latin America. We provide these travelers with the comprehensive tools and information, in multiple languages, that they need to research, plan, book and purchase travel products efficiently. That information includes approximately 5.0 million user-generated reviews over the last three years ended December 31, 2020, of which 0.4 million and 2.3 million were submitted in 2020 and 2019, respectively. We organize our business into two segments: (1) Air, which consists of the sale of airline tickets, and (2) Packages, Hotels and Other Travel Products, which consists of travel packages (which can include airline tickets and hotel rooms), as well as stand-alone sales of hotel rooms (including vacation rentals), car rentals, bus tickets, cruise tickets, travel insurance and destination services. We mostly offer our products online through our website and mobile applications, and use data and analytics to personalize the travel customer experience on our platform, based on geolocation, past search and purchasing history and social network interactions, which we believe increases engagement and likelihood of purchase.
Air
Through our Air segment, we offer airline tickets, primarily targeted at leisure travelers in Latin America, including travel domestically, to other countries in the region and outside of Latin America. Our Air segment includes airline tickets purchased on a stand-alone basis but excludes airline tickets that are packaged with other
non-airline
flight products. Our travel customers booked approximately 2.4 million, 6.2 million and 5.9 million transactions in our Air segment using our platform in 2020, 2019 and 2018, respectively.
We provide our travel customers with access to over 238 full service and
low-cost
airlines. We obtain inventory from these airlines either through a GDS or, primarily in the case of
low-cost
airlines, via direct connections to the airlines’ booking systems. We believe our platform provides comprehensive information to our travel customers in a time efficient and transparent manner. Travel customers are quickly and easily able to evaluate a broad range of fares and airline combinations, and may search for flights based on their preferred travel dates, destinations, number of passengers, number of stops and class of travel, or they may use our more advanced search tool and include additional search parameters. Travel customers can also filter and sort the results of their search easily according to their preferences.
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Packages, Hotels and Other Travel Products
The total number of transactions in our Packages, Hotels and Other Travel Products segment was 1.7 million, 4.4 million and 4.5 million in 2020, 2019 and 2018, respectively.
Packages
We offer travelers the opportunity to create custom packages by combining two or more travel products, such as airline tickets and hotel, airline tickets and car rental or hotel and car rental, and booking them in a single transaction. Combining multiple products into a package with a single quoted price allows us to offer travel customers lower prices than are available for individual products and helps us to cross-sell multiple products in a single transaction.
Hotels
Through our platform, travel customers can search, compare and book reservations at more than 660,000 hotels globally through our direct network and third-party inventory. In addition, since 2013 our hotels offering includes vacation rentals.
Travel customers may search for hotels based on their destination and preferred dates for
check-in
and checkout, and may filter and sort our search results easily by selecting star ratings, specific hotel chains and location.
Travel customers can also indicate amenity preferences such as business services, internet access, fitness centers, swimming pools and more. Travel customers can also view hotel pictures and read hotel reviews from other travel customers on our platform. Our platform features approximately 5.0 million user-generated reviews over the last three years ended December 31, 2020, of which 0.4 million and 2.3 million were generated in 2020 and 2019, respectively.
As of December 31, 2020, approximately 31,000 of our hotel suppliers in Latin America were directly connected to our booking system. Through these direct connections, our hotel suppliers allocate rooms to us either by managing their room inventory directly on an extranet supported by us, or on an extranet supported by one of our more than 48 third-party channel managers.
In 2020 and 2019, 6.2% and 8.4%, respectively, of our gross bookings were attributable to supply provided to us by affiliates of Expedia. Expedia, the beneficial owner of 13.67% of our ordinary shares outstanding as of December 31, 2020, holds certain rights in its capacity as a shareholder. For more information on our relationship with Expedia, see “Item 7. Major Shareholders and Related Party Transactions — B. Related Party — Relationship with Expedia” for more information.
We typically do not assume inventory risk as we do not
Under the
model, the travel customer pays the hotel directly at checkout and we either receive our commission later from the hotel suppliers or from the travel customer, at the time of booking. For the year ended December 31, 2020, 87% of the hotels booked in our platform were under the
model.
pre-purchase
hotel room inventory from our hotel suppliers. Hotel suppliers are paid by one of two methods:
“pre-pay”
and
“pay-at-destination.”
pre-pay
model, our travel customer pays us at the time of booking, and we pay our hotel suppliers after the travel customer checks out. Under the
pay-at-destination
pre-pay
model and 13% under the
pay-at-destination
Other Travel Products
We also offer other travel products on our platform. We provide our travel customers access to approximately 1,260 car rental agencies, more than 180 bus carriers, six cruise carriers, approximately 850 destination services, suppliers with more than 12,000 activities, and one travel insurance supplier. While we offer both pre-pay and
options for car rentals, the other travel products that we offer must be prepaid.
pay-at-destination
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Destination Services:
in-destination
services as an opportunity for us to offer attractions, tickets, tours and activities and local concierge services to package with other products and as a way to encourage
in-destination
transactions. The wide array of options offered is intended to suit varying budgets and preferences of potential travel customers.
Car Rentals:
Cruise Tickets:
COVID-19
pandemic we are not currently offering cruise tickets. Prior to July 2020 we offered cruise tickets to travel customers in Argentina, Brazil, Chile, Colombia and Mexico and had relationships with six cruise carriers.
Travel Insurance:
Bus Tickets:
COVID-19
pandemic we are not currently offering bus tickets. Prior to July 2020 we offered bus tickets in Brazil, Mexico, Argentina, and Chile and had relationships with suppliers that gave us access to more than 180 bus carriers.
Payment Options
Credit cards are the primary means of payment for products on our platform. We allow for the use of more than one credit card in a single transaction, permitting travel customers with lower credit limits to make larger purchases. We also offer other payment alternatives including debit cards as well as several localized payment options available in the markets in which we operate.
We generally partner with banking institutions to allow our travelers the possibility of purchasing the product of their choice through financing plans established, offered and administered by the banks, which we believe differentiates us from other global travel agencies which either do not offer installment plans or offer them from a more limited selection of financing providers or in a more limited selection of countries. Local banks look to partner with us because of our scale, access to our online audience and high transaction volume. Credit card travel customers may choose from a range of installment plan offerings and terms from different financial institutions with which the travel customer holds or obtains a credit card. Many of these installment plan offerings are interest-free to the travel customer. Installment plans allow travel customers to make larger purchases than they may otherwise be able to make in a single payment.
Banks bear risk of fraud, delinquency or default by travelers. When travelers elect to finance their purchases, we typically receive full payment for our services within a short period of time after booking is completed and confirmed, regardless of the payment plan selected by the traveler. However, in certain countries, we receive payment from the bank as installments become due regardless of when traveler actually makes the scheduled payments. In most cases, we receive payment before or during travel occurs and the period between completion of booking and reception of scheduled payments is one year or less. Beginning in August 2020, through our subsidiary, Koin, we began providing financing to certain risk-profiled travelers only in Brazil. This activity has been very limited to date.
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Marketing and Affiliates
Marketing
We execute a multi-channel marketing strategy. Through this effort, we have created a long-standing brand that is associated with superior travel products, high quality services and competitive prices in Latin America. We have an experienced
in-house
marketing team dedicated to delivering efficient allocation of time and resources across media channels, without relying on outside agencies or consultants. Key elements of our marketing strategy include:
In-house
Teams.
Buy Direct.
“Always On” Strategy.
Cross-Device Insights and Custom Attribution Model and Bidding Tools.
Focus on Efficient Use of Media.
Promotions and Sales.
Affiliates
We have relationships with a network of over 7,000 affiliates, including travel agents, airlines, websites and other third parties such as online and offline retailers, in seven countries across Latin America. Our agreements with these affiliates allow them to access our product inventory directly through our platform or through our application program interface (“API”). We believe our affiliate program is attractive because we provide access to a range of travel products that our affiliates otherwise may not be able to access cost-effectively or at all. Our affiliates earn commissions from us depending on country and type of products sold. Furthermore, our affiliate program allows us to expand our footprint in Latin America and distribution network in a cost-effective manner.
Sales Call Centers
In 2018, we launched call center operations through third parties in Peru, Ecuador, Mexico, Colombia, Chile, Argentina and Brazil. Through these call centers we sell all our products, with the exception of buses, cruise lines and vacation rentals. We included our sales call number on the homepage of each website. This complements our online platform, helping us to gain new travel customers and interact with those who might not be digitally enabled. We currently have call center operations for our Despegar, Decolar, Best Day and Viajes Falabella. As part of our cost savings program in connection with the
Covid-19
pandemic, since March 2020 we reduced our call center operations.
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Acquisition of Viajes Falabella
On June 7, 2019, we completed the acquisition of Viajes Falabella in Argentina, Peru and Chile, and on July 31, 2019 we completed the acquisition of Viajes Falabella in Colombia, for a total consideration of $23 million. Of this total consideration, we have paid $17.2 million, and the remaining $5.7 million will be paid in June 2021. Concurrent with the acquisition, we entered into a
10-year
commercial agreement with Grupo Falabella which provides for several marketing and promotional activities, and other activities to promote future business, including the license for the “Viajes Falabella” brand name, for which we paid $2 million in June 2019, $1 million in June 2020 and $1 million will be paid in June 2021. The license for the ‘Viajes Falabella’ brand name is for an initial period of four years and is renewable for
one-year
periods thereafter at our option, for a
pre-agreed
price, provided that we meet a service standard set forth under the contract.
The acquisition of Viajes Falabella provides travel customers of both companies with access to an enhanced travel and tourism product and service offerings, wherever and however they want to book travel (mobile, online, apps, call center and store-within-store locations). This includes air, hotel and insurance travel packages, as well as significant
non-air
travel offerings. In addition, travel customers are able to access exclusive discounts, earn double CMR Points Falabella’s loyalty program, both at Viajes Falabella and Despegar, as well as an expanded product offering in exchange for CMR Points at Viajes Falabella. Following the acquisition of Viajes Falabella, as of December 31, 2020 we operated 85 sales travel locations in Chile, Argentina, Peru and Colombia.
Acquisition of Best Day
On January 27, 2020, we entered into an agreement to acquire Best Day, a leading travel agency in Mexico, with business in Argentina, Colombia, Brazil, Uruguay, the Dominican Republic and the United States, subject to the occurrence of certain closing and business conditions. The agreement was amended on June 11, 2020 and again on September 9, 2020. The acquisition was completed on October 1, 2020. The purchase price was fixed at $10.3 million, after application of net indebtedness and working capital adjustments, and will be payable in cash on October 1, 2023. In addition, the agreement provides for an earnout for the benefit of certain sellers ranging from $0 to $20 million, based solely on the performance of our share price during a measurement period of six months prior to the fourth anniversary of the closing date. The earnout, if any, will be payable in cash on October 1, 2024.
Viajes Beda primarily operates in Mexico and to a lesser extent in South America, including Argentina, Brazil and Uruguay among others, and the United States. Transporturist primarily operates in Mexico. Best Day primarily provides travelers with several product offerings, including airline tickets, packages, hotels and other travel-related products, through its online platforms, call centers and offline presence, and provides travel suppliers a technology platform for managing the distribution of their travel products and access to traveler customers. The Best Day also provides ground transportation services and group tours to travelers principally across the main tourist destinations in Mexico and the Dominican Republic. Best Day offers these travel products and services through its brands “Best Day” and “BD Experience”. In addition, the Best Day offers hotel inventory, as well as transfers, activities, car rental, packages and tours to travel agencies through its tradename “HotelDo,” a leading hotel wholesale aggregator in Mexico and Latin America. Best Day also provides white label services for major travel vendors, including over 70 partnerships with key players in the travel industry—airlines, hotels, retails stores and banks.
We believe that we will be able to benefit from Best Day’s brand recognition in Mexico and synergies resulting from the combination of our businesses and technology platforms. We have already migrated Best Day’s online B2C business into our platform, which is more robust than Best Day’s prior platform from a performance, conversion, fraud, errors and marketing perspective. Our increased size and presence in Mexico has also allowed us to obtain better terms from suppliers in Mexico and has made us a more attractive partner for suppliers to work with. We believe we will be able to obtain further synergies as we further integrate Best Day into our business, in particular with respect to synergies related to marketing and general and administrative expenses, expansion of
in-destination
products to other countries and cross-selling of
in-destination
products currently provided by Best Day to current customers.
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Acquisition of Koin
On August 20, 2020, we completed the acquisition of an 84% equity interest in Koin. Koin is a payment fintech which offers a financing solution to merchants’ customers, predominantly in the travel sector in Brazil. We effected the acquisition through the conversion of an outstanding trade receivable we had with Koin for $1.0 million as of the acquisition date. The former owners remained as
non-controlling
shareholders of a 16% equity interest in Koin.
As part of the acquisition, we and the
non-controlling
shareholders entered into a Shareholders’ Agreement under which we have a call option to purchase the
non-controlling
interest during a period of 36 months as from the acquisition date at a fixed price of $4.3 million. In addition, the
non-controlling
shareholders have a put option to sell their shares back to us during a period commencing on February 20, 2022 and ending August 21, 2023 at a fixed price of $2.9 million.
Customer Service
Customer experience is a key focus for our business and we believe this is reflected in our strong brand recognition and loyalty throughout Latin America. We emphasize providing personalized support throughout the customer purchase cycle, including automated
web-based
support and support from live customer service representatives.
In addition to our customer service centers in Brazil and Colombia, we rely on outsourced services to provide 24/7 support to our customers for issues that cannot be resolved through our platform. To control expenditures related to customer support, we also outsource certain functions to international call center service providers. These outsourced customer service providers support our internal call center operations and improve our ability to support travel customers around the world.
We also have implemented comprehensive performance measures to monitor our calls to ensure that our travel customers receive quality service. In addition, as a part of our customer experience we maintain a database containing travel customer transactions and user preferences for each travel customer who has booked services through us in order to provide customized support and offerings in the future. We believe that the design of our existing systems can scale to meet further increases in call volume.
In addition, during 2018 we implemented a service button on our mobile app which enables travel customers to reach our Company no matter where they are via VOIP (Voice over Internet Protocol) or
WI-FI,
at no cost.
As a result of our efforts we managed to increase our post-trip net promoter score (“NPS”) 110 basis points, up to 67.4 % during 2019, with a reduction to 59.1% during 2020.
Revenue Management
From an organizational perspective, we have consolidated revenue management, marketing and product development efforts under the umbrella of our Commercial Direction. This new structure allows us to work in a more coordinated fashion and to improve our attribution model. This newly launched attribution model includes the development of new tools and testing capabilities that allow us to enhance spending allocation and direct investments to pull the levers that are most profitable to us.
Technology and Data
We use our technology platform to improve the travel customer experience and optimize the efficiency of our business operations. We have successfully built an innovative technology culture that we believe is unique in Latin America and enables us to attract and retain some of the best talent in the region. We employ more than 650 dedicated technology professionals. We actively recruit and train these highly-skilled technology professionals and many of our current technology managers started in our training program. Given the market demand for technology professionals, we have implemented a series of incentive to retain our highly-skilled technology professionals.
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We own our technology platform, which is comprised of applications that we develop
in-house
using primarily open source software. Our technology team has adopted a continuous improvement, high-frequency testing approach to our business, aimed at improving both traffic and conversion rates, while maintaining reliability.
Our platform is engineered to provide a personalized and secure experience to our travel customers. We invest heavily in understanding our travel customers’ behavior and intentions through a combination of detailed behavioral data collection and machine learning algorithms. Our machine learning algorithms also help us detect fraud attempts. We collect, maintain and analyze behavioral data from all the devices our travel customers are using to interact with our platform. The insights derived from the analysis of this data form the basis of our enhanced conversion strategies. We use email, social media marketing and retargeting campaigns to remind travel customers of their searches.
We believe our technology can scale to accommodate significantly higher volumes of site traffic, customers, bookings and the overall growth in our business. We routinely test and expand the capacity of our servers so we are prepared to provide our travel customers with uninterrupted access to our sites during periods with high levels of user traffic, such as when we are offering promotions. Our information technology platform employs a horizontal architecture, which allows us to increase our processing capacity by adding more hardware in parallel with our existing servers. With this structure, we can grow our platform to accommodate the growth of our business with minimal disruption to the operation of our customer-facing platform and without having to replace our existing equipment.
Our system has been designed around an open architecture with a focus on robust reliability to reduce downtime in the event of outages or catastrophic occurrences. Our platform provides 24/7 availability, except during twice-monthly planned maintenance periods. Our system hardware, which we own, is hosted by a third-party data center in Miami, Florida, which also provides redundant communications lines and emergency power backup.
We believe our technology infrastructure is an important asset due to its robustness, cost-effectiveness and scalability. We continuously evaluate, research and develop new services, platforms infrastructure, and software to improve and solidify our technological systems further and provide a reliable, personalized, fast and secure experience to our travel customers.
For more information, see “—Intellectual Property” and “Item 3. Key Information — D. Risk Factors—Risks Related to Our Business—We may not be able to adequately protect and enforce our intellectual property rights; and we could potentially face claims alleging that our technologies infringe the property rights of others.”
Security, Privacy and Anti-Fraud
We are committed to operating a secure online business. We use various security methods in an effort to protect the integrity of our networks and the confidential data collected and stored on our servers. For example, we use firewalls to protect access to our networks and to the servers and databases on which we store confidential data; we restrict access to our network by virtual private network (“VPN”) with
two-factor
authentication and conduct periodic audits of data access and modifications of our network; and we use password-protected encryption technology to protect our communication channels and sensitive travel customer data. In addition, we have developed and use internal policies and procedures to protect the personal information of our travel customers, and we comply with the Payment Card Industry Data Security Standard (“PCI DSS”). To enforce our security framework we have a dedicated cybersecurity team that conducts penetration testing and application security analysis, develops policies and standards, and ensures compliance with those policies and standards.
We believe that issues relating to privacy and the use of personally identifiable information are becoming increasingly important as the internet and its commercial use continue to grow. We have adopted what we believe is a detailed privacy policy that complies with local legal requirements in each of the Latin American countries in which we operate and outlines the information that we collect concerning our users and how we use it. Users must acknowledge and expressly agree to this policy when registering with our platform, signing up for our newsletters, or making a purchase.
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Although we send marketing communications to our users periodically, we use our best efforts to ensure that we respect users’ communication preferences. For example, when users register with us, they can opt out of receiving marketing
e-mails
from us. Users can modify their communication preferences at any time in the “My Account” section of our sites.
We use information about our users for internal purposes in order to improve marketing and promotional efforts and in order to improve our content, product offerings and site layout. We may also disclose information about our users in response to legal requirements. All information is stored on our servers located in Miami, Florida.
Moreover, we are committed to detecting and deterring possible instances of fraudulent transactions before they are completed. The key components of our fraud-prevention strategy include: (1) a dedicated and specialized fraud prevention team that works closely with our IT staff; (2) engagement with key actors in the online travel industry, such as banks and airlines, which strengthens our early-detection capabilities, thereby reducing the exposure period to potential fraud events; and (3) machine learning systems that analyze multiple factors, including intelligence gathered from our industry relationships, to help us adapt better to changing market conditions and detect and address fraudulent transactions. Our
in-house
team works with third-party vendors, allowing us to leverage best practices and scale quickly.
Competition
We operate in a highly competitive and evolving market. Travelers have a range of options, both online and offline, to research, find, compare, plan and book air, packages, hotels and other travel products.
Our competitors include:
| • |
global OTAs with presence in Latin America, such as Booking.com and Expedia and travel metasearch sites;
|
| • |
search websites and apps, such as Google and its travel businesses, and
e-commerce
and group buying websites and apps;
|
| • |
alternative accommodation and vacation rental businesses, such as Airbnb;
|
| • |
local offline travel agency chains and tour operators, such as CVC Brasil Operadora e Agência de Viagens; and
|
| • |
smaller online travel agencies lacking a
pan-regional
presence.
|
In addition, our travel customers have the option to book travel directly with travel suppliers, including airlines, hotels and other travel service providers via online and offline channels. See “Item 3. Key Information — D. Risk Factors—Risks Related to Our Business—We operate in a highly competitive and evolving market, and pressure from existing and new companies may adversely affect our business and results of operations” for more information.
We believe that the primary competitive factors in the travel industry, in particular as consumers increasingly research, plan and book travel online, are, among other things, brand recognition, price, availability and breadth of choice of travel services and products, customer service, ease of use, fees charged to travelers, accessibility, reliability and adoption of
e-commerce
by travelers in the markets in which we operate. We believe our brands, scale, operational and technological capabilities, including our local knowledge, marketing expertise and technology platform, provide us with a sustainable competitive advantage.
Intellectual Property
We regard our intellectual property as critical to our future success and rely on a combination of trademark laws and contractual restrictions to establish and protect our proprietary rights in our products. Our intellectual property includes trademarks and domain names associated with the names “Despegar.com” and “Decolar.com.” To protect
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our platform and technology, we have entered into confidentiality and invention assignment agreements with our employees and certain contractors and suppliers. We own our technology platform, which is comprised of applications that we develop
third parties under all applicable laws in Latin America. For more information, see “Item 3. Key Information — D. Risk Factors—Risks Related to our Business—We may not be able to adequately protect and enforce our intellectual property rights; and we could potentially face claims alleging that our technologies infringe the property rights of others.”
in-house
using primarily open source software. We have not registered our technology, however, because we believe it would be difficult to replicate and that it is adequately protected by the agreements we have in place. Additionally, our technology is constantly evolving and any registration may run the risk of protecting outdated technology. We cannot assure you that all our intellectual property is fully protected and enforceable
vis-à-vis
Seasonality
See “Item 5. Operating and Financial Review and Prospects — Operating Results.”
Regulation
Regulations Related to the Travel Industry
The laws and regulations applicable to the travel industry affect us and our travel suppliers in the jurisdictions in which we operate, the jurisdictions in which our travel customers reside and the jurisdictions of their destinations. We are also required to be accredited by the International Air Transport Association (“IATA”) in order to promote and sell tickets for airlines connected to IATA.
Brazil
In addition to the standard licenses and permits required for all companies to operate in the travel industry in Brazil, we are subject to a specific registration of tourism providers with the Ministry of Tourism (“CADASTUR”). In Brazil, there are four main norms that govern the activities related to tourism, as well as the enrollment of services providers in the tourism industry: (i) Law No. 11,771/2008, which regulates the National Tourism Policy and defines the responsibilities of the federal government in planning, developing and stimulating the tourism sector; (ii) Decree No. 7,381/2010, which regulates Law No. 11,771/2008; (iii) Ordinance No. 130/2011 from the Ministry of Tourism, which establishes the CADASTUR, the CADASTUR’s consulting committee and regulates other measures; and (iv) Law No. 12,974/2014, which regulates the activities of tourism agencies.
Mexico
As a travel agency in Mexico, Bestday.com and Despegar.com.mx must be registered in the National Tourism Registry (
or RNT) created by Decree dated June 26, 2015. The local regulation on commercial tourism activities is comprised of: (i) General Tourism Law and its regulations, which regulate tourism, as well as the processes derived from the activities carried out by the people during their trips and temporary stays in places other than their usual environment, with leisure purposes and other reasons; (ii) the resolutions issued by the Ministry of Tourism; (iii) The Federal Consumer Protection Law and its regulations, which promote and protect consumer rights and culture and seek the equity, certainty and legal security between suppliers and consumers.
Registro Nacional de Turismo
Argentina
As a travel agency in Argentina, Despegar.com.ar must be registered with the Registry of Travel Agents (
) created by Section 5 of Decree No. 2,182/72. The local regulation on commercial tourism activities is comprised of: (i) Law 25,997 and its applicable regulation which governs the development and promotion of tourism in Argentina; (ii) Law 18,829 which defines the regulations applicable to travel agents; (iii) the resolutions issued by the Secretariat of Tourism; and (iv) Law 24,240 as amended, which sets forth the provisions for the protection of consumers.
Registro de Agentes de Viajes
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Regulations that apply to the
E-Commerce
Industry
We are also subject to a variety of laws, decrees and regulations that affect companies conducting business on the internet in the countries where we operate related to
e-commerce,
electronic or mobile payments; data collection; data protection; privacy; information requirements for internet providers; taxation (including value added taxes (“VAT”) or sales tax collection obligations); obligations to provide information to certain authorities; and other legislation which also applies to other companies conducting business in general. It is not clear how existing laws in Latin America governing issues such as general commercial activities, property ownership, copyrights and other intellectual property issues, taxation, consumer protection, digital signatures and personal privacy, apply to online businesses. Some of these laws were adopted before the internet was available and, as a result, do not contemplate or address the unique issues of the internet. Due to these areas of legal uncertainty, and the increasing popularity and use of the internet and other online services in our markets, it is possible that new laws and regulations will be adopted with respect to the internet or other online services. These regulations could cover a wide variety of issues, including
e-commerce;
internet service providers’ responsibility for third-party content hosted in their servers; user privacy; electronic or mobile payments; pricing, content and quality of products and services; taxation (including VAT or sales tax collection obligations, obligation to provide certain information about transactions that occurred through our platform, or about our users); advertising; intellectual property rights; consumer protection and information security. See “Item 3. Key Information — D. Risk Factors—Risks Related to our Business—We process, store and use personal information, card payment information and other consumer data, which subjects us to risks stemming from possible failure to comply with governmental regulation and other legal obligations” and “Item 3. Key Information — D. Risk Factors—Risks Related to our Business—Internet regulation in the countries where we operate is scarce, and several legal issues related to the internet are uncertain” for more information.
Brazil
Resolution (
) issued by the Central Bank of Brazil No. 3,682 regulates the payment arrangement (
) services in Brazil (“Payment Arrangement Services Rule”). On July 27, 2017 and March 26, 2018, the Central Bank of Brazil revoked and amended certain provisions and included new provisions to the Payment Arrangement Services Rule, which introduced a definition of sub accrediting entities (
) and determined that all participants of the payment arrangements should be subject to a centralized settlement system not later than September 28, 2018.
Circular
arranjos de pagamento
subrecendiador
Pursuant to Payment Arrangement Services Rule, among other provisions,
sub-accrediting
entity is defined as a party of the payment arrangement that accredits a recipient to accept a payment instrument issued by a payment institution or a financial institution that is a party to the same payment arrangement, but that does not participate in the settlement process of transactions as creditor in relation to the issuer. The definition of
sub-accrediting
entity provided by the Payment Arrangement Services Rule is not precise enough to confirm that our Brazilian subsidiary would be subject to it. After carrying out several discussions with the Central Bank of Brazil, financial institutions and other participants involved in the payments arrangements, our Brazilian brand Decolar demonstrated to the Central Bank of Brazil that: (i) Resolution 3,682 does not apply to its business; (ii) Decolar should not be deemed a
sub-accrediting
institution; and (iii) it should not be obliged to integrate its activities into the payment arrangement Services, nor be subject to the payment arrangement rules issued by the Central Bank of Brazil, which on September 2018 issued a list of the entities and companies which should not be subject to Resolution 3,682 as well as their classification. Decolar has been classified as a non-subaccreditor, this is a simple business establishment, and not as a marketplace entity as provided in the Resolution.
Regulations Related to Consumer and Data Protection
We are subject to consumer and data protection laws in every country where we have a website.
Brazil
There are several laws in Brazil dealing with privacy and data protection, including: (i) the Brazilian Federal Constitution, which provides for the protection of individuals’ fundamental and inviolable rights of intimacy/privacy, private life and image; (ii) the Brazilian Civil Code (Law No. 10,406/2002), which reaffirms the Federal Constitution’s provision of fundamental rights, and provides for the right to act against violators in order to
55
cease the violation and seek compensation for suffered damage; (iii) the Consumer Protection and Defense Code (Law No. 8,078/1990), which provides for consumer-related databases, data collection and penalties related therewith; (iv) the Brazilian Internet Act (Law No. 12,965/2014), which establishes principles, guarantees, rights and obligations related to the use of the internet in Brazil; and (v) the Brazilian Internet Act Regulation (Decree No. 8,771/2016), which sets forth security standards to be complied with by internet connection and application providers (online platform operators) when storing personal data.
Brazilian consumer protection authorities and courts take the view that the express consent of the consumer must be obtained before the collection, treatment, sharing and transmission of personal data. With regard to data collection, the Brazilian Internet Act provides that personal data collection, use, storage, sharing, transmission and treatment must be authorized previously and expressly by the individual, consistent with the general privacy principle set forth by the Federal Constitution and Consumer Defense Code. For the purposes of the Brazilian Internet Act and its regulation, personal data is deemed any data related to an identified or identifiable individual, including identifying numbers, location data or electronic identifiers, when related to an individual.
In addition, Law No. 9,507/1997 regulates privacy requirements and the habeas data process, by which individual citizens can ask a court to issue an order to protect, correct or remove their personal data, and recognizes consumers’ rights to access, correct and update their personal information stored in governmental or public databases. For the purposes of this law, a public database is composed of information that either: (i) is and/or may be transmitted to third parties; or (ii) is not exclusively used by the governmental agency or legal entity generating or managing the information.
As an internet-based retailer, we are also subject to several laws and regulations designed to protect consumer rights—most importantly the Consumer Protection and Defense Code, which regulates commercial practices, product and service liability, strict liability of the supplier of products or services, reversal of the burden of proof to the benefit of consumers, joint and several liability of all companies within the supply chain, abuse of rights in contractual clauses, and advertising and information on products and services offered to the public. The Consumer Protection and Defense Code establishes the legal framework for the protection of consumers, setting out certain basic rights, including the right to clear and accurate information about products and services offered in the consumer market, with correct specification of characteristics, structure, quality and price and the risks they pose. In addition, Executive Decree No. 7.962/13 applies with regards to retaining of service in an online environment. This legislation describes, among others, the rules on disclosure of information, consumer service, payment protection and other procedures for the rendering of online services.
Brazilian General Data Protection Law No. 13.709/2018
The Brazilian General Data Protection Law (Law No. 13.709/2018 – “LGPD”) was approved in August 2018 and became effective in August 2020. The grace period was proposed in order to provide public and private institutions with a period for them to adapt to the LGPD. The LGPD is applicable to any individual or legal entity governed by public or private law treating personal data (i) in the Brazilian territory; or (ii) for the purposes of offering or supplying goods or services or treating information of data subjects located in Brazil; or (iii) if personal data has been collected in the Brazilian territory.
According to the LGPD, personal data can only be processed (i) upon data subject consent; (ii) in compliance with statutory or regulatory obligations; (iii) by public administration; (iv) for development of studies by research entities; (v) by contractual and preliminary contractual relationship; (vi) through lawsuits; (vii) for the protection of life and health; (viii) to legitimate interest of the controller; or (ix) for credit protection. The treatment of sensitive personal data (e.g., regarding ethnical or racial origin, religion, political opinion or affiliation, health information, sexual orientation) is subject to a higher scrutiny. The LGPD also provides liability obligations if damages are produced while processing personal data in violation of the provisions of the LGPD.
According to the LGPD, the eight situations in which the international transfer of data is allowed are: (i) when the data subject has provided specific and highlighted consent for such transfer; (ii) when countries or international organizations provide the appropriate level of protection of Personal Data established by Brazilian law; (iii) when controller provides and demonstrates safeguards of compliance with the principles, rights of the data subject and data protection regime established in the law, in the form of specific contractual clauses for a given transfer, among
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others; (iv) when the transfer is required for international legal cooperation between public bodies of intelligence; (v) when the transfer is required for life protection of the data subject or any third party; (vi) when the national authority authorizes such transfer; (vii) when the transfer results in a commitment undertaken under an international cooperation agreement; or (viii) when the transfer is required for enforcement of a public policy.
Provisional Measure No. 869/2018 of December 27, 2018 (MP 869/2018) created the National Data Protection Authority (“ANPD”), with powers –among others– to ensure the protection of personal data, construe the provisions of the LGPD, and supervise, monitor and apply sanctions in relation to the compliance of LGPD regulation. In order to gain definitive effectiveness, MP 869/2018 must be converted into law.
Mexico
In Mexico, data protection is regulated by the Federal Law on Protection of Personal Data Held by Private Parties, which was published in the Official Gazette of the Federation (
) on July 5, 2010. This law regulates, among other things, the type of information that can be collected, and how such information can be used. In addition, Federal Consumer Protection Law includes various rights and obligations regarding transactions carried out through electronic and other means. In April 2019, the Mexican Standard
was published which, although it is not mandatory, includes a list of recommendations with the best electronic commerce practices, including data security and protection.
Diario Oficial de la Federación
NMX-COE-001-SCFI-2018
Argentina
In Argentina, we are subject to
e-commerce
laws such as Resolution No. 104/05 adopted by the Ministry of Economy and the Argentine Consumer Protection Agency, which establishes certain information requirements for internet providers, and Law No. 25,326, as amended, and its corresponding regulations, which mandate the registration of databases with the Data Protection Agency and regulate, among other things, the type of information that can be collected, and how such information can be used.
Moreover, Law No. 24,240, as amended (the “Consumer Protection Law”), sets forth certain rules and principles designed to protect consumers. The Consumer Protection Law was amended on March 12, 2008 by Law No. 26,361 in several respects, including: (i) an increase in the size of the overall group of persons deemed to be consumers, or recipients of the protections of the Consumer Protection Law; (ii) an increase in the maximum penalties applicable to providers that breach the law to AR$5 million, as discussed below, and the granting of power to the administrative authority to require the payment of direct damages by any provider; (iii) requirements that providers pay punitive damages to consumers (which may not exceed AR$5 million); and (iv) regulations regarding the possibility for consumer associations to initiate class actions on behalf of consumer groups. The Argentine Secretary of Commerce, which is part of the Argentine Ministry of Economy, is the national enforcement authority of the Consumer Protection Law, while the Autonomous City of Buenos Aires and the provinces act as local enforcement authorities.
Regulations Related to Taxation
Brazil
In Brazil, between 2011 and 2015, our Brazilian subsidiary was exempt from collection of withholding income tax (“WHT”) on remittances to cover travel expenses of Brazilian individuals abroad, within the parameters established by applicable law. From January 1, 2016 to March 1, 2016, the applicable WHT for payments, credits, delivery, use by or remittance of these amounts to foreign persons was 25%. In February 2016, our Brazilian subsidiary filed a writ of mandamus (a judicial complaint) against the federal tax authority claiming that WHT should not be applicable due to a provision of
“non-imposition”
contained in the Income Tax Regulations. In March 2016, the court granted our Brazilian subsidiary a preliminary injunction on the writ of mandamus, which allowed our Brazilian subsidiary to make remittances free of WHT while the preliminary injunction was in place. In December 2016, the court published a decision on the merits of the case, against our Brazilian subsidiary (which terminated the effects of the preliminary injunction). Also in December 2016, our Brazilian subsidiary filed a motion for clarification, in an attempt to request the court to issue an opinion on the possible application of tax treaties to allow our Brazilian subsidiary to not collect WHT on the basis of their provisions.
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Since March 2, 2016, the former WHT exemption was converted into a WHT imposition of 6% on remittances to cover travel expenses of Brazilian individuals abroad, within the parameters established by applicable law. This reduced WHT rate was effective until December 31, 2019. During 2018, while the motion for clarification was still pending, our Brazilian subsidiary deposited (via judicial deposits) the withheld amounts before the court in order to guarantee that (i) if the company is not successful in the plea before the court, the applicable WHT will be converted into income of the federal revenue, without the imposition of any fines or interest and (ii) if the company is successful in its plea, the amount corresponding to the WHT will be returned to our Brazilian subsidiary with monetary adjustments. The new Income Tax Regulation RIR/18 came into effect on November 23, 2018, repealing former Decree No. 3,000/1999. Under the new RIR/18,
non-incidence
of income tax withholdings on remittances abroad was reconsidered. On January 2020, our Brazilian subsidiary submitted a partial withdrawal from the writ of mandamus (judicial complaint), and abandoned the discussion in court, for the upcoming periods.
On November 26, 2019 a new
907/2019 came into effect. According to the new regulation, new withholding tax rates were established for remittances to cover travel expenses of Brazilian individuals abroad, with progressively increased rates starting with 7.9% in 2020, 9.8% in 2021, 11.7% in 2022, 13.7% in 2023 and 15.5% in 2024. However, on 25 May 2020, the Brazilian president vetoed the article in
907/2019, meaning that the standard withholding tax rate of 25% applies as from 25 May 2020 for remittances to cover travel expenses of Brazilian individuals abroad.
Medida Provisoria
Medida Provisoria
Argentina
IT District Parque Patricios
Since 2013 we have been the beneficiary of a partial tax exemption, applicable until January 30, 2029, under Buenos Aires Municipal Law No. 2,972, which includes, among others, the turnover tax reduction. This benefit implies the reduction, from the turnover tax, of any revenue directly connected to services performed through software applied to
in the city of Buenos Aires, only when: (i) said entity/person is registered under the Information and Communications Technologies Registry; and (ii) the entity/person keeps or increases the number of employees hired at the time of registration.
e-commerce
that are performed within the designated IT district located in
Parque Patricios
Software Law Benefits & Knowledge-Based-Economy Promotional Regime
On August 18, 2017, the Argentine National Ministry of Production issued Disposition
82-E/2017,
accepting the registration of our Argentine subsidiary in the National Registry of Software Producers, created by Decree 1315/13. As a result of this registration and pursuant to Argentine National Law No. 25,922, as amended, and its corresponding regulations (the “Software Promotion Law”), our Argentine subsidiary had been granted several tax benefits through December 31, 2019. These benefits included (i) a fixed national tax rate, (ii) a fiscal bond equivalent to 70% of the value of 75.14% of the Company’s social security tax contribution payments under Laws 19,032, 24,013 and 24,241, which can be used as a tax credit to offset national taxes; (iii) exemption from value-added tax withholding regimes; and (iv) a 60% reduction in the total amount of corporate income tax as applied to income from the activities of creation, design, development, production, implementation or adjustment (upgrade) of developed software systems and their associated documents.
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. Law No. 27,506 allows companies that were benefiting from the software development law, to apply for tax benefits under Law No. 27,506. The aforementioned regime was suspended on January 20, 2020 through a new resolution issued by Argentina’s Ministry of Productive Development until new rules for the application of the knowledge-based economy promotional regime were issued.
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In October 2020, the Argentine Congress approved a new Knowledge Based Economy Law. The approved regime is effective as of January 1, 2020 until December 31, 2029. Based on the amended promotional regime, eligible companies that meet new specified criteria, are entitled to (i) a reduction of the income tax burden up to 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) and (iii) a
non-transferable
tax credit bond generally amounting to 70% (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). The tax credit may be used to offset federal taxes, such as value-added tax and income tax.
In December 2020, the Argentine government 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 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 on services duties. On January 13, 2021, Argentina’s Ministry of Productive Development, the government entity in charge of implementing the knowledge-based economy promotional regime, issued Resolution No. 4/2021 which was followed by Disposition No. 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. We believe we are eligible to benefit from the new Knowledge Based Economy Law and related tax benefits and applied before the Argentine Ministry of Productive Development for approval to benefit from such tax regime.
Disposition No. 11/2021 issued by the Under Secretariat of Knowledge Economy established that for those beneficiaries of the former software promotion regime who have submitted their application for the new Knowledge-based regime in the terms of Resolution No. 449/19 of the former Secretariat of Entrepreneurs (as is the case of Despegar Argentina), the procedure for registration in the new regime consists of submitting a ratification note, attaching the documentation issued by the regulator regarding the normal course of promotional obligations of the law of software promotion. As of the date of this Annual Report we are awaiting the issuance of the final document to comply with the aforementioned ratification.
Income Tax Reform
On December 27, 2017, the Argentine Congress approved a comprehensive income tax reform effective since January 1, 2018. Among the key features, the bill: (i) reduces the 35% income tax rate to 30% for 2018 and 2019, and to 25% as from 2020; (ii) imposes a dividend withholding tax paid by an Argentine entity of 7% for 2018 and 2019, increasing to 13% as from 2020; and (iii) repeals the “equalization tax” (i.e., 35% withholding applicable to dividends distributed in excess of the accumulated taxable income) for income accrued from January 1, 2018.
On December 23, 2019, the Argentine Congress enacted a law which maintains the corporate income tax rate of 30% for two more years, instead of reducing the rate to 25% as established under the previous law. The law also maintains the dividend withholding tax rate of 7% for two more years, instead of applying the 13% rate as previously established.
Tax on Export of Services
In September 2018, the Argentine government issued the Decree 793/2018 which established a temporary withholding on exports of services of 12% with a maximum limit of AR$ 4 per each dollar of the export invoice amount. This withholding on exports of services was applicable for exports of years 2019 and 2020. On December 2019, Decree No. 99/2019 reduced the percentage from 12% to 5% without limit of Argentine pesos per dollar, to become effective since January 1, 2020 until December 31, 2021.
In December 2020 the Argentine government issued Decree 1034/2020, which regulates the Knowledge Based Economy Law, provides that duties on export services will be taxed at a 0% tax rate when such services are exported by entities registered under the Registry of Beneficiaries of the Knowledge Based Economy Promotional Regime.
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Additionally, Resolution 4/2021, published on January 14, 2021, provides that this tax benefit will apply to services exported by beneficiaries of the regime since their registration in the relevant registry. However, for those entities that were registered under the Software Promotion Law, the registration under the Knowledge Based Economy Law will be granted as from January 1, 2020 and the 0% tax rate will be applicable for services exported from the date in which Decree 1034/2020 entered into force (December 22, 2020).
We believe our Argentine subsidiary is eligible to benefit from the new 0% export tax rate in the Knowledge Based Economy Law. Our Argentine subsidiary has applied before the Argentine Ministry of Productive Development for approval to benefit from such tax regime. Disposition No. 11/2021 issued by the Under Secretariat of Knowledge Economy established that for those beneficiaries of the former software promotion regime who have submitted their application for the new Knowledge-based regime in the terms of Resolution No. 449/19 of the former Secretariat of Entrepreneurs (as is the case of Despegar Argentina), the procedure for registration in the new regime consists of submitting a ratification note, attaching the documentation issued by the regulator regarding the normal course of promotional obligations of the law of software promotion. As of the date of this Annual Report we are awaiting the issuance of the final document to comply with the aforementioned ratification.
New Reverse Withholding Tax for an Inclusive and Solidarity Argentina (PAIS) and General Resolution No. 4815/2020.
Effective as of December 23, 2019, a new reverse withholding tax (Tax for an Inclusive and Solidarity Argentina (PAIS)) was created in Argentina. The new 30% tax applies on the purchases by Argentinean residents of foreign services through credit and debit cards; services to be provided outside Argentina, contracted through Argentine travel and tourism agencies –wholesale or retailers–; and the acquisition of international passenger transport services (by land, air, aquatic and road). Furthermore, the Argentine Federal Tax Authorities (AFIP) issued on September 16, 2020 General Resolution No. 4815/2020, which imposes an additional 35% reverse withholding tax applicable on same transactions by Argentine residents.
Uruguay and Others
We operate as a free trade zone user of the Zonamerica Free Trade Zone in Montevideo, Uruguay (the “Free Trade Zone”), under Law No. 15,921 and its corresponding regulations. No domestic Uruguayan tax whatsoever applies in the Free Trade Zone, except for social security contributions for any Uruguayan employees. No social security contributions are required for
or “IEI”). On the other hand, if goods are introduced into a
non-Uruguayan
employees, so long as they do not exceed 25% of the personnel working in the facility located in the Free Trade Zone. In addition, the inflow of goods and services to the Free Trade Zone, as well as their outflow abroad, are tax exempt. The movement of goods and services into a Free Trade Zone from a
non-Free
Trade Zone Uruguayan territory is treated as an export and therefore also exempt from VAT and the Specific Internal Tax (
Impuesto Específico Interno
non-Free
Trade Zone Uruguayan territory from a Free Trade Zone, the corresponding import tax will apply. Exporting services from a Free Trade Zone to a
non-Free
Trade Zone Uruguayan territory is generally prohibited. However, in 2016, our Uruguay subsidiary located in the Free Trade Zone was authorized by the Ministry of Economy in Uruguay to have limited operations with a related party located in Uruguay. By law, the Uruguayan state is liable for damages if the tax exemptions, benefits and rights of users of Free Zones granted pursuant to the law are not fulfilled during the term of their contracts.
We have operated as a free trade zone user in Bogotá, Colombia under Decree 2147 until December 31, 2019. Based on the regime, we received certain tax benefits, consisting primarily of a reduced income tax rate. Since January 1, 2020 our Colombian subsidiary after a corporate reorganization is no longer beneficiary of free trade tax benefits.
Regulations Related to Foreign Currency and Exchange Rates
There are also laws and regulations that address foreign currency and exchange rates in many of the countries in which we operate. In certain countries where we operate, we need governmental authorization to pay invoices to a foreign supplier or send money abroad due to foreign exchange restrictions. See “Item 3. Key Information — D. Risk Factors—Risks Related to Latin America—We are subject to significant foreign currency exchange controls in certain countries in which we operate.”
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Legal Proceedings
We are a party to various lawsuits and claims arising out of the ordinary course of business. We estimate the range of our liability related to pending litigation when we believe the amount or range of loss can be estimated. We record our best estimate of a loss when the loss is considered probable. When a liability is probable and there is a range of estimated loss with no best estimate in the range, we record the minimum estimated liability related to the lawsuits or claims. As additional information becomes available, we assess the potential liability related to our pending litigation and claims and revise our estimates. Due to uncertainties related to the resolution of lawsuits and claims, the ultimate outcome may differ significantly from our estimates. In the opinion of management and based on liability accruals provided, our ultimate exposure with respect to these pending lawsuits and claims is not expected to have a material adverse effect on our consolidated financial position or cash flows, although they could have a material adverse effect on our results of operations for a particular reporting period.
As of December 31, 2020, we have reserved $10.0 million to cover for probable losses.
We are currently not a party to any legal, arbitration or administrative proceedings that, in the opinion of our management, is likely to have a material and adverse effect on our business, financial condition and results of operations, other than as set forth below.
Brazil
Between May and July 2016, Booking.com filed several complaints against us before various public offices: Public Prosecution Office of the State of Rio Grande do Sul, Public Prosecution Office of the State of São Paulo, Consumer Defense Office of the State of Rio de Janeiro, Consumer Defense Office of the State of São Paulo (“PROCON”), Consumer Defense Office of the Department of Justice, Consumer Defense Committee of the Legislative Assembly of the State of Rio de Janeiro and the Public Prosecution Office of the State of Rio de Janeiro. Booking.com alleged that (i) we offered higher prices to Brazilian consumers than those offered to foreign consumers for the same accommodation during the same period of time (“geopricing”) and (ii) we made accommodations unavailable for Brazilian consumers whereas foreign consumers were allowed to book the same accommodations (“geoblocking”). Based on these allegations, Booking.com requested that the public prosecution offices order us to pay penalties and/or to initiate public civil actions against us in order to prevent the alleged practices. We presented our administrative defenses to all claims. Such complaints resulted in investigation proceedings with the respective authorities.
In June 2018 the Consumer Defense Office of the Department of Justice issued a decision against Decolar and condemned it to pay a fine in the amount of R$7.5 million, on the grounds of alleged geopricing and geoblocking practices and obligated Decolar to cease such practices. We appealed such decision. The proceeding filed before PROCON originally closed in favor of Decolar; however, on January 23, 2020, the same Office issued a new resolution imposing a fine against Decolar in the amount of R$1.2 million. In March 2020 Decolar filed its defense, which evidences the inconsistencies in PROCON’S resolution, especially considering the former favorable decision. We are currently waiting for PROCON’s decision.
In January 2018, the Public Prosecutor’s Office of the State of Rio de Janeiro filed a public civil action against us in the Rio de Janeiro court. This complaint also refers to the alleged geopricing and geoblocking practices in detriment to Brazilian consumers and seeks the cessation of the practice and payment of damages. We filed our defense on March 20, 2018 and provided evidence that we weren’t engaging in those alleged practices. However, the Rio de Janeiro Public Attorney Office requested to the court the suspension of the injunction granted to Decolar, not to seal (classify) Decolar’s defense, and make public available Decolar’s defense documentation. Decolar appealed and the court kept its defense sealed and private; however the court decided to start the phase of “expert examination”, which has not started yet.
Although we believe our Brazilian subsidiary has meritorious defenses to this lawsuit and administrative proceedings, we cannot assure you what the ultimate outcome of this matter will be. The final resolution of these claims, which could take several years, is not likely to have a material effect on our financial position or results of operations.
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Mexico
As in Brazil and Argentina, Booking.com filed a claim in Mexico accusing our Mexican subsidiary of carrying out certain illegal practices (geopricing and geoblocking) by favoring foreign consumers versus local consumers. The claim was filed before the Office of the Federal Prosecutor for the Consumer in 2019 and we were notified in February 2021. In March, 2021 Despegar filed its response rejecting the plaintiff’s allegation.
Argentina
On June 28, 2017, the
(Union for Employees of the Commercial Sector in the City of Buenos Aires, or “SECCF”) filed a lawsuit against our Argentine subsidiary, Despegar.com.ar, in which SECCF demanded the application of its collective labor agreement to all of the employees of the subsidiary. According to SECCF’s claim, Despegar.com.ar should have withheld and transferred to SECCF an amount equal to 2% of the gross monthly salaries of all of its employees for the period from October 2011 through October 2016. As a result, SECCF seeks payment of approximately AR$18 million. On April 19, 2018 SECCF filed a new claim, similar to the previous one, but against La Inc S.A.—an Argentine subsidiary company that had already been merged with Despegar.com.ar several months before. In this new claim, SECCF sought an amount equal to the 0.5% of the gross monthly salaries of La Inc’s employees for certain periods (July and August, 2012; September, 2013; and March, 2015 to the present).
Sindicato Empleados de Comercio de Capital Federal
We filed both responses in a timely manner, rejecting all the claims, with similar defenses. On May, 2019 we reached a settlement with SECCF in both proceedings, in which we accepted to execute a new labor collective agreement with the union, including certain employees, and the union agreed to withdraw these claims. The new collective agreement came into effect in April 2020.
As in Brazil, Booking.com filed two claims in Argentina accusing our Argentine subsidiary of carrying out certain illegal practices (geopricing and geoblocking) by favoring foreign consumers versus local consumers. The claims were filed before the National Consumer Protection Office (August 2019), and the National Unfair Competition Office (November 2019). In the first claim, Despegar filed its response rejecting plaintiff’s allegation and introducing a counterclaim, asserting that it was Booking.com and not Despegar who carried out misleading practices against consumers. We also accused Booking of lacking the compulsory license granted by the Tourism Ministry to sell tourism products in Argentina. On December 23, 2019 the National Consumer Protection Office rejected the claim filed by Booking and ordered an investigation against it, to be carried out before the National Ministry of Tourism. In the second claim (filed before the National Unfair Competition Office in November 2019) we filed our response rejecting plaintiff’s allegation on the same basis used on the case before the Consumer Protection Office. The Unfair Competition Office is in the process of collecting evidence. We believe that the final resolution of this claim is not likely to have a material effect on our financial position or results of operations.
Colombia
As in Brazil, Argentina and Mexico, in 2018 Booking.com filed a claim in Colombia accusing our Colombian subsidiary of carrying out certain illegal practices (geopricing and geoblocking) by favoring foreign consumers versus local consumers.The administrative claim before the Consumer Defense Office (“SIC”) has been pending since 2018. Pursuant to applicable law, the SIC had until April 1, 2021 to issue a decision on this matter. As of the date of this Annual Report the SIC has not issued a decision and, therefore, we believe this claim should be closed in favor of Despegar.
|
C.
|
Organizational Structure
|
Despegar.com, Corp. is a holding company organized in the British Virgin Islands, which owns, directly or indirectly, all of our operating subsidiaries. The diagram below depicts the organizational structure of our key subsidiaries:
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Property, Plants and Equipment
The following table shows the location of our significant leased offices and customer service centers, and the term of the leases under which they operate.
|
City, Country
|
Facility
|
Address
|
Approximate
Square Meters |
Agreement
Expiration Date |
||||||
| Buenos Aires Argentina | Argentina operation and regional functions | Avenida Corrientes 746, 6th Floor | 406 | 02/28/2023 | ||||||
| Buenos Aires, Argentina | Argentina operation and regional functions | Juana Manso 1069, 5 Floor | 1,203 | 05/21/2022 | ||||||
| La Plata, Buenos Aires Argentina | Argentina operation | Camino Centenario esq. 511, La Plata | 2,600 | 08/31/2022 | ||||||
| Bogotá, Colombia | Colombia operation and customer service center |
Interior 101, Manzana 15,
Carretera 106 Nbr.
