form 20-f...av. brigadeiro faria lima, 1384, 4º andar, parte a são paulo, sp, 01451-001, brazil...
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the fiscal year ended December 31, 2018
Commission File Number 1-38353
PAGSEGURO DIGITAL LTD.(Exactnameofregistrantasspecifiedinitscharter)
The Cayman Islands(Jurisdictionofincorporationororganization)
Av. Brigadeiro Faria Lima, 1384, 4º andar, parte ASão Paulo, SP, 01451-001, Brazil
(Addressofprincipalexecutiveoffices)
Eduardo Alcaro+55 11 3038 8123 – [email protected]
Av. Brigadeiro Faria Lima, 1384, 4º andar, parte ASão Paulo, SP, 01451-001, Brazil
(Name,telephone,e-mailand/orfacsimilenumberandaddressofcompanycontactperson)
SecuritiesregisteredortoberegisteredpursuanttoSection12(b)oftheAct:Title of each class: Name of each exchange on which registered:ClassAcommonshares,parvalueUS$0.000025 NewYorkStockExchange
SecuritiesregisteredortoberegisteredpursuanttoSection12(g)oftheAct:None
SecuritiesforwhichthereisareportingobligationpursuanttoSection15(d)oftheAct:None
As of December 31, 2018, there were 162,168,013 Class A common shares (including treasury shares), par value of US$0.000025 per share, and 165,620,861 Class Bcommon shares, par value of US$0.000025 per share, outstanding.
Indicatebycheckmarkiftheregistrantisawell-knownseasonedissuer,asdefinedinRule405oftheSecuritiesAct.
Yes☐ No☒
Ifthisreportisanannualortransitionreport,indicatebycheckmarkiftheregistrantisnotrequiredtofilereportspursuanttoSection13or15(d)oftheSecuritiesExchangeActof1934.
Yes☐ No☒
Indicatebycheckmarkwhethertheregistrant(1)hasfiledallreportsrequiredtobefiledbySection13or15(d)oftheSecuritiesExchangeActof1934duringthepreceding12months(orforsuchshorterperiodthattheregistrantwasrequiredtofilesuchreports),and(2)hasbeensubjecttosuchfilingrequirementsforthepast90days.
Yes☒ No☐
IndicatebycheckmarkwhethertheregistranthassubmittedelectronicallyeveryInteractiveDataFilerequiredtobesubmittedpursuanttoRule405ofRegulationS-T(§232.405ofthischapter)duringthepreceding12months(orforsuchshorterperiodthattheregistrantwasrequiredtosubmitsuchfiles).
Yes☒ No☐
Indicatebycheckmarkwhethertheregistrantisalargeacceleratedfiler,anacceleratedfiler,oranon-acceleratedfiler,oranemerginggrowthcompany.Seedefinitionof“largeacceleratedfiler,”“acceleratedfiler,”and“emerginggrowthcompany”inRule12b-2oftheExchangeAct:
LargeAcceleratedFiler☐ AcceleratedFiler☐ Non-acceleratedFiler☒ Emerginggrowthcompany☒
IfanemerginggrowthcompanythatpreparesitsfinancialstatementsinaccordancewithU.S.GAAP,indicatebycheckmarkiftheregistranthaselectednottousetheextendedtransitionperiodforcomplyingwithanyneworrevisedfinancialaccountingstandards†providedpursuanttoSection13(a)oftheExchangeAct.☐
†Theterm“neworrevisedfinancialaccountingstandard”referstoanyupdateissuedbytheFinancialAccountingStandardsBoardtoitsAccountingStandardsCodificationafterApril5,2012.
Indicatebycheckmarkwhichbasisofaccountingtheregistranthasusedtopreparethefinancialstatementsincludedinthisfiling:
U.S.GAAP☐ IFRS☒ Other☐
If“Other”hasbeencheckedinresponsetothepreviousquestion,indicatebycheckmarkwhichfinancialstatementitemtheregistranthaselectedtofollow.
Item17☐ Item18☐
Ifthisisanannualreport,indicatebycheckmarkwhethertheregistrantisashellcompany(asdefinedinRule12b-2oftheExchangeAct).
Yes☐ No☒
Table of Contents
Table of Contents PageFORWARD-LOOKINGSTATEMENTS 1CERTAINTERMSANDCONVENTIONS 2PRESENTATIONOFFINANCIALANDOTHERINFORMATION 2ITEM1. IDENTITYOFDIRECTORS,SENIORMANAGEMENTANDADVISERS 3ITEM2. OFFERSTATISTICSANDEXPECTEDTIMETABLE 3ITEM3. KEYINFORMATION 3ITEM4. INFORMATIONONTHECOMPANY 32ITEM4A. UNRESOLVEDSTAFFCOMMENTS 65ITEM5. OPERATINGANDFINANCIALREVIEWANDPROSPECTS 65ITEM6. DIRECTORS,SENIORMANAGEMENTANDEMPLOYEES 86ITEM7. MAJORSHAREHOLDERSANDRELATEDPARTYTRANSACTIONS 92ITEM8. FINANCIALINFORMATION 96ITEM9. THEOFFERANDLISTING 98ITEM10. ADDITIONALINFORMATION 98ITEM11. QUANTITATIVEANDQUALITATIVEDISCLOSURESABOUTMARKETRISK 120ITEM12. DESCRIPTIONOFSECURITIESOTHERTHANEQUITYSECURITIES 121ITEM13. DEFAULTS,DIVIDENDARREARAGESANDDELINQUENCIES 121ITEM14. MATERIALMODIFICATIONSTOTHERIGHTSOFSECURITYHOLDERSANDUSEOFPROCEEDS 121ITEM15. CONTROLSANDPROCEDURES 122ITEM16. [RESERVED] 123ITEM16A. AUDITCOMMITTEEFINANCIALEXPERT 123ITEM16B. CODEOFETHICS 123ITEM16C. PRINCIPALACCOUNTANTFEESANDSERVICES 123ITEM16D. EXEMPTIONSFROMTHELISTINGSTANDARDSFORAUDITCOMMITTEES 124ITEM16E. PURCHASESOFEQUITYSECURITIESBYTHEISSUERANDAFFILIATEDPURCHASERS 124ITEM16F. CHANGEINREGISTRANT’SCERTIFYINGACCOUNTANT 124ITEM16G. CORPORATEGOVERNANCE 125ITEM16H. MINESAFETYDISCLOSURE 126ITEM17. FINANCIALSTATEMENTS 126ITEM18. FINANCIALSTATEMENTS 126ITEM19. EXHIBITS 126GLOSSARYOFTERMS 128SIGNATURES 131
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FORWARD-LOOKING STATEMENTS
Thisannualreportcontainsinformationthatconstitutesforward-lookingstatementswithinthemeaningoftheU.S.PrivateSecuritiesLitigationReformActof1995,principallyunderthecaptions“Item3.KeyInformation—RiskFactors,“Item4.InformationontheCompany,”and“Item5.OperatingandFinancialReviewandProspects.”
Theseestimatesandforward-lookingstatementsarebasedmainlyonourcurrentexpectationsandestimatesoffutureeventsandtrendsthataffectormayaffectourbusiness,financialcondition,resultsofoperations,cashflow,liquidity,prospectsandthetradingpriceofourClassAcommonshares.Althoughwebelievethattheseestimatesandforward-lookingstatementsarebaseduponreasonableassumptions,theyaresubjecttomanysignificantrisks,uncertaintiesandassumptionsandaremadeinlightofinformationcurrentlyavailabletous.
Thesestatementsappearthroughoutthisannualreportandincludestatementsregardingourintent,belieforcurrentexpectationsinconnectionwith:
• theinherentrisksrelatedtothedigitalpaymentsmarket,suchastheinterruptionorfailureofourcomputerorinformationtechnologysystems;
• ourabilitytoinnovateandrespondtotechnologicaladvancesandchangingcustomerdemands;
• themaintenanceoftaxincentives;
• ourabilitytoattractandretainqualifiedpersonnel;
• generaleconomic,politicalandbusinessconditionsinBrazil,particularlyinthegeographicmarketsweserveaswellasanyothercountrieswemayserveinthefutureandtheirimpactonourbusiness,notablywithrespecttoinflation;
• labordisputes,employeestrikesandotherlabor-relateddisruptions,includinginconnectionwithnegotiationswithunions;
• management’sexpectationsandestimatesconcerningourfuturefinancialperformanceandfinancingplansandprograms;
• ourinterestratesandourlevelofdebtandotherfixedobligations;
• inflation,appreciation,depreciationanddevaluationofthereal ;
• expenses,abilitytogeneratecashflow,andabilitytoachieve,andmaintain,futureprofitability;
• ourabilitytoanticipatemarketneedsanddevelopandintroducenewandenhancedproductsandservicefunctionalitytoadapttochangesinourindustry;
• ouranticipatedgrowthandgrowthstrategiesandourabilitytoeffectivelymanagethatgrowth;
• theimpactofincreasedcompetitioninourmarket,innovationbyourcompetitors,andourabilitytocompeteeffectively;
• ourabilitytosuccessfullyenternewmarketsandmanageourexpansion;
• ourabilitytofurtherpenetrateourexistingclientbasetogrowourecosystem;
• ourexpectationsconcerningrelationshipswiththirdpartiesandkeysuppliers;
• ourabilitytomaintain,protectandenhanceourbrandandintellectualproperty;
• thesufficiencyofourcashandcashequivalentsandcashgeneratedfromoperationstomeetourworkingcapitalandcapitalexpenditurerequirements;
• ourcompliancewithapplicableregulatoryandlegislativedevelopmentsandregulationsandlegislationthatcurrentlyapplyorbecomeapplicabletoourbusiness;
• otherfactorsthatmayaffectourfinancialcondition,liquidityandresultsofoperations;and
• otherriskfactorsdiscussedunder“Item3.KeyInformation—RiskFactors.”
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Thewords“believe,”“understand,”“may,”“will,”“aim,”“estimate,”“continue,”“anticipate,”“seek,”“intend,”“expect,”“should,”“could,”“forecast”andsimilarwordsareintendedtoidentifyforward-lookingstatements.Youshouldnotplaceunduerelianceonsuchstatements,whichspeakonlyasofthedatetheyweremade.Wedonotundertakeanyobligationtoupdatepubliclyortoreviseanyforward-lookingstatementsafterwefilethisannualreportbecauseofnewinformation,futureeventsorotherfactors.Ourindependentpublicauditorshaveneitherexaminednorcompiledtheforward-lookingstatementsand,accordingly,donotprovideanyassurancewithrespecttosuchstatements.Inlightoftherisksanduncertaintiesdescribedabove,thefutureeventsandcircumstancesdiscussedinthisannualreportmightnotoccurandarenotguaranteesoffutureperformance.Becauseoftheseuncertainties,youshouldnotmakeanyinvestmentdecisionbasedupontheseestimatesandforward-lookingstatements.
CERTAIN TERMS AND CONVENTIONS
Aglossaryofindustryandotherdefinedtermsisincludedinthisannualreport,beginningonpage133.
PRESENTATION OF FINANCIAL AND OTHER INFORMATION
Thefollowingreferencesinthisannualreporthavethemeaningsshownbelow:
• “PagSeguroDigital”orthe“Company”meanPagSeguroDigitalLtd.PagSeguroDigitalLtd.isanexemptedcompanywithlimitedliabilityincorporatedunderthelawsoftheCaymanIslands.
• “PagSeguroBrazil”meansPagseguroInternetS.A.,ouroperatingcompany,asociedade anônima incorporatedinBrazil.PagseguroInternetS.A.issubstantiallywholly-ownedbyPagSeguroDigitalLtd.
• “We,”“us”and“our”meanPagSeguroDigital,PagSeguroBrazilandPagSeguroBrazil’ssubsidiariesonaconsolidatedbasis.
• “PagSeguro”meansourdigitalpaymentsbusiness,whichisoperatedbyPagSeguroBrazil.
• “UOL”meansUniversoOnlineS.A.,thecontrollingshareholder,ofPagSeguroDigital.FormoreinformationregardingUOL,see“Item7.MajorShareholdersandRelatedPartyTransactions.”
Theterm“Brazil”referstotheFederativeRepublicofBrazilandthephrase“Braziliangovernment”referstothefederalgovernmentofBrazil.“CentralBank”referstoBancoCentraldoBrasil.Referencesinthisannualreportto“real ,”“reais ”or“R$”refertotheBrazilianreal ,theofficialcurrencyofBrazilandreferencesto“U.S.dollar,”“U.S.dollars”or“US$”refertoU.S.dollars,theofficialcurrencyoftheUnitedStates.
Thisannualreportcontainsvariousillustrationsofourproductsandservices.Forconvenience,wehavetranslatedthetextinthoseillustrationsintoEnglish.TheactualproductsandservicesaregenerallypresentedtoourcustomersinPortugueseonly.
Effect of Rounding
Certainamountsandpercentagesincludedinthisannualreport,includinginthesectionofthisannualreportentitled“Item5.OperatingandFinancialReviewandProspects”havebeenroundedforeaseofpresentation.Percentagefiguresincludedinthisannualreporthavenotbeencalculatedinallcasesonthebasisoftheroundedfiguresbutonthebasisoftheoriginalamountspriortorounding.Forthisreason,certainpercentageamountsinthisannualreportmayvaryfromthoseobtainedbyperformingthesamecalculationsusingthefiguresinourauditedconsolidatedfinancialstatements.Certainotheramountsthatappearinthisannualreportmaynotsumduetorounding.
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Market and Industry Data
Thisannualreportcontainsdatarelatedtoeconomicconditionsinthemarketinwhichweoperate.Theinformationcontainedinthisannualreportconcerningeconomicconditionsisbasedonpubliclyavailableinformationfromthird-partysourcesthatwebelievetobereasonable.DataandstatisticsregardingtheBrazilianInternet,paymentsolutionsande-commercemarketsarebasedonpubliclyavailabledatapublishedbytheBrazilianAssociationofCreditCardandServicesCompanies(Associação Brasileirade Empresas de Cartões de Crédito e Serviços ,orABECS);comScore,across-platformmeasurementcompanythatmeasuresaudiences,brandsandconsumerbehavior,andprovidesmarketandanalyticaldatatoclients;Datafolha,aresearchinstituteandaffiliateofUOLcreatedbyGrupoFolha,whichconductsstatisticalsurveys,electionpollingandopinionandmarketsurveysforthemarketatlarge;theBrazilianInstituteofGeographyandStatistics(Instituto Brasileiro de Geografia e Estat í stica ,orIBGE);theWorldBank;SEBRAE;NeowayBusinessSolutions;Webshoppers;andeMarketer;amongothers.WealsomakestatementsinthisannualreportaboutourcompetitivepositionandthesizeoftheBraziliandigitalpaymentsande-commercemarkets.
Althoughwehavenoreasontobelieveanyofthisinformationorthesereportsareinaccurateinanymaterialrespectandbelieveandactasiftheyarereliable,neitherwenorouragentshaveindependentlyverifiedit.Governmentalpublicationsandothermarketsources,includingthosereferredtoabove,generallystatethattheirinformationwasobtainedfromrecognizedandreliablesources,buttheaccuracyandcompletenessofthatinformationisnotguaranteed.Inaddition,thedatathatwecompileinternallyandourestimateshavenotbeenverifiedbyanindependentsource.Exceptasdisclosedinthisannualreport,noneofthepublications,reportsorotherpublishedindustrysourcesreferredtointhisannualreportwerecommissionedbyusorpreparedatourrequest.Exceptasdisclosedinthisannualreport,wehavenotsoughtorobtainedtheconsentofanyofthesesourcestoincludesuchmarketdatainthisannualreport.
Emerging Growth Company Status
Wearean“emerginggrowthcompany,”asdefinedinSection2(a)oftheSecuritiesActof1933,asamended,ortheSecuritiesAct,asmodifiedbytheJumpstartOurBusinessStartupsActof2012,ortheJOBSAct.Wewillremainanemerginggrowthcompanyuntiltheearlierof(1)thelastdayofthefiscalyear(a)followingthefifthanniversaryofthecompletionofourIPO,(b)inwhichwehavetotalannualrevenuesofatleastUS$1.07billionor(c)inwhichwearedeemedtobealargeacceleratedfilerand(2)thedateonwhichwehaveissuedmorethanUS$1.0billioninnon-convertibledebtduringthepriorthree-yearperiod.Asanemerginggrowthcompany,weareeligibletotakeadvantageofcertainexemptionsfromvariousreportingrequirementsthatareapplicabletootherpubliccompaniesthatarenotemerginggrowthcompaniesincluding,butnotlimitedto,exemptionsfromtheauditorattestationrequirementsofSection404oftheSarbanes-OxleyActof2002,ortheSarbanes-OxleyAct,andanyPublicCompanyAccountingOversightBoard,orPCAOB,rules,includinganyfutureauditrulepromulgatedbythePCAOB(unlesstheSecuritiesandExchangeCommission,orSEC,determinesotherwise).Accordingly,theinformationaboutusavailabletoyouwillnotbethesameas,andmaybemorelimitedthan,theinformationavailabletoshareholdersofanon-emerginggrowthcompany.
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Notapplicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Notapplicable.
ITEM 3. KEY INFORMATION
Selected Financial and Operating Data
PagSeguroDigitalLtd.,ourCaymanIslandscompany,wasincorporatedonJuly19,2017foranindefiniteterm.PriortothecontributionofPagseguroInternetS.A.toitonJanuary4,2018,PagSeguroDigitalLtd.hadnotcommencedoperationsandhadonlynominalassetsandliabilities.
FollowingourIPOonJanuary23,2018,PagSeguroDigitalbeganreportingconsolidatedfinancialinformationtoshareholders,andPagSeguroBrazilnolongerpresentsconsolidatedfinancialstatements.PagSeguroBrazilpreparesandpresentsindividualfinancialstatementsinaccordancewithBrazilianGAAP,asapplicabletopaymentinstitutionsauthorizedbytheCentralBank.
ThefollowingtablessummarizefinancialdataforPagSeguroDigitalatandforeachoftheyearsendedDecember31,2018,2017,2016,2015and2014,derivedfromourauditedconsolidatedfinancialstatements.TheselectedconsolidatedfinancialdataasofandfortheyearendedDecember31,2018,2017,2016,2015and2014derivefromouryear-endfinancialstatementsauditedbyPricewaterhouseCoopersAuditoresIndependentes,withofficesatAv.FranciscoMatarazzo1400,TorreTorino,SãoPaulo,SP,Brazil05001-903,CaixaPostal61005.TheseauditedconsolidatedfinancialstatementswerepreparedinaccordancewithIFRS,asissuedbytheIASB.PagSeguroDigitalmaintainsitsbooksandrecordsinreais .
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Youshouldreadthisinformationinconjunctionwiththefollowingotherinformationincludedelsewhereinthisannualreport:
• ourauditedconsolidatedfinancialstatementsandrelatednotes;and
• theinformationunder“Item5.OperatingandFinancialReviewandProspects.”
Thefollowingtablespresentourselectedfinancialandoperatingdataasofandforeachoftheperiodsindicated.
STATEMENT OF OPERATIONS DATA For the Years Ended December 31, 2018 2018 2017 2016 2015 2014 (US$) (1) (R$) (R$) (R$) (R$) (R$) (in millions, except amounts per share and %) Netrevenuefromtransactionactivitiesandotherservices 585.1 2,267.1 1,224.3 480.0 268.2 160.1Netrevenuefromsales 96.7 374.6 471.9 260.6 176.5 48.2Financialincome 365.1 1,414.5 818.6 392.4 219.5 115.8Otherfinancialincome 71.9 278.5 8.6 5.3 10.7 1.8
Total revenue and income 1,118.7 4,334.7 2,523.4 1,138.4 674.9 325.8
Costofsalesandservices (553.5) (2,144.7) (1,324.4) (623.7) (382.5) (142.5)Sellingexpenses (90.7) (351.4) (245.8) (199.9) (162.6) (81.4)Administrativeexpenses (150.1) (581.7) (153.2) (84.5) (61.1) (51.3)Financialexpenses (8.1) (31.2) (104.5) (68.3) (29.7) (11.1)Other(expenses)income,net (2.1) (8.1) (12.0) (6.7) 1.3 (3.3)
Profit before Income Taxes 314.2 1,217.6 683.5 155.4 40.3 36.2
Currentincometaxandsocialcontribution (46.7) (180.9) (215.0) (7.4) (2.6) (9.9)Deferredincometaxandsocialcontribution (32.6) (126.3) 10.3 (20.1) (2.2) 1.0
Income Tax and Social Contribution (79.3) (307.2) (204.7) (27.6) (4.8) (8.9)
Net Income for the Year 235.0 910.4 478.8 127.8 35.5 27.2
Attributableto: OwnersofPagSeguroDigital 234.7 909.3 478.8 127.2 35.1 26.0Non-controllinginterests 0.3 1.1 — 0.6 0.4 1.3
Basic earnings per common share – R$ 0.7388 2.8625 1.8254 0.4849 0.1338 0.0990
Diluted earnings per common share – R$ 0.7376 2.8582 1.8254 0.4849 0.1338 0.0990
(1) Forconveniencepurposesonly,amountsinreais fortheyearendedDecember31,2018havebeentranslatedtoU.S.dollarsusingarateofR$3.8748toUS$1.00,thecommercialsellingrateforU.S.
dollarsatDecember31,2018asreportedbytheCentralBank.Thesetranslationsshouldnotbeconsideredrepresentationsthatanysuchamountshavebeen,couldhavebeenorcouldbeconvertedintoU.S.dollarsatthatoratanyotherexchangerate.See“—ExchangeRates”belowforfurtherinformationaboutrecentfluctuationsinexchangerates.
OPERATING DATA At and For the Years Ended December 31, 2018 (1) 2018 2017 2016 2015 2014 Operating Statistics: Activemerchantsatyear-end(inmillions) — 4.1 2.8 1.4 0.9 0.5TPV(inbillions) US$19.7 R$76.1 R$38.5 R$14.1 R$7.4 R$3.7Averagespendingperactivemerchant US$5,675 R$21,988 R$18,013 R$12,401 R$11,046 R$10,449(1) Forconveniencepurposesonly,amountsinreais fortheyearendedDecember31,2018havebeentranslatedtoU.S.dollarsusingarateofR$3.8748toUS$1.00,thecommercialsellingrateforU.S.
dollarsatDecember31,2018asreportedbytheCentralBank.Thesetranslationsshouldnotbeconsideredrepresentationsthatanysuchamountshavebeen,couldhavebeenorcouldbeconvertedintoU.S.dollarsatthatoratanyotherexchangerate.See“—ExchangeRates”belowforfurtherinformationaboutrecentfluctuationsinexchangerates.
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BALANCE SHEET DATA
ThefollowingtablepresentskeylineitemsfromPagSeguroDigital’sconsolidatedbalancesheetdata: At December 31, 2018 2018 2017 2016 2015 2014 (US$) (1) (R$) (R$) (R$) (R$) (R$) (in millions) Current Assets
Cashandcashequivalents 713.1 2,763.1 66.8 80.0 6.9 1.2Financialinvestments — — 210.1 131.2 — —Notereceivables 2,091.6 8,104.7 3,522.3 1,715.5 1,110.0 665.9Receivablesfromrelatedparties — — 124.7 300.8 55.9 84.3Inventories 22.9 88.6 61.6 21.0 41.2 16.1Taxesrecoverable 16.9 65.7 14.4 17.7 5.8 6.7Otherreceivables 5.2 20.1 28.0 4.5 21.0 4.3
Total Current Assets 2,849.7 11,042.1 4,028.0 2,270.8 1,240.8 778.6
Non-Current Assets Judicialdeposits 0.4 1.5 0.9 0.5 0.4 0.5Prepaidexpenses 0.2 1.0 0.1 0.1 0.4 —Deferredincometaxandsocialcontribution — — 37.0 8.3 6.7 8.1Propertyandequipment 17.3 67.1 10.9 4.6 3.8 1.9Intangibleassets 78.9 305.6 158.9 86.1 48.6 28.5
Total Non-Current Assets 96.8 375.2 207.8 99.7 59.9 39.0
TOTAL ASSETS 2,946.5 11,417.3 4,235.8 2,370.4 1,300.7 817.6
At December 31, 2018 2018 2017 2016 2015 2014 (US$) (1) (R$) (R$) (R$) (R$) (R$) (in millions) Current Liabilities
Payablestothirdparties 1,116.0 4,324.2 3,080.6 1,304.0 683.1 369.9Tradepayables 42.6 165.2 92.4 61.7 35.3 3.5Payablestorelatedparties 7.9 30.8 39.1 76.2 92.4 —Derivativefinancialinstruments — — — 6.6 — —Borrowings — — — 205.2 — —Salariesandsocialcharges 19.1 73.9 34.3 20.3 13.7 0.4Taxesandcontributions 20.7 80.1 52.1 6.9 3.0 2.8Provisionforcontingencies 1.8 7.0 4.6 0.7 — 1.6Dividendspayableandinterestonowncapital — — — 22.2 3.2 3.1Otherpayables 7.6 29.5 15.9 15.2 1.8 4.0
Total Current Liabilities 1,215.7 4,710.8 3,319.0 1,719.2 832.5 385.3
Non-Current Liabilities Deferredincometaxandsocialcontribution 34.1 132.1 42.8 24.4 6.3 5.4Provisionforcontingencies — — 3.6 — — 0.3
Total Non-Current Liabilities 34.1 132.1 46.4 24.4 6.3 5.7
TOTAL LIABILITIES 1,249.8 4,842.9 3,365.4 1,743.5 838.8 391.0
TOTAL EQUITY 1,696.7 6,574.4 870.4 626.9 461.9 426.6
TOTAL LIABILITIES AND EQUITY 2,946.5 11,417.3 4,235.8 2,370.4 1,300.7 817.6
(1) Forconveniencepurposesonly,amountsinreais fortheyearendedDecember31,2018havebeentranslatedtoU.S.dollarsusingarateofR$3.8748toUS$1.00,thecommercialsellingrateforU.S.
dollarsatDecember31,2018asreportedbytheCentralBank.Thesetranslationsshouldnotbeconsideredrepresentationsthatanysuchamountshavebeen,couldhavebeenorcouldbeconvertedintoU.S.dollarsatthatoratanyotherexchangerate.See“—ExchangeRates”belowforfurtherinformationaboutrecentfluctuationsinexchangerates.
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NON-GAAP FINANCIAL MEASURES
Wepresentnon-GAAPfinancialmeasureswhenwebelievethattheadditionalinformationisusefulandmeaningfultoinvestors.Thesenon-GAAPfinancialmeasuresareprovidedtoenhanceinvestors’overallunderstandingofourcurrentfinancialperformanceanditsprospectsforthefuture.Specifically,webelievethenon-GAAPfinancialmeasuresprovideusefulinformationtobothmanagementandinvestorsbyexcludingcertainexpenses,gainsandlosses,asthecasemaybe,thatmaynotbeindicativeofourcoreoperatingresultsandbusinessoutlook.
Thesemeasuresmaybedifferentfromnon-GAAPfinancialmeasuresusedbyothercompanies.Thepresentationofthisnon-GAAPfinancialinformation,whichisnotpreparedunderanycomprehensivesetofaccountingrulesorprinciples,isnotintendedtobeconsideredseparatelyfrom,orasasubstitutefor,ourfinancialinformationpreparedandpresentedinaccordancewithIFRS.Non-GAAPfinancialmeasureshavelimitationsinthattheydonotreflectalloftheamountsassociatedwithourresultsofoperationsasdeterminedinaccordancewithIFRS.ThesemeasuresshouldonlybeusedtoevaluateourresultsofoperationsinconjunctionwiththecorrespondingGAAPfinancialmeasures.
Reconciliation of Non-GAAP Financial Measures
Thefollowingtablepresentsareconciliationofournon-GAAPfinancialmeasurestothemostdirectlycomparableGAAPmeasuresfortheyearendedDecember31,2018:
For the Twelve Months EndedDecember 31,
2018
(in millions of reais , except
for amounts per share) Total revenue and income 4,334.7
Less:ForeignexchangegainonIPOandfollow-onofferingprimaryshareproceeds (131.3)
Non-GAAP total revenue and income (1) 4,203.4
Total expenses (3,117.1) Less:Share-basedlong-termincentiveplan(LTIP) 419.3Less:TaxrelatedtoremittanceofIPOandfollow-onprimaryshareproceeds(IOFtax) 18.0
Non-GAAP total expenses (2) (2,679.8)
Profit before taxes 1,217.6 Plus:Totalnon-GAAPAdjustments 306.0
Non-GAAP profit before taxes (3) 1,523.6
Income tax and social contribution (307.2) Less:Incometaxandsocialcontributiononnon-GAAPadjustments (148.7)
Non-GAAP deferred income tax (4) (455.9)
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For the Twelve Months Ended
December 31, 2018
(in millions of reais , except
for amounts per share) Net income 910.4
Plus:Totalnon-GAAPadjustments 157.3
Non-GAAP net income (5) 1,067.7
Basicearningspercommonshare—R$ 2.8625Dilutedearningspercommonshare—R$ 2.8582
Non-GAAPbasicearningspercommonshare—R$(6) 3.3578Non-GAAPdilutedearningspercommonshare—R$(6) 3.3527
(1) Non-GAAPtotalrevenueandincomeexcludesaforeignexchangegainonourJanuary2018IPOproceedsandJune2018follow-onofferingproceedsintheamountofR$131.3 millionintheyear
endedDecember31,2018,whichrelatestotheimpactofexchangeratevariationontheconversionfromU.S.dollarsintoBrazilianreais oftheproceedsfromourIPOandourJune2018follow-onoffering.Weexcludethisforeignexchangevariationfromournon-GAAPmeasuresprimarilybecauseitisunusualincome.TheforeignexchangegainonourJanuary2018IPOproceedsandJune2018follow-onofferingproceedsisincludedwithinOtherfinancialincome.OtherfinancialincomeintheamountofR$278.4 millionisthereforeadjustedbyexcludingtheforeignexchangegainonourJanuary2018IPOproceedsandJune2018follow-onofferingproceeds,resultinginnon-GAAPOtherfinancialincomeintheamountofR$147.2 million.
(2) Non-GAAPtotalexpensesexcludes:
(a) Stock-basedcompensationexpensesinthetotalamountofR$419.3 million,consistingofexpensesforequityawardsundertheLTIP.Weexcludestock-basedcompensationexpensesfromournon-GAAPfinancialmeasuresprimarilybecausetheyarenon-cashexpensesandtheydependonourstockpriceandtheexchangeratefromU.S.dollarsintoBrazilianreais atthetimeofthevestingoftheequityawards.TherelatedemployerpayrolltaxesdependonourstockpriceandtheexchangeratefromU.S.dollarsintoBrazilianreais atthetimeoftheexercisesandthevestingdateoftheequityawards,overwhichmanagementhaslimitedtonocontrol,andassuchmanagementdoesnotbelievetheseexpensescorrelatetotheoperationofourbusiness.Thetotalofstock-basedcompensationexpensesisallocatedbetweenCostofsalesandservices,AdministrativeexpensesandSellingexpenses.Excludingthestock-basedcompensationexpenses,CostofsalesandservicesintheamountofR$2,144.7 millionisadjustedbyR$58.8 millionresultinginnon-GAAPCostofsalesandservicesofR$2,084.9 million;AdministrativeExpensesintheamountofR$581.7 millionisadjustedbyR$359.2 millionresultinginnon-GAAPAdministrativeexpensesofR$222.5 million;andSellingexpensesintheamountofR$351.4 millionisadjustedbyR$0.3 millionresultinginnon-GAAPSellingexpenseofR$351.1 million.
(b) TaxrelatedtoremittanceofJanuary2018IPOproceedsandJune2018follow-onofferingproceeds(IOFtax)intheamountofR$18.0 millionintheyearendedDecember31,2018,whichrepresentstheimpactofBrazilianIOFtax(currencyremittancetax)payablewhenweremittedtheproceedsfromoursaleofnewsharesinourIPOandourJune2018follow-onofferingfromtheCaymanIslandstoBrazil.WeexcludethisIOFtaxontheremittanceofJanuary2018IPOproceedsandJune2018follow-onofferingproceedsfromournon-GAAPmeasuresprimarilybecauseitisanunusualexpense.TheIOFtaxisfullyallocatedtoFinancialexpenses.FinancialexpensesintheamountofR$31.2 millionisthereforeadjustedbyexcludingtheIOFtax,resultinginnon-GAAPFinancialexpensesintheamountofR$13.2 million.
(3) Non-GAAPProfitbeforetaxesisequaltothesumoftheadjustmentsdescribedinfootnotes(1)and(2)above.(4) Non-GAAPIncometaxandsocialcontributionconsistsofincometaxattherateof34%calculatedonthenon-GAAPadjustmentsdescribedinfootnotes(1)and(2)above,otherthantheforeign
exchangegainonourJanuary2018IPOproceedsandJune2018follow-onofferingproceedsofR$131.3 million,whichisnottaxable,andthetaxbenefitsrelatedtoothernon-GAAPadjustments.(5) Non-GAAPNetincomeisequaltothesumoftheadjustmentsdescribedinfootnotes(1),(2)and(4)above.(6) Non-GAAPBasicearningspercommonshareandnon-GAAPDilutedearningspercommonsharereflecttheadjustmentstonon-GAAPNetincome,whichisallocatedinfulltoOwnersofthe
Company.
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Financial Information U.S. Dollars
Wehavetranslatedsomeofthereal amountsincludedinthisannualreportintoU.S.dollars.YoushouldnotconstruethesetranslationsasrepresentationsbyusthattheamountsactuallyrepresenttheseU.S.dollaramountsorcouldbeconvertedintoU.S.dollarsattheratesindicated.Unlessotherwiseindicated,wehavetranslatedreal amountsintoU.S.dollarsusingarateofR$3.8748toUS$1.00,thecommercialsellingrateforU.S.dollarsatDecember31,2018asreportedbytheCentralBank.See“—ExchangeRates”belowformoreinformationregardingthereal /U.S.dollarexchangerate.
RISK FACTORS
Risks Relating to Our Business and Industry
If we cannot keep pace with rapid technological developments to provide new and innovative products and services, and address the rapidly evolving market fortransactions on mobile devices, the use of our products and services and, consequently, our revenues could decline.
Rapid,significantanddisruptivetechnologicalchangescontinuetoimpacttheindustriesinwhichweoperate,includingdevelopmentsinpaymentcardtokenization,mobilepayments,socialcommerce(i.e.,e-commercethroughsocialnetworks),authentication,virtualcurrencies,distributedledgerorblockchaintechnologies,nearfieldcommunicationandotherproximityorcontactlesspaymentmethods,virtualreality,machinelearningandartificialintelligence.
Forinstance,mobiledevicesareincreasinglyusedfore-commercetransactionsandpayments.Asignificantandgrowingportionofourcustomersaccessourplatformsthroughmobiledevices,includingforregularonlineshoppingaswellasforin-persontransactions.IntheyearendedDecember31,2018,61%ofourcustomersaccessedourplatformsthroughmobiledevices,comparedwith44%intheyearendedDecember31,2017.Wemaylosecustomersifwearenotabletocontinuetomeetourcustomers’mobileandmulti-screenexperienceexpectations.Differentmobiledevicesandplatformsuseawidevarietyoftechnicalandotherconfigurations,whichincreasethechallengesinvolvedinprovidingpaymentsinthemobileenvironment.Inaddition,anumberofothercompanieswithsignificantresourcesandanumberofinnovativestartupshaveintroducedproductsandservicesfocusingonmobilemarkets.Wecannotguaranteethatwewillbeabletocontinuetomeetcustomerexpectationsinthemobileenvironmentorincreaseourvolumeofmobiletransactions.
Wecannotpredicttheeffectsoftechnologicalchangesonourbusiness.Inadditiontoourowninitiativesandinnovations,werelyinpartonthirdpartiesforthedevelopmentofandaccesstonewtechnologies.Weexpectthatnewservicesandtechnologiesapplicabletotheindustriesinwhichweoperatewillcontinuetoemergeandmaybesuperiorto,orrenderobsolete,thetechnologieswecurrentlyuseinourproductsandservices.Developingandincorporatingnewtechnologiesintoourproductsandservicesmayrequiresubstantialexpenditures,takeconsiderabletime,andultimatelymaynotbesuccessful.Inaddition,ourabilitytoadoptnewproductsandservicesanddevelopnewtechnologiesmaybeinhibitedbyindustry-widestandards,paymentnetworks,changestolawsandregulations,resistancetochangefromconsumersormerchants,third-partyintellectualpropertyrights,orotherfactors.Oursuccesswilldependonourabilitytodevelopandincorporatenewtechnologies,addressthechallengesposedbytherapidlyevolvingmarketformobiletransactionsthroughourplatformsandadapttotechnologicalchangesandevolvingindustrystandards;ifweareunabletodosoinatimelyorcost-effectivemanner,ourbusinesscouldbeharmed.
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Substantial and increasingly intense competition, both within our industry and from other payment methods, may harm our business.
Wecompeteinmarketscharacterizedbyvigorouscompetition,changingtechnology,changingcustomerneeds,evolvingindustrystandardsandfrequentintroductionsofnewproductsandservices.Wecompetewithexistingprovidersofdigitalpaymentsolutions,in-personpaymentsviaPOS,freedigitalaccounts,prepaidcardsandacquisitionactivities.Intheonlinedigitalpaymentsmarket,wecompeteprimarilywithinternationalonlinepaymentservices,suchasPayPal,andregionalplayers,suchasMercadoPagofromMercadoLibreandMoIP/Wirecard.InthePOSpaymentsmarket,wecompeteprimarilywithinternationalplayers,suchasSumUp/Payleven,andregionalplayers,suchasMercadoPagofromMercadoLibre.Asisthecasewiththedigitalpaymentsindustryingeneral,wealsocompetewithothermeansofpayment,bothdigitalandtraditional,includingcash,checks,moneyordersandelectronicbankdeposits.
Weexpectcompetitiontointensifyinthefutureasexistingandnewcompetitorsintroducenewservicesorenhanceexistingservices.Wecompeteagainstmanycompaniestoattractcustomers,andsomeofthesecompanieshavegreaterfinancialresourcesandsubstantiallylargerbasesofcustomersthanwedo,whichmayprovidethemwithsignificantcompetitiveadvantages.Thesecompaniesmaydevotegreaterresourcesthanwedotothedevelopment,promotionandsaleofproductsandservices,andtheymaybemoreeffectiveinintroducinginnovativeproductsandservicesthathinderourgrowth.CompetingservicestiedtoestablishedbanksandotherfinancialinstitutionsmayoffergreaterliquidityandcreategreaterconsumerconfidenceinthesafetyandefficiencyoftheirservicesthanPagSeguro.Mergersandacquisitionsbyoramongthesecompaniesmayleadtoevenlargercompetitorswithmoreresources.Wealsoexpectnewentrantstooffercompetitiveproductsandservices.Forexample,establishedbanksandotherfinancialinstitutionscurrentlyofferonlinepaymentsandthosewhichdonotyetprovidesuchservicescouldquicklyandeasilydevelopthem.Certainmerchantshavelongstandingexclusive,ornearlyexclusive,relationshipswithourcompetitorstoacceptpaymentcardsandotherservicesthatweoffer.Theserelationshipsmaymakeitdifficultorcostprohibitiveforustoconductmaterialamountsofbusinesswiththem.Ifweareunabletodifferentiateourselvesfromandsuccessfullycompetewithourcompetitors,ourbusinesswillsufferseriousharm.
Wemayalsofacepricingpressuresfromcompetitors.Certaincompetitorsareabletoofferlowerpricestomerchantsforsimilarservicesbycross-subsidizingtheirdigitalpaymentsservicesusingotherservicestheyoffer.Thiscompetitionmaymeanweneedtoreduceourpricing,whichcouldreduceourprofits.Astheygrow,merchantsmaydemandmorecustomizedandfavorablepricingfromus,andcompetitivepressuresmayrequireustoagreetothis,furtherreducingourprofits.Ifmarketconditionsrequireustoincreasethediscountsorincentivesweprovide,ourbusinesscouldsufferseriousharm.
Interruption or failure of our information technology and communications systems could impair our operations, which could damage our reputation and harm our resultsof operations.
Oursuccessandabilitytoprocesspaymentsandprovidehighqualitycustomerservicedependontheefficientanduninterruptedoperationofourcomputerandinformationtechnologysystems.Anyfailureofourcomputersystemsandinformationtechnologytooperateeffectivelyortointegratewithothersystems,performanceinadequacyorbreachinsecuritymaycauseinterruptionsintheavailabilityofoursites,delaysinproductfulfilmentandreducedefficiencyofouroperations.Anyfailures,problemsorsecuritybreachesmaymeanthatfewercustomersarewillingtopurchasetheproductsweofferinthefuture.Factorsthatcouldoccurandsignificantlydisruptouroperationsinclude:systemfailuresandoutagescausedbyfire,floods,earthquakes,powerloss,telecommunicationsfailures,sabotage,vandalism,terroristattacksandsimilarevents,softwareerrors,computerviruses,worms,physicalorelectronicbreak-insandsimilardisruptionsfromunauthorizedtamperingwithourcomputersystemsanddatacenters;inaddition,securitybreachesrelatedtothestorageandtransmissionofproprietaryinformationorcustomerinformation,suchascreditcardnumbersorotherpersonalinformation.Also,iftoomanycustomersaccessoursiteswithinashortperiodoftimeduetoanyreason,wehaveexperiencedinthepastandmayinthefutureexperiencesysteminterruptionsthatmakeoursitesunavailableorpreventusfromefficientlycompletingpaymenttransactions,whichmayreducetheattractivenessofourproductsandservices.Wecannotassureyouthatsucheventswillnotoccur.Whilewehavebackupsystemsandcontingencyplansforcertainaspectsofouroperationsandbusinessprocesses,ourplanningdoesnotaccountforallpossiblescenarios.
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Specifically,wehavecontractedwithoneparty,UOLDiveo,toprovideuswithInternetdatacenterstohostoursitesandkeepthemoperational,andwerelyonitanditsoperational,privacyandsecurityproceduresandcontrolsanditsabilitytokeepoursitesoperational.UOLDiveoiscontrolledbyourparentcompanyUOLandisthereforeanaffiliateofourcompany.FailurebyUOLDiveotoadequatelykeepoursitesoperational,includinganyprolongedorunscheduledservicedisruptionthataffectsourcustomers’abilitytoutilizeoursites,couldresultinthelossofsalesandcustomersand/orincreasedcosts,whichcouldmateriallyaffectourreputationorresultsofoperations.Inaddition,werelyinpartonUOLDiveotoadviseusofanysecuritybreaches.IfUOLDiveodoesnotprovidenoticeonatimelybasis,ourreputationandresultsofoperationsmaybeharmed.WemaynotbeabletotimelyreplaceUOLDiveo,orfindareplacementonacost-efficientbasis,intheeventofdisruptions,failurestoprovideservicesorotherissueswithitthatmayharmourbusiness.FormoreinformationonouragreementwithUOLDiveo,see“Item7.MajorShareholdersandRelatedPartyTransactions—RelatedPartyTransactions.”
Anydisruptionsorserviceinterruptionsthataffectoursitescoulddamageourreputation,requireustospendsignificantcapitalandotherresourcesandexposeustoariskoflossorlitigationandpossibleliability.Someofouragreementswiththird-partyserviceprovidersdonotrequirethoseproviderstoindemnifyusforlossesresultingfromanydisruptioninservice.Anyoftheabovedisruptionscouldseriouslyharmourresultsofoperations.
Our business is subject to cyberattacks and security and privacy breaches.
Ourbusinessinvolvesthecollection,storage,processingandtransmissionofcustomers’personaldata,includingfinancialinformation.Inaddition,asignificantnumberofourcustomersauthorizeustobilltheirpaymentcardorbankaccountsdirectlyforalltransactionandotherfeeschargedbyus.Wehavebuiltourreputationonthepremisethatourplatformofferscustomersasecurewaytomakepayments.Anincreasingnumberoforganizations,includinglargemerchantsandbusinesses,otherlargetechnologycompanies,financialinstitutionsandgovernmentinstitutions,havedisclosedbreachesoftheirinformationsecuritysystems,someofwhichhaveinvolvedsophisticatedandhighlytargetedattacks,includingonportionsoftheirwebsitesorinfrastructure.
Thetechniquesusedtoobtainunauthorized,improperorillegalaccesstooursystems,ourdataorourcustomers’data,todisableordegradeservice,ortosabotagesystemsareconstantlyevolving,maybedifficulttodetectquicklyandoftenarenotrecognizeduntillaunchedagainstatarget.Unauthorizedpartiesmayattempttogainaccesstooursystemsorfacilitiesthroughvariousmeans,including,amongothers,hackingintooursystemsorthoseofourcustomers,partnersorvendors,orattemptingtofraudulentlyinduceouremployees,customers,partners,vendorsorotherusersofoursystemsintodisclosingusernames,passwords,paymentcardinformationorothersensitiveinformation,whichmayinturnbeusedtoaccessourinformationtechnologysystems.Certaineffortsmaybesupportedbysignificantfinancialandtechnologicalresources,makingthemevenmoresophisticatedanddifficulttodetect.Althoughwehavedevelopedsystemsandprocessesthataredesignedtoprotectourdataandcustomerdataandtopreventdatalossandothersecuritybreaches,andexpecttocontinuetoexpendsignificantadditionalresourcestobolstertheseprotections,thesesecuritymeasurescannotprovideabsolutesecurity.Ourinformationtechnologyandinfrastructuremaybevulnerabletocyberattacksorsecuritybreaches,andthirdpartiesmaybeabletoaccessourcustomers’personalorproprietaryinformationandcarddatathatarestoredonoraccessiblethroughthosesystems.Oursecuritymeasuresmayalsobebreachedduetohumanerror,malfeasance,systemerrorsorvulnerabilities,orotherirregularities.Anyactualorperceivedbreachofoursecuritycouldinterruptouroperations,resultinoursystemsorservicesbeingunavailable,resultinimproperdisclosureofdata,materiallyharmourreputationandbrand,resultinsignificantlegalandfinancialexposure,leadtolossofcustomerconfidencein,ordecreaseduseof,ourproductsandservices,andadverselyaffectourbusinessandresultsofoperations.Inaddition,anybreachesofnetworkordatasecurityatourcustomers,partnersorvendors(includingdatacenterandcloudcomputingproviders)couldhavesimilarnegativeeffects.Actualorperceivedvulnerabilitiesordatabreachesmayleadtoclaimsagainstus.
Inaddition,undercardrulesandourcontractswithourcardprocessors,ifthereisabreachofcardinformationthatwestore,wecouldbeliabletothepaymentcardissuersfortheircostofissuingnewcardsandrelatedexpenses.Wealsoexpecttospendsignificantadditionalresourcestoprotectagainstsecurityorprivacybreaches,andmayberequiredtoaddressproblemscausedbybreaches.Additionally,whilewemaintaininsurancepolicies,wedonotmaintaininsurancepoliciesspecificallyforcyber-attacksandourcurrentinsurancepoliciesmaynotbeadequatetoreimburseusforlossescausedbysecuritybreaches,andwemaynotbeabletocollectfully,ifatall,undertheseinsurancepolicies.
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Currently,severalrules,suchastheFederalConstitution,theConsumerProtectionCodeandtheInternetCivilRegistryregulatepersonaldataprocessinginBrazil.Effortstoprotectpersonaldatacreatedand/ormadeavailableinoursystemsmaynotguaranteethattheseprotectionsarefullyadequateandthattheyfullycomplywiththerulesestablishedbythecurrentlegislation.Failuretocomplywithcertainprovisionsofapplicablelaw,especiallyasregards(i)providingclearinformationonthedataprocessingoperationsweperform,(ii)respectforthepurposeoftheoriginaldatacollection;(iii)legaldeadlinesforthestorageandexclusionofuserdata,and(iv)theadoptionoflegallyrequiredsecuritystandardsforthepreservationandinviolabilityoftheprocessedpersonaldata,cangiverisetopenalties,suchasfinesandeventemporaryorpermanentsuspensionofourpersonaldataprocessingactivities.
DataprotectionandprivacylawsinBrazilarechangingtotakeintoaccountculturalandlocalconsumerattitudestowardspersonaldataprotection.Therecanbenoguaranteethatwewillhavesufficientfinancialresourcestocomplywithanynewregulationsorsuccessfullycompeteinthecontextofashiftingregulatoryenvironment.
In2017,LawNo.13,709/2018,theGeneralDataProtectionAct(Lei Geral de Proteção de Dados ),orGDPA,wassigned,whichwillcomeintoforceinAugust2020andwillchangepersonaldataprotectioninBrazil.TheGDPAestablishesanewlegalframeworkcoveringpersonaldataprocessing,includingclient,supplierandemployeedata.TheGDPAestablishes,amongothers,personaldataowners’rights,thelegalbasisforpersonaldataprotection,requirementsforobtainingconsentfromdataowners,obligationsandrequirementsrelatedtosecurityincidents,dataleaksanddatatransfers,aswellasthecreationoftheNationalDataProtectionAuthority.WehavebeguninitialpreparationstocomplywiththeGDPAaheadofitsAugust2020effectivedate,howeverwemayhavedifficultyadaptingoursystemsandprocessestothenewlegislationduetothelegislation’scomplexity.Intheeventofnon-compliancewiththeGDPA,wemaybesubjecttopenaltiesincludinginformationdisclosuretoauthorities,eliminationofpersonaldataandafine,perinfraction,ofupto2%(subjecttoanupperlimitofR$50,000,000)ofourbillingsinBrazilduringthelastfiscalyear,excludingtaxes.