15A-25,
Free Trade Zone |
1,754 | 02/23/2021 | ||||||
| Montevideo, Uruguay | International Hotels, Packages and Other Travel Products operations and Shared service center |
Ruta 8 Km. 17,500, local 318,
edificio 300, Zonamerica |
2,092 | 09/14/2020 | ||||||
| Sao Paulo, Barueri, Brazil | Brazil operation | Alameda Grajuá 219 | 5,600 | 08/16/2023 | ||||||
| Ciudad de Cancún | Quintana Roo | Av. Bonanpak Sm 10 Mz 2 Lote 7 | 4,478 | 10/31/2024 | ||||||
We also own two properties: (i) an approximately 2,077 square meter facility at Jujuy 2013 in the Parque Patricios tech district of Buenos Aires, Argentina, which houses part of our Argentina operations including IT support, and (ii) an approximately 223 square meter facility on Avenida Francisco de Miranda in Caracas, Venezuela, which is currently unused and previously housed our Venezuela operations.
As part of our Mexican operations, Best Day leases approximately 78 small kiosks, mainly in hotels and shopping centers, which house part of our sales operations and approximately 95 vans for providing transportation to customers who contract destination services.
Our properties are geographically distributed to meet our regional operating requirements, and none of our properties are individually material to our business operations. Many of our leases have an option to renew, and we believe that we will be able to successfully renew expiring leases on terms satisfactory to us if needed. We believe that our facilities are adequate for our operations and that suitable additional space will be available when needed.
|
ITEM 4A.
|
UNRESOLVED STAFF COMMENTS
|
None.
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|
ITEM 5
|
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
|
|
A.
|
Operating Results
|
Overview
We are the leading online travel company in Latin America, mainly known by our two brands, Despegar, our global brand, and Decolar, our Brazilian brand. In Mexico we are best known by our brand Best Day, which we acquired in October 2020. We have a comprehensive product offering, including airline tickets, packages, hotels and other travel-related products, which enables consumers to find, compare, plan and purchase travel products easily through our marketplace. We provide our network of travel suppliers a technology platform for managing the distribution of their travel products and access to our travel customers.
During 2020 and 2019, we had approximately 2.5 million and 5.2 million travel customers, respectively. For the years ended December 31, 2020 and 2019, our gross bookings were $1.4 billion and $4.7 billion, respectively.
All percentages within this section are calculated on actual, unrounded numbers.
Item 5 of this Annual Report on Form
20-F
discusses the Company’s operating and financial review and prospects as of and for the fiscal years ended December 31, 2020 and 2019. Item 5 “A. Operating and Financial Review and Prospects—Operating Results—Results of Operations—Year Ended December 31, 2019 Compared to Year Ended December 31, 2018,” Item 5 “Operating and Financial Review and Prospects—B. Liquidity and Capital Resources” and Item 5 Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Cash Flows—Cash Flows for the Year Ended December 31, 2019 Compared to Year Ended December 31, 2018” included in our Annual Report on Form
20-F
for the fiscal year ended December 31, 2019 filed with the SEC on April 10, 2020 are incorporated herein by reference.
Segments
We organize our business into two reportable segments: (1) “Air” and (2) “Packages, Hotels and Other Travel Products”. Our Air segment offers travelers the possibility of purchasing airline tickets from airlines around the world. Our Packages, Hotels and Other Travel Products offers travelers the possibility of purchasing travel packages (which can include airline tickets and hotel rooms), as well as stand-alone sales of hotel rooms (including vacation rentals), car rentals, bus tickets, cruise tickets, travel insurance and destination services.
In 2020, 47.8% and 52.2 % of our total consolidated revenue was derived from our Air and our Packages, Hotels and Other Travel Products segments, respectively. In 2019, 38.4% and 61.6% of our total consolidated revenue was derived from our Air and our Packages, Hotels and Other Travel Products segments, respectively.
For the years ended December 31, 2020 and 2019, we generated:
| • |
Consolidated net revenue of $131.3 million and $524.9 million, respectively;
|
| • |
Consolidated operating losses of $177.2 million and $8.9 million, respectively;
|
| • |
Consolidated net losses of $142.9 million and $20.9 million, respectively;
|
| • |
Consolidated Adjusted Segment EBITDA attributable to our Air segment of $(32.9) million and $3.3 million, respectively.
|
| • |
Consolidated Adjusted Segment EBITDA attributable to our Packages, Hotels and Other Travel Products segment of $(82.4) million and $36.5 million, respectively.
|
| • |
Consolidated Adjusted Segment EBITDA that is not allocated to either of our segments of $(6.5) million and $(13.2) million, respectively.
|
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| • |
Consolidated Adjusted EBITDA of $(121.8) million and $26.6 million, respectively.
|
Trends
Impact of
COVID-19
The
COVID-19
pandemic, and measures to contain the virus, including government travel restrictions and quarantine orders, have had a significant negative impact on the travel industry.
COVID-19
has negatively impacted consumer sentiment and consumer’s ability to travel, and many of our supply partners, particularly airlines and hotels, continue to operate at reduced service levels. As the spread of the virus has been contained to varying degrees in certain countries, some travel restrictions have been lifted and consumers have become more comfortable traveling, particularly to domestic locations. This has led to a moderation of the declines in travel bookings and in cancellation rates compared to the March and April 2020 time period. However, travel booking volume remains significantly below prior year levels and cancellation levels remain elevated compared to
pre-COVID
levels. Furthermore, new variants of
COVID-19
have been discovered and raise concern about new reinfections. We cannot predict how long the
COVID-19
pandemic will continue or how long current or future travel restrictions will remain in place.
The degree of containment of the virus, and the recovery in travel, has varied country by country. During the recovery period, there have been instances where cases of
COVID-19
have started to increase again after a period of decline, which in some cases impacted the recovery of travel in certain countries. While many countries have begun the process of vaccinating their residents against
COVID-19,
the large scale and challenging logistics of distributing the vaccines, as well as uncertainty over the efficacy of the vaccine against new variants of the virus, may contribute to delays in economic recovery.
COVID-19
has also had broader economic impacts, including an increase in unemployment levels and reduction in economic activity, which could lead to recession and further reduction in consumer or business spending on travel activities, which may negatively impact the timing and level of a recovery in travel demand. Broader, sustained negative economic impacts could also put strain on our suppliers, business and service partners which increases the risk of credit losses and service level or other disruptions.
Our financial and operating results for 2020 were significantly impacted due to the decrease in travel demand related to
COVID-19.
During the second, third and fourth quarters of 2020, our gross bookings declined by 83% as compared to the corresponding nine-month period of 2019. During the second quarter of 2020, our gross bookings declined by 94% compared to the first quarter of 2020. During the third quarter of 2020, our gross bookings increased by 238% compared to the second quarter of 2020 and during the fourth quarter of 2020, our gross bookings increased by 143% compared to the third quarter of 2020. We expect the impact to the overall travel market, and our business, to continue into 2021. The full duration and total impact of
COVID-19
remains uncertain and it is difficult to predict how the recovery will unfold for the travel industry and, in particular, our business. Additionally, further health-related events, political instability, geopolitical conflicts, acts of terrorism, significant fluctuations in currency values, sovereign debt issues, and natural disasters, are examples of other events that could have a negative impact on the travel industry in the future.
Following the onset of the
COVID-19
pandemic, we accelerated the execution of several cost saving and cash preservation initiatives. As such, we implemented several actions aimed at reducing our costs and our monthly cash usage. These actions included (i) temporarily reducing salaries of our senior and middle management; (ii) suspending bonuses to all employees; (iii) reducing part of our workforce and implementing a hiring freeze and limiting inflation salary increases; (iv) reducing working hours and implementing unpaid leave in certain locations; (v) accelerating synergies from acquisitions; (vi) renegotiating supplier payment terms and conditions; (vii) reviewing and renegotiating, to the extent possible, all contracts and commitments; (viii) reducing marketing expenses and
(ix) deferring non-critical capital
expenditures. As a result, we recognized $13.0 million in headcount reduction benefits during the year ended December 31, 2020. During the quarter ended March 31, 2021, we incurred additional severance costs of $1.1 million and we expect to incur a similar amount in April 2021. The full duration and total impact of
COVID-19
remains uncertain and it is difficult to predict how the recovery will unfold for global economies, the travel industry or our business. As a result, we continue to actively evaluate additional cost reduction efforts, and should we make decisions in future periods to take further actions we will incur additional reorganization charges.
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We also engaged in certain smaller scale restructure actions in 2020 to centralize certain operational functions and systems, for which we recognized $0.4 million in reorganization charges during the year ended December 31, 2020, which were primarily related to anticipated termination of several office leases.
While some cost reduction measures taken during the
COVID-19
pandemic are temporary and intended to minimize cash usage during this disruption, we expect to continue to benefit from the majority of the savings when business conditions return to more normalized levels.
Long-term trends
We believe that our results of operations and financial performance will be driven primarily by the following long-term trends:
| • |
Growth in and Retention of our Traveler Customer Base
|
| • |
Cross-Selling
|
| • |
Changes in Product Mix and New Product Offerings
|
| • |
Shift to Mobile Transactions
|
| • |
Selling and Marketing Expenditures
COVID-19
pandemic, we reduced our selling and marketing expenditures by 70% compared to 2019.
|
67
| • |
Integration of recent acquisitions
|
Recent Acquisitions
In June 2019 we acquired the Viajes Falabella travel companies in Chile, Argentina and Peru and in July 2019, we acquired Viajes Falabella which we consolidated for six months in our fiscal year 2019 as compared to twelve months in our fiscal year 2020.
In August 2020, we acquired Koin which we consolidated for four months in our fiscal year 2020.
In October 2020, we acquired the Best Day Group which we consolidated for three months in our fiscal year 2020.
Therefore, the comparison of our results of operations for 2020 to 2019 are affected by the timing and size of our acquisitions.
Seasonality
We generally experience seasonal fluctuations in the demand for our travel services. Our most significant market, Brazil, and the rest of South America were we operate, are located in the Southern hemisphere where summer runs from December 1 to February 28 and winter runs from June 1 to August 31. Our most significant market in the Northern hemisphere is Mexico where summer runs from June 1 to August 31 and winter runs from December 1 to February 28. Accordingly, traditional leisure travel bookings in the Southern hemisphere are generally the highest in the third and fourth quarters of the year as travelers plan and book their winter and summer holiday travel. The number of bookings typically decreases in the first quarter of the year. In the Northern hemisphere, bookings are generally the highest in the first three quarters as travelers plan and book their spring, summer and winter holiday travel. The seasonal revenue impact is exacerbated with respect to income by the nature of variable cost of revenue and direct sales and marketing costs, which is typically realized in closer alignment to booking volumes, and the more stable nature of fixed costs.
The continued growth of international operations or a change in product mix may influence the typical trend of the seasonality in the future, and there may also be business or market driven dynamics that result in short-term impacts to revenue or profitability that differ from the typical seasonal trends.
Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these consolidated financial statements may not be the same as those for any subsequent quarter or the full year.
Due to the
COVID-19
pandemic, which led to significant cancellations for future travel during the second and third quarters of 2020 and impacted new travel bookings for the the last three quarters of 2020, we did not experience our typical seasonal pattern for bookings, revenue and profit during 2020. In addition, with the decrease in new bookings and increase cancellations in 2020, our typical, seasonal working capital source of cash was significantly disrupted, resulting in unfavorable working capital trends and material negative cash flow since the second quarter of 2020 when we typically generate significant positive cash flow. Seasonal trends were more normalized during the fourth quarter of 2020, but it is difficult to forecast the seasonality for the upcoming quarters, given the uncertainty related to the duration of the impact from
COVID-19
pandemic and the shape and timing of any sustained recovery. In addition, we are experiencing much shorter booking windows, which could also impact the seasonality of our working capital and cash flow.
Critical Accounting Policies and Estimates
Critical accounting policies and estimates are those that we believe are important in the preparation of our consolidated financial statements because they require that we use judgment and estimates in applying those policies. We prepare our consolidated financial statements and accompanying notes in accordance with generally
68
accepted accounting principles in the United States (“GAAP”). Preparation of the consolidated financial statements and accompanying notes requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements as well as revenue and expenses during the periods reported. We base our estimates on historical experience, where applicable, and other assumptions that we believe are reasonable under the circumstances. Actual results may differ from our estimates under different assumptions or conditions. There are certain critical estimates that we believe require significant judgment in the preparation of our consolidated financial statements. We consider an accounting estimate to be critical if:
| • |
it requires us to make an assumption because information was not available at the time or it included matters that were highly uncertain at the time, we were making the estimate; and
|
| • |
changes in the estimate or different estimates that we could have selected may have had a material impact on our financial condition or results of operations.
|
For more information on each of these policies, see Note 3 — Significant Accounting Policies, in the notes to our consolidated financial statements. We discuss information about the nature and rationale for our critical accounting estimates below.
Recoverability of Goodwill and Indefinite and Definite-Lived Intangible Assets
Goodwill.
We generally base our measurement of fair value of reporting units on an analysis of the present value of future discounted cash flows. The discounted cash flows model indicates the fair value of the reporting units based on the present value of the cash flows that we expect the reporting units to generate in the future. Our significant estimates in the discounted cash flows model include: our weighted average cost of capital, long-term rate of growth and profitability of our business and working capital effects.
We believe the weighted use of discounted cash flows is the best method for determining the fair value of our reporting units because these are the most common valuation methodology used within the travel and internet industries.
Indefinite-Lived Intangible Assets
Definite-Lived Intangible Assets
69
The use of different estimates or assumptions in determining the fair value of our goodwill, indefinite-lived and definite-lived intangible assets may result in different values for these assets, which could result in an impairment or, in the period in which an impairment is recognized, could result in a materially different impairment charge.
Business Combinations
We assign the value of the consideration transferred to acquire a business to the tangible assets and identifiable intangible assets acquired and liabilities assumed on the basis of their fair values at the date of acquisition. Any excess purchase price over the fair value of the net tangible and intangible assets acquired is allocated to goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions, in particular with respect to intangible assets. Critical estimates in valuing certain intangible assets include but are not limited to future expected cash flows from customer relationships and trade names, and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.
Other Long-Term Liabilities
Various Legal and Tax Contingencies
Non-Convertible Preferred
Stock and Warrant Transaction
In September 2020, we completed the issuance and sale of our Series A Preferred Shares and Warrants to purchase our ordinary shares to LCLA Daylight LP, an affiliate of L Catterton Latin America III, L.P. pursuant to an Investment Agreement dated August 20, 2020. We issued and sold 150,000 shares of our newly created Series A Preferred Shares, no par value per share and Warrants to purchase 11,000,000 ordinary shares, no par value, for an aggregate purchase price of $150 million. As of the date of this Annual Report, LCLA Daylight LP has not exercised the Warrants.
In accordance with U.S. GAAP, the gross proceeds from the sale were allocated to
the non-convertible preferred
stock and warrants on a relative fair value basis. In determining the fair value of the Series A Preferred Shares, we primarily used discounted cash flow analyses. Inputs to the discounted cash flow analyses and other aspects of the valuation require judgment. The more significant inputs used in the discounted cash flow analyses and other areas of judgment include assumptions on term, cash flows, and market yield. In determining the fair value of the Warrants, we primarily used the Black Scholes Option Pricing Model (“BSOPM”). Inputs to the BSOPM and other aspects of the valuation require judgment. The more significant inputs used in the BSOPM and other areas of judgment include the starting stock price or value of the underlying assets, the strike price, the time to expiration, and volatility and risk-free rate. In order to consider
the two-year transfer
restriction of the Warrants, considered to be security specific, we applied a Discount for Lack of Marketability with the Finnerty Method.
Income Taxes
We account for income taxes under the asset and liability method that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been
70
recognized in our financial statements or tax returns. Variations in the actual outcome of these future tax consequences could materially impact our financial position, results of operations or effective tax rate.
Significant judgment is required in determining our worldwide income tax provision. In the ordinary course of a global business, there are many transactions and calculations where the ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of revenue sharing and cost reimbursement arrangements among related entities, the process of identifying items of revenues and expenses that qualify for preferential tax treatment, and segregation of foreign and domestic earnings and expenses to avoid double taxation. Although we believe that our estimates are reasonable, the final tax outcome of these matters could be different from that which is reflected in our historical income tax provisions and accruals. Such differences could have a material effect on our income tax provision and net income in the period in which such determination is made.
In estimating future tax consequences, all expected future events are considered other than enactments of changes in tax laws or rates. Valuation allowances are established when necessary to reduce deferred tax assets to amounts which are more likely than not to be realized. We consider future growth, forecasted earnings, future taxable income, the mix of earnings in the jurisdictions in which we operate, historical earnings, the carryforward periods available for tax reporting purposes and prudent and feasible tax planning strategies in determining the need for a valuation allowance. In the event we were to determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets valuation allowance would be charged to earnings in the period in which we make such a determination, or goodwill would be adjusted at our final determination of the valuation allowance related to an acquisition within the measurement period. If we later determine that it is more likely than not that the net deferred tax assets would be realized, we would reverse the applicable portion of the previously provided valuation allowance as an adjustment to earnings at such time.
The amount of income tax we pay is subject to ongoing audits by federal, state and foreign tax authorities, which often result in proposed assessments. Our estimate of the potential outcome for any uncertain tax issue is highly judgmental. We account for these uncertain tax issues pursuant to ASC 740, Income taxes, which contains a
two-step
approach to recognizing and measuring uncertain tax positions taken or expected to be taken in a tax return. The first step is to determine if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given with respect to the final outcome of these matters. We adjust reserves for our uncertain tax positions due to changing facts and circumstances, such as the closing of a tax audit, judicial rulings, refinement of estimates or realization of earnings or deductions that differ from our estimates. To the extent that the final outcome of these matters is different than the amounts recorded, such differences generally will impact our provision for income taxes in the period in which such a determination is made. Our provisions for income taxes include the impact of reserve provisions and changes to reserves that are considered appropriate and also include the related interest and penalties.
We treat taxes on global intangible
low-taxed
income (“GILTI”) introduced by the U.S. Tax Cuts and Jobs Act (the “Tax Act”) as period costs. See Note 19 to our consolidated financial statements for further additional information related to our income taxes.
Stock-Based Compensation
We measure the value of stock option awards on the date of grant at fair value using the appropriate valuation techniques, including the Black-Scholes and Monte Carlo option-pricing models. We amortize the fair value over the remaining term on a straight-line basis. We account for forfeitures as they occur. The pricing models require various highly judgmental assumptions including volatility and expected option term. If any of the assumptions used in the models change significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period.
Recently Issued and Not Yet Adopted Accounting Pronouncements under U.S. GAAP
For information on recently issued accounting pronouncements under U.S. GAAP, see Note 3 to our consolidated financial statements
71
Goodwill Impairment Testing:
As of December 31, 2020, we had an aggregate amount of goodwill of $123.2 million (of which $37.9 million relates to our Air segment and $85.3 million relates to our Packages, Hotels and Other Travel Products Segment) compared to $47.0 million as of December 31, 2019. The significant increase in goodwill was related to our recent acquisitions of Koin in August 2020 and Best Day in October 2020, which resulted in an aggregate increase of $73.3 million in goodwill.
Our reporting units are components which are one level below our operating segments and are primarily comprised by the country and brand (Despegar, Viajes Falabella and Best Day) where each set of travel products (air and packages, hotels and other travel products) are offered.
We perform our annual assessment of possible impairment of goodwill as of December 31, 2020, or more frequently if events and circumstances indicate that an impairment may have occurred. Due to the
COVID-19
pandemic and its impact on our business, we conducted interim impairment assessments of goodwill during the year ended December 31, 2020. We had no impairments of goodwill during the interim periods.
As of December 31, 2020, we recognized an impairment charge of $0.6 million related to the goodwill allocated to one reporting unit (related to our acquisition in 2019 of Viajes Falabella in Argentina). This reporting unit remains at risk although remaining goodwill allocated is not material and amounts to $0.2 million as of December 31, 2020.
We compared the fair value of the reporting units to their carrying values. The fair value estimates for all reporting units were based on a weighted-probability analysis of the present value of future discounted cash flows, Level 3 inputs. The significant estimates used in the discounted cash flows model included our weighted average cost of capital, projected cash flows and the long-term rate of growth. Our assumptions were based on the actual historical performance of the reporting unit and took into account the challenging global industry and market conditions and recent severe and continued weakening of operating results as well as the anticipated rate of recovery, and implied risk premiums based on market prices of our equity and debt as of the assessment dates. The full duration and total impact of
COVID-19
remains uncertain and it is difficult to predict how the recovery will unfold for global economies, the travel industry or our business. As a result, we may record impairment charges in the future due to the potential long-term economic impact and near-term financial impacts of the
COVID-19
pandemic.
Based on our analysis, we concluded that the estimated fair value for each of our reporting units, as of December 31, 2020, was reasonable. In each case, the estimated fair value exceeded the respective carrying value. We concluded that the goodwill assigned to each reporting unit, as of December 31, 2020, was not impaired and that neither reporting unit was at risk of failing the goodwill impairment test as prescribed under U.S. GAAP.
Operating and Financial Metrics
Our operating results are affected by certain operating metrics, such as number of transactions and gross bookings, which we believe are necessary for understanding and evaluating our company. We also regularly review the following key financial metrics to evaluate our business, measure our performance, identify trends in our business, prepare financial projections and make strategic decisions:
|
Year Ended December 31,
|
||||||||||||
|
2020
|
2019
|
% of
Change |
||||||||||
|
In thousands
|
||||||||||||
|
Operational Metrics
|
||||||||||||
|
Number of transactions
|
||||||||||||
|
By country
|
||||||||||||
|
Brazil
|
1,940 | 4,121 | (52.9 | ) | ||||||||
|
Argentina
|
457 | 2,324 | (80.3 | ) | ||||||||
|
Mexico
|
803 | 1,542 | (47.9 | ) | ||||||||
|
Other
|
891 | 2,691 | (66.9 | ) | ||||||||
|
|
|
|
|
|
|
|||||||
|
Total number of transactions
|
4,091 | 10,678 |
|
(61.7
|
)
|
|||||||
|
By segment
|
||||||||||||
|
Air
|
2,435 | 6,220 | (60.9 | ) | ||||||||
|
Packages, Hotels and Other Travel Products
|
1,656 | 4,458 | (62.9 | ) | ||||||||
|
|
|
|
|
|
|
|||||||
|
Total number of transactions
|
4,091 | 10,678 |
|
(61.7
|
)
|
|||||||
72
|
Year Ended December 31,
|
||||||||||||
|
2020
|
2019
|
% of
Change |
||||||||||
|
In thousands
|
||||||||||||
|
Gross Bookings
|
||||||||||||
|
By country
|
||||||||||||
|
Brazil
|
591,749 | 1,878,312 | (68.5 | ) | ||||||||
|
Argentina
|
206,871 | 1,027,359 | (79,9 | ) | ||||||||
|
Mexico
|
270,870 | 604,648 | (55,2 | ) | ||||||||
|
Other
|
362,845 | 1,223,874 | (70,4 | ) | ||||||||
|
|
|
|
|
|
|
|||||||
|
Total gross bookings
|
|
1,432,335
|
|
|
4,734,193
|
|
|
(69.7
|
)
|
|||
|
Financial Metrics
|
||||||||||||
|
Consolidated revenues
|
131,334 | 524,876 | (75.0 | ) | ||||||||
|
Consolidated operating loss
|
(177,217 | ) | (8,920 | ) | 1,886.7 | |||||||
|
Consolidated net loss
|
142,869 | 20,910 | 583.3 | |||||||||
|
Consolidated Adjusted EBITDA (unaudited)
|
(121,813 | ) | (26,643 | ) | (557.2 | ) | ||||||
|
Consolidated Adjusted Segment EBITDA:
|
||||||||||||
|
Air
|
(32,890 | ) | 3,346 | (1,083.0 | ) | |||||||
|
Packages, Hotels and Other Travel
|
||||||||||||
|
Products
|
(82,377 | ) | 36,546 | (325.4 | ) | |||||||
|
Unallocated
|
(6,546 | ) | (13,249 | ) | (50.6 | ) | ||||||
Note: “NM” denotes not meaningful.
Number of Transactions
The number of transactions for a period is an operating measure that represents the total number of travel customer orders completed on our platform in such period. We monitor the total number of transactions, as well as the number of transactions in each of our segments and the number of transactions with travel customers in each of the countries where we operate. The number of transactions is an important metric because it is an indicator of the level of engagement with our travel customers and the scale of our business from period to period but, unlike gross bookings and our financial metrics, the number of transactions is independent of the average selling price of each transaction, which can be significantly influenced by fluctuations in currency exchange rates.
Gross Bookings
Gross bookings is an operating measure that represents the aggregate purchase price of all travel products booked by our travel customers through our platform during a given period. We generate substantially all of our revenue from commissions and other incentive payments paid by our travel suppliers and service fees paid by our travel customers for transactions through our platform, and, as a result, we monitor gross bookings as an important indicator of our ability to generate revenue.
Adjusted Segment EBITDA
For 2020, we have changed our definition of Adjusted Segment EBITDA reported internally to exclude restructuring charges and acquisition costs. We have effected this change retroactively to all years presented in this Annual Report. However, we did not have restructuring charges in either 2019 or 2018 and we did not consummate any acquisitions in 2018.
73
We measure our segment’s performance by our Adjusted Segment EBITDA. We use Adjusted Segment EBITDA for purposes of making decisions about allocating resources to our segments and to internally evaluate their financial performance because we believe Adjusted Segment EBITDA reflects current core operating performance of each segment and provides an indicator of each segment’s ability to generate cash.
Adjusted Segment EBITDA is calculated, with respect to each segment, as our net loss adjusted for (1) provision for income taxes; (2) financial income / (expense); (3) stock-based compensation expense; (4) acquisition transaction costs; (5) depreciation and amortization; (6) impairment charges; and (7) restructuring charges. See note 20 to our audited consolidated financial statements for our Adjusted Segment EBITDA information and segment information.
Non-GAAP
Financial Measures
Consolidated Adjusted EBITDA
We report Consolidated Adjusted EBITDA as a
non-GAAP
financial measure. Consolidated Adjusted EBITDA is among the primary metrics by which management evaluates the performance of the business and on which internal budgets are based. Management believes that investors should have access to the same set of tools that management uses to analyze our results. This
non-GAAP
measure should be considered in addition to results prepared in accordance with U.S. GAAP but should not be considered a substitute for other measures of our financial performance prepared in accordance with U.S. GAAP. Our Consolidated Adjusted EBITDA has certain limitations as an analytical tool, including in that it does not consider the impact of certain expenses to our consolidated statements of income. We endeavor to compensate for the limitation of the
non-GAAP
measure presented by also providing a reconciliation to the most directly comparable U.S. GAAP measure and a description of the reconciling items and adjustments to derive the
non-GAAP
measure. Our Consolidated Adjusted EBITDA also excludes certain items related to transactional tax matters, which may ultimately be settled in cash, and we urge investors to review the detailed disclosure regarding these matters included elsewhere in this Annual Report, as well as in the notes to our audited consolidated financial statements. Our Consolidated Adjusted EBITDA may be calculated differently from, and therefore may not be comparable to, similarly titled measures used by other companies.
For 2020, we have changed our definition of Consolidated Adjusted EBITDA to exclude restructuring charges and acquisition costs. We have effected this change retroactively to all years presented in this Annual Report. However, we did not have restructuring charges in either 2019 or 2018 and we did not consummate any acquisitions in 2018.
We calculate Consolidated Adjusted EBITDA as net loss adjusted for (1) provision for income taxes; (2) financial income / (expense); (3) stock-based compensation expense; (4) acquisition transaction costs; (5) depreciation and amortization; (6) impairment charges; and (7) restructuring charges.
The above items are excluded from our Consolidated Adjusted EBITDA measure because these items are noncash in nature, or because the amount and timing of these items is unpredictable, or not driven by core operating results and renders comparisons with prior periods and competitors less meaningful. We believe our Consolidated Adjusted EBITDA is a useful measure for analysts and investors to evaluate our future
on-going
performance as this measure allows a more meaningful comparison of our performance and projected cash earnings with our historical results from prior periods and to the results of our competitors. Moreover, our management uses this measure internally to evaluate the performance of our business as a whole and our individual business segments. In addition, we believe that by excluding certain items, such as stock-based compensation and acquisition-related impacts, Consolidated Adjusted EBITDA corresponds more closely to the cash operating income generated from our business and allows investors to gain an understanding of the factors and trends affecting the ongoing cash earnings capabilities of our business.
74
The table below provides a reconciliation of our consolidated net loss to Consolidated Adjusted EBITDA.
|
Year Ended December 31,
|
||||||||
|
2020
|
2019
|
|||||||
|
(in thousands)
|
||||||||
|
Consolidated net loss
|
$ | (142,869 | ) | $ | (20,910 | ) | ||
|
Add (deduct):
|
||||||||
|
Financial expense/ (income), net
|
(12,910 | ) | 17,215 | |||||
|
Income tax (benefit)
|
(21,438 | ) | (5,225 | ) | ||||
|
Depreciation expense
|
7,981 | 6,659 | ||||||
|
Impairment of long-lived assets and goodwill
|
1,917 | — | ||||||
|
Amortization expense
|
21,699 | 16,137 | ||||||
|
Stock-based compensation expense
|
7,312 | 11,686 | ||||||
|
Restructuring and related reorganization charges
|
13,360 | — | ||||||
|
Acquisition-related expenses
|
3,135 | 1,081 | ||||||
|
|
|
|
|
|||||
|
Consolidated Adjusted EBITDA (unaudited)
|
$ | (121,813 | ) | $ | 26,643 | |||
|
|
|
|
|
|||||
Components of Results of Operations
Revenue
We offer traditional travel services on a stand-alone and package basis generally either through the
business models. We primarily generate revenue as a result of facilitation services, either directly or through the use of affiliated travel agencies. We consider both the traveler and the travel supplier as our customers.
pre-pay/merchant
or the
pay-at-destination/agency
Under the
pre-pay/merchant
model, we provide travelers access to book hotel rooms, airline seats, car rentals and destination services through our network of travel suppliers. Our travelers pay us for merchant transactions generally when they book the reservation. We pay our travel suppliers later, generally when the travelers use the travel service. Under these transactions, we generally earn a commission from travel suppliers and service fees from travelers. Travel suppliers generally bill us for travel products sold within a
12-month
period from the
check-out
date. We recognize breakage incremental revenue from unbilled amounts when the period expires. Our revenues under the
pre-pay/merchant
model typically represented more than 75% of our total consolidated revenues for both 2020 and 2019.
Under the
model, travelers pay the travel supplier directly at the destination and travel suppliers pay us our earned commissions at a later date, generally after checkout. We receive service fees from travelers at the time of booking. In any given year, our revenue under the
model represented less than 5% of our total consolidated revenues for both 2020 and 2019.
pay-at-destination/agency
pay-at-destination/agency
We seek to develop and maintain long-term relationships with travel suppliers, GDSs and other intermediaries. Our travel supplier management personnel work directly with travel suppliers to optimize access to their travel products for visitors to our platform, including through promotional activity, and maximize our revenue. In most cases, we enter into
non-exclusive
contracts with our travel suppliers, although in the case of some travel suppliers we may have informal arrangements without written contracts. Typically, supplier payment terms are negotiated on a regular basis. We have a contract with Expedia and its affiliates to offer through our platform hotel and other lodging products. The contract establishes agreed payment terms. In each of the years 2020 and 2019, 6.2% and 8.4% of our gross bookings, respectively, were attributable to supply provided by affiliates of Expedia. For more information about our relationship with Expedia, see “Item 7. Major Shareholders and Related Party Transactions —B. Related Party — Relationship with Expedia” and Note 22 of our audited consolidated financial statements. Given the fragmentation in travel suppliers in our markets, the frequency of negotiations of payment terms and competitive conditions, we have experienced what we consider to be limited volatility related to our arrangements with travel suppliers; however, we cannot assure you that we will not experience more volatility in the future.
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Major sources of revenue
Commissions and service fees
We facilitate travel suppliers the sale of their travel products and services to travelers. We generally receive commissions in consideration for these facilitation services. Generally, we charge a service fee to travelers, although this may vary depending on marketing strategies. We do not provide significant post-booking services to travelers. We consider any post-booking services beyond minor inquiries or minor administrative changes to the reservation (i.e. modifications to the original terms of the reservations) as new bookings. Accordingly, we may charge a new booking fee and administrative fees for these services. Also, if the requested change results in an incremental price of the reservation to the traveler set by the travel supplier, we receive an incremental commission from the travel supplier.
We recognize revenue upon the transfer of control of the promised facilitation services to our customers in an amount that reflects the consideration we expect to be entitled to in exchange for those facilitation services. Generally, we recognize revenue when the booking is completed, paid and confirmed, less a reserve for cancellations based on historical experience.
Given that the travel supplier is primarily responsible for providing the underlying travel services, we do not control the service or travel product provided by the travel supplier to the traveler and we do not bear inventory risk, we present revenue on a net basis for these transactions. Taxes assessed by a government authority, if any, are excluded from the measurement of transaction prices that are imposed on the travel related services or collected from customers (which are therefore excluded from revenue). We present revenue on a gross basis for some bookings only when we
pre-purchase
flight seats.
We partner with banks to allow our travelers the possibility of purchasing the product of their choice through financing plans established, offered and administered by such banks. Banks bear full risk of fraud, delinquency or default by travelers. When travelers elect to finance their purchases, we typically receive full payment for our services within a short period of time after booking is completed and confirmed, regardless of the payment plan selected by the traveler. However, in certain countries, we receive payment from the bank as installments become due regardless of when traveler actually makes the scheduled payments. In most cases, we receive payment before travel occurs or during travel and the period between completion of booking and reception of scheduled payments is typically one year or less. We have made use of the practical expedient in ASC
and we do not adjust the amount of consideration for the effects of a significant financing component. Beginning in late August 2020, we began providing financing to certain risk-profiled travelers only in Brazil. This activity has been very limited to date.
606-10-32-18
Our revenue from commissions and service fees represented 76.9% and 81.2% of our total consolidated revenues for 2020 and 2019, respectively.
Incentive fees
We may receive incentive fees from our travel suppliers or Global Distribution Services providers when we meet certain performance conditions, for example contractually agreed volume thresholds. We recognize revenue on an accrual basis in accordance with the achievement of contractual thresholds on a
basis.
case-by-case
Incentive fee revenues represented 13.0% and 13.9% of our total consolidated revenues for 2020 and 2019, respectively.
Advertising
We record advertising revenue ratably over the advertising period or upon delivery of advertising material, depending on the terms of the advertising agreement.
Advertising revenues represented 3.8% and 2.9% of our total consolidated revenues for 2020 and 2019, respectively.
76
Other revenue
We also derive revenue from other sources. Our other revenues sources are not material.
In late 2019 we began to operate a loyalty program through which we award loyalty points to travelers who complete purchases on our websites or use the services of other program participants, such bank
co-branded
credit cards. Loyalty points can be redeemed for free or discounted travel products.
For loyalty points earned through travel product purchases, we apply a relative selling price approach whereby the total amount collected from each travel product sale is allocated between the travel product and the loyalty points earned. The portion of each travel product sale attributable to loyalty points is initially deferred and then recognized in loyalty revenue when the points are redeemed. Due to the recent launch of our loyalty program, lack of historical data and redemption patterns, we recognize breakage when the likelihood of the traveler exercising its remaining rights becomes remote.
For loyalty points earned through
co-branded
credit card partners, consideration received from the sale of loyalty points is variable and payment terms typically are within 30 days subsequent to the month of sale of loyalty points. Sales of loyalty points to business partners are comprised of two components: loyalty points and marketing (i.e. the use of intellectual property, including our brand and access to customer lists and databases, which is the predominant element in the agreements, as well as advertising, collectively, the marketing component). We allocate the consideration received from these sales of loyalty points based on the relative selling price of each product or service delivered. Accordingly, we recognize the marketing component in other revenue in the period of the loyalty points sale following the sales-based royalty method. The loyalty points component is initially deferred and then recognized in revenue when points are redeemed. This activity has been limited to date.
In October 2020 we began offering our travelers tours, activities and transportation services through a fleet of dedicated vans. We recognize revenue as services are provided. We present revenue on a gross basis for these transactions because we are the primary responsible for providing the underlying travel services.
Revenue from interest earned on financing granted to certain risk-profiled customers in Brazil is recognized over the term of the financing and is based on effective interest rates. This activity has been immaterial and very limited to date.
In the aggregate, these other revenues represented 6.4% and 2.1% of our total consolidated revenues for 2020 and 2019, respectively.
Cost of Revenue
Cost of revenue consists of (1) credit card processing fees, (2) fees that we pay to banks relating to the travel customer financing installment plans that we offer, (3) the costs of operating our fulfillment center, customer service and risk management, (4) costs borne by us as a result of credit card chargebacks, including those related to fraud, (5) claims against us under consumer protection laws, (6) certain transaction-based taxes, other than income taxes (which are included under income tax expense) and sales taxes (which are deducted from our revenue) (7) a portion of overhead expenses distributed based on the percentage of our employees attributable to cost of revenue, and (8) depreciation of property, plant and equipment related to our operation.
Selling and Marketing
Selling and marketing expense is comprised of direct costs, including online marketing such as search engine and social media marketing, and offline marketing, such as television and print advertising. It also includes expenses of our selling and marketing personnel, and related overhead usually distributed based on the percentage of our employees attributable to selling and marketing (for example, rent, facilities, depreciation etc.) Selling and marketing expense also includes commissions paid to certain third-party affiliates for sales that they generate through our systems. Reductions on a per transaction basis are expected to continue as the economy scales. However, the impact on operating contribution will vary with the level of activity and average selling prices.
77
General and Administrative
General and administrative expense consists primarily of personnel expenses for management, including both senior management and local managers, and employees involved in general corporate functions, including finance, accounting, tax, legal, human resources and commercial analysts, our stock-based compensation expenses for grants to members of our management team and professional and consulting fees. General and administrative expense also includes a portion of the overhead distributed based on the percentage of our employees attributable to general and administrative (for example, rent, facilities and depreciation). General and administrative expense also includes bad debt expense that we recognize relating to the risk that we are unable to collect receivables from certain travel suppliers. In addition, general and administrative expense includes transaction costs related to our acquisitions, change in fair value of contingent earnout payments, if any, and changes to indemnity assets, if any.
Technology and Product Development
Technology and product development expense includes the costs of developing our platform, as well as information technology costs to support our infrastructure, back-office operations and overall monitoring and security of our networks. This expense is principally comprised of personnel, and depreciation and amortization of technology assets, including hardware, and purchased and internally developed software. Technology and product development expense also includes a portion of the overhead expense for our facilities, based on the percentage of our employees attributable to technology and product development.
We classify our supplier relationships as a component of the products that we offer to our travel customers and, accordingly, our costs of acquiring and maintaining supplier relationships, including the costs of our personnel engaged in supplier relationships, are included as a component of technology and product development expense.
Loss from Equity Investments
We use the equity method to account for investments in companies if our investment provides us with the ability to exercise significant influence, but not control, the operating and financial policies of the investee.
Financial Income / (Expense), net
Our functional currency and the functional currency of certain of our subsidiaries, including our U.S., Uruguay, Ecuador, Venezuela and Argentina (beginning July 1, 2018) subsidiaries, is the U.S. dollar. The functional currency of our other subsidiaries is their respective local currency. Gains and losses resulting from transactions by each subsidiary in
non-functional
currency are included in financial income / (expense). Financial income / (expense) also includes gains and losses on certain derivative financial instruments that we use from time to time, to manage our exposure to foreign exchange volatility.
In addition, our assets and liabilities are translated from local currencies into dollars at the end of each period. However, any gains and losses resulting from such translations are reflected in our consolidated statement of comprehensive income / (loss) and are not reflected in our consolidated statements of operations. See also “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Foreign Exchange Risk.”
Our financial income and expense also include interest expense on our financial liabilities, interest income on our investments and gains and losses on derivative financial instruments.
Income Tax Expense
We are subject to taxation in the United States and foreign jurisdictions. On December 22, 2017, the United States enacted the Tax Cuts and Jobs Act (“Tax TCJA Act”) that significantly changed U.S. tax law by, among other things, lowering U.S. corporate income tax rates, implementing a territorial tax system, and imposing a
one-time
transition tax on deemed repatriated earnings of foreign subsidiaries. The Tax Act reduced the U.S. corporate income tax rate from 35% to 21%, effective January 1, 2018.
78
Results of Operations
|
Year Ended December 31,
|
||||||||||||||||||||
|
2020
|
2019
|
|||||||||||||||||||
|
(in thousands)
|
||||||||||||||||||||
|
% of
Revenue |
% of
Revenue |
% of
change |
||||||||||||||||||
|
Total revenue
|
$ | 131,334 | 100.0 | $ | 524,876 | 100.0 | (75.0 | ) | ||||||||||||
|
Cost of revenue
|
(85,518 | ) | (65.1 | ) | (179,565 | ) | (34.2 | ) | (52.4 | ) | ||||||||||
|
|
|
|
|
|||||||||||||||||
|
Gross profit
|
|
45,816
|
|
|
34.9
|
|
|
345,311
|
|
|
65.8
|
|
|
(86.7
|
)
|
|||||
|
Operating expenses
|
||||||||||||||||||||
|
Selling and marketing
|
(57,292 | ) | (43.6 | ) | (187,894 | ) | (35.8 | ) | (69.5 | ) | ||||||||||
|
General and administrative
|
(94,722 | ) | (72.1 | ) | (92,962 | ) | (17.7 | ) | 1.9 | |||||||||||
|
Technology and product development
|
(67,043 | ) | (51.0 | ) | (73,375 | ) | (14.0 | ) | (8.6 | ) | ||||||||||
|
Impairment of long-lived assets and goodwill
|
(1,917 | ) | (1.5 | ) | — | — | NM | |||||||||||||
|
|
|
|
|
|||||||||||||||||
|
Total operating expenses
|
|
(220,974
|
)
|
|
(168.3
|
)
|
|
(354,231
|
)
|
|
(67.5
|
)
|
|
(37.6
|
)
|
|||||
|
|
|
|
|
|||||||||||||||||
|
Equity loss
|
(2,059 | ) | (1.6 | ) | — | — | NM | |||||||||||||
|
Operating loss
|
|
(177,217
|
)
|
|
(134.9
|
)
|
|
(8,920
|
)
|
|
(1.7
|
)
|
|
1,886.7
|
|
|||||
|
Financial income / expense, net
|
12,910 | 9.8 | (17,215 | ) | (3.3 | ) | (175.0 | ) | ||||||||||||
|
|
|
|
|
|||||||||||||||||
|
Net loss before income taxes
|
|
(164,307
|
)
|
|
(125.1
|
)
|
|
(26,135
|
)
|
|
(5.0
|
)
|
|
528.7
|
|
|||||
|
Income tax benefit
|
21,438 | 16.3 | 5,225 | 1.0 | 310.3 | |||||||||||||||
|
|
|
|
|
|||||||||||||||||
|
Net loss
|
|
(142,869
|
)
|
|
(108.8
|
)
|
|
(20,910
|
)
|
|
(4.0
|
)
|
|
583.3
|
|
|||||
|
Net loss attributable to redeemable
non-controlling
interest
|
|
282
|
|
|
0.2
|
|
|
—
|
|
|
—
|
|
|
NM
|
|
|||||
|
|
|
|
|
|||||||||||||||||
|
Net loss attributable to Despegar.com, Corp.
|
$
|
(142,587
|
)
|
|
(108.6
|
)
|
$
|
(20,910
|
)
|
|
(4.0
|
)
|
|
581.9
|
|
|||||
|
|
|
|
|
|||||||||||||||||
Note: “NM” denotes not meaningful.
Consolidated Revenues
The following table presents our consolidated revenues by business segment:
|
Year Ended December 31,
|
||||||||||||||||||||
|
2020
|
2019
|
|||||||||||||||||||
|
(in thousands)
|
||||||||||||||||||||
|
% of
Revenue |
% of
Revenue |
% of
change |
||||||||||||||||||
|
Revenue
|
||||||||||||||||||||
|
Air
|
$ | 62,713 | 47.8 | $ | 201,638 | 38.4 | (68.9 | ) | ||||||||||||
|
Packages, Hotels and Other Travel Products
|
68,621 | 52.2 | 323,238 | 61.6 | (78.8 | ) | ||||||||||||||
|
|
|
|
|
|||||||||||||||||
|
Total revenue
|
$ | 131,334 | 100.0 | $ | 524,876 | 100.0 | (75.0 | ) | ||||||||||||
|
|
|
|
|
|||||||||||||||||
The following table presents our consolidated revenues by type of revenue:
|
Year Ended December 31,
|
||||||||
|
2020
|
2019
|
|||||||
|
(in thousands)
|
||||||||
|
Commissions and service fees
|
$ | 100,908 | $ | 426,082 | ||||
|
Incentives
|
17,040 | 72,912 | ||||||
|
Advertising
|
5,040 | 15,063 | ||||||
|
Others
|
8,346 | 10,819 | ||||||
|
|
|
|
|
|||||
|
Total revenue
|
$ | 131,334 | $ | 524,876 | ||||
|
|
|
|
|
|||||
| (1) |
Net of sales tax.
|
79
For 2020, our consolidated revenues were significantly impacted by the effect of the
COVID-19
pandemic on our industry and our operations. Similar to the 61.7% decline in the overall number of transactions and the 69.7% decline in overall gross bookings for 2020, our consolidated revenues decreased $393.5 million, or 75.0 % in 2020 compared to 2019, primarily driven by cancellations and decreased demand for our travel products as a result of the
COVID-19
pandemic. The Best Day and Koin acquisitions completed in 2020 contributed $14.2 million to our consolidated revenues. Without the effect of the Best Day and Koin acquisitions, our consolidated revenues would have decreased $407.7 million, or 77.7 %, to $117.2 million in 2020 from $524.9 million in 2019.
Air revenue decreased $138.9 million or 68.9% in 2020 reflecting a 60.9% decline in tickets sold. Packages, Hotels and Other Travel Products decreased $254.6 million or 78.8% in 2020 reflecting a 62.9% decline in overall demand for our mix of travel products. Excluding the effect of the Best Day and Koin acquisitions, Air revenue would have decreased 69.3% in 2020 and Packages, Hotels and Other Travel Products would have decreased 82.9% in 2020.
Our commissions and service fee revenue decreased $325.2 million or 76.3% in 2020, a decrease of 65.3% or $90.3 million in our Air segment and a decrease 81.6% or $234.9 million in our Packages, Hotels and Other Travel Products segment, primarily as a result of the overall decline in travel demand for our mix of travel products due to the
COVID-19
pandemic, the impact of contra-revenue related to customer claims and cancellations, macro-economic conditions in our most significant markets (Brazil, Mexico and Argentina) leading to currency devaluations and newly imposed taxes on foreign currency transactions in Argentina, resulting in a decrease in the demand for international bookings in Argentina.
Incentive revenue decreased $55.9 million or 76.6 % in 2020, a decrease of 77.3% or $44.0 million in our Air segment and a decrease of 74.2% or $11.9 million in our Packages, Hotels and Other Travel Products segment, primarily as a result of lower incentives received from airlines, hotels and other travel suppliers reflecting the overall decline in travel volume.
Advertising revenue decreased $10.0 million or 66.5 % in 2020 a decrease of 73.7 % or $5.1 million in our Air segment and a decrease of 60.5 % or $4.9 million in our Packages, Hotels and Other Travel Products segment, due to lower demand for travel advertising.
Other revenue decreased $2.5 million or 22.9 % in 2020, primarily as a result of the decline in travel demand and partially offset by $3.0 million of new destination services offered by the Best Day.
In addition to the above segment and product revenue discussion, our revenue by business model is as follows:
|
Year Ended December 31,
|
||||||||
|
2020
|
2019
|
|||||||
|
(in thousands)
|
||||||||
|
Pre-pay model
|
$ | 102,591 | $ | 407,258 | ||||
|
Pay-at-destination model
|
1,305 | 13,130 | ||||||
|
Other
(1)
|
27,438 | 104,488 | ||||||
|
|
|
|
|
|||||
|
Total revenue
|
$ | 131,334 | $ | 524,876 | ||||
|
|
|
|
|
|||||
| (1) |
Primarily includes incentives from our travel suppliers, primarily airlines and GDSs.
|
Cost of Revenue
Cost of revenue decreased $94.0 million during 2020 compared to 2019, primarily due to a $38.1 million decrease in credit card processing fees, a $34.2 million decrease in cost of installments and a $9.5 million decrease in customer fraud and transaction processing errors, all resulting from lower transaction volumes from the impact of the
COVID-19
80
pandemic, as well as $9.3 million decrease in operating costs due to cost reductions initiatives, partially offset by an increase of $2.7 million in severance costs due to the restructuring costs associated with our cost reduction initiatives.
Excluding the effect of the Best Day and Koin acquisitions, our cost of revenue would have decreased $98.0 million, or 54.6%, to $81.6 million in 2020 from $179.6 million in 2019.
Gross Profit
Gross profit decreased 86.7% from $345.3 million in 2019 to $45.8 million in 2020, due to the
COVID-19
pandemic and the challenging macroeconomic conditions in the countries in which we operate, including our main markets, Brazil and Argentina.
As a percentage of revenue, gross profit represented 34.9% in 2020 and 65.8% in 2019. This decrease in 2020 is due to a greater percentage decrease in total revenue of 75.0% compared to the percentage decrease in cost of revenue or 52.4%.
Excluding the effect of the Best Day and Koin acquisitions, our gross profit would have decreased $309.7 million, or 89.7%, to $35.6 million in 2020 from $345.3 million in 2019.
Selling and Marketing
Selling and marketing expense decreased 69.5% to $57.3 million in 2020. The decrease was primarily as a result of the suspension of direct marketing expenses beginning in
mid-March
2020, which was part of our broader cost saving measures in connection with the
COVID-19
pandemic. The decrease was partially offset by $3.9 million that we incurred in employee severance and benefit expenses due to restructuring costs associated with our cost savings plan.
Excluding the effect of the Best Day and Koin acquisitions, our selling and marketing expenses would have decreased $138.3 million, or 73.6%, to $49.6 million in 2020 from $187.9 million in 2019.
General and Administrative
General and administrative expense increased 1.9% to $94.7 million in 2020. The increase was primarily due to an increase in employee severance expenses of $3.2 million and $0.4 million in office lease termination fees as part of our cost savings plan in response to the
COVID-19
pandemic, an increase of $2.2 million in depreciation and amortization expenses from acquired tangible and intangible assets and an increase of $7.2 in credit expected losses directly related to the impact of the
COVID-19
pandemic, partially offset by an overall reduction in all corporate expenses, including outsourcing services, personnel expenses and employee benefits.
Excluding the effect of the Best Day and Koin acquisitions, our general and administrative expenses would have decreased $10.1 million, or 10.9%, to $82.9 million in 2020 from $93.0 million in 2019.
Technology and Product Development
Technology and product development expense decreased 8.6% to $67.0 million in 2020. The decrease was primarily as a result of a reduction in technology and product development personnel expense, which was partially offset by $3.2 million that we incurred in employee severances expenses, as part of our cost savings plan in response to the
COVID-19
pandemic.
Excluding the effect of the Best Day and Koin acquisitions, our technology and development expenses would have decreased $10.1 million, or 13.8%, to $63.2 million in 2020 from $73.4 million in 2019.
81
Impairment Charges
During 2020, as a result of the significant negative impact related to the
COVID-19
pandemic, which has had a severe effect on the entire global travel industry, we recognized goodwill impairment charges of $0.6 million as well as intangible asset impairment charges of $1.1 million and property and equipment impairment charges of $0.3 million.
Loss from Equity Investments
During 2020, losses on equity investments were $2.1 million in connection with two associate investments acquired with Best Day. We did not have equity investments in 2019.
Operating loss
In 2020, we had an operating loss of $177.2 million compared to an operating loss of $8.9 million in 2019, primarily due to significant declining revenue in 2020 resulting from the
COVID-19
pandemic as well as the restructure and impairment charges mentioned above.
Financial Income / (Expense)
In 2020, we had net financial income of $12.9 million as compared to a net financial expense of $17.2 million in 2019. The change in financial result position was due primarily to lower factoring fees of $13.2 million derived from significantly lower activity impacted by the
COVID-19
pandemic and net foreign exchange gains of $11.1 million in 2020 as compared to foreign exchange losses of $7.0 million in 2019.
Income Tax Benefit
Our effective tax rate for the year ended December 31, 2020 was 13%, lower than the weighted average rate of 27% due primarily to the changes in tax rate related to the Promotional Regime enacted in Argentina, which reduced the income tax rate to 15% as from the following year and the reversal of valuation allowances.
Our effective tax rate for the year ended December 31, 2019 was 20%, lower than the weighted average rate of 29% due to the decrease in
non-taxable
income and the changes in valuation allowances related to our Brazilian subsidiary.
Net loss
In 2020, we had a net loss of $142.9 million compared to a net loss of $20.9 million in 2019 as a result of the factors described above. Excluding the effect of the Best Day and Koin acquisitions, our net loss would have been $127.9 million compared to a net loss of $20.9 million in 2019 as a result of the factors described above.
Net loss attributable to redeemable
non-controlling
interest
The share of net loss attributable to the redeemable
non-controlling
interest in our subsidiary Koin was $0.3 million. The activity and results of operations of this subsidiary were not significant in 2020. We did not have a
non-controlling
interest in 2019.
Net loss attributable to Despegar.com, Corp.
In 2020, we had a net loss of $142.6 million compared to a net loss of $20.9 million in 2019 as a result of the factors described above. Excluding the effect of the Best Day and Koin acquisitions, our net loss attributable to Despegar.com, Corp. would have been $127.6 million compared to a net loss of $20.9 million in 2019 as a result of the factors described above.
82
Adjusted Segment EBITDA
|
Year Ended December 31,
|
||||||||
|
2020
|
2019
|
|||||||
|
(in thousands)
|
||||||||
|
Air
|
$ | (32,890 | ) | $ | 3,346 | |||
|
Packages, Hotels and Other Travel Products
|
(82,377 | ) | 36,546 | |||||
|
Unallocated
|
(6,546 | ) | (13,249 | ) | ||||
Adjusted Segment EBITDA is our primary segment operating metric. See Note 20 — Segment Information in the notes to the consolidated financial statements for additional information.
Our Air segment Adjusted EBITDA significantly declined during 2020, resulting in negative Adjusted EBITDA of $(32.9) million compared to positive Adjusted EBITDA of $3.3 million in 2019, resulting from direct impacts of the
COVID-19
pandemic, which drove meaningful gross bookings and revenue declines, partially offset by a decline in direct sales and marketing expense.
Our Packages, Hotels and Other Travel Products segment Adjusted EBITDA also significantly declined during 2020, resulting in negative Adjusted EBITDA of $(82.4) million compared to positive Adjusted EBITDA of $36.6 million in 2019, also resulting from significant revenue declines due to the
COVID-19
pandemic, partially offset by a decline in direct sales and marketing expense.
Our Unallocated segment Adjusted EBITDA resulted in negative Adjusted EBITDA of $(6.5) million in 2020 as compared to a negative Adjusted EBITDA of $(13.2) million in 2019 primarily due to lower unallocated overhead costs related to our cost reduction initiatives.
|
B.
|
Financial Position, Liquidity and Capital Resources
|
Cash Flows
Our principal sources of liquidity are typically cash flows generated from operations, cash available under credit facilities and loan agreements as well as our cash and cash equivalents and short-term investment balances, which were $334.4 million and $309.2 million at December 31, 2020 and 2019, respectively. In addition, as of December 31, 2020, we had restricted cash of $16.1 million, which primarily consisted of amounts held in restricted accounts to secure our obligations to travel suppliers and service providers and the International Air Transport Association (“IATA”).
With the impacts of the
COVID-19
pandemic, including the high degree of cancellations and customer refunds, particularly during the first half of the year, and the lower new bookings in the merchant business model, these seasonal influences and the working capital source of cash to us has been significantly disrupted resulting in the Company experiencing unfavorable working capital trends and material negative cash flow in the first half of 2020 with the negative cash flow moderating as booking trends improved and cancellations stabilized during the second half of 2020. The full duration and total impact of
COVID-19,
and how the recovery will unfold, remains difficult to predict. We expect cash flow to remain negative until the decline in new merchant bookings improves further with cancellations either remaining stable or moderating further. In addition, we are experiencing much shorter booking windows in our lodging businesses, which could also impact the seasonality of our working capital and cash flow.
As of December 31, 2020, our travel accounts payable plus our related party payable and our accounts payable and accrued expenses, minus our trade accounts receivable net of credit expected loss and our related party receivable amounted to aggregate payables of $193.0 million, compared to aggregate payables of $120.1 million as of
83
December 31, 2019, with such increase being primarily the result of an increase in cancelled reservations pending payment, which amounted to $90.8 million as of December 31, 2020. In addition, we adopted the strategy to assist our travel customers with refunds and reschedulings, including the issuance of vouchers to be used by our travel customers during 2020 or 2021. If a travel customer does not accept the voucher, according to our standard commercial terms and conditions, the corresponding refund would depend on the regulation of each country, considering as an average typically payable within 120 days from the date the refund is requested.
Our business cash cycle provides a positive source of working capital for our operations. Our
pre-pay
model allows us to collect cash amounts from transactions with our travel customers well before we are required to make payments to our travel suppliers, which allows us to use the cash for other business purposes in the interim and reduces our need to use external sources of financing. Under our
pre-pay
model, we receive cash payments through credit card companies used by travel customers at or near the time of booking, and we are required to make payments related to the booking to the relevant travel suppliers generally two to three months afterwards, typically, after the travel customer uses the reservation and the travel supplier invoices us.
As of December 31, 2020, we had deferred merchant bookings of $76.6 million and our working capital (calculated as current assets minus current liabilities, except short-term debt and contingent liabilities) was $135.8 million. At December 31, 2020, our
model. If our
model or our overall business, or if there are changes to the
pre-pay
model represented 78.1% of our revenues compared to 1% represented by our
pay-at-destination
pre-pay
model declines relative to our
pay-at-destination
pre-pay
model (such as changes in booking patterns, or travel customer or travel supplier payment terms), our overall working capital benefits could be reduced. In such event, we could be required to obtain additional working capital financing, including using factoring or other financing sources.
Managing our balance sheet prudently and maintaining appropriate liquidity are high priorities during the current
COVID-19
pandemic. In order to best position the Company to navigate our current working capital challenges and depressed revenue throughout 2020, we have taken a number of actions to bolster our liquidity and preserve financial flexibility, including:
| (i) |
temporarily reducing salaries of the senior and middle management;
|
| (ii) |
suspending bonuses to all employees;
|
| (iii) |
reducing part of our workforce and implementing a hiring freeze and limiting inflation salary increases;
|
| (iv) |
reducing working hours and implementing unpaid leave in certain locations;
|
| (v) |
accelerating synergies from acquisitions;
|
| (vi) |
renegotiating supplier payment terms and conditions;
|
| (vii) |
reviewing and renegotiating, to the extent possible, all contracts and commitments;
|
| (viii) |
reducing marketing expenses and
|
| (ix) |
deferring
non-critical
capital expenditures.
|
In connection with the measures implemented due to the
COVID-19
pandemic discussed above, we incurred $13.0 million in employee severance expenses during 2020, which were fully paid as of
year-end.
Based on our plans as of the date of this Annual Report, we expect total severance charges in 2021 decrease. However, we continue to actively evaluate additional cost reduction efforts, and should we make decisions in future periods to take further actions we will incur additional reorganization charges. We also engaged in certain smaller scale restructure actions in 2020 to centralize and migrate certain operational functions and systems, for which we recognized $0.4 million in reorganization charges, which were primarily related to anticipated termination of several office rent contracts.
In August 2020, we entered into an investment agreement with LCLA Daylight LP, an affiliate of L Catterton Latin America III, L.P. (“L Catterton”) and an investment agreement Waha LATAM Investments Limited, an affiliate of Waha Capital PJSC (“Waha Capital”), to raise $200 million in gross proceeds in a private placement of shares of newly created series of preferred stock and warrants to purchase our common stock. The transaction with L. Catterton closed on September 18, 2020 and the transaction with Waha Capital closed on September 21, 2020. These transactions increased our cash position by $187.9 million.
In October 2020, we closed the acquisition of Best Day. The purchase price was fixed at $10.3 million, after application of net indebtedness and working capital adjustments, and will be payable in cash on October 1, 2023. In
84
addition, the agreement provides for an earnout for the benefit of certain sellers ranging from $0 to $20 million, based solely on the performance of our share price during a measurement period of six months prior to the fourth anniversary of the closing date. The earnout, if any, will be payable in cash on October 1, 2024.
In 2020 we paid $5.8 million for the second installment of the purchase price for the acquisition of Viajes Falabella. The last remaining installment of $5.8 million is scheduled to be paid in June 2021.
We believe that our existing cash and cash equivalents together with expected cash flows generated from operating activities will be sufficient to meet our currently anticipated cash needs for the next twelve months. As conditions are recent, uncertain and changing rapidly, we cannot assure you that our business will not require additional funds for operating activities in the future, nor whether the conditions of the global economy and financial markets will allow us to access to those financing options, particularly if the effects of the pandemic persist significantly longer.
Our cash flows are as follows:
|
Year Ended December 31,
|
||||||||
|
2020
|
2019
|
|||||||
|
(in thousands)
|
||||||||
|
Net cash flows (used in) / provided by operating activities
|
$ | (118,345 | ) | $ | 44,238 | |||
|
Net cash flows used in investing activities
|
(14,743 | ) | (30,784 | ) | ||||
|
Net cash flows provided by / (used in) financing activities
|
173,696 | (53,180 | ) | |||||
|
Effect of exchange rate changes on cash and cash equivalents
|
(3,767 | ) | 1,181 | |||||
|
|
|
|
|
|||||
|
Net increase / (decrease) in cash and cash equivalents
|
$
|
36,841
|
|
$
|
(38,545
|
)
|
||
|
|
|
|
|
|||||
In 2020, net cash used in operating activities was $118.3 million compared to cash provided by operating activities of $44.2 million for 2019. Impacts from the
COVID-19
pandemic, including a sharp decrease in gross bookings and refund obligations for cancelled bookings, have resulted in a significant use of cash to fund working capital expenses and operating losses in 2020 compared to a 2019 cash benefit from working capital.
In 2020, $14.7 million was used in investing activities compared to $30.8 million in 2019 primarily due to lower current year capital expenditures of $17.5 million, including lower spend on internal-developed software and the payment of $5.8 million of the second installment of the purchase price for the acquisition of Viajes Falabella, partially offset by cash acquired in the acquisitions of Best Day and Koin of $8.5 million. Cash used in investing activities in 2019 primarily included a $24.6 million investment in intangible assets, including software and website development costs and $5.9 million in acquired property and equipment.
Cash provided by financing activities in 2020 was $173.7 million primarily due to $187.9 million of net proceeds from the issuance of preferred shares and warrants in September 2020 and partially offset by the net payment of borrowings of $14.3 million and the cash dividend payment of $0.6 million to the Series A Preferred shareholders. In 2020 we did not repurchase any shares under our share repurchase program. Cash used in financing activities in 2019 primarily included a net $11.5 million payment of short-term loans and cash paid to acquire shares of $42.2 million under our share repurchase program.
Foreign exchange rate changes resulted in decreases of our cash balances denominated in foreign currency in 2020 of $3.8 million reflecting a net depreciation in foreign currencies related to the U.S. dollar during the year. Foreign exchange rate changes resulted in an increase of our cash balances denominated in foreign currency in 2019 of $1.2 million.
Indebtedness
Our total indebtedness, including short-term and long-term bank debt, seller financing and promissory notes amounted to $52.0 million as of December 31, 2020 as compared to $29.9 million as of December 31, 2019.
85
We have historically maintained a low level of bank debt. As of December 31, 2020, we have outstanding short and long-term debt of $19.3 million as compared to short-term debt of $19.2 million as of December 31, 2019. Our long-term bank debt is denominated in currencies other than the U.S. dollar and matures between 2023 and 2024. As of December 31, 2020, we were in compliance with all covenants.
We also have additional indebtedness related to seller financing for the acquisitions we completed in 2019 and 2020. Our seller financing increased $3.7 million from $10.7 as of December 31, 2019 million to $14.4 million as of December 31, 2020. The increase was primarily related to the seller financing for the Best Day acquisition comprised of a fixed portion and the earnout payment, which values were $8.8 million and $3.8 million as of December 31, 2020, respectively. We will pay the fixed portion in cash on October 1, 2023, and the earnout consideration, if any, will be payable in cash on October 1, 2024. The earnout payment is a variable amount which depends solely on our share price during a measurement period of six months prior to October 1, 2024. The increase in seller financing was partially offset by the payment of the second installment of the seller financing for the Viajes Falabella acquisition for $5.8 million.
In addition, as part of the Best Day acquisition agreement, we legally assumed debt that Best Day had with its prior shareholders. As such, we issued four U.S. dollar denominated promissory notes amounting to $14.5 million as of December 31, 2020. The promissory notes bear interest at a fixed rate of 5% per annum and we will pay them in cash on October 1, 2023.
|
C.
|
Research and Development, Patents and Licenses
|
Our technology and product development activities are primarily focused on the development of software, which we view as an important element of the investments we make in our technology and our business. Our primary software development activities have been focused on providing an effective and engaging platform for our travel customers and on collecting and using data to better customize the user experience, pricing and marketing efforts for our travel customers. In 2020 and 2019, we spent $67.0 million and $73.4 million, respectively, on software development and other technology and product development activities.
|
D.
|
Trend Information
|
In addition to the information set forth in this section, additional information about the trends affecting our business can be found in “—A. Key Trends and Factors Affecting Our Business.” You should also read our discussion of the risks and uncertainties that affect our business in “Item 3. Key Information—D. Risk Factors.”
Macroeconomic and Political Conditions in the Countries in which we Operate
Our travel customers are primarily located in Latin America, particularly in Brazil, Mexico and Argentina, and to a lesser extent, in other countries in the region. Our results of operations and financial condition are significantly influenced by political and economic developments in the countries in which our travel customers reside and, to a lesser extent, in the countries to which our travel customers may travel, and the effect that these factors may have on the availability of credit, employment rates, disposable income, average wages and demand for travel in those countries. In
the mid- to
long-term, we believe that macroeconomic changes in the region will generally benefit us due to an expanding middle class, increasing disposable income, reduced unemployment and lower interest rates, among other factors.
Currency Exchange Rates
We report our financial results in dollars, but most of our revenue and expenses are denominated in local currencies. Any changes in the exchange rates of any such currencies against the dollar will affect our reported financial results as translated into dollars. Furthermore, many of our travel customers travel internationally and any changes in the exchange rate between their home currency and the currency of their destination may influence their travel purchases.
86
Inflation
Historically, certain countries in Latin America, such as Argentina, have experienced high rates of inflation. Changes in inflation rates can affect our pricing as well as our expenses, including employee salaries, and the inflation rates in the countries where we generate revenue in any period may be higher or lower than the inflation rates in the countries where we incur expenses. In addition, higher inflation may lead our travel customers to make more purchases using installments or other financing options, which may result in an increase in the costs associated with offering such financing options to our travel customers. Below is a summary of certain macroeconomic data for Brazil, Mexico and Argentina, our three largest markets, for 2020 and 2019:
|
Brazil
|
||||||||
|
2020
|
2019
|
|||||||
|
Real GDP growth (decline)
(1)
|
(4.1 | )% | 0.6 | % | ||||
|
Population (in millions)
(1)
|
211.8 | 211 | ||||||
|
Inflation
(1)
|
4.52 | % | 3.74 | % | ||||
|
Exchange rate
(2)
|
5.20 | 4.03 | ||||||
| (1) |
Source: Instituto Brasileiro de Geografia e Estatistica (IBGE), measured in local currency.
|
| (2) |
Source: Banco Central do Brasil. Data as of December 31 of each year.
|
|
Argentina
|
||||||||
|
2020
|
2019
|
|||||||
|
Real GDP growth (decline)
(1)
|
(11.8 | )% | (3.1 | )% | ||||
|
Population (in millions)
(1)
|
45.40 | 44.93 | ||||||
|
Inflation
(1)
|
36.1 | % | 53.8 | % | ||||
|
Exchange rate
(2)
|
89.25 | 59.87 | ||||||
| (1) |
Source: Instituto Nacional de Estadistica y Censos (INDEC), measured in local currency.
|
| (2) |
Source: Banco de la Nación Argentina. Data as of December 31 of each year.
|
|
Mexico
|
||||||||
|
2020
|
2019
|
|||||||
|
Real GDP growth (decline)
(1)
|
(8.3 | )% | (0.1 | )% | ||||
|
Population (in millions)
(2)
|
126.0 | — | ||||||
|
Inflation
(3)
|
3.15 | % | 2.83 | % | ||||
|
Exchange rate
(4)
|
19.95 | 18.45 | ||||||
| (1) |
Source: Instituto Nacional de Estadística y Gegrafía (INEGI), measured in local currency.
|
| (2) |
Source: Instituto Nacional de Estadística y Gegrafía (INEGI). Census information is updated every five years. Latest census was conducted in 2020/
|
| (3) |
Source: Instituto Nacional de Estadística y Gegrafía (INEGI), measured in local currency.
|
| (4) |
Source: Banco de México. Data as of December 31 of each year.
|
|
E.
|
Off-Balance
Sheet Arrangements
|
As of December 31, 2020, we did not have any material
off-balance
sheet arrangements.
87
|
F.
|
Tabular Disclosure of Contractual Obligations
|
The following table represents our contractual commitments as of December 31, 2020:
|
Payments Due by Period
|
||||||||||||||||||||
|
Total
|
Within
1 Year |
2-3
Years |
4-5
Years |
After 5
Years |
||||||||||||||||
|
Operating lease obligations
|
$ | 46,544 | $ | 8,650 | $ | 10,956 | $ | 8,607 | $ | 18,331 | ||||||||||
|
Seller financing Viajes Falabella
|
5,750 | 5,750 | — | — | — | |||||||||||||||
|
Other long-term liabilities
(1)
|
125,000 | — | — | — | 125,000 | |||||||||||||||
|
Promissory notes issued
|
14,490 | 14,490 | ||||||||||||||||||
|
Accrued earnout liability
|
3,765 | 3,765 | ||||||||||||||||||
|
Redemption of
non-controlling
interest
(2)
|
2,880 | — | 2,880 | — | — | |||||||||||||||
|
Seller financing Best Day Group
|
8,768 | 8,768 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Total contractual obligations
|
$
|
207,197
|
|
$
|
14,400
|
|
$
|
35,094
|
|
$
|
12,372
|
|
$
|
143,331
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| (1) |
We may be required to make a termination payment of $125.0 million to Expedia if, among other things: we elect to terminate the Expedia Outsourcing Agreement on or after March 6, 2022; Expedia elects to terminate the Outsourcing Agreement if bookings sourced through Expedia are reduced such that the marketing fees payable back to us fall below $5.0 million over a
six-month
period; or if a bookings shortfall occurs, for any consecutive three months or any three months within a
six-month
period. The amount of the termination payment is reflected as a long-term liability on our balance sheet. For more information on our relationship of Expedia, see “Item 7. Major Shareholders and Related Party Transactions —B. Related Party — Relationship with Expedia.”
|
| (2) |
Pursuant to the Koin acquisition agreement, we have the right to call the
non-controlling
interest in Koin, and the
non-controlling
owners have the right to put their interest back to us, assuming we do not exercise our call right, at dates and prices defined in the agreement. The put price is fixed at $2,880.
|
|
G.
|
Safe Harbor
|
See “Part I. Introduction – Forward-Looking Statements.”
|
ITEM 6
|
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
|
|
A.
|
Directors and Senior Management
|
Board of Directors
Our business and affairs are managed by, or under the direction or supervision of, our board of directors. Our board of directors has all the powers necessary for managing, and for directing and supervising, our business and affairs and may exercise all our company powers and do all such lawful acts and things as are not by applicable law or our memorandum and articles of association required to be exercised or done by our shareholders. Accordingly, our board of directors have significant discretion (and, regarding the vast majority of management and governance matters, exclusive discretion) in the management and control of our business and affairs.
Our board of directors consists of eight members. Our memorandum and articles of association authorize us to have up to eight directors or such other number of directors as is from time to time fixed by resolution of the board.
Our board of directors is divided into three classes designated as the “Class I Directors,” “Class II Directors” and “Class III Directors” plus a director appointed by the L Catterton Purchaser (the “L. Catterton Director”) and director appointed by the Series B Preferred Shareholders (the “Series B Director”). Pursuant to our memorandum and articles of association, each of our directors (other than the L. Catterton Director and Series B Director) is appointed at an annual meeting of shareholders for a period of three years, with each director serving until the third annual meeting of shareholders following his or her election (except that the terms of the current Class I Directors, Class II Directors and Class III Directors will expire at our annual meetings in 2021, 2022 and 2023, respectively). Upon the expiration of the term of a class of directors, candidates will be elected (or
re-elected,
as the case may be)
88
as directors of that particular class for three-year terms at the annual meeting of shareholders in the year of such expiration. Our Class I, II and III Directors are divided among the three classes as follows:
| • |
the Class I Directors are Adam Jay and Michael James Doyle, and their terms will expire at the annual meeting of stockholders to be held in 2021;
|
| • |
the Class II Directors are Martín Rastellino and Mario Eduardo Vázquez, and their terms will expire at the annual meeting of stockholders to be held in 2022; and
|
| • |
the Class III Directors are Nilesh Lakhani and Damián Scokin, and their terms will expire at the annual meeting of stockholders to be held in 2023.
|
Elections for Class I, II and III Directors will take place by a plurality of the votes of the shares present in person or represented by proxy at the annual meeting and entitled to vote on the election of directors. No Class I, II or III Director may be elected or
re-elected
at any special meeting of our shareholders. Given the current restrictions related to the
COVID-19
pandemic, we cannot assure you that we will not be required to delay or adjourn our annual meeting for 2021 or host an annual meeting that shareholders can only attend remotely or by proxy.
The L Catterton Purchaser has the right to appoint the L. Catterton Director so long as the L Catterton Purchaser and its permitted transferees continue to beneficially own (a) (i) at least 75,000 Series A Preferred Shares and (ii) Warrants and/or ordinary shares that were issued upon exercise of the Warrants representing at least 5,500,000 ordinary shares or (b) if the Company shall have redeemed the Series A Preferred Shares in full, Warrants and/or ordinary shares that were issued upon exercise of Warrants representing at least 5,500,000 ordinary shares . The Series B Preferred Shareholders have the right to appoint a director so long as the Waha Purchaser holds Series B Preferred Shares (or ordinary shares issued opened conversion thereof) representing no less than 25,000 Series B Preferred Shares. The L. Catterton Director is Dirk Donath and the Series B Director is Aseem Gupta.
The following table presents the names and ages of the members of our board of directors:
|
Name
|
Age
|
Position
|
||
| Nilesh Lakhani | 61 | Chairman of the Board and Director | ||
| Damian Scokin | 54 | Chief Executive Officer and Director | ||
| Adam Jay | 44 | Director | ||
| Martín Rastellino | 49 | Director | ||
| Mario Eduardo Vázquez | 85 | Director | ||
| Michael James Doyle II | 50 | Director | ||
| Dirk Donath | 54 | Director | ||
| Aseem Gupta | 39 | Director |
Our board of directors has the exclusive power to fill any vacancy arising on the board from time to time and to increase the size of the board of directors from time to time and appoint additional directors in connection therewith. Our shareholders may not vote to fill any vacancy or to change the size of our board.
A director of the Company may only be removed: (i) with cause, by a resolution approved by shareholders holding not less than
two-thirds
of the voting rights at a meeting of shareholders called for the stated purpose of removing the director or for stated purposes including the removal of the director, or (ii) with cause, by a resolution approved by directors holding not less than
two-thirds
of the voting rights of all of those directors entitled to vote on the resolution at a meeting of directors or by way of unanimous written consent of those directors entitled to vote on the removal. See “Item 16G. Corporate Governance—Differences in Corporate Law” for further information.
The following is a brief summary of the business experience of our directors. The current business addresses for our directors is Juana Manso 1069, Floor 5, Ciudad Autónoma de Buenos Aires, Argentina (C1107CBR).
Nilesh Lakhani
89
NETS) from 2013 to 2019. He also served as an independent director on the board of directors of QIWI plc (Nasdaq: QIWI) from 2013 to 2014. Mr. Lakhani was an Operating Partner at Lumia Capital LLC, an emerging markets focused technology venture fund from 2015 to 2018. He has also held key executive positions with growth companies in the technology, media and financial services industries. From 2010 to 2012, he was the Chief Financial Officer of oDesk Corporation. Prior to that, from 2007 to 2010, he was the Chief Financial Officer of Yandex N.V. (Nasdaq: YNDX). He also served as Chief Financial Officer of CTC Media, Inc. (Nasdaq: CTCM) from 2004 to 2007. Prior to that, Mr. Lakhani was the Chief Financial Officer of Pogo.com, and was Vice President of Global Operations at Electronic Arts after it acquired Pogo.com. Mr. Lakhani also served as senior vice president with Transamerica Corporation from 1991 to 1997, and worked with GE Capital from 1984 to 1991. Mr. Lakhani holds a bachelor’s in Economics from the University of Manchester and an MBA from the University of San Francisco.
Damián Scokin
Adam Jay
UK-based
subsidiary of Homeserve plc. Mr. Jay holds an MBA from INSEAD and an MA (Hons) in Politics, Philosophy and Economics from Oxford University.
Martín Rastellino
co-founder
of the Company and has been extensively involved in the management of the Company from 1999 until June 2017. He has served as our Chief Operating Officer and Head of Hotels Business, among other key managerial positions. Prior to joining the Company, Mr. Rastellino served as a Manager for Teleglobe in the United States and has also worked as an auditor for Arthur Andersen in Argentina between 1993 and 1997. Mr. Rastellino holds a bachelor’s degree in Public Accounting from the University of Buenos Aires and an MBA from Duke University.
Mario Eduardo Vázquez
90
Michael James Doyle
Dirk Donath
Aseem Gupta
ADX-listed
investment holding company and operates through two divisions, Asset Management and Private Investments, managing proprietary and third-party capital invested across a number of sectors and geographies. Mr. Gupta is responsible for managing strategic proprietary investments, deploying capital in new investments, and delivering successful exits. Prior to joining Waha Capital, Mr. Gupta worked in the Technology, Media and Telecom Investment Banking Team at Deutsche Bank in New York. Mr. Gupta holds an MBA degree from Rice University, and a bachelor’s degree in Computer Engineering from Purdue University.
Executive Officers
The following table lists the current executive officers of our group:
|
Name
|
Age
|
Position
|
||
| Damián Scokin | 54 | Chief Executive Officer | ||
| Alberto López Gaffney | 49 | Chief Financial Officer | ||
| Mariano Scagliarini | 48 | General Counsel | ||
| Gonzalo García Estebarena | 41 | Chief Commercial Director | ||
| Sebastián Mackinnon | 49 | Executive VP Travel Partners & Corporate Affairs |
The following is a brief summary of the business experience of our executive officers who are not also directors. Unless otherwise indicated, the current business addresses for our executive officers is Juana Manso 1069, 5th Floor, Ciudad Autónoma de Buenos Aires, Argentina (C1107CBR).
Alberto López Gaffney
ex-Brazil.
Prior to that, Mr. López Gaffney worked between 1999 and 2012 with Morgan Stanley, in the Mergers & Acquisitions Group and later as Managing Director & Head of Southern Cone. He began his business career as a business analyst at McKinsey in 1996. Mr. López Gaffneyholds an MBA from Harvard University and a Master in Science in Industrial Engineering from Universidad Católica Argentina.
Mariano Scagliarini
91
Gonzalo García Estebarena
Sebastián Mackinnon
Family Relationships
There are no family relationships among any of our directors or executive officers.
|
B.
|
Compensation
|
Compensation of Directors and Executive Officers
For the years ended December 31, 2020, 2019 and 2018, the aggregate compensation to the officers and members of our board of directors amounted to $3,525,644, $4,051,274 and $7,235,508, respectively. We did not pay any compensation to the remaining directors in 2020, 2019 and 2018, and did not pay any other cash compensation or benefits in kind to our directors in 2020, 2019 and 2018, other than the equity awards described under “—Equity Incentive Plans.” Our officers receive comparable benefits generally provided to our employees, such as pension, retirement and health insurance coverage, with some variations with regard to company car benefits and levels of health insurance coverage. For information regarding share options and RSUs granted to our current officers and directors, see “—Equity Incentive Plans.”
Equity Incentive Plans
Our board of directors has adopted two stock incentive plans, namely, the 2015 Stock Option Plan (the “2015 Plan”) and the Amended and Restated 2016 Stock Incentive Plan (the “2016 Plan” and, together with the 2015 Plan, the “Plans”). The terms of the 2015 Plan and the 2016 Plan are substantially similar, although no further awards are being granted under the 2015 Plan. The purpose of these plans is to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to employees, outside directors and consultants, and to promote the success of our business. Our board of directors believes that our Company’s long-term success is dependent upon our ability to attract and retain superior individuals who, by virtue of their ability and qualifications, make important contributions to our business.
Pursuant to the Amended and Restated 2016 Stock Incentive Plan, we may grant restricted stock units (“RSUs”) and stock options to our directors, officers and/or employees. As of December 31, 2020, we had 1,919,099 shares of common stock reserved for new stock-based awards under the Amended and Restated 2016 Stock Incentive Plan. We issue new shares to satisfy the exercise or release of stock-based awards.
During 2020, we started issuing RSUs as our primary form of stock-based compensation. During 2020 and 2019, we granted an aggregate of 1,409,680 and 340,565 RSUs to our employees, directors and management. During 2020,
92
we did not grant any stock options while during 2019 we granted an aggregate of 225,903 stock options. For more information about our equity-based compensation, see “Item 6. Directors, Senior Management and Employees — B. Compensation.
Administration
Eligibility
non-incentive
stock options (“NSOs”), and the direct award or sale of shares or RSUs or other share-based awards, in the case of the 2016 Plan. Only employees are eligible for the grant of incentive stock options (“ISOs”). The term “option” as used in this section refers to both NSOs and ISOs.
Moreover, a person who owns more than 10% of the total combined voting power of all classes of our outstanding share capital is not eligible for ISO grants unless (i) the exercise price is at least 110% of the fair market value of a share on the date of the grant and (ii) such ISO by its terms is not exercisable after the expiration of five years from the date of the grant.
Vesting Schedule
Award Agreement
Transfer Restrictions
Exercise of Awards
Termination of Awards
Third-Party Acquisition
Acceleration
93
Amendment, Suspension or Termination
|
C.
|
Board Practices
|
For information about the date of expiration of the current term of office and the period during which each director and executive officer has served in such office, see “—A. Directors and Senior Management.” For information about contracts for benefits upon termination of employment, see “—B. Compensation.”
Board Committees
Our board of directors may establish committees from time to time with such responsibilities as determined by our board. Members will serve on these committees until their resignation or until otherwise determined by our board. Our board of directors have established an audit committee, as described below.
Audit Committee
Our audit committee consists of Mr. Mario Eduardo Vázquez, Mr. Michael Doyle and Mr. Martín Rastellino, with Mr. Vázquez serving as chair. Messrs. Vázquez, Doyle and Rastellino each satisfy the independence requirements of Rule
10A-3
under the Exchange Act. Our board of directors also has determined that Messrs. Vázquez, Doyle and Rastellino qualify as audit committee financial experts within the meaning of the SEC rules. Our audit committee oversees our accounting and financial reporting processes and the audits of our consolidated financial statements. Our audit committee is responsible for, among other things:
| • |
selecting our independent auditors and
pre-approving
all auditing and
non-auditing
services permitted to be performed by our independent auditors;
|
| • |
regularly reviewing the independence of our independent auditors;
|
| • |
reviewing all related party transactions on an ongoing basis;
|
| • |
discussing the annual and quarterly audited consolidated financial statements with management and our independent auditors;
|
| • |
periodically reviewing and reassessing the adequacy of our audit committee charter;
|
| • |
meeting separately and periodically with management and our internal and independent auditors;
|
| • |
reporting regularly to our full board of directors; and
|
| • |
such other matters that are specifically delegated to our audit committee by our board of directors from time to time.
|
Nomination and Compensation Committee
In February 2019 our Board of Directors formed a nomination and compensation committee. The nomination and compensation committee is composed of three members, Mr. Dirk Donath, Mr. Nilesh Lakhani and Mr. Martin Rastellino. The nomination and compensation committee is responsible for, among other things:
94
| • |
carrying out the Board’s responsibilities in relation to compensation of the Company’s CEO and his direct reports (including plans, policies and programs), overseeing the implementation of the Company’s compensation policy, and providing such guidance with respect to compensation matters as the Committee deems appropriate;
|
| • |
(i) identifying individuals to become Directors of the Company, (ii) nominating qualified individuals for election to the Board at the annual meeting of shareholders, (iii) recommending to the Board the individual directors to serve on the committees of the Board, and (iv) recommending the Board a set of corporate governance principles applicable to the Company; and
|
| • |
any such other duties as may be from time to time assigned to it by the Board or required by the rules and regulations of the SEC or the New York Stock Exchange.
|
Strategy Committee
In May 2019 our board of directors formed a strategy committee. The strategy committee is composed of four members, Mr. Nilesh Lakhani, Mr. Martín Rastellino, Mr. Michael Doyle and Mr. Dirk Donath. The strategy committee is responsible for, among other things:
| • |
assist and consult with the Board of Directors on the objectives for the Company’s strategic plans, and review management’s recommendations with respect to the strategic direction of the Company, oversee management’s implementation of the Company’s strategy and regularly report to the Board of Directors with respect thereto;
|
| • |
identify significant opportunities and challenges facing the Company, including potential transactions, the impact of external developments and factors on the Company’s corporate strategy and its execution, such as the changes in economic and market conditions, competition in the industry, regulations, among others; and
|
| • |
Review and make recommendations to the Board of Directors, with respect to any mergers, acquisitions, joint ventures, minority investments, and other strategic investments, as well as financing for those strategic investments in case they require approval of the Board of Directors.
|
|
D.
|
Employees
|
As of December 31, 2020, we had 3,577 employees, including the employees of Best Day. We also contracted with certain third-party providers to support our call center employees. The following tables show a breakdown of our employees as of December 31, 2020, 2019 and 2018 by category of activity.
|
Number of Employees
as of December 31, |
||||||||||||
|
Division/Function
|
2020
|
2019
|
2018
|
|||||||||
|
Operations and customer service
|
1,146 | 1,150 | 1,349 | |||||||||
|
Sales and marketing
|
1,025 | 355 | 263 | |||||||||
|
Technology and content
|
778 | 1,172 | 1,227 | |||||||||
|
General and administrative
(1)
|
628 | 352 | 559 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total
|
|
3,577
|
|
|
3,029
|
|
|
3,398
|
|
|||
|
|
|
|
|
|
|
|||||||
| (1) |
Includes business development, administration, finance and accounting, legal and human resources.
|
As of December 31, 2020, 380 of our employees in Argentina and all of our employees in Brazil were represented by labor unions. We believe that our relations with our employees are good and we implement a variety of human resources practices, programs and policies that are designed to hire, retain, develop and compensate our employees.
95
We have attracted and retained outstanding individuals over the years and we strive to bring more talent by hiring individuals with internet-related experience. We believe our future success will depend on our ability to attract and retain capable professionals.
|
E.
|
Share Ownership
|
The following table sets forth information regarding the beneficial ownership of our ordinary shares as of March 31, 2021 by (1) each of our directors and executive officers and (2) all of our directors and executive officers as a group.
In computing the number of ordinary shares beneficially owned by a person or entity and the percentage ownership of that person or entity, we deemed to be outstanding all ordinary shares subject to options or RSUs held by that person or entity that are currently exercisable or that will become exercisable or vested, as applicable, within 60 days of March 31, 2021. We did not deem these shares outstanding, however, for the purpose of computing the percentage ownership of any other person or entity. Unless otherwise indicated, the address of each beneficial owner listed in the table below is Juana Manso 1069, 5 Floor, Ciudad Autónoma de Buenos Aires, Argentina (C1107CBR).
|
Outstanding Ordinary Shares
as of March 31, 2021 |
||||||||
|
Name of Beneficial Owner
|
Number
|
%
|
||||||
|
Directors and Executive Officers:
|
||||||||
|
Nilesh Lakhani
(1)
|
47,462 | * | ||||||
|
Damián Scokin
(2)
|
— | — | ||||||
|
Adam Jay
|
— | — | ||||||
|
Martín Rastellino
(3)
|
474,627 | * | ||||||
|
Mario Eduardo Vázquez
(4)
|
18,393 | * | ||||||
|
Michael Doyle II
(5)
|
77,147 | * | ||||||
|
Dirk Donath
|
— | — | ||||||
|
Aseem Gupta
|
— | — | ||||||
|
Alberto Lopez Gaffney
(6)
|
51,416 | * | ||||||
|
Mariano Scagliarini
(7)
|
— | — | ||||||
|
Gonzalo García Estebarena
(8)
|
— | — | ||||||
|
Sebastián Mackinnon
(9)
|
38,309 | * | ||||||
|
|
|
|||||||
|
Directors and Executive Officers as a Group (13 persons)
|
972,549 | 1.3 | % | |||||
|
|
|
|||||||
| * |
Represents beneficial ownership of less than 1%.
|
| (1) |
Consists of 47,462 ordinary shares held by Mr. Lakhani, Chairman and member of our board of directors. Mr. Lakhani also holds 8,041 RSUs which will vest on January 1, 2022; provided that Mr. Lakhani remains in continuous service as an employee, director or consultant of the Company through each applicable date. See “Item 6—B. Compensation.”
|
| (2) |
Mr. Scokin, our Chief Executive Officer, holds options for the issuance of 86,901 shares that will vest in three equal installments in December 2021, 2022 and 2023 and 301,957 RSUs that will vest in three equal installments in December 2021, 2022 and 2023; in each case provided that Mr. Scokin remains in continuous service as an employee, director or consultant of the Company through each applicable date. See “Item 6—B. Compensation.” Mr. Scokin is our Chief Executive officer and a member of our board of directors.
|
| (3) |
Consists of 5,212 ordinary shares held by Mr. Rastellino, 469,415 ordinary shares held by Birbey S.A. Mr. Rastellino has sole voting and dispositive control over such shares and directly or indirectly owns 100% of the share capital of Birbey S.A. Mr. Rastellino also holds 6,031 RSUs which will vest on January 1, 2022; provided that Mr. Rastellino remains in continuous service as an employee, director or consultant of the Company through each applicable date. See “Item 6—B. Compensation.”
|
| (4) |
Consists of 18,393 ordinary shares held by Mr. Vázquez, a member of our board of directors. Mr. Vázquez also holds 6,031 RSUs which will vest on January 1, 2022; provided that Mr. Vázquez remains in continuous service as an employee, director or consultant of the Company through each applicable date. See “Item 6—B. Compensation.”
|
| (5) |
Consists of 77,147 ordinary shares held by Mr. Doyle, a member of our board of directors. Mr. Doyle also holds 4,021 RSUs which vest on January 1, 2022; provided that Mr. Doyle remains in continuous service as an employee, director or consultant of the Company through such date. See “Item 6—B. Compensation.”
|
| (6) |
Consists of 51,416 ordinary shares held by Mr. Lopez Gaffney, our Chief Financial Officer. Mr. Lopez Gaffney also holds: options for the issuance of 34,310 ordinary shares: which will vest in two equal installments on December 1, 2021 and 2022 and 82,896 RSUs which will vest in five equal installments on June 1, 2021, December 1, 2021, June 1, 2022, December 1, 2022 and December 1, 2023; in each case provided that Mr. Lopez Gaffney remains in continuous service as an employee, director or consultant of the Company through each applicable date. See “Item 6—B. Compensation”.
|
| (7) |
Mr. Scagliarini, our General Counsel, holds 12,369 RSUs which will vest in five equal installments on June 1, 2021, December 1, 2021, June 1, 2022, December 1, 2022 and December 1, 2023; in each case provided that Mr. Scagliarini remains in continuous service as an employee, director or consultant of the Company through each applicable date. See “Item 6—B. Compensation.”
|
96
| (8) |
Mr. Estebarena,, our Chief Commercial Director, holds options for the issuance of 58,597 which will vest in two equal installments on December 1, 2021 and on December 1, 2022 and 27,452 RSUs which will vest in five equal installments on June, 2021, December 1, 2021, June 1, 2022, December 1, 2022 and December 1, 2023; in each case provided that Mr. García Estebarena remains in continuous service as an employee, director or consultant of the Company through each applicable date. See “Item 6—B. Compensation.”
|
| (9) |
Consists of 38,309 ordinary shares held by Mr. Mackinon, our Executive VP Travel Partners & Corporate Affairs. Mr. Mackinon also holds: options for the issuance of 26,241 ordinary shares which will vest in two equal installments on December 1, 2021 and on December 1, 2022 and 81,107 RSUs which will vest in five equal installments on June 1, 2021, December 1, 2021, June 2022, December 1, 2022, and December 1, 2023; in each case provided that Mr. Mackinon remains in continuous service as an employee, director or consultant of the Company through each applicable date. See “Item 6—B. Compensation.”
|
For information regarding share options and RSUs held by the persons listed above, see “—Equity Incentive Plans.”
|
ITEM 7
|
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
|
|
A.
|
Major Shareholders
|
The following table sets forth information regarding the beneficial ownership of our ordinary shares as of March 31, 2021 by each person known to us to beneficially own more than 5% of any class of our outstanding voting securities.
In computing the number of ordinary shares beneficially owned by a person or entity and the percentage ownership of that person or entity, we deemed to be outstanding all ordinary shares subject to options or RSUs held by that person or entity that are currently exercisable or that will become exercisable or vested, as applicable, within 60 days of March 31, 2021. We did not deem these shares outstanding, however, for the purpose of computing the percentage ownership of any other person or entity.
|
Outstanding Ordinary Share
as of March 31, 2021 |
||||||||
|
Name of Beneficial Owner
|
Number
|
%
|
||||||
|
% Shareholders:
|
||||||||
|
LCLA Daylight LP
(1)
|
11,000,000 | 13.58 | ||||||
|
Expedia, Inc.
(2)
|
9,590,623 | 11.84 | ||||||
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Tiger Global Management LLC
(3)
|
9,256,550 | 11.71 | ||||||
|
Waha LATAM Investments Limited
(4)
|
5,405,405 | 7.20 | ||||||
|
Dorsey Asset Management LLC
(5)
|
4,255,213 | 5.95 | ||||||
|
Arisaig Global Emerging Markets
Consumer Fund (Singapore) Pte Ltd.
(6)
|
3,856,160 | 5.51 | ||||||
| (1) |
Based on Schedule 13D filed with the SEC on September 23, 2020. Consists of ordinary shares issuable upon exercise by LCLA Daylight LP of warrants to purchase up to 11,000,000 ordinary shares. CALA2 Managers, Ltd. is the sole general partner of LCLA Daylight LP. Scott A. Dahnke and Dirk Donath are members of the managing board of CALA2 Managers Ltd. Accordingly, such shares may be deemed to be beneficially owned by CALA2 Managers Ltd., Mr. Dahnke and Mr. Donath. Mr. Dahnke and Mr. Donath disclaim beneficial ownership of such ordinary shares. The principal business address of LCLA Daylight LP, CALA2 Managers, Ltd. and Mr. Donath is c/o Catterton Latin America Management Co., 30 Rockefeller Plaza, Suite 5405, New York, NY 10112. The principal business address of Mr. Dahnke is 599 West Putnam Avenue, Greenwich, CT 06830.
|
| (2) |
Consists of ordinary shares held by Expedia, Inc., a Washington corporation, a direct wholly owned subsidiary of Expedia Group, Inc., a Delaware corporation. The principal business address for Expedia Inc. is 333 108th Avenue NE, Bellevue, WA 98004.
|
| (3) |
Based on Schedule
13-F
filed with the SEC on February 16, 2021. The principal business address of Tiger Global Management, LLC, 9 West 57
th
Street, 35
th
Floor, New York, NY 10019.
|
| (4) |
Based on the Schedule 13D filed with the SEC on March 1, 2021. Consists of 50,000 Series B Preferred Shares held by Waha LATAM Investments Limited representing 5,405,405 ordinary shares on an
as-converted
basis. The Series B Preferred Shares are convertible, at the option of the holders, at any time into ordinary shares at an initial conversion price of $9.251 per share and an initial conversion rate of 108.1081 ordinary shares per Series B Preferred Share, subject to certain anti-dilution adjustments. Waha Latam Investments Limited is a wholly owned subsidiary of Waha Capital PJSC. Accordingly, Waha Capital PJSC may be deemed to share beneficial ownership of the securities held of record by Waha Latam Investments Limited. The principal business address of each of the entities named in this footnote is 42 / 43 Floor Etihad Towers, Tower 3, Abu Dhabi, United Arab Emirates.
|
| (5) |
Based on the Schedule 13G/A filed with the SEC on February 16, 2021. Dorsey Asset Management LLC is the direct owner of and has sole dispositive power over 4,255,213 ordinary shares. The principal business address of Dorsey Asset Management LLC is 150 North Wacker Dr., Suite 960, Chicago, Illinois 60606.
|
| (6) |
Based on the Schedule 13G/A filed with the SEC on February 12, 2021. Arisaig Global Emerging Markets Consumer Fund (Singapore) Pte Ltd. is the holder of record of 3,856,160 ordinary shares. Such shares may deemed to be beneficially owned by Arisaig Partners (Mauritius) Ltd., its investment manager, and Arisaig Partners (Asia) Pte Ltd., its
sub-investment
manager. The principal business address for eah of Arisaig Global Emerging Markets Consumer Fund (Singapore) Pte Ltd. and Arisaig Partners (Asia) Pte Ltd. is 6 Lorong Telok,
#02-01
Singapore 049019. The business address for Arisaig Partners (Mauritius) Ltd. is IFS Court, Bank Street, TwentyEight Cybercity, Ebene 72201 Mauritius.
|
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Significant Changes in Percentage Ownership
Except as disclosed below, to our knowledge, there has been no significant changes in the percentages of ownership held by the major shareholders listed below.
On May 3, 2017, the stockholders of our predecessor, Decolar.com, Inc., a Delaware corporation, exchanged their shares for newly issued ordinary shares of Despegar.com, Corp. to create a BVI holding company.
On March 6, 2015, Expedia purchased 9,590,623 shares of common stock (the “2015 Expedia Shares”) from our predecessor, Decolar.com, Inc., representing 16.4% of its capital stock, for an aggregate purchase price of $270.0 million.
On September 19, 2017, we completed our initial public offering on the New York Stock Exchange. We sold an aggregate of 14,685,500 ordinary shares (including 10,578,931 ordinary shares sold by us, including the full exercise of the over-allotment option by the underwriters to purchase up to an additional 1,915,000 ordinary shares, and 4,106,569 ordinary shares sold by our selling shareholders). The price per ordinary share was $26.00. In this initial public offering, Tiger Global sold 3,356,020 ordinary shares, reducing its ownership percentage from 57.3% to 43.7%. In turn, in the context of this initial public offering, Expedia was diluted from 16.4% to 13.9%.
On August 9, 2018, the Company´s board of directors approved a share repurchase program that enabled the Company to repurchase up to $75 million of its shares effective immediately and expiring in one year. During 2018 and 2019, the Company repurchased 1,544,475 ordinary shares with a weighted average cost per share of $16.84, and 1,525,632 shares with a weighted average cost per share of $13.54, respectively.
On August 21, 2018, the SEC declared effective our registration statement on Form
F-1,
which was filed for the purposes of registering ordinary shares for Tiger Global, our largest shareholder at the time and an affiliate of Jason Lenga, a member of our board of directors, pursuant to which Tiger Global could elect to make
in-kind
distributions to its members, partners or shareholders or otherwise dispose of the ordinary shares owned by Tiger Global. Such registration statement was amended pursuant to a post-effective amendment on Form
F-3,
which was declared effective by the SEC on December 19, 2018.
On August 1, 2019, the Company’s board of directors approved a new share repurchase that enables the Company to repurchase up to $100 million of its shares. The program became effective on August 8, 2019, and expired one year thereafter. Share repurchases may be undertaken through a variety of methods, including pursuant to trading plans adopted in accordance with Rule
10b5-1
of the Exchange Act, or through open market or privately negotiated transactions, in accordance with applicable law. During 2019, the Company repurchased 1,938,200 ordinary shares with a weighted average cost per share of $11.13.
On August 20, 2020, the Company, entered into the L Catterton Investment Agreement with the L Catterton Purchaser. The Company agreed to issue and sell to the L Catterton Purchaser, pursuant to the Catterton Investment Agreement, 150,000 shares of the Company’s newly created Series A Preferred Shares, without par value (the “Series A Preferred Shares”), and warrants to purchase 11 million of the Company’s ordinary shares, without par value, for an aggregate purchase price of $150 million. At the closing of the Catterton Investment Agreement on September 18, 2020, the Company issued 150,000 Series A Preferred Shares and the Warrants to the L Catterton Purchaser. As of the date of this Annual Report, the L. Catterton Purchaser has not exercised the Warrants.
On August 20, 2020, Despegar entered into the Waha Investment Agreement with the Waha Purchaser. The Company agreed to issue and sell to the Waha Purchaser, pursuant to the Waha Investment Agreement, 50,000 shares of the Company’s newly created Series B Preferred Shares, without par value (the “Series B Preferred Shares”), for an aggregate purchase price of $50 million. At the closing of the Waha Investment Agreement on September 21, 2020, the Company issued 50,000 Series B Preferred Shares to the Waha Purchaser. The Series B Preferred Shares are convertible, at the option of the holders, at any time into ordinary shares at an initial conversion
98
price of $9.251 per share and an initial conversion rate of 108.1081 ordinary shares per Series B Preferred Share, subject to certain anti-dilution adjustments. As of the date of this Annual Report, the 50,000 Series B Preferred Shares would be convertible into 5,405,405 ordinary shares.
|
B.
|
Related Party Transactions
|
Relationship with Expedia
Expedia Outsourcing Agreement
We entered into the Expedia Outsourcing Agreement with affiliates of Expedia on March 6, 2015. The agreement has been amended and restated, most recently on November 14, 2019. Expedia is the beneficial owner of 11.84% of our ordinary shares outstanding as of March 31, 2021.
Substantially all of the hotel and other lodging reservations that we offer through our platform for all countries outside Latin America are provided to us by Expedia pursuant to the Expedia Outsourcing Agreement. Under the agreement, Expedia is also the preferred provider to us of hotel and other lodging reservations inside Latin America.
Pursuant to the Expedia Outsourcing Agreement, Expedia pays monthly marketing fees to us, which are calculated as a percentage of the gross booking value of the bookings that we sourced through Expedia during that month. We are required to maintain a level of bookings through Expedia such that those marketing fees equal at least $5.0 million in a
six-month
period; otherwise, Expedia may require us to pay a $125.0 million termination fee. For 2020 and 2019, marketing fees paid by Expedia to us under the Expedia Outsourcing Agreement, net of fees we paid to Expedia under the Despegar Outsourcing Agreement (described below), amounted to $7.1 million and $38.8 million, which represented 5.4% and 7.3% of our consolidated revenue for the year, respectively. From time to time, under the Expedia Outsourcing Agreement, our fees have been supplemented by
one-time
incentives paid to us for reaching certain booking targets during a specified time period. As of December 31, 2020, our payables to Expedia under the Expedia Outsourcing Agreement were $19.4 million. For more information, see note 22 to our consolidated financial statements.
Given the uncertainty caused by the ongoing
COVID-19
pandemic, we cannot assure you that we will be able to meet this requirement in the future. As a result, on August 20, 2020, we entered into an amendment with respect to the Expedia Outsourcing Agreement (the “Outsourcing Agreement Amendment”), whereby the parties agreed, among other things, to waive Expedia’s termination rights under the Expedia Outsourcing Agreement relating to minimum bookings requirements through December 31, 2021, subject to certain conditions.
In addition, the agreement was amended and restated on November 14, 2019 in order to, among other things, allow us to source hotel bookings without Expedia on certain
pre-agreed
properties outside of Latin America, which transactions are limited to an agreed percentage of the transactions we source outside of Latin America. If such transactions exceed the agreed percentage threshold during a
six-month
period, we may be required to pay Expedia compensation; and if our
non-Expedia
sourced bookings outside of Latin America exceed the agreed percentage of gross bookings outside of Latin America for two consecutive quarters, or an agreed higher percentage threshold in one quarter, Expedia may elect to become our exclusive provider outside of Latin America once again. If such transactions exceed an agreed percentage of the minimum booking percentage set forth therein for any three consecutive months or any three months within a
six-month
period, then Expedia may require us to pay a $125.0 million termination fee.
The term of the Expedia Outsourcing Agreement automatically renews annually unless terminated in accordance with its terms, including (1) by mutual consent or by a party in the case of a material breach by the other party (with a $125.0 million termination payment if terminated by Expedia due to our breach or our failure to meet certain minimum performance requirements), (2) unilaterally by us without cause after March 6, 2022 upon payment to Expedia of a $125.0 million termination payment, and (3) unilaterally by Expedia in the event of a change of control of our Company. A change of control under the agreement is defined as the sale, lease or transfer of all or substantially all of our assets to or acquisition of more than 50% of voting or economic power in our Company or any parent of our Company by an entity in the consumer or corporate travel industry or an internet-enabled provider
99
of travel search or information services. Unilateral termination of the Expedia Outsourcing Agreement by us as described in (2) above, in addition to triggering the termination payment, also gives Expedia the right to sell the 2015 Expedia Shares back to us for fair market value under the Shareholder Agreements described below.
We may also terminate the agreement if Expedia ceases to hold all of the 2015 Expedia Shares unless the disposition of those shares was (1) approved by a majority of members of our Board of Directors that were not designated by Expedia, (2) involuntary or (3) the result of an action taken by us or any of our affiliates.