TheGDPAandotherlawsandregulationsthatmaybepassedinthefuturemaybeinterpretedandapplieddifferentlyovertimeandfromjurisdictiontojurisdiction.Itispossibletheywillbeinterpretedandappliedinwaysthatwillmateriallyandadverselyaffectourbusiness.Anyfailuretocomplywith(i)ourprivacypolicies,(ii)anyregulatoryrequirementsororders,(iii)orotherlocal,state,federal,orinternationalprivacyorconsumerprotection-relatedlawsandregulationscouldmateriallyandadverselyaffectourbusiness.
Our services must integrate with a variety of operating systems and networks, and the hardware that enables merchants to accept payment cards must interoperate withmobile networks offered by telecom operators and third-party mobile devices utilizing those operating systems. If we are unable to ensure that our services or hardwareinteroperate with such networks, operating systems and devices, our business may be seriously harmed.
Wearedependentontheabilityofourproductsandservicestointegratewithavarietyofoperatingsystemsandnetworks,aswellaswebbrowsersthatwedonotcontrol.Anychangesinthesesystemsornetworksthatdegradethefunctionalityofourproductsandservices,imposeadditionalcostsorrequirementsonus,orgivepreferentialtreatmenttocompetitiveservices,includingtheirownservices,couldseriouslyharmthelevelsofusageofourproductsandservices.Wealsorelyonbankplatformstoprocesssomeofourtransactions.Ifthereareanyissueswithorserviceinterruptionsinthesebankplatforms,usersmaybeunabletohavetheirtransactionscompleted,whichwouldseriouslyharmourbusiness.
Inaddition,ourhardwareinteroperateswithmobilenetworksofferedbytelecomoperatorsandmobiledevicesdevelopedbythirdparties.Changesinthesenetworksorinthedesignofthesemobiledevicesmaylimittheinteroperabilityofourhardwarewithsuchnetworksanddevicesandrequiremodificationstoourhardware.Ifweareunabletoensurethatourhardwarecontinuestointeroperateeffectivelywithsuchnetworksanddevices,orifdoingsoiscostly,ourbusinessmaybeseriouslyharmed.
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Our business depends on a strong and trusted brand, and any failure to maintain, protect and enhance our brand would harm our business.
Wehavedevelopedastrongandtrustedbrand,highlylinkedtothereputationandpublicimageofUOL,ourcontrollingshareholder,whichhascontributedsignificantlytothesuccessofourbusiness.Ourbrandispredicatedontheideathatsellersandbuyerswilltrustusandfindvalueinbuildingandgrowingtheirbusinesseswithourproductsandservices.Maintaining,protectingandenhancingourbrandarecriticaltoexpandingourbaseofsellers,buyersandotherthird-partypartners,aswellasincreasingengagementwithourproductsandservices.Thiswilldependlargelyonourabilitytomaintaintrust,beatechnologyleader,andcontinuetoprovidehigh-qualityandsecureproductsandservices.Anynegativepublicityaboutourindustry,ourcompanyorUOL,ourcontrollingshareholder,thequalityandreliabilityofourproductsandservices,ourriskmanagementprocesses,changestoourproductsandservices,ourabilitytoeffectivelymanageandresolvesellerandbuyercomplaints,ourprivacyandsecuritypractices,litigation,regulatoryactivity,theexperienceofsellersandbuyerswithourproductsorservices,andchangesinthepublicopinionofUOL,couldharmourreputationandtheconfidenceinanduseofourproductsandservices.Harmtoourbrandcanarisefrommanysources,includingfailurebyusorourpartnerstosatisfyexpectationsofserviceandquality;inadequateprotectionofsensitiveinformation;compliancefailuresandclaims;litigationandotherclaims;employeemisconduct;andmisconductbyourpartners,serviceprovidersorothercounterparties.Ifwedonotsuccessfullymaintainastrongandtrustedbrand,ourbusinesscouldbeseriouslyharmed.
Our business is subject to extensive government regulation and oversight and our status under these regulations may change. Violation of or compliance with present orfuture regulation could be costly, expose us to substantial liability and force us to change our business practices, any of which could seriously harm our business andresults of operations.
InDecember2014,PagSeguroBrazilappliedforauthorizationsfromtheCentralBankrelatingtothreeofourdigitalpaymentsactivities,andthoseauthorizationswereformallyapprovedonOctober17,2018.TheactivitiesinvolvedarethePagSegurodigitalaccount,ourissuanceofPagSeguroprepaidcards,andouractivitiesasanacquirer.WeappliedfortheseauthorizationsbecausethosebusinessesbegantoberegulatedbyBrazilianFederalLawNo.12,865/2013.PagSeguroBrazilalsoappliedinFebruary2019totheCentralBankforauthorizationtoconductactivitiesasapayment institution inordertoactasanissuerofpost-paid cards withinthird-partypaymentschemes.ThisauthorizationwasformallyapprovedonMarch16,2019.
Inaddition,theearlypaymentofreceivablesfeaturethatweoffermerchantsmakesupasignificantportionofouractivities.LawNo.12,865/2013prohibitspaymentinstitutionssuchasPagSeguroBrazilfromperformingactivitiesthatarerestrictedtofinancialinstitutions.ThereissomedebateunderBrazilianlawastowhetherprovidingearlypaymentofreceivablestomerchantscouldbecharacterizedas“lending,”whichisanactivitythatisrestrictedtofinancialinstitutions.Similarly,thereissomedebateastowhetherthediscountratesapplicabletothisearlypaymentfeatureshouldbeconsideredas“interest,”inwhichcasethelimitssetbytheBrazilianUsuryLawwouldapplytotheserates.Ifnewlawsareenactedorthecourts’interpretationofthisactivitychanges,eitherpreventingusfromprovidingthisfeatureorlimitingthefeesweusuallycharge,ourfinancialperformancecouldbenegativelyaffected.Forfurtherinformationregardingtheseregulatorymatters,see“Item4.InformationontheCompany—Regulation—RegulationofthedigitalpaymentsindustryinBrazil.”
Furthermore,ifwearefoundtobeinviolationofanycurrentorfutureregulations,wecouldbe(i)requiredtopaysubstantialfines(includingpertransactionfines)anddisgorgementofourprofits,(ii)requiredtochangeourbusinesspracticesor(iii)subjectedtoinsolvencyproceduressuchasaninterventionbytheCentralBankandtheout-of-courtliquidationofPagSeguroBrazil.Wecouldalsobesubjecttoprivatelawsuits.Anyoftheseconsequencescouldseriouslyharmourbusinessandresultsofoperations.
We are subject to costs and risks associated with increased or changing laws and regulations affecting our business, including those relating to the sale of consumerproducts. Specifically, developments in data protection and privacy laws could harm our business, financial condition or results or operations.
Weoperateinacomplexregulatoryandlegalenvironmentthatexposesustocomplianceandlitigationrisksandthatcouldmateriallyaffectourresultsofoperations.Theselawsmaychange,sometimessignificantly,asaresultofpolitical,economicorsocialevents.Someofthefederal,stateorlocallawsandregulationsthataffectusinclude:thoserelatingtoconsumerproducts,productliabilityorconsumerprotection;thoserelatingtothemannerinwhichweadvertise,marketorsellproducts;laborandemploymentlaws,includingwageandhourlaws;taxlawsorinterpretationsthereof;dataprotectionandprivacylawsandregulations;andsecuritiesandexchangelawsandregulations.Forinstance,dataprotectionandprivacylawsaredevelopingtotakeintoaccountthechangesinculturalandconsumerattitudestowardstheprotectionofpersonaldata.Therecanbenoguaranteethatwewillhavesufficientfinancialresourcestocomplywithanynewregulationsorsuccessfullycompeteinthecontextofashiftingregulatoryenvironment.Anyadditionalprivacylawsorregulationscouldseriouslyharmourbusiness,financialconditionorresultsofoperations.
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Changes in tax laws, tax incentives, benefits or differing interpretations of tax laws may harm our results of operations.
Changesintaxlaws,regulations,relatedinterpretationsandtaxaccountingstandardsinBrazil,theCaymanIslandsortheUnitedStatesmayresultinahighertaxrateonourearnings,whichmaysignificantlyreduceourprofitsandcashflowsfromoperations.Forexample,in2015theBraziliangovernmentincreasedtherateofPIS/COFINStax(whichisasocialcontributionongrossrevenues)from0%to4.65%onfinancialincomerealizedbyBraziliancompaniesthataretaxedunderthenon-cumulativeregime(whichisthetaxregimethatappliestous).Inaddition,ourresultsofoperationsandfinancialconditionmaydeclineifcertaintaxincentivesarenotretainedorrenewed.Forexample,BrazilianLawNo.11,196currentlygrantstaxbenefitstocompaniesthatinvestinresearchanddevelopment,whichsignificantlyreducesourannualincometaxexpense.Ifthetaxesapplicabletoourbusinessincreaseoranytaxbenefitsarerevokedandwecannotalterourcoststructuretopassourtaxincreasesontocustomers,ourfinancialcondition,resultsofoperationsandcashflowscouldbeseriouslyharmed.OurpaymentprocessingactivitiesarealsosubjecttoaMunicipalTaxonServices(Imposto Sobre Serviços ,orISS).AnyincreasesinISSrateswouldalsoharmourprofitability.
Inaddition,Braziliangovernmentauthoritiesatthefederal,stateandlocallevelsareconsideringchangesintaxlawsinordertocoverbudgetaryshortfallsresultingfromtherecenteconomicdownturninBrazil.Iftheseproposalsareenactedtheymayharmourprofitabilitybyincreasingourtaxburden,increasingourtaxcompliancecosts,orotherwiseaffectingourfinancialcondition,resultsofoperationsandcashflows.TaxrulesinBrazil,particularlyatthelocallevel,changeregularly,anditiscommonfortaxpayerstochallengesuchchanges,whichmayresultinadditionaltaxassessmentsandpenaltiesforourcompany.
Inthissense,weareinvolvedintaxproceedingsbasedondifferencesofinterpretationbetweenusandtheBraziliantaxauthoritiesregardingtaxlawsandregulations.Forfurtherinformation,see“Item8.FinancialInformation—TaxandSocialSecurityProceedings.”
Our financial success is sensitive to the method consumers choose to make payments, since these methods differ in profitability. Our profitability could be harmed if theproportion of our business funded using less profitable methods goes up.
Wepaytransactionfeestocardschemes,banksandotherintermediariesthatvaryaccordingtothemethodchosenbyconsumerstofundpaymenttransactions.Thesetransactionfeesarehigherwhenconsumersfundpaymentsusingcreditcards,andlowerwhenconsumersfundpaymentswithdebitcards.Transactionfeesarenominalwhencustomersfundpaymenttransactionsbydigitaltransferoffundsfrombankaccounts,andwepaynofeeswhencustomersfundpaymenttransactionsfromanexistingPagSeguroaccountbalance.Ourfinancialsuccessisthereforesensitivetochangesintheproportionofourbusinessfundedbyconsumersusingcreditanddebitcards,whichwouldincreaseourcostsifwewereunabletoadjusttherateswechargeourcustomersaccordingly.Consumersmayresistfundingpaymentsbydigitaltransferfrombankaccountsbecauseoftheincentivesofferedbycreditcards,forexample,orgeneralconcernsaboutprovidingbankaccountinformationtoathirdparty.
Failure to deal effectively with fraud, fictitious transactions, bad transactions or negative customer experiences would increase our loss rate and harm our business, andcould severely diminish merchant and consumer confidence in and use of our services.
Weincurlossesandexpensesduetoclaimsfromconsumersthatmerchantshavenotperformedorthattheirgoodsorservicesdonotmatchthemerchant’sdescription.Weseektorecovertheselossesandexpensesfromthemerchant,butmaynotbeabletorecovertheminfullwhenthemerchantisunwillingorunabletopay.Wealsoincurlossesandexpensesfromclaimsthattheconsumerdidnotauthorizethepurchase,fromconsumerfraudandfromerroneoustransmissions.Inaddition,ifthelossesweincurrelatedtocardtransactionsbecomeexcessive,theycouldpotentiallyresultinalossofourrighttoacceptcardsforpayment.Intheeventthatwewereunabletoacceptcards,thenumberoftransactionsprocessedthroughourplatformwoulddecreasesubstantiallyandourbusinesswouldbeharmed.Wearealsosubjecttotheriskoffraudulentactivitybymerchants,consumersofproductspurchasedthroughourplatform,orthirdpartieshandlingouruserinformation.Wetakemeasurestodetectandreducetheriskoffraud,butthesemeasuresneedtobecontinuallyimprovedandmaynotbeeffectiveagainstnewandcontinuallyevolvingformsoffraudorinconnectionwithnewproductofferings.Ifthesemeasuresdonotsucceed,ourbusinesscouldbeharmed.
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We rely on third parties in many aspects of our business, which creates additional risk.
Werelyonthirdpartiesinmanyaspectsofourbusiness,including,amongothers:
• networks,banks,paymentprocessors,andpaymentgatewaysthatlinkustothepaymentcardandbankclearingnetworkstoprocesstransactions;
• thirdpartiesthatprovidecertainoutsourcedcustomersupportandproductdevelopmentfunctions,whicharecriticaltoouroperations;and
• thirdpartiesthatprovidefacilities,infrastructure,componentsandservices,includingdatacenterfacilitiesandcloudcomputing.
Thethirdpartiesthatwerelyontoprocesstransactionsmayfailorrefusetoprocesstransactionsadequately.Anyofthethirdpartiesweusemaybreachtheiragreementswithus,refusetorenewtheseagreementsoncommerciallyreasonableterms,takeactionsthatdegradethefunctionalityofourservices,imposeadditionalcostsorrequirementsonus,orgivepreferentialtreatmenttocompetingservices.Financialorregulatoryissues,laborissues,orotherproblemsthatpreventthesethirdpartiesfromprovidingservicestousorourcustomerscouldharmourbusiness.Ifourserviceprovidersdonotperformsatisfactorily,ouroperationscouldbedisrupted,whichcouldresultincustomerdissatisfaction,damageourreputation,andharmourbusiness.
Inparticular,werelyonUOL,ourlargestshareholder,anditssubsidiariesforanumberofbusinessservices,particularly:datastorageservices;telecommunicationsservices;internetsecurityservices;softwaredevelopment,maintenanceandmanagement;andcallcenter,marketing,corporate,litigationandback-officeservices.UOLanditssubsidiariesalsoprovideuswithadvertisingandmediaspaceandresellcloudservicestous.Forfurtherdetailsoftheseservices,see“Item7.MajorShareholdersandRelatedPartyTransactions—RelatedPartyTransactions.”
Our failure to manage the assets underlying our customer funds properly could harm our business.
Ourabilitytomanageandaccountaccuratelyfortheassetsunderlyingourcustomerfundsrequiresahighlevelofinternalcontrols.Asourbusinesscontinuestogrowandweexpandourproductofferings,wemustcontinuetostrengthenourinternalcontrolsaccordingly.Oursuccessrequiressignificantpublicconfidenceinourabilitytohandlelargeandgrowingtransactionvolumesandamountsofcustomerfunds.Anyfailuretomaintainthenecessarycontrolsortomanagetheassetsunderlyingourcustomerfundsaccuratelycouldseverelydiminishcustomeruseofourproductsand/orresultinpenaltiesandfines,whichcouldharmourbusiness.
The e-commerce market in Brazil is developing, and the expansion of our business depends on the continued growth of e-commerce, as well as increased availability,quality and usage of the Internet in Brazil.
Ourfuturerevenuesfromdigitalpaymentsdependsubstantiallyonconsumers’widespreadacceptanceanduseoftheInternetasawaytoconductcommerce.RapidgrowthintheuseoftheInternet(particularlyasawaytoprovideandpurchaseproductsandservices)isarelativelyrecentphenomenoninBrazilandwecannotassureyouthatthisacceptanceandusagewillcontinueorincrease.Furthermore,ifthepenetrationofInternetaccessinBrazildoesnotincreasequickly,itmaylimitourpotentialgrowth,particularlyinregionswithlowlevelsofInternetqualityandaccessand/orlowlevelsofincome.
InternetpenetrationinBrazilmayneverreachthelevelsseeninmoredevelopedcountriesforreasonsthatarebeyondourcontrol,includingthelackofnecessarynetworkinfrastructureordelayeddevelopmentofenablingtechnologies,performanceimprovementsandsecuritymeasures.TheinfrastructurefortheInternetinBrazilmaynotbeabletosupportcontinuedgrowthinthenumberofusers,theirfrequencyofuseortheirbandwidthrequirements.DelaysintelecommunicationandinfrastructuredevelopmentorothertechnologyshortfallsmayimpedeimprovementsinInternetreliabilityinBrazil.IftelecommunicationsservicesarenotsufficientlyavailabletosupportthegrowthoftheInternetinBrazil,responsetimescouldbeslower,whichwouldreduceInternetusageandharmourservices.Inaddition,evenifInternetpenetrationinBrazilincreases,thismaynotleadtogrowthine-commerceduetoanumberoffactors,includinglackofconfidencebyusersinonlinesecurity.
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Furthermore,thepriceofInternetaccessandInternet-connecteddevices,suchaspersonalcomputers,tablets,mobilephonesandotherportabledevices,maylimitourgrowth,particularlyinpartsofBrazilwithlowlevelsofincome.IncomelevelsinBrazilaresignificantlylowerthanintheUnitedStatesandothermoredevelopedcountries,whilepricesofbothportabledevicesandInternetaccessinBrazilarehigherthaninthosecountries.IncomelevelsinBrazilmaydeclineanddeviceandaccesspricesmayincreaseinthefuture.
Anyofthesefactorscouldlimitourabilitytogeneraterevenuesinfuture.
Our quarterly results of operations and operating metrics may fluctuate and are unpredictable and subject to seasonality, which could result in the price of our Class Acommon shares being unpredictable or declining.
Ourquarterlyresultsofoperationsmayvarysignificantlyandarenotnecessarilyanindicationoffutureperformance.Thesefluctuationsmaybeduetoavarietyoffactors,someofwhichareoutsideofourcontrolandmaynotfullyreflecttheunderlyingperformanceofourbusiness.Inaddition,weoperateinasomewhatseasonalindustry,whichtendstoexperiencerelativelyfewertransactionsinthefirstquartersoftheyear,increasedactivityastheyear-endholidayshoppingseasoninitiates,andfewertransactionsaftertheyear-endholidays.Inaddition,businessesoperatinginBrazil,suchasours,tendtoexperiencerelativelyfewertransactionsduringcertaininternationalsportingevents,suchasthesoccerWorldCup.
Factorsthatmaycausefluctuationsinourquarterlyresultsofoperationsincludeourabilitytoattractandretaincustomers;thetiming,effectivenessandcostsofexpansionandupgradesofoursystemsandinfrastructure,aswellasthesuccessofthoseexpansionsandupgrades;theoutcomesoflegalproceedingsandclaims;ourabilitytomaintainorincreaserevenue,grossmarginsandoperatingmargins;ourabilitytocontinueintroducingnewservicesandtocontinueconvincingcustomerstoadoptadditionalofferings;increasesinandtimingofexpensesthatwemayincurtogrowandexpandouroperationsandtoremaincompetitive;period-to-periodvolatilityrelatedtofraudandrisklosses;systemfailuresresultingintheinaccessibilityofourproductsandservices;changesintheregulatoryenvironment,includingwithrespecttosecurity,privacyorenforcementoflawsandregulationsbyregulators,includingfines,orders,orconsentdecrees;changesinglobalbusinessormacroeconomicenforcementoflawsandregulationsbyregulators,includingfines,orders,orconsentdecrees;changesinglobalbusinessconditions;generalretailbuyingpatterns;andtheotherrisksdescribedinthisannualreport.FuturefluctuationsinquarterlyresultsmaymeanthatourbusinessislesspredictableandmayharmthetradingpriceofourClassAcommonshares.
Our business could be harmed if we are unable to forecast demand for our products accurately or to manage our product inventory adequately.
WiththegoalofincreasingourtransactionbusinessandPOSdevicesales,weinvestbroadlyinourPOSunittechnology.Ourproducts,suchastheModerninhaandtheMinizinha,oftenrequireinvestmentswithlongleadtimes.Aninabilitytoforecastthesuccessofaparticularproductcorrectlycouldharmourbusiness.Wemustforecastinventoryneedsandexpensesandplaceorderssufficientlyinadvancewithourthird-partysuppliersandcontractmanufacturersbasedonourestimatesoffuturedemandforparticularproducts.Ourabilitytoforecastdemandforourproductsaccuratelycouldbeaffectedbymanyfactors,includinganincreaseordecreaseindemandforourproductsorforourcompetitors’products,unanticipatedchangesingeneralmarketconditions,andthechangeineconomicconditions.
Ifweunderestimatedemandforaparticularproduct,ourcontractmanufacturersandsuppliersmaynotbeabletodeliversufficientquantitiesofthatproducttomeetourrequirements,andwemayexperienceashortageofthatproductavailableforsaleordistribution.Theshortageofapopularproductcouldseriouslyharmourbrand,oursellerrelationships,theacquisitionofadditionalsellersandourtotaltransactionbusiness.Ifweoverestimatedemandforaparticularproduct,wemayhaveexcessinventoryforthatproductandtheexcessinventorymaybecomeobsoleteoroutofdate.Inventorylevelsinexcessofdemandmayleadustowritedownorwriteofftheinventoryorsellexcessinventoryatfurtherdiscountedprices,whichcouldharmourprofitandourbusiness.
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Some of the key components of our POS devices are sourced from a limited number of suppliers. We are therefore at risk of shortage, price increases, changes, delay ordiscontinuation of key components, which could disrupt and harm our business.
SomeofthekeycomponentsusedtomanufactureourPOSdevices,suchasthechipandpinreader,comefromlimitedsourcesofsupply.Inaddition,wecurrentlyrelyononemanufacturertomanufacture,testandassembleasignificantamountofourPOSdevices.TheagreementsforthecomponentsusedtomanufactureourPOSdevicesareenteredintodirectlybythemanufacturerofourPOSdevicesandwedonothaveagreementswiththesesuppliers.
DuetorelianceofourPOSmanufacturersonthesecomponents,wearesubjecttotheriskofshortagesandlongleadtimesinthesupplyofcertainproducts.Ifourmanufacturerscannotfindalternativesourcesofsupply,wecouldbesubjecttocomponentsshortagesordelaysorotherproblemsinproductassembly.Inaddition,varioussourcesofsupply-chainrisk,includingstrikesorshutdowns,orlossofordamagetoourproductswhiletheyareintransitorstorage,couldlimitthesupplyofourPOSdevices.Anyinterruptionordelayincomponentsupply,anyincreasesincomponentcosts,theinabilityofourmanufacturerstoobtainthesepartsorcomponentsfromalternatesourcesatacceptablepricesandwithinareasonableamountoftime,and/ordifficultiesinfulfillingobligationsinconnectionwiththewarrantiesweprovideforourPOSdevices,wouldharmourabilitytoprovideourPOSdevicesorotherservicestoourmerchantsonatimelybasis.Thiscouldhurtourrelationshipswithourcustomers,preventusfromacquiringnewcustomers,andseriouslyharmourbusiness.
We are subject to anticorruption, anti-bribery and anti-money laundering laws and regulations.
Wearesubjecttovariousanticorruption,anti-briberyandanti-moneylaunderinglawsandregulationsthatprohibit,amongotherthings,ourinvolvementinimproperpaymentstocertainpublicofficialsforthepurposeofobtainingadvantagesorintransferringtheproceedsofcriminalactivities.Wehaveprogramsdesignedtocomplywithnewandexistinglegalandregulatoryrequirements.However,anyerrors,failures,ordelaysincomplyingwithanticorruption,anti-briberyandanti-moneylaunderinglawsandregulationscouldresultinsignificantcriminalandcivillawsuits,penalties,forfeitureofsignificantassets,orotherenforcementactions,aswellasreputationalharm.
Regulatorsmayincreaseenforcementoftheseobligations,whichmayrequireustofurtherreviseorexpandourcomplianceprogram,includingtheproceduresweusetoverifytheidentityofourcustomersandtomonitorourtransactions.Regulatorsregularlyre-examinethetransactionvolumethresholdsatwhichwemustobtainandkeepapplicablerecordsorverifyidentitiesofcustomersandanychangeinsuchthresholdscouldresultingreatercostsforcompliance.Costsassociatedwithfinesorenforcementactions,changesincompliancerequirements,orlimitationsonourabilitytogrowcouldharmourbusinessandanynewrequirementsorchangestoexistingrequirementscouldimposesignificantcosts,resultindelaystoplannedproductimprovements,makeitmoredifficultfornewcustomerstojoinournetworkandreducetheattractivenessofourproductsandservices.
The loss of any member of our management team and our inability to make up for such loss with a qualified replacement, could harm our business.
Ourbusinessdependsupontheeffortsandskillofourseniormanagement,whohasplayedanimportantroleinshapingourcompanyculture.Ourfuturesuccessdependstoasignificantextentonthecontinuedserviceofourseniormanagementteam,whoarecriticaltothedevelopmentandtheexecutionofourbusinessstrategies.Anymemberofourseniormanagementteammayleaveustosetuporworkinbusinessesthatcompetewithours.Thereisnoguaranteethatthecompensationarrangementsandnoncompetitionagreementswehaveenteredintowithourseniormanagementteamaresufficientlybroadoreffectivetopreventthemfromresigninginordertosetuporjoinacompetitor,orthatthenoncompetitionagreementswouldbeupheldinacourtoflaw.Intheeventthatanumberofourseniormanagementmembersleaveourcompany,wemayhavedifficultyfindingsuitablereplacements,whichcouldseriouslyharmus.
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Ourfuturesuccessalsodependsonourabilitytoidentify,attract,hire,train,retain,motivateandmanageotherhighlyskilledtechnical,managerial,informationtechnology,marketing,product,riskmanagementandcustomerservicepersonnel.Competitionforthesepersonnelisintense,andwemaynotbeabletosuccessfullyattract,hire,train,retain,motivateandmanagesufficientlyqualifiedpersonnel.
We partially rely on card issuers or card schemes to process our transactions. Changes to credit card scheme fees, rules or practices may harm our business.
Wepartiallyrelyoncardissuersorcardschemestoprocessourtransactions,andmustpayafeeforthisservice.Fromtimetotime,cardschemessuchasMasterCardandVisamayincreasetheinterchangefeesthattheychargeforeachtransactionusingoneoftheircards.Creditcardprocessorshavetherighttopassanyincreasesininterchangefeesontousaswellasincreasetheirownfeesforprocessing.Inaddition,cardschemeshaveimposedandmayagainimposespecialassessmentsfortransactionsthatareexecutedthrougha“digitalwallet,”andthesefeescouldparticularlyaffectusandsignificantlyincreaseourcosts.Theseincreasedfeesincreaseouroperatingcostsandreduceourprofitmargins.
Wearealsorequiredbycreditcardschemestocomplywiththeiroperatingrules.Thecreditcardschemesandtheirmemberbankssetandinterprettheserules.Thebankaccountsofferedbythosememberbankscompetewithourdigitalaccountservices.Visa,MasterCard,AmericanExpressorothercreditcardcompaniescouldadoptnewoperatingrulesorreinterpretexistingrulesthatweorourprocessorsmightfinddifficultorevenimpossibletofollow.Asaresult,wecouldloseourabilitytoprovideourcustomerstheoptionofusingcreditcardstofundtheirpaymentsandouruserstheoptiontopaytheirfeesusingacreditcard.Ifwewereunabletoacceptcreditcards,ourbusinesswouldbeseriouslyharmed.
WecouldlosetherighttoacceptcreditcardsorcouldberequiredtopayfinesifcreditcardschemessuchasMasterCardorVisadeterminethatusersareusingourplatformtoengageinillegalor“highrisk”activities,orifusersgeneratealargevolumeofchargebacksrelatedtofraudulenttransactions.Additionally,wemaybeunabletoaccessfinancinginthecreditandcapitalmarketsatreasonableratestofundouroperationsandforthatreasonourprofitabilityandtotaltransactionbusinesscoulddeclinesignificantly.
We might not successfully implement strategies to increase adoption of our digital payment methods, which would limit our growth.
Ourfutureprofitabilitywilldepend,inpart,onourabilitytosuccessfullyimplementourstrategytoincreaseadoptionofourdigitalpaymentmethods.Wecannotassureyouthatthemarketfordigitalpaymentswillcontinuetogroworwillremainviable.Weexpecttoinvestsubstantialamountsto:
• driveconsumerandmerchantawarenessofdigitalpayments;
• encourageconsumersandmerchantstosignupforanduseourdigitalpaymentproducts;
• enhanceourinfrastructuretohandleseamlessprocessingoftransactions;
• continuetodevelopstateoftheart,easy-to-usetechnology;
• expandouroperations;
• increasethenumberofuserswhocollectandpaydigitally;and
• growanddiversifyourcustomerbase.
Despitetheseinvestments,wemayfailtoimplementtheseprogramssuccessfullyortoincreasesubstantiallythenumberofcustomerswhopayforourdigitalpaymentmethods.Thiswouldholdbackanygrowthinourrevenuesandharmourbusiness.
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If we fail to establish and maintain proper and effective internal controls over financial reporting, our results of operations and our ability to operate our business may beharmed.
WearesubjecttotheSarbanes-OxleyAct,whichrequires,amongotherthings,thatweestablishandmaintaineffectiveinternalcontrolsoverfinancialreportinganddisclosurecontrolsandprocedures.UndertheSEC’scurrentrules,since2018wehavebeenrequiredtoperformsystemandprocessevaluationandtestingofourinternalcontrolsoverfinancialreportingtoallowmanagementtoassesstheeffectivenessofourinternalcontrols.Ourtestingmayrevealdeficienciesinourinternalcontrolsthataredeemedtobematerialweaknessesorsignificantdeficienciesandrenderourinternalcontrolsoverfinancialreportingineffective.Ifwearenotabletocomplywiththeserequirementsinatimelymanner,orifweorourmanagementidentifiesmaterialweaknessesorsignificantdeficienciesinourinternalcontrolsoverfinancialreportingthataredeemedtobematerialweaknesses,themarketpriceofourClassAcommonsharesmaydeclineandwemaybesubjecttoinvestigationsorsanctionsbytheSEC,theFinancialIndustryRegulatoryAuthority,Inc.,orFINRA,orotherregulatoryauthorities.Inaddition,wemayberequiredtoexpendsignificantmanagementtimeandfinancialresourcestocorrectanymaterialweaknessesthatmaybeidentifiedortorespondtoanyregulatoryinvestigationsorproceedings.
Our operating results are affected by decreases in consumer discretionary spending. Changes in macroeconomic conditions may reduce the volume and prices oftransactions on our payments platforms and harm our growth strategies and business prospects.
Ouroperatingresultsareaffectedbytheconditionoftheeconomy.Ourbusinessandfinancialperformancemaybeharmedbycurrentandfutureeconomicconditionsthatcauseadeclineinbusinessandconsumerspending,includingareductionintheavailabilityofcredit,increasedunemploymentlevels,higherenergyandfuelcosts,risinginterestrates,financialmarketvolatilityandrecession.Additionally,wemayexperiencedifficultiesinoperatingandgrowingouroperationsasaresultofeconomicpressures.
Asabusinessthatdependsonconsumerdiscretionaryspending,wemaysufferharmifourmerchants’customersreducetheirpurchasesduetocontinuedjoblosses,foreclosures,bankruptcies,higherconsumerdebtandinterestrates,reducedaccesstocredit,lowerconsumerconfidence,uncertaintyorchangesintaxpoliciesandtaxrates.Decreasesincustomertrafficoraveragevaluepertransactionnegativelyaffectourfinancialperformance,andaprolongedperiodofdepressedconsumerspendingcouldseriouslyharmourbusiness.Promotionalactivitiesanddecreaseddemandforconsumerproducts,particularlyhigher-endproducts,couldaffectourprofitability.ThepotentialeffectsoftheongoingeconomiccrisisinBrazilaredifficulttoforecastandmitigate.Anyoftheforegoingcouldseriouslyharmourbusiness,resultsofoperationsandfinancialconditionandcouldcausethetradingpriceofourClassAcommonsharestodecline.
Increases in interest rates may harm our business.
Processingconsumertransactionsmadeusingcreditcards,aswellasprovidingearlypaymentofreceivablestomerchantswhenconsumersmakecreditcardpurchasesininstallments,bothmakeupasignificantportionofouractivities.IfBrazilianinterestratesincrease,consumersmaychoosetomakefewerpurchasesusingcreditcards;andfewermerchantsmaydecidetouseourearlypaymentofreceivablesfeatureifouroverallfinancingcostsrequireustoincreasethediscountratewechargeforthisfeature.Eitherofthesefactorscouldcauseourbusinessactivitylevelstodecrease.
Customer complaints or negative publicity about our customer service could reduce usage of our products and, as a result, our business could suffer.
Customercomplaintsornegativepublicityaboutourcustomerservicecouldseverelydiminishconsumerconfidenceinanduseofourproduct.Breachesofourcustomers’privacyandoursecuritymeasurescouldhavethesameeffect.Measureswesometimestaketocombatrisksoffraudandbreachesofprivacyandsecurity,suchasfreezingcustomerfunds,candamagerelationswithourcustomers.Thesemeasuresheightentheneedforpromptandaccuratecustomerservicetoresolveirregularities.Effectivecustomerservicerequiressignificantexpenses,which,ifnotmanagedproperly,couldimpactourprofitabilitysignificantly.Anyinabilitybyustomanageortrainourcustomerservicerepresentativesproperlycouldcompromiseourabilitytohandlecustomercomplaintseffectively.Ifwedonothandlecustomercomplaintseffectively,ourreputationmaysufferandwemayloseourcustomers’confidence.
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We are susceptible to illegal or improper uses of our platform, which could expose us to additional liability and harm our business.
We,likeourplatforms,aresusceptibletopotentiallyillegalorimproperuses.Thesemayincludeillegalonlinegambling,fraudulentsalesofgoodsorservices,illicitsalesofprescriptionmedicationsorcontrolledsubstances,softwareandotherintellectualpropertypiracy,moneylaundering,bankfraud,childpornographytrafficking,terroristfinancing,prohibitedsalesofalcoholicbeveragesandtobaccoproductsandonlinesecuritiesfraud.Theownersofintellectualpropertyrightsorgovernmentauthoritiesmayseektobringlegalactionagainstusifourplatformisusedforthesaleofinfringingitems.Theseclaimscouldresultinreputationalharmandanyresultingliabilities,lossoftransactionvolumeorincreasedcostscouldharmourbusiness.
Inaddition,ourservicescouldbesubjecttounauthorizedcreditcarduse,identitytheft,employeefraudorotherinternalsecuritybreaches.Wemayincursignificantcoststoprotectagainstthethreatofinformationsecuritybreachesortorespondtooralleviateproblemscausedbyanybreaches.Lawsmayrequireustonotifyregulators,customersoremployeesofsecuritybreachesandwemayberequiredtoreimbursecustomersorbanksforanyfundsstolenasaresultofanybreachesortoprovidecreditmonitoringoridentitytheftprotectionintheeventofaprivacybreach.Theserequirements,aswellasanyadditionalrestrictionsthatmaybeimposedbycreditcardcompanies,couldraiseourcostssignificantlyandreduceourattractiveness.
Inadditiontothedirectcostsofsuchlosses,iftheyarerelatedtocreditcardtransactionsandbecomeexcessivetheycouldresultinuslosingtherighttoacceptcreditcardsforpayment.Sincecreditcardsarethemostwidelyusedmethodforourcustomerstopayfortheproductswesell,ourbusinesswillbeharmedifweareunabletoacceptcreditcards.
Unauthorized disclosure of sensitive or confidential customer information or our failure or the perception by our customers that we failed to comply with privacy laws orproperly address privacy concerns could harm our business and standing with our customers.
Wecollect,store,process,andusecertainpersonalinformationandotheruserdatainourbusiness.Asignificantriskassociatedwithe-commerceandcommunicationsisthesecuretransmissionofconfidentialinformationoverpublicnetworks.Theperceptionofprivacyconcerns,whetherornotvalid,mayharmourbusinessandresultsofoperations.Wemustensurethatallprocessing,collection,use,storage,dissemination,transferanddisposalofdataforwhichweareresponsiblecomplywithrelevantdataprotectionandprivacylaws.Theprotectionofourcustomer,employeeandcompanydataiscriticaltous.Currently,anumberofourusersauthorizeustobilltheircreditcardaccountsdirectly.Werelyoncommerciallyavailablesystems,software,toolsandmonitoringtoprovidesecureprocessing,transmissionandstorageofconfidentialcustomerinformation,suchascreditcardandotherpersonalinformation.Despitethesecuritymeasureswehaveinplace,ourfacilitiesandsystems,andthoseofourthird-partyserviceproviders,maybevulnerabletosecuritybreaches,actsofvandalism,computerviruses,misplacedorlostdata,programmingorhumanerrors,orothersimilarevents.Anysecuritybreach,oranyperceivedfailureinvolvingthemisappropriation,lossorotherunauthorizeddisclosureofconfidentialinformation,aswellasanyfailureorperceivedfailuretocomplywithlaws,policies,legalobligationsorindustrystandardsregardingdataprivacyandprotection,whetherbyusorourvendors,coulddamageourreputation,exposeustolitigationriskandliability,subjectustonegativepublicity,disruptouroperationsandharmourbusiness.Oursecuritymeasuresmayfailtopreventsecuritybreaches,whichcouldharmourbusiness.
We have only a limited ability to protect our intellectual property rights, which are important to our success.
Webelievetheprotectionofourintellectualproperty,includingourtrademarks,patents,copyrights,domainnames,tradedress,andtradesecrets,iscriticaltooursuccess.Weseektoprotectourintellectualpropertyrightsbyrelyingonapplicablelawsandregulations,aswellasavarietyofadministrativeprocedures.Wealsorelyoncontractualrestrictionstoprotectourproprietaryrightswhenofferingorprocuringproductsandservices,includingconfidentialityagreementswithpartieswithwhomweconductbusiness.
However,contractualarrangementsandotherstepswehavetakentoprotectourintellectualpropertymaynotpreventthirdpartiesfrominfringingormisappropriatingourintellectualpropertyordeterindependentdevelopmentofequivalentorsuperiorintellectualpropertyrightsbyothers.Trademark,copyright,patent,domainname,tradedressandtradesecretprotectionisexpensivetomaintainandmayrequirelitigation.Protectingourintellectualpropertyrightsandotherproprietaryrightsisexpensiveandtime-consumingandmaynotbesuccessfulineveryjurisdiction.Also,wemaynotbeabletodiscoverordeterminetheextentofanyunauthorizeduseofourproprietaryrights.Wehavelicensedcertainofourproprietaryrights,suchastrademarksorcopyrightedmaterial,toothersinthepast,andexpecttodosointhefuture.Theselicenseesmaytakeactionsthatdiminishthevalueofourproprietaryrightsorharmourreputation.Anyfailuretoprotectorenforceourintellectualpropertyrightsadequately,orsignificantcostsincurredindoingso,couldmateriallyharmourbusiness.
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Asthenumberofproductsinthesoftwareindustryincreasesandthefunctionalitiesoftheseproductsfurtheroverlap,andasweacquiretechnologythroughacquisitionsorlicenses,wemaybecomeincreasinglysubjecttoinfringementclaims,includingpatent,copyright,andtrademarkinfringementclaims.Wemayberequiredtoenterintolitigationtodeterminethevalidityandscopeofthepatentsorotherintellectualpropertyrightsofothers.Theultimateoutcomeofanyallegationisuncertainand,regardlessoftheoutcome,anysuchclaim,withorwithoutmerit,maybetime-consuming,resultincostlylitigation,divertmanagement’stimeandattentionfromourbusiness,requireustostopselling,delayshipping,orredesignourproducts,orrequireustopaysubstantialamountstosatisfyjudgmentsorsettleclaimsorlawsuitsortopaysubstantialroyaltyorlicensingfees,ortosatisfyindemnificationobligationsthatwehavewithsomeofourcustomers.Ourfailuretoobtainnecessarylicenseorotherrights,orlitigationorclaimsarisingoutofintellectualpropertymatters,mayharmourbusiness.
If we continue to grow, we may not be able to appropriately manage the increased size of our business.
Wearecurrentlyexperiencingaperiodofsignificantexpansionandanticipatethatfurtherexpansionwillberequiredtoaddresspotentialgrowthinourcustomerbaseandmarketopportunities.
Wemustconstantlyaddnewhardware,updatesoftware,enhanceandimproveourbillingandtransactionsystems,andaddandtrainnewengineersandotherpersonneltoaccommodatetheincreaseduseofourplatformsandthenewproductsandfeaturesweregularlyintroduce.Thisupgradeprocessisexpensive,andtheincreasingcomplexityandenhancementofourwebsiteresultsinhighercosts.Failuretoupgradeourtechnology,features,transactionprocessingsystems,securityinfrastructure,ornetworkinfrastructuretoaccommodateincreasedtrafficortransactionvolumecouldharmourbusiness.Adverseconsequencescouldincludeunanticipatedsystemdisruptions,slowerresponsetimes,degradationinlevelsofcustomersupport,impairedqualityofusers’experiencesofourservicesanddelaysinreportingaccuratefinancialinformation.
Ourrevenuesdependonpromptandaccuratetransactionprocesses.Ourfailuretogrowourtransaction-processingcapabilitiestoaccommodatetheincreasingnumberoftransactionsthatmustbebilledonourwebsitewouldharmourbusinessandourabilitytocollectrevenue.Furthermore,wemayneedtoenterintorelationshipswithvariousstrategicpartners,websitesandotheronlineserviceprovidersandotherthirdpartiesnecessarytoourbusiness.Theincreasedcomplexityofmanagingmultiplecommercialrelationshipscouldleadtoexecutionproblemsthatcanaffectcurrentandfuturerevenues,andoperatingmargins.
Wecannotassureyouthatourcurrentandplannedsystems,proceduresandcontrols,personnelandthird-partyrelationshipswillbeadequatetosupportourfutureoperations.Inaddition,ourcurrentexpansionhasplacedasignificantstrainonmanagementandonouroperationalandfinancialresources,andthisstrainisexpectedtocontinue.Ourfailuretomanagegrowtheffectivelycouldseriouslyharmourbusiness,resultsofoperationsandfinancialcondition.
Failure to maintain sufficient working capital could limit our growth and harm our business, financial condition and results of operations.
Wehavesignificantworkingcapitalrequirements,primarilydrivenbypaymenttermsagreedwithourmerchantclientsandtheextendedpaymenttermsthattheyoffertheircustomers.Differencesbetweenthedatewhenwepayourmerchantclientsandthedatewhenwereceivepaymentsfromfinancialinstitutionsmayharmourliquidityandourcashflows.Weexpectourworkingcapitalneedstoincreaseasourtotaltransactionbusinessincreases.Inordertofinanceourworkingcapitalneeds,wehaverecentlybeenenteringintofinancingarrangementsthatdecreasetheamountoftimeittakesforustocollectouraccountsreceivable,andtoincreasetheamountoftimewehavetopayouraccountspayable.Webelievethesefinancingarrangementsallowustogainaccesstocapitalfasterandmorecheaplythanwewouldotherwisebeableto.Therecanbenoassurancethatthesetypesoffinancingarrangementswillcontinuetobeavailabletousonacceptableterms,oratall.Ifwedonothavesufficientworkingcapital,wemaynotbeabletopursueourgrowthstrategy,respondtocompetitivepressuresorfundkeystrategicinitiatives,suchasthedevelopmentofoursites,whichmayharmourbusiness,financialconditionandresultsofoperations.
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We may face restrictions and penalties under the Brazilian Consumer Protection Code in the future.
Brazilhasaseriesofstrictconsumerprotectionlaws,referredtotogetherastheConsumerProtectionCode(Código de Defesa do Consumidor ).TheselawsapplytoallcompaniesinBrazilthatsupplyproductsorservicestoBrazilianconsumers.Theyincludeprotectionagainstmisleadinganddeceptiveadvertising,protectionagainstcoerciveorunfairbusinesspracticesandprotectionintheformationandinterpretationofcontracts,usuallyintheformofcivilliabilitiesandadministrativepenaltiesforviolations.ThesepenaltiesareoftenleviedbytheBrazilianConsumerProtectionAgencies(Fundação de Proteção e Defesa do Consumidor ,orPROCONs),whichoverseeconsumerissuesonadistrict-by-districtbasis.CompaniesthatoperateacrossBrazilmayfacepenaltiesfrommultiplePROCONs,aswellasfromtheNationalSecretariatforConsumers(Secretaria Nacional do Consumidor ,orSENACON).CompaniesmaysettleclaimsmadebyconsumersviaPROCONsbypayingcompensationforviolationsdirectlytoconsumersandthroughamechanismthatallowsthemtoadjusttheirconduct,calledaconductadjustmentagreement(Termo de Ajustamento de Conduta ,orTAC).BrazilianPublicProsecutorsmayalsocommenceinvestigationsofallegedviolationsofconsumerrights,andtheTACmechanismisalsoavailableasasanctioninthoseproceedings.CompaniesthatviolateTACsfacepotentialautomaticfines.BrazilianPublicProsecutorsmayalsofilepubliccivilactionsagainstcompanieswhoviolateconsumerrights,seekingstrictobservationoftheconsumerprotectionlawsandcompensationforanydamagestoconsumers.
AtDecember31,2018,wehadapproximately3,500activejudicialproceedingsandproceedingswithPROCONsandsmallclaimscourtsrelatingtoconsumerrights.Mostoftheseproceedingsarerelatedtoconsumerallegationsofnon-deliveryofproductsbymerchantsandrequestsforwithdrawalofdigitalaccountbalancesthatwereblockedbyPagSegurobecausetheywereunderinvestigationforfraudorundergoingclaimresolution.Totheextentconsumersfilesuchclaimsagainstusinthefuture,wemayberequiredtopayfinesfornoncompliancethatcouldharmourresultsofoperations.
We are subject to regulatory activity and antitrust litigation under competition laws.
Wereceivescrutinyfromvariousgovernmentalagenciesundercompetitionlaws.Othercompaniesorgovernmentalagenciesmayallegethatouractionsviolateantitrustorcompetitionlaws,orotherwiseconstituteunfaircompetition.Contractualagreementswithbuyers,sellers,orothercompaniescouldgiverisetoregulatoryactionorantitrustinvestigationsorlitigation.Also,ourunilateralbusinesspracticescouldgiverisetoregulatoryactionorantitrustinvestigationsorlitigation.Anysuchclaimsandinvestigations,eveniftheyareunfounded,areusuallyveryexpensivetodefend,involvenegativepublicityandsubstantialdiversionofmanagementtimeandeffort,andcouldresultinsignificantjudgmentsagainstus.
Unfavorable outcomes in litigation or our inability to post judicial collateral or provide guarantees in pending legal or administrative proceedings could have a materialadverse effect on our business, financial condition and results of operations.
Wearedefendantsinasignificantnumberofjudicialproceedings,includingindemnity,laborandtaxproceedings.AtDecember31,2018,wehadrecordedR$7.2millioninprovisionsforcurrentcivilandlaborproceedingsandnoprovisionsfornon-currentproceedings.Wehavenotrecordedanyprovisionswithrespecttoourproceedingsinwhichourchanceoflosshasbeendeemedpossible.Wecannotguaranteethatsuchproceedingswillhavefavorableoutcomesforusorthattheprovisionsmadewillbesufficienttopayanyamountsdue.Anyproceedingsthatrequireustomakesubstantialpayments,affectourreputationorotherwiseinterferewithourbusinessoperationscouldhaveamaterialadverseeffectonourbusiness,financialconditionandoperatingresults.
Additionally,wemaynothavesufficientfundstopostcollateralorprovideguaranteesinjudicialoradministrativeproceedingsthatclaimsubstantialamounts.Evenifwedonotpostsuchcollateralorprovideguarantees,wewillbeliableforpayinganyamountsduepursuanttoanyunfavorableoutcomesinlegalproceedings.Wecannotassureyouthat,ifwecannotmakesuchpayments,ourassets,includingfinancialassets,willnotbeattached,orthatwewillbeabletoobtaintaxgoodstandingcertificates,allofwhichmayhaveamaterialadverseeffectonourbusiness,financialconditionandresultsofoperations.
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We may pursue strategic acquisitions or investments. The failure of an acquisition or investment to produce the anticipated results, or the inability to integrate an acquiredcompany fully, could harm our business.