The foregoing description of the Expedia Outsourcing Agreement, as amended and restated by means of document executed on November 14, 2019, is qualified in its entirety by reference to the full text of Expedia Outsourcing Agreement filed as Exhibit 10.1 to this Annual Report. The foregoing description of the Amendment to the Outsourcing Agreement is qualified in its entirety by reference to the full text of the Amendment to the Outsourcing Agreement filed as Exhibit 10.2 to this Annual Report.
Despegar Outsourcing Agreement
We entered into the Despegar Outsourcing Agreement with certain affiliates of Expedia on August 17, 2016. Under the Despegar Outsourcing Agreement, we are required to make our hotel reservations available to certain affiliates of Expedia. The relevant Expedia Affiliate receives compensation equal to a percentage of the revenue earned by us from the property owner.
The agreement has a three-year term that automatically renews for
one-year
periods, unless either party elects not to renew. We are required to indemnify Expedia and/or its affiliates for losses derived from end user claims. However, if during any contract year Expedia and/or its affiliates suffer losses derived from end user claims exceeding 1% of the annual aggregate room price of the bookings made by the Company during such year, we may terminate the agreement.
As of December 31, 2020, our receivables with Expedia under the Despegar Outsourcing Agreement were $8.2million.
The foregoing description of the Despegar Outsourcing Agreement is qualified in its entirety by reference to the full text of the Despegar Outsourcing Agreement, which is filed as Exhibit 10.3 to this Annual Report.
Shareholder Agreements
We are party to the following agreements with certain of our shareholders: (i) the Sixth Amended and Restated Investors’ Rights Agreement, dated as of August 29, 2017, by and among the Company, Birbey S.A., Expedia and the other parties thereto (the “Sixth Amended and Restated Investors’ Rights Agreement”) and (ii) the Fourth Amended and Restated Voting Agreement dated as of August 29, 2017, by and among the Company, Expedia and the other parties thereto. For purposes of this Annual Report we refer to the Sixth Amended and Restated Investors’ Rights Agreement and the Fourth Amended and Restated Voting Agreement as the “Shareholder Agreements.” The Shareholder Agreements provide Expedia with the rights and obligations described below.
Expedia Preemptive Rights
As long as Expedia beneficially owns at least 5% of our share capital (calculated on a fully-diluted basis), it has preemptive rights to purchase newly issued shares to maintain its percentage ownership in all future offerings by us of our shares or of securities convertible into, or exchangeable or exercisable for, any of our shares, subject to certain limited exceptions.
Expedia Put Right
We are required to buy back from Expedia, or in certain circumstances facilitate the sale of, the 2015 Expedia shares for fair market value, if we exercise our right to terminate the Expedia Outsourcing Agreement on or after March 6, 2022 and make the required termination payment of $125.0 million to Expedia in connection therewith. If we remain
100
a public company with securities traded on a recognized securities exchange at the time we receive notice that Expedia is exercising its put right, then we are required to (1) use our best efforts to prepare and file with the SEC a registration statement covering the 2015 Expedia Shares, (2) request, in conjunction with Expedia, quotes from five internationally-recognized underwriting banks for a firm and fully underwritten sale of the 2015 Expedia Shares and (3) assist Expedia in its sale of the 2015 Expedia Shares on a recognized securities exchange or market or otherwise. If the 2015 Expedia Shares cannot be sold in this manner, we are required to purchase the 2015 Expedia Shares at the highest quoted price then available from the aforementioned underwriting banks. If we are no longer a public company with securities traded on a recognized securities exchange, fair market value will be a price agreed upon by the Company and Expedia or, if the parties cannot agree, a price determined through the assistance of third-party valuation experts.
Expedia
Non-Solicitation
Restriction
Expedia is also prohibited from soliciting certain of our employees, and vice versa, until one year after Expedia beneficially owns less than 10% of our share capital. A similar
non-solicitation
covenant applies during the term of the Expedia Outsourcing Agreement.
Expedia Director Business Opportunities
Subject to applicable confidentiality obligations, directors who have or currently serve as directors, officers, employees or agents of Expedia (the “Expedia Directors”) are not precluded from referring potential business opportunities in which we could have an interest to Expedia. If the Expedia Directors do so, we would be considered to have renounced our interest in such opportunity, unless the opportunity in question was presented to the director solely in his or her capacity as our director or for our benefit, in which case it can only be referred to Expedia if a majority of our board of directors (excluding the Expedia Directors) has formally declined the opportunity pursuant to a resolution.
Expedia Director Potential Conflicts of Interest
The Expedia Directors may be excluded from the relevant portion of any board or committee meeting or relevant resolutions of directors relating to any transaction, agreement or arrangement with respect to which (1) Expedia or any of its affiliates is a counterparty or has a material economic interest in the counterparty or (2) in the reasonable opinion of a majority of the members of the board that are not designated or nominated by, or employed by, Expedia or any of its affiliates, there would exist a conflict of interest between the interests of Expedia or its affiliates, on the one hand, and our interests, on the other (conflict of interest is defined for such purpose as a specific material economic or competitive interest of Expedia or any of its affiliates in a potential transaction, agreement or arrangement of the Company would be reasonably likely to materially impair the independence or objectivity of the Expedia Directors in the discharge of their responsibilities and duties to the Company, in light of their affiliation to Expedia).
Registration Rights
Expedia is entitled to two demand registrations as long as it owns 5% or more of our outstanding ordinary shares (calculated on a fully-diluted basis). Moreover, any other party to our Shareholder Agreements that owns 10% or more our outstanding ordinary shares (calculated on a fully-diluted basis) is also entitled to two demand registrations. We are also required to effect up to two registrations on Form
F-3
in any twelve-month period, upon the request of any such shareholders that own 10% or more of our outstanding ordinary shares (calculated on a fully-diluted basis). The Shareholder Agreements also provide the shareholders party thereto with customary piggyback registration rights. Moreover, we are required to pay certain expenses relating to such registrations and indemnify such shareholders against certain liabilities that may arise under the Securities Act. In addition, as previously described, we may also be required to facilitate the sale by Expedia of the 2015 Expedia Shares. In connection with the Amendment to the Expedia Outsourcing Agreement, on August 20, 2020 Despegar and Expedia entered into a letter agreement with Expedia (the “Letter Agreement”), extending Expedia’s registration rights under the for a period of two years beyond the expiration date of September 22, 2022
101
The foregoing description of the Sixth Amended and Restated Investors’ Rights Agreement is qualified in its entirety by reference to the full text of the Sixth Amended and Restated Investors’ Rights Agreement, which is filed as Exhibit 4.1 to this Annual Report. The foregoing description of the Fourth Amended and Restated Voting Agreement is qualified in its entirety by reference to the full text of the Fourth Amended and Restated Voting Agreement, which is filed as Exhibit 4.3 to this Annual Report. The foregoing description of the Letter Agreement is qualified in its entirety by reference to the full text of the Letter Agreement, which is filed as Exhibit 4.3 to this Annual Report.
Expedia Nominating Agreement
In connection with the Outsourcing Agreement Amendment and waivers granted by Expedia of certain rights set forth in the Sixth Amended and Restated Investors’ Rights Agreement, on October 21, 2020 the Company entered into a Nominating Agreement with Expedia (the “Nominating Agreement”) that grants Expedia the right to designate one individual to be a nominee for election to the board of directors of the Company.
As of the date of this Annual Report, one of the members of the board of directors of the Company, Adam Jay, whose term expires at the annual meeting of the Company’s stockholders to be held in 2021, was nominated by Expedia. Therefore, Expedia is not entitled to nominate a director under the Nominating Agreement until Mr. Jay no longer serves on the board of directors of the Company.
The foregoing description of the Nominating Agreement is not complete and is qualified in its entirety by reference to the full text of the Nominating Agreement, which is filed as Exhibit 4.4 to this Annual Report.
Catterton Registration Rights Agreement
Pursuant to the Catterton Investment Agreement, the Company and the L Catterton Purchaser entered into a Registration Rights Agreement (the “Registration Rights Agreement”), pursuant to which the L Catterton Purchaser is entitled to customary registration rights with respect to the ordinary shares for which the Warrants may be exercised.
The foregoing description of the Registration Rights Agreement is not complete and is qualified in its entirety by reference to the full text of the Shelf Registration Rights Agreement, which is filed as Exhibit 4.5 to this Annual Report.
Waha Registration Rights Agreement
Pursuant to the Waha Investment Agreement, the Company and the Waha Purchaser entered into a Shelf Registration Rights Agreement (the “Shelf Registration Rights Agreement), pursuant to which the Company is required to file a Registration Statement on
Form F-3 covering
the resale of the ordinary shares for which the Series B Preferred Shares may be converted. Such Registration Statement on Form
F-3
was declared effective by the SEC on March 17, 2021.
The foregoing description of the Shelf Registration Rights Agreement is not complete and is qualified in its entirety by reference to the full text of the Shelf Registration Rights Agreement, which is filed as Exhibit 4.6 to this Annual Report.
Statement of Policy Regarding Transactions with Related Persons
Our board of directors has adopted a written statement of policy regarding transactions with related persons, which we refer to as our “related person policy.” Our related person policy requires that a “related person” (as defined as in paragraph (a) of Item 404 of Regulation
S-K)
must promptly disclose to our general counsel any “related person transaction” (defined as any transaction that is anticipated would be reportable by us under Item 404(a) of Regulation
S-K
in which we were or are to be a participant and the amount involved exceeds $120,000 and in which any related person had or will have a direct or indirect material interest) and all material facts with respect thereto. The head of compliance will then promptly communicate that information to our board of directors. No related
102
person transaction will be executed without the approval or ratification of our board of directors. It is our policy that directors interested in a related person transaction will recuse themselves from any vote of a related person transaction in which they have an interest. Our policy does not specify the standards to be applied by directors in determining whether or not to approve or ratify a related person transaction and we accordingly anticipate that these determinations will be made in accordance with principles of the laws of the BVI generally applicable to directors of a BVI company.
|
C.
|
Interests of Experts and Counsel
|
Not applicable.
|
ITEM 8
|
FINANCIAL INFORMATION
|
|
A.
|
Consolidated Statements and Other Financial Information
|
See Exhibits.
Legal Proceedings
See “Item 4. Information on the Company — Business Overview — Legal Proceedings.”
Dividend Policy
In 2020, 2019 and 2018, no dividends were declared or paid on our ordinary shares or on the common stock of our predecessor, Decolar.com, Inc. We currently intend to retain our available funds and future earnings, if any, to finance the development and growth of our business and operations as well as expand our business and do not currently anticipate paying dividends on our ordinary shares in the near future.
The declaration, amount and payment of any future dividends will be at the sole discretion of our board of directors, subject to compliance with applicable BVI laws regarding solvency. Our board of directors will take into account general economic and business conditions, our financial condition and results of operations, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions and other implications on the payment of dividends by us to our shareholders or by our subsidiaries to us, and such other factors as our board of directors may deem relevant.
As we are a holding company, we rely on dividends paid to us by our subsidiaries for our cash requirements, including funds to pay any dividends and other cash distributions to our shareholders, service any debt we may incur and pay our operating expenses. Our ability to pay dividends to our shareholders will depend on, among other things, the availability of dividends from our subsidiaries.
Under BVI law, our board of directors may authorize payment of a dividend to shareholders at such time and of such an amount as they determine if they are satisfied on reasonable grounds that immediately following the dividend the value of our assets will exceed our liabilities and we will be able to pay our debts as they become due. There is no further BVI statutory restriction on the amount of funds which may be distributed by us by dividend.
Pursuant to our memorandum and articles of association:
| • |
Subject to the Company satisfying the solvency test described above, our board of directors may authorize payment of a dividend or other distribution at such time and of such an amount and pursuant to such method or methods of payment or other distribution as it thinks fit. A dividend or other distribution may be paid wholly or partly by the distribution of specific assets (which may consist of our shares or securities of any other entity) and our board of directors may settle all questions concerning such distribution. Without limitation, our board of directors may fix the value of such specific assets, may determine that cash payments shall be made to some shareholders in lieu of specific assets and may vest any such specific assets in a liquidating or other trust on such terms as our board of directors thinks fit.
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| • |
Our board of directors may deduct from any dividend or other distribution payable to any shareholder any or all monies then due from such shareholder to us.
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| • |
All dividends and other distributions unclaimed for three years after having been declared may be forfeited by a resolution of directors for the benefit of the Company. All unclaimed dividends and other distributions may be invested or otherwise made use of by our board of directors for the benefit of the Company pending claim or forfeiture as aforesaid. No dividend or other distribution shall bear interest against the Company.
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| • |
A dividend or other distribution made to a shareholder at a time when, immediately after the dividend or other distribution, the value of the Company’s assets did not exceed its liabilities and the Company was not able to pay its debts as they fell due, is subject to recovery in accordance with the provisions of the BVI Act.
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Each Series A Preferred Share confers on the holder the right to dividends on each Series A Preferred Share, accruing at a rate of 10.0% per annum and payable semi-annually in arrears. Each Series B Preferred Share confers on the holder: the right to dividends on each Series B Preferred Share, accruing at a rate of 4.0% per annum and payable quarterly in arrears;
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B.
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Significant Changes
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There has been no significant subsequent event following the close of the last financial year up to the date of this Annual Report that is known to us and requires disclosure in this Annual Report for which disclosure was not made in this Annual Report.
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ITEM 9
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THE OFFER AND LISTING
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A.
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Offer and Listing Details
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Our ordinary shares trade on the New York Stock Exchange since September 19, 2017 under the symbol “DESP”.
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B.
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Plan of Distribution
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Not applicable.
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C.
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Markets
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Our ordinary shares trade on the New York Stock Exchange under the symbol “DESP”.
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D.
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Selling Shareholders
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Not applicable.
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E.
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Dilution
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Not applicable.
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F.
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Expenses of the Issue
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Not applicable.
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ITEM 10
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ADDITIONAL INFORMATION
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A.
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Share Capital
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Not applicable.
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B.
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Memorandum and Articles of Association
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We are a BVI business company incorporated with limited liability and our affairs are governed by the provisions of our memorandum and articles of association, as amended and restated from time to time, and by the provisions of applicable BVI law, including the BVI Act.
Our company number in the BVI is 1936519. As provided in regulation 4 of our memorandum of association, subject to BVI law, we have full capacity to carry on or undertake any business or activity, do any act or enter into any transaction and, for such purposes, full rights, powers and privileges. Our registered office is at Commerce House, Wickhams Cay 1, P.O. Box 3140, Road Town, Tortola, British Virgin Islands and our registered agent is Conyers Trust Company (BVI) Limited of Commerce House, Wickhams Cay 1, P.O. Box 3140, Road Town, Tortola, British Virgin Islands.
The transfer agent and registrar for our ordinary shares is Computershare Trust Company, N.A., which maintains the register of members of the Company at 480 Washington Boulevard, Jersey City, NJ 07310, USA. The shares of the Company are held in uncertificated (book-entry) form and no shareholder has the right to require issuance or provision to it at any time of any share certificate.
The following is a summary of the material provisions of our share capital and our memorandum and articles of association. This discussion does not purport to be complete and is qualified in its entirety by reference to our memorandum and articles of association filed as Exhibit 3.1 hereto.
Ordinary Shares
The following summarizes the rights of holders of our ordinary shares. Each ordinary share confers on the holder:
| a) |
the right to one vote at a meeting per share on all matters to be voted on by shareholders generally, including the election of directors at an annual meeting of the shareholders;
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| b) |
the right to an equal share in any dividend paid by the Company and payable in respect of our ordinary shares and as may be declared from time to time by our board of directors out of funds legally available for that purpose, if any; and
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| c) |
upon our liquidation, dissolution or winding up, the right to an equal share in the distribution of the surplus assets of the Company available to the ordinary shareholders, but subject in each case to the rights attaching to any additional class or classes of shares (including any preferred shares) that may be authorized and issued after the closing date of our initial public offering. Our ordinary shares do not confer cumulative voting rights.
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Series A Preferred Shares
The following summarizes the rights of holders of our Series A Preferred Shares. Each Series A Preferred Share confers on the holder:
| a) |
the right to dividends on each Series A Preferred Share, accruing at a rate of 10.0% per annum and payable semi-annually in arrears.
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| b) |
the right to one vote per share on any matter on which holders of Series A Preferred Shares are entitled to vote separately as a class, whether at a meeting or by written consent; and
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| c) |
upon our liquidation, dissolution or winding up, a preferential right to the distribution of the surplus assets of the Company.
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The prior written approval of the holders of a majority of the Series A Preferred Shares outstanding at such time, acting together as a separate class, is required in order for the Company to (i) amend the memorandum and articles of association in a manner that adversely affects the holders of Series A Preferred Shares, (ii) create or issue any shares ranking senior or
to the Series A Preferred Shares, or any securities convertible or exchangeable into, or exercisable for shares, ranking senior or
to the Series A Preferred Shares or issue any additional Series A Preferred Shares or increase the authorized number of Series A Preferred Shares, other than as permitted in the memorandum and articles of association, (iii) declare or pay any dividend or distribution, or repurchase or redeem any shares, subject to certain exceptions, including with respect to the Series A Preferred Shares, (iv) make any fundamental change in the nature of the business in which the Company is primarily engaged, (v) initiate, engage in or permit to occur (to the extent within the control of the Company), any liquidation, dissolution or winding up of the Company, (vi) continue or
pari passu
pari passu
re-domicile
the Company in any jurisdiction other than the British Virgin Islands, or (vii) take or permit certain of the foregoing with respect to the significant subsidiaries of the Company.
So long as the L Catterton Purchaser holds any Series A Preferred Shares, the prior written consent of the L Catterton Purchaser is required in order for the Company to (i) incur any indebtedness for borrowed money in excess of the greater of (x) $60 million, and (y) an amount equal to 1.0x the Company’s consolidated Adjusted EBITDA for the twelve month period ending at the end of the last quarter for which the Company has publicly reported financial results, subject to certain exceptions, (ii) sell, dispose of or enter into any exclusive license for any material asset (or group of related assets) of the Company or with a fair market value equal or greater to 10% of the Company’s consolidated total assets and (iii) enter into certain affiliate transactions, in each case subject to certain exceptions.
At any time on or after September 18, 2025, each holder of Series A Preferred Shares may, at its election, cause the Company to redeem all or part of such holder’s then outstanding Series A Preferred Shares in cash at a price equal to the liquidation preference, plus, without duplication, accrued and unpaid distributions to, but excluding, the redemption date. In addition, if the Company undergoes a qualifying change of control, each holder of Series A Preferred Shares may, at its election, cause the Company to redeem all of such holder’s then outstanding Series A Preferred Shares in cash at a price equal to 110.0% of the liquidation preference, plus, without duplication, accrued and unpaid distributions to, but excluding, the redemption date.
Series B Preferred Shares
The following summarizes the rights of holders of our Series B Preferred Shares. Each Series B Preferred Share confers on the holder:
| a) |
the right to dividends on each Series B Preferred Share, accruing at a rate of 4.0% per annum and payable quarterly in arrears;
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| b) |
the right to vote on an
as-converted
basis on all matters to be voted on by shareholders generally, including, but not limited to, the election of directors at an annual meeting of the shareholders;
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| c) |
the right to an equal share in any dividend paid by the Company and payable in respect of our ordinary shares and as may be declared from time to time by our board of directors out of funds legally available for that purpose, if any; and
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| d) |
upon our liquidation, dissolution or winding up, a preferential right to the distribution of the surplus assets of the Company.
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The Series B Preferred Shares will be convertible, at the option of the holders, at any time into ordinary shares at an initial conversion price of $9.251 per share and an initial conversion rate of 108.1081 ordinary shares per Series B Preferred Share, subject to certain anti-dilution adjustments. At any time from September 21, 2023, if the volume
106
weighted average price of the ordinary shares exceeds certain thresholds for at least 10 consecutive trading days, the Series B Preferred Shares will be convertible into the relevant number of ordinary shares set forth in the memorandum and articles of association, at the election of the Company.
At any time on or after September 21, 2027, the Company may redeem all of the Series B Preferred Shares in cash at a price equal to the sum of (i) (x) the initial stated value of $1,000 per Series B Preferred Shares plus (y) any accrued and unpaid dividends plus (ii), without duplication, any accrued and unpaid distributions to, but excluding, the redemption date.
Additional Shares
Our board of directors may determine the rights, privileges, restrictions and conditions attaching to each such class of preferred shares (which may be more favorable than those attaching to the ordinary shares), as the board of directors may determine in its sole and absolute discretion (subject always to obtaining any approval required in respect of the consent, veto or approval rights assigned to the holders of Series A Preferred Shares and/or the Series B Preferred Shares in the memorandum and articles of association), including without limitation:
| • |
the number of shares constituting the additional class of preferred shares;
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| • |
the dividend and other distribution rights of the class of preferred shares and, (which may be payable in preference to, or in relation to, the dividends payable on our ordinary shares or any other class or classes of shares);
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| • |
whether the class of preferred shares shall have voting rights and, if so, whether they shall vote separately or together as a single class with the ordinary shares and/or any other class of shares;
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| • |
whether the class of preferred shares shall have conversion and/or exchange rights and privileges and, if so, the terms and conditions of such conversion and/or exchange;
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| • |
whether the class of preferred shares shall impose conditions and restrictions upon the business and affairs of the Company and/or any of its subsidiaries or the right to approve and/or veto certain matters and/or to appoint and/or remove one or more directors of the Company; and
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| • |
the rights of the preferred shares in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, including, without limitation, any liquidation preference and whether such rights shall be in preference to, or in relation to, the comparable rights of the ordinary shares or any other class or classes of shares.
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Limitation on Liability and Indemnification Matters
Under BVI law, each of our directors, in exercising his powers or performing his duties, is required to act honestly and in good faith and in what the director believes to be in our best interests, is required to exercise his powers as a director for a proper purpose, may not act, or agree to us acting, in a manner that contravenes the BVI Act or our memorandum or articles of association, and is required to exercise the care, diligence and skill that a reasonable director would exercise in the same circumstances (taking into account, but without limitation, the nature of the company; the nature of the decision; and the position of the director and the nature of the responsibilities undertaken by him).
Our memorandum and articles of association provide that, to the fullest extent permitted by law, the Company is authorized to provide indemnification of (and advancement of expenses to) directors, officers and agents of the Company (and any other persons to which the Company is permitted to provide indemnification under applicable law) through provisions in the memorandum and articles of association, agreements with such directors, officers agents or other persons, vote of disinterested directors or otherwise, subject only to limits created by the BVI Act.
107
Our memorandum and articles of association provide that the Company shall indemnify against all expenses, including legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred in connection with legal, administrative or investigative proceedings any person who: (a) is or was a party or is threatened to be made a party to any threatened, pending or completed proceedings, whether civil, criminal, administrative or investigative, by reason of the fact that the person is or was a director, an officer or a liquidator of the Company; or (b) is or was, at the request of the Company, serving as a director, officer or liquidator of, or in any other capacity is or was acting for, another body corporate or a partnership, joint venture, trust or other enterprise; provided that such indemnification shall not apply unless the person claiming such indemnification acted honestly and in good faith and in what he believed to be the best interests of the Company and, in the case of criminal proceedings, the person had no reasonable cause to believe that his conduct was unlawful.
We may pay any expenses, including legal fees, incurred by any such person in defending any legal, administrative or investigative proceedings in advance of the final disposition of the proceedings. If a person to be indemnified has been successful in defense of any proceedings referred to above, the person is entitled to be indemnified against all expenses, including legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred by the person in connection with the proceedings.
We may purchase and maintain insurance in relation to any person who is or was a director, an officer or a liquidator of the Company, or who at the request of the Company is or was serving as a director, an officer or a liquidator of, or in any other capacity is or was acting for, another body corporate or a partnership, joint venture, trust or other enterprise, against any liability asserted against the person and incurred by the person in that capacity, whether or not we have or would have had the power to indemnify the person against the liability as provided in memorandum and articles of association.
Shareholders’ Meetings and Consents
The following summarizes certain relevant provisions of BVI laws and our memorandum and articles of association in relation to our shareholders’ meetings:
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Our memorandum and articles of association contemplate two types of shareholders’ meetings, namely:
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○
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an annual meeting of shareholders (each an “annual meeting”); and
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○
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any meeting of shareholders which is not an annual meeting (each a “special meeting”).
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| • |
Only the board of directors may convene an annual meeting. All annual meetings shall be held at such date, time and place, either within or outside the BVI, as shall be determined from time to time by the board of directors. The business of an annual meeting shall be the election and
re-election
of directors for those board seats whose terms expire at such meeting and any other items of business proposed by the board of directors and/or otherwise duly proposed by eligible shareholders in accordance with the memorandum and articles of association.
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| • |
Special meetings may only be called: (i) by the board of directors at its own initiative; or (ii) by the board of directors upon receiving a compliant written request from a shareholder or shareholders entitled to exercise at least 30% of the voting rights in respect of the matter for which the meeting is requested. Upon receipt of a compliant requisition notice, the board of directors shall convene the requested special meeting for a date not later than 90 days after the date of receipt of the requisition notice, provided the various restrictions, conditions and provision of information and other procedural requirements set out in the memorandum and articles of association have been met by the requisitionists. A special meeting may be held at such date, time and place, within or outside the BVI, as shall be stated in the notice of the meeting.
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| • |
Director elections and
re-elections
by shareholders may occur only at annual meetings (not special meetings) and then only in respect of those board seats whose terms expire at such meeting.
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108
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Nominations of persons for election or
re-election
as directors of the Company at an annual meeting may only be made by (i) the board of directors; or (ii) any shareholder (or shareholders collectively) other than any holder of Series A Preferred Shares (for so long as such holder has the right to appoint the L. Catterton Director) or Series B Preferred Shares (for so long as such holder has the right to appoint the Series B Director), holding not less than 3% of the voting rights that may be exercised at the annual meeting entitled to attend and vote at such meeting, provided the various restrictions, conditions and provision of information and other procedural requirements set out in the memorandum and articles of association have been met by the nominating shareholders. The board of directors also retains discretion to veto inappropriate candidates nominated by shareholders for election as a director in certain enumerated circumstances, including (a) where the candidate is not qualified, does not have the necessary experience, has a conflict of interest or is otherwise unsuitable or unfit for office; and (b) where an appointment may adversely affect the Company’s (and/or its subsidiaries’ respective) reputation or business; or would result in the Company not having the required number of independent directors for its audit committee; or would result in the Company losing its “foreign private issuer” status.
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| • |
Written notice of any shareholder meeting shall be given to each shareholder entitled to vote at such meeting and each director not fewer than 10 nor more than 120 days before the date of the meeting. The inadvertent failure or accidental omission to give notice of a meeting to, or the
non-receipt
of a notice of a meeting by, any person entitled to receive notice shall not invalidate the shareholder meeting or the proceedings at that meeting. A meeting of shareholders held in contravention of such notice requirements is valid if shareholders holding at least 90% of the total voting rights on all the matters to be considered at the meeting have waived notice of the meeting and, for this purpose, the presence of a shareholder at the meeting shall be deemed to constitute waiver on his part.
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| • |
A shareholder may be represented at a meeting of shareholders by a proxy who may speak and vote on behalf of the shareholder.
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| • |
A meeting of shareholders is duly constituted and quorate if, at the commencement of the meeting, there are present in person or by proxy holders of not less than a simple majority of the votes of the shares entitled to vote on the resolutions to be considered at the meeting. If within two hours from the time appointed for the meeting a quorum is not present, the meeting, if convened upon the requisition of shareholders, shall be dissolved; in any other case it shall stand adjourned to such other date, time and place as the chairman may determine and announce at the meeting (without the need for any further notice to shareholders). At any such adjourned meeting at which a quorum shall be present or represented, any business may be transacted that might have been transacted at the meeting as originally notified. If the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each shareholder of record entitled to vote at the meeting.
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| • |
A resolution of shareholders is valid only if approved at a duly constituted and quorate meeting of shareholders by the affirmative vote of a simple majority (or such greater majority as may be specified in respect of a particular matter in the memorandum and articles of association) of the votes of those shareholders present at the meeting and entitled to vote and voting on the resolution. Shareholders are prohibited from adopting resolutions by written consent and all resolutions of the shareholders need to be adopted at a meeting of our shareholders convened in accordance with our memorandum and articles of association.
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| • |
In addition, in order to nominate candidates for election as a director at an annual meeting or propose topics for consideration at an annual meeting or special meeting of shareholders, shareholders must notify the Company in writing prior to the meeting at which directors are to be elected or the proposals are to be acted upon, and such notice must contain the documentation and information specified in our memorandum and articles of association. To be timely, notice with respect to an annual meeting of shareholders must be received by not later than the close of business on the 90th day, nor earlier than the close of business on the 120th day, prior to the first anniversary of the preceding year’s annual
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109
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meeting (provided that if the Company did not have an annual meeting the preceding year not later than the close of business on June 30 of the calendar year in which the annual meeting is to be held or such other date notified to shareholders by the board of directors). In the case of any business or other matter to be considered at a special meeting of shareholders, notice of such business or other matter must be included with the original requisition notice. Various other restrictions, conditions and provision of information and other procedural requirements set out in the memorandum and articles of association shall also apply. Such advance notice requirements and other provisions may preclude or limit the ability of shareholders to nominate candidates for election as a director or propose topics for consideration at a meeting of shareholders. Furthermore, our board of directors may in certain circumstances veto candidates proposed by shareholders (as described in the fourth bullet point in this section).
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C.
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Material Contracts
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For information regarding material contracts, see “Item 7. Major Shareholders and Related Party Transactions —B. Related Party.”
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D.
|
Exchange Controls
|
The following paragraphs summarize the exchange rates and exchange controls of Brazilian reais and Argentine pesos. See “Item 3. Key Information — D. Risk Factors—Risks Related to Latin America—Exchange rate fluctuations against the dollar in the countries in which we operate could negatively affect our results of operations” and “We are subject to foreign currency exchange controls in certain countries in which we operate” for more information.
Brazil
The Brazilian foreign exchange system allows the purchase and sale of foreign currency and the international transfer of Brazilian reais by any person or legal entity, regardless of the amount, subject to certain regulatory procedures.
The Brazilian real depreciated against the dollar from
mid-2011
to early 2016. In 2015, the Brazilian real depreciated 47.0% reaching R$3.9048 per dollar on December 2015. In 2016, the Brazilian real fluctuated significantly, primarily as a result of Brazil’s political instability, but appreciated 16.54%, reaching R$3.2591 per $1.00 on December 31, 2016. In 2017, the Brazilian Real depreciated 1.5% relative to the U.S. dollar, and in 2018, such depreciation reached 17.1% relative to the dollar. In 2019, the Brazilian Real depreciated 4% relative to the U.S. dollar. In 2020, the Brazilian Real depreciated 29% relative to U.S. dollar.
The Brazilian Central Bank has intervened occasionally in the foreign exchange market to attempt to control instability in foreign exchange rates. We cannot predict whether the Brazilian Central Bank or the Brazilian government will continue to allow the Brazilian real to float freely or will intervene in the exchange rate market by
re-implementing
a currency band system or otherwise. The Brazilian real may depreciate or appreciate substantially against the dollar in the future. Furthermore, Brazilian law provides that, whenever there is a serious imbalance in Brazil’s balance of payments or there are reasons to foresee a serious imbalance, temporary restrictions may be imposed on remittances of foreign capital abroad. We cannot assure you that the Brazilian government will not place restrictions on remittances of foreign capital abroad in the future.
On December 31, 2020, the exchange rate was R$ 5.20 per $1.00.
Argentina
From April 1, 1991 until the beginning of 2002, Law No. 23,928 (the “Convertibility Law”) established a regime under which the Argentine Central Bank was obliged to sell dollars at a fixed rate of one Argentine peso per dollar. On January 6, 2002, the Argentine Congress enacted Law No. 25,561 (as amended and supplemented, the “Public Emergency Law”), formally ending the regime of the Convertibility Law, abandoning over ten years of dollar-Argentine peso parity and eliminating the requirement that the Argentine Central Bank’s reserves in gold, foreign currency and foreign currency-denominated debt be at all times equivalent to 100% of the monetary base.
110
The Public Emergency Law, which has been extended on an annual basis and is in effect until March 2021, has granted the Argentine government the power to set the exchange rate between the Argentine peso and foreign currencies and to issue regulations related to the foreign exchange market. The Argentine Central Bank has had the power to intervene in the exchange rate market by buying and selling foreign currency for its own account, a practice in which it has engaged on a regular basis. Since 2011, the Argentine government has increased controls on exchange rates and the transfer of funds into and out of Argentina.
With the tightening of foreign exchange controls beginning in late 2011, in particular with the introduction of measures that restricted access to foreign currency for private companies and individuals, the implied exchange rate, as reflected in the quotations for Argentine securities that trade in foreign markets, compared to the corresponding quotations in the local market, increased significantly over the official exchange rate.
After several years of moderate variations in the nominal exchange rate, in 2012 the Argentine peso lost approximately 14% of its value with respect to the dollar. This was followed in 2013 and 2014 by a devaluation of the Argentine peso with respect to the dollar that exceeded 30%, including a loss of approximately 23% in January 2014. In 2015, the Argentine peso lost approximately 52% of its value with respect to the dollar, including a 10% devaluation from January 1, 2015 to September 30, 2015 and a 38% devaluation during the last quarter of the year, mainly concentrated after December 16, 2015 when certain exchange controls were lifted.
The Argentine peso depreciated 51%, 59% and 40% during 2018, 2019 and 2020, respectively.
On December 31, 2020, the exchange rate was AR$ 84.08 per $1.00.
Exchange Controls in Argentina
The enactment of the Public Emergency Law in 2002, among other things, authorized the Argentine government to implement a foreign exchange system and to enact foreign exchange regulations. Within this context, on February 8, 2002, pursuant to Decree No. 260/2002, the Argentine government (1) created the FX Market through which all transactions involving the exchange of foreign currency must be conducted, and (2) established that all foreign exchange transactions shall be made at the freely agreed exchange rate and in compliance with the requirements and regulations of the Argentine Central Bank (the main aspects of which are described below).
On June 9, 2005, by means of Decree No. 616/2005, the Argentine government established that (1) all inflows of funds into the FX Market arising from foreign debts incurred by Argentine residents, both individuals or legal entities of the private financial and
non-financial
sector, excluding export-import financings, and primary issues of debt securities sold through public offering and traded in authorized markets; (2) currency remittances made by non-Argentine-residents into the domestic foreign exchange market for the following purposes: holdings of Argentine currency, purchases of any kind of financial assets or liabilities of the financial or
non-financial
private sector, excluding direct foreign investments and primary issues of debt securities and shares sold through public offering and traded in self-regulated markets; and investments in public sector securities purchased in secondary markets, shall meet the following requirements: (a) currency remittances into the domestic foreign currency market shall only be transferred abroad upon the lapse of 365 calendar days computed as from the date of settlement of such funds into Argentine pesos (the “Minimum Stay Period”); (b) the proceeds of the exchange of the funds so remitted shall be deposited into an account in the local banking system; (c) an amount equal to 30.0% of the relevant amount shall be deposited in a registered,
non-transferable
and
non-interest
bearing account for a period of 365 calendar days, under the conditions established in the applicable regulations; and (d) such deposit shall be made in dollars with Argentine financial institutions, it shall not accrue any interest or other profit and shall not be used as security or collateral for any kind of credit transaction.
Any breach of the provisions of Executive Decree No. 616/05 or any other foreign exchange regulation is subject to criminal sanctions.
111
However, to date, the requirements set forth in (a), (c) and (d) above have been mitigated through resolutions issued by the Ministry of Treasury and Public Finance. On December 18, 2015, through Resolution No. 3/2015, the Ministry of Treasury and Public Finance amended Executive Decree No. 616/2005, reducing (i) the deposit percentage to zero and (ii) reducing the Minimum Stay Period from 365 to 120 calendar days. On January 5, 2017, through Resolution No. 1/2017, the Ministry of Treasury reduced the Minimum Stay Period to zero. In addition, on August 8, 2016, the Argentine Central Bank, by means of Communication “A” 6037, introduced material changes to the foreign exchange regime in force, which significantly eased access to the FX Market.
Furthermore, on May 19, 2017, the Argentine Central Bank issued Communication “A” 6244, which entered into effect on July 1, 2017, and pursuant to which new regulations regarding access to the foreign exchange market were established, essentially abrogating all prior regulations on the matter. Pursuant to these new regulations: (i) the principle of a free foreign exchange market is set. In accordance with section 1.1 of the communication, “All human or legal persons, assets and other universals may freely operate in the exchange market”; (ii) the obligation to carry out any exchange operation through an authorized entity (section 1.2) is maintained; (iii) restrictions regarding hours to operate in the FX Market, are eliminated; (iv) the obligation of Argentine residents to comply with the “Survey of foreign liabilities and debt issuances” (Communication “A” 3602 as supplemented) and the survey of direct investment (Communication “A” 4237 and complementary) are maintained, even if there has been no inflow of funds to the MULC and/or no future access to the MULC for operations to be declared; and (v) the obligation of Argentine residents to transfer to Argentina and sell in the FX Market the proceeds of their exports of goods within the applicable deadline remains in force.
Afterwards, by means of Decree No. 27/2018, dated January 11, 2018, the Free Exchange Market (“MELI” as per its acronym in Spanish) was created, as a replacement of the MULC, for purposes of providing additional flexibility to the market, enabling competition and allowing for the entry of new operators into the foreign exchange market, thus reducing systemic costs. Exchange operations will be conducted through the MELI by financial entities and other participants authorized by the Central Bank. On June 18, 2018, the National Congress enacted Law No. 27,444, which repeals Decree No. 27/2018, but confirms section 132, which created the MELI.
On September 1, 2019, due to various factors that impacted the evolution of the Argentine economy and the uncertainty caused in the financial markets by the presidential election that took place in 2019, by Emergency Decree No. 609/2019 and Communication “A” 6770 of the BCRA, the Macri administration
re-implemented
the exchange controls that had been lifted in 2016. Among other provisions, considerations, and exceptions set forth in such legislation, the most relevant aspects of the new foreign exchange rules (pursuant to Communication “A” 6844, as amended and supplemented), provide new regulation that impact the following areas and situations: (i) exports and imports of Services; (ii) payments of profits and dividends; (iii) sale of
non-produced
non-financial
assets; (iv) external financial loans disbursed as of September 1, 2019; (v) repayment local notes offerings in dollars; (vi) payment of principal and interest external financial indebtedness; (vii) payments in foreign currency among residents; (viii) payments of External Financial Indebtedness by Collateral Trustees; (ix) purchase of foreign currency by individuals, entities, and
non-residents;
and (x) funding of debt services reserve accounts on external indebtedness.
|
E.
|
Taxation
|
British Virgin Islands Tax Considerations
We are not liable to pay any form of taxation in the BVI and all dividends, interests, rents, royalties, compensations and other amounts paid by us to persons who are not persons resident in the BVI are exempt from all forms of taxation in the BVI and any capital gains realized with respect to any shares, debt obligations, or other securities of ours by persons who are not persons resident in the BVI are exempt from all forms of taxation in the BVI. The BVI is not party to any double tax treaties that are applicable to any payments made to or by us.
No estate, inheritance, succession or gift tax, rate, duty, levy or other charge is payable by persons who are not persons resident in the BVI with respect to any shares, debt obligation or other securities of ours.
Subject to the payment of stamp duty on the acquisition of property in the BVI by us (and in respect of certain transactions in respect of the shares, debt obligations or other securities of BVI incorporated companies owning land
112
in the BVI), all instruments relating to transfers of property to or by us and all instruments relating to transactions in respect of the shares, debt obligations or other securities of ours and all instruments relating to other transactions relating to our business are exempt from payment of stamp duty in the BVI.
There are currently no withholding taxes or exchange control regulations in the BVI applicable to us or our shareholders.
U.S. Federal Income Taxation
The following is a summary of certain material U.S. federal income and, in the case of a
non-U.S.
holder (as defined below), estate tax consequences of the purchase, ownership and disposition of our ordinary shares as of the date hereof. This summary deals only with our ordinary shares that are held as capital assets within the meaning of Section 1221 of the Code (as defined below) (generally, for investment purposes) by a beneficial owner.
As used herein, a “U.S. holder” means a beneficial owner of our ordinary shares that is, for U.S. federal income tax purposes, any of the following:
| • |
an individual citizen or resident of the United States;
|
| • |
a corporation (or any other entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia;
|
| • |
an estate the income of which is subject to U.S. federal income taxation regardless of its source; or
|
| • |
a trust if it (1) is subject to the primary supervision of a court within the United States and one or more United States persons have the authority to control all substantial decisions of the trust or (2) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a United States person.
|
As used herein, the term
“non-U.S.
holder” means a beneficial owner of our ordinary shares (other than a partnership or other pass-through entity for U.S. federal income tax purposes) that is not a U.S. holder.
This summary is based upon provisions of the Internal Revenue Code of 1986, as amended (the “Code”), and regulations, rulings and judicial decisions as of the date hereof. Those authorities may be changed, perhaps retroactively, so as to result in U.S. federal income and estate tax consequences different from those summarized below.
This discussion does not represent a detailed description of the U.S. federal income tax consequences applicable to you if you are subject to special treatment under the U.S. federal income tax laws, including if you are:
| • |
a dealer in securities or currencies;
|
| • |
a financial institution;
|
| • |
a regulated investment company;
|
| • |
a real estate investment trust;
|
| • |
an insurance company;
|
| • |
a
tax-exempt
organization;
|
| • |
a person holding our ordinary shares as part of a hedging, integrated or conversion transaction, a constructive sale or a straddle;
|
113
| • |
a trader in securities that has elected the
mark-to-market
|
| • |
a person liable for alternative minimum tax;
|
| • |
a partnership or other pass-through entity for U.S. federal income tax purposes;
|
| • |
a person required to accelerate the recognition of any item of gross income with respect to our ordinary shares as a result of such income being recognized on an applicable financial statement;
|
| • |
a U.S. holder whose “functional currency” is not the dollar;
|
| • |
a foreign pension fund;
|
| • |
a “controlled foreign corporation”;
|
| • |
a “passive foreign investment company”; or
|
| • |
a U.S. expatriate.
|
If a partnership (or other entity treated as a partnership for U.S. federal income tax purposes) holds our ordinary shares, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. If you are a partner of a partnership holding our ordinary shares, you should consult your tax advisors.
Notwithstanding our corporate reincorporation in the BVI, under Section 7874 of the Code, the Company will be treated for U.S. federal tax purposes as a U.S. corporation and, among other consequences, is subject to U.S. federal income tax on its worldwide income. This discussion assumes that Section 7874 of the Code continues to apply to treat us as a U.S. corporation for all purposes under the Code. If, for some reason (e.g., future repeal of Section 7874 of the Code), we were no longer treated as a U.S. corporation under the Code, the U.S. federal income tax consequences described herein could be materially and adversely affected.
This discussion does not contain a detailed description of all the U.S. federal income and estate tax consequences to you in light of your particular circumstances and does not address the Medicare tax on net investment income or the effects of any state, local or
non-U.S.
tax laws.
If you are considering the purchase of our ordinary shares, you should consult your own tax advisors concerning the particular U.S. federal income and estate tax consequences to you of the purchase, ownership and disposition of our ordinary shares, as well as the consequences to you arising under other U.S. federal tax laws and the laws of any other taxing jurisdiction.
Consequences to U.S. Holders
Dividends
In the event that we make a distribution of cash or other property (other than certain pro rata distributions of our stock) in respect of our ordinary shares, the distribution generally will be treated as a dividend for U.S. federal income tax purposes to the extent it is paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Any portion of a distribution that exceeds our current and accumulated earnings and profits generally will be treated first as a
tax-free
return of capital, causing a reduction in the adjusted tax basis of a U.S. holder’s ordinary shares, and to the extent the amount of the distribution exceeds a U.S. holder’s adjusted tax basis in our ordinary shares, the excess will be treated as gain from the disposition of our ordinary shares (the tax treatment of which is discussed below under “— Gain on Disposition of Ordinary Shares”). Subject to certain holding period and other requirements, (a) any dividends received by a U.S. holder that is a corporation will be eligible for the dividends received deduction and (b) any dividends received by a
non-corporate
U.S. holder (including an individual) will be eligible for the reduced tax rates that apply to “qualified dividend income.”
The amount of any dividend paid in foreign currency will equal the dollar value of the foreign currency received calculated by reference to the exchange rate in effect on the date the dividend is actually or constructively received
114
by a U.S. holder, regardless of whether the foreign currency is converted into dollars. If the foreign currency received as a dividend is converted into dollars on the date it is received, a U.S. holder generally will not be required to recognize foreign currency gain or loss in respect of the dividend income. If the foreign currency received as a dividend is not converted into dollars on the date of receipt, a U.S. holder will have a basis in the foreign currency equal to its dollar value on the date of receipt. Any gain or loss realized on a subsequent conversion or other disposition of the foreign currency will be treated as U.S. source ordinary income or loss.
Gain on Disposition of Ordinary Shares
U.S. holders of our ordinary shares will recognize capital gain or loss on any sale, exchange, or other taxable disposition of our ordinary shares in an amount equal to the difference between the amount realized for the ordinary shares and the U.S. holder’s tax basis in the ordinary shares. Such gain or loss generally will be long-term capital gain or loss if the ordinary shares have been held for more than one year. Long-term capital gains of
non-corporate
U.S. holders (including individuals) are generally eligible for reduced rates of taxation. The deductibility of capital losses is subject to limitations.
Consequences to
Non-U.S.
Holders
Dividends
The rules applicable to
non-U.S.
holders for determining the extent to which distributions on our ordinary shares, if any, constitute dividends for U.S. federal income tax purposes are the same as for U.S. holders. See “—Consequences to U.S. Holders—Dividends.”
Dividends paid to a
non-U.S.
holder generally will be subject to withholding of U.S. federal income tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. However, dividends that are effectively connected with the conduct of a trade or business by the
non-U.S.
holder within the United States (and, if required by an applicable income tax treaty, are attributable to a U.S. permanent establishment) are not subject to the withholding tax, provided certain certification and disclosure requirements are satisfied. Instead, such dividends are subject to U.S. federal income tax on a net income basis in the same manner as if the
non-U.S.
holder were a United States person as defined under the Code. Any such effectively connected dividends received by a foreign corporation may be subject to an additional “branch profits tax” at a 30% rate or such lower rate as may be specified by an applicable income tax treaty.
A
(or other applicable form) certifying under penalty of perjury that such holder is not a United States person as defined under the Code and is eligible for treaty benefits or (b) if our ordinary shares are held through certain foreign intermediaries, to satisfy the relevant certification requirements of applicable U.S. Treasury regulations. Special certification and other requirements apply to certain
non-U.S.
holder who wishes to claim the benefit of an applicable treaty rate and avoid backup withholding, as discussed below, for dividends will be required (a) to provide the applicable withholding agent with a properly executed Internal Revenue Service (“IRS”) Form
W-BEN
or Form
W-8BEN-E
non-U.S.
holders that are pass-through entities rather than corporations or individuals.
A
non-U.S.
holder eligible for a reduced rate of U.S. federal withholding tax pursuant to an income tax treaty may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund with the IRS.
Gain on Disposition of Ordinary Shares
Subject to the discussion of backup withholding below, any gain realized by a
non-U.S.
holder on the sale or other disposition of our ordinary shares generally will not be subject to U.S. federal income tax unless:
| • |
the gain is effectively connected with a trade or business of the
non-U.S.
holder in the United States (and, if required by an applicable income tax treaty, is attributable to a U.S. permanent establishment of the
non-U.S.
holder);
|
115
|
|
• |
the
non-U.S.
holder is an individual who is present in the United States for 183 days or more in the taxable year of that disposition, and certain other conditions are met; or
|
| • |
we are or have been a “United States real property holding corporation” for U.S. federal income tax purposes and certain other conditions are met.
|
A
non-U.S.
holder described in the first bullet point immediately above will be subject to tax on the gain derived from the sale or other disposition in the same manner as if the
non-U.S.
holder were a United States person as defined under the Code. In addition, if any
non-U.S.
holder described in the first bullet point immediately above is a foreign corporation, the gain realized by such
non-U.S.
holder may be subject to an additional “branch profits tax” at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. An individual
non-U.S.
holder described in the second bullet point immediately above will be subject to a 30% (or such lower rate as may be specified by an applicable income tax treaty) tax on the gain derived from the sale or other disposition, which gain may be offset by U.S.-source capital losses even though the individual is not considered a resident of the United States.
Generally, a U.S. corporation is a “United States real property holding corporation” if the fair market value of its U.S. real property interests equals or exceeds 50% of the sum of the fair market value of its worldwide real property interests and its other assets used or held for use in a trade or business (all as determined for U.S. federal income tax purposes). We believe we are not and do not anticipate becoming a “United States real property holding corporation” for U.S. federal income tax purposes.
U.S. Federal Estate Tax
Ordinary shares held by an individual
non-U.S.
holder at the time of death will be included in such holder’s gross estate for U.S. federal estate tax purposes, unless an applicable estate tax treaty provides otherwise.
Information Reporting and Backup Withholding
U.S. Holders
In general, information reporting will apply to dividends in respect of our ordinary shares and the proceeds from the sale, exchange or other disposition of our ordinary shares that are paid to a U.S. holder within the United States (and in certain cases, outside the United States), unless the U.S. holder is an exempt recipient. A backup withholding tax may apply to such payments if the U.S. holder fails to provide a taxpayer identification number or certification of exempt status or fails to report in full dividend and interest income.
Backup withholding is not an additional tax and any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against a U.S. holder’s U.S. federal income tax liability, provided the required information is timely furnished to the IRS.
Non-U.S.
Holders
Distributions paid to a
non-U.S.
holder and the amount of any tax withheld with respect to such distributions generally will be reported to the IRS. Copies of the information returns reporting such distributions and any withholding may also be made available to the tax authorities in the country in which the
non-U.S.
holder resides under the provisions of an applicable income tax treaty.
A
non-U.S.
holder will not be subject to backup withholding on dividends received if such holder certifies under penalty of perjury that it is a
non-U.S.
holder (and the payor does not have actual knowledge or reason to know that such holder is a United States person as defined under the Code), or such holder otherwise establishes an exemption.
Information reporting and, depending on the circumstances, backup withholding will apply to the proceeds of a sale or other disposition of our ordinary shares made within the United States or conducted through certain U.S.- related financial intermediaries, unless the beneficial owner certifies under penalty of perjury that it is a
non-U.S.
holder (and the payor does not have actual knowledge or reason to know that the beneficial owner is a United States person as defined under the Code), or such owner otherwise establishes an exemption.
116
Backup withholding is not an additional tax and any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against a
non-U.S.
holder’s U.S. federal income tax liability, if any, provided the required information is timely furnished to the IRS.
Additional Withholding Requirements
Under Sections 1471 through 1474 of the Code (such Sections commonly referred to as “FATCA”), a 30% U.S. federal withholding tax may apply to any dividends paid on our ordinary shares to (i) a “foreign financial institution” (as specifically defined in the Code) which does not provide sufficient documentation, typically on IRS Form
evidencing either (x) an exemption from FATCA, or (y) its compliance (or deemed compliance) with FATCA (which may alternatively be in the form of compliance with an intergovernmental agreement with the United States) in a manner which avoids withholding, or (ii) a
evidencing either (x) an exemption from FATCA, or (y) adequate information regarding certain substantial U.S. beneficial owners of such entity (if any). If a dividend payment is both subject to withholding under FATCA and subject to the withholding tax discussed above under “—Consequences to
W-8BEN-E,
“non-financial
foreign entity” (as specifically defined in the Code) which does not provide sufficient documentation, typically on IRS Form
W-8BEN-E,
Non-U.S.
Holders—Dividends,” the withholding under FATCA may be credited against, and therefore reduce, such other withholding tax. You should consult your own tax advisors regarding these requirements and whether they may be relevant to your ownership and disposition of our ordinary shares.
|
F.
|
Dividends and Paying Agents
|
Not applicable.
|
G.
|
Statement by Experts
|
Not applicable.
|
H.
|
Documents on Display
|
The SEC maintains a website at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that make electronic filings through its Electronic Data Gathering, Analysis, and Retrieval, or EDGAR, system. All our Exchange Act reports and other SEC filings are available through the EDGAR system.
|
I.
|
Subsidiary Information
|
Not applicable.
|
ITEM 11
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Our business activities are exposed to a variety of market risks, including foreign currency risk and inflation and interest rate risk.
Foreign Exchange Risk
We report our financial results in dollars, but most of our revenue and expenses are denominated in other currencies, particularly the Argentine peso, the Brazilian real and Mexican peso. Any changes in the exchange rates of any such currencies against the dollar will affect our reported financial results as translated into dollars. Furthermore, many of our travel customers travel internationally and any changes in the exchange rate between their home currency and the currency of their intended destination may influence their travel purchases. We also use derivative financial instruments in some cases to manage our foreign exchange risk.
117
Our supplier arrangements often result in significant balances of both accounts payable and accounts receivable denominated in various currencies. To the extent that the timing of such payments are within our control, we often attempt to accelerate or delay such payments to minimize the disparity between our accounts payable and accounts receivable denominated in each currency, which reduces the effect of exchange rate fluctuations on our reported financial results. For example, we reduced our factoring of Brazilian installment receivables in 2016 in part to increase the total amount of our receivables denominated in Brazilian reais to partially offset our larger balance of accounts payable to suppliers in Brazil that are denominated in Brazilian reais. In addition, we can be exposed to foreign exchange risk with respect to international travel if we accept upfront payment at the time of booking in a travel customer’s home currency and are later required to pay the supplier in the supplier’s home currency.
Inflation and Interest Rate Risk
Brazil, Mexico and Argentina and many other countries in Latin America have historically experienced high rates of inflation. Inflationary pressures persist, and actions taken in an effort to curb inflation, coupled with public speculation about possible future governmental actions, have in the past contributed to economic uncertainty in Brazil, Mexico, Argentina and other Latin America countries and heightened volatility in the Latin America financial markets. Changes in inflation rates can affect our pricing as well as our expenses, and the inflation rates in the countries where we generate revenue in any period may be higher or lower than the inflation rates in the countries where we incur expenses. In addition, higher inflation may lead our travel customers to make more purchases using installment or other financing options and may make such financing options more expensive for us.
The inflation rate in Brazil, as reflected by the IPCA was 3.75% in 2018, 3.74 % in 2019 and 4.52% for 2020. After experiencing in 2017 the lowest inflation rate since 1998, Brazil went through a higher rate of inflation, but which was better than expected by the government. In Mexico the inflation rate in was 4.83% in 2018, 2.82% in 2019 and 3.15% in 2020.The inflation rate in Argentina was 47.6% in 2018. In 2019, Argentina’s inflation rate was 53.8%, the highest rate since 1991 and the second highest rate in Latin America. In 2020 Argentina’s inflation rate was 36.%.
Interest rates are highly sensitive to many factors, including fiscal and monetary policies to combat inflation and economic and political and other factors beyond our control. From time to time, we factor our receivables to receive cash more quickly. The costs of factoring are driven primarily by interest rates which, in turn, are influenced significantly by inflation and expectations for future inflation. In addition, we maintain revolving credit facilities in certain countries, and the interest rates payable with respect to those facilities also vary based on local market interest rates.
|
ITEM 12
|
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
|
|
A.
|
Debt Securities
|
Not applicable.
|
B.
|
Warrants and Rights
|
Pursuant to the Catterton Investment Agreement, the Company has issued to the L Catterton Purchaser, warrants to purchase 11 million common shares at an exercise price of $0.01 per share, subject to certain customary anti-dilution adjustments provided under the Warrants, including for stock splits, reclassifications, combinations and dividends or distributions made by the Company on the ordinary shares. The Warrants expire On September 18, 2030. The foregoing description of the Warrants is qualified in its entirety by reference to the full text of the Ordinary Shares Purchase Warrant (Penny Warrant), dated September 18, 2020 issued by Despegar.com, Corp. in favor or LCLA Daylight LP, which is filed as Exhibit 4.7 to this Annual Report.
|
C.
|
Other Securities
|
Not applicable.
118
|
D.
|
American Depositary Shares
|
Not applicable.
PART II.
|
ITEM 13
|
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
|
None.
|
ITEM 14
|
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
|
|
A.
|
Material Modifications to the Rights of Security Holders
|
None.
|
B.
|
Material Modifications to the Rights of any Class
of Registered Securities
|
None.
|
C.
|
Withdrawal or Substitution of a Material Amount of the Assets Securing any Class
of Registered Securities
|
None.
|
D.
|
Changes in the Trustee or Paying Agents for any Registered Securities
|
None.
|
E.
|
Use of Proceeds
|
Initial public offering in September 2017
On September 19, 2017, we completed our initial public offering on the New York Stock Exchange. The registration statement on Form
F-1
(File
No. 333-
219973) filed by us in connection with the initial public offering was declared effective on September 19, 2017.
The net proceeds to us from the offering, after deducting underwriting discounts and commissions and offering expenses, amounted to $253.5 million. We have not allocated our net proceeds from our initial public offering to any particular purpose. Rather, our management has considerable discretion in the application of the net proceeds that we received. As of the date hereof, $19.8 million of the net proceeds from our initial public offering has been allocated to the acquisition of Viajes Falabella, and we may use additional proceeds for other acquisitions or investments and general corporate purposes. No amount of the net proceeds has been paid to directors, officers, general partners or their associates nor to persons owning 10% or more of any class of our equity securities nor to any of our other affiliates.
|
ITEM 15
|
CONTROLS AND PROCEDURES
|
|
A.
|
Disclosure Controls and Procedures
|
We have evaluated, with the participation of our chief executive officer and chief financial officer, the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to
13a-15(e)
and
15d-15(e)
of the Securities Exchange Act of 1934, as of December 31, 2020.
119
There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our evaluation, we, with the participation of our chief executive officer and chief financial officer, concluded that as of December 31, 2020, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
|
B.
|
Management’s Annual Report on Internal Control Over Financial Reporting
|
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules
13a-15(f)
and
15d-15(f)
under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that:
| (i) |
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
|
| (ii) |
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the company; and
|
| (iii) |
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
|
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013). Based on our assessment and those criteria, management believes that the Company maintained effective internal control over financial reporting as of December 31, 2020.
However, management has excluded Koin and Best Day from its assessment of Internal Control over Financial Reporting as of December 31, 2020, because such entities were acquired in August 2020 and October 2020, respectively. The Best Day entities are direct subsidiaries whose total aggregate assets and total aggregate revenues represent 11.1% and 8.9%, respectively, of our consolidated assets and revenues as of and for the year ended December 31, 2020. Koin is a direct subsidiary whose total aggregate assets and total aggregate revenues represent 0.4% and 0.1% respectively, of our consolidated assets and revenues as of and for the year ended December 31, 2020.
|
C.
|
Attestation Report of the Registered Public Accounting Firm
|
This Annual Report does not include an attestation report of the company’s registered public accounting firm due to the exemption from such requirement for emerging growth companies.
120
|
D.
|
Changes in Internal Control Over Financial Reporting
|
Management has evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, whether any changes in our internal control over financial reporting that occurred during our last fiscal year have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on the evaluation we conducted, management has concluded that no such changes have occurred.
|
ITEM 16
|
[RESERVED]
|
|
ITEM 16A.
|
AUDIT COMMITTEE FINANCIAL EXPERT
|
Our audit committee consists of Mr. Mario Eduardo Vázquez, Mr. Michael James Doyle II and Mr. Martín Rastellino, with Mr. Vázquez serving as chair. Messrs. Vázquez, Doyle and Rastellino, satisfy the independence requirements of Rule
10A-3
under the Exchange Act. Our board of directors also has determined that Messrs. Vázquez, Doyle and Rastellino qualify as audit committee financial experts within the meaning of the SEC rules.
|
ITEM 16B.
|
CODE OF ETHICS
|
We have adopted a written code of business conduct and ethics that provides that our directors and officers are expected to avoid any action, position or interest that conflicts with the interests of our company or gives the appearance of a conflict. Directors and officers have an obligation under our code of business conduct and ethics to advance our company’s interests when the opportunity to do so arises. The full text of our code of business conduct and ethics is available on our website, at
https://investor.despegar.com/corporate-governance/guidelines-and-ethics/default.aspx.
|
ITEM 16C.
|
PRINCIPAL ACCOUNTANT FEES AND SERVICES
|
Our consolidated financial statements prepared in accordance with U.S. GAAP are audited by Price Waterhouse & Co. S.R.L., a firm registered with the Public Company Accounting Oversight Board in the United States.
The following table shows the aggregate fees for services rendered by Price Waterhouse & Co. S.R.L. to us, including our subsidiaries, in fiscal year 2020 and 2019.
|
Year Ended December 31,
|
||||||||
|
2020
|
2019
|
|||||||
|
(in thousands)
|
||||||||
|
Audit fees (audit of financial statements)
(1)
|
2,231 | $ | 1,261 | |||||
|
Tax fees (other certifications and tax advisory services)
(2)
|
306 | 729 | ||||||
|
All other fees (advisory services)
(3)
|
675 | 375 | ||||||
|
|
|
|
|
|||||
|
Total
|
|
3,212
|
|
$
|
2,365
|
|
||
|
|
|
|
|
|||||
| (1) |
Includes fees related to the audit of the consolidated financial statements as of December 31, 2020 and 2019 and for the years ended December 31, 2020, 2019 and 2018.
|
| (2) |
Includes fees for permitted tax compliance and tax advisory services.
|
| (3) |
Includes fees for permitted due diligence transactions.
|
Audit Committee Pre-approval Process
Our audit committee (which was formed in connection with our initial public offering) reviews and
services which are approved by the audit committee prior to the completion of the audit.
pre-approves
the scope and the cost of audit services related to us and permissible
non-audit
services performed by the independent auditors, other than those for
de minimis
121
|
ITEM 16D.
|
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
|
Not applicable.
|
ITEM 16E.
|
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
|
None.
|
ITEM 16F.
|
CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
|
None.
|
ITEM 16G.
|
CORPORATE GOVERNANCE
|
As a foreign private issuer, we are permitted under NYSE rules to follow home country corporate governance practices instead of the NYSE requirements, except that we must maintain an audit committee of the board of directors that meets the requirements of Exchange Act Rule
10A-3
and disclose in our annual reports on Form
20-F
any significant ways in which our corporate governance practices differ from those followed by U.S. domestic listed companies under NYSE listing standards.
As a foreign private issuer, we are permitted under NYSE rules to follow the corporate governance practices of our home country, the British Virgin Islands (“BVI”), instead of most of the NYSE’s corporate governance requirements. We follow home country corporate governance practices instead of nearly all of the NYSE’s corporate governance requirements, as described in more detail below. See also “ITEM 6. Directors, Senior Management and Employees—C. Board Practices.”
|
Requirement
|
NYSE Requirement FOR
US Listed Companies |
BVI Law
|
Despegar Practice
|
|||
|
Independent Directors
|
The board of directors is required to have a majority of independent directors. | BVI law does not require us to have a majority of independent directors. | We do not have a majority independent board of directors in accordance with NYSE independence standards | |||
| Executive Sessions of Independent Directors | Independent directors of a NYSE-listed company must have meetings at which only the independent directors are present. | BVI law does not require us to hold executive sessions of the board of directors. | We do not hold independent directors’ meetings. | |||
| Audit Committee |
Must have an audit committee with the specific responsibilities and authority necessary to comply with SEC rules. Members must meet all of the independence requirements of the NYSE, as well as the SEC Rule
10A-3
independence requirements (subject to any available exemptions).
|
BVI law does not require an independent audit committee. |
Our board of directors has established an audit committee that complies with SEC Rule
10A-3
independence requirements only, and not general NYSE independence standards.
|
|||
| Internal Audit Function | Must have an internal audit function. This function may be performed by a third party. | BVI law does not require an internal audit function. | We do not have an internal audit function. | |||
| Compensation of Executive Officers | Must have a compensation committee consisting solely of independent directors. Must satisfy the additional independence requirements specific to compensation committee membership. | BVI law does not require an independent compensation committee. | The board of directors has established a nomination and compensation committee. However, its members are not all independent as determined in accordance with NYSE listing standards. | |||
122
|
Requirement
|
NYSE Requirement FOR
US Listed Companies |
BVI Law
|
Despegar Practice
|
|||
| Nomination of Directors | Must have a nominating/corporate governance committee consisting solely of independent directors. | BVI law does not require an independent nominating committee. | The board of directors has established a nomination and compensation committee. However, its members are not all independent as determined in accordance with NYSE listing standards. | |||
| Corporate Governance Guidelines | Company must adopt and disclose corporate governance guidelines | BVI law does not require corporate governance guidelines. | We do not have corporate governance guidelines. | |||
| Shareholder Approval of Equity Compensation Plans and Certain Other Share Issuances | Shareholders must approve all equity-compensation plans and material revisions thereto, with limited exemptions. Shareholder approval also required for certain other dilutive and related party equity issuances. | BVI law does not require shareholder approval of equity compensation plans or such other share issuances | We have not and do not intend to submit for shareholder approval any equity-compensation plans or the other dilutive and related party equity issuances covered by NYSE rules. | |||
|
ITEM 16H.
|
MINE SAFETY DISCLOSURE
|
Not applicable.
PART III.
|
ITEM 17
|
FINANCIAL STATEMENTS
|
Not applicable.
|
ITEM 18
|
FINANCIAL STATEMENTS
|
See our consolidated financial statements beginning at page
F-1.
|
ITEM 19
|
EXHIBITS
|
The agreements and other documents filed as exhibits to this Annual Report on Form
20-F
are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and for the benefit of the other parties to the agreements and they may not describe the actual state of affairs as of the date they were made or at any other time.
The exhibit index attached hereto is incorporated herein by reference.
123
EXHIBIT INDEX
124
| 31.2* | Certification by Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.3* | Certification by Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 31.4* | Certification by Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101. INS* | XBRL Instance Document | |
| 101. SCH* | XBRL Taxonomy Extension Schema | |
| 101. CAL* | XBRL Taxonomy Extension Schema Calculation Linkbase | |
| 101. DEF* | XBRL Taxonomy Extension Schema Definition Linkbase | |
| 101. LAB* | XBRL Taxonomy Extension Schema Label Linkbase | |
| * |
Filed herewith
|
| # |
Confidential treatment requested granted with respect to portions of this exhibit.
|
| *## |
Portions of this exhibit have been omitted because they are both (i) not material and (ii) would likely cause competitive harm to the Company if publicly disclosed.
|
125
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form
20-F
and that it has duly caused and authorized the undersigned to sign this Annual Report on Form
20-F
on its behalf.
|
DESPEGAR.COM, CORP.
|
||
| By: |
/s/ Damián Scokin
|
|
| Name: | Damián Scokin | |
| Title: | Chief Executive Officer | |
Date: April 30, 2021
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Despegar.com, Corp.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Despegar.com, Corp. and its subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2020, including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America.
Changes in Accounting Principles
As discussed in Note 9 to the consolidated financial statements, the Company changed the manner in which it accounts for credit expected losses in 2020 and the manner in which it accounts for leases in 2019.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
|
Price Waterhouse & Co. S.R.L., Bouchard 557, piso 8°, C1106ABG - Ciudad de Buenos Aires
|
|
T: +(54.11) 4850.6000, F: +(54.11) 4850.6100, www.pwc.com/ar
|
| Price Waterhouse & Co. S.R.L. es una firma miembro de la red global de PricewaterhouseCoopers International Limited (PwCIL). Cada una de las firmas es una entidad legal separada que no actúa como mandataria de PwCIL ni de cualquier otra firma miembro de la red. |
F-2
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
| /s/ PRICE WATERHOUSE & CO. S.R.L. |
|
/s/ Eduardo Alfredo Loiácono (Partner)
|
| Eduardo Alfredo Loiácono |
Buenos Aires, Argentina
April 30, 2021
We have served as the Company’s auditor since 2007.
F-3
Despegar.com, Corp.
Consolidated Balance Sheets as of December 31, 2020 and 2019
(in thousands of U.S. dollars)
| As of December 31, | As of December 31, | |||||||
|
2020
|
2019
|
|||||||
|
ASSETS
|
||||||||
|
Current assets
|
||||||||
|
Cash and cash equivalents
|
334,430 | 309,187 | ||||||
|
Restricted cash
|
16,055 | 4,457 | ||||||
|
Trade accounts receivable, net of credit expected loss of 10,795 and 3,205
|
79,816 | 213,551 | ||||||
|
Related party receivable
|
8,174 | 19,555 | ||||||
|
Other assets and prepaid expenses
|
52,295 | 69,694 | ||||||
|
|
|
|
|
|||||
|
Total current assets
|
$
|
490,770
|
|
$
|
616,444
|
|
||
|
|
|
|
|
|||||
|
Non-current
assets
|
||||||||
|
Other assets
|
71,795 | 25,351 | ||||||
|
Lease
right-of-use
|
36,239 | 41,638 | ||||||
|
Property and equipment, net
|
22,462 | 21,205 | ||||||
|
Intangible assets, net
|
96,495 | 49,619 | ||||||
|
Goodwill
|
123,217 | 46,956 | ||||||
|
|
|
|
|
|||||
|
Total
non-current
assets
|
$
|
350,208
|
|
$
|
184,769
|
|
||
|
|
|
|
|
|||||
|
TOTAL ASSETS
|
$
|
840,978
|
|
$
|
801,213
|
|
||
|
|
|
|
|
|||||
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
||||||||
|
Current liabilities
|
||||||||
|
Accounts payable and accrued expenses
|
32,161 | 59,673 | ||||||
|
Travel accounts payable
|
229,435 | 206,954 | ||||||
|
Related party payable
|
19,351 | 86,602 | ||||||
|
Short-term debt
|
8,949 | 19,209 | ||||||
|
Deferred revenue
|
9,324 | 8,853 | ||||||
|
Other liabilities
|
56,109 | 46,722 | ||||||
|
Contingent liabilities
|
8,398 | 6,297 | ||||||
|
Lease liabilities
|
8,591 | 6,498 | ||||||
|
|
|
|
|
|||||
|
Total current liabilities
|
$
|
372,318
|
|
$ | 440,808 | |||
|
|
|
|
|
|||||
|
Non-current
liabilities
|
||||||||
|
Other liabilities
|
44,913 | 6,646 | ||||||
|
Contingent liabilities
|
24,949 | 54 | ||||||
|
Long-term debt
|
10,367 | — | ||||||
|
Lease liabilities
|
28,694 | 34,469 | ||||||
|
Related party liability
|
125,000 | 125,000 | ||||||
|
|
|
|
|
|||||
|
Total
non-current
liabilities
|
$
|
233,923
|
|
$
|
166,169
|
|
||
|
|
|
|
|
|||||
|
TOTAL LIABILITIES
|
$
|
606,241
|
|
$
|
606,977
|
|
||
|
|
|
|
|
|||||
|
Series A
non-convertible
preferred shares, no par value, 150,000 shares issued and outstanding
|
91,686 | — | ||||||
|
Series B convertible preferred shares, no par value, 50,000 shares issued and outstanding
|
46,700 | — | ||||||
|
Redeemable
non-controlling
interest
|
2,621 | — | ||||||
|
|
|
|
|
|||||
|
Mezzanine Equity
|
$
|
141,007
|
|
$
|
—
|
|
||
|
|
|
|
|
|||||
|
SHAREHOLDERS’ EQUITY
|
||||||||
|
Common stock (1)
|
265,698 | 261,608 | ||||||
|
Additional
paid-in
capital
|
379,780 | 327,523 | ||||||
|
Other reserves
|
(728 | ) | (728 | ) | ||||
|
Accumulated other comprehensive income
|
(12,580 | ) | 610 | |||||
|
Accumulated losses
|
(470,173 | ) | (326,510 | ) | ||||
|
Treasury Stock
|
(68,267 | ) | (68,267 | ) | ||||
|
|
|
|
|
|||||
|
Total Shareholders’ Equity
|
$
|
93,730
|
|
$
|
194,236
|
|
||
|
|
|
|
|
|||||
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
|
$
|
840,978
|
|
$
|
801,213
|
|
||
|
|
|
|
|
|||||
| (1) |
Represents 70,099 shares (in thousands) issued and outstanding as of December 31, 2020 and 69,648 shares (in thousands) issued and outstanding as of December 31, 2019.
|
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Despegar.com, Corp.
Consolidated Statements of Income
for the years ended December 31, 2020, 2019 and 2018
(in thousands of U.S. dollars, except per share data in U.S. dollars)
|
For the year ended December 31,
|
||||||||||||
|
2020
|
2019
|
2018
|
||||||||||
|
Revenue
(1)
|
|
131,334
|
|
|
524,876
|
|
|
530,614
|
|
|||
|
Cost of revenue
|
|
(85,518
|
)
|
|
(179,565
|
)
|
|
(172,110
|
)
|
|||
|
|
|
|
|
|
|
|||||||
|
Gross profit
|
$
|
45,816
|
|
$
|
345,311
|
|
$
|
358,504
|
|
|||
|
|
|
|
|
|
|
|||||||
|
Operating expenses
|
||||||||||||
|
Selling and marketing
|
|
(57,292
|
)
|
|
(187,894
|
)
|
|
(174,357
|
)
|
|||
|
General and administrative
|
|
(94,722
|
)
|
|
(92,962
|
)
|
|
(67,240
|
)
|
|||
|
Technology and product development
|
|
(67,043
|
)
|
|
(73,375
|
)
|
|
(71,154
|
)
|
|||
|
Impairment of long-lived assets and goodwill
|
|
(1,917
|
)
|
|
—
|
|
|
(363
|
)
|
|||
|
|
|
|
|
|
|
|||||||
|
Total operating expenses
|
$
|
(220,974
|
)
|
$
|
(354,231
|
)
|
$
|
(313,114
|
)
|
|||
|
|
|
|
|
|
|
|||||||
|
Loss from equity investments
|
|
(2,059
|
)
|
|
—
|
|
|
—
|
|
|||
|
Operating (loss) / income
|
$
|
(177,217
|
)
|
$
|
(8,920
|
)
|
$
|
45,390
|
|
|||
|
Financial income / (expense), net
|
|
12,910
|
|
|
(17,215
|
)
|
|
(19,167
|
)
|
|||
|
|
|
|
|
|
|
|||||||
|
(Loss) / income before income taxes
|
$
|
(164,307
|
)
|
$
|
(26,135
|
)
|
$
|
26,223
|
|
|||
|
|
|
|
|
|
|
|||||||
|
Income tax benefit / (expense)
|
|
21,438
|
|
|
5,225
|
|
|
(7,069
|
)
|
|||
|
|
|
|
|
|
|
|||||||
|
Net (loss) / income
|
$
|
(142,869
|
)
|
$
|
(20,910
|
)
|
$
|
19,154
|
|
|||
|
|
|
|
|
|
|
|||||||
|
Net loss attributable to redeemable
non-controlling
interest
|
|
282
|
|
|
—
|
|
|
—
|
|
|||
|
|
|
|
|
|
|
|||||||
|
Net (loss) / income attributable to Despegar.com, Corp.
|
$
|
(142,587
|
)
|
$
|
(20,910
|
)
|
$
|
19,154
|
|
|||
|
|
|
|
|
|
|
|||||||
| (1) |
Includes $7,066, $38,760 and $43,975 for related party transactions for the years 2020, 2019 and 2018, respectively. See Note 22.
|
|
(Losses) / Earnings per share available to common stockholders:
|
||||||||||||
|
Basic
|
|
(2.06
|
)
|
|
(0.30
|
)
|
|
0.28
|
|
|||
|
Diluted
|
|
(2.06
|
)
|
|
(0.30
|
)
|
|
0.27
|
|
|||
|
Shares used in computing (losses) / earnings per share (in thousands):
|
||||||||||||
|
Basic
|
|
73,001
|
|
|
69,465
|
|
|
69,154
|
|
|||
|
Diluted
|
|
73,001
|
|
|
69,465
|
|
|
71,254
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Despegar.com, Corp.
Consolidated Statements of Comprehensive Income
for the years ended December 31, 2020, 2019 and 2018
(in thousands of U.S. dollars)
|
For the year ended December 31,
|
||||||||||||
|
2020
|
2019
|
2018
|
||||||||||
|
Net (loss) / income
|
$
|
(142,869
|
)
|
$
|
(20,910
|
)
|
$
|
19,154
|
|
|||
|
Other comprehensive loss, net of tax
|
||||||||||||
|
Foreign currency translation adjustment
|
(13,190 | ) | (2,441 | ) | (13,272 | ) | ||||||
|
|
|
|
|
|
|
|||||||
|
Comprehensive (loss) / income
|
$
|
(156,059
|
)
|
$
|
(23,351
|
)
|
$
|
5,882
|
|
|||
|
|
|
|
|
|
|
|||||||
|
Net loss attributable to redeemable
non-controlling
interest
|
282 | — | — | |||||||||
|
Foreign currency translation adjustment attributable to redeemable
non-controlling
interest
|
(170 | ) | — | — | ||||||||
|
|
|
|
|
|
|
|||||||
|
Comprehensive (loss) / income attributable to Despegar.com, Corp.
|
$
|
(155,947
|
)
|
$
|
(23,351
|
)
|
$
|
5,882
|
|
|||
|
|
|
|
|
|
|
|||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Despegar.com, Corp.
Consolidated Statements of Changes in Shareholders’ Equity
for the years ended December 31, 2020, 2019 and 2018
(in thousands of U.S. dollars)
| Common stock |
Additional
paid-in
capital |
Other
reserves |
Accumulated
other comprehensive income / (loss) |
Accumulated
losses |
Treasury Stock | Total Equity | ||||||||||||||||||||||||||
|
Number of
shares (in thousands) |
Amount | |||||||||||||||||||||||||||||||
|
Balance as of December 31, 2017
|
|
69,097
|
|
|
253,535
|
|
|
316,444
|
|
|
(728
|
)
|
|
16,323
|
|
|
(367,616
|
)
|
|
—
|
|
|
217,958
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
Change in accounting standard ASC 606
|
— | — | — | — | — | 42,862 | — | 42,862 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
Balance as of December 31, 2017 Adjusted
|
|
69,097
|
|
|
253,535
|
|
|
316,444
|
|
|
(728
|
)
|
|
16,323
|
|
|
(324,754
|
)
|
|
—
|
|
|
260,820
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
Stock-based compensation expense
|
— | — | 6,766 | — | — | — | — | 6,766 | ||||||||||||||||||||||||
|
Foreign currency translation adjustment
|
— | — | — | — | (13,272 | ) | — | — | (13,272 | ) | ||||||||||||||||||||||
|
Exercise of stock options
|
138 | 1,719 | (1,583 | ) | — | — | — | — | 136 | |||||||||||||||||||||||
|
Net income for the year
|
— | — | — | — | — | 19,154 | — | 19,154 | ||||||||||||||||||||||||
|
Treasury Stock
|
— | — | — | — | — | — | (26,030 | ) | (26,030 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
Balance as of December 31, 2018
|
|
69,235
|
|
|
255,254
|
|
|
321,627
|
|
|
(728
|
)
|
|
3,051
|
|
|
(305,600
|
)
|
|
(26,030
|
)
|
|
247,574
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
Stock-based compensation expense
|
— | — | 11,686 | — | — | — | — | 11,686 | ||||||||||||||||||||||||
|
Foreign currency translation adjustment
|
— | — | — | — | (2,441 | ) | — | — | (2,441 | ) | ||||||||||||||||||||||
|
Exercise of stock options
|
413 | 6,354 | (5,790 | ) | — | — | — | — | 564 | |||||||||||||||||||||||
|
Net loss for the year
|
— | — | — | — | — | (20,910 | ) | — | (20,910 | ) | ||||||||||||||||||||||
|
Treasury Stock
|
— | — | — | — | — | — | (42,237 | ) | (42,237 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
Balance as of December 31, 2019
|
|
69,648
|
|
|
261,608
|
|
|
327,523
|
|
|
(728
|
)
|
|
610
|
|
|
(326,510
|
)
|
|
(68,267
|
)
|
|
194,236
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
Change in accounting standard ASC 326
|
— | — | — | — | — | (1,076 | ) | — | (1,076 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
Balance as of January 1, 2020
|
|
69,648
|
|
|
261,608
|
|
|
327,523
|
|
|
(728
|
)
|
|
610
|
|
|
(327,586
|
)
|
|
(68,267
|
)
|
|
193,160
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
Stock-based compensation expense
|
— | — | 7,312 | — | — | — | — | 7,312 | ||||||||||||||||||||||||
|
Foreign currency translation adjustment
|
— | — | — | — | (13,190 | ) | — | — | (13,190 | ) | ||||||||||||||||||||||
|
Exercise of stock options
|
451 | 4,090 | (3,720 | ) | — | — | — | — | 370 | |||||||||||||||||||||||
|
Net loss for the year
|
— | — | — | — | — | (142,587 | ) | — | (142,587 | ) | ||||||||||||||||||||||
|
Warrants, net of issuance costs
|
— | — | 56,339 | — | — | — | — | 56,339 | ||||||||||||||||||||||||
|
Accretion of Series A
non-convertible
preferred shares
|
— | — | (2,831 | ) | — | — | — | — | (2,831 | ) | ||||||||||||||||||||||
|
Accrual of cumulative dividends of Series A
non-convertible
preferred shares
|
— | — | (4,212 | ) | — | — | — | — | (4,212 | ) | ||||||||||||||||||||||
|
Accretion of redeemable
non-controlling
interest
|
— | — | (78 | ) | — | — | — | — | (78 | ) | ||||||||||||||||||||||
|
Payment of dividends to Series B convertible preferred shares
|
— | — | (553 | ) | — | — | — | — | (553 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
Balance as of December 31, 2020
|
|
70,099
|
|
|
265,698
|
|
|
379,780
|
|
|
(728
|
)
|
|
(12,580
|
)
|
|
(470,173
|
)
|
|
(68,267
|
)
|
|
93,730
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-7
Despegar.com, Corp.
Consolidated Statements of Cash Flows
for the years ended December 31, 2020, 2019 and 2018
(in thousands of U.S. dollars)
|
|
|
|
||||||||||
|
For the year ended December 31,
|
||||||||||||
|
2020
|
2019
|
2018
|
||||||||||
|
Cash flows from operating activities:
|
||||||||||||
|
Net (loss) / income
|
$
|
(142,869
|
)
|
$
|
(20,910
|
)
|
$
|
19,154
|
|
|||
|
Adjustments to reconcile net (loss) / income to net cash flows from operating activities:
|
||||||||||||
|
Net loss attributable to redeemable
non-controlling
interest
|
|
282
|
|
|
—
|
|
|
—
|
|
|||
|
Unrealized foreign currency (gain) / loss
|
|
5,066
|
|
|
6,748
|
|
|
(1,088
|
)
|
|||
|
Changes in fair value of earnout liability
|
|
2,239
|
|
|
—
|
|
|
—
|
|
|||
|
Changes in seller indemnification
|
|
(2,239
|
)
|
|
—
|
|
|
—
|
|
|||
|
Loss from equity investments
|
|
2,059
|
|
|
—
|
|
|
—
|
|
|||
|
Depreciation expense
|
|
7,981
|
|
|
6,659
|
|
|
4,985
|
|
|||
|
Amortization expense
|
|
21,699
|
|
|
16,137
|
|
|
10,140
|
|
|||
|
Disposals of property and equipment
|
|
—
|
|
|
597
|
|
|
—
|
|
|||
|
Write-off
of leasehold improvements
|
|
3,661
|
|
|
—
|
|
|
—
|
|
|||
|
Impairment of long-lived assets and goodwill
|
|
1,917
|
|
|
—
|
|
|
363
|
|
|||
|
Stock-based compensation expense
|
|
7,312
|
|
|
11,686
|
|
|
6,766
|
|
|||
|
Amortization of lease
right-of-use
|
|
3,417
|
|
|
3,923
|
|
|
—
|
|
|||
|
Interest and penalties
|
|
2,082
|
|
|
1,228
|
|
|
494
|
|
|||
|
Income tax (benefit) / expense
|
|
(21,478
|
)
|
|
(9,666
|
)
|
|
2,876
|
|
|||
|
Allowance for credit expected losses
|
|
12,270
|
|
|
4,294
|
|
|
1,062
|
|
|||
|
Provision for contingencies
|
|
11,096
|
|
|
1,603
|
|
|
2,021
|
|
|||
|
Changes in assets and liabilities, net of
non-cash
transactions:
|
||||||||||||
|
Decrease / (Increase) in trade accounts receivable, net of credit expected loss
|
|
108,894
|
|
|
13,823
|
|
|
(54,705
|
)
|
|||
|
Decrease / (Increase) in related party receivable
|
|
13,897
|
|
|
(10,905
|
)
|
|
(3,406
|
)
|
|||
|
Decrease / (Increase) in other assets and prepaid expenses
|
|
27,105
|
|
|
19,695
|
|
|
(61,302
|
)
|
|||
|
(Decrease) / Increase in accounts payable and accrued expenses
|
|
(37,750
|
)
|
|
16,651
|
|
|
4,277
|
|
|||
|
(Decrease) / Increase in travel accounts payable
|
|
(75,888
|
)
|
|
(19,459
|
)
|
|
42,789
|
|
|||
|
(Decrease) / Increase in other liabilities
|
|
(300
|
)
|
|
4,391
|
|
|
3,309
|
|
|||
|
Decrease in contingent liabilities
|
|
(3,008
|
)
|
|
(1,990
|
)
|
|
(5,567
|
)
|
|||
|
(Decrease) / Increase in related party payable
|
|
(63,810
|
)
|
|
3,678
|
|
|
4,203
|
|
|||
|
Decrease in lease liabilities
|
|
(1,990
|
)
|
|
(4,573
|
)
|
|
—
|
|
|||
|
Increase in deferred revenue
|
|
10
|
|
|
628
|
|
|
6,009
|
|
|||
|
|
|
|
|
|
|
|||||||
|
Net cash flows (used in) / provided by operating activities
|
$
|
(118,345
|
)
|
$
|
44,238
|
|
$
|
(17,620
|
)
|
|||
|
|
|
|
|
|
|
|||||||
|
Cash flows from investing activities:
|
||||||||||||
|
Payments for acquired business, net of cash acquired
|
|
2,743
|
|
|
(228
|
)
|
|
—
|
|
|||
|
Acquisition of property and equipment
|
|
(3,458
|
)
|
|
(5,942
|
)
|
|
(13,085
|
)
|
|||
|
Increase of intangible assets, including
internal-use
software and website development
|
|
(14,028
|
)
|
|
(24,614
|
)
|
|
(13,494
|
)
|
|||
|
|
|
|
|
|
|
|||||||
|
Net cash flows used in investing activities
|
$
|
(14,743
|
)
|
$
|
(30,784
|
)
|
$
|
(26,579
|
)
|
|||
|
|
|
|
|
|
|
|||||||
|
Cash flows from financing activities:
|
||||||||||||
|
Net (decrease) / increase of short-term debt
|
|
(14,288
|
)
|
|
(11,507
|
)
|
|
24,637
|
|
|||
|
Increase in long-term debt
|
|
640
|
|
|
—
|
|
|
—
|
|
|||
|
Decrease in long-term debt
|
|
(375
|
)
|
|
—
|
|
|
—
|
|
|||
|
Exercise of stock-based compensation
|
|
370
|
|
|
564
|
|
|
136
|
|
|||
|
Purchase of treasury stock
|
|
—
|
|
|
(42,237
|
)
|
|
(26,030
|
)
|
|||
|
Proceeds from issuance of preferred shares
|
|
200,000
|
|
|
—
|
|
|
—
|
|
|||
|
Issuance costs of preferred shares and warrants
|
|
(12,098
|
)
|
|
—
|
|
|
—
|
|
|||
|
Payment of dividends to Series B convertible preferred shares
|
|
(553
|
)
|
|
—
|
|
|
—
|
|
|||
|
|
|
|
|
|
|
|||||||
|
Net cash flows provided by / (used in) financing activities
|
$
|
173,696
|
|
$
|
(53,180
|
)
|
$
|
(1,257
|
)
|
|||
|
|
|
|
|
|
|
|||||||
|
Effect of exchange rate changes on cash and cash equivalents
|
|
(3,767
|
)
|
|
1,181
|
|
|
(13,132
|
)
|
|||
|
|
|
|
|
|
|
|||||||
|
Net increase / (decrease) in cash and cash equivalents
|
$
|
36,841
|
|
$
|
(38,545
|
)
|
$
|
(58,588
|
)
|
|||
|
|
|
|
|
|
|
|||||||
|
Cash and cash equivalents and restricted cash as of beginning of the year
|
$
|
313,644
|
|
$
|
352,189
|
|
$
|
410,777
|
|
|||
|
Cash and cash equivalents and restricted cash as of end of the year
(1)
|
$
|
350,485
|
|
$
|
313,644
|
|
$
|
352,189
|
|
|||
| (1) |
See Note 8.
|
The accompanying notes are an integral part of these consolidated financial statements.
F-8
Despegar.com, Corp.
Consolidated Statements of Cash Flows
for the years ended December 31, 2020, 2019 and 2018 (Continued)
(in thousands of U.S. dollars)
|
|
|
For the year ended December 31,
|
|
|||||||||
|
2020
|
2019
|
2018
|
||||||||||
|
Supplemental cash flow information
|
||||||||||||
|
Cash paid for income tax
|
$
|
3,427
|
|
$
|
9,106
|
|
$
|
14,423
|
|
|||
|
Interest paid
|
$
|
4,948
|
|
$
|
5,767
|
|
$
|
5,311
|
|
|||
|
Financed portion of acquisitions
|
$
|
10,168
|
|
$
|
10,696
|
|
$
|
—
|
|
|||
The accompanying notes are an integral part of these consolidated financial statements.
F-9
Despegar.com, Corp.
Notes to the Consolidated Financial Statements
(in thousands of U.S. dollars, except per share data in U.S. dollars)
|
1.
|
Business
|
Despegar.com, Corp. (formerly Decolar.com, Inc.) is the leading online travel company in Latin America. We provide our traveler customers a comprehensive product offering, including airline tickets, packages, hotels and other travel-related products, which enables them to find, compare, plan and purchase travel products easily through our marketplace. We provide our network of travel suppliers a technology platform for managing the distribution of their travel products and access to traveler customers. We offer these travel products and services through our two brands: “Despegar”, our global brand, and “Decolar”, our brand for the Brazilian market. We refer to Despegar.com, Corp. and its subsidiaries collectively as “Despegar Group”, the “Company”, “us”, “we” and “our” in these consolidated financial statements.
On October 1, 2020, we closed the acquisition of the 100% equity interests of Viajes Beda S.A. de C.V. (“Viajes Beda”) and Transporturist S.A. de C.V. (“Transporturist”), both companies organized under the laws of Mexico (collectively the “Acquisition”). Viajes Beda and Transporturist are collectively hereinafter referred to as the “Best Day Group”. The Best Day Group operates mainly in Mexico and to a lesser extent in several countries in South America, including Argentina, Brazil and Uruguay among others, and the United States. The Best Day Group primarily provides travelers with several product offerings, including airline tickets, packages, hotels and other travel-related products, through its online platforms, call centers and offline presence, and provides travel suppliers a technology platform for managing the distribution of their travel products and access to traveler customers. The Best Day Group also provides ground transportation services and group tours to travelers principally across Mexico and the Dominican Republic main tourist destinations. The Best Day Group offers these travel products and services through its brands: “Best Day” and “BD Experience”. In addition, the Best Day Group offers hotel inventory, as well as transfers, activities, car rental, packages and tours to travel agencies through its tradename “HotelDo”. Also, the Best Day Group provides white label services for major travel vendors, including exclusive partnerships with the largest Mexican airlines operating their packages platforms. See Note 4 for a discussion of the Acquisition
.
Effect of Novel Coronavirus 2019
(COVID-19)
on these consolidated financial statements
The ongoing
COVID-19
pandemic is disrupting the global economy in general and the travel industry in particular, and consequently adversely affecting our business, results of operations and cash flows. The impact to date of the
COVID-19
pandemic on global economic conditions and on the travel industry has been severe. The pandemic has also significantly increased economic uncertainty and volatility.
Demand for travel began showing early signs of weakness by the beginning of March 2020. Within a matter of days, with more news of the potentially extensive spreading of the virus to other parts of the world, travel demand began to decline significantly, and then the decline accelerated precipitously as governments implemented strict measures to limit the spread of the virus. As a result, our travel booking volumes have been and are significantly lower than prior year levels and cancellation levels have been elevated compared to
pre-COVID
19 levels.
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
More recently, there has been varying degrees of containment of the virus in certain countries and hence some signs of travel recovery; however, the degree of containment and the recovery in travel has varied country to country and there have been instances where cases of
COVID-19
have started to increase again after a period of decline, and even new variants of the virus have been detected recently. Additionally, many travel restrictions and quarantine orders remain in place or were reimposed. On the other hand, in December 2020, several countries officially launched their
COVID-19
vaccination campaigns and began administering vaccine doses at various levels of speed. Health authorities in the countries in which we operate are prioritizing high-risk groups, as only a limited number of doses are expected to be available in the early stages of the vaccination rollout. It is unclear whether enough people in the countries in which we operate will get vaccinated and when such countries will reach a level of herd immunity to prevent the virus from further disrupting the travel industry.
Due to the high degree of cancellations and customer refunds and lower new bookings, in 2020 we experienced a 75% decrease in revenue as compared to the prior year. We experienced unfavorable working capital trends and material negative cash flows during the year ended December 31, 2020, although the level of negative cash flow has moderated as booking trends slightly improved and cancellations stabilized in the fourth quarter of 2020. Overall, the full duration and total impact of the
COVID-19
pandemic remains uncertain and it is difficult to predict how the recovery will unfold for the travel industry and, in particular, our business. For a discussion on incremental cancellation and allowance for expected uncollectible amounts impacts, see Note 3. For a discussion of asset impairments recognized in conjunction with the pandemic, see Notes 11, 12 and 13. For a discussion of recent actions to strengthen our liquidity position in the current environment, see Notes 6 and 18.
|
2.
|
Basis of consolidation and presentation
|
Basis of presentation
We prepared these consolidated financial statements in accordance with accounting principles generally accepted in the United States (“US GAAP”).
Our consolidated financial statements include the accounts of Despegar.com, Corp., our wholly owned subsidiaries, and entities for which we control a majority of the entity’s outstanding common stock. We record
non-controlling
interest in our consolidated financial statements to recognize the minority ownership interest in our consolidated subsidiaries.
Non-controlling
interest in the earnings and losses of consolidated subsidiaries represent the share of net income or loss allocated to members or partners in our consolidated entities, which includes the
non-controlling
interest share of net income or loss from our redeemable
non-controlling
interest entity. We consolidate our subsidiaries from the date on which we obtain control. We deconsolidate any subsidiary from the date we lose control. We record our investments in entities that we do not control, but over which we have the ability to exercise significant influence, using the equity method. We have eliminated significant intercompany transactions and accounts. We change the accounting policies of subsidiaries where necessary to ensure consistency with our accounting policies. All of our subsidiaries have the same
year-end.
We believe that the assumptions underlying our consolidated financial statements are reasonable. However, these consolidated financial statements do not present our future financial position, the results of our future operations and cash flows.
The accompanying notes are an integral part of these consolidated financial statements.
F-11
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
The following are our subsidiaries as of the end of the years presented:
|
Name of the subsidiary
(in alphabetical order)
|
Type
|
Country of
incorporation |
As of
December 31, 2020 |
As of
December 31, 2019 |
||||||||
|
% Owned
|
||||||||||||
|
Agencia de Viajes y Turismo Falabella S.A.S. (1)
|
Operating | Colombia | — | 100 | % | |||||||
|
Badurey S.A.
|
Holding | Uruguay | 100 | % | 100 | % | ||||||
|
BD Travelsolution, S. de R.L. de C.V.
|
Operating | Mexico | 100 | % | — | |||||||
|
BDTP Venture, Inc.
|
Operating | United States | 100 | % | — | |||||||
|
Beda Transportation, Inc.
|
Operating | United States | 100 | % | — | |||||||
|
Beda Travel & Tours, Inc.
|
Operating | United States | 100 | % | — | |||||||
|
Beda Travel, Inc.
|
Holding | United States | 100 | % | — | |||||||
|
Click Hoteles.com, LLC
|
Holding | United States | 100 | % | — | |||||||
|
Decolar.com Ltda.
|
Operating | Brazil | 100 | % | 100 | % | ||||||
|
Decolar.com, Inc.
|
Holding | United States | 100 | % | 100 | % | ||||||
|
Desonproc S.L.
(6)
|
Operating | Spain | — | 100 | % | |||||||
|
Despegar Colombia S.A.S.
|
Operating | Colombia | 100 | % | 100 | % | ||||||
|
Despegar Ecuador S.A.
|
Operating | Ecuador | 100 | % | 100 | % | ||||||
|
Despegar Servicios, S.A. de C.V.
(5)
|
Operating | Mexico | 100 | % | 100 | % | ||||||
|
Despegar.com Chile SpA
|
Operating | Chile | 100 | % | 100 | % | ||||||
|
Despegar.com México S.A. de C.V.
|
Operating | Mexico | 100 | % | 100 | % | ||||||
|
Despegar.com Panama S.A.
(6)
|
Operating | Panama | — | 100 | % | |||||||
|
Despegar.com Peru S.A.C.
|
Operating | Peru | 100 | % | 100 | % | ||||||
|
Despegar.com USA, Inc.
|
Operating | United States | 100 | % | 100 | % | ||||||
|
Despegar.com.ar S.A.
|
Operating | Argentina | 100 | % | 100 | % | ||||||
|
DFinance Holding Ltda.
|
Holding | Brazil | 100 | % | — | |||||||
|
Holidays S.A.
|
Operating | Uruguay | 100 | % | 100 | % | ||||||
|
Jamiray International S.A.
|
Operating | Uruguay | 100 | % | — | |||||||
|
Koin Administradora de Cartões e Meios de Pagamento S.A.
|
Operating | Brazil | 84 | % | — | |||||||
|
Rivamor S.A.
|
Holding | Uruguay | 100 | % | 100 | % | ||||||
|
Satylca S.C.A.
|
Holding | Uruguay | 100 | % | 100 | % | ||||||
|
Servicios Online 3351 de Venezuela C.A.
|
Operating | Venezuela | 100 | % | 100 | % | ||||||
|
Servicios Online S.A.S.
(1)
|
Operating | Colombia | — | 100 | % | |||||||
|
South Net Chile, LTDA
|
Operating | Chile | 100 | % | — | |||||||
|
South Net Travel, Inc.
|
Operating | United States | 100 | % | — | |||||||
|
South Net Turismo Colombia, S.A.
|
Operating | Colombia | 100 | % | — | |||||||
|
South Net Turismo Perú S.R.L.
|
Operating | Peru | 100 | % | — | |||||||
|
South-Net
Turismo Brasil, LTDA
|
Operating | Brazil | 100 | % | — | |||||||
|
South-Net
Turismo S.A.
|
Operating | Argentina | 100 | % | — | |||||||
|
Tecnobelt S.A.
|
Operating | Uruguay | 100 | % | 100 | % | ||||||
|
Transporturist, S.A. de C.V.
|
Operating | Mexico | 100 | % | — | |||||||
|
Travel Reservations S.R.L.
|
Operating | Uruguay | 100 | % | 100 | % | ||||||
|
Viaceco Travel, S.A. de C.V.
(5)
|
Operating | Mexico | 100 | % | — | |||||||
|
Viajes Beda, S.A. de C.V.
|
Operating | Mexico | 100 | % | — | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-12
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
|
Name of the subsidiary
(in alphabetical order)
|
Type
|
Country of
incorporation |
As of
December 31, 2020 |
As of
December 31, 2019 |
||||||||
|
Viajes Despegar.com O.N.L.I.N.E. S.A.
|
Operating | Costa Rica | 100 | % | 100 | % | ||||||
|
Viajes Falabella S.A.
(2)
|
Operating | Argentina | — | 100 | % | |||||||
|
Viajes Falabella S.A.C.
(3)
|
Operating | Peru | — | 100 | % | |||||||
|
Viajes Falabella SpA
(4)
|
Operating | Chile | — | 100 | % | |||||||
|
(1)
|
Merged with and into Despegar Colombia S.A.S.
|
|
(2)
|
Merged with and into Despegar.com.ar S.A.
|
|
(3)
|
Merged with and into Despegar.com Peru S.A.C.
|
|
(4)
|
Merged with and into Despegar.com Chile SpA.
|
|
(5)
|
Merged with and into Despegar.com México S.A. de C.V. on January 1, 2021.
|
|
(6)
|
Liquidated as of December 31, 2020.
|
Use of estimates
We use estimates and assumptions in the preparation of these consolidated financial statements in accordance with US GAAP. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of these consolidated financial statements. These estimates and assumptions also affect the reported amount of net income or loss during any period. The actual financial results could differ significantly from these estimates. The significant estimates underlying these consolidated financial statements include revenue recognition; allowance for credit expected losses; recoverability of long-lived assets, indefinite-lived intangible assets and goodwill; income and transactional taxes; loss contingencies; stock-based compensation and accounting for derivative instruments. The consolidated financial statements reflect all adjustments considered, in the opinion of management, necessary to fairly present the results for the periods presented.
Foreign currency translation
We have selected the U.S. dollar as our reporting currency. For local currency functional locations, assets and liabilities are translated at
rates while revenues and expenses are translated at average rates in effect during the period. Equity is translated at historical rates and the resulting cumulative translation adjustments are included as a component of accumulated other comprehensive income / (loss).
end-of-period
For U.S. dollar functional currency locations, foreign currency assets and liabilities are remeasured into U.S. dollars at
exchange rates, except for
end-of-period
non-monetary
balance sheet accounts, which are remeasured at historical exchange rates. Revenue and expenses are remeasured at average exchange rates in effect during each period, except for those expenses related to the
non-monetary
balance sheet amounts, which are remeasured at historical exchange rates. Gains or losses from foreign currency remeasurement are included in “Financial income / (expense), net” in our consolidated statements of income.
As from July 1, 2018, our subsidiary in Argentina changed its functional currency from Argentine Pesos to U.S. dollars due to the current highly inflationary status of the Argentine economy. A highly inflationary economy is one that has cumulative inflation of approximately 100% or more over a three-year period.
The accompanying notes are an integral part of these consolidated financial statements.
F-1
3
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
Concentration of risk
Our business is subject to certain risks and concentrations including our dependence on relationships with travel suppliers, primarily airlines and Expedia, dependence on third-party technology providers, exposure to risks associated with online commerce security and payment related fraud. We also rely on global distribution systems (“GDS”) providers and other third-party service providers for certain fulfillment services.
Financial instruments, which potentially subject the Company to concentration of credit risk, mainly consist of cash and cash equivalents and accounts receivable.
We maintain cash and cash equivalents balances in financial institutions that we believe are high credit quality. Our receivables are settled mainly through customer credit cards and debit cards. We maintain allowance for doubtful accounts based on management’s evaluation of various factors, including the credit risk of customers, historical trends and other information. See Note 9 for details.
Seasonality
We generally experience seasonal fluctuations in the demand for our travel services. The majority of our operations, such as Brazil and Argentina, are located in the Southern hemisphere where summer runs from December 1 to February 28 and winter runs from June 1 to August 31. Our most significant market in the Northern hemisphere is Mexico where summer runs from June 1 to August 31 and winter runs from December 1 to February 28. Accordingly, traditional leisure travel bookings in the Southern hemisphere are generally the highest in the second and fourth quarters of the year as travelers plan and book their winter and summer holiday travel. The number of bookings typically decreases in the first quarter of the year. In the Northern hemisphere, bookings are generally the highest in the first three quarters as travelers plan and book their spring, summer and winter holiday travel. The seasonal revenue impact is exacerbated with respect to income by the nature of variable cost of revenue and direct sales and marketing costs, which is typically realized in closer alignment to booking volumes, and the more stable nature of fixed costs.
The continued growth of international operations or a change in product mix may influence the typical trend of the seasonality in the future, and there may also be business or market driven dynamics that result in short-term impacts to revenue or profitability that differ from the typical seasonal trends.
Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these consolidated financial statements may not be the same as those for any subsequent quarter or the full year.
Due to the
COVID-19
pandemic, which led to significant cancellations for future travel during the first half of 2020 and impacted new travel bookings for the majority of 2020, we have not experienced our typical seasonal pattern for bookings, revenue and profit during the year ended December 31, 2020. In addition, with the decrease in new bookings and elevated cancellations in the merchant business model, our typical, seasonal working capital source of cash has been significantly disrupted resulting in unfavorable working capital trends and material negative cash flow since the second quarter of 2020 when we typically generate significant positive cash flow. It is difficult to forecast the seasonality for the upcoming quarters given the uncertainty related to the duration of the impact from the
COVID-19
pandemic and the shape and timing of any sustained recovery. In addition, we are experiencing much shorter booking windows, which could also impact the seasonality of our working capital and cash flow.
The accompanying notes are an integral part of these consolidated financial statements.
F-14
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
|
3.
|
Summary of significant accounting policies
|
Revenue recognition
We offer traditional travel services on a stand-alone and package basis generally either through the
business models. We primarily generate revenue as a result of facilitation services, either directly or through the use of affiliated travel agencies. We consider both the traveler and the travel supplier as our customers.
pre-pay/merchant
or the
pay-at-destination/agency
Under the
pre-pay/merchant
model, we provide travelers access to book hotel rooms, airline seats, car rentals and destination services through our contracts with our network of travel suppliers. Our travelers pay us for merchant transactions generally when they book the reservation. We pay our travel suppliers later, generally when the travelers use the travel service. Under these transactions, we generally earn a commission from travel suppliers and service fees from travelers. Travel suppliers generally bill us for travel products sold within a
12-month
period from
check-out
date. We recognize breakage incremental revenue from unbilled amounts when the period expires. Our revenues under the
pre-pay/merchant
model represented more than 75% of our total consolidated revenues for all years presented.