Wemayfromtimetotimeacquireorinvestincomplementarycompaniesorbusinesses.Thesuccessofanacquisitionorinvestmentwilldependonourabilitytomakeaccurateassumptionsregardingthevaluation,operations,growthpotential,integrationandotherfactorsrelatedtothatbusiness.Wecannotassureyouthatouracquisitionsorinvestmentswillproducetheresultsthatweexpectatthetimeweenterintoorcompleteagiventransaction.Furthermore,acquisitionsmayresultindifficultiesintegratingtheacquiredcompanies,andmayresultinthediversionofourcapitalandourmanagement’sattentionfromotherbusinessissuesandopportunities.Wemaynotbeabletointegratesuccessfullytheoperationsthatweacquire,includingtheirpersonnel,financialsystems,distributionoroperatingprocedures.Ifwefailtointegrateacquisitionssuccessfully,ourbusinesscouldsuffer.Inaddition,theexpenseofintegratinganyacquiredbusinessandtheirresultsofoperationsmayharmouroperatingresults.
Our developer platforms, which are open to merchants and third-party developers, subject us to additional risks.
Weprovidethird-partydeveloperswithaccesstoapplicationprogramminginterfaces,softwaredevelopmentkitsandothertoolsdesignedtoallowthemtoproduceapplicationsforuse,withaparticularfocusonmobileapplications.Therecanbenoassurancethatmerchantsorthird-partydeveloperswilldevelopandmaintainapplicationsandservicesonouropenplatformsonatimelybasisoratall.Anumberoffactorscouldcausethemtocurtailorstopdevelopmentforourplatforms.Inaddition,ourbusinessissubjecttomanyregulatoryrestrictions.Itispossiblethatmerchantsandthird-partydeveloperswhoutilizeourdevelopmentplatformsortoolscouldviolatetheseregulatoryrestrictionsandwemaybeheldresponsibleforsuchviolations,whichcouldharmourbusiness.
We are a holding company and do not have any material assets other than the shares of our subsidiaries.
WeareaCaymanIslandsexemptedcompanywithlimitedliability.Ourmaterialassetsareourdirectandindirectequityinterestsinoursubsidiaries,particularlyPagseguroInternetS.A.,ourBrazilianoperatingcompany,whichwerefertoasPagSeguroBrazil.Weare,therefore,dependentuponpayments,dividendsanddistributionsfromoursubsidiariesforfundstopayouroperatingandotherexpensesandtopayfuturecashdividendsordistributions,ifany,toholdersofourClassAcommonsharesorClassBcommonshares,andwemayhavetaxcostsinconnectionwithanydividendordistribution.Furthermore,exchangeratefluctuationswillaffecttheU.S.dollarvalueofanydistributionsoursubsidiariesmakewithrespecttoourequityinterestsinthosesubsidiaries.See“—RisksRelatingtoBrazil—TheBrazilianfederalgovernmenthasexercised,andcontinuestoexercise,significantinfluenceovertheBrazilianeconomy.ThisinvolvementaswellasBrazil’spoliticalandeconomicconditionscouldharmusandthepriceofourClassAcommonshares,”“—RisksRelatingtoOurClassACommonShares—Wehavenotadoptedadividendpolicywithrespecttofuturedividends.Ifwedonotdeclareanydividendsinthefuture,youwillhavetorelyonpriceappreciationofourClassAcommonsharesinordertoachieveareturnonyourinvestment.”and“Item10.AdditionalInformation—MemorandumandArticlesofAssociation—DividendsandCapitalizationofProfits.”
An occurrence of a natural disaster, widespread health epidemic or other outbreaks could seriously harm our business, financial condition and results of operations.
Naturaldisasters,suchasfiresorfloods,theoutbreakofawidespreadhealthepidemic,orotherevents,suchaswars,actsofterrorism,politicalevents,environmentalaccidents,powershortagesorcommunicationinterruptionscouldseriouslyharmourbusiness.Theoccurrenceofadisasterorsimilareventcouldmateriallydisruptourbusinessandoperations.Theseeventscouldalsocauseustocloseouroperatingfacilitiestemporarily,whichwouldseverelydisruptouroperationsandseriouslyharmourbusiness,financialconditionandresultsofoperations.Inaddition,ournetsalescouldbesignificantlyreducedtotheextentthatanaturaldisaster,healthepidemicorothermajoreventharmstheeconomyofBraziloranyotherjurisdictionswherewemayoperate.Ouroperationscouldalsobeseverelydisruptedifourcustomers,merchantsorotherparticipantswereaffectedbynaturaldisasters,healthepidemicsorothermajorevents.
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Risks Relating to Brazil
The Brazilian federal government has exercised, and continues to exercise, significant influence over the Brazilian economy. This involvement as well as Brazil’s politicaland economic conditions could harm us and the price of our Class A common shares.
TheBrazilianfederalgovernmentfrequentlyexercisessignificantinfluenceovertheBrazilianeconomyandoccasionallymakessignificantchangesinpolicyandregulations.TheBraziliangovernment’sactionstocontrolinflationandotherpoliciesandregulationshaveofteninvolved,amongothermeasures,increasesininterestrates,changesintaxpolicies,pricecontrols,foreignexchangeratecontrols,currencydevaluations,capitalcontrolsandlimitsonimports.WehavenocontroloverandcannotpredictwhatmeasuresorpoliciestheBraziliangovernmentmaytakeinthefuture.WeandthemarketpriceofoursecuritiesmaybeharmedbychangesinBraziliangovernmentpolicies,aswellasgeneraleconomicfactors,including,withoutlimitation:
• growthordownturnoftheBrazilianeconomy;
• interestratesandmonetarypolicies;
• exchangeratesandcurrencyfluctuations;
• inflation;
• liquidityofthedomesticcapitalandlendingmarkets;
• importandexportcontrols;
• exchangecontrolsandrestrictionsonremittancesabroad;
• modificationstolawsandregulationsaccordingtopolitical,socialandeconomicinterests;
• fiscalpolicyandchangesintaxlaws;
• economic,politicalandsocialinstability;
• laborandsocialsecurityregulations;
• energyandwatershortagesandrationing;and
• otherpolitical,socialandeconomicdevelopmentsinoraffectingBrazil.
Inaddition,Braziliscurrentlyexperiencingarecessionandweakmacroeconomicconditionsareexpectedtocontinuethroughthefirstsixmonthsof2019,whilethesocialsecurityreformproposalremainspending,see“Item5.OperatingandFinancialReviewandProspects—PrincipalFactorsAffectingOurFinancialConditionandResultsofOperations.”WecannotpredictwhatmeasurestheBrazilianfederalgovernmentwilltakeinthefaceofmountingmacroeconomicpressuresorotherwise.
UncertaintyoverwhethertheBrazilianfederalgovernmentwillimplementchangesinpolicyorregulationaffectingtheseorotherfactorsinthefuturemayaffecteconomicperformanceandcontributetoeconomicuncertaintyinBrazil,whichmayhaveanadverseeffectonusandourClassAcommonshares.RecenteconomicandpoliticalinstabilityhasledtoanegativeperceptionoftheBrazilianeconomyandhighervolatilityintheBraziliansecuritiesmarkets,whichalsomayadverselyaffectusandourClassAcommonshares.See“Item5.OperatingandFinancialReviewandProspects—PrincipalFactorsAffectingOurFinancialConditionandResultsofOperations—Brazilianpoliticalenvironmentandmacroeconomicconditions,interestrates,consumercreditandconsumerspending.”
Ongoing political instability may adversely affect our business, results of operations and the trading price of our Class A common shares.
TherecenteconomicinstabilityinBrazilhascontributedtoadeclineinmarketconfidenceintheBrazilianeconomyaswellastoadeterioratingpoliticalenvironment.Despitethesloweconomicrecoveryandthestillhighfiscalvulnerability,severalBrazilianmacroeconomicfundamentalsimprovedduring2017-18.Themainhighlightwasthedecelerationofinflationandtheachievementofhistoricallylowinterestrates.
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Theeconomicoutlookfor2019continuestofacesignificantuncertainties.TheBrazilianeconomyisexpectedtocontinuerecoveringatamoderatepace.ThemedianmarketforecastcurrentlypredictsthattheGDPgrowthratewillacceleratefrom1.1%in2018toaround2.5%in2019(accordingtoFocusReportonJanuary4,2019).
Inaddition,variousongoinginvestigationsintoallegationsofmoneylaunderingandcorruptionbeingconductedbytheOfficeoftheBrazilianFederalProsecutor,includingthelargestsuchinvestigation,knownas“OperaçãoLavaJato,”havenegativelyimpactedtheBrazilianeconomyandpoliticalenvironment.
Under“OperaçãoLavaJato”membersoftheBrazilianfederalgovernmentandofthelegislativebranch,aswellasseniorofficersoflargestate-ownedandprivatecompanies,havefacedallegationsand,incertaincases,convictions,or,also,enteringintopleabargains,relatedtocrimesofpoliticalcorruption,involvingallegedbribesbymeansofkickbacksoncontractsgrantedbythegovernmenttoseveralinfrastructure,oilandgasandconstructioncompanies.Theprofitsofthesekickbacksallegedlyfinancedthepoliticalcampaignsofpoliticalpartiesofthegovernmentthatwereunaccountedforornotpubliclydisclosed,inadditiontoallegedpersonalenrichmentoftherecipientsofthebribesandthefavoringofcompaniesincontractswiththeBraziliangovernment.Furthermore,certainofthesecompanieshaveorarealsofacinginvestigations,and,incertaincases,beingconvictedbythecompetentauthorities,suchastheBrazilianSecuritiesCommission(ComissãodeValoresMobiliários),theSECandtheUnitedStatesDepartmentofJustice.Certainofthesecompanieshavechosentoenterintoleniencyagreementswiththecompetentauthorities,whenpossible.Thepotentialoutcomeoftheseinvestigations,convictions,pleabargainingandleniencyagreementsisstilluncertain,buttheyhavealreadyhadanadverseimpactontheimageandreputationoftheimplicatedcompanies,politicalpartiesandonthegeneralmarketperceptionoftheBrazilianeconomyandpoliticalenvironment.Wecannotpredictwhethersuchinvestigationswillleadtofurtherpoliticalandeconomicinstabilityorwhethernewallegationsagainstgovernmentofficials,officersand/orcompanieswillariseinthefuture.Inaddition,wecannotpredicttheoutcomeofanysuchinvestigationsorallegationsnortheireffectontheBrazilianeconomy.
We also cannot predict which policies the current President of Brazil, Jair Bolsonaro, may adopt or change during his mandate or the effect that any such policies mighthave on our business and on the Brazilian economy. During his presidential campaign in 2018 and at the start of his four-year term beginning in January 2019,Bolsonaro reportedly favored the privatization of state-owned companies, economic liberalization, new pension legislation and tax reforms. However, there is noguarantee that Bolsonaro will be successful in executing his campaign promises or passing certain favored reforms fully or at all, particularly when confronting afractured congress. Moreover, Bolsonaro was generally a polarizing figure during his campaign for presidency, particularly in relation to certain social views, and wecannot predict the ways in which a divided electorate may continue to impact his presidency and ability to implement policies and reforms. Any such new policies orchanges to current policies may have a material adverse effect on us or the price of our Class A common shares. Furthermore, uncertainty over whether the currentBrazilian government will implement changes in policy or regulation in the future may contribute to economic uncertainty in Brazil and to heightened volatility in thesecurities issued abroad by Brazilian companies.Inflation and certain measures by the Brazilian government to curb inflation have historically harmed the Brazilianeconomy and Brazilian capital markets, and high levels of inflation in the future would harm our business and the price of our Class A common shares.
Inthepast,Brazilhasexperiencedextremelyhighratesofinflation.InflationandsomeofthemeasurestakenbytheBraziliangovernmentinanattempttocurbinflationhavehadsignificantnegativeeffectsontheBrazilianeconomygenerally.Inflation,policiesadoptedtocurbinflationarypressuresanduncertaintiesregardingpossiblefuturegovernmentalinterventionhavecontributedtoeconomicuncertaintyandheightenedvolatilityintheBraziliancapitalmarkets.
AccordingtotheNationalConsumerPriceIndex(Í ndice Nacional de Pre ç os ao Consumidor Amplo ),orIPCA,Brazilianinflationrateswere3.75%,2.95%and6.29%in2018,2017and2016,respectively.BrazilmayexperiencehighlevelsofinflationinthefutureandinflationarypressuresmayleadtotheBraziliangovernment’sinterveningintheeconomyandintroducingpoliciesthatcouldharmourbusinessandthepriceofourClassAcommonshares.Inthepast,theBraziliangovernment’sinterventionsincludedthemaintenanceofarestrictivemonetarypolicywithhighinterestratesthatrestrictedcreditavailabilityandreducedeconomicgrowth,causingvolatilityininterestrates.Forexample,theSELIC(Sistema Especial de Liquida ç ã o e de Cust ó dia ),theCentralBank’sovernightrate,asestablishedbytheMonetaryPolicyCommittee(Comit ê dePol í tica Monet á ria do Banco Central do Brasil ),orCOPOM,increasedfrom10.00%atthebeginningof2014toahighpointof14.25%in2016beforeaseriesofratereductionsin2017,bringingtheSELICratedownto7.00%asofDecember7,2017,whereitremainedatyear-end2017.TheCOPOMreducedtheSELICrateto6.75%onFebruary7,2018,andfurtherreduceditto6.50%onMarch21,2018,whereitcurrentlyremains.Conversely,morelenientgovernmentandCentralBankpoliciesandinterestratedecreaseshavetriggeredandmaycontinuetotriggerincreasesininflation,and,consequently,growthvolatilityandtheneedforsuddenandsignificantinterestrateincreases,whichcouldnegativelyaffectusandincreaseourindebtedness.
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Exchange rate instability may have adverse effects on the Brazilian economy, us and the price of our Class A common shares.
TheBraziliancurrencyhasbeenhistoricallyvolatileandhasbeendevaluedfrequentlyoverthepastthreedecades.Throughoutthisperiod,theBraziliangovernmenthasimplementedvariouseconomicplansandusedvariousexchangeratepolicies,includingsuddendevaluations,periodicmini-devaluations(duringwhichthefrequencyofadjustmentshasrangedfromdailytomonthly),exchangecontrols,dualexchangeratemarketsandafloatingexchangeratesystem.Althoughlong-termdepreciationofthereal isgenerallylinkedtotherateofinflationinBrazil,depreciationofthereal occurringovershorterperiodsoftimehasresultedinsignificantvariationsintheexchangerate,betweenthereal ,theU.S.dollarandothercurrencies.Thereal depreciatedagainsttheU.S.dollarby32.0%atyear-end2015ascomparedtoyear-end2014,andby11.8%atyear-end2014ascomparedtoyear-end2013.Thereal /U.S.dollarexchangeratereportedbytheCentralBankwasR$3.9048perU.S.dollaronDecember31,2015andR$3.2591perU.S.dollaronDecember31,2016,whichreflecteda19.8%appreciationofthereal againsttheU.S.dollarduring2016.Betweenyear-end2016andyear-end2017,thereal remainedrelativelystable,depreciating1.5%againsttheU.S.dollar.Betweenyear-end2017and2018,thereal depreciatedgreatly,by16.9%,againsttheU.S.dollar,primarilyasaresultoflowerinterestratesinBrazil,whichreducedthevolumeofforeigncurrencydepositedinBrazilinthe“carrytrade,”aswellasuncertaintyregardingtheresultsoftheBrazilianpresidentialelectionsheldinOctober2018.Thereal /U.S.dollarexchangeratereportedbytheCentralBankwasR$3.8748perU.S.dollaronDecember31,2018.Therecanbenoassurancethatthereal willnotagainappreciateordepreciateagainsttheU.S.dollarorothercurrenciesinthefuture.
Adevaluationofthereal relativetotheU.S.dollarcouldcreateinflationarypressuresinBrazilandcausetheBraziliangovernmentto,amongothermeasures,increaseinterestrates.Anydepreciationofthereal maygenerallyrestrictaccesstotheinternationalcapitalmarkets.ItwouldalsoreducetheU.S.dollarvalueofourresults.RestrictivemacroeconomicpoliciescouldreducethestabilityoftheBrazilianeconomyandharmourresultsofoperationsandprofitability.Inaddition,domesticandinternationalreactionstorestrictiveeconomicpoliciescouldhaveanegativeimpactontheBrazilianeconomy.Thesepoliciesandanyreactionstothemmayharmusbycurtailingaccesstoforeignfinancialmarketsandpromptingfurthergovernmentintervention.Adevaluationofthereal relativetotheU.S.dollarmayalso,asinthecontextofthecurrenteconomicslowdown,decreaseconsumerspending,increasedeflationarypressuresandreduceeconomicgrowth.
Ontheotherhand,anappreciationofthereal relativetotheU.S.dollarandotherforeigncurrenciesmaydeterioratetheBrazilianforeignexchangecurrentaccounts.WeandcertainofoursupplierspurchasegoodsandservicesfromcountriesoutsideBrazil,andthuschangesinthevalueoftheU.S.dollarcomparedtoothercurrenciesmayaffectthecostsofgoodsandservicesthatwepurchase.Dependingonthecircumstances,eitherdevaluationorappreciationofthereal relativetotheU.S.dollarandotherforeigncurrenciescouldrestrictthegrowthoftheBrazilianeconomy,aswellasourbusiness,resultsofoperationsandprofitability.
Infrastructure and workforce deficiency in Brazil may impact economic growth and have a material adverse effect on us.
OurperformancedependsontheoverallhealthandgrowthoftheBrazilianeconomy.BrazilianGDPgrowthhasfluctuatedoverthepastfewyears,withgrowthof3.0%in2013butdecreasingto0.5%in2014,acontractionof3.5%in2015,acontractionof3.3%in2016,growthof1.1%inboth2017and2018.Growthislimitedbyinadequateinfrastructure,includingpotentialenergyshortagesanddeficienttransportation,logisticsandtelecommunicationsectors,thelackofaqualifiedlaborforce,andthelackofprivateandpublicinvestmentsintheseareas,whichlimitproductivityandefficiency.Anyofthesefactorscouldleadtolabormarketvolatilityandgenerallyimpactincome,purchasingpowerandconsumptionlevels,whichcouldlimitgrowthandultimatelyhaveamaterialadverseeffectonus.
Developments and the perceptions of risks in other countries, including other emerging markets, the United States and Europe, may harm the Brazilian economy and theprice of Brazilian securities, including the price of our Class A common shares.
ThemarketforsecuritiesissuedbyBraziliancompaniesisinfluencedbyeconomicandmarketconditionsinBraziland,tovaryingdegrees,marketconditionsinotherLatinAmericanandemergingmarkets,aswellastheUnitedStates,Europeandothercountries.Totheextenttheconditionsoftheglobalmarketsoreconomydeteriorate,thebusinessofBraziliancompaniesmaybeharmed.Theweaknessintheglobaleconomyhasbeenmarkedby,amongotheradversefactors,lowerlevelsofconsumerandcorporateconfidence,decreasedbusinessinvestmentandconsumerspending,increasedunemployment,reducedincomeandassetvaluesinmanyareas,reductionofChina’sgrowthrate,currencyvolatilityandlimitedavailabilityofcreditandaccesstocapital.DevelopmentsoreconomicconditionsinotheremergingmarketcountrieshaveattimessignificantlyaffectedtheavailabilityofcredittoBraziliancompaniesandresultedinconsiderableoutflowsoffundsfromBrazil,decreasingtheamountofforeigninvestmentsinBrazil.
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Crisesandpoliticalinstabilityinotheremergingmarketcountries,theUnitedStates,EuropeorothercountriescoulddecreaseinvestordemandforBraziliansecurities,suchasourClassAcommonshares.InJune2016,theUnitedKingdomhadareferenduminwhichthemajorityvotedtoleavetheEuropeanUnion.WehavenocontroloverandcannotpredicttheeffectoftheUnitedKingdom’sexitfromtheEuropeanUnionnoroverwhetherandtowhicheffectanyothermemberstatewilldecidetoexittheEuropeanUnioninthefuture.OnJanuary20,2017,DonaldTrumpbecamethePresidentoftheUnitedStates.WehavenocontroloverandcannotpredicttheeffectofDonaldTrump’sadministrationorpolicies.Thesedevelopments,aswellaspotentialcrisesandformsofpoliticalinstabilityarisingtherefromoranyotherasofyetunforeseendevelopment,mayharmourbusinessandthepriceofourClassAcommonshares.
Any further downgrading of Brazil’s credit rating could reduce the trading price of our Class A common shares.
Wemaybeharmedbyinvestors’perceptionsofrisksrelatedtoBrazil’ssovereigndebtcreditrating.RatingagenciesregularlyevaluateBrazilanditssovereignratings,whicharebasedonanumberoffactorsincludingmacroeconomictrends,fiscalandbudgetaryconditions,indebtednessmetricsandtheperspectiveofchangesinanyofthesefactors.
BrazilhaslostitsinvestmentgradesovereigndebtcreditratingwiththethreemainU.S.basedcreditratingagencies,Standard&Poor’s,Moody’sandFitch.Standard&Poor’sdowngradedBrazil’ssovereigndebtcreditratingfromBBB+toBBinFebruary2016andfurtherreducedittoBB-inJanuary2018withastableoutlook.InDecember2015,Moody’splacedBrazil’sBaa3sovereigndebtcreditratingonreviewanddowngradedBrazil’ssovereigncreditratinginFebruary2016toBa2withanegativeoutlook,citingtheprospectforfurtherdeteriorationinBrazil’sindebtednessfiguresamidarecessionandchallengingpoliticalenvironment.InApril2018,Moody’sreaffirmedtheBa2rating,butraisedtheoutlookfromnegativetostable,citingexpectationsthatthewinneroftheOctober2018presidentialelectionswillpassfiscalreforms.FitchdowngradedBrazil’ssovereigncreditratingtoBBwithanegativeoutlookinFebruary2016,citingthecountry’srapidlyexpandingbudgetdeficitandworse-than-expectedrecession,andfurtherdowngradedBrazil’ssovereigndebtcreditratinginMay2017toBB-withanegativeoutlook.AsBrazil’screditratingsarecloselylinkedtotheproposedsocialsecurityreform,expectedtooccurin2019,Brazil’screditratingsmaysufferifthisproposalisnotapproved.
Brazil’ssovereigncreditratingiscurrentlyratedbelowinvestmentgradebythethreemaincreditratingagencies.ConsequentlythepricesofsecuritiesissuedbyBraziliancompanieshavebeennegativelyaffected.AprolongationorworseningofthecurrentBrazilianrecessionandcontinuedpoliticaluncertainty,amongotherfactors,couldleadtofurtherratingsdowngrades.AnyfurtherdowngradeofBrazil’ssovereigncreditratingscouldheighteninvestors’perceptionofriskand,asaresult,causethetradingpriceofourClassAcommonsharestodecline.
Internet regulation in Brazil is recent and still limited and several legal issues related to the Internet are uncertain.
In2014,Brazilenactedalaw,whichwerefertoastheInternetAct,settingforthprinciples,guarantees,rightsanddutiesfortheuseoftheInternetinBrazil,includingprovisionsaboutInternetserviceproviderliability,InternetuserprivacyandInternetneutrality.InMay2016,furtherregulationswerepassedinconnectionwiththeInternetAct.However,unlikeintheUnitedStates,littlecaselawexistsaroundtheInternetActandexistingjurisprudencehasnotbeenconsistent.Legaluncertaintyarisingfromthelimitedguidanceprovidedbycurrentlawsinforceallowsfordifferentjudgesorcourtstodecideverysimilarclaimsindifferentwaysandestablishcontradictoryjurisprudence.Thislegaluncertaintyallowsforrulingsagainstusandcouldsetadverseprecedents,whichindividuallyorintheaggregatecouldseriouslyharmourbusiness,resultsofoperationsandfinancialcondition.Inaddition,legaluncertaintymayharmourcustomers’perceptionanduseofourservice.
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Risks Relating to Our Class A Common Shares
UOL, our largest shareholder, owns 100% of our outstanding Class B common shares, which represent approximately 91.1% of the voting power of our issued sharecapital, and controls all matters requiring shareholder approval. This concentration of ownership and voting power limits your ability to influence corporate matters.
OurClassBcommonsharesareentitledto10votespershareandourClassAcommonsharesareentitledtoonevotepershare.OurClassBcommonsharesareconvertibleintoanequivalentnumberofClassAcommonsharesandgenerallyconvertintoClassAcommonsharesupontransfersubjecttolimitedexceptions.UOLcontrolsourcompanyandholdsallofouroutstandingClassBcommonshares,representing50.5%ofourissuedsharecapital.Becauseoftheten-to-onevotingratiobetweenourClassBcommonsharesandClassAcommonshares,theseClassBcommonsharesgiveUOLapproximately91.1%ofthevotingpowerofourissuedsharecapital.UOLthereforecontrolstheoutcomeofalldecisionsatourshareholders’meetings,andisabletoelectamajorityofthemembersofourboardofdirectors.Itisalsoabletodirectouractionsinareassuchasbusinessstrategy,financing,distributions,acquisitionsanddispositionsofassetsorbusinesses.UOL’sdecisionsonthesemattersmaybecontrarytoyourexpectationsorpreferences,anditmaytakeactionsthatcouldbecontrarytoyourinterests.Itwillbeabletopreventanyothershareholders,includingyou,fromblockingtheseactions.Forfurtherinformationregardingshareholdingsinourcompany,see“Item7.MajorShareholdersandRelatedPartyTransactions—MajorShareholders.”
IfUOLsellsortransfersanyofitsClassBcommonshares,theywillgenerallyconvertautomaticallyintoClassAcommonshares,subjecttolimitedexceptions,suchastransferstoaffiliates,totrusteesfortheholderoritsaffiliatesandcertaintransferstoU.S.taxexemptorganizations.ThefactthatanyClassBcommonsharesconvertintoClassAcommonsharesifUOLsellsortransfersthemmeansthatUOLwillinmanysituationscontinuetocontrolamajorityofthecombinedvotingpowerofouroutstandingsharecapital,duetothevotingrightsofanyClassBcommonsharesthatitretains.IfourClassBcommonsharesatanytimerepresentlessthan10%ofthecombinedvotingpowerofourClassAcommonsharesandClassBcommonsharestogether,however,theClassBcommonsharesthenoutstandingwillautomaticallyconvertintoClassAcommonshares.Foradescriptionofthedualclassstructure,see“Item10.AdditionalInformation—MemorandumandArticlesofAssociation.”
Class A common shares eligible for future sale may cause the market price of our Class A common shares to drop significantly.
ThemarketpriceofourClassAcommonsharesmaydeclineasaresultofsalesofalargenumberofourClassAcommonsharesinthemarket(includingClassAcommonsharesissuableuponconversionofClassBcommonshares)ortheperceptionthatthesesalesmayoccur.Thesesales,orthepossibilitythatthesesalesmayoccur,alsomightmakeitmoredifficultforustosellequitysecuritiesinthefutureatatimeandatapricethatwedeemappropriate.
AsofMarch31,2019,wehadoutstanding162,267,064ClassAcommonshares(includingtreasuryshares)and165,620,861ClassBcommonshares.AllClassBcommonsharesarebeneficiallyownedbyUOL.Subjecttothelock-upagreementsdescribedbelow,theClassAcommonsharessoldinourJune2018follow-onofferingarefreelytradablewithoutrestrictionorfurtherregistrationundertheSecuritiesActbypersonsotherthanouraffiliateswithinthemeaningofRule144oftheSecuritiesAct.
Ourshareholdersorentitiescontrolledbythemortheirpermittedtransfereesare,subjecttothelock-upagreementsdescribedbelow,abletoselltheirsharesinthepublicmarketfromtimetotimewithoutregisteringthem,subjecttocertainlimitationsonthetiming,amountandmethodofthosesalesimposedbyregulationspromulgatedbytheSEC.Ifanyofourshareholders,theaffiliatedentitiescontrolledbythemortheirrespectivepermittedtransfereesweretosellalargenumberoftheirClassAcommonshares,themarketpriceofourClassAcommonsharesmaydeclinesignificantly.Inaddition,theperceptioninthepublicmarketsthatsalesbythemmightoccurmayalsocausethetradingpriceofourClassAcommonsharestodecline.
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PagSeguroDigitalhasagreedwiththeunderwriterstoitsJune2018follow-onoffering,subjecttocertainexceptions,nottooffer,sellordisposeofanysharesinitssharecapitalorsecuritiesconvertibleintoorexchangeableorexercisableforanysharesinitssharecapitalduringthe12monthperiodfollowingJune21,2018,thedateofourfollow-onoffering.UOLhasalsoagreedtolock-uprestrictionsfor12monthsfollowingtheJune21,2018,thedateofourfollow-onoffering,insubstantiallysimilarterms,exceptthatthelock-uprestrictionsapplicabletoUOLarenotsubjecttoanyexceptions.Thelock-uprestrictionsapplicabletoPagSeguroDigitalandUOLarenotsubjecttowaiverbytheunderwritersoftheJune2018follow-onoffering.Thelock-upagreemententeredintobyPagSeguroDigitalissubjecttotheexceptionsdescribedin“Item10.AdditionalInformation—CommonSharesEligibleforFutureSale,”includingtherightforourcompanytoissuenewsharesifwecarryoutanacquisitionorenterintoamerger,jointventureorstrategicparticipation.
Salesofasubstantialnumberofourcommonsharesuponexpirationofthelock-upagreements,theperceptionthatsuchsalesmayoccur,orearlyreleaseoftheselock-upperiods,couldcauseourmarketpricetofallormakeitmoredifficultforyoutosellyourClassAcommonsharesatatimeandpricethatyoudeemappropriate.
We have not adopted a dividend policy with respect to future dividends. If we do not declare any dividends in the future, you will have to rely on price appreciation of ourClass A common shares in order to achieve a return on your investment.
Wehavenotadoptedadividendpolicywithrespecttofuturedividends.Theamountofanydistributionswilldependonmanyfactorssuchasourresultsofoperations,financialcondition,cashrequirements,prospectsandotherfactorsdeemedrelevantbyourboardofdirectorsor,whereapplicable,ourshareholders.Accordingly,ifwedonotdeclaredividendsinthefuture,investorswillmostlikelyhavetorelyonsalesoftheirClassAcommonshares,whichmayincreaseordecreaseinvalue,astheonlywaytorealizecashfromtheirinvestment.ThereisnoguaranteethatthepriceofourClassAcommonshareswilleverexceedthepricethatyoupay.
We may raise additional capital in the future by issuing equity securities, which may result in a potential dilution of your equity interest.
Wemayissueadditionalequitysecuritiestoraisecapital,makeacquisitions,orforavarietyofotherpurposes.Additionalissuancesofoursharesmaybemadepursuanttotheexerciseorconversionofconvertibledebtsecurities,warrants,stockoptionsorotherequityincentiveawardssuchastheLTIPandLTIP-Goals.Anystrategicpartnership,issuanceorplacementofsharesand/orsecuritiesconvertibleintoorexchangeableforsharesmayaffectthemarketpriceofoursharesandcouldresultindilutionofyourequityinterest.
If securities or industry analysts do not publish research or reports about our business, or publish negative reports about our business, the market price and tradingvolume of our Class A common shares could decline.
ThetradingmarketforourClassAcommonsharesdependsinpartontheresearchandreportsthatsecuritiesorindustryanalystspublishaboutusorourbusiness.Ifoneormoreoftheanalystswhocoverusdowngradeourstockorpublishinaccurateorunfavorableresearchaboutourbusiness,ourstockpricewouldlikelydecline.Ifoneormoreoftheseanalystsceasecoverageofourcompanyorfailtopublishreportsonusregularly,demandforourClassAcommonsharescoulddecline,whichmightcausethemarketpriceandtradingvolumeofourClassAcommonsharestodecline.
Our dual class capital structure means our stock will not be included in certain indices. We cannot predict the impact this may have on our stock price.
InJuly2017,S&PDowJones,aproviderofwidelyfollowedstockindices,announcedthatcompanieswithmultipleshareclasses,suchasours,willnotbeeligibleforinclusionincertainoftheirindices.Asaresult,ourClassAcommonsharesarenoteligibleforthesestockindices.Additionally,sinceSeptember2017,FTSERussell,anotherproviderofwidelyfollowedstockindices,requiresnewconstituentsofitsindicestohaveatleastfivepercentoftheirvotingrightsinthehandsofpublicstockholders.UOLcontrolsapproximately91.1%ofthevotingpowerofouroutstandingsharecapital.Manyinvestmentfundsareprecludedfrominvestingincompaniesthatarenotincludedinsuchindices,andthesefundswouldbeunabletopurchaseourClassAcommonsharesifwewerenotincludedinsuchindices.WecannotassureyouthatotherstockindiceswillnottakeasimilarapproachtoS&PDowJonesandFTSERussellinthefuture.ExclusionfromindicescouldmakeourClassAcommonshareslessattractivetoinvestorsand,asaresult,themarketpriceofourClassAcommonsharescouldbeadverselyaffected.
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We are a Cayman Islands exempted company with limited liability. The rights of our shareholders may be different from the rights of shareholders governed by the laws ofU.S. jurisdictions.
WeareaCaymanIslandsexemptedcompanywithlimitedliability.OurcorporateaffairsaregovernedbyourMemorandumandArticlesofAssociationandbythelawsoftheCaymanIslands.TherightsofshareholdersandtheresponsibilitiesofmembersofourboardofdirectorsmaybedifferentfromtherightsofshareholdersandresponsibilitiesofdirectorsincompaniesgovernedbythelawsofU.S.jurisdictions.Intheperformanceofitsduties,theboardofdirectorsofasolventCaymanIslandsexemptedcompanyisrequiredtoconsiderthecompany’sinterests,whichisgenerallydefinedwithreferencetotheinterestsofitsshareholders(bothpresentandfuture)asawhole,whichmaydifferfromtheinterestsofoneormoreofitsindividualshareholders.See“Item10.AdditionalInformation—MemorandumandArticlesofAssociation—PrincipalDifferencesbetweenCaymanIslandsandU.S.CorporateLaw.”
Our shareholders may face difficulties in protecting their interests because we are a Cayman Islands exempted company.
OurcorporateaffairsaregovernedbyourMemorandumandArticlesofAssociation,bytheCompaniesLawoftheCaymanIslands(asamended),ortheCompaniesLaw,andthecommonlawoftheCaymanIslands.TherightsofourshareholdersandthefiduciaryresponsibilitiesofourdirectorsunderthelawsoftheCaymanIslandsarenotasclearlydefinedasunderstatutesorjudicialprecedentinexistenceinjurisdictionsintheUnitedStates.Therefore,youmayhavemoredifficultyprotectingyourintereststhanwouldshareholdersofacorporationincorporatedinajurisdictionintheUnitedStates,duetothecomparativelylessformalnatureofCaymanIslandslawinthisarea.
WhileCaymanIslandslawallowsadissentingshareholdertoexpressashareholder’sviewthatacourtsanctionedreorganizationofaCaymanIslandscompanywouldnotprovidefairvaluefortheshareholder’sshares,CaymanIslandsstatutorylawinrespectofschemesofarrangementdoesnotspecificallyprovideforshareholderappraisalrightsinconnectionwithamergerorconsolidationeffectedbyaschemeofarrangementofacompany.Thismaymakeitmoredifficultforyoutoassessthevalueofanyconsiderationyoumayreceiveinamergerorconsolidationortorequirethattheacquirergivesyouadditionalconsiderationifyoubelievetheconsiderationofferedisinsufficient.However,CaymanIslandsstatutorylaw,whichpermitsamerger/consolidationwithoutacourtorder,providesamechanismforadissentingshareholderinamergerorconsolidationtorequireustoapplytotheGrandCourtforadeterminationofthefairvalueofthedissenter’ssharesifitisnotpossibleforthecompanyandthedissentertoagreeonafairpricewithinthetimelimitsprescribed.
ShareholdersofCaymanIslandsexemptedcompanies(suchasus)havenogeneralrightsunderCaymanIslandslawtoinspectcorporaterecordsandaccountsortoobtaincopiesoflistsofshareholders.OurdirectorshavediscretionunderourArticlesofAssociationtodeterminewhetherornot,andunderwhatconditions,ourcorporaterecordsmaybeinspectedbyourshareholders,butarenotobligedtomakethemavailabletoourshareholders.Thismaymakeitmoredifficultforyoutoobtaininformationneededtoestablishanyfactsnecessaryforashareholdermotionortosolicitproxiesfromothershareholdersinconnectionwithaproxycontest.
Subjecttolimitedexceptions,underCaymanIslandslaw,aminorityshareholdermaynotbringaderivativeactionagainsttheboardofdirectors.ClassactionsarenotrecognizedintheCaymanIslands,butgroupsofshareholderswithidenticalinterestsmaybringrepresentativeproceedings,whicharesimilar.
Our Memorandum and Articles of Association contain anti-takeover provisions that may discourage a third party from acquiring us and reduce the rights of holders ofour Class A common shares.
OurMemorandumandArticlesofAssociationcontaincertainprovisionsthatcouldlimittheabilityofotherstoacquireourcontrol,includingaprovisionthatgrantsauthoritytoourboardofdirectorstoissuenewsharesinourcompanyfromtimetotime(includingcommonsharesandpreferredshares)withoutactionbyourshareholders.TheseprovisionscouldhavetheeffectofdeprivingourshareholdersoftheopportunitytoselltheirClassAcommonsharesatapremiumovertheprevailingmarketpricebydiscouragingthirdpartiesfromseekingtoobtainourcontrolinatenderofferorsimilartransactions.See“Item10.AdditionalInformation—MemorandumandArticlesofAssociation—Anti-TakeoverProvisionsinourMemorandumandArticlesofAssociation.”
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United States civil liabilities and certain judgments obtained against us by our shareholders may not be enforceable.
PagSeguroDigitalisaCaymanIslandsexemptedcompanyandsubstantiallyallofourassetsarelocatedoutsideoftheUnitedStates.Inaddition,allofourcurrentdirectorsandofficersareresidentsofBrazil,andasubstantialportionoftheirassetsislocatedoutsideoftheUnitedStates.Asaresult,itmaybedifficulttoeffectserviceofprocesswithintheUnitedStatesuponthesepersons.ItmayalsobedifficulttoenforceinU.S.courtsjudgmentsobtainedinU.S.courtsbasedonthecivilliabilityprovisionsoftheU.S.federalsecuritieslawsagainstusandthoseofficersanddirectors.
Further,itisuncleariforiginalactionspredicatedoncivilliabilitiesbasedsolelyuponU.S.federalsecuritieslawsareenforceableincourtsoutsidetheUnitedStates,includingintheCaymanIslandsandBrazil.CourtsoftheCaymanIslandsmaynot,inanoriginalactionintheCaymanIslands,recognizeorenforcejudgmentsofU.S.courtspredicateduponthecivilliabilityprovisionsofthesecuritieslawsoftheUnitedStatesoranystateoftheUnitedStatesonthegroundsthatsuchprovisionsarepenalinnature.AlthoughthereisnostatutoryenforcementintheCaymanIslandsofjudgmentsobtainedintheUnitedStates,courtsoftheCaymanIslandswillrecognizeaforeignjudgmentin personam ofacourtofcompetentjurisdictionandgiveajudgmentbasedthereonifsuchjudgmentisfinal,foraliquidatedsum,provideditisnotinrespectoftaxesorafineorpenalty,isnotinconsistentwithaCaymanIslands’judgmentinrespectofthesamematters,andwasnotobtainedinamannerwhichiscontrarytothepublicpolicyoftheCaymanIslands.Inaddition,aCaymanIslandscourtmaystayproceedingsifconcurrentproceedingsarebeingbroughtelsewhere.
Judgments of Brazilian courts to enforce our obligations with respect to our Class A common shares may be payable only in reais.
MostofourassetsarelocatedinBrazil.IfproceedingsarebroughtinthecourtsofBrazilseekingtoenforceourobligationsinrespectofourClassAcommonshares,wemaynotberequiredtodischargeourobligationsinacurrencyotherthanthereal .UnderBrazilianexchangecontrollaws,anobligationinBraziltopayamountsdenominatedinacurrencyotherthanthereal mayonlybesatisfiedinBraziliancurrencyattheexchangerateineffectonthedatethejudgmentisobtainedasdeterminedbytheCentralBank.Theseamountsarethenadjustedtoreflectexchangeratevariationsthroughtheeffectivepaymentdate.Theexchangerateatthattimemaynotaffordnon-BrazilianinvestorswithfullcompensationforanyclaimarisingoutoforrelatedtoourobligationsundertheClassAcommonshares.
As a foreign private issuer and an “emerging growth company” (as defined in the JOBS Act), the disclosure requirements that we must comply with and otherrequirements are different from those applicable to U.S. domestic registrants and non-emerging growth companies.
Asaforeignprivateissuerandemerginggrowthcompany,thedisclosurerequirementsthatwemustcomplywithandotherrequirementsaredifferentfromthoseapplicabletoU.S.domesticregistrantsandnon-emerginggrowthcompanies.Forexample,asaforeignprivateissuerforU.S.purposes,wearenotsubjecttothesamedisclosurerequirementsasadomesticU.S.registrantundertheSecuritiesExchangeActof1934,asamended,ortheExchangeAct,includingtherequirementstoprepareandissuequarterlyreportsonForm10-QortofilecurrentreportsonForm8-Kupontheoccurrenceofspecifiedsignificantevents,theproxyrulesapplicabletodomesticU.S.registrantsunderSection14oftheExchangeActortheinsiderreportingandshort-swingprofitrulesapplicabletodomesticU.S.registrantsunderSection16oftheExchangeAct.Inaddition,werelyonexemptionsfromcertainU.S.ruleswhichpermitustofollowCaymanIslandslegalrequirementsratherthancertainoftherequirementsthatareapplicabletoU.S.domesticregistrants.
WefollowtheCaymanIslandslawsandregulationsthatareapplicabletoCaymanIslandscompanies.However,theselawsandregulationsdonotcontainanyprovisionscomparabletotheU.S.proxyrules,theU.S.rulesrelatingtothefilingofreportsonForm10-Qor8-KortheU.S.rulesrelatingtoliabilityforinsiderswhoprofitfromtradesmadeinashortperiodoftime,asreferredtoabove.
Furthermore,foreignprivateissuersarerequiredtofiletheirannualreportonForm20-Fwithin120daysaftertheendofeachfiscalyear,whileU.S.domesticissuersthatareacceleratedfilersarerequiredtofiletheirannualreportonForm10-Kwithin75daysaftertheendofeachfiscalyear.ForeignprivateissuersarealsoexemptfromRegulationFairDisclosure,aimedatpreventingissuersfrommakingselectivedisclosuresofmaterialinformation.Asaresultoftheabove,eventhoughwearerequiredtofilereportsonForm6-KdisclosingthelimitedinformationthatismaterialtousandwhichwemakepublicpursuanttoCaymanIslandslaw,orarerequiredtodistributetoshareholdersgenerally,youmaynotreceiveinformationofthesametypeoramountthatisrequiredtobedisclosedtoshareholdersofaU.S.company.
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TheJOBSActcontainsprovisionsthat,amongotherthings,relaxcertainreportingrequirementsforemerginggrowthcompanies.Underthisact,asanemerginggrowthcompany,wearenotsubjecttothesamedisclosureandfinancialreportingrequirementsasnon-emerginggrowthcompanies.Forexample,asanemerginggrowthcompanywearepermittedto,andtakeadvantageofcertainexemptionsfromvariousreportingrequirementsthatareapplicabletootherpubliccompaniesthatarenotemerginggrowthcompanies.Also,ourauditorsdonothavetocomplywithanynewauditingstandardspromulgatedbythePCAOB(unlesstheSECdeterminesotherwise)orattesttoourinternalcontrolsunderSection404(b)oftheSarbanes-OxleyAct.Wemayfollowthesereportingexemptionsuntilwearenolongeranemerginggrowthcompany.Asaresult,ourshareholdersmaynothaveaccesstocertaininformationthattheydeemimportant.Wewillremainanemerginggrowthcompanyuntiltheearlierof(1)thelastdayofthefiscalyear(a)followingthefifthanniversaryofthecompletionofourIPO,(b)inwhichwehavetotalannualrevenuesofatleastUS$1.07billionor(c)inwhichwearedeemedtobealargeacceleratedfilerand(2)thedateonwhichwehaveissuedmorethanUS$1.00billioninnonconvertibledebtduringthepriorthree-yearperiod.Accordingly,theinformationaboutusavailabletoyouwillnotbethesameas,andmaybemorelimitedthan,theinformationavailabletoshareholdersofacompanythatisnotanemerginggrowthcompany.
WecannotpredictifinvestorswillfindourClassAcommonshareslessattractivebecausewewillrelyontheseexemptions.IfsomeinvestorsfindourClassAcommonshareslessattractiveasaresult,theremaybealessactivetradingmarketforourClassAcommonsharesandoursharepricemaybemorevolatile.
PagSeguro Digital is a foreign private issuer and, as a result, in accordance with the listing requirements of the NYSE we rely on certain home country governancepractices from the Cayman Islands, rather than the corporate governance requirements of the NYSE.
WereportundertheExchangeActasanon-U.S.companywithforeignprivateissuerstatus.TheNYSErulesprovidethatforeignprivateissuersarepermittedtofollowhomecountrypracticeinlieuofcertainNYSEcorporategovernancestandards.ThestandardsapplicabletousareconsiderablydifferentfromthestandardsappliedtoU.S.domesticissuers.Forinstance,wearenotrequiredto:
• haveamajorityofindependentmembersonourboardofdirectors(otherthanasmayresultfromtherequirementsfortheauditcommitteememberindependenceundertheExchangeAct);
• haveaminimumofthreemembersonourauditcommittee;
• haveacompensationcommitteeoranominatingandcorporategovernancecommittee;
• haveregularlyscheduledexecutivesessionsofourboardthatconsistofindependentdirectorsonly;or
• adoptanddiscloseacodeofbusinessconductandethicsfordirectors,officersandemployees.
Asaforeignprivateissuer,wemayfollowhomecountrypracticefromtheCaymanIslandsinlieuoftheaboverequirements.Therefore,theapproachtogovernanceadoptedbyourboardofdirectorsmaybedifferentfromthatofaboardofdirectorsconsistingofamajorityofindependentdirectors,and,asaresult,ourmanagementoversightmaybemorelimitedthanifweweresubjecttoalloftheNYSEcorporategovernancestandards.Accordingly,youmaynothavethesameprotectionsaffordedtoshareholdersofcompaniesthatarenotforeignprivateissuers.
Although we do not expect to be a passive foreign investment company, or PFIC, for U.S. federal income tax purposes, there can be no assurance that we will not be aPFIC for any taxable year, which could subject United States investors in our shares to significant adverse U.S. federal income tax consequences.
WedonotexpecttobeaPFICforthecurrenttaxableyearoranyfutureyear,basedonourcurrentbusinessplans.However,whetherweareaPFICwillbedeterminedannuallybaseduponthecompositionandnatureofourincomeandthecomposition,natureandvaluationofourassets(includinggoodwill),allofwhicharesubjecttochange,andwhichmaybedeterminedinlargepartbyreferencetothemarketvalueofourshares,whichmaybevolatile.ThedeterminationofwhetherweareaPFICwillalsodependupontheapplicationofcomplexU.S.federalincometaxrulesconcerningtheclassificationofourassets(includinggoodwill)andincomeforthispurpose,andtheapplicationoftheserulesisuncertaininsomerespects.OurstatusasaPFICmayalsodepend,inpart,onhowweutilizethecashproceedsfromourJanuary2018IPOandJune2018follow-onoffering,inourbusiness.Accordingly,therecanbenoassurancethattheIRSwillnotchallengeanydeterminationbyusthatwearenotaPFIC.
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IfwewereclassifiedasaPFIC,specialadverseU.S.federaltaxruleswouldgenerallyapplytoaUnitedStatesHolder(asdefinedin“Item10.AdditionalInformation—Taxation—U.S.FederalIncomeTaxConsiderations”)thatholdsourClassAcommonshares.UnitedStatesHoldersareurgedtoconsulttheirowntaxadvisorswithrespecttothepotentialtaxconsequencesofthePFICrulestotheirparticularcircumstances.
Althoughweconsiderourselvestobeactivelyengagedinanactivebusinesswithrespecttoanumberofbusinesslines,andtobeengagedinanactivefinancingactivitywithrespecttotheearlypaymentofreceivablesfeaturethatweoffermerchantsregardingcreditcardtransactionsininstallmentsinparticular,andwebelievethatincomefromsuchbusinessesandfeaturesislikelynottreatedaspassiveincomeforpurposesofthePFICrules,itisnotentirelyclearhowsuchincomewillbetreatedforthesepurposes.Inparticular,certainofourincomemaybetreatedaspassiveincomeunlesssuchincomeiseligibleforanexceptionforcertainincomederivedintheactiveconductofafinancingbusinessunderSection954(h)oftheCode(the“activefinancingexception”),andrelatedassetsmaybeconsideredpassiveassetsunlesstheactivefinancingexceptionapplies.Webelievethattheactivefinancingexceptionwilllikelyapplytotreatsuchincomeasactive,butifitisdetermined,contrarytoourview,thattheincomefromthesebusinessesandfeaturesispassiveforsuchpurposes,thatwouldalterthecompositionofourincomeandassetsforpurposesoftestingourPFICstatus,andmaycauseustobetreatedasaPFIC.FormoreinformationontheapplicationofthePFICrulestous,see“Item10.AdditionalInformation—Taxation—U.S.FederalIncomeTaxConsiderations—PassiveForeignInvestmentCompany.”