Under the
model, travelers pay the travel supplier directly at destination and travel suppliers pay us our earned commissions later, generally after checkout. We receive service fees from travelers up front. Our revenue under the
model represented less than 5% of our total consolidated revenues for all years presented.
pay-at-destination/agency
pay-at-destination/agency
Our primary sources of revenue are commissions and service fees, incentive fees and advertising comprising more than 90% of our consolidated revenue for all years presented.
Commissions and service fees
We facilitate our travel suppliers the sale of their travel products and services to our travelers and travel agencies. We generally receive commissions in consideration of our facilitation services. Generally, we charge a service fee to our travelers, although this may vary depending on marketing strategies. We do not provide significant post-booking services to travelers. We consider any post-booking services beyond minor inquiries or minor administrative changes to the reservation (i.e. modifications to the original terms of the reservations) as new bookings. Accordingly, we may charge a new booking fee and administrative fees for these services. Also, if the requested change results in an incremental price of the reservation to the traveler set by the travel supplier, we receive an incremental commission from the travel supplier.
We recognize revenue upon the transfer of control of the promised facilitation services to our customers in an amount that reflects the consideration we expect to be entitled to in exchange for those facilitation services. Generally, we recognize revenue when the booking is completed, paid and confirmed, less a reserve for cancellations based on historical experience.
The accompanying notes are an integral part of these consolidated financial statements.
F-15
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
We present revenue on a net basis for the majority of our transactions because the travel supplier is primarily responsible for providing the underlying travel services, we do not control the service or travel product provided by the travel supplier to the traveler and we do not bear inventory risk. Taxes assessed by a government authority, if any, are excluded from the measurement of transaction prices that are imposed on the travel related services or collected from customers (which are therefore excluded from revenue). We present revenue on a gross basis for some bookings when we
pre-purchase
flight seats. These transactions have been limited to date.
We partner with banks to allow our travelers the possibility of purchasing the product of their choice through financing plans established, offered and administered by such banks. Banks bear full risk of fraud, delinquency or default by travelers. When travelers elect to finance their purchases, we typically receive full payment for our services within a short period of time after booking is completed and confirmed, regardless of the payment plan selected by the traveler. However, in certain countries, we receive payment from the bank as installments become due regardless of when traveler actually makes the scheduled payments. In most cases, we receive payment before travel occurs or during travel and the period between completion of booking and reception of scheduled payments is typically one year or less. We have made use of the practical expedient in ASC
and we do not adjust the amount of consideration for the effects of a significant financing component. Beginning in late August 2020, we began providing financing to certain risk-profiled travelers only in Brazil. This activity has been very limited to date.
606-10-32-18
Our revenue from commissions and service fees represented 77%, 81% and 81% of our total consolidated revenues for the years ended December 31, 2020, 2019 and 2018, respectively.
Incentive fees
We may receive incentive fees from our travel suppliers or GDS providers if we meet certain performance conditions, for example contractually agreed volume thresholds. We recognize revenue on an accrual basis in accordance with the achievement of contractual thresholds on a
basis.
case-by-case
Incentive fee revenues represented 13%, 14% and 15% of our total consolidated revenues for the years ended December 31, 2020, 2019 and 2018, respectively.
Advertising
We record advertising revenue ratably over the advertising period or upon delivery of advertising material, depending on the terms of the advertising agreement.
Advertising revenues represented 4%, 3% and 3% of our total consolidated revenues for the years ended December 31, 2020, 2019 and 2018, respectively.
Other revenue:
We also derive revenue from other sources. Our other sources of revenue are not material:
The accompanying notes are an integral part of these consolidated financial statements.
F-16
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
Destination services
In October 2020 we began offering tours, activities and transportation services to travelers through a fleet of dedicated vans. We recognize revenue as services are provided. We present revenue on a gross basis for these transactions because we are the primary responsible for providing the underlying travel services. Our destination services represented 2% of our total consolidated revenue for the year ended December 31, 2020.
Loyalty revenue
In late 2019 we began to operate a loyalty program through which we award loyalty points to travelers who complete purchases on our websites or use the services of other program participants, such bank
co-branded
credit cards. Loyalty points can be redeemed for free or discounted travel products.
For loyalty points earned through travel product purchases, we apply a relative selling price approach whereby the total amount collected from each travel product sale is allocated between the travel product and the loyalty points earned. The portion of each travel product sale attributable to loyalty points is initially deferred and then recognized in loyalty revenue when the points are redeemed. Due to our recent launch of our loyalty program, lack of historical data and redemption patterns, we recognize breakage when the likelihood of the traveler exercising its remaining rights becomes remote.
For loyalty points earned through
co-branded
credit card partners, consideration received from the sale of loyalty points is variable and payment terms typically are within 30 days subsequent to the month of sale of loyalty points. Sales of loyalty points to business partners are comprised of two components: loyalty points and marketing (i.e. the use of intellectual property, including our brand and access to customer lists and databases, which is the predominant element in the agreements, as well as advertising, collectively, the marketing component). We allocate the consideration received from these sales of loyalty points based on the relative selling price of each product or service delivered. Accordingly, we recognize the marketing component in other revenue in the period of the loyalty points sale following the sales-based royalty method. The loyalty points component is initially deferred and then recognized in revenue when points are redeemed. This activity has been limited to date.
Interest revenue
Revenue from interest earned on financing granted to certain risk-profiled customers in Brazil is recognized over the term of the financing and is based on effective interest rates. This activity has been immaterial and very limited to date.
In the aggregate, these other revenues represented 6%, 2% and 1% of our total consolidated revenues for the years ended December 31, 2020, 2019 and 2018, respectively.
Cash and cash equivalents
Cash and cash equivalents include cash on hand, deposits held with banks and other short-term liquid investments with original maturities of three months or less. Gains or losses on short-term investments are recognized in financial expenses or financial income when incurred.
The accompanying notes are an integral part of these consolidated financial statements.
F-17
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
Accounts receivable and allowances
Accounts receivable are generally due within thirty days and are recorded net of an allowance for expected uncollectible amounts. We consider accounts outstanding longer than the contractual payment terms as past due. The risk characteristics we generally review when analyzing our accounts receivable pools primarily include the country of origin, type of receivable, collection terms and historical or expected credit loss patterns. For each pool, we make estimates of expected credit losses for our allowance by considering a number of factors, including the length of time trade accounts receivable are past due, previous loss history continually updated for new collections data, the credit quality of our customers, current economic conditions, reasonable and supportable forecasts of future economic conditions and other factors that may affect our ability to collect from customers. The provision for estimated credit losses is recorded as “General and administrative” expenses in our consolidated statements of income. During the year ended December 31, 2020, we recorded $7,199 of incremental allowance for expected uncollectible amounts, including estimated future losses in consideration of the impact of
COVID-19
pandemic on the economy and the Company. Actual future bad debt could differ materially from this estimate resulting from changes in our assumptions of the duration and severity of the impact of the
COVID-19
pandemic. See Note 9 for a discussion of the adoption of ASC ASU
2016-13
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASC 326”).
Property and equipment, net
We record property and equipment at acquisition cost, net of accumulated depreciation. We compute depreciation using the straight-line method over the estimated useful lives of the assets. Land is not depreciated. We depreciate leasehold improvement using the straight-line method, over the shorter of the estimated useful life of the improvement or the remaining term of the lease.
The estimated useful lives (in years) of the main categories of our property and equipment are as follows:
|
Asset
|
Estimated useful life (years) | |
|
Computer hardware
|
3 | |
|
Vans
|
4 | |
|
Office furniture and fixture
|
10 | |
|
Buildings
|
50 |
Expenditures for repairs and maintenance are charged to expense as incurred. The cost of significant renewals and improvements is added to the carrying amount of the respective asset and it is depreciated over the life of the contract.
When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in our consolidated statements of income.
The accompanying notes are an integral part of these consolidated financial statements.
F-18
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
Business combinations
We use the acquisition method of accounting to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair value of the ass
e
ts transferred, the liabilities incurred, and the equity interests issued, if any. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition-related costs are expensed as incurred. We assign the value of the consideration transferred to acquire a business to the tangible assets and identifiable intangible assets acquired and liabilities assumed on the basis of their fair values at the date of acquisition. Any excess purchase price over the fair value of the net tangible and intangible assets acquired is allocated to goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect to intangible assets. Critical estimates in valuing certain intangible assets include but are not limited to future expected cash flows from customer relationships and trademarks and tradenames, and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.
We have a period of 12 months as from the date of acquisition (the “measurement period”) to finalize the accounting for a business combination. We report provisional amounts when the accounting for a business combination is not complete by the end of the reporting period in which the business combination occurred. Any changes to provisional amounts identified during the measurement period are recognized in the reporting period in which the adjustment amounts are determined.
Goodwill
We record goodwill as the amount by which the aggregate of the fair value of consideration transferred, the acquisition date fair value of any previously held interest and any
non-controlling
interest exceeds the fair value of the assets and liabilities acquired. Goodwill is not subject to amortization and is tested at least annually for impairment, or earlier if an event occurs or circumstances change and there is an indication of impairment.
See Note 13 for further information.
Intangible assets, net
Intangible assets acquired in business combinations are initially recorded at fair value. We determine the fair value of intangible assets using standard valuation techniques, including the income approach (discounted cash flows) and/or market approach, as considered appropriate, and based on market participant assumptions.
Indefinite-lived intangible assets such as certain trademarks and tradenames are not subject to amortization and are tested at least annually for impairment, or earlier if an event occurs or circumstances change and there is an indication of impairment.
Definite-lived intangible assets such as customer relationships, licenses and certain trademarks and tradenames are amortized over their respective estimated useful lives.
We also capitalize certain direct development costs associated with website and
internal-use
developed technology and include external direct costs of services and payroll costs for employees devoting time to the software projects principally related to platform development, including support systems, software coding, designing system interfaces and installation and testing of the software. These costs are recorded as definite-lived intangible assets and are generally amortized over a period of 3 to 10 years beginning when the asset is substantially ready for use. Costs incurred for enhancements that are expected to result in additional features or functionalities are capitalized and amortized over the estimated useful life of the enhancements. Costs incurred during the preliminary project stage, as well as maintenance and training costs, are expensed as incurred.
See Note 12 fo
r
further information.
The accompanying notes are an integral part of these consolidated financial statements.
F-
19
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
Recoverability of goodwill and indefinite-lived intangible assets
Goodwill is assigned to reporting units that are expected to benefit from the synergies of the business combination as of the acquisition date. We assess goodwill and indefinite-lived intangible assets, neither of which is amortized, for impairment annually as of December 31, or more frequently, if events and circumstances indicate impairment may have occurred. In the evaluation of goodwill for impairment, we typically perform a quantitative assessment and compare the fair value of the reporting unit to its carrying value. An impairment charge is recorded based on the excess of the reporting unit’s carrying amount over its fair value. Periodically, we may choose to perform a qualitative assessment, prior to performing the quantitative analysis, to determine whether the fair value of the goodwill is more likely than not impaired.
We generally base our measurement of fair value of reporting units on an analysis of the present value of future discounted cash flows and market valuation approaches, as appropriate. The discounted cash flows model indicates the fair value of the reporting units based on the present value of the cash flows that we expect the reporting units to generate in the future. Our significant estimates in the discounted cash flows model include: our weighted average cost of capital; long-term rate of growth and profitability of our business; and working capital effects. The market valuation approach indicates the fair value of the business based on a comparison of the Company to comparable publicly traded firms in similar lines of business. Our significant estimates in the market approach model include identifying similar companies with comparable business factors such as size, growth, profitability, risk and return on investment and assessing comparable revenue and operating income multiples in estimating the fair value of the reporting units.
We believe the discounted cash flows and market approaches are the best methods for determining the fair value of our reporting units because these are the most common valuation methodologies used within the travel and internet industries.
In addition to measuring the fair value of our reporting units as described above, we consider the combined carrying and fair values of our reporting units in relation to our total fair value of equity plus debt as of the assessment date. Our equity value assumes our fully diluted market capitalization, using either the stock price on the valuation date or the average stock price over a range of dates around the valuation date, plus an estimated acquisition premium which is based on observable transactions of comparable companies. The debt value is based on the highest value expected to be paid to repurchase the debt, which can be fair value, principal or principal plus a premium depending on the terms of each debt instrument.
In our evaluation of our indefinite-lived intangible assets, we typically first perform a quantitative assessment and an impairment charge is recorded for the excess of the carrying value of indefinite-lived intangible assets over their fair value, if necessary. We base our measurement of fair value of indefinite-lived intangible assets, which primarily consist of trade name and trademarks, using the relief-from-royalty method. As with goodwill, periodically, we may choose to perform a qualitative assessment, prior to performing the quantitative analysis, to determine whether the fair value of the indefinite-lived intangible asset is more likely than not impaired.
See Notes 12 and 13 for further information.
The accompanying notes are an integral part of these consolidated financial statements.
F-20
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
Recoverability of intangible assets with definite lives and other long-lived assets
Intangible assets with definite lives and other long-lived assets are carried at cost and are amortized on a straight-line basis over their estimated useful lives of 3 to 10 years and 50 years for buildings. We review the carrying value of long-lived assets or asset groups, including property and equipment, to be used in operations whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Factors that would necessitate an impairment assessment include a significant adverse change in the extent or manner in which an asset is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset, or a significant decline in the observable market value of an asset, among others. If such facts indicate a potential impairment, we would assess the recoverability of an asset group by determining if the carrying value of the asset group exceeds the sum of the projected undiscounted cash flows expected to result from the use and eventual disposition of the assets over the remaining economic life of the primary asset in the asset group. If the recoverability test indicates that the carrying value of the asset group is not recoverable, we will estimate the fair value of the asset group using appropriate valuation methodologies which would typically include an estimate of discounted cash flows. Any impairment would be measured as the difference between the asset groups carrying amount and its estimated fair value.
Assets held for sale, to the extent we have any, are reported at the lower of cost or fair value less costs to sell.
See Notes 11 and 12 for further information.
Equity method investments
We use the equity method to account for investments in companies, if our investment provides us with the ability to exercise significant influence, but not control, over operating and financial policies of the investee. Our judgment regarding the level of influence over each equity method investment includes considering key factors such as our ownership interest, representation on the board of directors, participation in policy-making decisions and material intercompany transactions. We include the total of our investments in equity-method investees, including identifiable intangible assets, deferred tax liabilities, and goodwill, if any, within
“Non-current
other assets” in our consolidated balance sheets. We include our proportionate share of earnings and/or losses of our equity method investees in “Loss from equity investments” in our consolidated statements of income.
In the event that net losses of the investee reduce our equity-method investment carrying amount to zero, additional net losses may be recorded if we have committed to provide financial support to the investee. We regularly evaluate these investments, which are not carried at fair value, for other-than-temporary impairment. We also consider whether our equity-method investments generate sufficient cash flows from their operating or financing activities to meet their obligations and repay their liabilities when they come due. When our share in the net assets of associates is negative, we include the balance within
“Non-current
other liabilities” in our consolidated balance sheets. In the event we no longer have the ability to exercise significant influence over an equity-method investee, we would discontinue accounting for the investment under the equity method.
The accompanying notes are an integral part of these consolidated financial statements.
F-21
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
Redeemable
non-controlling
interests
We have a
non-controlling
interest in a majority owned entity which was valued at fair value at acquisition date. The
non-controlling
interest contains certain rights, whereby we have the right but not the obligation to acquire, and the minority shareholders have the right but not the obligation to sell to us, the additional shares of the company for cash at a fixed price other than fair value. The
non-controlling
interest is not currently redeemable, but it is probable of becoming redeemable (the redemption depends solely on the passage of time). Accordingly, we record the
non-controlling
interest at the greater of (i) its acquisition date fair value as adjusted for its share (if any) of earnings, losses, or dividends or (ii) an accreted value from the date of the acquisition to the earliest redemption date, February 20, 2022. The accretion of the
non-controlling
interest to February 20, 2022 is recorded using the interest method.
We adopted a policy to charge the carrying value adjustment to retained earnings or, absent retained earnings, additional
paid-in
capital and will reduce net income available to our common shareholders in the calculation of earnings per share in accordance with the
two-class
method. We record the
non-controlling
interest amount in the “mezzanine” section of our consolidated balance sheet as of December 31, 2020, outside of shareholders’ equity.
The details of the balances and changes in the redeemable
non-controlling
interest are presented in Note 5.
Travel accounts payable
Travel accounts payable comprises trade accounts payable to airlines, hotels and other travel suppliers for products and services offered. Airline suppliers are generally within thirty days of a confirmed air booking reservation. Under the
pre-pay
model, hotel suppliers are generally paid after traveler checks out. Generally, our contracts with hotels and other suppliers provide for a
12-month
time period for invoicing us for past services. If an invoice is not received after that period, we recognize breakage revenue for the unbilled payable.
Severance payments
We recognize a liability for severance payments if the following criteria are met: (a) management, having the authority to approve the action, commits to a plan of termination; (b) the plan identifies the number of employees to be terminated, their job classifications or functions and their locations, and the expected completion date; (c) the plan establishes the terms of the benefit arrangement, including the benefits that employees will receive upon termination, in sufficient detail to enable employees to determine the type and amount of benefits they will receive if they are involuntarily terminated; (d) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn; and (e) the plan has been communicated to employees.
The accompanying notes are an integral part of these consolidated financial statements.
F-22
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
Pension information
We do not maintain any pension plans. Certain countries in which we operate provide for pension benefits to be paid to retired employees from government pension plans and/or private pension plans. Amounts payable to such plans are accounted for on an accrual basis.
Contingent liabilities
We have a number of tax, regulatory and legal matters outstanding, as discussed further in Note 21.
Periodically, we review the status of all significant outstanding matters to assess the potential financial exposure. When (i) it is probable that an asset has been impaired or a liability has been incurred and (ii) the amount of the loss can be reasonably estimated, we record the estimated loss in our consolidated statements of income. We provide disclosure in the notes to the consolidated financial statements for loss contingencies that do not meet both of these conditions if there is a reasonable possibility that a loss may have been incurred that would be material to the financial statements. Significant judgment is required to determine the probability that a liability has been incurred and whether such liability is reasonably estimable. We base accruals made on the best information available at the time which can be highly subjective. The final outcome of these matters could vary significantly from the amounts included in the accompanying consolidated financial statements.
Derivative financial instruments
We carry derivative instruments at fair value on our consolidated balance sheets. The fair values of the derivative financial instruments generally represent the estimated amounts we would expect to receive or pay upon termination of the contracts as of the reporting date. As of December 31, 2020 and 2019, our derivative instruments primarily consisted of foreign currency forward contracts. We are exposed to various market risks that may affect our consolidated results of operations, cash flows and financial position. These market risks include, but are not limited to, fluctuations in foreign currency exchange rates. Our primary foreign currency exposures are to the currencies of Argentina, Brazil and Mexico, in which we conduct a significant portion of our business activities. As a result, we face exposure to adverse movements in foreign currency exchange rates as the results of our international operations are translated from local currencies into U.S. dollars upon consolidation. Additionally, foreign currency exchange rate fluctuations on transactions denominated in currencies other than the functional currency of an entity result in gains and losses that are reflected in net income.
We use foreign currency forward contracts to economically hedge these exposures. Our goal in managing our foreign exchange risk is to reduce, to the extent practicable, our potential exposure to the changes that exchange rates might have on our earnings, cash flows and financial position. Our foreign currency forward contracts are typically short-term and, as they do not qualify for hedge accounting treatment, we classify the changes in their fair value in “Financial income / (expense), net” in our consolidated statements of income in the period that the changes occur and are classified within “Net cash provided by operating activities” in our consolidated statements of cash flows. We do not hold or issue financial instruments for speculative or trading purposes. We report the fair value of our derivative assets and liabilities on a gross basis in our consolidated balance sheets in “Other assets and prepaid expenses” and “Other liabilities”, respectively.
The accompanying notes are an integral part of these consolidated financial statements.
F-23
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
Leases
We determine if an arrangement is a lease, or contains a lease, at inception. Operating leases are primarily for office space, customer service centers and a fleet of dedicated vans, and, as of January 1, 2019 with the adoption of the new guidance for leasing arrangements, are included in operating lease
(“ROU”) assets, accrued expenses and other current liabilities, and operating lease liabilities on our consolidated balance sheets. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
right-of-use
For operating leases with a term of one year or less, we have elected to not recognize a lease liability or ROU asset on our consolidated balance sheet. Instead, we recognize the lease payments as expense on a straight-line basis over the lease term. Short-term lease costs are immaterial to our consolidated statements of operations and cash flows.
Our lease agreements have insignificant
non-lease
components and accordingly we have elected the practical expedient to combine and account for lease and
non-lease
components as a single lease component.
Financial income / (expense), net
We incur in financial results such as factoring interest and commissions on receivables, gains or losses on derivative financial instruments, interest income from financial investments, interest paid on financial liabilities and foreign exchange gains or losses.
Stock-based compensation
We measure and amortize the fair value of restricted stock units (“RSUs”) and stock options as follows:
Restricted Stock Units.
4-year
period, but may accelerate in certain circumstances. During the year ended December 31, 2020, we started issuing RSUs as our primary form of stock-based compensation, some of them vest 33% after one year and others vest 25% after one year and will then vest yearly over the following 3 or 4 years, as appropriate. We measure the value of RSUs at fair value based on the number of shares granted and the quoted price of our common stock at the date of grant. We amortize the fair value as stock-based compensation expense over the vesting term on a straight-line basis.
Stock Options.
The accompanying notes are an integral part of these consolidated financial statements.
F-24
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
The expected volatility is based on historical volatility of our common stock and other relevant factors. We base our expected term assumptions on our historical experience and on the terms and conditions of the stock awards granted to employees. We amortize the fair value over the remaining explicit vesting term in the case of service-based awards. The majority of our stock options vest over 6 years.
Estimates of fair value are not intended to predict actual future events or the value ultimately realized by employees who receive these awards, and subsequent events are not indicative of the reasonableness of our original estimates of fair value.
Marketing and advertising expenses
We incur advertising expense consisting of offline costs, including television and radio advertising, and online advertising expense to promote our business. We expense the production costs associated with advertisements in the period in which the advertisement first takes place. We expense the costs of advertisement in the period during which the advertisement space or airtime is consumed. Internet advertising expenses are recognized based on the terms of the individual agreements, which is generally over the greater of (i) the ratio of the number of clicks delivered over the total number of contracted clicks, on a
basis, or (ii) on a straight-line basis over the term of the contract. Our advertising expenses were $27,661, $147,693 and $151,372 for the years ended December 31, 2020, 2019 and 2018, respectively.
pay-per-click
Accounting for income taxes
We are organized as a British Virgin Islands corporation. However, under the “anti-inversion” rules of Section 7874 of the U.S. Internal Revenue Code, we are treated as a U.S. corporation for U.S. federal tax purposes. Accordingly, we are subject to U.S. federal income tax on our worldwide income. We are subject to foreign income taxes in the jurisdictions where we operate in accordance with the respective local tax laws.
We account for income taxes under the asset and liability method that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns. Variations in the actual outcome of these future tax consequences could materially impact our financial position, results of operations or effective tax rate.
Significant judgment is required in determining our worldwide income tax provision. In the ordinary course of a global business, there are many transactions and calculations where the ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of revenue sharing and cost reimbursement arrangements among related entities, the process of identifying items of revenues and expenses that qualify for preferential tax treatment, and segregation of foreign and domestic earnings and expenses to avoid double taxation. Although we believe that our estimates are reasonable, the final tax outcome of these matters could be different from that which is reflected in our historical income tax provisions and accruals. Such differences could have a material effect on our income tax provision and net income in the period in which such determination is made.
The accompanying notes are an integral part of these consolidated financial statements.
F-25
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
In estimating future tax consequences, all expected future events are considered other than enactments of changes in tax laws or rates. Valuation allowances are established when necessary to reduce deferred tax assets to amounts which are more likely than not to be realized. We consider future growth, forecasted earnings, future taxable income, the mix of earnings in the jurisdictions in which we operate, historical earnings, the carryforward periods available for tax reporting purposes and prudent and feasible tax planning strategies in determining the need for a valuation allowance. In the event we were to determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets valuation allowance would be charged to earnings in the period in which we make such a determination, or goodwill would be adjusted at our final determination of the valuation allowance related to an acquisition within the measurement period. If we later determine that it is more likely than not that the net deferred tax assets would be realized, we would reverse the applicable portion of the previously provided valuation allowance as an adjustment to earnings at such time.
The amount of income tax we pay is subject to ongoing audits by federal, state and foreign tax authorities, which often result in proposed assessments. Our estimate of the potential outcome for any uncertain tax issue is highly judgmental. We account for these uncertain tax issues pursuant to ASC 740, Income Taxes, which contains a
two-step
approach to recognizing and measuring uncertain tax positions taken or expected to be taken in a tax return. The first step is to determine if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given with respect to the final outcome of these matters. We adjust reserves for our uncertain tax positions due to changing facts and circumstances, such as the closing of a tax audit, judicial rulings, refinement of estimates or realization of earnings or deductions that differ from our estimates. To the extent that the final outcome of these matters is different than the amounts recorded, such differences generally will impact our provision for income taxes in the period in which such a determination is made. Our provisions for income taxes include the impact of reserve provisions and changes to reserves that are considered appropriate and also include the related interest and penalties.
We treat taxes on global intangible
low-taxed
income (“GILTI”) introduced by the U.S. Tax Cuts and Jobs Act (the “Tax Act”) as period costs.
See Note 19 for further information.
Earnings per share
We compute basic earnings per share by dividing our net loss or income for the year attributable to Despegar.com, Corp. common shareholders, as adjusted for preferred stock accretion and dividends accrued, by our weighted-average outstanding common shares during the year on a basic and diluted basis. Since we issue warrants for nominal consideration which vest and are exercisable as from the issuance date, we include the shares of common stock underlying the outstanding warrants when calculating our basic earnings per share.
We compute diluted earnings per share using our weighted-average outstanding common shares including the dilutive effect of stock options and convertible preferred stock as determined under the
if-converted
method. In periods when we recognize a net loss, we exclude the impact of outstanding stock awards and convertible preferred stock from the diluted loss per share calculation as their inclusion would have an antidilutive effect.
The accompanying notes are an integral part of these consolidated financial statements.
F-26
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
We present basic and diluted earnings per share using the
two-class
method required for participating securities. We consider that our Series B preferred stock to be participating securities and, in accordance with the
two-class
method, earnings allocated to participating securities and the related number of outstanding shares of participating securities are excluded from the computation of basic and diluted net loss per common share. If a dividend is paid on common stock, the holders of Series B preferred stock are entitled to a proportionate share of any such dividend as if they were holders of common stock (on an
if-converted
basis). As the holders of our Series B preferred stock do not have contractual obligation to share in the losses of the Company, the net loss attributable to common stockholders for each period is not allocated between common stock and participating securities. Accordingly, preferred stock is excluded from the calculation of basic and diluted net loss per share as the effect would have been antidilutive.
For additional information on how we compute earnings per share, see Note 24.
Fair value recognition, measurement and disclosure
The carrying amounts of cash and cash equivalents and restricted cash reported on our consolidated balance sheets approximate fair value as we maintain them with various high-quality financial institutions. The accounts receivable are short-term in nature and are generally settled shortly after the sale.
We disclose the fair value of our financial instruments based on the fair value hierarchy using the following three categories:
Level 1 — Valuations based on quoted prices for identical assets and liabilities in active markets.
Level 2 — Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3 — Valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.
For additional information on items measured at fair value on a recurring or
non-recurring
basis, see Note 23.
The accompanying notes are an integral part of these consolidated financial statements.
F-27
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
Recently adopted accounting policies
Simplifying the Test for Goodwill Impairment
In January 2017, the Financial A
c
counting Standards Board (“FASB”) issued a new accounting update to simplify the test for goodwill impairment. The revised guidance eliminates the previously required step two of the goodwill impairment test, which required a hypothetical purchase price allocation to measure goodwill impairment. Under the revised guidance, a goodwill impairment loss will be measured at the amount by which a reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill. In addition, income tax effects from any
tax-deductible
goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. We adopted and applied this update in the first quarter of 2020.
Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued a new accounting update on the measurement of credit losses for certain financial assets measured at amortized cost and
debt securities. For financial assets measured at amortized cost, this update requires an entity to (1) estimate its lifetime expected credit losses upon recognition of the financial assets and establish an allowance to present the net amount expected to be collected, (2) recognize this allowance and changes in the allowance during subsequent periods through net income and (3) consider relevant information about past events, current conditions and reasonable and supportable forecasts in assessing the lifetime expected credit losses. We adopted this update in the first quarter of 2020 and applied it on a modified retrospective basis. The adoption did not have a material impact on our consolidated financial statements. See Note 9 for details of the adoption of the new standard.
available-for-sale
Disclosure requirements on fair value measurements
In August 2018, the FASB issued ASU
2018-13
“Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement”. The update is related to the disclosure requirements on fair value measurements, which removes, modifies or adds certain disclosures. We adopted this update in the first quarter of 2020 and applied it on a prospective basis. The adoption did not have a material impact on our consolidated financial statements.
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
In August 2018, the FASB issued a new accounting standard to address a customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract and also added certain disclosure requirements related to implementation costs incurred for
internal-use
software and cloud computing arrangements. The amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain
internal-use
software (and hosting arrangements that include an
internal-use
software license). We adopted this update in the first quarter of 2020 and applied it on a prospective basis. The adoption did not have a material impact on our consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
F-28
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
Recent accounting policies not yet adopted
Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued a new accounting update relating to income taxes. This update provides an exception to the general methodology for calculating income taxes in an interim period when a
loss exceeds the anticipated loss for the year. This update also (1) requires an entity to recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for any incremental amount incurred as a
year-to-date
non-income-based
tax, (2) requires an entity to evaluate when a
step-up
in the tax basis of goodwill should be considered part of the business combination in which goodwill was originally recognized for accounting purposes and when it should be considered a separate transaction, and (3) requires that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. For public business entities, this update is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. The amendment related to franchise taxes that are partially based on income should be applied on either a retrospective basis for all periods presented or a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. All other amendments should be applied on a prospective basis. We have evaluated the impact to our consolidated financial statements of adopting this update and we do not expect it to have a material impact.
4. Acquisitions
2020 Acquisition Activity
During the year ended December 31, 2020, we completed two business combinations, as follows:
Acquisition of Best Day Group
On October 1, 2020 (the “Closing Date”), we consummated the acquisition of the 100% equity interests of Viajes Beda and Transporturist, both companies organized under the laws of Mexico (collectively the “Acquisition”), pursuant to an Amended and Restated Stock Purchase Agreement dated June 11, 2020, as further amended on September 9, 2020 (the “Acquisition Agreement”). Viajes Beda primarily operates in Mexico and to a lesser extent in South America, including Argentina, Brazil and Uruguay among others, and the United States. Transporturist primarily operates in Mexico. Viajes Beda and Transporturist are collectively referred to as the “Best Day Group”.
The Best Day Group primarily provides travelers with several product offerings, including airline tickets, packages, hotels and other travel-related products, through its online platforms, call centers and offline presence, and provides travel suppliers a technology platform for managing the distribution of their travel products and access to traveler customers. The Best Day Group also provides ground transportation services and group tours to travelers principally across the main tourist destinations in Mexico and the Dominican Republic. The Best Day Group offers these travel products and services through its brands “Best Day” and “BD Experience”. In addition, the Best Day Group offers hotel inventory, as well as transfers, activities, car rental, packages and tours to travel agencies through its tradename “HotelDo”. Also, the Best Day Group provides white label services for major travel vendors, including exclusive partnerships with the largest Mexican airlines operating their packages platforms.
The purchase price was fixed at $10,288 after application of net indebtedness and working capital adjustments and will be payable in cash on October 1, 2023. In addition, the Acquisition Agreement provides for an earnout for the benefit of certain sellers ranging from $0 to $20,000 based solely on the performance of our share price during a measurement period of six months prior to the fourth anniversary of the Closing Date. The earnout, if any, will be payable in cash on October 1, 2024.
The accompanying notes are an integral part of these consolidated financial statements.
F-29
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
Under the Acquisition Agreement, the sellers contractually agreed to indemnify us for certain contingencies and uncertain tax positions. We recognized and measured the seller indemnification based on the same basis as the indemnified items. Indemnified items are partially covered by a fixed amount of $10,288 plus any amount payable under the contingent consideration agreement. Changes in the amount recognized for the seller indemnification which are not the result of qualifying measurement-period adjustments, are recognized in earnings in the same period as changes in the indemnified items are recognized. See Note 10.
We have made a preliminary allocation of the estimated purchase price to the tangible and intangible assets acquired and liabilities assumed based on their fair values at acquisition date. The preliminary estimated fair value of assets acquired and liabilities assumed was determined with the assistance of a third-party valuer. Goodwill was recognized as the excess of the aggregate of the fair values of consideration transferred over the fair value of assets acquired and liabilities assumed. We have made significant assumptions and estimates in determining the preliminary estimated purchase price, including the contingent consideration comprising a portion of the total consideration, and the preliminary allocation of the estimated purchase price in these consolidated financial statements. The acquisition accounting is dependent upon certain valuations and other studies that have yet to progress to a stage where there is sufficient information for a definitive measurement. Therefore, these preliminary estimates and assumptions are subject to change during the measurement period as we finalize the valuations of the net intangible and tangible assets. The final allocation may include changes to (1) the fair values of property and equipment; (2) the fair values of customer relationships and
off-market
components of certain contracts; (3) the recognized amounts of contingencies and liabilities for unrecognized tax benefits; and (4) assets and liabilities, as more information becomes available.
These final valuations may change significantly from our preliminary estimates. Differences between these preliminary estimates and the final acquisition accounting could have a material impact on these consolidated financial statements and our consolidated future results of operations and financial position. We expect to finalize the purchase price allocation during the second quarter ended June 30, 2021.
The accompanying notes are an integral part of these consolidated financial statements.
F-30
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
The following table summarizes the estimated preliminary purchase price:
|
Consideration:
|
||||
|
Fair value of purchase price payable on October 1, 2023
|
8,642 | |||
|
Fair value of contingent consideration payable on October 1, 2024
|
1,526 | |||
|
|
|
|||
|
Total consideration as of acquisition date
|
$ | 10,168 | ||
|
|
|
|||
|
Recognized amounts of assets acquired and liabilities assumed:
|
||||
|
Cash and cash equivalents
|
5,404 | |||
|
Restricted cash
|
2,763 | |||
|
Trade accounts receivable, net of credit expected loss
|
9,122 | |||
|
Related party receivable
|
2,337 | |||
|
Lease
right-of-use
|
7,415 | |||
|
Property and equipment, net
|
8,836 | |||
|
Intangible assets, net
|
51,758 | |||
|
Deferred tax assets
|
12,851 | |||
|
Seller indemnification
|
11,814 | |||
|
Other assets and prepaid expenses
|
33,446 | |||
|
|
|
|||
|
Total assets acquired
|
$ | 145,746 | ||
|
|
|
|||
|
Accounts payable and accrued expenses
|
7,948 | |||
|
Travel accounts payable
|
82,170 | |||
|
Related party payable
|
266 | |||
|
Short-term and long-term debt
|
10,618 | |||
|
Lease liabilities
|
7,955 | |||
|
Contingent liabilities
(1)
|
22,436 | |||
|
Deferred revenue
|
775 | |||
|
Taxes payable
(2)
|
29,573 | |||
|
Deferred tax liabilities
|
11,015 | |||
|
Promissory notes issued
(3)
|
13,928 | |||
|
Other liabilities
|
16,534 | |||
|
|
|
|||
|
Total liabilities assumed
|
$ | 203,218 | ||
|
|
|
|||
|
Total net liabilities assumed
|
$ | 57,472 | ||
|
|
|
|||
|
Goodwill
|
$ | 67,640 | ||
|
|
|
|
(1)
|
Includes $17,933 of identified acquisition-date probable contingencies related to
non-income
tax and $4,503 of identified acquisition-date probable contingencies related to social security and other matters. Amount reflects the best estimate of probable outcome. See Note 21.
|
|
(2)
|
Includes a liability of $28,955 for acquisition-date unrecognized tax benefits related to uncertain tax positions taken by the acquiree prior to our acquisition. See Note 19.
|
|
(3)
|
As part of the Acquisition Agreement, we legally assumed a debt that the acquired companies had with its previous shareholders. We issued four promissory notes for an aggregate nominal amount of $14,323 (which fair value was $13,928 as of the date of acquisition). The notes accrue interest at a fixed rate of 5% per annum and will be payable in cash on October 1, 2023.
|
Intangible assets acquired consisted of the following:
| Amount |
Estimated
useful life (years) |
|||||||
|
Trademarks
|
13,299 | 20 | ||||||
|
Domains
|
204 | 20 | ||||||
|
Developed technology
|
8,206 | 2.5 | ||||||
|
Licenses
|
634 | 1.3 | ||||||
|
Customer relationships
|
29,415 | 7 | ||||||
|
|
|
|||||||
|
Total intangible assets acquired
|
$ | 51,758 | ||||||
|
|
|
|||||||
The useful lives of the intangible assets for amortization purposes was determined considering the period of expected cash flows used to measure the fair value of the intangible assets adjusted as appropriate for the entity-specific factors including legal, regulatory, contractual, competitive, economic or other factors that may limit the useful life of intangible assets.
The accompanying notes are an integral part of these consolidated financial statements.
F-31
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
We used an income approach to measure the fair value of trademarks based on the relief-from-royalty method. The relief-from-royalty valuation method estimates the benefit of ownership of the intangible asset as the “relief” from the royalty expense that would need to be incurred in absence of ownership.
We used a market approach to measure the fair value of domains.
We used a cost approach to measure the fair value of developed technology based on the reproduction cost method, adjusted by a functional obsolescence factor. An additional cross-check analysis based on income approach has also been performed.
We used a replacement cost method to measure the fair value of licenses.
We used an income approach to measure the fair value of customer relationships based on the Multi-Period Excess Earnings Method. The excess earnings look at projected discounted cash flows of the customer relationships, considering estimated attrition rates. These fair value measurements were based on significant inputs not observable in the market and thus represent Level 3 measurements under the fair value hierarchy.
We used a replacement cost method or a market approach, as appropriate, to measure the fair value of fixed assets.
We measure the fair value of the earnout payment using a series of “digital options”. We believe this methodology can be applied because our earnout payment provides for a fixed payment to the sellers if our stock price exceeds a predetermined strike price during the earnout measurement period. In the application of this methodology, we performed a valuation in a risk neutral framework, using a Black-Scholes-Merton Digital call option formula. The significant inputs used were our share price as of the valuation date, our share price historical volatility, U.S. risk free rate, estimated term and credit-risk adjustment spread.
All other net tangible assets were valued at their respective carrying amounts, as we believe that these amounts approximate their current fair values.
A decrease in the fair value of assets acquired, or an increase in the fair value of liabilities assumed, from those preliminary valuations would result in a
corresponding increase in the amount of goodwill that will result from the Acquisition. In addition, if the value of the acquired assets is higher than the preliminary values above, it may result in higher depreciation and amortization expense.
dollar-for-dollar
Goodwill was primarily attributable to the synergistic value created from the opportunity for additional expansion in Mexico and other businesses where we did not have a presence and is
non-deductible
for tax purposes.
We incurred $2,856 and $617 of acquisition-related expenses which were included in “General and administrative” expenses in our consolidated statements of income for the years ended December 31, 2020 and 2019, respectively. We report the results of operations of the acquired business within our two reportable segments.
The accompanying notes are an integral part of these consolidated financial statements.
F-32
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
The following table summarizes the revenue and net loss (including purchase accounting amortization and the impact of intercompany eliminations) of the Best Day Group included in our consolidated statements of income for the year ended December 31, 2020 since October 1, 2020, the date of acquisition:
|
Period from
the date of acquisition to December 31, 2020 |
||||
|
Revenue
|
$ | 14,125 | ||
|
Net loss
|
$ | (14,983 | ) | |
The following pro forma summary presents certain consolidated information as if the acquisition of the Best Day Group had occurred on January 1, 2019:
|
For the years ended
December 31, |
||||||||
|
2020
|
2019
|
|||||||
|
Revenue
|
$ | 165,122 | $ | 658,147 | ||||
|
Net loss
|
$ | (242,261 | ) | $ | (38,241 | ) | ||
These pro forma results include adjustments for purposes of consolidating the historical financial results of the Best Day Group for the periods indicated. These pro forma results also include $5,034 and $6,712 for the years ended December 31, 2020 and 2019, respectively, to reflect the incremental depreciation and amortization as a result of recording property and equipment and intangible assets at fair value. These pro forma results do not represent financial results that would have been realized had the acquisition actually occurred on January 1, 2019, nor are they intended to be a projection of future results.
Acquisition of Koin
On August 20, 2020, we completed the acquisition of an 84% equity interest in Koin Administradora de Cartões e Meios de Pagamentos S.A., a company incorporated under the laws of Brazil (“Koin”). Koin is a payment fintech which offers a financing solution to merchants’ customers, predominantly in the travel sector in Brazil.
We effected the acquisition through conversion of an outstanding trade receivable we had with Koin for $977 as of the acquisition date. The former owners remained as
non-controlling
shareholders of a 16% equity interest in Koin.
As part of the acquisition, we and the
non-controlling
shareholders entered into a Shareholders’ Agreement under which we have the option, but not the obligation, to purchase the
non-controlling
interest during a period of 36 months as from the acquisition date at a fixed price of $4,320. In addition, the
non-controlling
shareholders have the option, but not the obligation, to sell their shares back to us during a period commencing on February 20, 2022 and ending August 21, 2023 for a fixed price in cash of $2,880.
The accompanying notes are an integral part of these consolidated financial statements.
F-33
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
We allocated the purchase price to ide
at $2,655, which was calculated using an option pricing model and generally reflected the net present value of the expected future fixed redemption amount. Intangible assets include $593 allocated to trademarks and $150 allocated to developed technology.
n
tifiable tangible and intangible assets acquired and liabilities assumed, and redeemable
non-controlling
interest based on their fair values at acquisition date. Goodwill was recognized as the excess of the aggregate of the fair values of consideration transferred and the redeemable
non-controlling
interest over the fair value of assets acquired and liabilities assumed. The acquisition date fair value of the redeemable
non-controlling
interest was estimated
In determining the fair value of assets acquired and liabilities assumed, we primarily used discounted cash flow analyses. Inputs to the discounted cash flow analyses and other aspects of the allocation of purchase price require judgment. The more significant inputs used in the discounted cash flow analyses and other areas of judgment include projected revenues, costs and expenses, working capital, capital expenditures and discount rate.
Goodwill was primarily attributable to the assembled workforce of Koin and synergistic value created from the opportunity for additional expansion and is not deductible for tax purposes.
The following table presents the final purchase price allocation as of December 31, 2020:
|
Consideration:
|
||||
|
|
|
|||
|
Fair value of purchase price
|
$ | 977 | ||
|
|
|
|||
|
|
|
|||
|
Redeemable
non-controlling
interest:
|
$ | 2,655 | ||
|
|
|
|||
|
Recognized amounts of assets acquired and liabilities assumed:
|
||||
|
Cash and cash equivalents
|
322 | |||
|
Restricted cash
|
4 | |||
|
Trade accounts receivable, net of credit expected loss
|
1,194 | |||
|
Lease
right-of-use
|
177 | |||
|
Property and equipment, net
|
99 | |||
|
Intangible assets, net
|
743 | |||
|
Other assets and prepaid expenses
|
66 | |||
|
|
|
|||
|
Total assets acquired
|
$ | 2,605 | ||
|
|
|
|||
|
Accounts payable and accrued expenses
|
1,721 | |||
|
Short-term debt
|
1,250 | |||
|
Lease liabilities
|
178 | |||
|
Contingent liabilities
|
19 | |||
|
Taxes payable
|
684 | |||
|
Deferred tax liabilities
|
253 | |||
|
Other liabilities
|
479 | |||
|
|
|
|||
|
Total liabilities assumed
|
$ | 4,584 | ||
|
|
|
|||
|
Total net liabilities assumed
|
$ | 1,979 | ||
|
|
|
|||
|
Goodwill
|
$ | 5,611 | ||
|
|
|
|||
We report the results of operations of the acquired business within our two reportable segments. Transaction related expenses during the year ended December 31, 2020 associated with the completion of the acquisition totaled $279 and were charged to “General and administrative” expenses in our consolidated statements of income.
The accompanying notes are an integral part of these consolidated financial statements.
F-34
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
The pro forma effects of this acquisition would not materially impact our reported results for any period presented, and as a result no pro forma financial information is presented. During the period from acquisition through December 31, 2020, the business contributed revenue of $138 and a net loss of $1,786.
2019 Acquisition Activity
During the year ended December 31, 2019, we completed one business combination, as follows:
Acquisition of Viajes Falabella
On June 7, 2019, we obtained the regulatory approvals and obtained control of the outstanding capital stock of Viajes Falabella Argentina, Viajes Falabella Chile and Viajes Falabella Peru. The acquisition of Viajes Falabella Colombia was completed on July 31, 2019, after the regulatory approvals were obtained. We refer to the acquired entities collectively as “Viajes Falabella”. We acquired the Viajes Falabella entities from Grupo Falabella. The Viajes Falabella entities are engaged in the travel agency business through their online and offline presence. The acquisition purchase price totaled $23,000, of which we paid $11,500 in cash at the acquisition date, $5,750 in June 2020 and $5,750 will be paid in June 2021.
Concurrent with the acquisition, we entered into a
10-year
commercial agreement with Grupo Falabella which provides for several marketing and promotional activities and other activities to promote future business. The agreement also provides for the use of the Viajes Falabella brand in Argentina, Chile, Peru and Colombia for an initial period of 4 years, renewable for
one-year
periods at our option. We account for the use of the brand as a prepaid asset and amortizes it under the straight-line basis over the term of the contract.
We acquired Viajes Falabella and entered into the commercial agreement to enhance our position as a leading travel agency providing customers with an enhanced travel and tourism product and service offerings through online, call center and physical stores.
We allocated the purchase price to identifiable tangible and intangible assets acquired and liabilities assumed based on their fair values. Goodwill was recognized as the excess of the aggregate of the fair values of consideration transferred over the fair value of assets acquired and liabilities assumed. In determining the fair value of assets acquired and liabilities assumed, we primarily used discounted cash flow analyses. Inputs to the discounted cash flow analyses and other aspects of the allocation of purchase price required judgment. The more significant inputs used in the discounted cash flow analyses and other areas of judgment include (i) future revenue growth or attrition rates (ii) projected margins (iii) discount rates used to present value future cash flows (iv) the amount of synergies expected from the acquisition and (v) the economic useful life of assets, among others.
The accompanying notes are an integral part of these consolidated financial statements.
F-35
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
The following table presents the final purchase price allocation as of December 31, 2019 and the reconciliation with “Payments for acquired business, net of cash acquired” line item in our consolidated statements of cash flows for the year ended December 31, 2019:
|
Consideration:
|
||||
|
|
|
|||
|
Fair value of purchase price
|
$ | 22,196 | ||
|
|
|
|||
|
Recognized amounts of assets acquired and liabilities assumed:
|
||||
|
Cash and cash equivalents
|
11,272 | |||
|
Trade accounts receivable, net of credit expected loss
|
11,828 | |||
|
Other assets and prepaid expenses
|
34,611 | |||
|
Property and equipment, net
|
2,420 | |||
|
Intangible assets, net
|
3,663 | |||
|
|
|
|||
|
Total assets acquired
|
$ | 63,794 | ||
|
|
|
|||
|
Travel accounts payable
|
36,656 | |||
|
Other liabilities
|
15,807 | |||
|
|
|
|||
|
Total liabilities assumed
|
$ | 52,463 | ||
|
|
|
|||
|
Total net assets acquired
|
$ | 11,331 | ||
|
|
|
|||
|
Goodwill
|
$ | 10,865 | ||
|
|
|
Intangible assets primarily consisted of customer relationships, with a weighted average useful life of 3.7 years
.
Goodwill was primarily attributable to the synergistic value created from the opportunity for additional expansion in the
off-line
channel and is not deductible for tax purposes.
We incurred $464 of acquisition-related expenses which were included in “General and administrative” expenses in our consolidated statements of income for the year ended December 31, 2019. We report the results of operations of the acquired business within our two reportable segments.
The following table summarizes the revenues and net loss (including purchase accounting amortization and the impact of intercompany eliminations) of Viajes Falabella included in our consolidated statements of income for the year ended December 31, 2019 since the date of acquisition:
|
Period from the date
of acquisition to December 31, 2019 |
||||
|
Net revenue
|
$ | 20,710 | ||
|
Net loss
|
$ | (3,060 | ) | |
The following pro forma summary presents certain consolidated information as if the acquisition of Viajes Falabella had occurred on January 1, 2018:
|
|
|
For the years ended December 31,
|
|
|||||
|
|
|
2019
|
|
|
2018
|
|
||
|
Net revenue
|
|
$
|
532,710
|
|
|
$
|
584,986
|
|
|
Net (loss) / income
|
|
$
|
(20,872
|
)
|
|
$
|
19,770
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-36
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
These pro forma results include adjustments for purposes of consolidating the historical financial results of Viajes Falabella for the periods indicated. These pro forma results also include $757 and $757 for the years ended December 31, 2019 and 2018, respectively, to reflect the incremental depreciation and amortization as a result of recording property and equipment and intangible assets at fair value. These pro forma results do not represent financial results that would have been realized had the acquisition actually occurred on January 1, 2018, nor are they intended to be a projection of future results.
2018 Acquisition Activity
We have not completed any business combinations during the year ended December 31, 2018.
|
5.
|
Redeemable
non-controlling
interest
|
In connection with the acquisition of the 84% controlling interest in Koin on August 20, 2020 (see Note 4 for details), we recognized $2,655 for the 16% redeemable
non-controlling
interest held by the former owners. The terms of the agreement provide us with the right to call the former owners’
non-controlling
interest in Koin, and the former owners the right to put their
non-controlling
interests in Koin back to us, assuming we do not exercise our call right, at dates and prices defined in the agreement. The put price is fixed at $2,880.
The
non-controlling
interest is not currently redeemable, but it is probable of becoming redeemable (the redemption depends solely on the passage of time). Accordingly, we record the
non-controlling
interest at the greater of (i) its acquisition date fair value as adjusted for its share (if any) of earnings, losses, or dividends or (ii) an accreted value from the date of the acquisition to the earliest redemption date, February 20, 2022. The accretion of the
non-controlling
interest to the earliest redemption value is recorded using an interest method. We adopted a policy to charge the carrying value adjustment to retained earnings or, absent retained earnings, additional
paid-in
capital and will reduce net income available to our common shareholders in the calculation of earnings per share in accordance with the
two-class
method. We record the
non-controlling
interest amount in the “mezzanine” section of our consolidated balance sheet as of December 31, 2020, outside of shareholders’ equity.
During the period from acquisition through December 31, 2020 there was a $78 adjustment to reflect a redemption value in excess of carrying value. See Note 24.
Reconciliation of changes in redeemable
non-controlling
interests
|
Beginning balance as of January 1, 2020
|
$ | — | ||
|
Initial fair value of redeemable
non-controlling
interest of acquired businesses
|
2,655 | |||
|
Comprehensive loss adjustments:
|
||||
|
Net loss attributable to redeemable
non-controlling
interest
|
(282 | ) | ||
|
Other comprehensive loss attributable to redeemable
non-controlling
interest
|
170 | |||
|
Additional
paid-in-capital
|
||||
|
Adjustment to redemption value
|
78 | |||
|
|
|
|||
|
Ending balance as of December 31, 2020
|
$ | 2,621 | ||
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-37
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
|
6.
|
Preferred Stock and Warrants
|
Non-Convertible
Redeemable Series A Preferred Shares and Warrants
On September 18, 2020 (the “Catterton Closing Date”), we completed the issuance and sale of our Series A Preferred Shares (as defined below) and warrants (the “Warrants”) to purchase our common stock (“Common Stock”) to LCLA Daylight LP, an affiliate of L Catterton Latin America III, L.P. (the “L Catterton Purchaser”) pursuant to our previously announced Investment Agreement, dated as of August 20, 2020, with the L Catterton Purchaser (the “L Catterton Investment Agreement”).
We issued and sold to the L Catterton Purchaser, pursuant to the L Catterton Investment Agreement, 150,000 shares of our newly created Series A Preferred Shares, no par value per share (the “Series A Preferred Shares”) and Warrants to purchase 11,000,000 shares of our Common Stock, no par value, for an aggregate purchase price of $150,000.
At closing, we paid certain fees in an aggregate amount of $2,250 to the L Catterton Purchaser.