Our Class A common shares may not be a suitable investment for all investors, as investment in our Class A common shares presents risks and the possibility of financiallosses.
TheinvestmentinourClassAcommonsharesissubjecttorisks.InvestorswhowishtoinvestinourClassAcommonsharesarethussubjecttoassetlosses,includinglossoftheentirevalueoftheirinvestment,aswellasotherrisks,includingthoserelatedtoourClassAcommonshares,thecompany,thesectorinwhichweoperate,ourshareholdersandthegeneralmacroeconomicenvironmentinBrazil,amongotherrisks.
EachpotentialinvestorinourClassAcommonsharesmustthereforedeterminethesuitabilityofthatinvestmentinlightofitsowncircumstances.Inparticular,eachpotentialinvestorshould:
• havesufficientknowledgeandexperiencetomakeameaningfulevaluationofourClassAcommonshares,themeritsandrisksofinvestinginourClassAcommonsharesandtheinformationcontainedinthisannualreport;
• haveaccessto,andknowledgeof,appropriateanalyticaltoolstoevaluate,inthecontextofitsparticularfinancialsituation,aninvestmentinourClassAcommonsharesandtheimpactourClassAcommonshareswillhaveonitsoverallinvestmentportfolio;
• havesufficientfinancialresourcesandliquiditytobearalloftherisksofaninvestmentinourClassAcommonshares;
• understandthoroughlythetermsofourClassAcommonsharesandbefamiliarwiththebehaviorofanyrelevantindicesandfinancialmarkets;and
• beabletoevaluate(eitheraloneorwiththehelpofafinancialadviser)possiblescenariosforeconomic,interestrateandotherfactorsthatmayaffectitsinvestmentanditsabilitytobeartheapplicablerisks.
ITEM 4. INFORMATION ON THE COMPANY
Overview
WeareadisruptiveprovideroffinancialtechnologysolutionsfocusedprimarilyonMicro-Merchants,SmallCompaniesandMedium-SizedCompanies,orSMEs,inBrazil.Amongourpeers,wearetheonlyfinancialtechnologyproviderinBrazilwhosebusinessmodelcoversallofthefollowingfivepillars:
• Multipledigitalpaymentsolutions;
• In-personpaymentsviaPOSdevicesthatweselltoclients;
• Freedigitalaccounts;
• Issuerofprepaidcardstoclientsforspendingorwithdrawingaccountbalances;and
• Operatingasanacquirer.
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Ourend-to-enddigitalecosystemenablesourcustomersnotonlytoacceptpayments,butalsotogrowandmanagetheirbusinesses.BeforePagSeguro,manyoftheseMicro-MerchantsandSMEswereoverlookedorunderservedbyincumbentpaymentprovidersandlargefinancialinstitutionsinBrazil.Forexample,accordingtoasurveyconductedbyusinJune2017,75 %ofmerchantswhoownourentry-levelmPOSdevice,theMinizinha,didnotacceptcardpaymentspriortosigningupwithPagSeguro.Weoffersafe,affordable,simple,mobile-firstsolutionsformerchantstoacceptpaymentsandmanagetheircashthroughtheirPagSegurodigitalaccounts,withouttheneedforabankaccount.Ourdigitalaccountoffersmorethan35cash-inmethodsandeightcash-outoptionsincludingourPagSeguroprepaidcard,allusingourproprietarytechnologyplatformandbackedbythetrustedPagSeguroandUOLbrands.Ourdigitalecosystemalsofeaturesotherdigitalfinancialservices,businessmanagementtoolsandfunctionalitiesforourclients.
AtDecember31,2018,thePagSeguronetworkconsistedofactiveclientsinall26statesandtheFederalDistrictinBrazil.Ourbusinesshascontinuedtogrowrapidly,despitethemajormacroeconomicslow-downinBrazilsince2014:
• AtDecember31,2018,ouractivemerchantstotaled4.1million,representinganincreaseof48.2%comparedwithR$2.8millionatyear-end2017.Ouractivemerchantsatyear-end2017representedanincreaseof92.9%comparedwithR$1.4millionatyear-end2016.
• In2018,ourTPVtotaledR$76.1billion,representinganincreaseof97.9%comparedwithR$38.5billionin2017.OurTPVin2017representedanincreaseof173.0%comparedwithR$14.1billionin2016.
• In2018,ouraveragespendingperactivemerchanttotaledR$21,988,representinganincreaseof20%comparedwithR$18,374,in2017.Ouraveragespendingperactivemerchantin2017representedanincreaseof48.1%comparedwithR$12,404in2016.
• In2018,ourTotalrevenueandincometotaledR$4,334.7million,representinganincreaseof71.8%comparedwithR$2,523.4millionin2017.OurTotal
revenueandincomein2017representedanincreaseof121.7%comparedwithR$1,138.4millionin2016.TheprincipalcomponentsofourTotalrevenueandincomepostedthefollowinggrowth:
• Ourtwonetrevenueitems(NetrevenuefromtransactionactivitiesandotherservicesandNetrevenuefromsales)togethertotaledR$2,641.7millionin
2018,anincreaseof55.7%comparedwithR$1,696.2millionin2017.Thetotalofthesenetrevenueitemsin2017representedanincreaseof129.0%comparedwithR$740.6millionin2016.
• OurFinancialincometotaledR$1,414.5millionin2018,anincreaseof72.8%comparedwithR$818.6millionin2017.Financialincomein2017representedanincreaseof108.6%comparedwithR$392.4millionin2016.
• In2018,ourNetincomefortheyeartotaledR$910.4million,representinganincreaseof90.1%comparedwithR$478.8millionin2017.Netincomefortheyearin2017representedanincreaseof274.6%comparedwithR$127.8millionin2016.
Brazilhasapproximately7.9millionIndividualMicroEntrepreneurs,4.5millionMicroCompanies,0.5millionSMEsand0.04millionLargeCompaniesaccordingtoSEBRAE(PortaldoEmpreendedor)andIBGE.MicroEntrepreneursandMicroCompaniesrepresentamajormarketopportunity,asmostofthemremainunbankedandseekdigitalpaymentssolutions.Inaddition,accordingtoSEBRAE,thenumberofIndividualMicroEntrepreneursinBrazilincreasedbyapproximatelyonemillioneachyearfrom2010to2017,from780thousandto7.9million(whichamountremainedstablein2018).WebelievethatbycontinuingtomigratetheseIndividualMicroEntrepreneursandMicroCompaniesintoourecosystem,wecancontinuetodrivesignificantadditionalrevenuegrowthinthecomingyears.Atthesametime,wewillcontinuetointroducemorevalue-addedproductsandservicestargetedatlargerclients.Forexample,inFebruary2018,weannouncedanewfunctionalityforourMonderninhaWi-FiandModerninhaPro,enablingmultiplemerchantstoshareasinglePOSdevice;inMarch2018,welaunchedourMinizinhaChip,aPOSdevicethatcombineshigh-endfunctionalities,suchasWi-FiandGPRSconnection(chip)incompacthardwarethatcanfitinamerchant’spocketandcomeswithitsownSIMcardandafreedataplan,thusnolongerrequiringsmartphonepairingliketraditionalmPOSdevices;inMay2018,welaunchedourModerninhaPlus,thenext-generationsubstituteforourhighlysuccessfulModerninhaWi-Fi,nowwithanimprovedphysicalkeyboard,afasterprocessoranddoublethebatterylife;andinSeptember2018,welaunchedourModerninhaSmart,amodern,portableandfullyintegratedAndroidbasedPOSdevicethatoffersafullintegrationofhardware,ourappsandafastandsecurepaymentsnetwork.
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The 2015 Reorganization of PagSeguro Brazil
PagSeguroBrazilwasincorporatedasalegalentityin2006,althoughitdidnotoperatethePagSegurobusinesspriortoAugust1,2015sincemostofthePagSegurobusinessactivitieswereoperatedbyotherUOLgroupmemberspriortothatdate.OnAugust1,2015,UOLcarriedoutacorporatereorganizationinwhichitsegregatedsomeofthePagSeguroactivitiesfromitsotheractivitiesandcontributedthemtoPagSeguroBrazil.
PriortothecontributionofthesePagSeguroactivitiestoPagSeguroBrazil,theirresultsofoperationswererecordedinUOL’sfinancialstatements.Asaresult,thefinancialinformationofPagSeguroDigitalreflectsacarve-outofthePagSeguroactivitiesforperiodspriortoAugust1,2015.Thatcarve-outfinancialinformationisderivedfromUOL’saccountingrecordsanddoesnotnecessarilyreflectthefinancialposition,resultsofoperationsorcashflowsthatwouldhavebeenrecordedhadPagSeguroBrazilbeenoperatingasaseparateentityinthoseperiodsoratthosedates.
FromJanuary1,2014throughJuly31,2015,certainoftheassetsandliabilities,revenues,costsandexpensesdirectlyrelatedtothePagSegurobusinesswerealreadycontrolledseparatelyfromUOL’sotheractivities.Ontheotherhand,certainothercorporatebalancesandtransactionsrelatingtothePagSegurooperationswerenotaccountedforseparatelywithinUOL;thesehavebeenallocatedtoourauditedconsolidatedfinancialstatementsfortheperiodfromJanuary1,2014throughJuly31,2015basedonassumptionssimilartothoseusedafterAugust1,2015,whenthePagSegurobusinesswastransferredtoPagSeguroBrazil.
PriortothecompletionofourIPO,PagSegurousedcentralizedcashmanagementwithUOL.Consequently,allamountsreceivedorpaidinconnectionwiththePagSegurobusinesswererecognizedasbalancesbetweenrelatedpartiesinourauditedconsolidatedfinancialstatements.ThisapproachisconsistentwiththetreatmentofourauditedconsolidatedfinancialstatementspriortoAugust1,2015,whichwerepreparedonacarve-outbasis.PagSeguro’scashmanagementwasseparatedfromUOL’scashmanagementstartingfromthedateofcompletionofourIPO.Anyremainingbalancesthatrelatedtopriorcashmanagementactivitiesbeganaccruinginterestonarms’lengthtermsfromthedateofcompletionofourIPO,andallsuchbalanceswererepaidbyUOLfollowingcompletionofourIPO.
Inaddition,during2016,UOLtransferredits100%interestinNet+Phoneandits75%interestinBoaCompratoPagSeguroBrazilasacapitalcontribution,andPagSeguroBrazilpurchasedtheremaining25%non-controllinginterestsinBoaComprafromitsminorityshareholders.
Our History
UOLlaunchedPagSeguroin2006,acquiringaBraziliandigitalpaymentsstartupandcombiningitwithUOL’sownknow-howinInternetservices.Initiallylaunchedasanonlinepaymentplatform,PagSeguroaimedtoprovidethedigitalpaymentinfrastructurenecessarytosupportthegrowthofe-commerceinBrazilandby2016wewereconsideredthelargestBrazilianonlinepaymentcompanyintermsofTPV,accordingtodatacompiledbyEbit.UOL’scredibilityintheBrazilianInternetsectorwaskeytothissuccessfullaunch,andremainssotoday.Foundedin1996,UOLisBrazil’slargestInternetcontent,digitalproductsandservicescompany.AccordingtocomScore,90.4millionuniquevisitors(approximately75%ofBrazilianinternetusers)accessedaUOLwebsiteinApril2018.ThePagSeguroandUOLbrandstogethergaveBrazilianonlineconsumerstheconfidencetousetheirsensitivepersonalandfinancialdataonourpaymentsplatform,inordertoshoponlineeasilyandsafely.Asanexampleofourcommercialinitiativestoinstilltrustandsafetyinonlineshopping,weintroducedourescrowservicewhereweholdtheconsumer’spaymentforasetperiodoftimefollowingthepurchase,asaprecautionincaseofacommercialclaim.
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In2008,PagSegurowasnamed“PreferredE-commerceCompany”byInfo Exame magazine.Customernumberscontinuedtogrow,with20,000storesandapproximately600,000consumerscarryingouttransactionsthroughthePagSeguroplatformduringtheyear.
In2009,westrengthenedourpresenceindigitalpaymentsbyacquiringBoldcronTechnologies,agatewaypaymentcompanylinkedtothemainacquisitionprovidersinBrazil,whichofferedpaymentprogramsandnetworks.Inthesameyear,Exame magazinenamedUOLintheDigitalIndustrycategoryasoneofthe1000Melhores eMaiores (“biggestandbest”)companiesinBrazil,whenmanyofthePagSegurobusinessactivitieswerestilloperatedbyUOL.In2009,approximately100,000onlinestorescarriedouttransactionsthroughthePagSeguroplatform.
In2010,approximately5,000,000consumerscarriedouttransactionsthroughthePagSeguroplatform.
In2011,weacquiredBoaCompra,acompanyfocusedononlinegaminglicensesanddigitalpaymentsolutionsinvariouscountries.Inthesameyear,approximately311,000onlinestoresandapproximately6.5millionconsumerscarriedouttransactionsthroughthePagSeguroplatformusingoneofthe14paymentmethodsweacceptedatthetime.
In2013,theCentralBankamendedregulationstoterminatetheexclusivebankingarrangementsbetweenbanksandsomecardandmealvoucherschemes,endingtheeffectiveduopolyintheacquirerindustryinBrazil.ThismovewaspartofaconcertedfocusbytheCentralBankonconcentrationinthemarket,followingareportissuedbyitin2010ontheeffectiveduopolybetweentwoacquirers,bothofwhichwereownedbysomeofthelargestbanksinBrazil:RedeCard(nowknownasRede,whichhadexclusiveaccreditationwithMasterCard)andVisanet(nowknownasCielo,whichhadexclusiveaccreditationwithVisa).
Alsoin2013,weexpandedfromonlinepaymentsintopointofsale,orPOS,payments,whichenablemerchantstoreceivein-personpaymentsfrompaymentcards,becomingthefirstpaymentproviderinBraziltosellPOSdevices(asopposedtoofferingrentals).OurfirstPOS,amagneticstripcardreaderthatpluggedintoasmartphoneheadphonejackcombinedwithanapp,wasreleasedinApril2013.Inthesameyear,webecameaccreditedwithSorocred,alocalcardscheme,asanacquirer,andwealsoreceivedPCI-DSSCertificate-DataSecurityStandardCertification.In2013,approximately7.8millionconsumerscarriedouttransactionsthroughthePagSeguroplatform.
In2014,weappliedtotheCentralBanktobecomeanauthorizedpaymentinstitutionunderBrazilianFederalLawNo.12,865/2013.SincewewerealreadyaccreditedbySorocredasanacquirer,theCentralBankregulationspermitustocontinuecarryingoutouractivitiesuntiltheauthorizationisgranted,asfurtherdescribedin“—Regulation—RegulationofthedigitalpaymentsindustryinBrazil.”
InMarch2014,welaunchedourfirstPOSdevice,whichwascompatiblewithiOSandAndroid,thatallowedmerchantstoprocessdebitandcreditcardsusingchips.Inthesameyear,weaccepted25paymentmethods.
In2015,welaunchedtheModerninha,ourfirststandalonePOSdevicebrandedwithitsownnickname,andourPagSeguroprepaidcardundertheMasterCardscheme.WealsoestablishedapartnershipwithTicket,amajormealvoucherscheme.WiththelaunchofourPagSeguroprepaidcard,webecamethefirstpaymentproviderinBraziltooperateasaclosedloopwhereclientsareabletoreceiveandspendfundsallwithinourend-to-enddigitalecosystem.
In2016,webecamethefirstpaymentsproviderinBrazil,otherthantheincumbentacquirersassociatedwithbanks,toobtainaccreditationasanacquirerwithMasterCardandVisa.WehadalreadybeenoperatingasalocalacquirerforSorocredsince2014,andwebeganoperatingasanacquireronalarge-scalebasisinthesecondhalfof2016,oncewehadcompletedtheintegrationofourplatformwithVisaandMasterCard.Inthesameyear,weestablishedpartnershipswithElo,acardscheme,andSodexo,amajormealvouchercardscheme.WealsolaunchedourModerninhaWi-FiandModerninhaProstandalonePOSdevices;beganacceptingin-appcheckout;andlaunchedourfreePOSappPagSeguro Vendas .In2016,webecamelargerthanourparentcompanyUOLforthefirstyearintermsofourTotalrevenueandincomeascomparedwithUOL’snetrevenue(withoutincludingitsconsolidatedsubsidiaries).
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In2017,welaunchedPlugPag,ourPOSdeviceMinizinha,EFTPOS,ouri-BankingappPagSeguro Minha Conta andPag.aeandothernewservicessuchasourFacebookchatbot,reconciliationservicesandone-dayapprovalformerchantswhowishtoobtainearlypaymentoftheirinstallmentreceivables.ThelaunchofourEFTPOSintegrationsolutionmadeusthefirstpaymentproviderinBraziltoconnectPOSdevicestoamerchant’ssalessystem.WealsoobtainedaccreditationasanissuerwithVisa,establishedpartnershipswithmajormealvoucherschemesVRandAlelo,andobtainedaccreditationasanacquirerwithHipercard.Furthermore,inOctober2017,weacquiredacontrollinginterestinBivacoHoldingS.A.,orBIVA,anonlineplatformthatfacilitatespeer-to-peerlending.BetweenNovember2017andApril2018,weacquiredanadditionalinterestinBIVA,bringingourtotalinterestto77.4%ofBIVA’ssharecapital.ThetotalamountwepaidforourshareholdinginBIVAwasR$23.9million.
InJanuary2018,wecarriedoutourIPO,inwhichweandUOLofferedandsoldatotalof121,193,388ofourClassAcommonshares.OurClassAcommonsharesarelistedontheNYSE.InFebruary2018,weannouncedanewfunctionalityforourModerninhaWi-FiandModerninhaPro,enablingmultiplemerchantstoshareasinglePOSdevice,andinMarch2018,welaunchedourMinizinhaChip,aPOSdevicethatcombineshigh-endfunctionalities,suchasWi-FiandGPRSconnection(chip)incompacthardwarethatcanfitinamerchant’spocketandcomeswithitsownSIMcardandafreedataplan,thusnolongerrequiringsmartphonepairingliketraditionalmPOSdevices.InMay2018,welaunchedourModerninhaPlus,thenext-generationsubstituteforourhighlysuccessfulModerninhaWi-Fi,nowwithanimprovedphysicalkeyboard,afasterprocessoranddoublethebatterylife.InJune2018,wecarriedoutafollow-onoffering,inwhichweandUOLofferedandsoldatotalof35,950,000ofourClassAcommonshares.InSeptember2018,welaunchedourModerninhaSmart,amodern,portableandfullyintegratedAndroidbasedPOSdevicethatoffersafullintegrationofhardware,ourappsandafastandsecurepaymentsnetwork.InOctober2018,ourboardofdirectorsauthorizedasharerepurchaseprogramunderwhichourmanagementisresponsiblefordeterminingthetimingandnumberofsharestobeacquired,withinthelimitsestablishedbytheboardofdirectors.Formoreinformationonoursharerepurchaseprogram,see“Item16E.PurchasesofEquitySecuritiesbytheIssuerandAffiliatedPurchasers.”InDecember2018,weacquiredTilixDigitalS.A.,orTilix.Tilixprovidessoftwaredevelopmentformanagingpaymentsolutionsforbusiness-to-customer,orB2C,andbusiness-to-business,orB2B.
InJanuary2019,weacquiredBBNBancoBrasileirodeNegóciosS.A.(renamedBancoseguroS.A.inFebruary2019),orBancoseguro,throughBSHoldingFinanceiraLtda.,orBSHolding,aholdingcompanyincorporatedunderPagSeguroDigital.Bancoseguroholdsamulti-banklicensetoprovidefinancialservices.Weexpectthatthisacquisitionwillallowustoexpandourproductsandservicesoffering.Asafinancialinstitution,BancoseguroissubjecttoLaw4,595/64andtherulesoftheCMNandtheCentralBank.
Our Products and Services
Weprovideawiderangeofaffordablesolutionsandtoolstohelpourmerchantsmanageandgrowtheirbusinesses.Theseincludeavarietyofcash-inandcash-outoptionswithfeaturesdesignedtoattractandretainclients,providethemwithaccesstoworkingcapitalandhelpthemmanagetheircashflow.
Wehaveanin-depthunderstandingofourclients,theissuestheyfaceandthemarketsinwhichtheyoperate.AsapioneerintheBraziliandigitalpaymentsmarket,weareabletoanticipatetrendsandtranslatethemintonewproductsandsolutionsthatmeetourclients’needsmoreefficientlythanforeigncompetitorsoperatinginBrazil.Forexample,theBrazilianmarketexpectsdigitalpaymentsproviderstoofferanumberofcountry-specificfeatures,suchasinstallmentpaymentsoncreditcards,earlypaymentofinstallmentreceivablesandpaymentsviaboletos ,allofwhicharecentraltoBrazilianfinancialculture.Webuiltourend-to-enddigitalecosystemandourdigitalfinancialservicesofferingaroundtheselocalspecificities.
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Withtheincreasedadoptionofmobiledevicesbymerchantsandconsumersasaformofpayment,wedesignalloursolutionsonamobile-firstbasissothatourmerchantscanbeself-sufficientatalltimesandofferpaymentoptionstoconsumersusingmobiledevices.
Ourindustryischaracterizedbyrapidlychangingtechnology,changingcustomerneeds,evolvingindustrystandardsandfrequentintroductionsofnewproductsandservices.Forexample,inadditiontotheproductsandservicesthatwecurrentlyoffer,WeChatPayandAlipay,playersintheChinesedigitalpaymentsindustry,alreadyofferpromotionsandcashbackfeaturesaswellason-platformthird-partybillpayments.Westrivetocontinuetodevelopandreleasenewproductsandservicestomatchtheneedsandexpectationsofourclients.
The PagSeguro Ecosystem
Ourend-to-enddigitalecosystemoperatesasaclosedloopwhereourclientsareabletoaddresstheirmaindaytodayfinancialneeds,includingreceivingandspendingfundsandmanagingandgrowingtheirbusinesses.ClientsdonotneedtopurchaseaPOSdeviceinordertogainaccesstoourend-to-enddigitalecosystem.Ourmainproductsandservicesfallintothefollowingcategories,describedinfurtherdetailbelow:
• thefreePagSegurodigitalaccount,aroundwhichallourfunctionalitiesandservicesaredesigned
• morethan35cash-insolutions
• earlypaymentofmerchants’installmentreceivables
• advancedbuilt-infunctionalitiesaswellasvalue-addedservicesandfeatures
• avarietyofcash-outmethods
Thediagrambelowshowsourmaincash-inandcash-outsolutions:
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The Free PagSeguro Digital Account
ThefreePagSegurodigitalaccount,whichisthecoreofourclientofferingforbothmerchantsandconsumers,centralizesallcash-inoptions,functionalities,servicesandcash-outoptionsinasingleecosystemsothatourclientscangrowtheirbusinessinasafe,affordable,scalableandsimpleway,allwithoutneedingabankaccount.Asa“closed-loopdomestic”paymentschemeforBrazilianregulatorypurposes,thePagSegurodigitalaccountdoesnotprovidecreditfacilitiesorenableholderstoincurnegativebalances,however.
MerchantscansignupforafreePagSegurodigitalaccount,gainingaccesstoalloftheofferingsinourecosystem,throughasingleonlinecontractthatcanbecompletedinminuteswithoutpaperwork.Ouronlinecontractistypicallyforanindefiniteterm,butforcertainclientswhogeneratehigherTPV,wemayoffercontractswithtermsbetween12and24months.Bysigningupwithus,merchantscanautomaticallystartacceptingmorethan35cash-inmethods,allwithantifraudprotection,andcanbeginaccessingourbusinessmanagementtools.Formerchantswhorequiremorecomplexfunctionalities,weoffervalue-addedservicesandfeaturessuchastheearlypaymentofinstallmentreceivablesformerchants,accountingreconciliationandshippingsolutions.WithourfreePagSegurodigitalaccount,merchantsmayrequestthetransferoftheiraccountbalancetoabankaccountandalsouseourproductsandservicestospendtheiraccountbalanceorotherfundsdirectlyonourplatformby(i)buyingonline,(ii)makingpeer-to-peertransfersor(iii)transferringtheirbalancetothePagSeguroprepaidcard,allowingthemtobuygoodsandservicesin-personandonlineorwithdrawcashatmorethanonemillionCirrusnetworkATMsinBrazilandabroad.
Forconsumers,thefreePagSegurodigitalaccountoffersnotonlynumeroussimpleandsafeoptionstopaymerchants,butalsotheoptiontosavetheircarddetailsonoureWalletsolutionandtomakeandreceivepaymentsonapeer-to-peerbasis.
Webelievethattheseproductsandservicescreatea“networkgrowtheffect.”Theadvantagesofourdigitalpaymentsolutionsformerchantsdrivegrowthintheirbusinesses,andtheadvantagesofourdigitalpaymentsolutionsforconsumersleadthemtoprefermerchantswhoofferthesesolutions,resultingintheacquisitionofnewclientsthroughword-of-mouthrecommendationsbybothmerchantsandconsumers.
• Cash-In Solutions
Ourcash-inmethodscanbeacceptedthroughwebcheckout,in-appcheckoutorin-personusingourPOSdevices.Theyincludecreditanddebitcards,mealvouchers,boletos ,banktransfers,bankdebits,transfersbetweenPagSegurodigitalaccountsandcashdeposits.
• Online and In-Person Payment Tools
Ourmerchantscanchoosetoacceptpaymentsfromconsumersthroughvariousonlineandin-personpaymenttools.Forourmerchantsconductingbusinessonline,weofferwebcheckoutsolutionsandin-apppaymentoptions.Formerchantsconductingin-persontransactions,weofferarangeofPOSdevices.
• Online Payment Tools
Weofferavarietyofonlinepaymenttoolsthatenablemerchantstointegratesophisticatedcheckoutandpaymentprocessesintotheironlinebusiness.Theseinclude(i)threewebcheckoutoptionsformerchantsconductingbusinessoverbrowsers(whetherdesktopormobile),(ii)anin-apppaymenttoolformerchantsconductingbusinessusingmobileappsand(iii)P2Pandsocialpaymenttools.
Web Checkout: Ourwebcheckoutoptionsoffertokenization,advancedhandlingofshippinginformation,managementofsubscriptionsandautomaticbillingandordertracking.Weofferthreedifferentlevelsofwebcheckoutintegration:“Redirect,”“Lightbox”and“Transparent,”allofwhichareeasytosetupandcustomize.Wesupplyourcodeanddocumentationtothemerchantfreeofcharge,allowingthemerchanttoselectandimplementthewebcheckoutsolutionthatbestmeetshisorherneeds.
Redirect :WithRedirect,uponclickingonthepaymentoption,theconsumerisredirectedawayfromthemerchant’swebsitetothePagSegurosecuredomain,wherethepaymentisprocessed.Afterpayment,theconsumerisredirectedtothemerchant’swebsite.
Lightbox :WithLightbox,thepaymentisprocessedonthemerchant’sownwebsitebutusingthePagSegurosecuredomain.Theconsumerseesbothinterfacesduringtheonlinecheckoutprocess,withaPagSeguropop-upoverlayingthemerchant’swebsite.Aftercompletingthepurchase,thepop-upwillcloseandtheconsumercancontinuenavigatingonthemerchant’swebsite.
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Transparent :TheTransparentcheckoutsolutionallowsthemerchanttocreateafullycustomizedconsumerexperience.Paymentsareprocessedbyusunderthemerchant’sdomainwhilestillbenefitingfromthefeaturesandfunctionalitiesofthePagSeguroecosystem,suchasantifraudandconsumerdataprotection.
In-App Checkout: Ourin-appcheckoutisapaymenttooldevelopedtobeintegratedinourmerchants’mobileappswhichallowspaymentprocessingviathePagSegurosecuredomain,whileofferingsingle-clickcheckoutwithinthemerchant’smobileapp.
P2P and Social Payment Tools (Pag.ae): OurinnovativeP2Pand“socialpayment”toolsallowourclientstorequestpaymentsbysendingaweblinkviasocialmediastraighttothepersonpaying,creatingafastandeasywayforanyonetosendandreceivemoneyelectronically.Userscanrequestpaymentseveniftheydonothaveawebsite,andthepersonpayingdoesnotneedtoregisterwithPagSeguroandmaypaythroughavarietyofoptions,includingcreditcard,boleto orbankdeposit.WithourPag.aesocialpaymenttool,ourcustomercanrequestpaymentsusingalinkandcansendthislinktooneormorepayer(s)viae-mail,socialnetworkormessagingservicesuchasWhatsApp,usingtherecipient’sphonenumberore-mailaddress.Thepayerclicksonthelinkandcanmakethepaymenteasilyinvariousways(creditcard,boletoorbankdeposit).Pag.aeallowstherecipienttopayinupto12installments.
WebelievetheseP2Pandsocialpaymenttoolsdriveorganicgrowthinourcustomerbase,establishingrelationshipswithpotentialPagSegurocustomersandencouragingthemtojoinourplatformwhentheymakeapayment.
• In-Person Payment Tools
OurrangeofaffordablePOSdevicesallowsmerchantstoacceptcredit,debitandmealvouchercardpaymentsonanin-personbasis.OurPOSdevicescanbesetupinlessthanfiveminutes.Theyaredesignedtobeeasytouseandhavehighlevelsofsystemavailability,efficientback-upsolutions,value-addedfunctionalitiesandafive-yearwarranty.
WithPagSeguro,merchantscanpurchasetheirowndevicewithaflexiblepaymentplanandnomonthlyrentalorotherrecurringfees.Fortheequivalentofthreetosixmonths’rentalpaymentstoanincumbent,merchantscanbuyacomparableorbetterdevicefromPagSeguro,freeingthemfromtheincumbents’continuousmonthlyrentalfees.Nocreditchecksonthemerchantarerequired.AllofourPOSdevicescomewithafreePagSeguroprepaidcardtogivethemerchantanimmediatecash-outoptionwithoutneedingabankaccount.
WeofferacomprehensivesuiteofPOSdevices,fromourentry-levelMinizinhatotheModerninhaSmart.ThesePOSdevicesareofferedseparatelyfromourtransactionservices.
• TheMinizinhamPOSdeviceconnectsviaBluetoothtoourfreePOSappPagSeguro Vendas installedonthemerchant’ssmartphoneandprovidesasimpleyet
securemeanstoacceptpaymentcards.TheMinizinhaprovidesreceiptsviaSMSfortheconsumer.WeoffertheMinizinhaforapurchasepriceof12monthlyinstallmentsofonlyR$4.90(orUS$1.26),appealingtotheMicro-MerchantsandSMEswhoplantheirownbusinessexpensesonamonthlybasis.
• TheMinizinhaChipmPOSdevicecombineshigh-endfunctionalities,suchasWi-FiandGPRSconnection(chip)incompacthardwarethatcanfitinamerchant’spocket.ThismPOSdevicethatcomeswithitsownSIMcardandafreedataplan,improvingthemerchantexperiencebynolongerrequiringsmartphonepairingliketraditionalmPOSdevices.ThesefeaturesmaketheMinizinhaChipappealingtoMicro-MerchantsandSMEsseekingmobilityandconvenience.WeoffertheMinizinhaChipappealingtoMicro-MerchantsandSMEsseekingmobilityandconvenience.WeoffertheMinizinhaChipforapurchasepriceof12monthlyinstallmentsofonlyR$9.90(orUS$2.55).
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• Forbusinesseswithgreaterneedsweofferthreemoresophisticatedunits,theModerninhaPlus(pricedat12monthlyinstallmentsofR$19.90(orUS$5.14)),theModerninhaPro(pricedat12monthlyinstallmentsofR$35.90(orUS$9.26))andtheModerninhaSmart(pricedat12monthlyinstallmentsofR$39.90(orUS$10.30)).TheModerninhaPlus,whichprovidesconsumerreceiptsviaSMS,isaimedatmerchantswhogeneratelowertransactionvolumes;whiletheModerninhaPro,whichprovidesconsumerreceiptsviaSMSorinpaperform,isaimedatmerchantswhogeneratehighertransactionvolumes.TheModerninhaProisthefirstsingleunittoofferGPRS/2G/3Gchipconnection,NFC,plug-and-playWi-FiandBluetoothconnections(forcommercialautomationandconnectiontootherdevices)onthesamedevice,makingitthePOSdevicewiththemostconnectivityfeaturesinBrazil.Thedeviceswitchesautomaticallybetweenthevariousconnectionformats.InFebruary2018,welaunchedanewfunctionalityfortheModerninhaProandModerninhaWi-Fi(substitutedfortheModerninhaPlusinMay2018),enablingseveralmerchantstoshareasinglePOSdevice(eachterminalcanserveuptosixdigitalaccounts,handlingsalestransactionsforeachaccountseparately).TheModerninhaSmarthasallthefeaturesoftheModerninhaPro,plustheintegrationofaproductcatalogueandinventorymanagementsoftware,aninstallmentpaymentcalculator,boleto issuanceandpaymentlinks.Theintegrationofsoftwareandhardwarehelpsmerchantsbemoreproductiveandbetterservetheirclients.
WealsoofferavirtualPOSterminalviaourfreeAndroidandiOSappthatenablesthemerchant’ssmartphonetobeusedasaPOSdeviceforcreditcardpaymentswithnoexternalhardware.Themerchanttypestheconsumer’scardnumberintotheapp,withsecurityprovidedvianetworkencryption.
WegeneraterevenuesfromoursalesofPOSdevicestomerchants,inadditiontothecommissionsgeneratedonthecredit,debitandmealvouchercardtransactionsprocessedthroughthedevice.AllPOSdevicesaresetuptoofferupto12monthlyinstallmentsoncreditcardpaymentsatthepointofpurchaseiftheconsumerchooses.
Wecurrentlyrelyononemanufacturertomanufacture,testandassembleasignificantamountofourPOSdevices.TheAgreementfortheSupplyofEquipment,datedasofJune26,2014,asamendedfromtimetotime,byandamongPAXBRComérciodeEquipamentosdeInformáticaLtda.,orPAX,TransireFabricaçãodeComponentesEletrônicosLtda.,orTransire,andNet+PhoneTelecomunicaçõesLtda,orNet+Phone,setsforththetypesofPOSdevicestobesoldbyPAXandTransiretoNet+PhoneandthestandardtermsandconditionsgoverningthissupplyofPOSdevices.PAXandTransiretogetherserveasourmainsupplierofPOSdevices.ConsiderationpayabletoPAXandTransireunderthisagreementisdeterminedbythenumberofPOSdevicesorderedbyNet+Phone.Formoreinformation,seeItem3.KeyInformation—RiskFactors—SomeofthekeycomponentsofourPOSdevicesaresourcedfromalimitednumberofsuppliers.Wearethereforeatriskofshortage,priceincreases,changes,delayordiscontinuationofkeycomponents,whichcoulddisruptandharmourbusiness.
• Payment Methods
ThefreePagSegurodigitalaccountprovidesmorethan35cash-inmethods,includingtheitemslistedbelow.Ourcash-inmethodscanbeacceptedthroughwebcheckout,in-appcheckout,orin-personusingourPOSdevices.Fordebitcardtransactions,cardissuersinBrazilpayusasacquireronthefirstbusinessdayfollowingtheconsumertransaction;andforcreditcardtransactions,cardissuersinBrazilpayusasacquireronthe30thbusinessdayfollowingtheconsumertransaction.Webelieveourpricingmodelissimple,transparentandeasytounderstand,whencomparedwiththatofincumbentpaymentprocessingproviders,whichistypicallydeterminedbasedonamixofvolume,cardschemeandpaymentmethod.Webelievethattheseincumbentprovidershavelittleincentivetomakeaggressivepricechangesastheymayruntheriskofcannibalizingtheirownmerchantbaseasaresult.
• Credit cards
Weacceptcardpayments,throughouronlineandin-personPOSpaymenttools,fromallthemajorcreditcardschemesactiveinBrazil,includingVisa,MasterCard,Elo,AmericanExpress,Hiperandregionalschemes.Thecreditcardschemesacceptedonourplatformtogetherrepresent99%ofthetotalpaymentvolumecarriedoutusingcreditcardsinBrazilin2016,accordingtotheCentralBank.Wegeneraterevenuefromcreditcardtransactionsbychargingamerchantdiscountrate,orMDR,acommissionwithheldbyusfromthetransactionvaluepaidtothemerchant.Thetransactionamount,lesstheMDR,iscreditedtothemerchant’sPagSegurodigitalaccount.OurMDRpricingmodelisstandardized,easytounderstandandtransparent.WealsooffercustomizedMDRpricingforcertainmerchantswhoprocesslargepaymentvolumes.WerecognizetheMDRfeesinourfinancialstatementsasrevenue.
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InthestandardpaymentcycleinBrazil,merchantsreceivesalesrevenuesfromcreditcardtransactions30businessdaysaftertheconsumertransaction.Weofferourmerchantstheoptiontoreceivetheircreditcardrevenuesfromusearlier,oneitherthefirstorthe14thbusinessdayfollowingtheconsumertransaction.Werefertothisoptionasthemerchant’s“paymentdateelection”service(regime de recebimento ).Ifthemerchantselectstheone-dayor14-daypaymentdateelection,thefeesforthisserviceareincludedinthemerchant’soverallMDRfee.Thisserviceisseparatefromtheearlypaymentofreceivablesfeaturethatweoffermerchants,whichisdescribedinthefollowingparagraph.
Exceptwhenmerchantschoosetoreceiveearlypaymentoftheirreceivablesrelatedtocreditcardtransactionstobepaidininstallments,asdescribedinthefollowingparagraph,and/orwhenmerchantsselectthe14-dayorone-daypaymentdateelectionservice,wereleasetheamountoftheconsumertransaction(lessourcommission)tothemerchant’sPagSegurodigitalaccountthreedaysafterwereceivetheunderlyingpaymentfromthecreditcardissuer.
Inaddition,Brazilianconsumersexpectmerchantstoallowthemtochooseatthepointofpurchasetohavethepurchasepriceeither(i)chargedtotheircreditcardaccountsinasinglepayment,asinothermarkets,or(ii)splitintoseveralpaymentsandonlychargedtotheircreditcardaccountsinmonthlyinstallments.Inthiscase,themerchantonlyreceivestherevenuesaftertherespectivemonthlyinstallmenthasbeencharged,ratherthan30businessdaysaftertheoriginaltransaction.Tohelpourmerchantsoffertheinstallmentpaymentoptiontoconsumers,weoffertopaythemonthlyinstallmentreceivablestoourmerchantsup-frontinalumpsumwhentheconsumerchosestopayininstallments.Micro-MerchantsandSMEshavehistoricallyfaceddifficultiesobtainingthisservicefromtheincumbentpaymentprocessingproviders,andtheyoftenrequiremerchantstorequestearlypaymentonatransaction-by-transactionbasis.Weofferasolutiontothesebottlenecksthroughsimpleronboardingandpreapprovalofamerchant’searlypayments.Theunderlyingreceivablesrelatingtothesepaymentsareowedtousbythecreditcardissuers,whichareownedprimarilybyBrazil’slargeretailbanks.
Whenmerchantschoosetomakeuseofthisearlypaymentofreceivablesfeaturewechargethemafinancefeeintheformofadiscountfromthelumpsumofthereceivable.ThisdiscountisadditionaltotheMDRfeewithheldfromthemerchant.ThefinancefeeisdeductedfromtheamountspayabletothemerchantatthesametimeasMDR,butisrecognizedinourfinancialstatementsasfinancialincomeratherthanrevenues.ThediscountthatgeneratesourFinancialincomerelatesonlytotheearlypaymentofthesecondandsuccessiveinstallmentsofthepurchase;thefirstinstallmentisnotpaidearlyasitisdisbursedtothemerchantwithinthenormalbillingcycle,soitdoesnotgenerateremunerationintheformofFinancialincome(althoughitdoesgenerateMDR,whichisrecognizedasGrossrevenuefromtransactionactivitiesandotherservices).(Thelumpsumreceivable,lessthefinancefeediscountandtheMDRortheintermediationtransaction,iscreditedtothemerchantonthe30th,14thor1stbusinessdayafterthetransaction,accordingtothemerchant’s“paymentdateelection”describedintheparagraphabove.)
Merchantswhochoosenottomakeuseofourearlypaymentofreceivablesfeatureonlyreceivetheamountpayabletothemundertheconsumertransaction(afterdeductionoftheMDRfee)afterthemonthlyinstallmentsarechargedtotheconsumer’screditcardandthecardissuerhaspaidus.
• Debit cards
WeacceptdebitcardsfromallthemajorcardschemesactiveinBrazil,includingMaestro(MasterCard),VisaElectronandElo,forin-personpayments.Thedebitcardschemesacceptedonourplatformtogetherrepresent98%ofthetotalpaymentvolumecarriedoutusingdebitcardsinBrazilin2016,accordingtotheCentralBank.WegeneraterevenuesintheformofMDRcommissionsusingastandardized,easytounderstandandtransparentpricingmodel.Unlikecreditcards,Braziliandebitcardsdonotofferaninstallmentpaymentoption.
Fordebitcardtransactions,wereceivetheunderlyingpaymentfromthedebitcardissueronebusinessdayaftertheconsumertransaction,andwepaytheamountoftheconsumertransaction(lessourcommission)tothemerchantonthesamedayaswereceiveit.
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• Meal voucher cards
MealvouchercardsarealaborbenefitincludedinBrazilianemploymentcontracts.Theemployersimplycreditstheemployee’scardonaprepaidbasis,andtheemployeecanusetheprepaidbalanceonthecardtomakepurchasesinrestaurantsandgrocerystores.Weacceptin-personcardpaymentsfromtheprincipalmealvouchercardissuersactiveinBrazil,generatingrevenuesintheformofavalueaddednetwork,orVAN,commission,whichiscurrentlychargedataflatratepertransaction.Mealvouchercardsdonotofferaninstallmentpaymentoption.
• Boletos
Boletos arepaymentslipdocumentsissuedbyBrazilianbusinessesandutilitiesthroughbankstoenableconsumerstopaytheirbills.Boletos canbeusedforproductsorservices,utilitiesortaxes.Eachboleto referstoaspecificmerchantandcustomertransaction,andincludesthemerchant’sname,customerinformation,expirationdateandtotalamountdue,plusaserialnumberthatidentifiestheaccounttobecreditedandabarcodesothattheentiredocumentcanbereadandprocessed.Theconsumercanpaytheboleto throughhisorherbankeitheronline,overthephone,atabranchoratanATM.Merchantscanreceivecreditsfromboletos directlyintotheirPagSegurodigitalaccount.WegenerateMDRcommissionsoncash-inpaymentsmadeviaboletos toamerchant’sPagSegurodigitalaccount.
• Bank transfers and bank debits
Consumerscanmaketransfersfrombankaccounts,eithertotheirownPagSegurodigitalaccountinordertoaddfundstotheiraccountbalancethatcanthenbeusedanywhereonourecosystem,ortoamerchant’sdigitalaccounttopayforaproductorservice.Thesepaymentscanbemadeviaanybanktransferor,inthecaseofpaymentstomerchants,viaanonlinebankdebittool.WegenerateMDRcommissionsonpaymentsmadeviabanktransferorbankdebittoamerchant’sPagSegurodigitalaccount.ThereisnoMDRoranyothercommissionchargedbyuswhenconsumersaddfundstotheirownPagSegurodigitalaccount.
• Cash deposits
Similartobanktransfers,consumerscanmakecashdepositsatabankbranchorATMdirectlytoPagSegurodigitalaccounts–eithertoamerchant’sdigitalaccounttopayforaproductorservice,ortotheconsumer’sowndigitalaccount.WegenerateMDRcommissionsonpaymentsmadeviacashdeposittoamerchant’sPagSegurodigitalaccount.ThereisnoMDRoranyothercommissionchargedbyuswhenconsumersaddfundstotheirownPagSegurodigitalaccount.
• Early payment of installment receivables
Asdescribedunder“—Cash-inSolutions—CreditCards”above,ourearlypaymentofinstallmentreceivablesfeaturehelpsourmerchantsoffertheinstallmentpaymentoptiontotheirconsumerspayingbycreditcard,withoutsacrificingtheirowncashflow.Inadditiontogeneratingfinancialincomeforus,thisearlypaymentfeatureisanimportantsourceofworkingcapitalformerchants,inparticularforourMicro-MerchantsandSMEs,whomaynototherwisehaveefficientaccesstocapitalfrombanksortraditionalfinancialinstitutions.Webelievethatbyofferingthisfeature,wecanstrengthenourbusinesspartnershipswithourmerchantsbyprovidingthiscapitaltohelpthemgrowtheirbusinesses.
Wegeneratefinancialincomethroughthisearlypaymentfeaturebychargingafinancefeeintheformofadiscountfromthesecondandsuccessiveinstallmentsthatarepaidearlyinthelumpsum,inadditiontotheMDRfeeontheintermediationtransaction.Thefinancefeeisdeductedfromtheamountspayabletothemerchant,butisrecognizedinourfinancialstatementsasfinancialincomeratherthanrevenues.
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PriortoourIPO,wefundedtheworkingcapitalforthisearlypaymentserviceusingdebtincurredbyus.Inaddition,inNovember2017wesetupaBrazilianinvestmentfundtopurchaseandholdreceivablesknownasaFIDCthroughwhichwemayraisedebttofinancetheearlypaymentofreceivablesfeature.TheFIDCiscontrolledbyourBrazilianoperatingcompany(byvirtueofsubscribingforitssubordinatedquotas)butraisescapitalbyissuingseniorquotasinthefundtooutsideinvestors,whoreceiveinterestontheseinvestmentsfromtheFIDC.TheFIDCusesthecapitalitraisestofinancethegrowthofthisearlypaymentofreceivablesfeature.OurremunerationfromtheearlypaymentofreceivablesfeaturecontinuestobereflectedasFinancialincomeinourconsolidatedfinancialstatements.WedonotexpecttheestablishmentoftheFIDCtoimpactthediscountratewechargeinconnectiontotheearlypaymentofreceivablesfeatureortheexpensesweincurtoobtainearlypaymentofnotereceivablesfromcardissuersandacquirers.ForfurtherinformationregardingtheFIDC,see“—OrganizationalStructure.”
• Advanced Built-In Functionalities and Value-Added Services and Features
OurPagSegurodigitalaccountcomeswithanumberofadvancedbuilt-infunctionalities,providedfreeofcharge,aswellasvalue-addedservicesandfeaturesthataredesignedtoprotectbothmerchantsandconsumersandhelpourmerchantsbettermanagetheirbusinesses.Thesefunctionalitiesandvalue-addedservicesandfeaturesincludepurchaseprotectionmechanisms,antifraudplatform,accountandbusinessmanagementtools,eWalletandourPOSApp.OurplatformalsoprovidessolutionssuchasPlugPag,afreetoolcompatiblewithiOS,AndroidandWindows,aimedatourmedium-sizedandlargermerchants,enablingthemtoconnecttheirPOSdevicedirectlytotheirenterpriseresourceplanning,orERP,softwareorsalesautomationsystemviaBluetooth;cartrecoverysolutionstoimprovesalesconversionratesone-commercewebsites;anddeveloperplatformsallowingmerchantstogivethird-partydevelopersaccesstotheirPagSegurodigitalaccountsonasecurebasisusingapplicationprogramminginterfaces,orAPIs;amongotherfunctionalities.
✓ Purchase Protection
OurPurchaseProtectionsolutionaddsmultiplelayersofsecurityforonlinepurchasesmadeonourplatform.Asapaymentcardindustry,orPCI,compliantcompany,wedonotshareconsumercreditcarddataorsensitiveinformationwithmerchants,helpingtopreventfraudanddatamisuse.Foraddedprotectiontoonlineconsumers,ourecosystemholdsconsumerpaymentsinescrowforasetperiodafterpurchase.Ifthereisnoconsumercomplaint,thefundsaretypicallyreleasedtothemerchantintwoweeksfromthepurchasedate.IfaproblemoccurswiththepurchaseandthetransactioniseligibleforPurchaseProtection,theconsumercanfileaclaimand,ifrequested,wewillactasmediatortohelpresolvetheissuewiththemerchant.Iftheissueisnotresolved,wereimbursetheconsumerforthefullpurchasepriceplusshippingcosts.IntheyearendedDecember31,2018,only0.13%ofouronlinetransactionsrequiredclaimmediationandforthosethatdid,theaveragetimeforclaimmediationsettlementwas16days.81%ofthedisagreementsrelatedtonon-receiptofapurchase,and33 %wereresolvedinfavorofthemerchant.
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✓ Antifraud platform
Inaddition,ourITbackgroundcombinedwiththe11yearsofhistoricaltransactiondatawehaveamassedsinceourlaunchallowustodevelopproprietarytechnologyandgainexpertiseagainstonlinefraudandchargebacksrelatedtofraudulenttransactionsinBrazil.Ourantifraudplatformcombinesproprietaryfeatures,suchasinternalriskmodelingandscoringthroughartificialintelligenceandriskassessmenttoolsthatcollectpublicandprivatemarketinformation,aswellasfront-linethird-partysolutionssuchasFeedzai,EmailageandThreatmetrix.Theantifraudplatformisfullyintegratedintoourecosystem,andfeaturesprocessesdesignedtomonitorpotentialfraudinrealtime,trackingtransactionapprovalsanddenials,enablingustomaintainhightransactionapprovalratesandlowincidencesoffraud.
Whenaclientrequestsachargebackfromthecardissuer,weverifywhetherthesaleoccurredandwhethertheproductorservicewasdeliveredbythemerchant.Ifthechargebackclaimwasfraudulent,wepaytheamountduetothemerchantandwecontesttheattemptedchargebackwiththecardissuerbyprovidingthesupportingdocumentation.Ifthechargebackclaimwasjustified,wepassonthecosttothemerchant.Forinformationonclaimmediationrequestsfiledbyourclientsonourplatform,see“—ProtectingOurClients—TransactionSecurity.”
✓ Account management tools
WeaimtohelpourmerchantsexpandtheirbusinessesbyofferingfreetoolssuchasaccountstatementsfortheirPagSegurodigitalaccount,customizeddigitalinvoicing,salesdatareports,simulationsofearlypaymentofmerchants’receivables,andrevenuemanagement.
✓ Business management tools
Formerchantswhogeneratelargertransactionvolumesandrequiremorecomplexcontrols,weofferservicessuchasflexiblecreditingdates,paymentintoseparatebankaccountsforeachcardscheme,andasplitpaymentsolutionthatautomaticallysegregatescreditsbetweentwodifferentcompanies.Oursplitpaymentsolutionallowsmerchantstogeneratepayments,integrateemployees,managereceivablesandreceivecommissionsinrealtime.Weoffertheseservicesbyprovidingourmerchantswiththecodeanddocumentationtoimplementthesetools.
✓ eWallet
WithoureWallet,userscansavetheircreditcardinformationdirectlytoourecosystem,allowingthemtomakeonlinepaymentstomerchantswithouthavingtotypeinthecreditcarddetailsforeachpurchase.Thisimprovesuserexperienceandmakesthepaymentprocessfaster,easierandmoresecure.OureWalletallowsuserstosavemultiplecreditcards.CreditcardtransactionsmadeusingcreditcardsstoredineWalletgenerateMDRfees.
OurrelatedeWalletapp,currentlyavailableintheGooglePlaystore,offersanin-appcardscannerandallowsclientstousethecreditcardinformationsavedintheireWallettopayanyPagSeguromerchantviatheirsmartphone.Inaddition,usingaQRcodefeaturethatiscurrentlyinthepilotphase,consumerswillbeabletomakepurchaseswithoureWalletappbysimplyscanningtheQRcode(createdusingourproprietaryQRcodetechnology)generatedbythemerchant’sPagSeguro Vendas app,ModerninhaPro,ModerninhaSmartorModerninhaWifi.AfterscanningtheQRcode,theconsumer’seWalletappwillauthenticateandfinalizethetransactionbyscanningtheconsumer’sfingerprintonhisorhersmartphone.
✓ POS App (PagSeguro Vendas)
OurfreesalesappPagSeguro Vendas isaPOSsoftwareappavailableforsmartphonesandtabletsrunningiOSorAndroidthatintegratesseamlesslywithourpaymentprocessingsolutionbutcanalsobeusedonastand-alonebasis.ThetabletversionoftheappallowsmerchantsusingPOSdevicestoimprovetheirbusinessoperationsbyregisteringanditemizingtheirservicesandproducts,sellingmerchandiseoncustomizableterms,trackingbusinessdataandallowingforfasterin-appcheckout.Itemscanbegrouped,categorized,sorted,andlinkedtoinventorymanagement.PagSeguro Vendas isuser-friendlyandsecure,andfullyintegratedwithourmerchants’freePagSegurodigitalaccountsandtheModerninhaPro,ModerninhaSmart,ModerninhaandMinizinhaPOSdevices.AsofMarch31,2019,PagSeguro Vendaswasratedanaverageof4.8starsby85thousandreviewersinApple’sBrazilianappstoreand4.4starsby86thousandreviewersintheAndroidappstore.
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✓ PagSeguro Minha Conta (i-Banking App)
Ourfreedigitalaccountapp,PagSeguro Minha Conta ,isatransactionanddigitalaccountmanagementappavailableforsmartphonesandtabletsrunningiOSorAndroidwhichprovidesourclientswithaneasyandpracticalwaytomanagetheirtransactionsandaccountbalances.ThroughPagSeguro Minha Conta ,ourclientscanpaytheirbillsandtransfertheiraccountbalancesdirectlytotheirPagSeguroprepaidcardsorthird-partyfinancialinstitutions.PagSeguro Minha Conta alsoprovidesreal-timestatementsofauser’shistoricalaccountandPagSeguroprepaidcardactivity.AsofMarch31,2019,PagSeguro Minha Conta wasratedanaverageof4.8starsby219thousandreviewersinApple’sBrazilianappstoreandanaverageof4.8starsby316thousandreviewersintheAndroidappstore.Inaddition,beginninginJune2018,usersofouri-BankingappPagSeguro Minha Conta willhavetheoptiontotopupcreditsontheirprepaidmobilephones.
✓ PlugPag
PlugPagisafreetool,aimedatourmedium-sizedandlargermerchants,enablingthemtoconnecttheirPOSdevicedirectlytotheirenterpriseresourceplanning(ERP)softwareorsalesautomationsystemviaBluetooth.ThePlugPagfeatureoffersvariousadvantagessuchasadirectconnectionbetweenthemerchant’ssoftwareandthePOSdevice,whichautomatestheflowofinformation,avoidinghumaninterventionsoastominimizepotentialmistakesandfraud.Bysendingtheconfirmationorrejectionofeachsaledirectlytothemerchant’ssoftware,thistoolfacilitatesautomaticreconciliationofsalesrecords,acommonrequirementoflargermerchants.
✓ Accounting reconciliation
Weoffermerchantsaplatformforreconcilingtheirdigitaltransactionrevenuesandtherelatedfeeswiththeirbankaccountbalanceandaccountingrecords.ThisserviceofferingrampedupsignificantlywithouracquisitionofR2TechInformáticaS.A.,orR2Tech,acompanyspecializedinreconciliation,andisbackedbyourexpertiseinmiddlewareandback-officesolutionsprocessing.Wegeneraterevenuesfromthisserviceintheformofaflatcommissionpertransactionreconciledfortheclient.
✓ Peer-to-Peer Lending
Throughour77.4%controllinginterestinBIVA,whichweacquiredbetweenOctober2017andApril2018,wefacilitatepeer-to-peerlendingservices.Thisactivityconsistsofconnectingaborrowertoalenderorgroupoflenders.Wegeneraterevenuesfromthisserviceintheformofacommissionpertransaction,plusaperformancefeeifthelenders’returnontheirportfolioofloansexceedscertaintargets.Thelenderstakethefullcreditriskontheloans;asintermediarybetweenlenderandborrower,wearenotexposedtothiscreditrisk.
✓ Cart recovery
Ourcartrecoverysolutionaimstoimprovesalesconversionratesone-commercewebsites.Iftheconsumeraccessesamerchantwebsite,placesitemsinthewebsite’svirtualcart,continuestoourwebcheckoutbutthenleavesthewebsitebeforefinalizingthepurchase,thistoolkeepstheitemsinthecart,savingtheconsumertimeifheorshelaterreturnstothemerchant’swebsitetocompletethepurchase.Italsofeaturese-mailremindersandremarketingtodirecttheconsumerbacktothemerchant’swebcheckout.
✓ Subscription service and automatic billing
OurMerchantscanprovidesubscriptionservicesandautomaticbillingfortheirconsumers.Thistoolenablesthemerchanttomanage,cancelorrenewsubscriptionsandmanageandcancelautomaticbillings,allthroughthefreePagSegurodigitalaccount.
✓ Smart Supply
OurModerninhaSmartandModerninhaProhavebuilt-intechnologythatmeasurestheconsumptionofPOSreceiptpaper.Thistechnology,combinedwithanadvancedlogisticssystem,allowsustodeliverreplacementpaperrollstothemerchantautomaticallyinadvance.Webelievethistoolincreasesmerchantsatisfactionwhilereducinginquiriesandtherelatedcustomerservicecosts.Weconsiderthisservicealoyaltyinitiativeandprovideitfreeofcharge.
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✓ POS Assistance
AllofourPOSdeviceshaveafive-yearwarranty.InordertoreducetheinconvenienceofwaitingforrepairtoorreplacementofaPOSdevice,weoffereligiblemerchantsthreelevelsofassistance:(i)standardservice,wherethereplacementdeviceisdeliveredviamail,(ii)expressservice,wherethereplacementdeviceisdeliveredviacourierservice,and(iii)quarterlypreventiveassistanceforlargerclients,whereourfieldtechniciansvisitthemerchantperiodicallytocarryoutmaintenanceonapreventivebasis.
✓ Developer platform
Weenablemerchantstogivethird-partydevelopersaccesstotheirPagSegurodigitalaccountsonasecurebasisusingapplicationprogramminginterfaces,orAPIs.OurAPIsaredesignedtoallowdevelopersaplug-and-playservicetocreateintegratedwebsitesandsoftwareapplicationsthatconnecttothePagSeguroplatform,allowingmerchantstobenefitfullyfromthefeaturesandvalue-addedservicesandfeaturesavailableonourecosystem,whilekeepingourcustomers’financialinformationconfidential.Ourdeveloperplatformoffersintegrationtestsandguides(includingmodulesandavirtuallibrary)andcommunityandGitHubforums.
✓ Shipping solutions
ThroughapartnershipwiththeBrazilianPostOffice,weofferintegratedshippingsolutionsenablingonlinemerchantstosend,insureandtracktheirpackagesatloweroverallshippingratesthantheBrazilianPostOffice’sstandardprices.Deliveryfeescanbeincludedintheonlinesalestransactionorpaidseparatelybythepurchaser.Usingourshippingcostcalculator,merchantscanchoosetooffer(i)afixedfreightratebasedonthenumberofitemsshipped,(ii)aweight-basedrateor(iii)acustomizedratebasedonafixedamountplusanincrementalrateforeachadditionalitem.Merchantscanalsotrackallshipmentsandinsuretheirproductsagainstloss.WemonitorandreviewtheBrazilianPostOffice’sperformanceandcompliancewithourcontractualterms.
✓ EFTPOS Integration Solution
OurEFTPOSintegrationsolution,whichwelaunchedinAugust2017,offerssolutionsthatintegrateEFTPOStechnologywithmerchantsoftware,securedviaPINpad.ThisserviceallowsmerchantstoprocessoflargetransactionvolumesandissuetaxreceiptsmoreeasilythanwithtraditionalPOSdevices.
✓ Single-Click
OurSingle-Clickserviceisafunctionalityofferedacrossoure-commerceplatformsthatenablesmerchantstorequestcustomerapprovaltosavetheirpaymentinformation,simplifyingfuturepurchases.Onceapproved,e-commercemerchantscanprovideaseamlesscheckoutoption,allowingcustomerstomakepurchaseswithasingleclick.
✓ Promotional engine
Ourpromotionalengineisamarketingtoolthatallowsmerchantstoadvertiseacrossourclientbase.Forexample,amerchantcanofferpromotionaldiscountstootherPagSegurocustomersinspecificsectors.
✓ Multiple merchant feature
InFebruary2018,welaunchedaninnovativefunctionalityforbothourModerninhaWi-FiandModerninhaProwhichenablesmultiplemerchantstoshareasinglePOSdevice.OurModerninhaSmart(whichwelaunchedinOctober2018)alsohasthisfunctionality.Withthisnewfunctionality,eachofthesePOSdevicescanserveuptosixdigitalaccounts,handlingsalestransactionsforeachaccountseparatelyandallowingentrepreneursandmerchantstomanagemultiplebusinessesusingasinglePOSdevice.Thelaunchofthisnewfunctionality,innovativeintheBrazilianmarket,furthersourcontinuousprocessofdemocratizationandgreaterpenetrationofourpaymentterminalsforentrepreneursandmerchantsacrossalltypesofbusinesses.
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✓ Cash-Out Solutions
Ourcash-outsolutionsenableourclientstotransferorspendthebalanceontheirPagSegurodigitalaccountsecurelybyavarietyofmeansincludingonlinepurchasesviaeWallet,in-personandonlinepurchasesorcashwithdrawalsusingourPagSeguroprepaidcard,on-platformpeer-to-peertransfers,transferstobankaccountsandcross-borderremittances.
✓ Online purchases via eWallet
UserscansaveinformationformultiplecreditcardsdirectlytoourecosystemusingoureWalletsolution,allowingthemtomakeonlinepaymentstomerchantsonasecurebasiswithouthavingtotypeinthecreditcarddetailsforeachpurchase.Thisimprovesuserexperienceandmakesthepaymentprocessfasterandeasier.ForfurtherinformationregardingoureWalletsolution,see“—OurProductsandServices—TheFreePagSeguroDigitalAccount—AdvancedBuilt-InFunctionalitiesandValue-AddedServicesandFeatures—eWallet.”
✓ PagSeguro prepaid cards
OurPagSeguroMasterCardprepaidcardsallowmerchantsorconsumerstousethebalancefromtheirfreePagSegurodigitalaccounttobuygoodsandservicesin-personandonlineorwithdrawcashatmorethanonemillionCirrusnetworkATMsinBrazilandabroad.MerchantscanthereforereceivepaymentsfromsalestransactionsintotheirPagSegurodigitalaccountandspendthatmoneydirectlyusingthePagSeguroprepaidcard,withoutneedingabankaccount.Withamodestinitialpurchasecost,thecardcomeswithnoannualfeesorinterestrates–andweprovideitfreetomerchantswhopurchaseaPagSeguroPOSormPOSdevice.ThePagSeguroprepaidcarddoesnotrequirecreditchecksonthemerchantorpreapprovalforissuance.AtDecember31,2018,morethan1.4millionPagSeguroprepaidcardshadbeenissued.
Wegeneraterevenuesfrom(i)theissuancefeesforPagSeguroprepaidcards,(ii)interchangefeeswereceive,asacardissuer,fromeachtransactionmadethroughPagSeguroprepaidcards,and(iii)aflatfeeforcashwithdrawalsatATMsusingPagSeguroprepaidcards.Aftertheinitialissuancefee,thecardholderdoesnotpayanannualfeeorotherfeesforusingthecard.
✓ On-platform peer-to-peer transfers
OurclientscanusethebalanceontheirPagSegurodigitalaccounttotransferfundstootherPagSegurodigitalaccountsonourplatform.Wechargeacommissionpaidbytherecipientofthepayment.
✓ Bank transfers
ClientscanmaketransfersfromtheirPagSegurodigitalaccountdirectlytoabankaccount.Webelieve,however,thatournumerousdirectcash-outoptionsareincreasinglyreducingtheneedforourmerchantstotransferbalancesoutofourdigitalplatform.Wedonotreceiverevenuesfromcash-outbanktransfers.
✓ Bill payment
Clientscanpayawidevarietyofbills,suchasutilities,consumer,taxandotherboletos ,throughouri-bankingappPagSeguro Minha Conta usingthecashbalanceintheirPagSegurodigitalaccount.Thereisnocosttoourclientsforusingthisfeature.Wereceiverevenuesintheformofaflatfeefromtheissuerofthebillforeachbillpaymentprocessed.
✓ Cross-border remittance
Our“BoaCompra”platformallowsourclientstooperatecross-bordertransactionswhenconsumersarelocatedindifferentcountriesacrossLatinAmerica,Spain,PortugalandTurkey(forexample,forforeignmerchantssellingtoBrazilianconsumers,orforBrazilianmerchantssellingtoforeignconsumers–althoughtheplatformisalsousedfortransactionswhereneitherpartyisBrazilian).BoaCompraoriginallyoperatedintheonlinegamingindustryandhasbeenparticularlyattractivetoclientsinthatindustry.Sinceitslaunch,however,BoaComprahasnowexpandedtoserveotherindustries.
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UsingBoaCompra,internationalonlinemerchants,suchasValve(Steam),ElectronicArtsandRiotGames,canprovidetheirend-userswithlocalpaymentmethods,leveragingconversionratesandunlockingthemarketpotentialofcross-bordere-commerce.TheBoaCompraplatformfeaturesanintegratedweb-checkoutsolutionwhichallowsclientstosavetheircreditcardinformationforfuturetransactionsandenablesinternationalcheckoutbyofferingusersmorethan140paymentmethodsinmultiplecurrencies,includingourproprietarydigitalcurrencyCréditos Gold .Créditos Gold canbepurchasedonlinethroughBoaCompra’sonlinedigitalgamingportalGo4GoldinBrazil,Chile,Peru,Mexico,PortugalandTurkey.Oncepurchased,Créditos Gold canbeusedimmediatelytomakein-apppurchases.WhenBrazilianconsumers,forinstance,makeapurchaseabroadusingBoaCompra,weorganizetheremittanceofthefundsoutsideBrazilonbehalfofeachcustomerinaccordancewithCentralBankregulationsusingtheconsumer’sBraziliantaxpayeridentificationnumber.
Our Customers
Weofferourclientsfreedigitalaccountswhichtheycanusetosellproductsasmerchants,ortobuyproductsasconsumers.Thereisnodivisionbetweenthetwocategories,sincethesamedigitalaccountservesbothtypesofclients–indeed,ourmerchantsarealsoconsumerswhentheyspendtheirdigitalaccountbalanceusingourcash-outfeatures,andourconsumerclientscanalsobemerchants.
Weofferthefollowingmajorbenefitsforbothmerchantsandconsumers:
• Customersdonotneedabankaccounttojoinourecosystem.Witha100%onlineonboardingprocess(ascomparedwiththeofflineonboardingprocessofincumbentproviders,whichtypicallyrequiresatechniciantoinstallthePOSdevice),withoutpaperwork,quickturnaroundandahighacceptancerate,weofferaccesstoouradvanceddigitalpaymentprocessingandreceivablesearlypaymentfeatures.Weacceptmerchantswhoareeitherindividualsorcompanies.Theincumbentproviders,ontheotherhand,generallyrequiretheirclientstohavebankaccountsanddonotofferonlineonboarding,whichwebelievereducestheirabilitytoreachlowervolumeclients,evenwithlowerpricing.
• Weofferafullsuiteofmorethan35cash-inoptionsunderasinglecontract,withsecurityandreliability,pluseightcash-outoptionsincludingbanktransfers,onlinepurchasing,andspendingbothin-personandonlineaswellascashwithdrawalsusingourPagSeguroprepaidcard.
• Ourpricingmodelforallofourservicesandfeatures–whethertransactionfees,earlypaymentofinstallmentreceivablesorsalesofPOSdevices–issimple,transparentandeasytounderstand.Forexample,weoffertheMinizinhamPOSdeviceforapurchasepriceof12monthlyinstallmentsofonlyR$4.90(orUS$1.26),theMinizinhaChipmPOSdeviceforapurchasepriceof12monthlyinstallmentsofonlyR$9.90(orUS$2.55),theModerninhaPlusforapurchasepriceof12monthlyinstallmentsofR$19.90(orUS$5.14),theModerninhaProforapurchasepriceof12monthlyinstallmentsofR$35.90(orUS$9.26)andtheModerninhaSmart(whichwelaunchedinOctober2018)forapurchasepriceof12monthlyinstallmentsofR$39.90(orUS$10.30).WealsoofferpromotionsonourMDRpricing,suchasourApril2018promotionofferingnewmerchantclientsareducedMDRrateof0.99%oncreditanddebitcardtransactionswithoutinstallmentsuptoR$10,000invalue.InMayandJune2018,ourpromotionalcampaignofferednewmerchantclientsaMDRrateof0%oncreditanddebitcardtransactionswithoutinstallmentsuptoR$1,500invalue.
• Oursocialpaymentsolutions,suchasPag.ae,allowbothconsumersandmerchantstousetheirPagSeguroaccounttorequestpaymentsviaweblinkssentthroughe-mail,socialnetworksormessagingservicessuchasWhatsApp.
• WeofferacomprehensivesuiteofaffordablePOSdevices,withuser-friendlyfeaturesandfunctionalities,reliableconnectivityandafive-yearwarranty.Ourdevicesrangefromtheentry-levelMinizinhatotheModerninhaSmart.Ourmerchantspurchasetheirowndevicethroughaflexiblepaymentplan.Fortheequivalentofthreetosixmonths’rentalpaymentswithincumbents,merchantscanbuyacomparabledevicefromPagSeguroandavoidcontinuousmonthlyrentalfees.
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• Dataprotectionandconfidentialityforconsumers,withmerchantverificationandtransactionprotectionmechanisms,includingescrowperiodsandclaimmediationservices.
• OurpaymentsolutionsreducetheneedforconsumerstocarrycashsincemoreMicro-MerchantsandSMEsareabletoacceptdigitalpaymentsin-person.
Sinceweonlyprovidethepaymentserviceandtheacquiringservice,theconsumerintheunderlyingcommercialtransactionisnotourclient,andwearenotresponsibleforprovidingthegoodsorservicesorfulfillingtheconsumerorder.Asproviderofthepaymentservice,wefacilitatethepaymenttransactiononbehalfofthemerchant;whileasacquirer,weenablemerchantstoacceptpaymentcardsbycompletingtheprocessingofthepaymenttransaction.
Ourmerchantbaseishighlydiversified,whichshieldsusfromdependenceonasmallnumberofbusinesssectorsormajoraccounts.In2018,restaurants/foodandbeveragemerchants,ourlargestvolumesector,anddepartment/generalretailstores,oursecondlargestvolumesector,accountedfor13%and12%,respectively,ofouroveralltransactionbusiness.Noothermajorbusinesssector(clothingstores(6%),beautyparlors(5%),autosparesandrepairshops(3%)orsupermarkets/grocerystores(2%))accountedformorethan10%ofouroverallTPV.Wearenotdependentonanyindividualmerchants.In2018,ourtop10clientsrepresentedlessthan3%ofourTPVandourtop100clientsrepresentedlessthan5%ofourTPV.
WeprincipallytargetMicro-MerchantsandSMEs,manyofwhomwereignoredorunderservedbytheincumbentpaymentprovidersandfinancialinstitutionsinBrazilbeforePagSegurowaslaunched.TheseincumbentsgenerallychargeMicro-MerchantsandSMEshigheroverallfeesandcommissionsbecausetheygeneratelowertransactionvolumes.Ourplatformenablesustokeepoverallper-transactionfeeslowerformerchantswhogeneratelowertransactionvolumes.Webelieveourclientdatasupportsthismodel:AccordingtoasurveyconductedbyusinOctober2016,81%ofourmerchantsusedPagSeguroastheirsoleelectronicpaymentsservice(while2%ofourmerchantsalsousedGetNet,4%alsousedMercadoPago,6%alsousedRedeand11%alsousedCielo,accordingtothesamesurvey)andaccordingtoasurveyconductedbyusinJanuary2019,85%ofMinizinhaownersdidnotacceptcardsbeforesigningupwithus.
Westrivetoproviderelevantproducts,efficientcustomerservice,accountsupportandprotectionfromfraudandloss.Wehavedevelopedanumberofsecurityprocedurestoprovideprotectiontoconsumersbyofferingescrowperiodsandclaimmediation,coveringissuessuchasnon-deliveryorfailuretomatchthemerchant’sdescriptionoftheproductsold.See,“—ProtectingOurClients”and“—OurProductsandServices—TheFreePagSeguroDigitalAccount—ThePagSeguroEcosystem—AdvancedBuilt-InFunctionalitiesandValue-AddedServicesandFeatures—PurchaseProtection.”
Product Development and Technology
Wedevelopmostofthesoftwaretechnologyusedbyourdigitalpaymentsplatformin-house,althoughwealsooutsourcecertainprojectstooutsidedevelopersinordertoexpeditethedeliveryofsoftwareandkeepourtime-to-marketadvantage.Throughthiscombinationoftechnology,developedbothin-houseandbyoutsourceddevelopers,wehavedevelopedastable,reliable,proprietaryandhighlyscalableplatformwithintuitiveuserinterfaces,managementtools,transactionprocessing,APIs,anddatabaseandnetworkapplicationsthathelpourcustomersutilizeoursuiteofproductsandservices,whilekeepingtheirfinancialinformationconfidential.
Ourplatformallowsconsumerstomakepurchasesusingabroadrangeofpaymentmethods,regardlessofwhereamerchantislocated.ForpurchasesmadeoutsideBrazil,wepartnerwithlocalpaymentserviceproviders.
Wemanagelargevolumesofsystemaccessdataandtransactions,withmorethan99.9%availabilityin2018,usingInternetdatacentersprovidedbyUOLDiveo,aUOLgroupcompanythatfocusesonIToutsourcing,datacenters,cloudcomputingandothermanagedITservices.Thisallowsustohavemultipleredundanciesand,tothebenefitofourmerchants,automaticallyswitchtothenetworksofotheracquirersinthecaseofconnectionfailure.BackedbyUOLDiveo,weareabletoscaleupourserviceswhileretaininghighavailabilityforpeak–volumeoccasionssuchasChristmas,Mother’sDayandBlackFriday.Thishigh-availabilityandcontinuouslydeployedplatformensuresthatallofourclientsareabletooperatewiththelatestfeaturesandthenewestinnovationswithoutanyneedtopatchorupgradetheirsoftware.OurscaleasaUOLgroupcompanyallowsustoestablishfavorablepartnershipswithseveralsuppliers,includingsoftwaredevelopersandhardwaremanufacturers.WeworkwiththesesupplierstocontinuouslytailoroursolutionsandPOSdevicestofittheneedsofourmaintargetmerchants.
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AtDecember31,2018,65%ofthetotalheadcountofPagSegurowasengagedinproductsandengineering.Withourspecializedteamof1,168peoplefocusedondevelopingreliable,scalableandproprietarysystemsandnewproductsandfeatures,weregularlyrolloutinnovativeanddisruptivesolutionsthataretailoredtotheBrazilianmarket.Ourexpenditureonsoftwareandtechnology(includingsalaries)amountedtoR$218.9millionintheyearendedDecember31,2018,R$95.0millionin2017andR$68.6millionin2016.
Westrivetooffernewfeaturesandformatstoimproveourusers’experienceonourplatform.Thisprocessstartsbylisteningtosuggestionsfromourclients.Weholdfocusgroupmeetingsandconductsurveysperiodicallywithregularandhighlyactivecustomerstoobtainfeedbackregardingourproductsandservices,aswellassuggestionsandideasfornewfeatures.
Wetestallnewproductsandfeaturesrigorouslyin-houseandwithpilotgroupsofmerchantsbeforerollingthemout.Onceourinternalteamhasensuredtheyareworkingproperly,wetypicallyrollthemoutfirsttoaselectgroupofcustomersonatrialbasis,listeningtofeedbackandsuggestionsandenhancingthefinaldetailsoftheproductorfeaturebeforerollingouttoallcustomers.Wefrequentlyupdateoursoftwareproductsandfollowaregularsoftwarereleaseschedulewithimprovementsdeployedperiodically,ensuringourmerchantsgetimmediateaccesstothelatestfeatures.
Managingourplatform’ssoftwarearchitectureandhardwareisasimportantasofferingnewproductsandfeatures.Wefocusonoptimizingourprocessesandequipmenttohelpensurethatoursystemsarecapableofhandlingourrapidgrowthinanefficientandcost-effectiveway.
Ourtechnologyinfrastructuresimplifiesthestorageandprocessingoflargeamountsofdata,automatesmanyadministrativetasks,andenablesustodeployandoperateproductsandservicesonawidescale.Ourtechnologyinfrastructureisdesignedtoreducedowntimeintheeventofsystemoutagesorcatastrophicevents,withcontinuityfeatures,systemredundancyandprotectionagainstcyber-securitythreats.Forfurtherinformationonthemeasureswetaketoprotectagainstcyber-securitythreats,see“—ProtectingOurClients.”Westrivetoimproveourtechnologyinfrastructureandplatformcontinuouslyinordertoenhancethecustomerexperienceandtoincreasesecurity,efficiencyandscalability.
Ourresearchanddevelopmentteamfocusesonourongoingpipelineofreliable,scalableandproprietarysystemsandnewproductsandfeaturestailoredtothecurrentBrazilianmarket.Usingourqualifiedproductandservicedesignteamsandresearchanddevelopmentteam,weintendtorolloutaportfolioofnewsolutions,forbothmerchantsandconsumers,basedonmobileapps,furtherstrengtheningourmobile-firstcommitmentandsimplifyingourclients’lives.Weanticipatethatwewillcontinuetodevoteconsiderableresourcestoresearchanddevelopmentinthefutureasweaddnewfeaturesandfunctionalitytoourproductsandservices.Ourmarketischaracterizedbyrapidlychanginganddisruptivetechnologies,aswellasevolvingindustryandregulatorystandards,andweseektoremaininthefrontlineofthesechanges.Webelieveourabilitytoadapttorapidlychangingtechnologies,productsandservicesinanevolvingindustryisthecornerstoneofourfuturesuccess.Forfurtherinformationonthetechnologicalchallengesinourindustry,see“Item3.KeyInformation—RiskFactors—RisksRelatingtoourBusinessandIndustry—Substantialandincreasinglyintensecompetition,bothwithinourindustryandfromotherpaymentmethods,mayharmourbusiness.”
Protecting Our Clients
Trustandsecurityareessentialtosuccessinthedigitalpaymentsmarket.Fraudisaconstantthreat,involvingitemssuchasaccounttakeover,identitytheftandmaliciouscounterpartyactivities.Theabilitytoprotectourclientsfromfinanciallossanddatathefthasbeenkeytoourcompetingsuccessfullyandgrowingourbusinesssustainably,andwebelievesecuritywillcontinuetobeamajorcompetitivefactorinthefuture.Weinvestinprovidingcomprehensiveprotectionforourclientsonourecosystem,focusingonthreemainareas:transactionsecurity;platformsecurity;andcustomerservice.Ourinvestmentsinthisareahavebeenrecognizedbyourcustomersandtheindustry.Forexample,wewererecognizedasthe“Best Company for Consumers ”forelectronicpaymentsinboth2017and2016andforonlinepaymentsin2015byÉpoca magazineandReclame Aqui ,aconsumerprotectionserviceandwererecognizedforclientserviceexcellenceinthefinancialservicescategoryin2015and2017byConsumidor Moderno .
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Transaction Security
Wehavefocusedsinceourlaunchonensuringthesecurityofpaymenttransactionscarriedoutonourecosystem.WebelievewehavebeenapioneerindevelopingtechnologyandexpertiseagainstonlinefraudandchargebacksrelatedtofraudulenttransactionsinBrazil,backedbythereputationofthePagSeguroandUOLbrands.Ourtransactionapprovalratecontinuestoincrease,withratesintheyearendedDecember31,2018beinghigherthanthoseachievedin2017andearlieryears.In2016,wewerenamedtheBrazilianacquirerwiththelowestchargeback-to-salesratiobyVisa.Ournetchargebackratesfortransactionsofsixmonthsoldaveraged0.15%in2018,adeclineof0.3percentagepointsfrom0.18%in2017.Thesenetchargebackratescomparehighlyfavorablywiththe1.0%limitestablishedbythecardschemes.Weachievetransactionsecuritythroughacombinationofantifraudtechnology,thedesignofourplatform,andprotectionprogramsforourclients.
Asisthecasewithanydigitaltransaction,thosethattakeplaceonourdigitalplatformaresusceptibletopotentiallyfraudulentorimpropersales.Weusetwomainprocessestocontrolthisfraudrisk.Thefirstprocessconsistsofmonitoringcreditcard,debitcardandboleto transactionsonarealtimebasis,throughsystemsthatidentifypotentialfraud.Thisprocessapprovesorrejectssuspicioustransactionsatthetimeoftheauthorization,basedonstatisticalmodelsthatarerevisedonanongoingbasis.Thesecondprocess,whichoccursafterapprovalofthetransaction,consistsofareconciliationprocessinwhichPagSeguroBrazilfollowsuponallchargebackswiththecardissuersand,whereappropriate,opensaclaimprocesstoseekreversalofthechargeback.Thisisacomplementaryprocessandincreasesourabilitytoavoidandmanagechargebacks.
Ourantifraudplatformcombinesproprietaryfeatures,suchasinternalriskmodelingandscoringthroughartificialintelligenceandriskassessmenttoolsthatcollectpublicandprivatemarketinformation,aswellasfront-linethird-partysolutionssuchasFeedzai,EmailageandThreatmetrics.Formoreinformation,see“—OurProductsandServices—TheFreePagSeguroDigitalAccount—ThePagSeguroEcosystem—AdvancedBuilt-InFunctionalitiesandValue-AddedServicesandFeatures—AntifraudPlatform.”
Thedesignofourplatformalsoassistsinpreservingdataconfidentiality.ConsumerscanmakepaymentsthroughPagSegurowithoutsharingsensitivefinancialinformationsuchascreditcardordebitcarddetailswiththemerchant.TransactionsonPagSeguroaretokenizedandpaymentauthorizationcredentialsarekeptseparatedfromaccountholder’sinformation,helpingustobetterdetectandpreventfraudwhenfundsenter,flowthroughandexitourecosystem.Inaddition,theabilitytomakeandacceptdigitalpaymentsincreasespersonalsecurityinin-persontransactionsbyreducingtheneedforbothconsumersandmerchantstocarrycash.
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Ourprotectionprogramsguardourclientsfromlossthroughfraudandcounterpartynon-performance.WebelievethehistoryandcriticalmassofourconsumerdatabaseallowsustoprovidequickerandmorereliabletransactionapprovalwhencomparedwithsmallerormorerecentlyestablisheddigitalpaymentsprovidersinBrazil.Ourprotectionprograms,whichapplytoonlinepurchasetransactionscompletedthroughourecosystem,aimtoreassureconsumerstheconfidencethattheywillonlyberequiredtopayiftheyreceivetheproductintheconditionasdescribed,andmerchantstheconfidencethattheywillreceivepaymentfortheproductthattheyaredeliveringtothecustomer.
Ourmerchantprogramprotectsagainstlossesforchargebacksrelatedtofraudulenttransactionsandsimilarclaimsonsubstantiallyallofouronlinetransactions.Achargebacksituationmayalsooccurifthecardusedwasunauthorizedorifthereisanon-fraudulentcardholderclaim.Ifachargebackclaimisvalid,thecardissuersendsthetransactionbacktothemerchantandchargesthemerchanttheamountofthequestionedsale.Ifthemerchantcannotremedythechargeback,itisthemerchant’sloss.Iftherearenotsufficientfundsinthemerchant’saccount,thechargebackamountischargedtotheacquirer.
Forconsumers,weprovideprotectionagainstlossesunderwhichtheycansubmitaclaimifthereisaproblemwithapurchase.TheconsumercanfileaclaimthroughourPagSegurowebsite,inwhichcasetheconsumerandthemerchantcanseektoresolvetheclaimtogether.Iftheycannotresolvetheclaimwithinsevendaysaftertheclaimisfiled,theconsumerhasupto20daysafterfilingtheclaimtorequestourassistance,inwhichcaseweactasmediatortohelpresolvetheissuewiththemerchant.Ifaconsumerdoesnotrequestmediationwithin20daysafterfilingaclaim,theclaimwillberesolvedinfavorofthemerchant.
Platform Security
Thearchitectureofourproprietaryend-to-endpaymentsplatformcoupledwiththird-partyfront-linesolutionsarekeytoourabilitytoprovideconsumersandmerchantswithcontinuityandsecurityintheirtransactions.Throughournumerouscash-inandcash-outoptionsweareabletocollectdatafromourclients,whichallowsustosaveimportantinformationoncustomersforpurposesoftheapprovaloffuturetransactions.Themultiplelayersofprotectionincludedinourplatformhelpensurecontinuityaswellasaddressingthecybersecurityrisksdiscussedin“—TransactionSecurity”above.
Wehavedevelopedintuitiveuserinterfaces,customertoolsandtransactionprocessinganddatabaseandnetworkapplicationsthathelpouruserscompletetransactionsreliablyandsecurely,bothonourplatformandonmerchantsitesintegratedwithPagSeguro.Ourtechnologyinfrastructuresimplifiesthestorageandprocessingoflargeamountsofdata,facilitatesthedeploymentandoperationoflarge-scaleglobalproductsandservices,andautomatesadministrativetasks.Thistechnologyinfrastructurehasbeendesignedaroundindustry-standardarchitecturestoreducedowntimeintheeventofoutagesorcatastrophicoccurrences.Weworkhardtoimproveourtechnologyinfrastructurecontinuouslyinordertoenhancecustomerexperienceandincreaseefficiency,scalabilityandsecurity.Wealsomakeuseofwell-knownsecurityprotocolsandsolutionstosecureuserdata,including,amongothers:EV-SSLcertificate,multipledataencryptiontechniques,intrusiondetection(IPS/IDS),applicationfirewalls(WAF),Anti-DistributedDenial-of-Service(Anti-DDos),DataLossPrevention(DLP),2-factorauthenticationandencryptedcommunications.Wealsoholdthefollowingcertifications:PINsecurity;MasterCardandVisamerchantacquiringhost;MasterCardterminalintegrationprocess,orM-TIP;Visaacquirerdevicevalidationtoolkit,orADVT;MasterCardend-to-enddemonstrationservices,orETED;PCIDataSecurityStandard,orPCI-DSS;andEuropay,MasterCard,andVisa,orEMV,Levels1and2.OurdatacentersarealsocertifiedundertheInternationalOrganizationofSecuritization,orISO,standards9001,20000and27001.Wealsoperformsecuritypenetrationtestsonaregularbasisandapplytop-mostsecuritysolutionsforcodeandapplicationscanning(SAST/DAST).Forinformationonnewdataprotectionregulations,see“Item3A.KeyInformation—RiskFactors—RisksRelatingtoOurBusinessandIndustry—Ourbusinessissubjecttocyberattacksandsecurityandprivacybreaches.”
Ourplatform’sarchitectureenablesustoconnectallpartiesregardlessofwhetherthetransactionisoccurringatatraditionalphysicallocation(suchasinsideastore),anon-traditionalphysicallocation(suchasinapark),oronline,andwhetherthroughamobileorfixed-linedevice.Webelievethatmobiledevices,inadditiontobeingthefutureofe-commerce,createopportunitiestomakedigitalpaymentssafer.Forexample,weareabletouselocationdatafrommobiledevicestoreduceriskforourclients.
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Customer Service
Webelieveinexcellenceincustomerservice.Byhelpingourclientsnavigateourapplicationsandansweringtheirquestionsquickly,wehavebeenabletogrowrapidlyandtobuildtrustwithourclients,whichhasincreasedtheirloyaltyandenhancedourreputation.
Weprovideourcustomerswithanarrayofdigitalself-servicefeaturesincludingreal-timeonlinechat,chatbots,customerservicee-mailandacustomerservicehotline.OurcustomerserviceoperationsareprovidedbyacombinationofPagSeguroemployeesandoutsourcedproviders,whichtogethermakeupapproximately1,700full-timeequivalent,orFTE,positions.
Wemaintainservicequalitybyplacingemphasisoncarefulselectionofourcustomerservicepersonnelandregularmonitoringofemployeeperformance.Ouremployeesaretrainedtohavein-depthproductandserviceknowledge,professionalserviceattitudesandcommunicationskillstobestaddresscustomerneedsandinquiries.
Sales and Marketing
OurmarketingstrategyisdesignedtogrowourplatformbybuildingandmaintainingthebrandrecognitionandtrustofthePagSeguroandUOLbrands,attractingnewusersandgeneratingmorefrequentactivitybyourexistingusers.OurmarketinginitiativesaimingtorecruitmerchantstoourecosystemcurrentlyfocusonourPOSdevices,webcheckoutsolutionsandotheronlinepaymentsolutions.Webelievethatintroducingourdigitalpaymentsolutionstomerchantswhoarenotyetourclientsisthemostefficientandcost-effectivestrategytosustainourgrowthamongbothmerchantsandconsumers,creatinga“networkgrowtheffect.”Theadvantagesofourdigitalpaymentsolutionsformerchantsdrivegrowthintheirbusinesses,andtheadvantagesofourdigitalpaymentsolutionsforconsumersleadthemtoprefermerchantswhoofferthesesolutions,resultingintheacquisitionofnewclientsthroughword-of-mouthrecommendationsbybothmerchantsandconsumers.
Ourexistingclients,manyofwhomusePagSeguroasanexclusivepaymentmethod,enableustogrowourmerchantbaserapidlyandorganically.EachtimeaconsumerwhohasnotyetregisteredwithPagSegurovisitsourwebsiteorpaysamerchantusingoneofouronlineorin-appcheckoutsolutions,theconsumerisinvitedtoopenafreePagSegurodigitalaccounttomakehisorhernextpurchasewithPagSeguroeasyandseamless.
WestrivetopositionPagSeguroproductsandservicesintopofmindandpresentthemasadesirable,easyandsecuremeanstoacceptandmakepaymentsinBrazil,whileaccompanyingtheconsumerthroughoutthepurchasingprocess,fromgeneralbrandawarenessthroughtoactualpurchaseoraccountregistration.Asadigitalcompany,andwiththesupportofUOL’saudience,wecontinuetobuildandmaintainbrandrecognitionandawareness,whilegeneratingdemandforourproductsandservicesthroughavarietyofmarketingcampaigns,including:
• traditionalofflinemedia:televisionadvertisementsandmerchandising(broadcastandcable),radio,movietheaters,theprintedpress,festivalsandevents,anddisplaymediasuchasbillboards,urbandigitaltimeandweatherdisplays,andairportandbusstationdisplays;
• traditionalonlineadvertising:displaymedia(includingbanners,richmedia,interstitials,videosandnativeads)onavarietyofonlineplatforms,suchaspremium
websites,portals,videoplatformssuchasYouTube,socialmediaplatformssuchasFacebookandInstagram,mobileapps,e-mailmarketingandaffiliatesprograms;and
• search:wehaveexpertiseinpositioningourproductsinpreferentialplacementsonsearchplatformsdisplayedondesktops,tabletsandsmartphones,using
specificinitiativessuchaspaidsearch(SearchEngineMarketing,orSEM,whichincludesbidmanagementtoolsandkeywordsanalysis)andnaturalororganicsearch(SearchEngineOptimization,orSEO,whichincludeswebsiteoptimization).
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Ourmarketingdepartmentdevelopsalltheseonlineandofflinemarketingstrategiesusingsingleintegratedconcepts,sothatourcampaignsincludekeyvisualcharacteristicsandconsistentmessagesacrossallchannels.Inlinewithourgrowthstrategy,mostofourcampaignsfocusonMicro-MerchantsandSMEs,withmessagesthathighlightoureasy,safeandhassle-freewayofacceptingpayments,suchas“asingleonlinecontractthatallowsyoutoacceptmorethan35cash-inmethods”and“freeyourselffromPOSrentalfees.”Weregularlycompareourpricingtoourcompetitors’andpointouttheadvantagesofourproductsandservicesforneworgrowingbusinesses.Atthesametime,wealsoadvertisevalue-addedproductsandservicestargetedatlargermerchantsandconsumersfromhigherincomesectors,includingourbusinessmanagementtoolsandcommercialautomationsolutions.
WebelievethatourassociationwiththeUOLgroupbringsexperienceandcompetitiveadvantagesindesigning,negotiatingandpurchasingadvertisingspace.
Throughourongoingfocusonexpandingourpaymentsolutionsandincreasingourbrandrecognition,thestrengthofourbrand,productsandserviceshasbeenrecognizedinanumberofawards,including:
• Recognizedasthe8thMostInnovativeCompanyinLatinAmericabyFast Company in2019;
• RecognizedforconductingtheInitialPublicOfferingoftheYearbyLatinFinance andDealoftheYearinLatinAmericabyIFR in2018;
• RecognizedasBestFintechinCapitalMarketsbyLatinFinance in2018;
• RecognizedashavingthemosteasilymemorizablecommercialinApril2017andthecommercialthatattractedthemostattentionin2018byForebrain,aconsumeropinionsresearchcompany;
• Namedasthe“Best Company for Consumers ”forelectronicpaymentsin2018,2017and2016andforonlinepaymentsin2015byÉpoca magazineandReclame Aqui ,aconsumerprotectionservice;
• Recognizedfor“Best Payment Processing ”in2015byAfiliados Brasil ,amarketingcompany;
• RecognizedasthebestcompanyinitsindustryintermsofclientserviceexcellencebyConsumidor Moderno Awardin2015and2017;and
• RecognizedforleadingperformanceinBrazilianretailbyPrêmio BR Week in2016.
Asfurthersupportoftheincreasingstrengthofourbrand,accordingtoGoogleTrends,andasillustratedbythebelowchart,asofDecember2018,“PagSeguro”and“Moderninha”haveexperiencedrapidgrowthinsearchvolumeoverthepastsixyears(orsincetheMarch2015launch,inthecaseofModerninha)whencomparedtotheotherdigitalpaymentsolutionsinBrazil(theverticalaxisinthebelowchartrepresentstherelativenumberofGooglesearchesforeachname).AccordingtoGoogleTrends,inFebruary2019,forevery95Googlesearchesfortheterms“Pagseguro,”therewere33fortheterm“MercadoPago”and18fortheterm“PayPal.”
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Weuseourproprietarytoolsandmarketmeasurementsystemsdevelopedbythirdparties,suchasAdobeandGoogle,todeepenourknowledgeaboutconsumerbehaviorand,consequently,optimizeourmarketingeffortsandexpendituresbycustomizingoursalesmessagestomakeiteasierforuserstounderstand,findandbuyourproductsandservices.
Ourmarketingstrategyiscustomizedandwemanageourdesktopsites,mobilewebsitesandmobileapplicationsdifferently,eachoptimizedforthescreenstheyfitandthewayourcustomersusethem.
Inadditiontoouronlineandofflineadvertisingeffortsdescribedabove,wedevelopedabroadrangeofmarketingandsaleschannelstoaccesspotentialclients,including:
• ourownsalesteam,mainlyfocusedonsalesofourPOSdevicesandonlineproductsandsolutionstolargerclients,aswellasonprovidingongoingsupporttothoseclients;
• partnercompaniesthatdistributePagSegurodevicesandsolutionstotheircustomerbase(mostlypointofsalesolutions’companies);
• thirdpartieshiredasindependentsaleorganizationstodistributeourPOSdevicesacrossBrazil;
• onlinestoreplatformsandwebdevelopmentcompanies,whichintegratePagSeguroasanexclusiveorpreferredpaymentmethodtotheirclients;and
• third-partycallcenterserviceproviderhiredtoanswercalls,e-mailsandchatinquiriesfromourclientsandprospects,andtosellourdevicesandsolutions.
Organizational Structure
WeareanexemptedcompanywithlimitedliabilityincorporatedunderthelawsoftheCaymanIslandswiththelegalnamePagSeguroDigitalLtd.andareasubsidiaryofUniversoOnlineS.A.,orUOL.OurprincipalexecutiveofficeislocatedatAvenidaBrigadeiroFariaLima,1384,01452-002SãoPaulo–SP,Brazilandourtelephonenumberis+55(11)3038-8127.Ourinvestorrelationsofficecanalsobereachedat+55(11)3038-8127andourwebsiteaddressiswww.pagseguro.uol.com.br.Informationprovidedonourwebsiteisnotpartofthisannualreportandisnotincorporatedbyreferenceherein.
UOLisaBraziliansociedade por ações thatwasfoundedin1996.UOLisBrazil’slargestInternetcontent,digitalproductsandservicescompany.ItsmajorityshareholderisGrupoFolha,oneofthelargestmediagroupsinBrazilandtheowneroftheSãoPaulodailynewspaperFolha de S. Paulo ,Brazil’smost-readnewspaperaccordingtotheCirculationVerifierInstitute(Instituto Verificador de Circulação, orIVC).GrupoFolhaalsoincludesTransfolha,oneofthethreetopeCommercelogisticscompaniesinBrazilintermsofordersduring2017,basedondatafromEbit;Plural,thelargestprintingcompanyinLatinAmericanintermsofrotateoffsetprintersduring2015,accordingtoABRO;UOLHost,thesecondlargestBrazilianwebhostingcompanyintermsof“br”domainnamesinMay2017,accordingtoHostmapperBrasil;andUOLDiveo,thelargestcloudandITinfrastructureservicescompanycontrolledbyBrazilianshareholdersintermsofdatacenterareaasofDecember11,2017,accordingtopubliclyavailableinformation.
WecarryoutouroperationsprincipallythroughourBrazilianoperatingcompany,PagSeguroInternetS.A.,aBraziliansociedade por a ç õ es .