On the terms and subject to the conditions set forth in the L Catterton Investment Agreement, from and after September 18, 2020, LCLA Daylight LP is entitled to appoint one director to our Board of Directors (the “Board”) and one
non-voting
observer to the Board, in each case until such time as LCLA Daylight LP and its permitted transferees no longer hold (a) (i) at least 50% of the Series A Preferred Shares purchased by LCLA Daylight LP under the L Catterton Investment Agreement and (ii) Warrants and/or Common Stock for which the Warrants were exercised that represent, in the aggregate and on an
as-exercised
basis, at least 50% of the shares underlying the Warrants purchased by LCLA Daylight LP under the L Catterton Investment Agreement or (b) if the Company has redeemed the Series A Preferred Shares in full (pursuant to the Company’s redemption right with respect thereto), Warrants and/or Common Stock for which the Warrants were exercised that represent, in the aggregate and on an as-exercised basis, at least 50% of the shares underlying the Warrants purchased by LCLA Daylight LP under the L Catterton Investment Agreement.
The L Catterton Investment Agreement (including the forms of our amended Memorandum of Association and Articles of Association, the terms of the Series A Preferred Shares, Warrants and Registration Rights Agreement) contains other customary covenants and agreements, including certain transfer restrictions, standstill and voting provisions and preemptive rights.
In connection with and concurrently with the closing of the transactions contemplated by the L Catterton Investment Agreement, we issued to LCLA Daylight LP Warrants to purchase 11,000,000 shares of our Common Stock at an exercise price of $0.01 per share, subject to certain customary anti-dilution adjustments provided under the Warrants, including for stock splits, reclassifications, combinations and dividends or distributions made by us on the Common Stock. The Warrants expire on September 18, 2030.
In connection with and concurrently with the closing of the transactions contemplated by the L Catterton Investment Agreement, we and LCLA Daylight LP entered into a Registration Rights Agreement (the “Registration Rights Agreement”), pursuant to which LCLA Daylight LP is entitled to customary registration rights with respect to the Common Stock for which the Warrants may be exercised.
The accompanying notes are an integral part of these consolidated financial statements.
F-38
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
Principal Terms of the Series A Preferred Shares
Dividends:
Dividends on each Series A Preferred Share accrue daily at a rate of 10.0% per annum and are payable semi-annually in arrears on September 30 and March 31, beginning on March 31, 2021. Dividends are payable, either in cash or through an accrual of unpaid dividends (“Dividend Accrual”), at the Company’s option. Dividends on each Series A Preferred Share accrue whether or not declared and whether or not we have assets legally available to make payment thereof. To the extent that any dividends are declared but unpaid, or any dividends are not declared in any given year, (i) such accrued and unpaid dividends and/or (ii) an amount equal to the dividend entitlement, shall compound semi-annually at the rate of 10.0% per annum (“Accumulating Dividends”). All Accumulating Dividends shall be paid in full prior to any distribution, dividend or other payment in respect of any equity securities junior to the Series A Preferred Shares.
Ranking:
The Series A Preferred Shares rank senior to the Common Stock with respect to dividend rights and rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company.
Company’s Redemption Rights:
At any time on or after the third anniversary of the Catterton Closing Date but prior to the fourth anniversary of the Catterton Closing Date, we may redeem all or any portion of the Series A Preferred Shares in cash at a price equal to 105.0% of the sum of the liquidation preference of $1,000 per Series A Preferred Share plus any Dividend Accruals per Series A Preferred Share (the “Liquidation Preference”), plus, without duplication, accrued and unpaid distributions to, but excluding, the redemption date. At any time on or after the fourth anniversary of the Catterton Closing Date but prior to the fifth anniversary of the Catterton Closing Date, we may redeem all or any portion of the Series A Preferred Shares in cash at a price equal to 102.5% of the Liquidation Preference, plus, without duplication, accrued and unpaid distributions to, but excluding, the redemption date. At any time after the fifth anniversary of the Catterton Closing Date, we may redeem all or any portion of the Series A Preferred Shares in cash at a price equal to the Liquidation Preference plus, without duplication, accrued and unpaid distributions to, but excluding, the redemption date.
Holders’ Redemption Rights:
At any time on or after the fifth anniversary of the Catterton Closing Date, each holder of Series A Preferred Shares may, at its election, cause the Company to redeem all or part of such holder’s then outstanding Series A Preferred Shares in cash at a price equal to the Liquidation Preference, plus, without duplication, accrued and unpaid distributions to, but excluding, the redemption date. In addition, if the Company undergoes a qualifying change of control, each holder of Series A Preferred Shares may, at its election, cause the Company to redeem all of such holder’s then outstanding Series A Preferred Shares in cash at a price equal to 110.0% of the Liquidation Preference, plus, without duplication, accrued and unpaid distributions to, but excluding, the redemption date.
The accompanying notes are an integral part of these consolidated financial statements.
F-39
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
Conversion Rights:
The Series A Preferred Shares are not convertible into Common Stock.
Voting Rights:
Each holder of Series A Preferred Shares will have one vote per share on any matter on which holders of Series A Preferred Shares are entitled to vote separately as a class, whether at a meeting or by written consent. The holders of Series A Preferred Shares do not otherwise have any voting rights at any meetings of the Company’s shareholders or on any resolution of the Company’s shareholders.
The prior written approval of the holders of a majority of the Series A Preferred Shares outstanding at such time, acting together as a separate class, is required in order for the Company to (i) amend the Memorandum and Articles of Association in a manner that adversely affects the holders of Series A Preferred Shares, (ii) create or issue any shares, or any securities convertible or exchangeable into, or exercisable for shares, ranking senior or pari passu to the Series A Preferred Shares or issue any additional Series A Preferred Shares or increase the authorized number of Series A Preferred Shares, other than an additional financing meeting certain requirements, (iii) declare or pay any dividend or distribution, or repurchase or redeem any shares, subject to certain exceptions, including with respect to the Series A Preferred Shares, (iv) make any fundamental change in the nature of the business in which the Company is primarily engaged, (v) initiate, engage in or permit to occur (to the extent within our control), any liquidation, dissolution or winding up of the Company, (vi) continue or
re-domicile
the Company in any jurisdiction other than the British Virgin Islands, or (vii) take or permit certain of the foregoing with respect to our significant subsidiaries.
So long as the Catterton Purchaser holds any Series A Preferred Shares, the prior written consent of the Catterton Purchaser is required in order for us to (i) incur any indebtedness for borrowed money in excess of the greater of $60,000, and an amount equal to 1.0x the Company’s consolidated Adjusted EBITDA for the twelve month period ending at the end of the last quarter for which we have publicly reported financial results, (ii) sell, dispose of or enter into any exclusive license for any material asset (or group of related assets) of the Company or with a fair market value equal or greater to 10% of our consolidated total assets and (iii) enter into certain affiliate transactions, in each case subject to certain exceptions.
Pursuant to the L Catterton Investment Agreement, on September 18, 2020, Mr. Dirk Donath was appointed as a member of the Board and Mr. Ramiro Lauzan was appointed as a
non-voting
observer. Mr. Donath has also been appointed to serve on the Strategy Committee and Nomination and Compensation Committee of the Board.
Principal Terms of the Warrants to Purchase Common Stock
Pursuant to the L Catterton Investment Agreement, we issued to the Catterton Purchaser Warrants to purchase 11,000,000 Common Shares at an exercise price of $0.01 per share (“Penny Warrants”), subject to certain customary anti-dilution adjustments provided under the Warrants, including for stock splits, reclassifications, combinations and dividends or distributions made by the Company on the Common Shares. The Penny Warrants expire ten years after the Catterton Closing Date.
The Penny Warrants vest and are exercisable as of the issuance date.
The accompanying notes are an integral part of these consolidated financial statements.
F-40
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
The Penny Warrants also include customary anti-dilution adjustments.
Initial and Subsequent Accounting:
The Series A Preferred Shares are classified within temporary equity on our consolidated balance sheet as of December 31, 2020 due to the provisions that could cause the equity to be redeemable at the option of the holder and the terms of the Series A Preferred Shares which do not include an unconditional obligation to redeem at a specified or determinable date, or upon an event certain to occur. The Penny Warrants qualify for classification in stockholders’ equity and are included in our consolidated balance sheet as of December 31, 2020 within “Additional
paid-in
capital”.
As indicated above, if a qualifying change of control occurs, then each holder of Series A Preferred Shares may, at its election, cause the Company to redeem all of such holder’s then outstanding Series A Preferred Shares in cash at a price equal to 110.0% of the Liquidation Preference, plus, without duplication, accrued and unpaid distributions to, but excluding, the redemption date (the “Change of Control Put”). There is a substantial premium as the Company is required to pay 110.0% upon a change of control. The Change of Control Put requires bifurcation. However, it is uncertain whether or when a qualifying change of control would occur that would obligate the Company to pay the substantial premium liquidation preference to holders of the Series A Preferred Shares and at the balance sheet date, these circumstances were not probable. Thus, no value was assigned at inception. A subsequent adjustment to the carrying value of the Series A Preferred Shares may be made only when it becomes probable that such a change of control event will occur.
The gross proceeds received from the issuance of the Series A Preferred Shares were allocated to the Series A Preferred Shares and Warrants on a relative fair value basis.
In determining the fair value of the Series A Preferred Shares, we primarily used discounted cash flow analyses. Inputs to the discounted cash flow analyses and other aspects of the valuation require judgment. The more significant inputs used in the discounted cash flow analyses and other areas of judgment include assumptions on term, cash flows, and market yield.
In determining the fair value of the Warrants, we primarily used the Black Scholes Option Pricing Model (“BSOPM”). Inputs to the BSOPM and other aspects of the valuation require judgment. The more significant inputs used in the BSOPM and other areas of judgment include the starting stock price or value of the underlying assets, the strike price, the time to expiration, and volatility and risk-free rate. In order to consider the
two-year
transfer restriction of the Warrants, considered to be security specific, we applied a Discount for Lack of Marketability with the Finnerty Method.
Therefore, the Series A Preferred Shares were initially recognized at an allocated amount on a fair value basis of $84,643, net of $5,415 in initial discount and issuance costs. The Penny Warrants were recognized at an allocated amount on a fair value basis of $56,339, net of $3,604 in issuance costs. Penny Warrants were recorded as additional
paid-in
capital.
The accompanying notes are an integral part of these consolidated financial statements.
F-41
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
The Series A Preferred Shares are not redeemable at December 31, 2020; however, they will become redeemable on September 18, 2025. Since only the passage of time is needed to occur in order for the Series A Preferred Shares to become redeemable, it is considered to be probable that it will be redeemable. As such, we elected to accrete the difference between the initial value of $84,643 and the redemption value of $150,000 over the five-year period from the date of issuance through September 18, 2025 (the date at which the holder has the unconditional right to redeem the shares, deemed to be the earliest likely redemption date) using the effective interest method. The accretion to the carrying value of the redeemable preferred shares is treated as a deemed dividend, recorded as a charge to additional
(since there is a deficit in retained earnings) and deducted in computing earnings per share (analogous to the treatment for stated dividends paid on the redeemable preferred shares). The accumulated accretion as of December 31, 2020 is $2,831 resulting in an adjusted redeemable preferred share balance of $91,686.
paid-in-capital
The Series A Preferred Shares accumulated $4,212 of total accrued dividends from issuance date through December 31, 2020 recorded as a charge to additional
paid-in-capital.
Convertible Redeemable Series B Preferred Shares
On September 21, 2020 (the “Waha Closing Date”), we completed the issuance and sale of our Series B Preferred Shares (as defined below) to Waha LATAM Investments Limited, an affiliate of Waha Capital PJSC (the “Waha Purchaser”) pursuant to our previously announced Investment Agreement, dated as of August 20, 2020, with the Waha Purchaser (the “Waha Investment Agreement”).
We issued and sold to the Waha Purchaser, pursuant to the Waha Investment Agreement, 50,000 shares of our newly created Series B Preferred Shares, no par value per share (the “Series B Preferred Shares”) for an aggregate purchase price of $50,000.
At closing, we paid certain fees in an aggregate amount of $1,000 to affiliates of the Waha Purchaser.
On the terms and subject to the conditions set forth in the Waha Investment Agreement, from and after September 21, 2020, the Waha Purchaser is entitled to appoint one director to our Board and one
non-voting
observer to the Board, in each case until such time as (i) the Waha Purchaser no longer holds at least 50% of the Series B Preferred Shares purchased by the Waha Purchaser under the Waha Investment Agreement and (ii) in the event that the Waha Purchaser or the Company converts the Series B Preferred Shares to Common Shares in full, the Waha Purchaser will be entitled to appoint one director to the Board and one
non-voting
observer to the Board, in each case, until such time as the Waha Purchaser no longer holds at least 50% of the issued and outstanding Common Shares issued to the Waha Purchaser at the conversion date.
The Waha Investment Agreement (including the forms of our amended Memorandum of Association and Articles of Association, the terms of the Series B Preferred Shares and the Waha Shelf Registration Rights Agreement) contains other customary covenants and agreements, including certain transfer restrictions, standstill and voting provisions and preemptive rights.
Pursuant to the Waha Investment Agreement, we and the Waha Purchaser entered into a Shelf Registration Rights Agreement (the “Waha Shelf Registration Rights Agreement”), pursuant to which the Company filed a Registration Statement on Form
F-3
covering the resale of the Common Shares for which the Series B Preferred Shares may be converted. The issuance of the Series B Preferred Shares pursuant to the Waha Investment Agreement is intended to be exempt from registration under the Securities Act, by virtue of the exemption provided by Section 4(a)(2) of the Securities Act.
The accompanying notes are an integral part of these consolidated financial statements.
F-42
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
Principal Terms of the Series B Preferred Shares
Dividends:
Dividends on each Series B Preferred Share accrue daily from and including the Waha Closing Date at a rate of 4.0% per annum and are payable quarterly in arrears commencing on December 31, 2020. Dividends on each Series B Preferred Share accrue whether or not declared and whether or not the Company has assets legally available to make payment thereof.
Dividends are payable, at the Company’s option, either (i) in cash or (ii) by increasing the amount of Accrued Dividends in an amount equal to the amount of the dividend to be paid. If the Company does not declare and pay in cash a full dividend on each Series B Preferred Share on any dividend payment date, then the amount of such unpaid dividend shall automatically be added to the amount of accrued dividends on such share on the applicable dividend payment date without any action on the part of the Company.
In addition, the Series B Preferred Shares are entitled to participate in dividends and other distributions declared and made on the Common Stock on an
as-converted
basis.
Ranking:
The Series B Preferred Shares rank on a parity basis to the Series A Preferred Shares and senior to the Common Stock with respect to dividend rights and rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company.
Liquidation Rights:
In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, the holders of the Series B Preferred Shares shall be entitled, out of assets legally available therefor, before any distribution or payment out of the assets of the Company may be made to or set aside for the holders of any Common Shares, and subject to the rights of the holders of any Senior Shares or Parity Shares and the rights of the Company’s existing and future creditors, to receive in full a liquidating distribution in cash and in the amount per Series B Preferred Share equal to the Liquidation Preference with respect to such Series B Preferred Share.
Conversion Rights:
The Series B Preferred Shares are convertible, at the option of the holder, at any time into Common Stock at an initial conversion price of $9.251 (the “Initial Conversion Price) per share and an initial conversion rate of 108.1081 Common Shares per Series B Preferred Share, subject to certain anti-dilution adjustments. As of December 31, 2020, there were no conversions of the Series B Preferred Shares.
Each holder of Series B Preferred Shares has the right, at such holder’s option, to convert all or a part of such holder’s Series B Preferred Shares at any time into (i) the number of Common Shares per Series B Preferred Share equal to the quotient of (A) the sum of the Stated Value plus, without duplication, any accrued and unpaid Dividends with respect to such Series B Preferred Share as of the applicable Conversion Date (to the extent such accrued and unpaid Dividend is not included in the Stated Value already) (such sum, the “Conversion Amount”) divided by (B) the Conversion Price as of the applicable Conversion Date.
The accompanying notes are an integral part of these consolidated financial statements.
F-43
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
At any time from the third to the fifth anniversary of the Waha Closing Date, if the volume weighted average price (“VWAP”) of the Common Shares exceeds $
13.88
% of the Initial Conversion Price) as may be adjusted pursuant to the Memorandum and Articles of Association, for at least
10
consecutive trading days, the Company may convert all of the Series B Preferred Shares into the number of Common Shares equal to the quotient of
(1)
% of the conversion amount as of the conversion date divided by
(2)
the conversion price of such share in effect as of the conversion date.
At any time from the fifth to the seventh anniversary of the Waha Closing Date, if the VWAP of the Common Shares exceeds $12.49 (135% of the Initial Conversion Price), as may be adjusted pursuant to the Memorandum and Articles of Association, for at least 10 consecutive trading days, the Company may convert all of the Series B Preferred Shares into the number of Common Shares equal to the quotient of (1) 105% of the conversion amount as of the conversion date divided by (2) the conversion price of such share in effect as of the conversion date.
In addition, at any time from the seventh anniversary of the Waha Closing Date, if the VWAP of the Common Shares exceeds the Initial Conversion Price, as may be adjusted pursuant to the Memorandum and Articles of Association, for at least 10 consecutive trading days, the Company may convert all of the Series B Preferred Shares into the number of Common Shares equal to the conversion amount divided by the lower of (1) the VWAP per Common Share on the 15 trading days immediately preceding the conversion date or (2) the price per Common Share on the trading day immediately preceding the conversion date.
Redemption Rights:
At any time on or after the seventh anniversary of the Waha Closing Date, the Company may redeem all of the Series B Preferred Shares in cash at a price equal to the sum of (i) (x) the initial stated value of $1,000 per Series B Preferred Shares plus (y) any Dividend Accruals (such sum, the “Stated Value”) plus (ii), without duplication, any accrued and unpaid distributions to, but excluding, the redemption date.
Change of Control Redemption:
If the Company undergoes a qualifying change of control prior to the seventh anniversary of the Waha Closing Date, the Company must redeem, subject to the right of each holder to convert its then outstanding Series B Preferred Shares into Common Shares, all of the then outstanding Series B Preferred Shares for a cash price per share equal to the greater of (x) 110.0% of the Stated Value plus, without duplication, any accrued and unpaid distributions to, but excluding, the redemption date, and (y) the amount such holder would have received in respect of the number of Common Shares that would be issuable upon conversion thereof.
If the Company undergoes a qualifying change of control on or following the seventh anniversary of the Waha Closing Date, the Company must redeem, subject to the right of each holder to convert its then outstanding Series B Preferred Shares into Common Shares, all of the then outstanding Series B Preferred Shares for a cash price per share equal to the greater of (x) 100.0% of the Stated Value plus, without duplication, any accrued and unpaid distributions to, but excluding, the redemption date, and (y) the amount such holder would have received in respect of the number of Common Shares that would be issuable upon conversion thereof, subject to certain conditions.
The accompanying notes are an integral part of these consolidated financial statements.
F-44
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
Voting Rights:
The Series B Preferred Shares will vote on all matters together with the Common Shares on an
as-converted
basis. Until such time as the Waha Purchaser no longer holds at least 50% of the Series B Preferred Shares purchased by the Waha Purchaser under the Waha Investment Agreement, the prior written consent of the Waha Purchaser is required in order for the Company to (i) authorize, create or issue any shares senior to or on parity with the Series B Preferred Shares, excluding an additional financing meeting certain requirements; (ii) amend, modify or repeal any provision of the Memorandum and Articles of Association in a manner adverse to the Series B Preferred Shares; (iii) change the authorized number of directors of the Company; (iv) enter into certain affiliate transactions; (v) declare or pay any dividend or distribution with respect to any shares; (vi) redeem, purchase or otherwise acquire any Common Shares; (vii) liquidate, dissolve or wind up the affairs of the Company or any of its subsidiaries, effect a recapitalization or reorganization, or reincorporate the Company under the laws of a jurisdiction other than the British Virgin Islands; (viii) effect a conversion of the Company into a different legal form; and (ix) enter into any exclusive license for all or substantially all of the Company’s products or technologies to a third party, in each case subject to certain exceptions.
Pursuant to the Waha Investment Agreement, on September 21, 2020, Mr. Aseem Gupta was appointed as a member of the Board.
Initial and Subsequent Accounting:
The Series B Preferred Shares are classified within temporary equity on our consolidated balance sheet as of December 31, 2020 due to the provisions that cause the equity to be redeemable upon the occurrence of a change of control. The terms of the Series B Preferred Shares do not include an unconditional obligation to redeem at a specified or determinable date, or upon an event certain to occur.
The Series B Preferred Shares were determined to have characteristics more akin to equity than debt. As a result, the conversion at holder’s option or at the Company’s option prior to the seventh anniversary of the Waha Closing Date were determined to be clearly and closely related to the Series B Preferred Shares and therefore do not need to be bifurcated and classified as a derivative liability.
The Company’s conversion option after the seventh anniversary of the Waha Closing Date was not determined to be clearly and closely related to the Series B Preferred Shares as the feature is
in-substance
a put option as it is designed to provide the investor with a fixed monetary amount, settleable in shares. Put (call) options embedded in equity hosts are not considered clearly and closely related. However, the embedded feature does not meet the definition of a derivative. It has an underlying, a notional amount and a settlement provision, little to no initial net investment but it is not net settled. Therefore, the feature does not need to be bifurcated and classified as a derivative liability.
We also evaluated whether a beneficial conversion feature (“BCF”) should be bifurcated and separately recognized. A convertible instrument contains a BCF when the conversion price is less than the fair value of the shares into which the instrument is convertible at the commitment date. As the conversion price is above the share price and the conversion option is not priced
we concluded that the Series B Preferred Shares did not contain a BCF and no accounting entry was required.
“in-the-money”,
The accompanying notes are an integral part of these consolidated financial statements.
F-45
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
All of the other embedded features in the Series B Preferred Shares do not need to be bifurcated.
Accordingly, the Series B Preferred Shares were recognized at fair value of $50,000 (the proceeds on the date of issuance) less issuance costs of $3,300 resulting in an initial value of $46,700.
The Series B Preferred Shares were not currently redeemable at December 31, 2020. Also, the events that could cause the Series B Preferred Shares to become redeemable are not considered probable of occurring as of December 31, 2020. Accordingly, accretion from the initial carrying amount to the redemption amount was not required. Dividends were accrued, approved and paid in cash for $553 and as of December 31, 2020 there were no undeclared dividends.
|
7.
|
Debt
|
The following table sets forth our outstanding short-term and long-term debt:
The accompanying notes are an integral part of these consolidated financial statements.
F-46
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
The changes in the balance of the total debt as of December 31, 2020 and December 31, 2019 consist of the following:
|
As of December 31,
2020 |
As of December 31,
2019 |
|||||||
|
Balance, beginning of year
|
$ | 19,209 | $ | 31,162 | ||||
|
Acquisitions
|
9,335 | — | ||||||
|
Borrowings obtained
|
640 | — | ||||||
|
Payment of borrowings
|
(375 | ) | — | |||||
|
Accrued interest
|
196 | — | ||||||
|
Interest paid
|
(195 | ) | — | |||||
|
Foreign currency translation adjustment
|
962 | — | ||||||
|
Short-term loans, net
|
(10,456 | ) | (11,953 | ) | ||||
|
|
|
|
|
|||||
|
Balance, end of year
|
$ | 19,316 | $ | 19,209 | ||||
|
|
|
|
|
|||||
The following table shows the details of the long-term debt outstanding as of December 31, 2020:
|
Loan
|
Issuance
date |
Maturity
date |
Currency |
Principal
amount in original currency |
Principal
amount in U.S. dollars |
Interest rate |
Interest
payment |
|||||||||||||
|
HSBC Mexico, S.A.
|
February 2020 | March 2023 | Mexican Pesos | 100,000,000 | 5,100 |
TIIE
(1)
+3.25%
|
Monthly | |||||||||||||
|
Bank Sabadell Mexico S.A.
|
January 2020 | March 2023 | Mexican Pesos | 83,831,941 | 4,433 |
TIIE
(1)
+2.5%
|
Monthly | |||||||||||||
|
Bank Sabadell Mexico S.A.
|
January 2020 | January 2022 | Mexican Pesos | 20,000,000 | 1,058 |
TIIE
(1)
+3.2%
|
Monthly | |||||||||||||
|
Banco de Crédito e Inversiones
|
June 2020 | May 2024 | Chilean Pesos | 500,000,000 | 640 | 3.50 | Monthly | |||||||||||||
|
(1)
|
TIIE represents an interbank interest rate in Mexico. As of December 31, 2020, interest rates for HSBC Mexico, S.A. loan, Bank Sabadell I loan and Bank Sabadell II loan were 7.5%, 6.75% and 7.45%, respectively.
|
The weighted average interest rate on short-term borrowings outstanding as of December 31, 2020 and 2019 was 3.4% and 4.3%, respectively.
The accompanying notes are an integral part of these consolidated financial statements.
F-47
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
|
8.
|
Cash and cash equivalents and restricted cash
|
Cash and cash equivalents
Cash and cash equivalents consist of the following:
|
As of December 31,
2020 |
As of December 31,
2019 |
|||||||
|
Cash on hand
|
121 | 42 | ||||||
|
Bank deposits
|
201,217 | 118,933 | ||||||
|
Time deposits
|
45,031 | 153,838 | ||||||
|
Money market funds
|
88,061 | 36,374 | ||||||
|
|
|
|
|
|||||
| $334,430 | $309,187 | |||||||
|
|
|
|
|
|||||
Restricted cash
We place collateralized amounts related to operations with our travel suppliers and service providers and the International Air Transport Association (“IATA”). We are required to be accredited by IATA to sell international airlines tickets of IATA-affiliated airlines. We, therefore, as part of our operations, maintain restricted cash in the form of time deposits or bank or insurance guarantees aggregating $16,055 and $4,457 as of December 31, 2020 and 2019.
The following table reconciles our cash and cash equivalents and restricted cash as reported in our consolidated balance sheets to the total amount shown in our consolidated statements of cash flows:
|
As of December 31,
2020 |
As of December 31,
2019 |
As of December 31,
2018 |
||||||||||
|
As included in our consolidated balance sheets:
|
||||||||||||
|
Cash and cash equivalents
|
334,430 | 309,187 | 346,480 | |||||||||
|
Restricted cash
|
16,055 | 4,457 | 5,709 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total cash and cash equivalents and restricted cash as shown in our consolidated statements of cash flows:
|
$ | 350,485 | $ | 313,644 | $ | 352,189 | ||||||
|
|
|
|
|
|
|
|||||||
|
9.
|
Measurement of credit losses on financial instruments
|
On January 1, 2020, we adopted ASU
2016-13
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASC 326”) which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost.
As of the date of adoption, January 1, 2020 and as of December 31, 2020, substantially all our financial assets under the scope of the standard corresponded to trade accounts receivable as a result of revenue transactions recognized in accordance with ASC 606.
We adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. We recorded a net increase to accumulated losses of $1,076 as of January 1, 2020 for the cumulative effect of adopting ASC 326.
The accompanying notes are an integral part of these consolidated financial statements.
F-48
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
The following table illustrates the impact of adopting ASC 326 as of January 1, 2020:
| As of January 1, 2020 | ||||||||||||
|
As reported
under previous GAAP |
Impact of ASC
326 adoption |
As reported
under ASC 326 |
||||||||||
|
Allowance for credit expected losses:
|
3,205 | 1,076 | 4,281 | |||||||||
Trade receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method, less an allowance for expected credit losses.
Upon adoption of ASC 326, we grouped our trade receivables by country of origin and type (i.e. facilitation services, incentives, advertising, transportation and tour services and others) based on similar risk characteristics.
Payment terms for receivables vary depending on type and jurisdiction, generally less than one year.
As it relates to trade receivables with credit card processors which represent the majority of our trade receivables as of any given date, payment terms vary but typically are received within 30 days after booking except in those cases where transactions are effected through financing installment plans offered by banks. When travelers pay in installments, we receive payment from credit card processors at the time each installment is due generally within 12 months after booking depending on installment plan selected. However, we typically enter into factoring arrangements to cash these receivables thereby reducing days outstanding exposures. Receivables
from back-end incentives
and advertising transactions typically do not have stated payment terms, although we generally receive payment within 12 months.
Generally, we utilized a loss rate method to calculate the allowance for expected credit losses. We compiled information for a period of time before adoption and tracked historical loss information for our trade receivables by type and geography using their contractual lives. We believe that use of a period of 12 months or more prior to adoption was reasonable based on the nature and term of our receivables. We applied the historical credit loss percentages to our outstanding balances as of adoption and as of December 31, 2020. We determined that historical loss information is a reasonable basis on which to determine expected credit losses for trade receivables held at the reporting date because their composition at the reporting date is consistent with that used in developing the historical credit-loss percentages.
Historically the default or delinquency rates of our trade receivables have been low even during recessions or distressed economic periods. Recessions or other poor economic conditions had historically affected the amount of bookings by travelers and therefore generation of revenue and corresponding receivables, but they generally did not affect the collection behavior of receivables from confirmed bookings. A booking is not confirmed if credit card information is not validated by the credit card processors’ systems. Therefore, due to the nature of our receivables and counterparties, losses have been historically limited to very specific events at the counterparty level such as bankruptcy or financial difficulties.
The accompanying notes are an integral part of these consolidated financial statements.
F-49
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
During the year ended December 31, 2020, we recorded $7,199 of incremental allowance for expected uncollectible amounts, including estimated future losses in consideration of the impact of
COVID-19
pandemic on our operations and the economy. Actual future bad debt could differ materially from this estimate resulting from changes in our assumptions of the duration and severity of the impact of the
COVID-19
pandemic.
Our exposure to credit risk takes the form of a loss that would be recognized if counterparties failed to, or were unable to, meet their payment obligations. We are also exposed to political and economic risk events, which may cause
non-payment
of foreign currency obligations to us.
Generally, the counterparties to our trade receivables are major well-recognized and externally-credit rated credit card companies, such as MasterCard, Visa, Diners and other local or regional credit card processors; major GDS providers, such as Travelport, Amadeus and Sabre, individual major airlines; and to a lesser extent hotel chains and operators. We may seek cash collateral, letter of credit or parent company guarantees, as considered appropriate. We have not experienced significant credit problems with these customers to date. Most of these entities or their parent companies are externally credit-rated. We review these external ratings from credit agencies. Certain airlines have been severely affected by the
COVID-19
pandemic and entered into Chapter 11 protection in the United States. We have recognized incremental allowances for expected uncollectible amounts. The maximum exposure to credit risk is represented by the carrying amount of each financial asset in our consolidated balance sheet after deducting the expected credit loss allowance.
The following table shows the activity on the expected credit loss allowance for trade receivables during the years ended December 31, 2020 and 2019:
|
As of December 31,
2020 |
As of December 31,
2019 |
|||||||
|
Balance, beginning of year
|
$ | 3,205 | $ | 2,065 | ||||
|
Impact of adoption of ASC 326
|
1,076 | — | ||||||
|
Provisions
|
12,270 | 4,294 | ||||||
|
Recoveries and
write-off
|
(7,369 | ) | (3,050 | ) | ||||
|
Foreign currency translation adjustment
|
1,613 | (104 | ) | |||||
|
|
|
|
|
|||||
|
Balance, end of year
|
$ | 10,795 | $ | 3,205 | ||||
|
|
|
|
|
|||||
|
10.
|
Other assets and prepaid expenses
|
Other current assets and prepaid expenses consist of the following:
|
As of December 31,
2020 |
As of December 31,
2019 |
|||||||
|
Tax credits
|
34,465 | 37,067 | ||||||
|
Prepaid expenses and advance to suppliers
|
15,664 | 29,083 | ||||||
|
Prepaid advertising
|
175 | 1,483 | ||||||
|
Others
|
1,991 | 2,061 | ||||||
|
|
|
|
|
|||||
| $ | 52,295 | $ | 69,694 | |||||
|
|
|
|
|
|||||
The accompanying notes are an integral part of these consolidated financial statements.
F-50
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
Other
non-current
assets consist of the following:
|
As of December 31,
2020 |
As of December 31,
2019 |
|||||||
|
Deferred tax assets
|
57,742 | 25,351 | ||||||
|
Seller indemnification
|
14,053 | — | ||||||
|
|
|
|
|
|||||
| $ | 71,795 | $ | 25,351 | |||||
|
|
|
|
|
|||||
|
11.
|
Property and equipment, net
|
Property and equipment, net consists of the following:
|
As of December 31,
2020 |
As of December 31,
2019 |
|||||||
|
Computer hardware and software
|
48,895 | 31,966 | ||||||
|
Office furniture and fixtures
|
17,909 | 21,882 | ||||||
|
Buildings
|
3,128 | 2,086 | ||||||
|
Vans
|
1,571 | — | ||||||
|
Land
|
266 | 41 | ||||||
|
|
|
|
|
|||||
|
Total property and equipment
|
$ | 71,769 | $ | 55,975 | ||||
|
|
|
|
|
|||||
|
Accumulated depreciation
(1)
|
(49,036 | ) | (34,770 | ) | ||||
|
Impairment charge
|
(271 | ) | — | |||||
|
|
|
|
|
|||||
|
Total property and equipment, net
|
$ | 22,462 | $ | 21,205 | ||||
|
|
|
|
|
|||||
|
(1)
|
Accumulated depreciation as of December 31, 2020 comprised of $37,171, $10,169, $852 and $844 for computer hardware and software, office furniture and fixtures, buildings and vans, respectively. Accumulated depreciation as of December 31, 2019 comprised of $23,955, $10,345 and $470 for computer hardware and software, office furniture and fixtures and buildings, respectively.
|
The changes in the balance of property and equipment for the years ended December 31, 2020 and 2019 consist of the following:
|
As of December 31,
2020 |
As of December 31,
2019 |
|||||||
|
Balance, beginning of year
|
$ | 21,205 | $ | 19,716 | ||||
|
Additions
|
3,458 | 5,942 | ||||||
|
Disposals
|
— | (597 | ) | |||||
|
Write-off
of leasehold improvements
|
(3,661 | ) | — | |||||
|
Acquisitions
(1)
|
8,935 | 2,420 | ||||||
|
Depreciation
|
(7,981 | ) | (6,659 | ) | ||||
|
Impairment charge
|
(271 | ) | — | |||||
|
Foreign currency translation adjustment
|
777 | 383 | ||||||
|
|
|
|
|
|||||
|
Balance, end of year
|
$ | 22,462 | $ | 21,205 | ||||
|
|
|
|
|
|||||
|
(1)
|
Acquired property and equipment was comprised mainly of computer hardware and software, office furniture and fixtures and a fleet of dedicated vans.
|
The accompanying notes are an integral part of these consolidated financial statements.
F-51
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
Depreciation expense for the years ended December 31, 2020, 2019 and 2018 was classified as follows:
|
For the year
ended December 31, 2020 |
For the year
ended December 31, 2019 |
For the year
ended December 31, 2018 |
||||||||||
|
Technology and product development
|
4,351 | 4,001 | 1,036 | |||||||||
|
General and administrative
|
3,377 | 2,658 | 3,949 | |||||||||
|
Selling and marketing
|
253 | — | — | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total depreciation expense
|
$ | 7,981 | $ | 6,659 | $ | 4,985 | ||||||
|
|
|
|
|
|
|
|||||||
Due to the
COVID-19
impact on the global travel industry and our business and results of operations, we concluded that sufficient indicators existed to require us to perform interim impairment testing of our property and equipment. During the second quarter of 2020, we recognized impairment charges of $271. The impairment charges were primarily related to office assets.
The full duration and total impact of
COVID-19
remains uncertain and it is difficult to predict how the recovery will unfold for global economies, the travel industry or our business. As a result, we may continue to record impairment charges in the future due to the potential long-term economic impact and near-term financial impacts of the
COVID-19
pandemic.
|
12.
|
Intangible assets, net
|
Indefinite-lived and definite-lived intangible assets, net consists of the following:
|
As of December 31,
2020 |
As of December 31,
2019 |
|||||||
|
Indefinite-lived intangible assets:
|
||||||||
|
Trademarks and domains
|
13,882 | 13,882 | ||||||
|
Definite-lived intangible assets:
|
||||||||
|
Trademarks and domains
|
14,296 | — | ||||||
|
Developed technology
|
91,107 | 72,532 | ||||||
|
Licenses
|
9,823 | 1,795 | ||||||
|
Customer relationships
|
35,706 | 3,663 | ||||||
|
|
|
|
|
|||||
|
Total intangible assets
|
$ | 164,814 | $ | 91,872 | ||||
|
|
|
|
|
|||||
|
Accumulated amortization
(1)
|
(67,266 | ) | (42,253 | ) | ||||
|
Impairment charge
|
(1,053 | ) | — | |||||
|
|
|
|
|
|||||
|
Total intangible assets, net
|
$ | 96,495 | $ | 49,619 | ||||
|
|
|
|
|
|||||
|
(1)
|
Accumulated amortization as of December 31, 2020 comprised of $56,770, $7,751 and $2,745 for developed technology, licenses and customer relationships, respectively. Accumulated amortization as of December 31, 2019 comprised of $41,605, $154 and $494 for developed technology, licenses and customer relationships, respectively.
|
The accompanying notes are an integral part of these consolidated financial statements.
F-52
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
The changes in the balance of intangible assets, net as of December 31, 2020 and December 31, 2019 consist of the following:
|
As of December 31,
2020 |
As of December 31,
2019 |
|||||||
|
Balance, beginning of year
|
$ | 49,619 | $ | 37,512 | ||||
|
Additions
|
14,028 | 24,614 | ||||||
|
Acquisitions
(1)
|
52,501 | 3,663 | ||||||
|
Amortization
|
(21,699 | ) | (16,137 | ) | ||||
|
Impairment charge
|
(1,053 | ) | — | |||||
|
Foreign currency translation adjustment
|
3,099 | (33 | ) | |||||
|
|
|
|
|
|||||
|
Balance, end of year
|
$ | 96,495 | $ | 49,619 | ||||
|
|
|
|
|
|||||
|
(1)
|
Acquired intangible assets was comprised mainly of customer relationships, trademarks and developed technology.
|
Amortization expense for the years ended December 31, 2020, 2019 and 2018 was classified as follows:
|
For the year
ended December 31, 2020 |
For the year
ended December 31, 2019 |
For the year
ended December 31, 2018 |
||||||||||
|
Technology and product development
|
17,190 | 14,198 | 9,495 | |||||||||
|
General and administrative
|
3,753 | 1,523 | 645 | |||||||||
|
Selling and marketing
|
756 | 416 | — | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total amortization expense
|
$ | 21,699 | $ | 16,137 | $ | 10,140 | ||||||
|
|
|
|
|
|
|
|||||||
The estimated future amortization expense related to intangible assets with definite lives as of December 31, 2020, assuming no subsequent impairment of the underlying assets, is as follows:
|
Year
|
Amount | |||
|
2021
|
16,794 | |||
|
2022
|
16,652 | |||
|
2023
|
16,641 | |||
|
2024
|
6,445 | |||
|
2025
|
6,259 | |||
|
2026 and thereafter
|
19,822 | |||
|
|
|
|||
|
Total
|
$ | 82,613 | ||
|
|
|
|||
Impairment Assessments
We perform our annual assessment of possible impairment of indefinite-lived intangible assets as of December 31, 2020, or more frequently if events and circumstances indicate that an impairment may have occurred. As of December 31, 2020, we had no impairments of intangible assets with indefinite-lives. Due to the
COVID-19
pandemic and its impact on our business, we conducted interim impairment assessments during the year ended December 31, 2020. We had no impairments of intangible assets with indefinite lives during the interim periods.
The accompanying notes are an integral part of these consolidated financial statements.
F-53
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
In addition, due to the
COVID-19
impact, we concluded that sufficient indicators existed to require us to perform interim impairment testing of our definite-lived intangible assets. We conducted interim impairment assessments during the year ended December 31, 2020. We recognized impairment charges of $1,053 related to customer relationship assets during the second quarter ended June 30, 2020. The assets, classified as Level 3 measurements, were written down to $815 based on valuation using the Income Approach, specifically the Multi-Period Excess Earnings Method, which includes unobservable inputs, including projected revenues, costs and expenses, contributory asset charges (i.e. fixed assets, working capital and assembled workforce), and discount rate.
The full duration and total impact of
COVID-19
remains uncertain and it is difficult to predict how the recovery will unfold for global economies, the travel industry or our business. As a result, we may continue to record impairment charges in the future due to the potential long-term economic impact and near-term financial impacts of the
COVID-19
pandemic.
|
13.
|
Goodwill
|
Goodwill consists of the following:
|
As of December 31,
2020 |
As of December 31,
2019 |
|||||||
|
Goodwill
|
$ | 123,217 | $ | 46,956 | ||||
|
|
|
|
|
|||||
The following table presents the changes in goodwill by reportable segment:
|
Air
|
Packages, Hotels
and Other Travel
Products
|
Total
|
||||||||||
|
Balance as of January 1, 2019
|
$ | 36,207 | $ | — | $ | 36,207 | ||||||
|
Additions
|
2,772 | 8,093 | 10,865 | |||||||||
|
Foreign currency translation adjustment
|
(96 | ) | (20 | ) | (116 | ) | ||||||
|
|
|
|
|
|
|
|||||||
|
Balance as of December 31, 2019
|
$ | 38,883 | $ | 8,073 | $ | 46,956 | ||||||
|
Additions
|
2,328 | 70,923 | 73,251 | |||||||||
|
Impairment charge
|
(593 | ) | — | (593 | ) | |||||||
|
Foreign currency translation adjustment
|
(2,677 | ) | 6,280 | 3,603 | ||||||||
|
|
|
|
|
|
|
|||||||
|
Balance as of December 31, 2020
|
$ | 37,941 | $ | 85,276 | $ | 123,217 | ||||||
|
|
|
|
|
|
|
|||||||
Impairment Assessments
We perform our annual assessment of possible impairment of goodwill as of December 31, 2020, or more frequently if events and circumstances indicate that an impairment may have occurred. As of December 31, 2020, we recognized impairments charges of $593 related to the goodwill of Viajes Falabella attributable to the air segment. Due to the
COVID-19
pandemic and its impact on our business, we conducted interim impairment assessments of goodwill during the year ended December 31, 2020. We had no impairments of goodwill during the interim periods.
The accompanying notes are an integral part of these consolidated financial statements.
F-54
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
We compared the fair value of the reporting units to their carrying values. The fair value estimates for all reporting units were based on a weighted-probability analysis of the present value of future discounted cash flows, Level 3 inputs. The significant estimates used in the discounted cash flows model included our weighted average cost of capital, projected cash flows and the long-term rate of growth. Our assumptions were based on the actual historical performance of the reporting unit and took into account the recent severe and continued weakening of operating results as well as the anticipated rate of recovery, and implied risk premiums based on market prices of our equity and debt as of the assessment dates.
The full duration and total impact of
COVID-19
remains uncertain and it is difficult to predict how the recovery will unfold for global economies, the travel industry or our business. As a result, we may record impairment charges in the future due to the potential long-term economic impact and near-term financial impacts of the
COVID-19
pandemic.
|
14.
|
Accounts payable and accrued expenses
|
Accounts payable and accrued expenses consist of the following:
|
As of December 31,
2020 |
As of December 31,
2019 |
|||||||
|
Marketing suppliers
|
7,706 | 29,957 | ||||||
|
Unbilled suppliers
|
15,360 | 10,742 | ||||||
|
Other suppliers
|
9,095 | 18,974 | ||||||
|
|
|
|
|
|||||
| $ | 32,161 | $ | 59,673 | |||||
|
|
|
|
|
|||||
|
15.
|
Travel accounts payable
|
Travel accounts payable consist of the following:
|
As of December 31,
2020 |
As of December 31,
2019 |
|||||||
|
Hotels and other travel service suppliers
(1)
|
131,744 | 179,397 | ||||||
|
Cancelled reservations pending payment to travelers
|
90,764 | — | ||||||
|
Airlines
|
6,927 | 27,557 | ||||||
|
|
|
|
|
|||||
| $ | 229,435 | $ | 206,954 | |||||
|
|
|
|
|
|||||
|
(1)
|
Includes $76,603 and $140,987 as of December 31, 2020 and December 31, 2019, respectively, for deferred merchant bookings which will be due after the traveler has checked out.
|
The accompanying notes are an integral part of these consolidated financial statements.
F-55
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
|
16.
|
Other liabilities
|
Other current liabilities consist of the following:
|
As of December 31,
2020 |
As of December 31,
2019 |
|||||||
|
Taxes payable
|
32,955 | 10,958 | ||||||
|
Salaries payable
|
14,444 | 25,196 | ||||||
|
Seller financing Viajes Falabella
(1)
|
5,624 | 5,477 | ||||||
|
Other
|
3,086 | 5,091 | ||||||
|
|
|
|
|
|||||
| $ | 56,109 | $ | 46,722 | |||||
|
|
|
|
|
|||||
Other
non-current
liabilities consist of the following:
|
As of December 31,
2020 |
As of December 31,
2019 |
|||||||
|
Seller financing Viajes Falabella
|
— | 5,219 | ||||||
|
Taxes payable
|
598 | 1,427 | ||||||
|
Deferred tax liabilities
|
11,111 | — | ||||||
|
Purchase price payable for Best Day Group
(2)
|
8,768 | — | ||||||
|
Accrued earnout liability
(3)
|
3,765 | — | ||||||
|
Promissory notes issued
(4)
|
14,490 | — | ||||||
|
Equity method investments
|
2,059 | — | ||||||
|
Other
|
4,122 | — | ||||||
|
|
|
|
|
|||||
| $ | 44,913 | $ | 6,646 | |||||
|
|
|
|
|
|||||
|
(1)
|
As of December 31, 2020, this amount corresponds to the last installment due June 2021.
|
|
(2)
|
We will pay the purchase price on October 1, 2023. See Note 4 for details.
|
|
(3)
|
Under the terms of the acquisition of the Best Day Group, we may be required to pay an earnout amount up to a maximum of $20,000 on October 1, 2024. The amount represents the fair value of the earnout consideration as of December 31, 2020. Changes in the fair value of the earnout consideration are charged to earnings in the period incurred. See Note 21 for details of the earnout consideration.
|
|
(4)
|
Under the terms of the acquisition of the Best Day Group, we legally assumed a debt that Best Day Group had with their prior shareholders. We issued four promissory notes for an aggregate nominal amount of $14,323 which accrue interest at a fixed rate of 5% and are payable on
October 1, 2023. The fair value of this debt as of December 31, 2020 was $14,341.
|
|
17.
|
Derivative financial instruments
|
As of December 31, 2020, and 2019, derivative financial instruments consist of foreign currency forward contracts of a short-term nature. The following table shows the derivative financial position as of the end of each year:
|
Local currency
|
Notional
amount
|
Type
|
Maturity
|
Fair
value |
||||||||||
|
2020
|
||||||||||||||
| Brazilian reais | $ | 10,500 | Sell | Jan / Feb 21 | 77 | |||||||||
| Mexican pesos | $ | 15,000 | Sell | Jan 21 | 395 | |||||||||
| Mexican pesos | $ | 10,000 | Sell | Jan 21 | 262 | |||||||||
| Mexican pesos | $ | 5,000 | Sell | Jan 21 | 51 | |||||||||
| Mexican pesos | $ | 10,000 | Sell | Feb 21 | 166 | |||||||||
| Mexican pesos | $ | 10,000 | Sell | Feb 21 | 103 | |||||||||
| Mexican pesos | $ | 10,000 | Sell | Feb 21 | 103 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-56
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
|
|
|
Local currency
|
|
|
Notional
amount
|
|
|
Type
|
|
Maturity
|
|
|
Fair
value |
|
|
2019
|
||||||||||||||
| Argentinian pesos | $ | 15,000 | Purchase | Jan - 20 | (360 | ) | ||||||||
| Chile pesos | $ | 24,500 | Purchase | Jan / Feb / Mar - 20 | (848 | ) | ||||||||
| Colombian pesos | $ | 2,000 | Purchase | Jan - 20 | (63 | ) | ||||||||
| Argentinian pesos | $ | 6,000 | Sell | Jan - 20 | 335 | |||||||||
| Mexican pesos | $ | 7,000 | Sell | Jan / Feb - 20 | 119 |
|
18.
|
Restructuring and related reorganization charges
|
Due to the impact of the
COVID-19
pandemic on the global travel industry and our business and results of operations, we committed to several actions intended to simplify our business structure and improve operational efficiencies. These actions were aimed at
reducing non-critical expenditures
and readjusting structural costs to deliver savings and preserve cash, including (i) temporarily reducing salaries of our senior and middle management; (ii) suspending bonuses to all employees; (iii) reducing part of our workforce and implementing a hiring freeze and limiting inflation salary increases; (iv) reducing working hours and implementing unpaid leave in certain locations; (v) accelerating synergies from acquisitions; (vi) renegotiating supplier payment terms and conditions; (vii) reviewing and renegotiating, to the extent possible, all contracts and commitments; (viii) reducing marketing expenses and
(ix) deferring non-critical capital
expenditures.
As a result, we recognized $12,961 in headcount reduction benefits during the year ended December 31, 2020, which were fully paid as of period end. Based on current plans, we expect total severance benefits in 2021 to decrease. However, we continue to actively evaluate additional cost reduction efforts, and should we make decisions in future periods to take further actions we will incur additional reorganization charges.
We also engaged in certain smaller scale restructure actions during the year ended December 31, 2020 to centralize and migrate certain operational functions and systems, for which we recognized $399 in reorganization charges during the year ended December 31, 2020, which were primarily related to anticipated termination of several office rent contracts.
The following table summarizes the restructuring and related reorganization activity for the year ended December 31, 2020:
|
Employee
severance and benefits |
Other | Total | ||||||||||
|
Accrued liability as of January 1, 2020
|
$ | — | $ | — | $ | — | ||||||
|
Charges
|
12,961 | 399 | 13,360 | |||||||||
|
Payments
|
(12,961 | ) | (248 | ) | (13,209 | ) | ||||||
|
|
|
|
|
|
|
|||||||
|
Accrued liability as of December 31, 2020
|
$ | — | $ | 151 | $ | 151 | ||||||
|
|
|
|
|
|
|
|||||||
We allocated the total employee severance and benefit expenses of $12,961 to “Cost of revenue” ($2,662), “Selling and marketing” expenses ($3,851), “General and administrative” expenses ($3,239) and “Technology and product development” expenses ($3,209) in our consolidated statements of income based on the departmental assignment of terminated employees. The remaining total reorganization charges of $399 were allocated to “General and administrative” expenses in our consolidated statements of income based on departmental use of terminated leased asset contract. Restructuring and related reorganization charges are included in the “Unallocated” segment.
The accompanying notes are an integral part of these consolidated financial statements.
F-57
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
|
19.
|
Income taxes
|
The Company is organized as a British Virgin Islands corporation. However, under the “anti-inversion” rules of Section 7874 of the U.S. Internal Revenue Code, the Company is treated as a U.S. corporation for U.S. federal tax purposes. Accordingly, the Company is subject to U.S. federal income tax on its worldwide income. On December 22, 2017, the United States enacted the Tax Cuts and Jobs Act (“Tax TCJA Act”) that significantly changed U.S. tax law by, among other things, lowering U.S. corporate income tax rates, implementing a territorial tax system, and imposing a
one-time
transition tax on deemed repatriated earnings of foreign subsidiaries. The Tax Act reduced the U.S. corporate income tax rate from 35% to 21%, effective January 1, 2018.