PagseguroInternetS.A.carriesoutmostoperationsdirectly,andalsohassevensubsidiaries.Thefollowingsubsidiariesarewholly-owned:(i)R2Tech,organizedinBrazil,whichmanagesourreconciliationproductand(ii)Tilix,organizedinBrazil,whichprovidessoftwaredevelopmentformanagingpaymentsolutionsforB2CandB2B.Weacquired51%ofR2Techin2017andtheremaining49%inFebruary2019.WeacquiredTilixin2018.Thefollowingsubsidiariesaresubstantiallywholly-owned:(i)BoaCompraTecnologiaLtda.,organizedinBrazil,whichoperatesouronlinegamingandcross-borderdigitalservicesinLatinAmerica,Portugal,SpainandTurkey;(ii)NET+PhoneTelecomunicaçõesLtda.,organizedinBrazil,whichhandlespurchasesandsalesofourPOSdevices;(iii)BCPSOnlineServices,Lda,orBCPS,organizedinPortugal,whichservesasBoaCompra’shubinPortugalandhandlespartofitsaccountmanagement;and(iv)BIVA,organizedinBrazil,whichisanonlineplatformthatfacilitatespeer-to-peerlending.WeacquiredBCPSin2017.
InadditiontoouroperationscarriedoutbyPagSeguroInternetS.A.,onJanuary4,2019,weacquired100%ofBancoseguro,organizedinBrazil,throughourwholly-owneddirectsubsidiaryBSHolding.Bancoseguroholdsalicensetoprovidefinancialservices.Weexpectthatthisacquisitionwillallowustoexpandourproductandservicesoffering.
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InNovember2017wesetupaFIDCthroughwhichwemayraisedebttofinancethegrowthofourbusiness.TheFIDCiscontrolledbyPagSeguroBrazilandraisescapitalbyissuingseniorquotasinthefundtooutsideinvestors,whoreceiveinterestontheseinvestmentsfromtheFIDC.Asofthedateofthisannualreport,theFIDCisratedAA+byFitchRatings.InaccordancewithBrazilianlaw,theFIDCmayusebetween50%and100%ofitscapitaltopurchasemerchantreceivables.TheFIDCusesthecapitalitraisestofinancetheearlypaymentofreceivablesfeature.OurremunerationfromtheearlypaymentofreceivablesfeaturecontinuestobereflectedasFinancialincomeinourconsolidatedfinancialstatements.WedonotexpecttheestablishmentoftheFIDCtoimpactthediscountratewechargeinconnectionwiththeearlypaymentofreceivablesfeatureortheexpensesweincurtoobtainearlypaymentofnotereceivablesfromcardissuersandacquirers.TheFIDCisacommonstructureforBrazilianpaymentproviderswhoofferearlypaymentofmerchants’receivables.Inadditiontobroadeningourfinancingoptionsforthisfeaturegenerally,itreducescertainregulatoryconstraintssincetheFIDCstructureisspecificallydesignedforthisfinancingactivityunderBrazilianlaw,andwealsoexpectitwillallowustodefercertaintaxobligations.Forfurtherinformationregardingourearlypaymentofreceivablesfeature,see“—OurProductsandServices—TheFreePagSeguroDigitalAccount—ThePagSeguroEcosystem—Earlypaymentofinstallmentreceivables.”
Thechartbelowshowsourcorporatestructure,includingourwholly-ownedandmajorityownedsubsidiaries,asofthedateofthisannualreport:
(*) Including0.15%consistingoftreasurysharesandsharesissuedundertheLTIP,representinglessthan1%oftheoutstandingshares.
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Competition
TheBrazilianpaymentsindustryishighlycompetitiveandfast-changing.WecompeteintheonlinedigitalpaymentsmarketandinthePOSpaymentsmarket.
Intheonlinedigitalpaymentsmarket,wecompeteprimarilywithinternationalonlinepaymentservices,suchasPayPal,andregionalplayers,suchasMercadoPagofromMercadoLibreandMoIP/Wirecard.InthePOSpaymentsmarket,wecompeteprimarilywithinternationalplayers,suchasSumUp/Payleven,andregionalplayers,suchasMercadoPagofromMercadoLibre.OurbusinessmodeldiffersfromthemodelusedbytheincumbentBrazilianproviders,suchasCielo,Rede,GetNetandStone,whogenerallyoffertheirPOSdevicesunderlong-termmonthlyrentalcontractswithpricingthatworksouttobemoreexpensivethanthemonthlyinstallmentsforthepurchaseofourPOSdevices.Theseincumbentprovidersalsotargetlargerclients,sincetheirbusinessmodelresultsinmoreexpensiveproductsandservices,whileourprimarytargetcustomersarecurrentlyMicro-MerchantsandSMEs,whoareunderservedbyincumbentpaymentprovidersandlargefinancialinstitutionsinBrazil.
Likethedigitalpaymentsindustryingeneral,wealsocompetewithothermeansofpayment,bothdigitalandtraditional,includingcash,checks,moneyordersandelectronicbankdeposits.
Amongourpeers,wearetheonlyfinancialtechnologyproviderinBrazil,however,whosebusinessmodelcoversallofthefollowingfivepillars:
• Multipledigitalpaymentsolutions
• In-personpaymentsviaPOSdevicesthatweselltoclients
• Freedigitalaccounts
• Issuerofprepaidcardstoclientsforspendingorwithdrawingaccountbalances
• Operatingasanacquirer
Weseektodifferentiateourselvesfromourcompetitorsprimarilyonthebasisofthisend-to-endcoverageaswellasourfocusontransactionsecurity,oneaseofuse,andonthemobileenvironment.Whilecompetitivefactorsandtheirrelativeimportancevarybasedonthesize,industryandfocusofeachmerchant,webelievethefollowingfactorsarekeytocompetitioninthedigitalpaymentsmarketinBrazil:
• anecosystemthatattracts,retainsandengagesmerchantsandconsumers;
• speedandsimplicityofthecustomeronboardingprocess;
• consumerconfidenceintransactionsecurity,includingtheabilityforconsumerstomakepaymentswithoutsharingtheirfinancialinformationwiththemerchantorcounterparty;
• POSdeviceswithaffordablepricesandnorentalfees;
• qualityofcustomerservice;
• breadthanddepthoffeaturesandfunctionality;and
• brandrecognitionandreputation.
Forinformationonrisksrelatingtoincreasedcompetitioninourindustry,see“Item3.KeyInformation—RiskFactors—RisksRelatingtoourBusinessandIndustry—Substantialandincreasinglyintensecompetition,bothwithinourindustryandfromotherpaymentmethods,mayharmourbusiness.”
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Insurance
Wehaveinsurancepolicieswithreputableinsurersinamountsthatourmanagementconsiderstobesufficienttocoverpotentiallossesarisingfromeventsthatmayaffectourassets,aswellasforanydamagesthatwemayhavetopaytothirdpartiesduetoourbusinessactivities.Weseekcoverageagainstrisksthatareappropriateforourbusinessactivitiesandourscale,takingintoaccountthenatureofourbusiness,therisksweareexposedto,marketpracticesinourindustry,andadvicefromourinsuranceconsultants.Wecurrentlyhavethefollowinginsurancepolicies,whichwerecontractedbyourcontrollingshareholder,UOL,andlistourcompanyand/oroursubsidiariesasco-beneficiaries,asapplicable:
• insurancepolicyforcoverageofdamagestoproperty,businessinterruptionandlostprofits,whichexpiresonDecember10,2019andhasacoveragelimitofR$1,819.0million;
• D&Oinsurance,contractedforbyUOL,whichexpiresonMarch1,2020andhasacoveragelimitofUS$15million;
• warehouseandstoragefacilityinsurancepolicy,whichexpiresonNovember17,2019andhasacoveragelimitofR$105million;and
• generalliabilityinsurance,whichcoversdamageawardspaidbyusinconnectionwithtortclaims.ThispolicyexpiresonDecember31,2019andhasacoveragelimitofR$15million.
Wereviewourcoveragelimitseveryyearwhenthepoliciesarerenewed,toensurethattheyremainconsistentwiththevalueofourassetsandtheliabilitieslinkedtoourbusiness.Wedonotcurrentlyanticipateanydifficultiesinrenewinganyofourinsurancepolicies.
Whilewebelieveourinsurancecontractsreflectstandardmarketpractices,therearecertaintypesofrisksthatmaynotbecoveredbyourpolicies(suchaswar,terrorism,actsofGodandforcemajeure,liabilityforcertainharmorinterruptionofcertainbusinessactivities).Therefore,ifanyoftheseuncoveredeventsoccur,wemayberequiredtoincuradditionalcoststoremedythesituation,reconstituteourassetsorindemnifyourcustomers,whichmayadverselyaffectus.Inaddition,evenifariskiscoveredbyourpolicies,wecannotassureyouthatanypaymentfromourinsurerswillbesufficienttocovertheloss.
Seasonality
Weoperateinasomewhatseasonalindustry,whichtendstoexperiencerelativelyfewertransactionsinthefirstquarteroftheyear,increasedactivityastheyear-endholidayshoppingseasoninitiates,andfewertransactionsaftertheyear-endholidays.Whilewehavenotexperiencedsignificantseasonalityinourresultsatthedateofthisannualreportduetoourongoinggrowth,thiscouldchangeinthefuture.Foradditionalinformation,see“Item3.KeyInformation—RiskFactors—RisksRelatingtoOurBusinessandIndustry—Ourquarterlyresultsofoperationsandoperatingmetricsmayfluctuateandareunpredictableandsubjecttoseasonality,whichcouldresultinthepriceofourClassAcommonsharesbeingunpredictableordeclining.”
Regulation
Regulation of the digital payments industry in Brazil
OuractivitiesinBrazilaresubjecttoBrazilianlawsandregulationsrelatingtodigitalpayments.LawNo.12,865/2013,whichtookeffectonOctober9,2013,establishesthefirstsetofrulesregulatingthedigitalpaymentsindustrywithintheoverallBrazilianPaymentSystem(theSistema de Pagamentos Brasileiro, orSPB),whichreferstoalltheentities,systemsandproceduresrelatedtotheclearingandsettlementoffundstransfer,foreigncurrencyoperations,financialassets,andsecuritiestransactionsinBrazil).Thislawcreatedtheconceptsofpaymentschemes(arranjos de pagamento ),paymentschemeowners(instituidores de arranjos de pagamento )andpaymentinstitutions(instituições de pagamento ).
LawNo.12,865/2013gavetheCentralBankandtheNationalMonetaryCouncil(theConselho Monetário Nacional ,orCMN)powerstoregulateentitiesinvolvedinthedigitalpaymentsindustry.Thesepowerscovermatterssuchastheincorporationandoperationoftheseentities,riskmanagement,theopeningofpaymentaccounts,andthetransferoffundstoandfrompaymentaccounts.AfterenactmentofLawNo.12,865/2013,theCMNandtheCentralBankcreatedaregulatoryframeworkregulatingtheoperationofpaymentschemesandpaymentinstitutions.Originally,theframeworkconsistedofResolutionsNo.4,282and4,283andCircularsNo.3,680,3,681,3,682and3,683,allofwhichwerepublishedonNovember4,2013andbecameeffectiveonMay5,2014,andoCircularNo.3,685,publishedonMarch26,2018,asamendedsincethatdate.
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Payment Schemes
Apaymentscheme,forBrazilianregulatorypurposes,isabodyofrulesandtechnicalstandardsfortheexecutionofpaymenttransactionsthroughapaymentsystem.Theregulationsapplicabletopaymentschemesdependoncertainfeatures,suchasthenumberofusersandtheannualcashvalueoftransactionshandledbythepaymentscheme:
• PaymentschemesthatexceedcertainthresholdsareconsideredtoformpartoftheSPBandrequireauthorizationbytheCentralBank.
• PaymentschemesthatoperatebelowthesethresholdsarenotconsideredtoformpartoftheSPBandarethereforenotrequiredtoobtainauthorizationfromthe
CentralBank,althoughtheyarerequiredtoreportcertainoperationalinformationtotheCentralBankonanannualbasisandtheCentralBankcanissueanorderrequiringthesepaymentschemestoapplyforauthorizationtobepartoftheSPBonacase-by-casebasis.
• CertaintypesofpaymentschemeshavespecificexemptionsfromtherequirementtoobtainauthorizationfromtheCentralBank.Thisapplies,forexample,to
limited-purposepaymentschemes,paymentschemessetupbygovernmentalauthoritiesandpaymentschemesrelatedtoemployeebenefitsestablishedbylaw,suchasmealvouchercards.
Payment Scheme Owners
Paymentschemeowners,forBrazilianregulatorypurposes,arethelegalentitiesresponsibleformanagingtherules,proceduresandtheuseofthebrandassociatedwithapaymentscheme.CentralBankregulationsrequirethatpaymentschemeownersmustbeincorporatedinBrazil,musthaveacorporatepurposecompatiblewithpaymentsactivities,andmusthavethetechnical,operational,organizational,administrativeandfinancialcapacitytomeettheirobligations.Theymustalsohaveclearandeffectivecorporategovernancemechanismsthatareappropriatefortheneedsofpaymentinstitutionsandtheusersofpaymentschemes.
Payment Institutions
PaymentinstitutionsareclassifiedintothefollowingtypesunderBrazilianregulations,asperCircularNo.3,885,whichreplacedformerCircularNo.3,683:
• Issuersofelectroniccurrency(i.e.,e-money,generallyintheformofprepaiddeposits):thesepaymentinstitutionsmanageprepaidpaymentaccountsfor
cardholdersorend-users.Theycarryoutpaymenttransactionsusingelectroniccurrencydepositedintothesepre-paidsuchaccounts,andconvertthedepositsintophysicalorbook-entrycurrencyorviceversa.
• Issuersofpost-paidpaymentinstruments(principallycreditcards):thesepaymentinstitutionsmanagepaymentaccountswherethecardholderorend-userintendstomakepaymentonapost-paidbasis.Theycarryoutpaymenttransactionsusingthesepost-paidaccounts.
• Acquirers:thesepaymentinstitutionsdonotmanagepaymentaccounts,butenablemerchantstoacceptpaymentinstrumentsissuedbyapaymentinstitutionor
byafinancialinstitutionthatparticipatesinapaymentscheme.Theyparticipateinthesettlementprocessforpaymenttransactionsbyreceivingthepaymentfromtheissueroftheprepaidorpost-paidinstrument,andsettlingwiththemerchant.
ApaymentinstitutionmustbeincorporatedinBrazilandmusthaveacorporatepurposethatiscompatiblewithpaymentsactivities.OnlypaymentinstitutionsthatoperateabovecertainthresholdsarerequiredtoobtainauthorizationfromtheCentralBankinordertooperate.TheCMNandCentralBankregulationsapplicabletopaymentinstitutionscoverawidevarietyofissues,includingpenaltiesfornoncompliance;thepromotionoffinancialinclusion;thereductionofsystemic,operationalandcreditrisks;reportingobligations;andgovernance.
Theregulationsapplicabletopaymentinstitutionsalsocover“paymentaccounts”(contas de pagamento ),whicharetheend-useraccounts,inregistered(i.e.,book-entry)form,whichareopenedwithpaymentinstitutionsthatareissuersofprepaidorpost-paidinstrumentsandusedforcarryingouteachpaymenttransaction.CircularNo.3,860/2013classifiespaymentaccountsintotwotypes:
• Prepaidpaymentaccounts:wherethefundshavebeendepositedintothepaymentaccountinadvanceoftheintendedpaymenttransaction.
• Post-paidpaymentaccounts:wherethepaymenttransactionisintendedtobeperformedregardlessofwhetherornotfundshavebeendepositedintothepaymentaccountinadvance.
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Inordertoprovideprotectionfrombankruptcy,LawNo.12,865/2013requirespaymentinstitutionsthatareissuersofprepaidelectroniccurrencytosegregatethefundsdepositedinprepaidpaymentaccountsfromtheirownassets.Inaddition,withrespecttoprepaidelectroniccurrency,thepaymentinstitutionmustholdaportionofthefundsdepositedintheprepaidpaymentaccountincertainspecifiedinstruments:either(i)inaspecificaccountwiththeCentralBankthatdoesnotpayinterest;or(ii)infederalgovernmentbondsregisteredwiththeSELIC.Theportionoftheprepaidelectroniccurrencythatmustbeheldinthisformiscurrently100%.
PagSeguro Brazil’s Regulatory Position
InDecember2014,PagSeguroBrazilappliedtotheCentralBankforthefollowingauthorizations:
1. Authorizationasapayment scheme owner ofa“closed-loopdomestic”paymentscheme,formingpartoftheSPB.ThisapplicationrelatestothePagSegurodigitalaccount,whichisaprepaidaccountavailabletoourcustomers.TheapplicationrelatestoourrulesapplyingtothePagSegurodigitalaccountandourbrand.
2. Authorizationasapayment institution ,asanissuer of prepaid electronic money .ThisapplicationrelatestothePagSegurodigitalaccountandtoourissuanceofPagSeguroelectroniccurrencyandprepaidcards.TheapplicationregardingthePagSegurodigitalaccountrelatestoourrulesandourbrand,andtheapplicationregardingourprepaidcardsrelatestothethird-partypaymentschemeswithinwhichthecardsareissued.
3. Authorizationasapayment institution ,asanacquirer .
TheseauthorizationswereformallyapprovedonOctober17,2018.
PagSeguroBrazilisalsoapayment scheme owner ofa“closed-loopdomestic”paymentschemenotformingpartoftheSPB,whichrelatestopeer-to-peertransfersbetweenaccountsopenedbyourclientswithinthePagSegurodigitalaccount,usingourrulesapplyingtothePagSegurodigitalaccountandourbrand.SincethispaymentschemedoesnotformpartoftheSPBitdoesnotcurrentlyrequireCentralBankauthorization;however,wearerequiredtoreportcertainoperationalinformationregardingthisschemetotheCentralBankonanannualbasis,suchasthenumberofusersandtheannualcashvalueofourpeer-to-peertransfertransactions.IfthesenumbersorcertainotheroperationaldataexceedtherelevantCentralBankthresholdsinthefuture,wewillalsoberequiredtoapplyforCentralBankauthorizationforthispaymentscheme.
PagSeguroBrazilalsoappliedtotheCentralBankinFebruary2019forauthorizationtoconductactivitiesasapayment institution inordertoactasanissuerofpost-paid cards withinthird-partypaymentscheme.ThisauthorizationwasformallyapprovedonMarch16,2019.
LawNo.12,865/2013prohibitspaymentinstitutionsfromperformingactivitiesthatarerestrictedtofinancialinstitutions,whichareregulatedbyLawNo.4,595/1964.ThereissomedebateunderBrazilianlawastowhetherprovidingearlypaymentofreceivablestomerchantscouldbecharacterizedas“lending,”whichisanactivitythatisrestrictedtofinancialinstitutions.Similarly,thereissomedebateastowhetherthediscountratesapplicabletothisearlypaymentfeatureshouldbeconsideredas“interest,”inwhichcasethelimitssetbytheBrazilianUsuryLawwouldapplytotheserates.
FortransactionsthatformpartoftheBrazilianfinancialsystem,financialinstitutionsmaysetinterestratesfreely,providedthattheyarenotexcessiveforconsumers.FortransactionsthatdonotformpartoftheBrazilianfinancialsystem,historically,theBrazilianUsuryLaw(Decree-LawNo.22,623/1933)cappedinterestratesat12%peryear.Subsequently,theBrazilianCivilCode,whichreplacedtheUsuryLaw,cappedinterestratesattwotimestheinterestratesapplicabletotheNationalTreasury(FazendaNacional ),whichiscurrentlytheSELICrate(althoughthereissomelegaldebateastowhethertheBrazilianCivilCodehaseffectivelyreplacedtheoriginalBrazilianUsuryLaw).Asaresult,ifthediscountratethatwechargemerchantsforearlypaymentoftheirreceivablesisconsideredtobe“interest,”itwouldbecappedattwotimestheSELICrate.ThislimitationismitigatedbytheFIDCthatweusetofinanceourearlypaymentofreceivablesfeature.
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IfwefailtocomplywiththerequirementsoftheBrazilianlegalandregulatoryframeworks,wecouldbepreventedfromcarryingoutourregulatedactivities,wecouldbe(i)requiredtopaysubstantialfines(includingpertransactionfines)anddisgorgementofourprofits,(ii)requiredtochangeourbusinesspracticesor(iii)subjectedtoinsolvencyproceduressuchasaninterventionbytheCentralBankandtheout-of-courtliquidationofPagSeguroBrazil.Wecouldalsobesubjecttoprivatelawsuits.Foradditionalinformation,see“Item3.KeyInformation—RiskFactors—RisksRelatingtoOurBusinessandIndustry—Ourbusinessissubjecttoextensivegovernmentregulationandoversightandourstatusundertheseregulationsmaychange.Violationoforcompliancewithpresentorfutureregulationcouldbecostly,exposeustosubstantialliabilityandforceustochangeourbusinesspractices,anyofwhichcouldseriouslyharmourbusinessandresultsofoperations.”
TheCentralBankalsoregulatesourinternationaltransfersoffundsunderforeignexchangeregulations.Compliancewiththeserulesismandatoryandanyfailuretocomplymayresultinpenaltiesagainstus.
TheCentralBank’sregulationsalsoallowpaymentschemestosetadditionalrulesforentitiesthatusetheirbrands.Sinceweparticipateinthesethird-partypaymentschemes,wemustcomplywiththeirrulesinordertocontinueacceptingpaymentsfrompaymentinstrumentsbearingtheirbrands.
Anti-Money Laundering Rules
Wecomplywithallanti-moneylaundering,orAML,rulesapplicabletousandhaveimplementedpoliciesandprocedurestoreportsuspiciousactivitiestotheauthorities,includinganysuspectedterrorismfinancingandotherpotentiallyillegalactivities.
OuractivitiesinBrazilaresubjecttoBrazilianlawsandregulationsrelatingtoanti-moneylaundering,orAML,terrorismfinancingandotherpotentiallyillegalactivities.Theserulesrequireustoimplementpoliciesandinternalprocedurestomonitorandidentifysuspicioustransactions,whichmustbedulyreportedtotherelevantauthorities.Wehaveimplementedalltherequiredpoliciesandinternalprocedurestoensurefullcompliancewiththeserulesandregulations,includingstructuringariskandfrauddivisionledbyariskofficer.Ouremployeesaretrainedandinformedofourpoliciesandinternalproceduresandtheircomplianceismandatoryandsupervised.
TheBraziliananti-moneylaunderinglawestablishesthebasicframeworktopreventandpunishmoneylaunderingasacrime.Itprohibitstheconcealmentordissimulationoforigin,location,availability,handlingorownershipofassets,rightsorfinancialresourcesdirectlyorindirectlyoriginatedfromcrimes,subjectingtheagentsoftheseillegalpracticestoimprisonment,temporarydisqualificationfrommanagingenterprisesupto10yearsandmonetaryfines.
TheBraziliananti-moneylaunderinglawalsocreatedtheFinancialActivitiesControlCouncil,orCOAF,whichistheBrazilianfinancialintelligenceunitthatoperatesunderthejurisdictionoftheMinistryofFinance.COAFperformsakeyroleintheBraziliananti-moneylaunderingandcounter-terrorismfinancingsystem,anditslegalresponsibilityistocoordinatethemechanismsforinternationalcooperationandinformationexchange.
IncompliancewiththeBraziliananti-moneylaunderinglaw,paymentinstitutionsinBrazilmustestablishinternalcontrolandproceduresaimingat:
• identifyingandknowingtheirclients;
• checkingthecompatibilitybetweenthemovementoffundsofaclientandsuchclient’seconomicandfinancialcapacity;
• checkingtheoriginoffunds;
• carryingoutaprioranalysisofnewproductsandservices,undertheperspectiveofmoneylaunderingprevention;
• controls,resourcesandmonitoringsystemsfortherapiddetectionandreportingofsuspiciousactivity;
• compliancewithallapplicableregulatoryrequirementsforrecordkeepingandreporting;
• keepingrecordsofalltransactions;
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• applyingspecialattentionto(i)unusualtransactionsorproposedtransactionswithnoapparenteconomicorlegalbasis;(ii)clientandtransactionsforwhichtheUBOcannotbeidentified;and(iii)situationsinwhichitisnotpossibletokeeptheclients’identificationrecordsdulyupdated;
• offeringanti-moneylaunderingtrainingforemployees;
• monitoringtransactionsandsituationswhichcouldbeconsideredsuspiciousforanti-moneylaunderingpurposes;
• reportingtoCOAFtheoccurrenceofsuspicioustransactions,asrequiredunderapplicableregulations,andalso,atleastonceayear,whetherornotsuspicioustransactionsareverified,inordertocertifythenon-occurrenceoftransactionssubjecttoreportingtoCOAF(negativereport);and
• ensuringthatpolicies,proceduresandinternalcontrolsarecommensuratewiththesizeandvolumeoftransactions.
E-Commerce, Data Protection, Consumer Protection and Taxes
Inadditiontoregulationsaffectingdigitalpaymentschemes,wearealsosubjecttolawsrelatingtoInternetactivitiesande-commerce,aswellasconsumerprotectionlaws,taxlawsandotherregulationsapplicabletoBraziliancompaniesgenerally.InternetactivitiesinBrazilareregulatedbyLawNo.12,965/2014,knownastheBrazilianCivilRightsFrameworkfortheInternet,whichembodiesasubstantialsetofrightsandobligationsrelatingtoInternetserviceproviders.ThislawexemptsintermediaryplatformssuchasPagSegurofromliabilityforactivitiescarriedoutbytheirusers.Sincetherearenosettledcourtdecisionsinthisarea,however,itisstillpossiblethatwemaybesubjecttojointcivilliabilityforactivitiescarriedoutbyourusers.
LawNo.8,078/1990,knownastheConsumerProtectionCode,regulatesconsumerrelationsinBrazil,includingmatterssuchas:commercialpractices;productandserviceliability;areaswheresuppliersofproductsorservicesaresubjecttostrictliability;thereversaloftheburdenofproofsoastobenefitconsumers;thejointandseveralliabilityofallcompanieswithinasupplychain;unfaircontractterms;advertising;andinformationonproductsandservicesthatareofferedtothepublic.Consumershavetherighttoreceiveclearandaccurateinformationregardingretailproductsandservices,withcorrectspecificationofcharacteristics,structure,quality,price,risks,andconsumers’rightstoaccessandamendpersonalinformationcollectedaboutthemandstoredinprivatedatabases.
CustomeraccountsonourdigitalplatformaresubjecttodataprotectionundertheBrazilianCivilRightsFrameworkfortheInternetandArticle17oftheCMN’sResolutionNo.4,282/13.Wearealsosubjecttotrademarkprotectionrules,andtotaxlawsandrelatedobligationssuchastherulesgoverningthesharingofcustomerinformationwithtaxandfinancialauthorities.Itisunclearwhetherthetaxandregulatoryauthoritieswouldseektoobtaininformationregardingourcustomers.Anysuchrequestcouldcomeintoconflictwiththedataprotectionrules,whichcouldcreaterisksforourbusiness.
ThelawsandregulationsapplicabletotheBraziliandigitalpaymentsindustryaresubjecttoongoinginterpretationandchange,andourdigitalpaymentsbusinessmaybecomesubjecttoregulationbyotherauthorities.Forfurtherinformationontherisksrelatingtoregulationofbusiness,pleasesee“Item3.KeyInformation—RiskFactors—RisksRelatingtoourBusinessandIndustry.”
Property, Plant and Equipment
Our Facilities
Wedonotownanyrealestate.OurheadofficeandoperationscenterinSãoPauloareprovidedbyUOLonacost-sharingbasisunderanagreementforapportionmentofexpensessignedbetweenusandUOL.Formoreinformationonthisagreement,see“Item7.MajorShareholdersandRelatedPartyTransactions—RelatedPartyTransactions—AgreementswithUOLandUOLSubsidiaries—Cost-SharingAgreements.”Wealsoleaseofficespaceforoursubsidiaries.
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Other Equipment
Themajorityofourequipmentconsistsofdataprocessingequipment,whichmadeup23.1%ofourequipmentcostsin2018.Therestofourequipmentconsistsofmachinery,facilitiesandfurnitureandfittings.
Intellectual Property
Weregardtheprotectionofourtrademarks,copyrights,logos,servicemarks,tradedress,domainnames,patentsandtradesecretsascriticaltoourfuturesuccess.Toestablishandprotectourproprietaryrightsinourproductsandservices,werelyonacombinationoftrademark,copyright,servicemark,patentandtradesecretlaws,administrativeproceduresandcontractualrestrictions.Wehaveenteredintoconfidentialityandinventionassignmentagreementswithouremployeesandcertainoutsidecontractors.Wehavealsoestablishednon-disclosureagreementswithouremployees,strategicpartnersandsomesuppliersinordertolimitaccesstoanddisclosureofourproprietaryinformationandtechnology.
Weactivelypursueregistrationofourtrademarks,copyrights,logos,servicemarks,tradedressanddomainnames.WehaveregisteredorappliedforregistrationoftrademarkswiththeBrazilianPatentandTrademarkOffice(Instituto Nacional da Propriedade Industrial ,orINPI)including,amongothers,thetrademarksandlogosof“PagSeguro,”“Moderninha,”“Minizinha”and“PlugPag.”WehavealsoregisteredseveraldomainnameswithNIC.br,Brazil’sInternetdomainnameregistry,anddomainregistrarsintheUnitedStatesandelsewhere,including“pagseguro.com.br,”“pagseguro.com,”“moderninha.com.br,”“moderninhapro.com.br,”“minizinha.com.br,”“boacompra.com.br”and“moderninhasmart.com.br.”Weownorhavetherighttouseallofthematerialintellectualpropertythatweuse.
WehavematerialcontractswithVisa,MasterCardandEloinconnectionwithouractivitiesasanacquirerforthesecardschemes.OurVisaPaymentArrangementsParticipationandTrademarkLicenseAgreement,datedasofAugust24,2015andamendedonJuly3,2017,betweenVisadoBrasilEmpreendimentosLtda.andPagSeguroBrazil,setsforththegeneraltermsandconditionsunderwhichPagSeguroBrazilactsasamerchantacquiringprincipalparticipantforVisainBrazilandprovidesPagSeguroBrazilwithanon-exclusiveandnon-transferablelicensetousecertaintrademarksownedbyVisainconnectionwithitsactivitiesasanacquirerinBrazil.Underthisagreement,PagSeguroBrazilisexclusivelyresponsibleforallthecostsandrisksassociatedwithitsparticipationasamerchantacquiringprincipal,andfeespayabletoVisaunderthisagreementisdeterminedbythestandardpaymenttermssetforthintheVisaCoreRulesandVisaProductandServiceRules,availableonVisa’swebsite.OurLicenseAgreement,datedasofJune18,2015andasamendedfromtimetotime,betweenMasterCardInternationalIncorporatedandPagSeguroBrazilsetsforththegeneraltermsandconditionsunderwhichMasterCardgrantsPagSeguroBrazilanon-exclusivelicensetousecertaintradenames,trademarks,servicemarksandlogotypes(includingMasterCard,CirrusandMaestrobrandedmarks)inBrazilinconnectionwithPagSeguroBrazil’sissuingandacquiringactivities.NoconsiderationisduetoMasterCardunderthisagreement.OurAgreementforAccreditorParticipationinELOPaymentArrangements,datedasofFebruary13,2019,betweenEloServiçosS.A.andPagSeguroBrazil,setsforththegeneraltermsandconditionsunderwhichPagSeguroBrazilactsasamerchantacquiringprincipalparticipantforEloandprovidesPagSeguroBrazilwithanon-exclusiveandnon-transferablelicensetousecertaintrademarksownedbyEloinconnectionwithitsactivitiesasanacquirer.Underthisagreement,PagSeguroBrazilisexclusivelyresponsibleforallthecostsandrisksassociatedwithitsparticipationasamerchantacquiringprincipal,andfeespayabletoElounderthisagreementisdeterminedbythestandardpaymenttermssetforthintheEloArrangementsManual,availableonElo’swebsite.
Weoperatesoftwareproductsunderlicenses,includingcertainopensourcelicenses,fromourvendors,including,amongothers,Verifone,Oracle,FeedzaiandCisco.Evenifanysuchthird-partytechnologydidnotcontinuetobeavailabletousoncommerciallyreasonableterms,webelievethatalternativetechnologieswouldbeavailableasneededineverycase.
ThestandardonlinecontractenteredintobetweenusandourmerchantswhentheyopenaPagSegurodigitalaccountprovidesalimited,non-transferablelicensetocertainofourproprietaryrights,suchasournameandlogo,forusebyourmerchantsforcommercialpurposes.Weexpecttocontinuethispracticeinthefutureaspartofourmarketingstrategy.WhileweattempttoensurethatourlicenseesmaintainthequalityofthePagSegurobrand,theymaytakeactionsthatcouldmateriallyadverselyaffectthevalueofourproprietaryrightsorreputation.
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Forinformationaboutrisksaffectingourintellectualproperty,see“Item3.KeyInformation—RiskFactors—RisksRelatingtoourBusinessandIndustry—Wehaveonlyalimitedabilitytoprotectourintellectualpropertyrights,whichareimportanttooursuccess.”
Our Industry
Micro-Merchants and Small and Medium Businesses Drive the Brazilian Economy
AccordingtoSEBRAE(Portal do Empreendedor )andIBGE,in2017,Micro-MerchantsandSMEsaccountedfor99.7%ofBrazil’s12.7millionbusinesses.AccordingtodatacompiledbyNeowayBusinessSolutionsin2017,Micro-MerchantsandSMEsrepresented35.4%,orR$1.8trillion,oftheR$5.1trilliontotalannualTPVfrombusinessesinthefollowingsectors:wholesale,retail,othercommercial,electronics,pharmaceutical,hotelsandfoodservice,education,healthcare,professionalandtechnicalservices,textilesandtransportation.
Significant Room for Growth of Alternative and Digital Payment Methods
Businessandconsumersindevelopedeconomiesaremovingawayfromcashandpaperpaymentsataslowbutsteadyrateandmigratingtoelectronicpaymentmechanisms.SincethistrendhasnotyetfullyimpactedtheBrazilianeconomy,theopportunityforexpansionofdigitalpaymentsinBrazilremainssignificant.Themigrationawayfromchecks,inparticular,createsefficienciesforbusinesses,whocanreducecostandacceleratecashflowiftheiraccountspayableandaccountsreceivablefunctionsareautomatedthroughelectronicpaymentsandreconciliation.Similaropportunitiesexistforconsumerbillpayment,directdeposit,andperson-to-personpayments.
Ine-commerce,transactionvolumesinBrazilgrewtoR$47.7billionin2017fromR$18.7billionin2011accordingtoebit,representingaveragegrowthof16.9%peryearfortheperiod.Inaddition,thegrowthofe-commerceovermobiledevices,which,accordingtoeMarketer,in2017represented26.4%ofe-commercetransactionsinBrazil,comparedto34.5%intheUnitedStatesand43.3%intheUnitedKingdom,createsnewpaymentsoptionsforbothsellersandbuyers,bringingbusinessopportunitiesforacquirersanddigitalpaymentsproviders.
The Structure of the Brazilian Financial Market Creates Significant Opportunities for Disruption
ThestructureoftheBrazilianfinancialmarketcreatessignificantopportunitiesfortechnology-drivendisruption,particularlywhencomparedtomoredevelopedmarkets.Thebankingmarketisrelativelyconcentratedforglobalstandards.Forexample,aWorldBankreportusing2015dataratedprincipalbankingmarketsusingtheHerfindahl-HirschmanIndex,orHHI,whichexpressesmarketconcentrationofgrossloans,where10,000representsaperfectmonopolyand1representsperfectcompetition.Accordingtothisreport,BrazilhadHHIconcentrationof1,248in2015,makingitthe18thmostconcentratedmarketintheworldonthismeasure.InthesameyeartheUnitedStateshadHHIconcentrationof714,makingitthe36thmostconcentratedmarket;andtheUnitedKingdomhadHHIconcentrationof432,makingitthe42ndmostconcentratedmarket.ThesamereportshowedthatbankingpenetrationinBrazillagsmoredevelopedmarketsintermsofthepercentageofthepopulationthathadabankaccount,hadacreditcard,orhadmadeorreceivedadigitalpayment.Brazil’srelativelackofpenetrationwasevengreaterwithrespecttoe-commerceandmobilepayments.TheselowerpenetrationmeasuresareamplifiedamongthelowerincomeclassesinBrazil.
PaymentcardusealsoremainsrelativelylowinBrazilcomparedtomoredevelopedmarkets.AccordingtoaSeptember2018reportbytheBankofInternationalSettlements,orBIS,withdatafromtheWorldBankandABECS,debitandcreditcardpaymentsaccountedfor34.0%ofBrazilianhouseholdconsumptionbetweenJanuaryandSeptember2018,comparedwith46.0%intheUnitedStatesand68.6%intheUnitedKingdom,representingsignificantgrowthpotentialforacquirersinBrazil.Creditcardpenetrationlevelsareafundamentaldriverforthedigitalpaymentsindustry.
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Commerce Is Increasingly Digital and Mobile Worldwide
AccordingtotheInternationalTelecommunicationsUnion,anestimated343billionpeople,or45.5%ofthetotalglobalpopulation,usedtheInternetin2016,comparedwith2.2billionpeople,or31.1%ofthetotalglobalpopulation,in2011.Ofthisuserbase,58.3%carriedoute-commercetransactionsin2016,comparedwith37.2%in2011,showingsignificantgrowthine-commerce.Thisgrowthissupportedbytheglobalincreaseinmobiledevicepenetration,reductionsinthecostofInternetaccessinvariousmarkets,andimprovingtelecommunicationsnetworkinfrastructure.
Theincreasingnumberofbusinessesofferingonlineshoppingisfuelingconsumerdemandforfasterandmorereliablepaymentmethods.Webelievethesetrendscreateanenvironmentwheremerchantsfeelcompelledtointeractmorecloselywithabroaderrangeofcustomers,throughtheuseofonlinestores,mobile-friendlytechnologiesandextensivecompatibilitywithdigitalpaymentmethods,suchascardsande-wallets.Webelievethatthereisasignificantmarketopportunityforgrowthine-commerceinBrazil.
Businesses Are Shifting Towards Increasingly Non-Bureaucratic, Friendly and All-in-One Services
Astechnologyandtheregulatoryenvironmentevolve,sellersofalltypesandsizesfaceacontinuousneedfornewsolutions.AsignificantnumberofbusinessesinBrazilremainunservedorunderservedintermsofonlinepayments,POSandmPOSservicesaswellasvalue-addedfinancialservicestoolsforanumberofreasons,includinglackofaccess,lackofall-in-oneofferings,time-consuming,limitedaccesstoconventionalfundsandlackoftransparency.
ITEM 4A. UNRESOLVED STAFF COMMENTS
None.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Thefollowingdiscussionshouldbereadinconjunctionwithourauditedconsolidatedfinancialstatementsandthenotestheretoincludedelsewhereinthisannualreport,aswellasthedatasetforthin“Item3.KeyInformation—SelectedFinancialandOperatingData.”Thefollowingdiscussioncontainsforward-lookingstatementsthatreflectourplans,estimatesandbeliefs.Ouractualresultscoulddiffermateriallyfromthosediscussedintheforward-lookingstatements.Factorsthatcouldcauseorcontributetothesedifferencesincludethosediscussedbelowandelsewhereinthisannualreport,particularlyin“Item3.KeyInformation—RiskFactors.”
Operating and Financial Review and Prospects
Overview
WeareadisruptiveprovideroffinancialtechnologysolutionsfocusedprimarilyonMicro-Merchants,SmallCompaniesandMedium-SizedCompanies,orSMEs,inBrazil.WearetheonlyfinancialtechnologyproviderinBrazilwhosebusinessmodelcoversallofthefollowingfivepillars:
• Multipledigitalpaymentsolutions
• In-personpaymentsviaPOSdevicesthatweselltoclients
• Freedigitalaccounts
• Issuerofprepaidcardstoclientsforspendingorwithdrawingaccountbalances
• Operatingasanacquirer.
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Ourend-to-enddigitalecosystemenablesourcustomersnotonlytoacceptpayments,butalsotogrowandmanagetheirbusinesses.BeforePagSeguro,manyoftheseMicro-MerchantsandSMEswereoverlookedorunderservedbyincumbentpaymentprovidersandlargefinancialinstitutionsinBrazil.Forexample,accordingtoasurveyconductedbyusinJanuary2019,85%ofmerchantswhoownourentry-levelmPOSdevice,theMinizinha,didnotacceptcardpaymentspriortosigningupwithPagSeguro.Weoffersafe,affordable,simple,mobile-firstsolutionsformerchantstoacceptpaymentsandmanagetheircashthroughtheirPagSegurodigitalaccounts,withouttheneedforabankaccount.Ourdigitalaccountoffersmorethan35paymentmethodsandeightcash-outoptionsincludingourPagSeguroprepaidcard,allusingourproprietarytechnologyplatformandbackedbythetrustedPagSeguroandUOLbrands.Ourdigitalecosystemalsofeaturesotherdigitalfinancialservices,businessmanagementtoolsandfunctionalitiesforourclients.
Financial Presentation and Accounting Practices
Forinformationonourconsolidatedfinancialstatements,see“PresentationofFinancialandOtherInformation.”
Principal Factors Affecting Our Financial Condition and Results of Operations
WebelieveouroperatingandbusinessperformanceisdrivenbyvariousfactorsthataffecttheglobalandBrazilianeconomy,theBraziliandigitalpaymentsmarket,trendsaffectingthebroaderBrazilianfinancialtechnologysolutionsindustry,andtrendsaffectingthespecificmarketsandcustomerbasethatwetarget,particularlyMicro-MerchantsandSMEsinBrazil.Thefollowingkeyfactorsmayaffectourfutureperformance.
Adoption of our digital payment services and POS devices, and usage of our early payment of receivables feature
Webelieveourdigitalplatform,digitalpaymentservicesandPOSdevicesarethefoundationofourrelationshipwithourclients.Wegeneraterevenuethroughthecommissionsandotherfeesthatwechargeforelectronicpaymentintermediation,aswellasfeesforotherservicesandrevenuesfromsalesofPOSdevicesandrelateditems,andwegeneratefinancialincomethroughtheearlypaymentofreceivablesfeaturethatweofferourmerchantclients.Weintendtocontinuetodrivegrowthinourdigitalpaymentservices,POSdevicesandearlypaymentofreceivablesfeaturebyscalingoursolutionstomeettheneedsofourclients.
OurdigitalpaymentsolutionsandPOSdevicesaretheprincipalwayinwhichourclientsbecomefamiliarwithourfullrangeofproductsandservices.Weseektoleveragethefamiliaritygeneratedbytheseservices,featuresanddevicestoencouragemerchantstosignupforourotherservices,whichcanhelpthemincreasetheirsalesand,inturn,generateincrementalrevenueforus.Asaresult,thenumberofnewmerchantswhoadoptourdigitalpaymentservicesandpurchaseourPOSdeviceswillaffectourgrowth.
Furthermore,ourcustomerbaseconsistsprimarilyofMicro-MerchantsandSMEs,whotendtogeneraterelativelyhighlevelsofearlypaymentofreceivablesfrominstallmenttransactionsinordertofulfilltheirworkingcapitalneeds.TheseMicro-MerchantsandSMEsareatthecoreofourstrategy.Inthefuture,however,aswesignupagreaterproportionoflargermerchants,weexpectearlypaymenttorepresentasmallerrelativeproportionofouroverallresults,sincelargermerchantstendtorequestsignificantlylowervolumesofearlypayment,giventheireasieraccesstoalternativefunding.Hence,webelievethatwhileourFinancialincomewillcontinuetoincreaseinabsolutetermsasourclientbasegrows,itmaydecreaseasaproportionofourTotalrevenuesandincomeinthemediumandlongerterm.
Increased use of credit and debit cards and expanded card payments network
TheresultsofouroperationsdependtoasignificantdegreeontheuseofcreditanddebitcardstomakedigitalpaymentsinBrazil.In2014,accordingtoABECSandtheCentralBank,thetransactionvolumeforpaymentcardsovertookthetransactionvolumeforchecksforthefirsttime.CreditanddebitcardtransactionvolumeinBrazilhasincreasedatacompoundannualgrowthrateof13.8%from2010to2017accordingtoABECS.Asafurtherindicationofthisgrowth,MasterCardstatedinitsannualreportthattheBrazilianreal wasoneofitsthreeprimaryrevenuebillingcurrenciesin2017,surpassingtheBritishpoundandonlybehindtheU.S.dollarandtheEuro.
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Growth of e-Commerce
Ourresultsofoperationsdependinpartonconsumers’widespreadacceptanceanduseoftheInternetasawaytoconductcommerceandfinancialtransactions.E-commerceisalsounderpenetratedcomparedtoe-commercelevelsinmoredevelopedeconomies.InBrazil,e-commerceaccountedforonly4.8%ofretailsalesin2018,comparedto11.9%worldwide,accordingtoeMarketer.Accordingtoa2018reportcommissionedbyABECSandcarriedoutbyDatafolha,onlinepurchasesmadeuponly22.8%ofthetotalcreditcardtransactionvolumeinBrazilin2017,anincreaseof4.2percentagepointsfrom18.6%in2015.Sinceweviewcommerceviamobiledevicesasakeydriverofgrowthgoingforward,wefocusonmaintainingamobile-firstdigitalplatform,andwedesignoursolutionsonamobile-firstbasissothatourmerchantscanbeself-sufficientatalltimes.
Launch of new products and services and cross-selling to our clients
Westrivetostayonthecuttingedgeofthefinancialtechnologysolutionsindustrybydevelopingandlaunchingnewproductsandservicestooffertobothnewandexistingclientsandintendtocontinuetoinvestinproductdevelopmenttobuildnewproductsandservicesandtobringthemtomarket.Thisallowsustocontinuetomeettheneedsofourclients,astheseneedsgrowandchangeovertime.Whileweexpectourtotalexpensestoincreaseintheshorttermasweplanforgrowth,weexpectourexpensestodeclineasapercentageofourTotalrevenueandincomeoverthemediumtermastheseinvestmentsbenefitourbusinessandourbusinessgrows.
Ourexistingclientsrepresentasizableopportunitytocross-sellproductsandserviceswithrelativelylowincrementalmarketingandadvertisingexpensesforus.Webelievethatourrangeofservices,manyofwhichcanbeusedforbothbusinessandpersonalneeds,representsanopportunitytofurtherincreaseengagementwithourexistingclients.Weplantocontinuallyinvestinproductdevelopmentsoastomaintainandincreasetheattractivenessofourproductsandservices.Totheextentthatweareabletocross-selltheseproductsandservicesanddevelopandintroducenewproductsandservicestoourexistingclientsandattractnewclients,weexpectourrevenuesandfinancialincometocontinuetogrowandourmarginstoincrease.
Marketing and advertising
Forinformationregardingourmarketingandadvertising,see“Item4.InformationontheCompany—SalesandMarketing.”
Merchant size
WebenefitfromourprimaryfocusonMicro-MerchantsandSMEs,whowebelievewereoverlookedorunderservedbyincumbentpaymentprovidersandlargefinancialinstitutionsinBrazilbeforePagSeguro.AsourexistingmerchantsgrowandasweserveincreasinglylargermerchantsweexpectourTPVtogrowaccordingly,whilewewillremainfocusedonMicro-MerchantsandSMEs.Servinganincreasingnumberoflargermerchantsalsopresentsanopportunitytocross-sellvalue-addedservicesandfeaturessuchasaccountingreconciliation,whichgenerateincrementalrevenuesandmarginwithlowornocustomeracquisitioncosts.Overtime,weexpectanincreasingportionofourgrowthtocomefromacombinationofincreasednumbersofactivemerchantsandincreasedaveragespendingperactivemerchant.
Consumer adoption of our products and services
Manyofourproductsandservicesreachconsumersdirectly.Ourescrowperiodserviceforconsumerprotectionandmediationservicesmakee-commercesaferforconsumers,andwebelieveourdigitalaccountandPagSeguroprepaidcardsprovideeasy,attractivealternativesforconsumerswhodonothavebankaccounts.Inaddition,oursocialpaymentsolutions,suchasPag.ae,allowourclientstousetheirPagSeguroaccountforeitherbusinessorpersonalneeds.Wehavemadesignificantinvestmentsinthedevelopmentoftheseconsumer-facingproductsandservices,andourabilitytogrowourconsumernetworkgoingforwardwillbeimportantforstrengtheningourecosystemanddrivingourgrowth.
Currency fluctuations
Wedonotgeneratematerialrevenuesinforeigncurrenciesthatcouldsubstantiallyaffectourresultsofoperations.Certainofourexpensesaresubjecttocurrencyfluctuation,asthepricesofthePOSdeviceswepurchasearesetinU.S.dollars(bothforthedevicesweimportedfromoutsideBrazilpriortomid-2015,andforthelocally-madedeviceswehavebeenpurchasingsincethen).
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Inflation
Inflation,governmentpoliciesadoptedtocurbinflationarypressuresanduncertaintiesregardingpossiblefuturegovernmentalinterventionhavecontributedtoeconomicuncertaintyinBrazil.AccordingtotheIPCA,Brazilianinflationrateswere3.75%,2.95%and6.29%in2018,2017and2016,respectively,whiletheSELICrate,theCentralBank’sovernightrate,increasedfrom10.00%atthebeginningof2014toahighpointof14.25%in2016,beforeaseriesofratereductionsin2017,bringingtheSELICratedownto7.00%asofDecember7,2017,whereitremainedatyear-end2017.TheCOPOMreducedtheSELICrateto6.75%onFebruary7,2018,andfurtherreduceditto6.50%onMarch21,2018,whereitcurrentlyremains.Formoreinformation,see“—Brazilianpoliticalenvironmentandmacroeconomicconditions,interestrates,consumercreditandconsumerspending”and“Item3.KeyInformation—RiskFactors—RisksRelatingtoBrazil—InflationandcertainmeasuresbytheBraziliangovernmenttocurbinflationhavehistoricallyharmedtheBrazilianeconomyandBraziliancapitalmarket,andhighlevelsofinflationinthefuturewouldharmourbusinessandthepriceofourClassAcommonshares.”