The following table summarizes our U.S. and foreign (loss) / income before income taxes for the years ended December 31, 2020, 2019 and 2018:
|
Year ended December 31,
|
||||||||||||
|
2020
|
2019
|
2018
|
||||||||||
|
U.S.
|
(15,510 | ) | 1,942 | 17,296 | ||||||||
|
Foreign
|
(148,797 | ) | (28,077 | ) | 8,927 | |||||||
|
|
|
|
|
|
|
|||||||
|
Total
|
$ | (164,307 | ) | $ | (26,135 | ) | $ | 26,223 | ||||
|
|
|
|
|
|
|
|||||||
Provision for Income Taxes
The following table summarizes our provision for income taxes for the years ended December 31, 2020, 2019 and 2018:
|
Year ended December 31,
|
||||||||||||
|
2020
|
2019
|
2018
|
||||||||||
|
Current income tax expense:
|
||||||||||||
|
U.S. Federal
|
1,424 | 1,035 | (1,608 | ) | ||||||||
|
Foreign
|
(4,440 | ) | (8,235 | ) | (14,210 | ) | ||||||
|
|
|
|
|
|
|
|||||||
|
Total current income tax expense
|
(3,016 | ) | (7,200 | ) | (15,818 | ) | ||||||
|
|
|
|
|
|
|
|||||||
|
Deferred income tax expense:
|
||||||||||||
|
U.S. Federal
|
2,653 | — | — | |||||||||
|
Foreign
|
21,801 | 12,425 | 8,749 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total deferred income tax expense
|
24,454 | 12,425 | 8,749 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Income tax benefit / (expense)
|
$ | 21,438 | $ | 5,225 | $ | (7,069 | ) | |||||
|
|
|
|
|
|
|
|||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-58
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
Deferred Income Taxes
As of December 31, 2020 and 2019, the significant components of our deferred tax assets and deferred tax liabilities were as follows:
|
As of December 31,
2020 |
As of December 31,
2019 |
|||||||
|
Non-current
deferred tax assets
|
66,768 | 36,700 | ||||||
|
|
|
|
|
|||||
|
Total deferred tax assets
|
66,768 | 36,700 | ||||||
|
|
|
|
|
|||||
|
Less valuation allowance
|
(9,026 | ) | (11,349 | ) | ||||
|
|
|
|
|
|||||
|
Net deferred tax assets
|
57,742 | 25,351 | ||||||
|
|
|
|
|
|||||
|
Non-current
tax liabilities
|
(11,111 | ) | — | |||||
|
|
|
|
|
|||||
|
Total deferred tax liabilities
|
(11,111 | ) | — | |||||
|
|
|
|
|
|||||
|
Total deferred tax
|
$ | 46,631 | $ | 25,351 | ||||
|
|
|
|
|
|||||
The following table summarizes the composition of deferred tax assets and deferred tax liabilities as of December 31, 2020 and 2019:
|
As of December 31,
2020 |
As of December 31,
2019 |
|||||||
|
Tax loss carryforwards
|
33,036 | 25,717 | ||||||
|
Allowance for credit expected losses
|
4,161 | 462 | ||||||
|
Royalties
|
533 | 69 | ||||||
|
Provisions and other assets
|
22,978 | 11,319 | ||||||
|
Property and equipment
|
268 | (438 | ) | |||||
|
Intangible assets
|
(9,377 | ) | — | |||||
|
Others
|
4,058 | (429 | ) | |||||
|
|
|
|
|
|||||
|
Total deferred tax assets, net before valuation allowance
|
$ | 55,657 | $ | 36,700 | ||||
|
|
|
|
|
|||||
|
Less valuation allowance
|
(9,026 | ) | (11,349 | ) | ||||
|
|
|
|
|
|||||
|
Total deferred tax assets, net after valuation allowance
|
$ | 46,631 | $ | 25,351 | ||||
|
|
|
|
|
|||||
As of December 31, 2020, we have both foreign and U.S. net operating loss carryforwards (“NOLs”) of $143,823. If not utilized, the NOLs will begin to expire, as follows:
|
(1)
|
A partial valuation allowance is booked as of December 31, 2020 in order to reserve $58,765 of the tax loss carryforwards detailed above.
|
The accompanying notes are an integral part of these consolidated financial statements.
F-59
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
The following table shows the breakdown of our NOLs by country of origin as of December 31, 2020:
|
Country
|
NOL gross
amount |
Expiration terms
|
||||
|
Brazil
|
48,584 | No expiration. Offset limitation to 30% of taxable income | ||||
|
Mexico
|
47,824 |
10 years
|
||||
|
Argentina
|
35,408 |
5 years
|
||||
|
Colombia
|
7,559 |
12 years
|
||||
|
Others
|
4,448 | |||||
|
|
|
|||||
|
Total NOLs
|
$ | 143,823 | ||||
|
|
|
|||||
In the aggregate, we have foreign and U.S NOLs amounting to $52,684 which may be carried forward indefinitely but subject to certain percentage limitations of taxable income each year.
As of December 31, 2020, we had a valuation allowance of $8,742 related to certain NOL carryforwards for which it is more likely than not the tax benefits will not be realized. The valuation allowance decreased by $2,323 from the amount recorded as of December 31, 2019 primarily due to the reduction of a portion of valuation allowances of the Brazil subsidiary. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period change, or if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as our projections for growth.
The following table presents the changes in our valuation allowance for the years ended December 31, 2020, 2019 and 2018:
|
Valuation
allowance |
||||
|
Balance as of January 1, 2018
|
$ | 42,584 | ||
|
Increases
|
997 | |||
|
Decreases
|
(25,574 | ) | ||
|
|
|
|||
|
Balance as of December 31, 2018
|
$ | 18,007 | ||
|
|
|
|||
|
Increases
|
5,892 | |||
|
Decreases
|
(12,550 | ) | ||
|
|
|
|||
|
Balance as of December 31, 2019
|
$ | 11,349 | ||
|
|
|
|||
|
Increases
|
754 | |||
|
Decreases
|
(3,077 | ) | ||
|
|
|
|||
|
Balance as of December 31, 2020
|
$ | 9,026 | ||
|
|
|
|||
The accompanying notes are an integral part of these consolidated financial statements.
F-60
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
Deferred tax assets and liabilities are recognized for the future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax bases using enacted tax rates in effect for the year in which the differences are expected to reverse. We have foreign subsidiaries with aggregated undistributed
earnings of $
27,506
as of December
31
,
2020
. We have not provided deferred income taxes on taxable temporary differences related to investments in certain foreign subsidiaries where the foreign subsidiary has or will invest undistributed earnings indefinitely outside of the United States. In the event we distribute such earnings in the form of dividends or otherwise, we may be subject to income taxes. Further, a sale of these subsidiaries may cause these temporary differences to become taxable. Due to complexities in tax laws, uncertainties related to the timing and source of any potential distribution of such earnings, and other important factors such as the amount of associated foreign tax credits, it is not practicable to estimate the amount of unrecognized deferred taxes on these taxable temporary differences. We consider the earnings of our foreign subsidiaries to be indefinitely reinvested, other than certain earnings the distributions of which do not imply withholdings or state income taxes, and for that reason we have not recorded a deferred tax liability.
Reconciliation of Statutory Income Tax Rate to Effective Income Tax Rate
A reconciliation of the provision for income taxes computed by applying the weighted average income tax rate for the years ended December 31, 2020, 2019 and 2018 to total income tax expense is as follows:
|
Year ended December 31,
|
||||||||||||
|
2020
|
2019
|
2018
|
||||||||||
|
Net (loss) / income before income tax
|
$ | (164,307 | ) | $ | (26,135 | ) | $ | 26,223 | ||||
|
Weighted average income tax rate
(3)
|
27 | % | 29 | % | 39 | % | ||||||
|
|
|
|
|
|
|
|||||||
|
Income tax (benefit) / expense at weighted average income tax rate
|
$ | (43,651 | ) | $ | (7,474 | ) | $ | 10,273 | ||||
|
Permanent differences:
|
||||||||||||
|
Non-taxable
income
(1)
|
7,959 | (469 | ) | (1,448 | ) | |||||||
|
Foreign
non-creditable
withholding tax
(2)
|
1,471 | 4,439 | 4,193 | |||||||||
|
Non-deductible
expenses
|
12,161 | 1,054 | 1,346 | |||||||||
|
Currency translation adjustment
|
1,289 | 1,891 | 1,902 | |||||||||
|
Tax credits recovery
|
12 | (157 | ) |
|
—
|
|
||||||
|
Others
|
20 | 553 | 540 | |||||||||
|
Provisions and contingencies
|
1,747 |
|
—
|
|
|
—
|
|
|||||
|
True up
|
849 | (2,693 | ) | 1,204 | ||||||||
|
Change in valuation allowance
|
(3,367 | ) | (5,010 | ) | (10,941 | ) | ||||||
|
Change in tax rate
|
72 | 2,641 |
|
—
|
|
|||||||
|
|
|
|
|
|
|
|||||||
|
Income tax (benefit) / expense
|
$ | (21,438 | ) | $ | (5,225 | ) | $ | 7,069 | ||||
|
|
|
|
|
|
|
|||||||
|
(1)
|
Includes tax (benefits) / losses generated by operations located in the Uruguayan “Free Trade Zone”.
|
|
(2)
|
Includes foreign withholding taxes on royalties and services.
|
|
(3)
|
We use a weighted average rate for the income tax reconciliation, since the majority of our operations are outside the U.S. The calculation is performed based on an average between the enacted tax rates of the foreign jurisdictions.
|
Our effective tax rate for the year ended December 31, 2020 was 13%, lower than the weighted average rate of 27% due primarily to the changes in tax rate related to the Promotional Regime enacted in Argentina, which reduced the income tax rate to 15% as from the following year and the reversal of valuation allowances.
The accompanying notes are an integral part of these consolidated financial statements.
F-61
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
Our effective tax rate for the year ended December 31, 2019 was 20%, lower than the weighted average rate of 29% due to the decrease in
non-taxable
income and the changes in valuation allowances related to our Brazilian subsidiary.
Uncertain tax positions
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits and interest is as follows:
|
Year ended December 31,
|
||||||||||||
|
2020
|
2019
|
2018
|
||||||||||
|
Balance, beginning of year
|
— | — | — | |||||||||
|
Increases to tax positions related to current year
|
— | — | — | |||||||||
|
Increases to tax positions related to prior years
(1)
|
31,778 | — | — | |||||||||
|
Decreases to tax positions related to prior years
|
— | — | — | |||||||||
|
Reductions due to lapsed statute of limitations
|
— | — | — | |||||||||
|
Settlements during current year
|
— | — | — | |||||||||
|
Interest and penalties
|
1,128 | — | — | |||||||||
|
|
|
|
|
|
|
|||||||
|
Balance, end of year
|
$ | 32,906 | $ | — | $ | — | ||||||
|
|
|
|
|
|
|
|||||||
|
(1)
|
Corresponds to uncertain tax positions recognized as part of the acquisition of the Best Day Group. See Note 4.
|
As of December 31, 2020, we had $32,906 of gross unrecognized tax benefits, if recognized, would affect the effective tax rate. As of December 31, 2019, and 2018, we did
not
have gross unrecognized tax benefits that would have affected the effective tax rate.
As of December 31, 2020, total gross interest and penalties accrued was $18,879. During the year ended December 31, 2020 we recognized interest expense of $1,128 in connection with our unrecognized tax benefits.
We evaluate the tax positions and establish liabilities for uncertain tax positions that may be challenged by local authorities and may not be fully sustained, despite our belief that the underlying tax positions are fully supportable. Uncertain tax positions are reviewed on an ongoing basis and are adjusted in light of changing facts and circumstances, including progress of tax audits, developments in case law, and closing of statute of limitations. Such adjustments are reflected in the income tax provision as appropriate.
We are routinely audited by U.S. federal and foreign income tax authorities. At any point in time, we may have tax audits underway at various stages of completion. These audits include questioning the timing and the amount of income and deductions, and the allocation of income and deductions among various tax jurisdictions. The Mexican Tax Authority is currently examining the income tax returns for the 2014, 2015 and 2017 tax years of our subsidiary Viajes Beda. The Mexican Tax Authority has already issued a notice of observations for fiscal year 2014. We are currently preparing the information requested in order to submit a response and reject any adjustment related to the issues raised during the tax audit.
The accompanying notes are an integral part of these consolidated financial statements.
F-62
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
During the third quarter of 2020, the Internal Revenue Service (“IRS”) issued final adjustments related to foreign tax credits allocation criteria taken during our fiscal year 2017. We recognized a tax assessment of $1,649 as income tax provision. Tax liability is expected to be offset with net operating losses and the final payment could be refunded by the IRS.
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act)
On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, a relief package comprising a combination of tax provisions and other stimulus measures. The CARES Act broadly provides entities tax payment relief and significant business incentives and makes certain technical corrections to the Tax Act. The tax relief measures for entities include a five-year net operating loss carry back, increases interest expense deduction limits, acceleration of alternative minimum tax credit refunds, payroll tax relief, and a technical correction to allow accelerated deductions for qualified improvement property. The CARES Act also provides other
non-income
tax benefits, including federal funding for a range of stabilization measures and emergency funding to assist those impacted by the
COVID-19
pandemic.
Under the Tax Act, NOL deductions arising in tax years beginning after December 31, 2017, can offset only up to 80% of future taxable income. The Tax Act also prohibits NOL carrybacks for NOLs arising in tax years ending after December 31, 2017 but allows indefinite carryforwards.
On the contrary, the CARES Act provides that NOLs arising in tax years beginning after December 31, 2017, and ending before January 1, 2021, may be carried back for five years. Generally, any NOL carried back must be carried back to the earliest applicable tax year. Further, the 80% limitation enacted under the Act is temporarily suspended for tax years beginning before 2021 and will be reinstated beginning in 2021. Under these conditions, NOLs arising in 2018, 2019 or 2020 could be carried back to years before 2018, in order to maximize the potential cash refund associated with carryback claims.
We could be allowed to apply for this benefit and the current NOLs could be carried back to compensate potential claims of the IRS. We continue to assess the effect of the CARES Act and ongoing government guidance related to
COVID-19
that may be issued.
|
20.
|
Segment information
|
We organize our business into two reportable segments: (1) “Air” and (2) “Packages, Hotels and Other Travel Products”.
Our “Air” segment primarily consists of facilitation services for the sale of airline tickets on a stand-alone basis and excludes airline tickets that are packaged with other
non-airline
flight products.
Our “Packages, Hotels and Other Travel Products” segment primarily consists of facilitation services for the sale of travel packages (which can include airline tickets and hotel rooms), as well as stand-alone sales of hotel rooms (including vacation rentals), car rentals, bus tickets, cruise tickets, travel insurance and destination services.
Both segments also include sale of advertisements and, to a lesser extent, incentives earned from suppliers and interest revenue.
The accompanying notes are an integral part of these consolidated financial statements.
F-63
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
For the year ended December 31, 2020, we have changed our calculation of Adjusted Segment EBITDA reported to the Chief Operating Decision Maker (“CODM”) to exclude restructuring charges and acquisition costs. We have effected this change retroactively to all years presented. However, we did not have restructuring charges in either the years ended December 31, 2019 or 2018. We did not engage in acquisition activity in the year ended December 31, 2018.
We measure our segment’s performance by our Adjusted Segment EBITDA. We use Adjusted Segment EBITDA for purposes of making decisions about allocating resources to our segments and to internally evaluate their financial performance because we believe Adjusted Segment EBITDA reflects current core operating performance of each segment and provides an indicator of each segment’s ability to generate cash.
Adjusted Segment EBITDA is calculated, with respect to each segment, as net loss adjusted for (1) provision for income taxes; (2) total financial results, net; (3) stock-based compensation expense; (4) acquisition transaction costs; (5) depreciation and amortization; (6) impairment charges; and (7) restructuring charges.
Adjusted Segment EBITDA includes allocations of certain expenses based on transaction volumes and other usage metrics. Our allocation methodology is periodically evaluated and may change.
There are no intersegment revenues in any of the periods presented.
As depreciation and amortization are not included in our segment’s performance measure, we do not report assets by segment as it would not be meaningful. Our CODM does not regularly use this information.
The following tables present our segment information for the years ended December 31, 2020, 2019 and 2018:
|
Year ended December 31, 2020
|
||||||||||||||||
|
Air
|
Packages,
Hotels and
Other travel
products
|
Unallocated
|
Total
Consolidated |
|||||||||||||
|
Revenue
|
$ | 62,713 | $ | 68,621 | $ | — | $ | 131,334 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Adjusted EBITDA
|
$
|
(32,890
|
)
|
$
|
(82,377
|
)
|
$
|
(6,546
|
)
|
$
|
(121,813
|
)
|
||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Depreciation and amortization
|
(9,784 | ) | (9,784 | ) | (10,112 | ) | (29,680 | ) | ||||||||
|
Stock-based compensation expense
|
— | — | (7,312 | ) | (7,312 | ) | ||||||||||
|
Impairment charges
|
— | — | (1,917 | ) | (1,917 | ) | ||||||||||
|
Restructuring charges
|
— | — | (13,360 | ) | (13,360 | ) | ||||||||||
|
Acquisition transaction costs
|
— | — | (3,135 | ) | (3,135 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Operating loss
|
$
|
(42,674
|
)
|
$
|
(92,161
|
)
|
$
|
(42,382
|
)
|
$
|
(177,217
|
)
|
||||
|
Financial income, net
|
— | — | — | 12,910 | ||||||||||||
|
|
|
|||||||||||||||
|
Loss before income tax
|
— | — | — |
$
|
(164,307
|
)
|
||||||||||
|
Income tax benefit
|
— | — | — | 21,438 | ||||||||||||
|
|
|
|||||||||||||||
|
Net loss for the year
|
— | — | — |
$
|
(142,869
|
)
|
||||||||||
|
Net loss attributable to redeemable
non-controlling
interest
|
— | — | — | 282 | ||||||||||||
|
|
|
|||||||||||||||
|
Net loss attributable to Despegar.com, Corp.
|
— | — | — |
$
|
(142,587
|
)
|
||||||||||
|
|
|
|||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-64
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
|
Year ended December 31, 2019
|
||||||||||||||||
|
Air
|
Packages,
Hotels and
other travel
products
|
Unallocated
|
Total
Consolidated |
|||||||||||||
|
Revenue
|
$ | 201,638 | $ | 323,238 | $ | — | $ | 524,876 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Adjusted EBITDA
|
$
|
3,346
|
|
$
|
36,546
|
|
$
|
(13,249
|
)
|
$
|
26,643
|
|
||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Depreciation and amortization
|
(7,716 | ) | (7,716 | ) | (7,364 | ) | (22,796 | ) | ||||||||
|
Stock-based compensation expense
|
— | — | (11,686 | ) | (11,686 | ) | ||||||||||
|
Impairment charges
|
— | — | — | — | ||||||||||||
|
Restructuring charges
|
— | — | — | — | ||||||||||||
|
Acquisition transaction costs
|
— | — | (1,081 | ) | (1,081 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Operating (loss) / income
|
$
|
(4,370
|
)
|
$
|
28,830
|
|
$
|
(33,380
|
)
|
$
|
(8,920
|
)
|
||||
|
Financial expense, net
|
— | — | — | (17,215 | ) | |||||||||||
|
|
|
|||||||||||||||
|
Loss before income tax
|
— | — | — |
$
|
(26,135
|
)
|
||||||||||
|
Income tax benefit
|
— | — | — | 5,225 | ||||||||||||
|
|
|
|||||||||||||||
|
Net loss for the year
|
— | — | — |
$
|
(20,910
|
)
|
||||||||||
|
|
|
|||||||||||||||
|
|
|
Year ended December 31, 2018
|
|
|||||||||||||
|
|
|
Air
|
|
|
Packages,
Hotels and other travel products |
|
|
Unallocated
|
|
|
Total
Consolidated |
|
||||
|
Revenue
|
|
$
|
214,804
|
|
|
$
|
315,810
|
|
|
$
|
—
|
|
|
$
|
530,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
27,790
|
|
|
$
|
37,739
|
|
|
$
|
2,115
|
|
|
$
|
67,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
(4,630
|
)
|
|
|
(4,582
|
)
|
|
|
(5,913
|
)
|
|
|
(15,125
|
)
|
|
Stock-based compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
(6,766
|
)
|
|
|
(6,766
|
)
|
|
Impairment charges
|
|
|
—
|
|
|
|
—
|
|
|
|
(363
|
)
|
|
|
(363
|
)
|
|
Restructuring charges
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Acquisition transaction costs
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income / (loss)
|
|
$
|
23,160
|
|
|
$
|
33,157
|
|
|
$
|
(10,927
|
)
|
|
$
|
45,390
|
|
|
Financial expense, net
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(19,167
|
)
|
|
|
|
|
|
|
|
|
||||||||||
|
Income before income tax
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
26,223
|
|
|
Income tax expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(7,069
|
)
|
|
|
|
|
|
|
|
|
||||||||||
|
Net income for the year
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
19,154
|
|
|
|
|
|
|
|
|
|
||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-65
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
Revenue by Business Model, Type and Country
The following table presents our revenues by business model, revenue type and country for the years ended December 31, 2020, 2019 and 2018:
|
Year ended December 31,
|
||||||||||||
|
2020
|
2019
|
2018
|
||||||||||
|
Business Model:
|
||||||||||||
|
Prepay/Merchant Model
|
102,591 | 407,258 | 415,812 | |||||||||
|
Pay-at-Destination/Agency
|
1,305 | 13,130 | 20,143 | |||||||||
|
Others
(1)
|
27,438 | 104,488 | 94,659 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total Revenue
|
$
|
131,334
|
|
$
|
524,876
|
|
$
|
530,614
|
|
|||
|
|
|
|
|
|
|
|||||||
|
Revenue Type:
|
||||||||||||
|
Commissions and service fees
|
100,908 | 426,082 | 428,722 | |||||||||
|
Incentive fees
|
17,040 | 72,912 | 80,710 | |||||||||
|
Advertising
|
5,040 | 15,063 | 15,170 | |||||||||
|
Others
(2)
|
8,346 | 10,819 | 6,012 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total Revenue
|
$
|
131,334
|
|
$
|
524,876
|
|
$
|
530,614
|
|
|||
|
|
|
|
|
|
|
|||||||
|
Country:
|
||||||||||||
|
Argentina
|
16,112 | 98,946 | 122,656 | |||||||||
|
Brazil
|
45,289 | 159,676 | 165,688 | |||||||||
|
Uruguay
|
9,240 | 131,160 | 142,902 | |||||||||
|
Mexico
|
30,801 | 39,500 | 38,243 | |||||||||
|
Other countries
(3)
|
29,892 | 95,594 | 61,125 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total Revenue
|
$
|
131,334
|
|
$
|
524,876
|
|
$
|
530,614
|
|
|||
|
|
|
|
|
|
|
|||||||
| (1) |
Others includes incentive fees, advertising, breakage, loyalty and interest revenue.
|
| (2) |
Others includes breakage, loyalty, destination services and interest revenue.
|
| (3) |
Other countries include Chile, Peru, Colombia, Ecuador and United States.
|
Assets by Country
The following table presents our main assets by country:
|
As of December 31,
2020 |
As of December 31,
2019 |
|||||||
|
Goodwill:
|
||||||||
|
Argentina
|
2,455 | 3,048 | ||||||
|
Brazil
|
14,132 | 10,508 | ||||||
|
Mexico
|
81,137 | 7,543 | ||||||
|
Uruguay
|
16,839 | 16,839 | ||||||
|
Other countries
(1)
|
8,654 | 9,018 | ||||||
|
|
|
|
|
|||||
|
$
|
123,217
|
|
$
|
46,956
|
|
|||
|
|
|
|
|
|||||
|
Intangible assets:
|
||||||||
|
Argentina
|
28,104 | 28,487 | ||||||
|
Uruguay
|
28,500 | 14,859 | ||||||
|
Mexico
|
36,546 | — | ||||||
|
Other countries
(2)
|
3,345 | 6,273 | ||||||
|
|
|
|
|
|||||
|
$
|
96,495
|
|
$
|
49,619
|
|
|||
|
|
|
|
|
|||||
The accompanying notes are an integral part of these consolidated financial statements.
F-66
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
|
|
|
As of December 31,
2020 |
|
|
As of December 31,
2019 |
|
||
|
Property and equipment:
|
||||||||
|
Argentina
|
9,661 | 7,067 | ||||||
|
Brazil
|
2,056 | 3,779 | ||||||
|
Mexico
|
3,538 | — | ||||||
|
Uruguay
|
499 | 929 | ||||||
|
United States
|
3,304 | 4,357 | ||||||
|
Other countries
(3)
|
3,404 | 5,073 | ||||||
|
|
|
|
|
|||||
|
$
|
22,462
|
|
$
|
21,205
|
|
|||
|
|
|
|
|
|||||
| (1) |
Other countries include Chile, Peru and Colombia
|
| (2) |
Other countries include Chile, Peru, Colombia, Brazil and United States.
|
| (3) |
Other countries include Chile, Peru, Colombia and Ecuador.
|
|
21.
|
Commitments and contingencies
|
Commitments:
Operating leases
Our commitments include operating lease commitments. Generally, our property and equipment, including a fleet of dedicated vans to provide transportation services, office and retail space, and others are supplied through operating leases. The future contractual aggregate minimum lease payments under
non-cancellable
operating leases and other commitments are disclosed in Note 28.
Employment Agreements
In the ordinary course of business, we entered into employment agreements with certain of our key employees which provide for compensation guidelines. Generally, we pay compensation to our executive officers in the form of (i) cash paid on a monthly basis and (ii) an annual bonus subject to the fulfillment of certain performance targets. We recognize compensation in “Other liabilities” in our consolidated balance sheets and in “General and administrative” expenses in our consolidated statements of income.
As mentioned in Note 18, due to the
COVID-19
impact on the global travel industry and our business and results of operations, we temporarily reduced salaries of our senior and middle management and suspended bonuses to all employees.
Best Day Earnout Provision
The Acquisition Agreement provides for an earnout for the benefit of certain sellers ranging from $0 to $20,000 based solely on the performance of our share price during a measurement period of six months (the “earnout measurement period”) prior to the fourth anniversary of the Closing Date. The earnout, if any, will be payable in cash on October 1, 2024.
We will pay no earnout to the sellers if our average share price is below $10 during the earnout measurement period. We will pay $5,000 to the sellers if our average share price is between $10 and $15 during the earnout measurement period. We will pay $10,000 to the sellers if our average share price is between $15 and $20 during the earnout measurement period. We will pay $15,000 to the sellers if our average share price is between $20 and $25 during the earnout measurement period. And we will pay $20,000 to the sellers if our average share price is above $25 during the earnout measurement period.
As of the date of acquisition, we estimated an additional consideration of $1,526 will be paid. We remeasured the contingent consideration as of December 31, 2020 and adjusted it to $3,765. We recognized the change in the fair value of the earnout liability under “General and administrative” expenses in our consolidated statements of income. See Note 4 for additional information on the acquisition.
The accompanying notes are an integral part of these consolidated financial statements.
F-67
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
Services Agreement with Mr. Julián Balbuena Alonso and BD Operadora de Servicios, S.A. de C.V. (“BOS”)
Our subsidiary, Viajes Beda, entered into a services agreement (the “Services Agreement”) with Mr. Julián Balbuena Alonso (“JBA”) and BD Operadora de Servicios, S.A. de C.V. (“BOS”) (collectively herein referred to as the “Service Providers”) pursuant to which the Service Providers provide consulting services to Viajes Beda for a limited period of 120 days commencing on October 1, 2020. Under the terms of the Services Agreement, the Service Providers are encouraged to renegotiate more beneficial terms and conditions with travel suppliers in consideration for a fee ranging from $0 to $5,000.
We accrued $1,819 towards the completion of the services as of December 31, 2020. The amount was recognized in “General and administrative” expenses in our consolidated statements of income for the year ended December 31, 2020.
Contingencies:
Legal Proceedings
We are a party to various lawsuits and claims arising out of the ordinary course of business. We estimate the range of our liability related to pending litigation when we believe the amount or range of loss can be estimated. We record our best estimate of a loss when the loss is considered probable. When a liability is probable and there is a range of estimated loss with no best estimate in the range, we record the minimum estimated liability related to the lawsuits or claims. As additional information becomes available, we assess the potential liability related to our pending litigation and claims and revise our estimates. Due to uncertainties related to the resolution of lawsuits and claims, the ultimate outcome may differ significantly from our estimates. In the opinion of management and based on liability accruals provided, our ultimate exposure with respect to these pending lawsuits and claims is not expected to have a material adverse effect on our consolidated financial position or cash flows, although they could have a material adverse effect on our results of operations for a particular reporting period.
As of December 31, 2020, we have provided an amount of $9,990 to cover for probable losses.
Labor, Social Security and
Non-Income
Tax Contingencies
We have reserved for certain foreign labor, social security and
non-income
tax contingencies based on the likelihood of an obligation in accordance with accounting guidance for probable loss contingencies. Loss contingency provisions are recorded for probable losses at management’s best estimate of a loss, or when a best estimate cannot be made, a minimum loss contingency amount is recorded.
As of December 31, 2020, we have provided an amount of $23,357 related to labor, social security and
non-income
tax contingencies. While we believe that the assumptions and estimates used to determine contingent liabilities are reasonable, the ultimate outcome of these matters cannot presently be determined.
The accompanying notes are an integral part of these consolidated financial statements.
F-68
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
Tax Audits
We are involved in various tax matters, with respe
c
t to some of which the outcome is uncertain. We establish reserves to remove some or all of the tax benefit of any of our tax positions at the time we determine that it becomes uncertain based upon one of the following conditions: (1) the tax position is not “more likely than not” to be sustained, (2) the tax position is “more likely than not” to be sustained, but for a lesser amount, or (3) the tax position is “more likely than not” to be sustained, but not in the financial period in which the tax position was originally taken. For purposes of evaluating whether or not a tax position is uncertain, (1) we presume the tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information; (2) the technical merits of a tax position are derived from authorities such as legislation and statutes, legislative intent, regulations, rulings and case law and their applicability to the facts and circumstances of the tax position; and (3) each tax position is evaluated without consideration of the possibility of offset or aggregation with other tax positions taken. A number of years may elapse before a particular uncertain tax position is audited and finally resolved or when a tax assessment is raised. The number of years subject to tax assessments varies depending on the tax jurisdiction. The tax benefit that has been previously reserved because of a failure to meet the “more likely than not” recognition threshold would be recognized in our income tax expense in the first interim period when the uncertainty disappears under any one of the following conditions: (1) the tax position is “more likely than not” to be sustained, (2) the tax position, amount, and/or timing is ultimately settled through negotiation or litigation, or (3) the statute of limitations for the tax position has expired. See Note 19 for details.
|
22.
|
Related party transactions
|
Balances and operations with Expedia
Expedia, Inc. (“Expedia”), a subsidiary of Expedia Group, Inc., a Delaware corporation, is a shareholder of record of the Company.
In March 2015, we entered into an outsourcing agreement (the “Expedia Lodging Outsourcing Agreement”) pursuant to which all hotel and other lodging reservations for countries outside of Latin America offered through our platforms were provided by Expedia on an exclusive basis. The Expedia Lodging Outsourcing Agreement was amended in November 2019 (hereinafter referred to as the “Expedia Amended and Restated Lodging Outsourcing Agreement”) to allow us to contract 10% of lodging inventory directly without using Expedia. Under the Expedia Amended and Restated Lodging Outsourcing Agreement, Expedia is also the preferred provider of hotel and other lodging reservations in Latin America. The term of the Expedia Amended and Restated Lodging Outsourcing Agreement renews annually automatically unless terminated in accordance with its terms. We lastly renewed the Expedia Amended and Restated Lodging Outsourcing Agreement in November 2020.
Under the Expedia Amended and Restated Lodging Outsourcing Agreement, we are required to reach certain marketing fee thresholds during specified periods. Failure to reach the minimum marketing fee thresholds may require us to pay a $125,000 termination fee. Expedia may also unilaterally terminate the Expedia Amended and Restated Lodging Outsourcing Agreement in the event of a change of control of the Company. Beginning March 2022, we may unilaterally terminate the Expedia Amended and Restated Lodging Outsourcing Agreement upon payment of a $125,000 termination fee. As noted in more detail below, in connection with the
COVID-19
pandemic, Expedia has agreed to waive its termination right relating to minimum marketing fee thresholds for any period through December 31, 2021.
In August 2016, we entered into another outsourcing agreement with Expedia (the “Despegar Outsourcing Agreement”) pursuant to which we are required to make our hotel reservations inventory available to certain affiliates of Expedia. The Despegar Outsourcing Agreement has a three-year term that renews automatically
for one-year periods
unless either party elects not to renew. We lastly renewed the Despegar Outsourcing Agreement in August 2020 for an additional
one-year
term.
The accompanying notes are an integral part of these consolidated financial statements.
F-69
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
As a result of the impact of the
COVID-19
pandemic on the global travel industry and our business in particular, on August 20, 2020, we entered into an amendment to the Expedia Amended and Restated Lodging Outsourcing Agreement. Expedia agreed to waive its termination rights under the Expedia Amended and Restated Lodging Outsourcing Agreement relating to minimum marketing fee thresholds for any period through December 31, 2021, subject to certain conditions. Additionally, we have entered into a Nominating Agreement with Expedia, pursuant to which Expedia has the right to designate one individual to be a nominee for election to our Board of Directors and we shall cause such Expedia designee to be included in the slate of directors approved and recommended by the Board for election at each meeting of shareholders at which the term of an Expedia designee will expire. According to the Nominating Agreement, Mr Adam Jay was appointed as a member of the Board.
Under the Expedia Amended and Restated Lodging Outsourcing Agreement and the Despegar Outsourcing Agreement, we maintained a net payable position with Expedia of $11,177 and $67,047 recognized under “Related party receivable” and “Related party payable” in our consolidated balance sheet as of December 31, 2020 and 2019, respectively. We generated revenue of $7,066, $38,760 and $43,975 for the years ended December 31, 2020, 2019 and 2018, respectively. Revenue from Expedia represented 5%, 7% and 8% of our total consolidated revenues for the years ended December 31, 2020, 2019 and 2018, respectively.
|
23.
|
Fair value measurements
|
Items measured at fair value on a recurring basis
Financial assets and liabilities carried at fair value at December 31, 2020 are classified in the categories described in the table below:
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||||||
|
Assets
|
||||||||||||||||
|
Cash equivalents
|
||||||||||||||||
|
Money market funds
|
88,061 | — | — | 88,061 | ||||||||||||
|
Time deposits
|
45,031 | — | — | 45,031 | ||||||||||||
|
Derivatives
|
||||||||||||||||
|
Foreign currency forwards
|
— | 725 | — | 725 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total assets at fair value
|
$ | 133,092 | $ | 725 | $ | — | $ | 133,817 | ||||||||
|
Liabilities
|
||||||||||||||||
|
Accrued earnout liability
|
— | — | (3,765 | ) | (3,765 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total liabilities at fair value
|
$ | — | $ | — | $ | (3,765 | ) | $ | (3,765 | ) | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-70
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
Financial assets and liabilities carried at fair value at December 31, 2019 are classified in the categories described in the table below:
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||||||
|
Assets
|
||||||||||||||||
|
Cash equivalents
|
||||||||||||||||
|
Money market funds
|
36,374 | — | — | 36,374 | ||||||||||||
|
Time deposits
|
153,838 | — | — | 153,838 | ||||||||||||
|
Derivatives
|
||||||||||||||||
|
Foreign currency forwards
|
— | 454 | — | 454 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total assets at fair value
|
$ | 190,212 | $ | 454 | $ | — | $ | 190,666 | ||||||||
|
Liabilities
|
||||||||||||||||
|
Derivatives
|
||||||||||||||||
|
Foreign currency forwards
|
— | (1,271 | ) | — | (1,271 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total liabilities at fair value
|
$ | — | $ | (1,271 | ) | $ | — | $ | (1,271 | ) | ||||||
We value our derivative instruments using pricing models. Pricing models consider the contract terms as well as multiple inputs where applicable, such as interest rate yield curves, option volatility and foreign currency exchange rates. Derivatives are considered “Level 2” fair value measurements. Our derivative instruments are typically short-term in nature.
We measure the fair value of the earnout payment using a series of “digital options”. We believe this methodology can be applied because our earnout payment provides for a fixed payment to the sellers if our stock price exceeds a predetermined strike price during the earnout measurement period. In the application of this methodology, we performed a valuation in a risk neutral framework, using a Black-Scholes-Merton Digital call option formula. The significant inputs used were our share price as of the valuation date, our share price historical volatility, U.S. risk free rate, estimated term and credit-risk adjustment spread.
We classify our cash equivalents and investments within Level 1 as we value our cash equivalents and investments using quoted market prices.
We hold term deposit investments with financial institutions. Term deposits with original maturities of less than three months are classified as cash equivalents and those with remaining maturities of less than one year are classified within short-term investments.
As of December 31, 2020, and 2019, our cash and cash equivalents consisted primarily of term deposits with maturities of three months or less and bank account balances.
Items measured at fair value on a
non-recurring
basis
Our
non-financial
assets, such as goodwill, intangible assets and property and equipment, as well as equity method investments, are adjusted to fair value only when an impairment charge is recognized, or the underlying investment is sold. Such fair value measurements are based predominately on Level 3 inputs. During the fourth quarter ended December 31, 2020, we recorded an impairment of $593 to carry goodwill to fair value. During the third quarter ended September 30, 2020, we recorded an impairment of $271 to carry office assets to fair value. During the second quarter ended June 30, 2020, we recorded an impairment of $1,053 to carry customer relationship intangibles to fair value. See Notes 11, 12 and 13 for details.
The accompanying notes are an integral part of these consolidated financial statements.
F-71
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
|
24.
|
Earnings per share
|
The following table presents our basic and diluted earnings per share for the years ended December 31, 2020 and 2019:
|
Year ended
December 31, |
||||||||
|
2020
|
2019
|
|||||||
|
Basic and diluted earnings per share
|
||||||||
|
Net loss for the year
|
(142,869 | ) | (20,910 | ) | ||||
|
Less: Net loss for the year attributable to redeemable
non-controlling
interest
|
282 | — | ||||||
|
|
|
|
|
|||||
|
Net loss for the year attributable to Despegar.com, Corp.
|
(142,587 | ) | (20,910 | ) | ||||
|
|
|
|
|
|||||
|
Accretion of redeemable
non-controlling
interest to redemption value
|
(78 | ) | — | |||||
|
Accretion of redeemable Series A preferred stock to redemption value
|
(2,831 | ) | — | |||||
|
Accrued dividends of redeemable Series A preferred stock
|
(4,212 | ) | — | |||||
|
Dividends of redeemable Series B preferred stock
|
(553 | ) | — | |||||
|
|
|
|
|
|||||
|
Net loss for the year attributable to Despegar.com, Corp. common shareholders
|
(150,261 | ) | (20,910 | ) | ||||
|
|
|
|
|
|||||
|
Numerator of basic and diluted earnings per share
|
(150,261 | ) | (20,910 | ) | ||||
|
|
|
|
|
|||||
|
Weighted average common shares outstanding—basic and diluted
|
73,001 | 69,465 | ||||||
|
Denominator of basic and diluted earnings per share
|
73,001 | 69,465 | ||||||
|
|
|
|
|
|||||
|
Basic and diluted earnings per share
|
(2.06 | ) | (0.30 | ) | ||||
For the year ended December 31, 2020, we excluded 1,680 of outstanding stock awards and 5,405 convertible preferred stock from the calculations of diluted earnings per share attributable to common stockholders because their effect would have been antidilutive.
For the year ended December 31, 2019, we excluded 1,150 of outstanding stock awards from the calculations of diluted earnings per share attributable to common stockholders because their effect would have been antidilutive.
Basic and diluted earnings per share is presented using the
two-class
method required for participating securities. We consider that our Series B preferred stock to be participating securities and, in accordance with the
two-class
method, earnings allocated to participating securities and the related number of outstanding shares of participating securities are excluded from the computation of basic and diluted net loss per common share. If a dividend is paid on common stock, the holders of Series B preferred stock are entitled to a proportionate share of any such dividend as if they were holders of common stock (on an
if-converted
basis). As the holders of our Series B preferred stock do not have contractual obligation to share in the losses of the Company, the net loss attributable to common stockholders for each period is not allocated between common stock and participating securities. Accordingly, preferred stock is excluded from the calculation of basic and diluted net loss per share as the effect would have been antidilutive.
The accompanying notes are an integral part of these consolidated financial statements.
F-72
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
|
25.
|
Shareholders’ equity and mezzanine equity
|
In connection with our issuances of
non-convertible
redeemable Series A preferred shares and warrants to L Catterton Latin America III, L.P. and convertible redeemable Series B preferred shares to Waha LATAM Investments Limited, on September 18, 2020, we amended our Memorandum of Association and Articles of Association to establish the terms of the Series A Preferred Shares and Series B Preferred Shares. See Note 6 for a description of the terms of the Series A Preferred Shares and Series B Preferred Shares.
Common Stock
We are authorized to issue an unlimited number of common shares without par value. Common stock is entitled to 1 vote per share. Common stock qualifies for dividends, when and if declared by our Board of Directors.
Preferred Stock
We are authorized to issue 150,000 series A preferred shares without par value (the “Series A Preferred Shares”) and 50,000 series B preferred shares without par value (the “Series B Preferred Shares”). Both Series A Preferred Shares and Series B Preferred Shares are not part of our shareholders’ equity, rather they are classified as mezzanine equity due to their redemption features. See Note 6 for a description of the rights attaching to the Series A Preferred Shares and Series B Preferred Shares.
The Series A Preferred Shares are classified within the mezzanine equity section on our consolidated balance sheet as of December 31, 2020 due to the provisions that could cause the equity to be redeemable at the option of the holder. The Series B Preferred Shares are classified within the mezzanine equity section on our consolidated balance sheet as of December 31, 2020 due to the provisions that cause the equity to be redeemable upon the occurrence of a change of control.
As of December 31, 2020, and 2019, we have no preferred stock outstanding as part of our shareholders’ equity.
Warrants
Pursuant to the L Catterton Investment Agreement, we agreed to issue to the Catterton Purchaser, Warrants to purchase 11,000,000 Common Shares at an exercise price of $0.01 per share (“Penny Warrants”), subject to certain customary anti-dilution adjustments provided under the Warrants, including for stock splits, reclassifications, combinations and dividends or distributions made by the Company on the Common Shares. The Penny Warrants expire ten years after the Catterton Closing Date. The Penny Warrants vest and are exercisable as of the issuance date.
We classified our warrants in our shareholders’ equity and are included in our consolidated balance sheet as of December 31, 2020 within “Additional
paid-in
capital”.
Treasury Stock
As of both December 31, 2020, and 2019, our treasury stock was comprised of $68,267 and 5,008,307 shares of common stock.
The accompanying notes are an integral part of these consolidated financial statements.
F-73
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
Share Repurchases
During the years ended December 31, 2018 and 2019, our Board of Directors approved share repurchase programs under which we were authorized to repurchase up to $75,000 and $100,000 of common stock, respectively, and were active for a period of one year as from authorization. These share repurchases could be made through a variety of methods, including in the open market, a
10b5-1
program and through privately negotiated transactions. The timing and number of common stocks repurchased depended on a variety of factors, including price, general business and market conditions, and alternative investment opportunities. We were not obligated to purchase any specific number of common stock and the share repurchase program may be suspended, terminated or modified at any time for any reason.
Shares repurchased under the authorized programs were as follows:
|
Year ended December 31,
|
||||||||||||
|
2020
|
2019
|
2018
|
||||||||||
|
Number of shares repurchased
|
— | 3,463,832 | 1,544,475 | |||||||||
|
Average price per share
|
— | 12.17 | 16.84 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total cost of repurchases
(1)
|
— | 42,167 | 25,999 | |||||||||
(1)
Amount excludes transaction costs.
We have no share repurchase program outstanding as of December 31, 2020.
Dividends on our Common Stock
During the years ended December 31, 2020, 2019 and 2018, we neither declared nor paid any dividends.
Dividends on our Preferred Stock
During the year ended December 31, 2020, we paid $553 of dividends to our Series B preferred shareholders.
Accumulated Other Comprehensive Income / (Loss)
The balance of accumulated other comprehensive income / (loss) as of December 31, 2020 and 2019 was comprised of foreign currency translation adjustments. These translation adjustments include foreign currency translation losses for the years ended December 31, 2020, 2019 and 2018 of $13,190, $2,441 and $13,272, respectively.
The accompanying notes are an integral part of these consolidated financial statements.
F-74
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
|
26.
|
Financial income / (expense), net
|
The following table presents the components of financial income / (expense), net:
|
Year ended December 31,
|
||||||||||||
|
2020
|
2019
|
2018
|
||||||||||
|
Foreign exchange gains / (losses)
|
11,131 | (6,982 | ) | (10,511 | ) | |||||||
|
Gains / (losses) on derivative financial instruments
|
10,648 | 3,648 | 45 | |||||||||
|
Interest income
|
3,857 | 7,944 | 7,415 | |||||||||
|
Interest expense
|
(5,471 | ) | (5,767 | ) | (4,370 | ) | ||||||
|
Factoring expense
|
(2,194 | ) | (15,379 | ) | (12,368 | ) | ||||||
|
Bank expenses
|
(1,371 | ) | (481 | ) | (434 | ) | ||||||
|
Others
|
(3,690 | ) | (198 | ) | 1,056 | |||||||
|
|
|
|
|
|
|
|||||||
|
Total financial income / (expense), net
|
$ | 12,910 | $ | (17,215 | ) | $ | (19,167 | ) | ||||
|
|
|
|
|
|
|
|||||||
|
27.
|
Stock-based compensation
|
Pursuant to the Amended and Restated 2016 Stock Incentive Plan, we may grant restricted stock units (“RSUs”) and stock options to directors, officers and/or employees. As of December 31, 2020, we had 1,919,099 shares of common stock reserved for new stock-based awards under the Amended and Restated 2016 Stock Incentive Plan. We issue new shares to satisfy the exercise or release of stock-based awards.
Our employee stock options consist of service-based awards. The majority of our stock options vest over 6 years. During the year ended December 31, 2020, we started issuing RSUs as our primary form of stock-based compensation, which vest 33% or 25% after one year and will then vest quarterly over the following three or four years, respectively.
The following table presents a summary of our RSU activity:
|
RSUs
|
Weighted
average
grant-date
fair value |
|||||||
|
Balance as of January 1, 2018
|
90,626 | $ | 7.47 | |||||
|
Granted
|
1,394,159 | $ | 12.48 | |||||
|
Vested
(1)
|
(164,814 | ) | $ | 10.88 | ||||
|
|
|
|
|
|||||
|
Balance as of December 31, 2018
|
1,319,971 | $ | 12.33 | |||||
|
Granted
|
340,565 | $ | 11.49 | |||||
|
Vested
|
(362,577 | ) | $ | 12.23 | ||||
|
Cancelled
|
(148,215 | ) | $ | 12.64 | ||||
|
|
|
|
|
|||||
|
Balance as of December 31, 2019
|
1,149,744 | $ | 12.08 | |||||
|
Granted
|
1,409,680 | $ | 7.89 | |||||
|
Vested
|
(419,367 | ) | $ | 10.95 | ||||
|
Cancelled
|
(460,851 | ) | $ | 10.32 | ||||
|
|
|
|
|
|||||
|
Balance as of December 31, 2020
|
1,679,206 | $ | 9.33 | |||||
(1)
90,626 vested RSU pertained to the former 2015 Stock Incentive Plan. There is no more activity under this plan.
The total market value of shares vested during the years ended December 31, 2020, 2019 and 2018 was $3,648, $5,707 and $1,548, respectively.
The accompanying notes are an integral part of these consolidated financial statements.
F-75
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
The following table presents a summary of our stock option activity:
|
Options
|
Weighted
average exercise price |
Remaining
contractual life (in years) |
Aggregate
intrinsic value |
|||||||||||||
|
Balance as of January 1, 2018
|
3,496,058 | $ | 26.02 | — | — | |||||||||||
|
Granted
|
1,174,489 | $ | 23.50 | — | — | |||||||||||
|
Exercised
|
(4,973 | ) | $ | 12.00 | — | — | ||||||||||
|
Forfeited / Cancelled
|
(1,873,213 | ) | $ | 26.43 | — | — | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Balance as of December 31, 2018
|
2,792,361 | $ | 17.50 | — | — | |||||||||||
|
Granted
|
225,903 | $ | 17.50 | — | — | |||||||||||
|
Exercised
|
(44,096 | ) | $ | 12.00 | — | — | ||||||||||
|
Forfeited / Cancelled
|
(436,280 | ) | $ | 17.50 | — | — | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Balance as of December 31, 2019
|
2,537,888 | $ | 17.50 | — | — | |||||||||||
|
Exercised
|
(33,133 | ) | $ | 11.31 | — | — | ||||||||||
|
Forfeited / Cancelled
|
(1,685,242 | ) | $ | 17.05 | — | — | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Balance as of December 31, 2020
|
819,513 | $ | 9.11 | 2 | $ | 10.50 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Exercisable as of December 31, 2020
|
423,644 | $ | 6.03 | 2 | $ | 5.43 | ||||||||||
|
Vested and expected to vest after December 31, 2020
|
819,513 | $ | 12.41 | 2 | $ | 5.07 | ||||||||||
The aggregate intrinsic value of outstanding options shown in the stock option activity table above represents the total pretax intrinsic value at December 31, 2020, based on our closing stock price of $12.81 as of the last trading date in 2020. The total intrinsic value of stock options exercised was $10,498, $34,211 and $34,653 for the years ended December 31, 2020, 2019 and 2018.
We did not grant options during the year ended December 31, 2020. The fair value of stock options granted during the years ended December 31, 2019 and 2018 were estimated at the date of grant using appropriate valuation techniques, including the Black-Scholes and Monte Carlo option-pricing models, assuming the following weighted average assumptions:
|
2020
|
2019
|
2018
|
||||||||||
|
Risk-free interest rate
|
— | 1.95 | % | 2.48 | % | |||||||
|
Expected volatility
|
— | 39.21 | % | 41.52 | % | |||||||
|
Expected life (in years)
|
— | 10 | 10 | |||||||||
|
Weighted-average estimated fair value of options granted during the year
|
— | 2.91 | 13.47 | |||||||||
During the years ended December 31, 2020, 2019 and 2018, we recognized total stock-based compensation expense of $7,312, $11,686 and $6,766, respectively, within “General and administrative” expenses in our consolidated statements of income. Cash received from stock-based award exercises for the years ended December 31, 2020, 2019 and 2018 was $370, $564 and $136, respectively.
The accompanying notes are an integral part of these consolidated financial statements.
F-76
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
As of December 31, 2020, there was $20,391 of unrecognized stock-based compensation expense related to unvested stock-based awards, which is expected to be recognized in expense over a weighted-average period of 3 years.
|
28.
|
Leases
|
We have operating leases for office space, customer centers and a fleet of dedicated vans. Our leases have remaining lease terms of 1 year to 15 years, some of which include options to extend the leases for up to 5 years, and some of which include options to terminate the leases within one year.
As of December 31, 2020, our weighted-average discount rate and weighted-average remaining lease term were approximately 6% and 2 to 12 years, respectively. As of December 31, 2019, our weighted-average discount rate and weighted-average remaining lease term were approximately 9% and 12 years, respectively.
We had no finance leases as of any of years presented. We had not entered into leases that had not yet commenced as of any of the years presented.
As a result of the impact of
COVID-19
to the travel industry and our business and results of operations, we renegotiated some of our lease contracts which included anticipated termination, payment forgiveness and deferral of payments, and in some cases the negotiation is still open to new amendments as new events evolve.
Supplemental cash flow information related to leases were as follows:
|
Year ended
December 31, 2020 |
Year ended
December 31, 2019 |
|||||||
|
Cash paid for amounts included in the measurement of lease liabilities:
|
||||||||
|
Operating cash flows for operating lease payments
|
$ | 10,348 | $ | 6,748 | ||||
As of December 31, 2020, the operating lease liabilities will mature over the following periods:
|
As of December 31,
2020 |
||||
|
2021
|
8,650 | |||
|
2022
|
6,026 | |||
|
2023
|
4,930 | |||
|
2024
|
4,276 | |||
|
2025
|
4,331 | |||
|
2026 and thereafter
|
18,331 | |||
|
|
|
|||
|
Total remaining lease payments
|
$ | 46,544 | ||
|
Less imputed interest
|
(9,259 | ) | ||
|
|
|
|||
|
Total operating lease liabilities:
|
$ | 37,285 | ||
|
|
|
|||
|
Current operating lease liability
|
8,591 | |||
|
|
|
|||
|
Non-current
operating lease liability
|
$ | 28,694 | ||
The accompanying notes are an integral part of these consolidated financial statements.
F-77
Despegar.com, Corp.
Notes to the Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars, except per share data in U.S. dollars)
Operating lease costs were $10,348 and $6,748 for the years ended December 31, 2020 and 2019. Under the lease accounting guidance in effect for the year ended December 31, 2018, rent expense was $4,354, which included operating lease costs as well as expense for
non-lease
components such as common area maintenance.
Lease Agreements
As of December 31, 2020, we have operating leases outstanding for office space with Inmobiliaria Buenaventuras, S.A. de C.V., an entity related to JBA, member of the board of Viajes Beda.
As of December 31, 2020, our weighted-average discount rate and weighted-average remaining lease term under these agreements were approximately 5.1% and 3 years, respectively. Operating lease costs under these agreements were $1,071 for the year ended December 31, 2020.
Supplemental consolidated balance sheet information related to these lease agreements were as follows:
|
As of December
31, 2020
|
||||
|
Operating lease
right-of-use
|
$ | 692 | ||
|
|
|
|||
|
Current lease liabilities
|
378 | |||
|
Non-current
lease liabilities
|
341 | |||
|
|
|
|||
|
Total operating lease liabilities
|
$ | 719 | ||
|
|
|
|||
29. Valuation and qualifying accounts
The following table presents the changes in our valuation and qualifying accounts:
|
Balance,
beginning of year |
Charges
to earnings |
Charges
to other accounts |
Deductions
|
Balance,
end of year |
||||||||||||||||
|
2018
|
||||||||||||||||||||
|
Allowance for credit expected losses
|
3,164 | 1,062 | (1,098 | ) | (1,063 | ) | 2,065 | |||||||||||||
|
2019
|
||||||||||||||||||||
|
Allowance for credit expected losses
|
2,065 | 4,294 | (104 | ) | (3,050 | ) | 3,205 | |||||||||||||
|
2020
|
||||||||||||||||||||
|
Allowance for credit expected losses
|
3,205 | 12,270 | 2,689 | (7,369 | ) | 10,795 | ||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-78