Inflationhasadirecteffectonourcontractswithcertainsuppliers,suchastelecommunicationsoperators,whosecostsareindexedtotheIPCA,anddataprocessors,whoselaborcostsareadjustedaccordingtoinflation.Whileinflationmaycauseoursupplierstoincreasetheirprices,wearegenerallyabletooffsetthiseffectbyincreasingthepriceswechargeforourproductsandservices.
Whenmerchantsadjusttheirpricesforinflation,thepurchasingpowerofconsumersmaybereduced,whichmayadverselyaffectourrevenueifitresultsinareductioninthenumberandvolumeoftransactions.However,ifourmerchantsraisetheirpricesduetoinflation,theamountwereceiveoneachtransactionalsoincreases.
Pricing and revenue mix in our payment processing services
Wegeneraterevenueintheformofcommissionsandfeesonthecapture,transmission,processingandsettlementoftransactionscarriedoutusingcredit,debitandmealvouchercards,aswellasfeesforotherservices.Creditanddebitcardsgeneratecommissionsintheformofthemerchantdiscountrate,orMDR,whichisacommissionwithheldbyusfromthetransactionvaluepaidtothemerchant.TheMDRwechargemayvaryovertimeandwemaymakedifferentcommercialoffersfordifferentservicesorforlargerclients.However,overall,theMDRfordebitcardsislowerthanthatforcreditcards.OurcurrentstandardMDRratesare1.99%forPOSdebitcardtransactions,3.19%forPOScreditcardtransactionsnotpaidininstallments,3.79%forPOScreditcardtransactionspaidininstallmentsand3.99%foronlinetransactions,irrespectiveofwhethersuchonlinetransactionwaspaidininstallments.OnlinetransactionsarealsochargedafixedamountofR$0.40persaleinadditiontotheseMDRrates.Paymentsmadeusingmealvouchercardsandotherpaymentmethodsgenerateper-transactionand/orpercentagecommissionsatvariousrates.TheMDRratesforcreditcardtransactionsvaryaccordingtowhetherthemerchanthasoptedforthe14-dayorone-daypaymentserviceunderourpaymentdateelectionservice.Formerchantswhoselecttheone-daypaymentdateelection,thestandardMDRis4.99%forPOScreditcardtransactionsnotpaidininstallmentsand5.59%forPOScreditcardtransactionspaidininstallments.Formerchantswhoselectthe14-daypaymentdateelection,thestandardMDRis3.99%forPOScreditcardtransactionsnotpaidininstallmentsand4.59%forPOScreditcardtransactionspaidininstallments.Ourrevenuesarethereforeimpactedbythemixofthesetypesofservicesthatwesell,aswellasanychangesinthepricingforeachservice.
WefacecompetitioninallofourpaymentservicesandsalesofPOSdevices,andweexpectthiscompetitiontointensifyinthefuture.Forfurtherinformation,see“Item3.KeyInformation—RiskFactors—Substantialandincreasinglyintensecompetition,bothwithinourindustryandfromotherpaymentmethods,mayharmourbusiness.”Inaddition,wecurrentlyofferlowerpricingtocertainofourclientswhogeneratehigherTPV,andwemayberequiredtoextendthispricingtootherclientsasourmerchantbaseexpandstoincludeagreaterproportionoflargermerchants.
Financing of our early payment of merchants’ receivables feature
Wereceivesignificantfinancialincomefromofferingourmerchantstheoptiontoobtainearlypaymentoftheirreceivablesfromcreditcardinstallments.Wealsoincursignificantfinancialexpensesinordertofundthisoptionalfeature.ThroughthedateofourIPO,wefundedthisfeature(i)principallybyobtainingearlypaymentofnotereceivablesduetousfromthecardissuersandacquirers,enablingustoprovidetherelatedearlypaymenttomerchants,aswellas(ii)throughourgeneralthirdpartyborrowingsandowncapital.Ourabilitytomaintainadequatefundingfortheearlypaymentfeatureisimportantforouroperationsandfutureincomegeneration.Forfurtherinformation,see“—PrincipalComponentsofOurResultsofOperations—FinancialExpenses.”
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Interchange fees
Werelyoncardissuersandcardschemestoprocessourtransactions,andwearerequiredtopayfeesforthisservice.Inaddition,althoughweareaccreditedasanacquirer,wealsousethird-partyacquirers.Fromtimetotime,cardschemessuchasMasterCardandVisamayincreasetheinterchangefeesthattheychargeforeachtransactionusingoneoftheircards.Creditcardschemeshavetherighttopassanyincreasesininterchangefeesontousaswellasincreasetheirownfeesforprocessing.Inaddition,cardschemeshaveimposedandmayagainimposespecialassessmentsfortransactionsthatareexecutedthrougha“digitalwallet,”andthesefeescouldparticularlyaffectusandsignificantlyincreaseourcosts.Althoughourstandardcontractwithourmerchantclientsallowsustoadjustourratesandtariffsatourdiscretionbynoticetothemerchant,ourabilitytovaryourpricingremainssubjecttoavarietyoffactors,includingcompetitionfromotherpaymentproviders,marketconditionsand,incertaincases,directpricenegotiationswiththemerchant.Asaresult,wemaynotnecessarilybeabletopassthroughallinterchangeandprocessingfeestoourmerchantclientsandincreasesinthesefeesmaythereforeincreaseourCostofsalesandservicesandreduceourmargins.
Theinterchangefee,whichwerecordasTransactioncostswithinCostofsalesandservices,hasthepotentialtoaffectourmargins.AnincreaseininterchangefeeswillresultinanincreaseinourCostofsalesandservicesandifwecannotpasstheinterchangefeesontocustomersviaacorrespondingincreaseinMDR,ourmarginwillalsobeaffected.Currently,thedifferencebetweeninterchangefeesandtheMDRwechargeislessfordebitcardtransactionsthanforcreditcardtransactions,soourmarginsoncreditcardtransactionsaregreater.Wecannotpredictiforwhenthecardschemeswillincreasetheirinterchangefees,orwhattheamountofanysuchincreasesmaybe.Forfurtherinformation,see“Item3.KeyInformation—RiskFactors—RisksRelatingtoOurBusinessandIndustry—Wepartiallyrelyoncardissuersorcardschemestoprocessourtransactions.Changestocreditcardschemefees,rulesorpracticesmayharmourbusiness.”
Brazilian political environment and macroeconomic conditions, interest rates, consumer credit and consumer spending
SubstantiallyallofouroperationsarelocatedinBrazil.Asaresult,ourrevenues,financialincomeandprofitabilityareaffectedbypoliticalandeconomicdevelopmentsinBrazilandtheeffectthatthesefactorshaveontheavailabilityofcredit,disposableincome,employmentratesandaveragewagesinBrazil.Ouroperations,andthefinancialtechnologysolutionsindustryingeneral,areparticularlysensitivetochangesineconomicconditions.
OurTotalrevenueandincomeareaffectedbylevelsofconsumerspending,interestratesandtheexpansionorretractionofconsumercreditinBrazil,eachofwhichimpactthenumberandoverallvalueofpaymenttransactions.Theinterestrateschargedonconsumercredittransactionshaveanindirecteffectonustotheextentthatlowerinterestratescanleadtoincreasesinprivateconsumption,andthereforeincreasesinthenumberofcreditanddebitcardtransactionsordecreasesinthenumberofinstallmentsconsumerselectwhenmakingapurchase.Increasesininterestrates,ontheotherhand,mayleadtoadecreaseinprivateconsumptionoranincreaseinthenumberofinstallmentsconsumerselectwhenmakingapurchase.Increasesininterestratesmayalsocausefewermerchantstodecidetouseourearlypaymentofreceivablesfeatureifouroverallfinancingcostsrequireustoincreasethediscountratewechargeforthisfeature.
TherecenteconomicinstabilityinBrazilhascontributedtoadeclineinmarketconfidenceintheBrazilianeconomyaswellastoadeterioratingpoliticalenvironment,andweakmacroeconomicconditionsareexpectedtocontinuethroughthefirstsixmonthsof2019,whilethesocialsecurityreformproposalremainspending.Formoreinformation,see“Item3.KeyInformation—RiskFactors—RisksRelatingtoBrazil—TheongoingeconomicuncertaintyandpoliticalinstabilityinBrazilmayharmusandthepriceofourClassAcommonshares.”
BrazilisthelargesteconomyinLatinAmerica,asmeasuredbygrossdomesticproduct,orGDP,yetdigitalpaymentpenetrationremainslowcomparedtomoredevelopedeconomies.AccordingtoaSeptember2018reportbyABECSanddatafromtheBureauofEconomicAnalysis,orBEA,cardusageasapaymentmethodinBrazilrepresentedonlyapproximately34%ofprivateconsumptionin2018,comparedtoapproximately46%intheUnitedStates.Accordingtoa2018reportbySEBRAE,46%ofentrepreneursinBrazilownPOSdevices,ofwhichPagSegurohastheleadingmarketshareat35%ofsuchPOSdevices.Accordingtothesamereport,thispercentageisevenhigherforIndividualMicroEntrepreneurs,with54%usingPagSeguro’sPOSdevices.Furthermore,accordingtothesamereport,72%ofentrepreneursareservedbyonlyoneacquiringcompany.Thisillustratesthepotentialfortheprovisionofadditionalfinancialservicesbyusinthissegment,whichisinsufficientlyservedbythebankingsector.Webelievethatasignificantportionofthisunderpenetrationisduetothenumberofunbankedindividuals,whomakeupamajortargetsectorforus.AccordingtodatafromtheWorldBank,asof2017,30.0%oftheBrazilianpopulationabove15yearsold,or65.2millionindividuals,didnothaveabankaccount.
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ThefollowingtableshowsdataforrealGDP,inflationandinterestratesinBrazilandtheU.S.dollar/real exchangerateatthedatesandfortheperiodsindicated.
For the Years Ended December 31,
2018 2017 2016 Realgrowth(contraction)ingrossdomesticproduct 1.1% 1.1% (3.3)%Inflation(IGP-M)(1) 7.55% (0.5)% 7.2%Inflation(IPCA)(2) 3.8% 3.0% 6.3%Long-terminterestrates–TJLP(average)(3) 6.7% 7.1% 7.5%CDIinterestrate(average)(4) 6.4% 10.1% 14.1%LIBOR(5) 2.8% 1.3% 0.7%Period-endexchangerate—reais perUS$1.00 3.87 3.31 3.26Averageexchangerate—reais perUS$1.00(6) 3.66 3.19 3.48Changeinaverageexchangerateoftherealvs.US$ (14.7)% 8.3% (4.2)%Averageunemploymentrate(7) 12.3% 12.7% 11.5%Source :FGV,IBGE,CentralBankandBloomberg(1) Inflation(IGP-M)isthegeneralmarketpriceindexmeasuredbytheFGV.(2) Inflation(IPCA)isabroadconsumerpriceindexmeasuredbytheIBGE.(3) TJLPistheBrazilianlong-terminterestrate(averageofmonthlyratesfortheperiod).(4) TheCDIinterestrateisanaverageofinterbankovernightratesinBrazil(dailyaveragefortheperiod).(5) AverageUSdollarthree-monthLondonInterbankOfferRate.(6) Averageoftheexchangerateoneachbusinessdayoftheperiod.(7) AverageunemploymentrateforyearasmeasuredbytheIBGE.
TheBrazilianpoliticalandeconomicenvironmenthasrecentlybeencharacterizedbyhighlevelsofuncertaintyandinstability,includingacontractionofeconomicgrowth,despitearecentappreciation,anoverallsharpdepreciationofthereal againsttheU.S.dollar,increasedlevelsofunemploymentanddepressedlevelsofconsumerconfidenceandspending.Brazilenteredarecessionin2014dueinparttoadecreaseinglobalcommoditiespricesaswellaswide-scalecorruptionprobesfocusedoncertainstate-ownedandprivatecompanies.Forfurtherinformation,see“Item3.KeyInformation—RiskFactors—TheongoingeconomicuncertaintyandpoliticalinstabilityinBrazilmayharmusandthepriceofourClassAcommonshares.”
Ourbusinesshasgrownrapidly,drivenbynewclientsandincreasedTPV,withourTotalrevenueandincomeincreasingtoR$4,334.7millionin2018fromR$2,523.4millionin2017.Inadditiontocontinuingtogrowourclientbase,webelievethatourbusinessmodelwillallowustobenefitfromBrazil’seconomicgrowthpotential,particularlyamongMicro-Merchants,SMEsandindividualswithoutbankaccounts.
Seasonality
Forinformationregardingourseasonality,see“Item4.InformationontheCompany—Seasonality.”
Trend Information
Webelievethatdemandforourproductsandserviceswillremainstrongincomingyears,sinceouraddressablemarketremainssignificant.Webelievethatthismarketopportunitywillcontinuetofuelvolumegrowthinourbusiness,supportedbyincreasinglevelsofpenetrationandusageofcreditcardsamongtheBrazilianpopulationandtheintroductionofnewproductsandservices.
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New IFRS standards that may affect our future results of operations
CertainIFRSstandardsandinterpretationsthathavebeenissuedbutarenotyetineffectcouldimpactthepresentationofourfinancialpositionorperformanceoncetheybecomeeffective.Forfurtherinformation,seeNote2.19toourauditedconsolidatedfinancialstatements.
Principal Components of Our Results of Operations
Thefollowingisasummaryoftheitemscomprisingourstatementsofincome:
Total revenue and income
OurTotalrevenueandincomeconsistsofthetotalofourNetrevenuefromtransactionactivitiesandotherservices,Netrevenuefromsales,FinancialincomeandOtherfinancialincome.
Net revenues
Wegeneraterevenuesfromtransactionactivitiesandotherservices,andfromsales.Ineachcase,ournetrevenuesconsistofgrossrevenueslessdeductionsfromthoserevenues.
Net revenue from transaction activities and other services
OurNetrevenuefromtransactionactivitiesandotherservicesconsistsofGrossrevenuefromtransactionactivitiesandotherservices,lessdeductionsfromthosegrossrevenues.
OurmainsourceofGrossrevenuefromtransactionactivitiesandotherservicesiscommissionsandfeesonthecapture,transmission,processingandsettlementoftransactionscarriedoutusingcredit,debitandmealvouchercardsandfeesforotherservices.Wehavetheprimaryresponsibilityforprovidingtheservicestoourclientsandwealsodirectlysetthepricesforsuchservices,independentlyfromtherelatedtransactioncostsagreedbetweenusandthecardschemesorcardissuers.Sincewehaveprimaryresponsibilityforprovidingourmerchantclientswiththeintermediationservice,andwehavepricediscretiontoadjusttheratesandtariffswechargemerchants,wearetheprincipalintheintermediationtransaction.Wethereforerecognizeourtransactionfeesasrevenueonagrossbasis,andwerecognizethetransactioncostsseparatelyasdiscussedbelow.Dependingonthetypeofcash-inpaymentortransaction,thesecommissionsandfeesconsistoftheMDR,whichisacommissionwithheldbyusfromthetransactionvaluepaidtothemerchant,and/orothercommissionsorper-transactionfees.Thislineitemalsoincludesthefeeswechargeforotherservices.Werecognizerevenuesfromthesecommissionsandfeeswhenthepurchaseisapprovedbythecardissuer,inthecaseofcash-inpaymentsmadeviapaymentcards;whenthetransactioniscarriedout,inthecaseofpaymentsmadeviaothercash-inpaymentmethods;orinthecaseofservices,whentheservice,isrendered.
TheamountsdeductedfromourGrossrevenuefromtransactionactivitiesandotherservicesconsistprincipallyoftheapplicableBraziliansalestaxesandsocialsecuritycontributions:servicetax(Imposto sobre Serviços ,orISS);contributionstotheBraziliangovernment’sSocialIntegrationProgram(Programa Integração Social ,orPIS);andcontributionstotheBraziliangovernment’ssocialsecurityprogram(Contribuição para o Financiamento da Seguridade Social ,orCOFINS).Wearerequiredtocollecteachoftheseonourtransactionactivitiesandotherservices.
Net revenue from sales
OurNetrevenuefromsalesconsistsofGrossrevenuefromsales,lessdeductionsfromthosegrossrevenues.
WeearnrevenuefromthesaletomerchantsofourPOSdevices.WecurrentlyoffertheMinizinhaforapurchasepriceof12monthlyinstallmentsofR$4.90,theMinizinhaChip(whichwelaunchedinMarch2018)forapurchasepriceof12monthlyinstallmentsofR$9.90,theModerninhaPlusforapurchasepriceof12monthlyinstallmentsofR$19.90,theModerninhaProfor12monthlyinstallmentsofR$35.90andtheModerninhaSmart(whichwelaunchedinOctober2018)for12monthlyinstallmentsofR$39.90.ThislineitemalsoincludesrevenuesfromsalesofPOSdeviceperipheralssuchaschargingbasesandprotectivecovers.Werecognizetheserevenuesupondeliveryoftheequipmenttothemerchant.
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TheamountsdeductedfromourGrossrevenuesfromsalesconsistof(i)PISandCOFINS,aswellastheImposto sobre Circulação de Mercadorias e Serviços tax,orICMS,thatwearerequiredtocollectonsalesofdevicesandperipherals,and(ii)amountscorrespondingtodefectivePOSdevicesthatarereturnedtousandpurchasesthatarecancelledbymerchants.
TheapplicabletaxesandcontributionsvaryaccordingtowhetherthedeviceandperipheralwasmanufacturedinBrazilorimported.Forlocally-madedevices,whenwepurchasethedevicewepaythetaxesandcontributionstothesupplieratstandardrates;andwhenwesellthedevicetoourclients,wecollectthesetaxesatthesameratesonthesellingprice,recordthetaxonthesaleinthislineitemasadeduction,andremitthedifferencebetweenthetaxesonorinputcostandoursellingpricetothetaxingauthorities.Forimporteddevices,wepayalowerrateoftaxinplaceofICMSonthepurchase,andarenotrequiredtochargeICMSwhenwesellthedevicetoourclients,meaningthattheamountrecordedinthisdeductionslineitemisrelativelylowerforimporteddevices.Priortomid-2015wepurchasedsignificantnumbersofimportedPOSdevices,butsincemid-2015substantiallyallofthePOSdeviceswesellhavebeenmanufacturedinBrazil.
Financial Income
Asdescribedunder“Item4.InformationontheCompany—OurProductsandServices—Cash-inSolutions—CreditCards,”ourearlypaymentofreceivablesfeatureconsistsofpayingourmerchantstheirinstallmentreceivablesupfrontwhenconsumerspayingbycreditcardchoosetopaythemerchantininstallments.WeaccountfortheremunerationfromthisfeatureasFinancialincome.ThisFinancialincomemakesupasignificantportionofouroverallTotalrevenueandincome.
Ourremunerationfromtheearlypaymentofreceivablesfeatureconsistsofadiscountthatwewithholdfromthetransactionvalueofthereceivablesthatwepaytomerchantsinadvance.WerecognizethisdiscountasFinancialincome(separatefromandinadditiontotheMDRfeeforthepaymentprocessingtransaction,whichwerecognizeasGrossrevenuefromtransactionactivitiesandotherservices).WerecognizethediscountamountasFinancialincomeatthetimeasaletransactionisapprovedinvolvingamerchantwhohasoptedtoreceiveearlypaymentsofthereceivablesfromtheircreditcardinstallmentsales.ThediscountthatgeneratesourFinancialincomerelatesonlytotheearlypaymentofthesecondandsuccessiveinstallmentsofthepurchase;thefirstinstallmentisnotpaidearlyasitisdisbursedtothemerchantwithinthenormalbillingcycle,soitdoesnotgenerateremunerationintheformofFinancialincome(althoughitdoesgenerateMDR,whichisrecognizedasGrossrevenuefromtransactionactivitiesandotherservices).
Inaddition,theFinancialincomelineitemdoesnotincludethefeeswechargeforthemerchant’spaymentdateelectionwithinthemonthlybillingcycle,whicharepartoftheMDRandareaccountedforinGrossrevenuefromtransactionactivitiesandotherservices.
OurFinancialincomerelatestoearlypaymentstomerchantsofamountsrelatedtoreceivablesfrompurchasetransactionsthathavebeenapprovedbythecardissuerandthecardscheme.
ThefinancialexpensesweincurinfundingthisearlypaymentofreceivablesfeatureareaccountedforinourFinancialexpenses,discussedbelow.
FormoreinformationregardingourearlypaymentofreceivablesfeatureandtheFIDCthatweestablishedinthefourthquarterof2017tofinanceaportionofourrelatedFinancialexpenses,see“Item4.InformationontheCompany—OurProductsandServices—AdvancedIntegratedFunctionalitiesandValue-AddedServicesandFeatures—EarlyPaymentofReceivables.”
Other Financial Income
OurOtherfinancialincomeconsistsprincipallyofinterestgeneratedbybanksavingsaccountsandbydepositswemakewithBraziliancourts,knownasjudicialdeposits,whichguaranteeanycompensationwemayberequiredtopayinlitigationmatters.
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OurOtherfinancialincomealsoincludesournetforeignexchangevariations,i.e.,thenetgainorlossonourassetsandliabilitiesrelatedtotheappreciationordepreciationofthereal againstforeigncurrencies,whichhaslimitedimpactonourcashposition.Wehadswapsinplacetoprotectusagainstexposuretocurrencyfluctuationsonallofourborrowingsinforeigncurrencies.
Cost of Sales and Services
OurCostofsalesandservicesrepresentstheamountsthatmakeupthecostoftheservicesanddeviceswesell.TheseamountsaredividedintoTransactioncosts,Costofgoodssold,Marketingandadvertising,Personnelexpenses,DepreciationandamortizationandOthercosts.Forfurtherinformationonthesecosts,seeNote21toourauditedconsolidatedfinancialstatements.
• OurTransactioncostsconsistofinterchangefeessetbycardschemesthatarepaidtothefinancialinstitutionthatistheissuerofthecard;assessmentfeespaidtocardschemes;feespaidtothird-partypaymentprocessors;feespaidtoacquirers;andbanksettlementfees.AllofourTransactioncostsareaccountedforwithinourCostofsalesandservices.Sincewearetheprincipalintheintermediationtransaction,werecognizethetransactioncoststhatwepaytothirdparties,suchascardschemesandcardissuerswhoprocessthesetransactions,withinourCostofsalesandservicesseparatelyfromthetransactionfeeswereceive,whichwerecognizeonagrossbasis.Thetransactioncostsareagreedbetweenthecardschemesorcardissuersandus,independentlyfromthefeeswechargeourmerchantclients.
• CostofgoodssoldconsistsoftheamountswespendinpurchasingPOSdevicesandperipheralsfromoursuppliers,togetherwiththerelatedshippingchargesandapplicablepurchasetax.AllofourCostofgoodssoldisaccountedforwithinourCostofsalesandservices.
• OurMarketingandadvertisingexpensesaredividedbetweenourCostofsalesandservicesaswellasourSellingexpenses.Ofthistotal,theportionofMarketingandadvertisingthatisaccountedforwithinourCostofsalesandservicesrelatestocustomersupport.
• OurPersonnelexpensesconsistofwages,overtime,benefits(suchasmealvouchers,transportationvouchersandmedicalinsurance,amongothers),profitsharing,andsocialcontributionandpayrolltaxes.InBrazil,socialcontributionandpayrolltaxesconsistoftheBrazilianSocialSecurityInstitute(InstitutoNacional de Seguridade Social – INSS )contributionandtheBrazilianUnemploymentCompensationFund(Fundo de Garantia por Tempo de Serviço – FGTS )contribution.OurPersonnelexpensesaredividedbetweenourCostofsalesandservicesaswellasourSellingexpensesandourAdministrativeexpenses.Ofthistotal,theportionofourPersonnelexpensesthatisaccountedforwithinourCostofsalesandservicesreferstoemployeesengagedinactivitiesrelatedtothecostofgoodsandservicesthatwesell,suchastechnology,customersupport,logistics,antifraudactivitiesandmediationservices.
• OurDepreciationandamortizationexpensesaredividedbetweenourCostofsalesandservicesaswellasourSellingexpensesandourAdministrativeexpenses.Ofthistotal,theportionofourDepreciationandamortizationexpensesthatisincludedinourCostofsalesandservicesconsistsmainlyof(i)thedepreciationofequipment,furniture,technologyandinstallationsthatformpartofthecostofthegoodsandservicesthatwesell,and(ii)theamortizationofsoftwarethatwedevelopinternallyforuseinouroperations.
• OurOtherexpensesaredividedbetweenourCostofsalesandservicesaswellasourSellingexpensesandourAdministrativeexpenses.Ofthistotal,theportion
ofourOtherexpensesthatisincludedinourCostofsalesandservicesconsistsmainlyofitemssuchastravelexpensesandofficesuppliesthatformpartofthecostofthegoodsandservicesthatwesell.
Selling Expenses
OurSellingexpensesrepresenttheamountsthatwespendonpublicity,marketing,qualitycontrolanddirectorindirectrelationswithourclients.TheseamountsaredividedintoMarketingandadvertising,Personnelexpenses,Chargebacks,DepreciationandamortizationexpensesandOtherexpenses.Forfurtherinformationontheseexpenses,seeNote21toourauditedconsolidatedfinancialstatements.
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• TheportionofMarketingandadvertisingexpensesincludedinourSellingexpensesrelatestotheproductionanddistributionofourmarketingandadvertisingcampaignsontraditionalofflinemedia,traditionalonlineadvertising,thepositioningofourproductsinsearchplatforms,telemarketingrelatedtoPOSdevicesales,commissionstoourthirdpartysalesforceandpartnerssuchasplatforms,bloggersanddevelopers,expensesincurredinrelationtotrademarketingatevents,andamountsthatwespendonconsultingservicesandcallcentersforourtelemarketingcampaigns.
• TheportionofourPersonnelexpensesincludedinourSellingexpensesrelatestoemployeesengagedinmarketingandadvertisingofourservices,POSdevicesandfeatures.
• Chargebacksconsistoftransactionlossesarisingfromchargebacksrelatedtofraudulenttransactions,whichoccurs,principallyinonlinetransactions,whena
consumermakesapurchaseviacreditcardandthenrequestsachargebackfromtheissuingbankafterreceivingthegoodsorservicespurchased.AllofourChargebackexpensesareaccountedforwithinourSellingexpenses.
• TheportionofourDepreciationandamortizationexpenseincludedinourSellingexpensesconsistsofthedepreciationofequipmentusedforclientrelationships.
• TheportionofourOthercostsincludedinourSellingexpensesconsistofexpensesrelatedtotravel,lodgingandinsurance,facilities,rent,consultancyfeesandofficesuppliesrelatingtomarketingandadvertisingofourservices,POSdevicesandfeatures.
Administrative Expenses
OurAdministrativeexpensesrepresenttheamountsthatwespendonbackofficeandoverheadexpenses.TheseamountsaredividedintoPersonnelexpenses,DepreciationandamortizationexpensesandOthercosts.WhileweexpectourAdministrativeexpensestoincreaseintheshorttermasweplanforgrowthandasweincurcostsofcomplianceassociatedwithbeingapubliccompany,weexpecttheseexpensestodeclineasapercentageofourTotalrevenueandincomeoverthemediumtermasourbusinessgrows.
• TheportionofourPersonnelexpensesthatformpartofourAdministrativeexpensesrelatestoourfinance,legal,humanresources,andadministrativepersonnel,aswellasfeespaidforprofessionalservices,includinglegal,taxandaccountingservices.
• TheportionofourDepreciationandamortizationexpensesthatformpartofourAdministrativeexpensesrelatesto(i)thedepreciationoftheequipment,
furniture,toolsandtechnologyusedinourheadofficeandback-officeoperationsand(ii)theamortizationofsoftwaredevelopedinternallytosupportourheadofficeandback-officeneeds,whichisshowninNote12toourauditedconsolidatedfinancialstatements.
• TheportionofourOthercoststhatformpartofourAdministrativeexpensesincludesitemssuchasbankcharges,travel,reimbursementofstaffexpensesandofficesupplies.
Financial Expenses
Ourfinancialexpensesinclude(i)thechargesweincurtoobtainearlypaymentofnotereceivablesowedtousbycardissuersandacquirersinordertofinancetheearlypaymentofreceivablesfeaturethatweoffermerchants,(ii)interestexpenseonourotherborrowingsand(iii)thecostofswapsrelatingtoourforeigncurrencyborrowings.VariationsinourFinancialexpenseswhenexpressedasapercentageofFinancialincomearedrivenbyBrazilianinterestrates,whichdeterminethecostofmostofourfinancing,togetherwithchangesinthemixofthefinancingweuseforourearlypaymentofreceivablesfeature.
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ThroughthedateofourIPO,wefundedtheearlypaymentofreceivablesfeature(i)principallybyobtainingearlypaymentofreceivablesowedtousbycardissuersandacquirers,aswellas(ii)throughourgeneralthirdpartyborrowingsandowncapital.Inaddition,inNovember2017wesetupaBrazilianinvestmentfundtopurchaseandholdreceivablesknownasaFundo de Investimento em Direitos Creditórios (aFundforInvestmentinCreditRights,orFIDC)throughwhichwemayraisedebttofinancetheearlypaymentofreceivablesfeature.TheFIDCiscontrolledbyourBrazilianoperatingcompany(byvirtueofsubscribingforitssubordinatedquotas)butraisescapitalbyissuingseniorquotasinthefundtooutsideinvestors,whoreceiveinterestontheseinvestmentsfromtheFIDC.TheFIDCusesthecapitalitraisestofinancethegrowthofourearlypaymentofreceivablesfeature.OurremunerationfromtheearlypaymentofreceivablesfeaturecontinuestobereflectedasFinancialincomeinourconsolidatedfinancialstatements.WedonotexpecttheestablishmentoftheFIDCtoimpactthediscountratewechargeinconnectionwiththeearlypaymentofreceivablesfeatureortheexpensesweincurtoobtainearlypaymentofnotereceivablesfromcardissuersandacquirers.ForfurtherinformationregardingtheFIDC,see“Item4.InformationontheCompany—OrganizationalStructure.”
WedidnothaveanyoutstandingborrowingsatDecember31,2018and2017.Allofourthird-partyborrowingsatDecember31,2016weredenominatedinU.S.dollarsandthereforeexposedtocurrencyfluctuationswhenwecontractedderivativefinancialinstrumentsknownasswapsinordertoprotectusagainstthisexposure.Forfurtherinformationonourborrowings,see“—LoansandFinancing.”
Other (Expenses) Income, Net
OurOther(expenses)income,netlineitemconsistsmainlyofcontingencies,chargesandmiscellaneousincomeand/orexpenseitems.
Current Income Tax and Social Contribution
Currentincometaxandsocialcontributionconsistsoftaxassetsandliabilitiesforthecurrentyear.OurliabilitytoincometaxprincipallyreflectsthelevelofourProfitbeforeincometaxes;thislineitemalsovaries,however,totheextentthatweareentitledtodefertaxoncertaininvestmentsintechnologicalinnovation,inwhichcaseourtaxbaseforincometaxfortheyearisreducedandtherelateddeferredtaxliabilityisaccountedforintheDeferredincometaxandsocialcontributionlineitembelow.
Ourtaxassetsforthecurrentyeararecalculatedbasedontheexpectedrecoverableamount,andtaxliabilitiesforthecurrentyeararecalculatedbasedontheamountpayabletotheapplicabletaxauthorities.Thetaxratesandtaxlawsusedtocalculatethisamountarethoseenactedorsubstantiallyenactedatthebalancesheetdate.Currentincometaxandsocialcontributionrelatedtoitemsrecognizeddirectlyinequityisalsorecognizedinequity.Weperiodicallyevaluateourtaxpositionswithrespecttointerpretingtaxregulationsand,whenappropriate,establishprovisions.
Deferred Income Tax and Social Contribution
Deferredincometaxandsocialcontributionconsistsoftemporarydifferencesbetweenthetaxbasisofassetsandliabilitiesandtheircarryingamountsatthebalancesheetdate.ThislineitemrefersprincipallytodeferralsoftaxliabilitythatweareentitledtotakeoncapitalinvestmentsthatwemakeintechnologicalinnovationunderBrazilianLawNo.11,196/2005,knownastheTechnologicalInnovationLawor“Lei do Bem.” Weareabletousethistaxdeferrallawprincipallyfortheinvestmentswemakeindevelopingsoftwareinternally,wherewecapitalizethelaborandothercostsinvolvedasanintangibleassetratherthanaccountingfortheseamountsasexpenses,andwedepreciatetheaccountingvalueoftheintangibleassetoveritsusefullife.TheLei do Bem allowsustodeferourtaxliabilityontheseinvestments.OtherBraziliantaxrulesalsoallowustodefertaxoncertainitems,forexampleonunpaidamountsduefromcreditors.TheDeferredincometaxandsocialcontributionlineitemconsistsofourliabilitytofuturetaxundertheLei do Bem andtheseothertaxlaws,lessthedepreciationandamortizationthatwetakeduringtheyearontherespectivecapitalizedassets,andlessthetaxlossescarriedforwardfromprioryearsthatweareabletooffsetagainstourtaxliabilityduringtheyear.Forfurtherinformationonthislineitem,seeNote17toourauditedconsolidatedfinancialstatements.
Deferredtaxliabilitiesarerecognizedforalltaxabletemporarydifferences,exceptincertainsituationsexplainedinNote2.14ofourauditedconsolidatedfinancialstatements.Thecarryingamountofdeferredtaxassetsisreviewedateachbalancesheetdateandimpairmentisrecognizedtotheextentthatitisnolongerprobablethatsufficienttaxableprofitwillbeavailabletoallowallorpartofthedeferredtaxassetstobeutilized.Unrecognizeddeferredtaxassetsarereviewed,ateachbalancesheetdate,andrecognizedtotheextentthatitisprobablethatfuturetaxableprofitwillbeavailabletoallowfortheirutilization.
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ThereisnoCaymanIslandstaxationontheincomeearnedbyPagSeguroDigitalandassuch,wedonothaveanytaximpactsatthePagSeguroDigitallevel.
Withrespecttooursubsidiaries,deferredtaxassetsandliabilitiesaremeasuredusingtheprevailingtaxratesintheyearinwhichtheassetswillberealizedandtheliabilitieswillbesettled.Thecurrentlydefinedtaxratesof25%forincometaxand9%forsocialcontributionareusedtocalculatedeferredtaxes.Deferredtaxassetsandliabilitiesarepresentedonanetbasiswhenthereisalegallyorcontractuallyenforceablerighttooffsetthetaxassetagainstthetaxliability,andthedeferredtaxesarerelatedtothesametaxableentityandsubjecttothesametaxauthority.
Results of Operations
Thefollowingdiscussionofourresultsofoperationsisbasedonthefinancialinformationderivedfromourauditedconsolidatedfinancialstatementsincludedelsewhereinthisannualreport.
Results of Operations in 2018, 2017 and 2016 For the Years Ended December 31,
2018 Percent Change 2017
Percent Change 2016
(in millions of reais , with the exception of percentages and
per-share amounts) Netrevenuefromtransactionactivitiesandotherservices 2,267.1 85.2% 1,224.3 155.1% 480.0Netrevenuefromsales 374.6 (20.6)% 471.9 81.1% 260.6Financialincome 1,414.5 72.8% 818.6 108.6% 392.4Otherfinancialincome 278.5 3,138.4% 8.6 62.3% 5.3
Total revenue and income 4,334.7 71.8% 2,523.4 121.7% 1,138.4
Costofsalesandservices (2,144.7) 61.9% (1,324.4) 112.3% (623.7)Sellingexpenses (351.4) 43.0% (245.8) 23.0% (199.9)Administrativeexpenses (581.7) 279.7% (153.2) 81.3% (84.5)Financialexpenses (31.2) (70.1)% (104.5) 53.0% (68.3)Other(expenses)income,net (8.1) (32.5)% (12.0) 79.1% (6.7)
Profit before Income Taxes 1,217.6 78.1% 683.5 339.8% 155.4
Currentincometaxandsocialcontribution (180.9) (15.9)% (215.0) 2,805.4% (7.4)Deferredincometaxandsocialcontribution (126.3) (1,326.2)% 10.3 (151.2)% (20.1)
Income Tax and Social Contribution (307.2) 50.1% (204.7) 641.7% (27.6)
Net Income for the Year 910.4 90.1% 478.8 274.6% 127.8
Attributableto: OwnersofPagSeguroDigital 909.3 89.9% 478.8 276.4% 127.2Non-controllinginterests 1.1 100.0% — (100.0)% 0.6Basic earnings per common share – R$ 2.8625 56.8% 1.8254 276.4% 0.4849Diluted earnings per common share – R$ 2.8582 56.6% 1.8254 276.4% 0.4849
Total revenue and income
OurTotalrevenueandincomeamountedtoR$4,334.7millionin2018,anincreaseof71.8%fromR$2,523.4millionin2017.OurTotalrevenueandincomein2017representedanincreaseof121.7%fromR$1,138.4millionin2016.
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Net revenue from transaction activities and other services
OurGrossrevenuefromtransactionactivitiesandotherservicesin2018amountedtoR$2,638.1million,anincreaseofR$1,246.7million,or89.6%,fromR$1,391.4millionin2017.Grossrevenuefromtransactionactivitiesandotherservicesin2017representedanincreaseofR$847.6million,or155.9%,fromR$543.8millionin2016.
TheincreaseinGrossrevenuefromtransactionactivitiesandotherservicesduring2018comparedto2017wasprincipallyduetoacontinuedincreaseinouractivemerchantbaseandTPV.OurGrossrevenuefromtransactionactivitiesandotherservicesincreasedbyalesserpercentagethanourTPV,whichincreasedtoR$76.1billionfromR$38.5billionin2017.Thisdifferenceinthegrowthratewasdrivenbythemixofdebitandcreditcardpaymentsprocessedcontainingahigherpercentageofdebitcardpaymentsandwithinthecreditcardpaymentsprocessed,alowerpercentageofcreditcardtransactionsmadeininstallments.
TheincreaseinGrossrevenuefromtransactionactivitiesandotherservicesduring2017comparedto2016wasprincipallyduetoacontinuedincreaseinourcustomerbaseandTPV.OurGrossrevenuefromtransactionactivitiesandotherservicesduring2017increasedbyalesserpercentagethanourTPV,whichincreasedtoR$38.5billionfromR$14.1billionin2016.ThisdifferenceintherateofgrowthwasprincipallyduetothehigherproportionofdebitcardtransactionsinourTPVin2017ascomparedtoin2016,drivenbythefactthatinDecember2016weestablishedanewpartnershipwithElo,aBraziliancardschemewhosebusinessisheavilyweightedtowarddebitcards.OurTPVfor2017thereforeincludedthisadditionaldebitcardTPVthatwedidnothaveformostof2016;anddebitcardsgeneratelowerMDRthancreditcardtransactions.
Theincreaseingrossrevenuefromtransactionactivitiesandotherservicesin2016wasprincipallyduetoanincreaseinTPVduringtheperiod.Thisincreasewaspartiallyoffsetbyachangeinmixin2016ascash-inpaymentsfromdebitcards,whichgeneratelowerMDRfees,increasedinproportiontocash-inpaymentsfromcreditcards,whichgeneratehigherMDRfees.
OurDeductionsfromgrossrevenuefromtransactionactivitiesandotherservices,whichconsistprincipallyofsalestaxes,amountedtoR$371.0millionin2018,or14.1%ofourGrossrevenuefromtransactionactivitiesandotherservicesfortheyear.In2017,DeductionsfromgrossrevenuefromtransactionactivitiesandotherservicestotaledR$167.1million,or12.0%ofourGrossrevenuefromtransactionactivitiesandotherservicesfortheyear.In2016,DeductionsfromgrossrevenuefromtransactionactivitiesandotherservicestotaledR$63.8million,or11.7%ofGrossrevenuefromtransactionactivitiesandotherservicesfortheyear.TheincreaseintheDeductionsfromgrossrevenue,asapercentageofourGrossrevenuesfromtransactionactivitiesandotherservices,in2018whencomparedto2017wasprincipallyduetotherepealofthelawthatchargesISSbasedonthemunicipalitywherethePOSdeviceisused.Sincetherepealofthislawisbeingcontested,wearecurrentlymakingjudicialdepositsforthefulltaxrateregardingsalesmadewithintheSãoPaulomunicipalityandrecognizingaprovisionforthedifferencechargedbyothermunicipalities.TheincreaseintheDeductionsfromgrossrevenuein2017whencomparedto2016wasprincipallyduetosalestaxesrelatedtothetransactionservicesprovidedbyR2Tech.
Asaresultoftheabove,ourNetrevenuefromtransactionactivitiesandotherservicesin2018amountedtoR$2,267.1million,anincreaseofR$1,042.8million,or85.2%,fromR$1,224.3millionin2017.Netrevenuefromtransactionactivitiesandotherservicesin2017representedanincreaseofR$744.3million,or155.1%,fromR$480.0millionin2016.
Net revenue from sales
OurGrossrevenuefromsalesin2018amountedtoR$513.8million,adecreaseofR$141.4million,or21.6%,fromR$655.2millionin2017.Grossrevenuefromsalesin2017representedanincreaseofR$283.7million,or76.4%,fromR$371.5millionin2016.ThedecreaseinGrossrevenuefromsalesin2018comparedto2017isduetoareductionofourPOSdevices’salespriceandpromotionalactivityduringtheyear.Thesignificantgrowthinthisitemin2017comparedto2016wasduetoanincreaseinthevolumeofPOSdevicessoldandtherapidramp-upofourPOSdevicesales,andourrolloutofanincreasinglybroadrangeofPOSdevices.
OurDeductionsfromgrossrevenuefromsalesin2018amountedtoR$139.2million,or27.1%ofourGrossrevenuefromsalesfortheyear.In2017,theseDeductionstotaledR$183.2million,or28.0%ofourGrossrevenuefromsalesfortheyear.In2016,theseDeductionstotaledR$110.9million,or29.9%ofourGrossrevenuefromsalesfortheyear.
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ThesmalldecreaseintheseDeductionsasapercentageofourGrossrevenuefromsalesin2018comparedwith2017and2017comparedwith2016isduetochangesinthemixofBrazilianstatesinwhichwesoldPOSdevices,sinceICMSisleviedbyeachstateatadifferentrate.Asaresultoftheabove,ourNetrevenuefromsalesin2018amountedtoR$374.6million,adecreaseofR$97.3million,or20.6%fromR$471.9millionin2017.Netrevenuefromsalesin2017representedanincreaseofR$211.3million,or81.1%,fromR$260.6millionin2016.
Financial income
OurFinancialincome,whichrepresentsthevolumeofthediscountfeeswewithholdfromTPVintheearlypaymentofreceivablesfeaturethatweoffermerchants,amountedtoR$1,414.5millionin2018,anincreaseofR$595.9million,or72.8%fromR$818.6millionin2017.In2017thisitemrepresentedanincreaseofR$426.2million,or108.6%,fromR$392.4millionin2016.Theyear-on-yearincreaseinthisactivitywasdrivenbygrowthinourTPV.
Other financial income
OurOtherfinancialincomeamountedtoR$278.5millionin2018,anincreaseofR$269.9million,or3,138.4%fromR$8.6millionin2017.OurOtherfinancialincomein2017representedanincreaseofR$3.3million,or62.3%,fromwithR$5.3millionin2016.
OurOtherfinancialincomein2018includedapositivenetforeignexchangevariationofR$138.1million,anincreaseofR$136.3millioncomparedtoapositivenetforeignexchangevariationofR$1.8millionin2017.OftheR$138.1millioninnetforeignexchangevariationin2018,R$131.3millionwasrelatedtotheforeignexchangegainonourJanuary2018IPOproceedsandJune2018follow-onofferingproceeds,andtheremainingincreaseofR$6.8millionwasduetoincomefromshort-terminvestments,whichincreasedsignificantlyduetoourJanuary2018IPOproceedsandJune2018follow-onofferingproceeds.OurOtherfinancialincomein2017includedapositivenetforeignexchangevariationfromR$1.8million,adecreaseofR$0.5millionfromR$2.3millionin2016.ThesevariationsreflecttheeffectofexchangeratefluctuationsinourforeigncurrencyaccountslocatedoutsideofBrazil.In2016and2017,ournetforeignexchangevariationrelatedtoBoaCompra’sinternationaloperationsaswellascash-outpaymentsusingPagSeguroprepaidcardsoutsideofBrazilandcash-inpaymentsviainternationalcardsinBrazil,bothofwhicharesettledinforeigncurrency.
Expenses
OurtotalexpensesamountedtoR$3,117.1millionin2018,anincreaseofR$1,277.2million,or69.4%fromR$1,839.9millionin2017.AsapercentageofourTotalrevenueandincome,ourtotalexpensesin2018decreasedby1.0percentagepoint,to71.9%in2018from72.9%in2017.OurtotalexpensesamountedtoR$1,839.9millionin2017,anincreaseofR$856.9million,or87.2%,fromR$983.0millionin2016.AsapercentageofourTotalrevenueandincome,ourtotalexpensesin2017decreasedby13.5percentagepoints,to72.9%in2017from86.4%in2016.
Cost of sales and services
OurCostofsalesandservicesamountedtoR$2,144.7millionin2018,anincreaseofR$820.3million,or61.9%fromR$1,324.4millionin2017.AsapercentageofthetotalofourNetrevenuefromtransactionactivitiesandotherservicesandourNetrevenuefromsales,ourCostofsalesandservicesdecreasedby13.6percentagepoints,to94.6%from108.2%in2017.
WithinourCostofsalesandserviceslineitem,ourCostofservices,expressedasapercentageofourNetrevenuefromtransactionactivitiesandotherservices,decreasedto66.6%from67.8%in2017.Thisdecreaseisduetothemixofdebitandcreditcardpaymentsprocessedcontainingahigherpercentageofdebitcardpaymentsandlowerinterchangefeeexpenses.OurCostofsales,expressedasapercentageofourNetrevenuefromsales,increasedto169.2%in2018from104.8%in2017,duetoareductionofourPOSdevicessalespriceandpromotionalactivityduringtheyear.
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OurCostofsalesandservicesamountedtoR$1,324.4millionin2017,anincreaseofR$700.7million,or112.3%fromR$623.7millionin2016.AsapercentageofthetotalofourNetrevenuefromtransactionactivitiesandotherservicesandourNetrevenuefromsales,ourCostofsalesandservicesremainedrelativelystable,postingadecreaseof6.1percentagepoints,to78.1%from84.2%in2016.
WithinourCostofsalesandserviceslineitem,ourCostofservices,expressedasapercentageofourNetrevenuefromtransactionactivitiesandotherservices,decreasedto67.8%from74.5%in2016.ThisdecreasereflectedareductioninthefeeswepaidtothirdpartyacquirersaswellasongoingeconomiesofscaleduetogrowthinourTPV.OurCostofsales,expressedasapercentageofourNetrevenuefromsales,increasedto104.8%in2017from102.0%in2016,duetothechangeinourdeviceproductmix:thelaunchofthehigher-valueModerninhaWifiinJune2016andModerninhaProinOctober2016ledtoincreasedexpensesthroughout2017thatlargelydidnotimpactthemixin2016.
Selling expenses
OurSellingexpensesamountedtoR$351.4millionin2018,anincreaseofR$105.6million,or43.0%fromR$245.8millionin2017.AsapercentageofourTotalrevenueandincome,ourSellingexpensesdecreasedby1.6percentagepoints,to8.1%in2018from9.7%in2017.ThisdecreaseinourSellingexpensesasapercentageofourTotalrevenueandincomewasdrivenbyourgrowth,aswecontinuetoleverageoursellingexpensesbaseasourTPVincreases.
OurSellingexpensesamountedtoR$245.8millionin2017,anincreaseofR$45.9million,or23.0%fromR$199.9millionin2016.AsapercentageofourTotalrevenueandincome,ourSellingexpensesdecreasedby7.9percentagepoints,to9.7%in2017from17.6%in2016.OurMarketingandadvertisingcostsinparticular,whileincreasinginabsoluteterms,decreasedsignificantlyasapercentageofTotalrevenueandincomeduetogrowthinourrevenuevolumesandthereturnonourinvestmentsinmarketingandadvertisinginpriorperiods,aswellasadecisiontofocusouronlineadvertisingonrelativelycheaperspacesratherthanheadlinebanners.
Administrative expenses
OurAdministrativeexpensesamountedtoR$581.7millionin2018,anincreaseofR$428.5million,or279.7%,fromR$153.2millionin2017.ThisincreasewasmainlyduetoourSharebasedlong-termincentiveplan(LTIP)expenses,whichamountedtoR$359.2million.AsapercentageofourTotalrevenueandincomeourAdministrativeexpensesincreasedby7.3percentagepoints,to13.4%in2018from6.1%in2017.
In2017,ourAdministrativeexpensesincreasedbyR$68.7million,or81.3%,comparedwithR$84.5millionin2016.Thisincreasewasmainlyduetoanincreaseinemployeecosts,bankchargesandconsultingfees.AsapercentageofourTotalrevenueandincome,however,ourAdministrativeexpensesdecreasedby1.3percentagepoints,to6.1%in2017from7.4%in2016.
Financial expenses
OurFinancialexpensesamountedtoR$31.2millionin2018,adecreaseofR$73.3million,or70.1%,fromexpensesofR$104.5millionin2017.Thesameitemin2017reflectedanincreaseinexpenseofR$36.2million,or53.0%,fromexpensesofR$68.3millionin2016.ExpressedasapercentageofourFinancialincome,ourFinancialexpensesrepresented2.2%in2018,12.8%in2017and17.4%in2016.
ThevariationinourFinancialexpenseswhenexpressedasapercentageofFinancialincomeisdrivenbyBrazilianinterestrates,whichdeterminethecostofmostofourfinancing,togetherwithchangesinthemixofthefinancingweuseforourearlypaymentofreceivablesfeature,sincewehavedecreasedourexternalfinancingduetoourJanuary2018IPOproceedsandJune2018follow-onofferingproceeds.TheSELICratewasheldat14.25%forthefirstninemonthsof2016,beingreducedto14.00%inOctober2016and13.75%inDecember2016.TheSELICratewasfurtherreducedto8.25%atSeptember30,2017andto7.00%atDecember7,2017,whereitremainedatyear-end2017.TheCOPOMreducedtheSELICrateto6.75%onFebruary7,2018,andfurtherreduceditto6.50%onMarch21,2018,whereitcurrentlyremains.Ourfinancialexpensealsoreflectedchangesinourmixoffinancing:in2016,inadditiontoourexistingfinancingsources,wefurtherincreasedourlevelsofexternalfinancing,withearlypaymentofthereceivablesduetousfromcardissuersaswellasacquirers,andweincurredthirdpartyborrowings.In2017,werepaidourthirdpartyborrowingsandthereafterfinancedtheearlypaymentfeaturebyobtainingearlypaymentofnotereceivablesduetousfromthecardissuersandacquirers.In2018,wefinancedtheearlypaymentfeatureusingourIPOprimaryshareproceedingsFormoreinformation,see“—Financingofourearlypaymentofmerchants’receivablesfeature.”
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Other (expenses) income, net
OurOther(expenses)income,net,recordedexpensesofR$8.1millionin2018.Thisnetamountprincipallyreflectedexpensesrelatedtocivillitigationproceedingsduringtheyear.
In2017,ourOther(expenses)income,net,recordedexpensesofR$12.0million.Thisnetamountprincipallyreflectedexpensesrelatedtocivillitigationproceedingsduringtheyear.
In2016,ourOther(expenses)income,net,recordedexpensesofR$6.7million.Thisnetamountprincipallyreflectedexpensesrelatedtocivillitigationproceedingsduringtheyear.
Profit before income taxes
OurProfitbeforeincometaxesamountedtoR$1,217.6millionin2018,anincreaseofR$534.1million,or78.1%,fromR$683.5millionin2017.TheincreasewasduetosignificantcontinuedgrowthinourTotalrevenueandincome,reflectingvolumegrowthinbothournetrevenueitemsaswellgrowthinincomefromourearlypaymentofreceivablesfeature.
In2017,ourProfitbeforeincometaxamountedtoR$683.5million,anincreaseofR$528.1million,or339.8%,fromR$155.4millionin2016.TheincreasewasduetosignificantgrowthinourTotalrevenueandincome,reflectingvolumegrowthinbothournetrevenueitemsaswellgrowthinincomefromourearlypaymentofreceivablesfeature.
Income tax and social contribution
IncometaxandsocialcontributionamountedtoexpensesofR$307.2millionin2018,anincreaseofR$102.5million,or50.1%,fromexpensesofR$204.7millionin2017.In2017,ourincometaxandsocialcontributionexpensesincreasedbyR$177.1million,or641.7%,fromexpensesofR$27.6millionin2016.ThistotalitemconsistsofCurrentincometaxandsocialcontributionanddeferredincometaxandsocialcontribution,whichrelatesprincipallytothetaxbenefitundertheLei do Bem ,whichreducesincometaxchargesbasedoninvestmentsmadeininnovationandtechnology,suchasthosemadebyPagSeguroBrazil,ourBrazilianoperatingsubsidiary.
Ourtotaleffectivetaxratewas25.2%in2018,comparedwith29.9%in2017.Thedecreasein2018wasmainlyduetoincreaseinourLei do Bem taxbenefitsandincomegeneratedbyPagSeguroDigitalontheexchangevariationfromU.S.dollarstoreaiswhichisnottaxableundertheCompaniesLaw.
Ourtotaleffectivetaxratewas29.9%in2017,comparedwith17.8%in2016.Theincreasein2017wasduetotheincreaseinourProfitbeforeincometaxeswhiletheamountofourLei do Bem taxbenefitsremainedstable.
Net income for the year
OurNetincomefortheyearin2018amountedtoR$910.4million,anincreaseofR$431.6million,or90.1%,fromR$478.8millionin2017.AsapercentageofourTotalrevenueandincome,ourNetincomefortheyearincreasedby2.0percentagepoints,to21.0%in2018comparedwith19.0%in2017.Thisincreasewasprincipallydrivenbythevolumegrowthinbothournetrevenueitemsaswellgrowthinincomefromourearlypaymentofreceivablesfeature,asdiscussedabove.
OurNetincomefortheyearin2017amountedtoR$478.8million,anincreaseofR$351.0million,or274.6%,fromR$127.8millionin2016.AsapercentageofourTotalrevenueandincome,ourNetincomefortheyearincreasedby7.8percentagepoints,to19.0%in2017comparedwith11.2%in2016.Thisincreasewasprincipallydrivenbythevolumegrowthinbothournetrevenueitemsaswellgrowthinincomefromourearlypaymentofreceivablesfeature,asdiscussedabove.
Liquidity and Capital Resources
Thefollowingdiscussionofourliquidityandcapitalresourcesisbasedonthefinancialinformationderivedfromourauditedconsolidatedfinancialstatementsincludedelsewhereinthisannualreport.
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General
Ourprincipalliquidityrequirementsrelatetotheearlypaymentofreceivablesfeaturethatweoffermerchants.Webelieveourcurrentworkingcapitalissufficientforpresentrequirements.Throughthedateofthisannualreport,wehavesatisfiedourfundingandworkingcapitalrequirements(i)throughthecashgeneratedbyourbusinessesand(ii)byobtainingearlypaymentofnotereceivablesduetousfromthecardissuersandacquirers.
Thetablebelowpresentsourcashpositionatthebeginningofeachperiod,andournetcashprovidedbyoperatingactivities,netcashusedininvestingactivitiesandnetcashprovidedbyfinancingactivitiesduringtheperiodsindicated:
At and for the Year Ended December 31,
(in millions of reais ) 2018 2017 2016 Liquidity and Capital Resources Cashandcashequivalents 2,763.0 66.8 80.0Netcashprovidedby(usedin)operatingactivities (1,763.2) 453.6 77.0Netcash(usedin)investingactivities (44.3) (207.3) (203.3)Netcashprovidedby(usedin)financingactivities 4,503.8 (259.5) 199.4
Ourcashandcashequivalentsincludecashonhand,depositswithbanksandothershort-termhighlyliquidinvestmentswithoriginalmaturitiesofthreemonthsorless,andwithimmaterialriskofchangeinvalue.Formoreinformation,seeNote6toourauditedconsolidatedfinancialstatements.
Cash Flows
OurNetCashprovidedbyoperatingactivitiesconsistsof(i)ourProfitbeforeincometaxesfortheyear,(ii)amountsthatarerecordedasexpensesorrevenuesinourstatementofincomebutwhichdonotaffectcash,(iii)amountsrepresentingchangesinouroperatingassetsandliabilities,(iv)thecashamountsofincometaxesandsocialcontributionsthatwepayduringtheperiod,(v)thecashamountsofinterestincomereceivedand(vi)interestpaidonoutstandingborrowings.
OurCashflowsusedininvestingactivitiesconsistofamountspaidonacquisitions,ourpurchasesofpropertyandequipment,ourpurchasesofintangibleassets,andournewfinancialinvestmentslessthepaymentswemaketoredeemexistingfinancialinvestments.
OurCashflowsfromfinancingactivitiesconsistoftheproceedsfromourJanuary2018IPOandJune2018follow-onofferingandrespectivetransactioncosts.In2018,wealsorepurchasedsharesinaccordancewithoursharerepurchaseprogram,whichwasapprovedbyourboardofdirectorsinOctober2018.Formoreinformationonoursharerepurchases,see“Item16E.PurchasesofEquitySecuritiesbytheIssuerandAffiliatedPurchasers.”
Cash Flows in 2018
Ourcashandcashequivalentsatthebeginningof2018amountedtoR$66.8million.
OurProfitbeforeincometaxesin2018,asdiscussedabove,wasR$1,217.6million.
Theadjustmentsforrevenue,incomeandexpensesrecordedinourstatementofincomein2018butwhichdidnotaffectourcashflowstotaledthepositiveamountofR$454.8million,mainlyduetoR$264.2millionofShare-basedlong-termincentiveplan(LTIP)expenses,R$71.5millioninChargebacksandR$95.4millionofDepreciationandamortizationrecordedinourstatementofincome.Sharebasedlong-termincentiveplan(LTIP)relatestoexpensesforequityawardsundertheLTIP.Chargebacksrelatetoamountsthatweinitiallyrecordedasrevenuesbutforwhichwedidnotreceivetherelatedcashpaymentduetofraud.
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Theadjustmentsforchangesinouroperatingassetsandliabilitiesin2018amountedtonegativecashflowsofR$1,954.2million:
• OurNotereceivablesitem,whichispresentednetoftransactioncostsandfinancialexpensesweincurwhenweelecttoreceiveearlypaymentofthenotereceivablesowedtousbycardissuers,consistsofthedifferencebetweentheopeningandclosingbalancesoftheNotereceivablesitemofCurrentAssetsonourbalancesheet(R$8,104.7millionatyear-end2018versusR$3,522.3millionatyear-end2017)excludinginterestincomereceivedincashandchargebacks,whicharepresentedseparatelyinthestatementofcashflows.NotereceivablesrepresentednegativecashflowofR$5,048.5millionintheyearendedDecember31,2018.FromtheR$5,048.5millionofnegativecashflow,R$1,737.5millionwasfromnotereceivablesforwhichwereceivedearlypaymentfromissuingbanksasofDecember31,2017andwhichweresubsequentlyrepaidduring2018withourIPOprimaryshareproceeds.Wedonotexpectthislineitemtohaveanyfurtherimpactonourcashflowin2019.TheremainingR$3,310.9millionnegativecashflowisrelatedtoTPVgrowthintheyearendedDecember31,2018.
• OurPayablestothirdpartiesitem,whichispresentednetofrevenuefromtransactionactivitiesandfinancialincomewereceivewhenmerchantselecttoreceiveearlypayments,consistsofthedifferencebetweentheopeningandclosingbalancesofthePayablestothirdpartiesitemofCurrentLiabilitiesonourbalancesheet(R$4,324.2millionatyear-end2018versusR$3,080.6millionatyear-end2017).PayablestothirdpartiesrepresentedpositivecashflowofR$1,243.7millionin2018.
• OurReceivablesfrom(payablesto)relatedpartiesitemconsistsofthedifferencebetweentheopeningandclosingbalancesoftheReceivablesfromrelatedpartiesitem(i.e.,UOL)ofCurrentAssetsonourbalancesheet(nobalanceatyear-end2018versusR$124.7millionatyear-end2017)offsetbythedifferencebetweentheopeningandclosingbalancesofthePayablestorelatedpartiesitem(i.e.,UOL)ofCurrentLiabilitiesonourbalancesheet(R$30.8millionatyear-end2018versusR$39.1millionatyear-end2017),whichrepresentedmovementsinourtreasurycashpositionwithUOLpriortothecompletionofourIPO.Receivablesfrom(payablesto)relatedpartiesrepresentedpositivecashflowofR$112.8millionintheyearendedDecember31,2018.FormoreinformationonourtreasurycashpositionwithUOL,seeNote9toourauditedconsolidatedfinancialstatements.OurcashmanagementhasbeenseparatefromUOL’scashmanagementstartingfromthedateofcompletionofourIPO,andallsuchbalanceswererepaidbyUOL.
• OurInventoriesitemrepresentschangesinthecarryingvalueoftheInventoriesitemofCurrentAssetsonourbalancesheet.ThisitemrepresentednegativecashflowofR$47.0millionin2018.
• OurSalariesandsocialchargesitemrepresentsamountsthatwererecordedonourstatementofincome,butwhichremainedunpaidatyear-end,principallybecausetheyrelatedtothefinalmonthoftheyear.ThisitemrepresentedpositivecashflowofR$39.3millionin2018.
• OurTaxesandcontributionsitemrepresentssalestaxes(ISS,ICMS,PISandCOFINS).ThisitemrepresentedpositivecashflowofR$31.8millionin2018.
SinceourstatementofcashflowsbeginswithourProfitbeforeincometaxes,italsoadjustsforcashamountspaidinrespectofourincometaxandsocialcontribution,whichtotaledR$203.6millionduringtheyearendedDecember31,2018.Ourstatementofcashflowsalsoadjustsforinterestincomereceived,whichrepresentedapositivecashflowofR$394.6millionin2018.
Asaresultoftheabove,ourNetCashusedinoperatingactivitiesin2018totaledR$1,763.2million,ofwhichR$1,737.5millionwasfromnotereceivablesforwhichwereceivedearlypaymentfromissuingbanksasofDecember31,2017andwhichweresubsequentlyrepaidduring2018withourIPOprimaryshareproceeds.
OurCashflowsusedininvestingactivitiesin2018totaledR$44.3million.ThisamountconsistedofR$211.1millioninredemptionsoffinancialinvestments,representingtotalcashthatwewithdrewduringtheyear.WealsoinvestedR$192.0millioninpurchasesanddevelopmentofintangibleassets,whichrepresentpurchasesofthird-partysoftwareandsalariesandotheramountsthatwepaidtodevelopinternallysoftwareandtechnology,whichwecapitalizeasintangibleassets.Formoreinformationonourintangibleassets,seeNote12toourauditedconsolidatedfinancialstatements.
OurCashflowsprovidedbyfinancingactivitiesin2018totaledR$4,503.8million,consistingofR$4,717.9millionrepresentingourJanuary2018IPOproceedsandJune2018follow-onofferingproceeds,lessR$189.9millionrepresentingtransactioncosts,bothofwhichrelatedtoourJanuary2018IPOandJune2018follow-onoffering.During2018wealsorepurchasedR$39.5millioninClassAcommonsharesaccordingtooursharerepurchaseprogram.ForfurtherinformationseeNotes1and18toourauditedcondensedconsolidatedfinancialstatementsand“Item16E.PurchasesofEquitySecuritiesbytheIssuerandAffiliatedPurchasers.”
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AfteraccountingforthetotalincreaseinCashandcashequivalentsofR$2,696.3milliondiscussedabove,ourCashandcashequivalentsatthecloseof2018amountedtoR$2,763.0million.
Cash Flows in 2017
Ourcashandcashequivalentsatthebeginningof2017amountedtoR$80.0million.
OurProfitbeforeincometaxesin2017,asdiscussedabove,wasR$683.5million.
Theadjustmentsforrevenue,incomeandexpensesrecordedinourstatementofincomein2017butwhichdidnotaffectourcashflowstotaledthepositiveamountofR$103.7million,principallyreflectingR$47.9millionofChargebacksandR$51.6millionofDepreciationandamortizationrecordedinourstatementofincome,whicharedetailedinNote21toourauditedconsolidatedfinancialstatements.Chargebacksrelatetoamountsthatweinitiallyrecordedasrevenuesbutforwhichwedidnotreceivetherelatedcashpaymentduetofraud.
Theadjustmentsforchangesinouroperatingassetsandliabilitiesin2017amountedtonegativecashflowsofR$366.7million.OurNotereceivablesitem,whichispresentednetoftransactioncostsandfinancialexpensesweincurwhenweelecttoreceiveearlypaymentofthenotereceivablesowedtousbycardissuers,representedreductionofcashflowofR$2,060.9million(NotereceivablesonourbalancesheetwereR$3,522.3millionatyear-end2017versusR$1,715.5millionatyear-end2016)excludinginterestincomereceivedincashandchargebacks,whicharepresentedseparatelyinthestatementofcashflows.OurPayablestothirdpartiesitem,whichispresentednetofrevenuefromtransactionactivitiesandfinancialincomewereceivewhenmerchantselecttoreceiveearlypayments,representedpositivecashflowofR$1,776.5million(PayablestothirdpartiesonourbalancesheetwereR$3,080.6millionatyear-end2017versusR$1,304.0millionatyear-end2016).OurReceivablesfrom(payablesto)relatedpartiesitemrepresentednegativecashflowofR$64.4million(Receivablesfromrelatedpartiesitem,i.e.,UOL,ofCurrentAssetsonourbalancesheetwereR$124.7millionatyear-end2017versusR$300.8millionatyear-end2016;andPayablestorelatedpartiesitem,i.e.,UOL,ofCurrentLiabilitiesonourbalancesheetwereR$39.1millionatyear-end2017versusR$76.2millionatyear-end2016).InventoriesrepresentednegativecashflowofR$40.6million;andSalariesandsocialchargesrepresentedpositivecashflowofR$13.3million.
WepaidincometaxesandsocialcontributionsincashtotalingR$166.4millionandwerecordedapositivecashflowofR$208.6millionandanegativecashflowofR$9.2millionrelatedtointerestincomereceivedincashandinterestpaid,respectively,duringtheyear.
Asaresultoftheabove,ourNetCashprovidedbyoperatingactivitiesin2017totaledR$453.6million.
OurCashflowsusedininvestingactivitiesin2017totaledR$207.2million.ThisamountconsistedofR$77.5millioninacquisitionsoffinancialinvestmentsnetofredemptionsoffinancialinvestments,representingtotalcashthatwewithdrewduringtheyear,lesstheR$22.2millionwepaidforouracquisitionsofR2Tech,BCPSandBIVA.WealsoinvestedR$99.7millioninpurchasesanddevelopmentofintangibleassets,whichrepresentpurchasesofthirdpartysoftwareandthesalariesandotheramountsthatwepaidtodevelopinternallyoursoftwareandtechnology,whichwecapitalizeasintangibleassets.Formoreinformationonourintangibleassets,seeNote12toourauditedconsolidatedfinancialstatements.
OurCashflowsusedinfinancingactivitiesin2017totaledR$259.6million,consistinginpartofR$199.5millionrepresentingtherepaymentofourtwooutstandingborrowingsandR$5.8millionrepresentingtheliquidationofderivativefinancialinstruments(swaps)relatingtothoseborrowingsduringtheyear.Forfurtherinformationonourborrowings,see“—LoansandFinancing.”Furthermore,onSeptember29,2017,PagSeguroBrazil’sshareholdersapprovedadistributionofR$238.8millionindividends.Thisamountconsistedof(i)R$142.8millionofdividendsrelatedtothesix-monthperiodendedJune30,2017and(ii)R$96.0millionindividendsrelatedtotheyearendedDecember31,2016.Formoreinformationregardingthe2016dividend,seeNote18toourauditedconsolidatedfinancialstatements.
TheR$238.8millionindividendsweredistributedonSeptember29,2017inthefollowingmanner:(i)R$54.3millionpaidincashand(ii)R$184.5millionoffsetagainstamountsthenduetoPagSeguroBrazilandBoaCompraunderourcentralizedcashmanagementwithUOL.ForfurtherinformationonourcentralizedcashmanagementwithUOL,see“PresentationofFinancialandOtherInformation—CorporateEvents—The2015Reorganization.”
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Inaddition,subjecttocertainlimitations,Braziliancompaniesgenerallyalsodistributeamountsinrespectofinterestonowncapital,whichiscalculatedbasedonagovernmentinterestrate.Inits2016financialstatementsPagSeguroBrazilrecordedanamountofR$22.2millionininterestonowncapitalpayabletoUOL.ThisamountwaspaidtoUOLonApril30,2017,althoughthepaymentwasoffsetinfullagainstamountsthenduetoPagSeguroBrazilandBoaCompraunderourcentralizedcashmanagementwithUOL,ratherthanbeingpaidincash.
AfteraccountingforthetotaldecreaseinCashandcashequivalentsofR$13.2milliondiscussedabove,ourCashandcashequivalentsatthecloseof2017amountedtoR$66.8million.
Cash Flows in 2016
Ourcashandcashequivalentsatthebeginningof2016amountedtoR$6.9million.
OurProfitbeforeincometaxesin2016,asdiscussedabove,wasR$155.4million.
Theadjustmentsforrevenue,incomeandexpensesrecordedinourstatementofincomein2016butwhichdidnotaffectourcashflowstotaledthepositiveamountofR$75.6million,principallyreflectingthepositiveamountofR$31.6millionofChargebacksandthepositiveamountofR$31.2millionofDepreciationandamortizationrecordedinourstatementofincome,whicharedetailedinNote21toourauditedconsolidatedfinancialstatements.Alsoin2016,werecordedanunrealizedlossofR$6.6milliononderivativeinstruments(swaps).
Theadjustmentsforchangesinouroperatingassetsandliabilitiesfor2016amountedtonegativecashflowsofR$282.2million.OurNotereceivablesitem,whichispresentednetoftransactioncostsandfinancialexpensesweincurwhenweelecttoreceiveearlypaymentofthenotereceivablesowedtousbycardissuers,representednegativecashflowofR$784.0million(NotereceivablesonourbalancesheetwereR$1,715.5millionatyear-end2016versusR$1,110.0millionatyear-end2015)excludinginterestincomereceivedincashandchargebacks,whicharepresentedseparatelyinthestatementofcashflows.OurPayablestothirdpartiesitem,whichispresentednetofrevenuefromtransactionactivitiesandfinancialincomewereceivewhenmerchantselecttoreceiveearlypayments,representedpositivecashflowofR$620.9million(PayablestothirdpartiesonourbalancesheetwereR$1,304.0millionatyear-end2016versusR$683.1millionatyear-end2015).OurReceivablesfrom(payablesto)relatedpartiesitemrepresentednegativecashflowofR$214.5million(Receivablesfromrelatedparties,i.e.,UOL,wereR$300.8millionatyear-end2016versusR$55.9millionatyear-end2015;andpayablestorelatedparties,i.e.,UOL,wereR$76.2millionatyear-end2016versusR$92.4millionatyear-end2015).InventoriesrepresentedpositivecashflowofR$20.2million;andSalariesandsocialchargesrepresentedpositivecashflowofR$6.6million.TaxesandcontributionsrepresentedpositivecashflowofR$3.9million.
WepaidincometaxesandsocialcontributionsincashtotalingR$18.1millionandwerecordedapositivecashflowofR$146.3millionrelatedtointerestincomereceivedduringtheyear.
Asaresultoftheabove,ourNetCashprovidedbyoperatingactivitiesin2016totaledR$77.0million.
OurCashflowsusedininvestingactivitiesin2016totaledR$203.3million.ThisamountconsistedofacquisitionoffinancialinvestmentsofR$337.1million,representingtotalcashthatweinvestedinshort-termdepositsduringtheyear,lessR$206.2millioninredemptionsoffinancialinvestments,representingtotalcashthatwewithdrewfromtheseshort-termdepositsduringtheyear.WealsoinvestedR$70.4millioninpurchasesanddevelopmentofintangibleassets,whichrepresentpurchasesofthirdpartysoftwareandthesalariesandotheramountsthatwepaidtodevelopinternallythesoftwareandtechnology,whichwecapitalizeasintangibleassets.Formoreinformationonourintangibleassets,seeNote12toourauditedconsolidatedfinancialstatements.
OurCashflowsfromfinancingactivitiesin2016providedtotalcashflowsofR$199.4million,whichwereceivedastheproceedsoftheborrowingsweincurredduringtheyear.
AfteraccountingforthetotalincreaseinCashandcashequivalentsofR$73.1milliondiscussedabove,ourCashandcashequivalentsatthecloseof2016amountedtoR$80.0million.
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Loans and Financings
Wehadnothird-partyborrowingsatDecember31,2018,sincewesatisfiedourfundingandworkingcapitalrequirementsduringthisyearthroughourJanuary2018IPOproceedsandJune2018follow-onofferingproceeds.WehadnothirdpartyborrowingsatDecember31,2017,sincewesatisfiedourfundingandworkingcapitalrequirementsinthisyear(i)throughthecashgeneratedbyourbusinesses,(ii)byobtainingearlypaymentofnotereceivablesduetousfromthecardissuersandacquirers,aswellas(iii)throughourowncapital.Ourtotalthird-partyborrowingsamountedtoR$205.2millionatDecember31,2016.
InJuly2016,weobtainedaloanintheamountofUS$40.0million(approximatelyR$129.4millionapplyingexchangeratesineffectatthetime),whichmaturedinJanuary2017.InSeptember2016,weobtainedafurtherloanintheamountofUS$21.8million(approximatelyR$70.0millionapplyingexchangeratesineffectatthetime),whichmaturedinMarch2017.Wepurchasedswapstoprovideprotectionagainstexchangeratefluctuationsforbothloans.Neitherofthesecreditagreementscontainsanyprovisionsrequiringustoprovidecollateralorcomplywithanyfinancialcovenants.
Theseloanswererepaidonscheduleinthefirsthalfof2017andwehaveincurrednonewborrowingssincethen.Asdiscussedabove,weareincreasinglyfinancingourservicesandfeaturesbyobtainingearlypaymentofreceivablesowedtousfromacquirersandcardissuers,inordertofinancetheearlypaymentofreceivablesfeaturethatweoffertoourmerchantclients.
Forfurtherinformationonourfinancingactivities,seeNote24toourauditedconsolidatedfinancialstatements.
Capital Expenditures
Thenettotalofourcapitalexpenditures(purchasesofpropertyandequipmentandpurchasesanddevelopmentofintangibleassets),foreachoftheyearsendedDecember31,2018,2017and2016wereR$253.6million,R$107.6millionandR$72.4million,respectively,mostofwhichrelatedtodataprocessingequipment,facilities,machineryandequipment,furnitureandfittings,leaseholdimprovements,vehicles,softwareandtechnology,allinBrazil.
Forfurtherinformationonourcapitalexpenditures,seeNotes11and12toourauditedconsolidatedfinancialstatements.
Commitments and Contractual Obligations
OurcontractualobligationsatDecember31,2018consistedofobligationstopurchasePOSdevicesandplatformtechnologyforouracquireroperationsasfollows: At December 31, 2018
Less than
1 year 1 to 3years
3 to 5years
More than5 years Total
(R$ millions) POSdevicepurchases 409.6 — — — 409.6 Acquirerplatformtechnology 3.4 2.0 — — 5.4
Total 413.0 2.0 — — 415.0
Off-Balance Sheet Arrangements
Otherthanthecontractualobligationsshownabove,wedonothaveanyoff-balancesheetarrangementsanddidnothaveanysucharrangementsfortheyearsendedDecember31,2018,2017or2016.
Critical Accounting Estimates and Judgments
Thepreparationoffinancialstatementsrequirestheuseofcertaincriticalaccountingestimates.Italsorequiresmanagementtoexerciseitsjudgmentintheprocessofapplyingouraccountingpolicies.Theareasinvolvingahigherdegreeofjudgmentorcomplexity,orareaswhereassumptionsandestimatesaresignificanttothefinancialstatements,aredescribedbelowandinNote3toourauditedconsolidatedfinancialstatements.
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Accountingestimatesandjudgmentsarecontinuallyevaluatedandarebasedonhistoricalexperienceandotherfactors,includingexpectationsoffutureeventsthatarebelievedtobereasonableunderthecircumstances.Basedonassumptions,PagSeguroDigitalmakesestimatesconcerningthefuture.Theresultingaccountingestimateswill,bydefinition,seldomequaltherelatedactualresults.Theestimatesandassumptionsthathaveasignificantriskofcausingamaterialadjustmenttothecarryingamountsofassetsandliabilitieswithinthenextfinancialyearareaddressedbelow:
Estimated useful life of intangible assets
PagSeguroDigitalusesanestimatedusefullifetocalculateandrecordtheamortizationappliedtoitsintangibleassetswhichmaydifferfromtheactualtermoverwhichtheintangibleassetsareexpectedtogeneratebenefitsforPagSeguroDigital.
Theamortizationofsoftwareusagerightsisdefinedbasedontheeffectiveperiodofthelicensecontracted.
Theamortizationofinternallydevelopedsoftwareisdefinedbasedontheperiodoverwhichthesoftwarewillgeneratefutureeconomicbenefits.
Deferred income tax and social contribution
PagSeguroDigitalrecognizesdeferredincometaxandsocialcontributionbasedonfuturetaxableprofitestimatesforthenexttenyears.Theseprojectionsareperiodicallyreviewedandapprovedbymanagement.
Provision for contingencies
PagSeguroDigitalrecognizesprovisionsforcivilandlaborsuits.Werecognizeprovisionsforlegalproceedingsinourfinancialstatementswhenweareadvisedbyindependentoutsidecounselthat(i)itisprobablethatanoutflowofresourceswillberequiredtosettletheobligation,and(ii)areliableestimatecanbemadeoftheamountoftheobligation.Theassessmentofprobabilityoflossincludesassessingtheavailableevidenceandjurisprudence,thehierarchyoflawsandmostrecentcourtdecisions.Provisionsarereviewedandadjustedtotakeintoaccountchangesincircumstancessuchastheapplicablelimitationperiod,findingsoftaxinspectionsandadditionalexposuresidentifiedbasedonnewissuesordecisionsofcourts.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
Directors and Senior Management
Board of Directors
Ourboardofdirectorsisresponsiblefor,amongotherthings,establishingouroverallstrategyandgeneralbusinesspolicies,supervisingmanagement,electingandremovingourexecutiveofficers,andappointingourindependentauditors.
Ourboardofdirectorsiscomposedofsevenmembers.Eachdirectorholdsofficefortheterm,ifany,fixedbytheshareholders’resolutionthatappointedhimorheror,ifnotermisfixedontheappointmentofthedirector,untiltheearlierofhisorherdeath,resignationorremoval.Directorsappointedbytheboardofdirectorsholdofficeuntilthenextannualgeneralmeeting.OurdirectorsdonothavearetirementagerequirementunderourArticlesofAssociation.MariaJudithdeBritowasappointedtoourboardofdirectorsonJuly19,2017,LuizFrias,EduardoAlcaroandRicardoDutradaSilvawereappointedonDecember18,2017,NoemiaGushikenwasappointedonJanuary23,2018,MarcosdeBarrosLisboawasappointedonApril13,2018,andClevelandPratesTeixeirawasappointedonDecember18,2018,effectiveJanuary1,2019.Allcurrentmembersofourboardofdirectorshavebeenappointedtoserveforanindefiniteperiod.
Wedonothaveanyservicecontractswithourexecutivedirectorsthatprovidebenefitsuponterminationofemployment.
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Thetablebelowsetsforthcertaininformationofthecurrentmembersofourboardofdirectors:Name Title Date of BirthLuizFrias Chairman April6,1963EduardoAlcaro Director April26,1972MariaJudithdeBrito Director April30,1958RicardoDutradaSilva Director December1,1975NoemiaGushiken* Director November3,1972MarcosdeBarrosLisboa* Director August2,1964ClevelandPratesTeixeira* Director August15,1966* IndependentaccordingtoSECandNYSErules.
Thefollowingisabriefsummaryofthebusinessexperienceofourcurrentdirectors.Unlessotherwiseindicated,thecurrentbusinessaddressforourdirectorsisAv.BrigadeiroFariaLima,1384,4ºandar,parteA,SãoPaulo,SP,01451-001,Brazil.
Luiz Frias. Mr.FriashasbeentheChairmanofourboardofdirectorsandourPrincipalExecutiveOfficersinceDecember18,2017.HejoinedGrupoFolhain1981andhasbeenitsprincipalexecutiveofficersince1989.InthatcapacityheledGrupoFolha’sexpansionintovariousnewmarkets,suchascommercialprinting(throughPlural,apartnershipwithQuadGraphics)ande-commercelogistics(throughTransfolha).In1996,hefoundedUOL,apioneeringBrazilianInternetcompany.AsPrincipalExecutiveOfficerandChairmanoftheBoardofDirectorsofUOL,hehasexpandedUOL’sbusiness,throughorganicgrowthandmorethan20acquisitions,tocoverdigitalcontentandproducts,e-learningandcloud/ITservices,aswellasthePagSegurofinancialtechnologybusiness.Heholdsabachelor’sdegreeineconomicsfromtheUniversityofSãoPaulo(Universidade de São Paulo – USP ).
Eduardo Alcaro. Mr.AlcarohasbeenamemberofourboardofdirectorsandourChiefFinancialandInvestorRelationsOfficerandChiefAccountingOfficersinceDecember18,2017.HehasbeentheChiefFinancialOfficeroftheUOLgroupandExecutiveOfficeroftheFolhaGroupsince2011.Heholdsabachelor’sdegreeinbusinessadministrationfromtheGetulioVargasFoundation(Fundação Getulio Vargas – FGV-SP )inSãoPaulo.Beforejoiningourgroup,Mr.Alcaroheldseveralpositions,includingFinanceVicePresidentatWalmartBrazilfrom2008to2011,FinancialPlanningandInvestorsRelationsDirectoratWalmartUSAfrom2006to2008,Mergers&AcquisitionsDirectoratWalmartInternationalfrom2003to2006,FinanceManageratWalmartBrazilfrom1997to2003andAuditoratPricewaterhouseCoopersfrom1992to1997.
Maria Judith de Brito. Mrs.deBritohasbeenamemberofourboardofdirectorssinceJuly19,2017.Shehasalsobeenheadofhumanresources,legalmattersandinstitutionalrelationsoftheUOLgroupsinceitscreationin1996,andhasbeentheViceChairmanofUOL’sboardofdirectorssince2005.ShehasworkedforGrupoFolhasince1990,andisthecurrentSuperintendentofGrupoFolha.Sheholdsabachelor’sdegreeinpublicadministrationfromtheGetulioVargasFoundation(Fundação GetulioVargas – FGV-SP )inSãoPauloandamaster’sdegreeinpoliticalsciencefromthePontificalCatholicUniversityofSãoPaulo(Pontifícia Universidade Católica de SãoPaulo – PUC-SP ).Mrs.deBritowasaprofessoroftheundergraduatecourseinBusinessAdministrationattheGetulioVargasFoundationfrom1986to1990,andprofessorofthegraduateprograminjournalismatESPM(Escola Superior de Propaganda e Marketing )from2011to2013.ShewaspresidentoftheNationalNewspaperAssociation(Associação Nacional de Jornais )from2008to2012,andiscurrentlyamemberoftheboardofABECS.
Ricardo Dutra da Silva .Mr.DutrahasbeenamemberofourboardofdirectorsandourExecutiveOfficersinceDecember18,2017.HehasbeenChiefExecutiveOfficerofPagSeguroBrazilandChiefExecutiveOfficerofUOLDigitalContentandProductssince2016.Mr.DutraworkedfortheUOLgroupfrom1997to2005,holdingmanagementpositionsinoperations,marketingandsales,andrejoinedthegroupin2009asCountryManageratUOLArgentinainBuenosAires,whereheserveduntil2010.Heholdsabachelor’sdegreeinelectrical/industrialengineeringfromtheIndustrialEngineeringUniversity(Centro Universitário da Faculdade de Engenharia Industrial –FEI ),apost-graduatedegreeinbusinessfromtheGetulioVargasFoundation(Fundação Getulio Vargas –FGV )inSãoPaulo,andafull-timeMBAfromDardenGraduateSchoolofBusinessAdministrationattheUniversityofVirginia.PriortorejoiningUOL,hewasamanagementconsultantatBain&Companyfrom2007to2009.
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Noemia Gushiken .Ms.GushikenhasbeenamemberofourboardofdirectorssinceJanuary23,2018.Shehasmorethan20yearsofexperienceinthetechnologyandconsumerindustries.SheadvisesandassistscompaniesinBrazilinoperations,management,andlegal,corporategovernanceandcompliancematters.SheisalsoapartneratEsper,GushikenAdvogados.Ms.Gushikenservedasstrategicadvisorforfamilyofficesandstart-upsinBrazil,aswellastheoperationsdirectoratCervejaProibidafrom2013to2017,legalcounselatMicrosoftfrom2007to2013,andastheheadoflegalatUOLfrom2000to2007.ShehasalsorepresentedthesecompaniesinindustryassociationsandcorporateaffairsinitiativesinBrazil.Sheholdsalawdegreeandapost-graduatedegreeinCommercialandCorporateLaw,bothfromthePontificalCatholicUniversityofSãoPaulo(Pontifícia Universidade Católica de São Paulo – PUC ).Ms.GushikenalsostudiedJapaneseConstitutionalLawattheUniversityofShizuoka–Japanfrom1993to1994.SheisadmittedtotheBrazilianBarinSãoPaulo.
Marcos de Barros Lisboa .Mr.LisboahasbeenamemberofourboardofdirectorssinceApril13,2018.Mr.Lisboaholdsabachelor’sdegreeandamaster’sdegree,bothineconomics,fromtheFederalUniversityofRiodeJaneiro(Universidade Federal do Rio de Janeiro ).HealsohasaPh.D.ineconomicsfromtheUniversityofPennsylvania.HewasanassistantprofessorintheeconomicsdepartmentatStanfordUniversityfrom1996to1998andanassistantprofessorattheSchoolofEconomicsofGetulioVargasFoundation(Fundação Getulio Vargas )from1998to2002.Since2013,hehasworkedatInsper,abusiness,economicsandengineeringschool,initiallyasvice-presidentand,since2015,aspresident.From2003to2005,Mr.LisboaservedasSecretaryofEconomicPolicyfortheBrazilianFederalMinistryofFinance.HealsoservedaspresidentoftheInstitutodeRessegurosdoBrasilfrom2005to2006and,from2006to2013,heworkedatItaú-Unibanco,whereheservedasvice-presidentfrom2009to2013.
Cleveland Prates Teixeira .Mr.Teixeiraholdsamaster’sdegreeinEconomicsfromGetulioVargasFoundation(Fundação Getulio Vargas – FGV-SP )inSãoPauloandabachelor’sdegreeineconomicsfromtheUniversityofSãoPaulo(Universidade de São Paulo – USP ).From2002to2004,heservedasaCommissioneroftheAdministrativeCounselforEconomicDefense(Conselho Administrativo de Defesa Econômica – CADE ),theBrazilianantitrustagency,andfrom1999to2002,heservedasDeputySecretaryforEconomicMonitoring(Secretaria de Acompanhamento Econômico – SEAE )oftheBrazilianMinistryofFinance,andasCoordinatorGeneralofTradeandServicesandCartelProsecutionforthesamedepartment.In2002,hewasamemberoftheFederalFundfortheDefenseofCollectiveRightsoftheBrazilianMinistryofJustice,andfrom2006to2008,hewasCounciloftheBrazilianInstituteofEconomics(Instituto Brasileiro de Economia – IBRE )atGetulioVargasFoundation(FundaçãoGetulio Vargas – FGV ).Since2007,hehastaughtcoursesonMicroeconomics,EconomicAnalysisofLaw,AntitrustandRegulationattheGVLawgraduateprogramatthelawschoolofGetulioVargasFoundation(Fundação Getulio Vargas – FGV-SP )inSãoPaulo,andhascoordinatedacourseinMarketRegulationattheFoundationInstituteofEconomicResearch(Fundação Instituto de Pesquisas Econômicas – FIPE ).HeisalsotheManagingPartnerofMicroanalysisConsultoriaEconômica,havingworkedoneconomicissuesandcoordinatedprojectsinfinancial,regulatoryandcompetitionaffairsinvarioussectorsoftheeconomy,includingconsultancytobothnationalandinternationalgovernmentagencies,suchastheAppliedEconomicResearchInstitute(Instituto de Pesquisa Econômica Aplicada – IPEA ),theUnitedNationsConferenceonTradeandDeveloment(UNCTAD)andtheWorldBank.
Executive Officers
Ourexecutiveofficersareprimarilyresponsiblefortheday-to-daymanagementofourbusinessandforimplementingthegeneralpoliciesanddirectivesestablishedbyourboardofdirectors.Ourboardofdirectorsisresponsibleforestablishingtherolesofeachexecutiveofficer.Ourexecutiveofficerswereappointedbyourboardofdirectorsforanindefiniteterm.
Thetablebelowshowsourcurrentexecutiveofficers:Name Title Date of BirthLuizFrias PrincipalExecutiveOfficer April6,1963
EduardoAlcaro ChiefFinancialandInvestorRelationsOfficerandChiefAccountingOfficer April26,1972
RicardoDutradaSilva ExecutiveOfficer December1,1975
ThebusinessaddressofeachofourexecutiveofficersisAvenidaBrigadeiroFariaLima,1384,01452-002SãoPaulo–SP,Brazil.
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Audit Committee
Ourboardofdirectorshasestablishedanauditcommittee.Memberswillserveonthiscommitteeuntiltheearliestof(1)themomenttheyceasetobeadirector,(2)theirresignationor(3)asotherwisedeterminedbyourboardofdirectors.Ourauditcommitteecurrentlyconsistsofthreemembers,includingMarcosdeBarrosLisboa,NoemiaGushikenandClevelandPratesTeixeira.Allofourauditcommitteememberssatisfythe“independence”requirementsoftheNYSErulesandmeettheindependencestandardsunderRule10A-3undertheExchangeAct.NoemiaGushikensatisfiesthecriteriaofanauditcommitteefinancialexpertassetforthundertheapplicablerulesoftheSEC.
Theauditcommitteeoverseesouraccountingandfinancialreportingprocessesandtheauditsofourfinancialstatements.Ourauditcommitteeisresponsiblefor,amongotherthings:
• selectingourindependentauditor,approvingrelatedfeesandterminatingourrelationshipwithourindependentauditorinthecommittee’sdiscretion;
• pre-approvingauditandnon-auditservicespermittedtobeperformedbytheindependentauditor;
• annuallyreviewingtheindependentauditor’sreportdescribingtheauditingfirm’sinternalqualitycontrolprocedures,anymaterialissuesraisedbythemostrecentinternalqualitycontrolreview,orpeerreview,oftheindependentauditorsandallrelationshipsbetweentheindependentauditorandourcompany;
• reviewingwiththeindependentauditoranyauditproblemsordifficultiesandmanagement’sresponse,aswellasresolvinganydisagreementsbetweenmanagementandtheindependentauditorregardingfinancialreporting;
• reviewinganddiscussingtheannualauditedfinancialstatementswithmanagement,internalauditteam(orthird-serviceproviderperformingthisfunction)andtheindependentauditor,aswellasquarterlyunauditedfinancialstatements;
• reviewinganddiscussingwithmanagementandtheindependentauditorsmajorissuesregardingaccountingprinciplesandfinancialstatementpresentations;
• discussingearningspressreleaseswithmanagement,aswellasfinancialinformationandearningsguidanceprovidedtoanalystsandratingagencies;
• reviewingtheeffectofregulatoryandaccountinginitiatives,aswellasoff-balancesheetstructures,onourfinancialstatements;
• overseeingourdisclosurecontrolsandproceduresandinternalcontroloverfinancialreporting;
• assessingandmonitoringourriskexposures,aswellasthepoliciesandguidelineswithrespecttoriskmanagement;
• timelyreviewingreportsfromtheindependentauditorregardingallcriticalaccountingpoliciesandpracticestobeusedbyourcompany,allalternative
treatmentsoffinancialinformationwithinIFRSthathavebeendiscussedwithmanagementandallothermaterialwrittencommunicationsbetweentheindependentauditorandmanagement;
• establishingproceduresforthereceipt,retentionandtreatmentofcomplaintsreceivedbyourcompanyregardingaccounting,internalaccountingcontrolsorauditingmatters,andtheconfidential,anonymoussubmissionbyouremployeesofconcernsregardingquestionableaccountingorauditingmatters;
• analyzingourrelated-partytransactionsbasedonourpolicyforthesetransactions;
• periodicallyreviewingandreassessingtheadequacyofourauditcommitteecharter;
• anyothermattersthatarespecificallydelegatedtoourauditcommitteebyourboardofdirectorsfromtimetotime;
• periodicallymeetingwithmanagement,internalauditteam(orthird-partyserviceprovidersperformingthisfunction)andtheindependentauditors,separately;and
• reportingregularlytothefullboardofdirectors.
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Duties of Directors
Directorsareresponsibletothecompanyandnot,intheabsenceofspecialcircumstances,totheshareholdersasindividuals.Forthepurposesofdescribingdirectors’duties,thecompanyisgenerallydefinedwithreferencetotheinterestsofbothpresentandfutureshareholdersofthecompanyasawhole.UnderCaymanIslandslaw,adirectorowestwotypesofdutiestothecompany:fiduciarydutiesanddutiesofskillandcare.Infulfillingtheirdutyofcaretous,ourdirectorsmustensurecompliancewithourMemorandumandArticlesofAssociation,asamendedandrestatedfromtimetotime.Youshouldreferto“Item10.AdditionalInformation—MemorandumandArticlesofAssociation—PrincipalDifferencesbetweenCaymanIslandsandU.S.CorporateLaw”foradditionalinformationonourstandardofcorporategovernanceunderCaymanIslandslaw.
Compensation
Management Compensation
Ourexecutiveofficers,directorsandmanagementreceivefixedandvariablecompensation.TheyalsoreceivebenefitsinlinewithmarketpracticeinBrazil.Thefixedcomponentoftheircompensationissetonmarkettermsandadjustedannually.
Thevariablecomponentconsistsofcashbonusesandawardsofrestrictedshares(orthecashequivalent)undertheLTIP,asdiscussedbelow.Cashbonusesarepaidtoexecutiveofficersandmembersofourmanagementbasedonthepreviouslyagreedcorporateresults-sharingplan(plano de participações nos resultados )andoveralltargetsforthebusiness.
CertainofourdirectorsandofficersreceivecompensationfromUOLforservicesrenderedtoPagSeguro.TherelatedcostisapportionedbetweenUOLandPagSeguroinaccordancewiththeservicesthatarerendered.
TheaggregatecompensationpaidtotheexecutiveofficersofPagSeguroBrazilin2018wasR$99.3million.Thisincludesbenefitspaidinkindandvariablecompensation.
Long-Term Incentive Plan – Goals
LTIP-GoalswasestablishedatPagSeguroBrazilonDecember18,2018,asapprovedbyourboardofdirectors.Currently,nobeneficiariesofLTIP-Goalshavebeennamedandassuch,nonewClassAcommonshareshavebeenissuedundertheLTIP-Goals.WebelievetheLTIP-Goalswillhelpusattractandretainindividualswhohaveahighpotentialtocontributetooursuccess,andfurtheraligntheirinterestswithours.BeneficiariesundertheLTIP-GoalswillbeselectedbytheLTIP-GoalsCommittee,whichconsistsofourChairmanofourboardofdirectorsandtwoofficersofUOL.
BeneficiariesundertheLTIP-Goalswillbegrantedawards,whichmaybepayableincash,ClassAcommonsharesoracombinationofthetwo,atthediscretionoftheLTIP-GoalsCommitteebasedonthegoalsestablishedinourcorporateresults-sharingplanforanygivenyear.IfanyportionofanawardispayableinClassAcommonshares,therelevantvaluewillbeconvertedintoClassAcommonsharesonthelastbusinessdayofJanuaryfollowingtheyearforwhichsuchamountwasawarded.
WeexpectthatallofthedirectorsofPagSeguroDigitalLtd.,exceptforNoemiaGushiken,MarcosdeBarrosLisboaandClevelandPratesTeixeira,willbenamedbeneficiariesundertheLTIP-Goals.
Ifabeneficiaryisdismissedbyus,resigns,retiresordiesbeforeofanygivenyear,thebeneficiarywillnotbeentitledtoanyawardsundertheLTIP-Goalsforthatyear.Ifabeneficiaryisdismissedbyus,resigns,retiresordiesaftertheendofanygivenyear,butbeforethedateonwhichthevalueofsuchbeneficiary’sawardisconvertedintoourClassAcommonshares,thebeneficiarywillbeentitledtohisorherawardundertheLTIP-Goals,providedthatthegoalsforthepreviousyearhavebeenmet.
ThemaximumnumberofClassAcommonsharesthatcanbedeliveredtobeneficiariesundertheLTIP-Goalsmaynotexceed1%ofourtotalissuedandoutstandingsharecapitalatanytime.
Long-Term Incentive Plan
MembersofourmanagementparticipatedintheLTIP(replacedbytheLTIP-GoalsonDecember18,2018),whichwasestablishedbyUOLforitsgroupcompaniesonJuly29,2015andwasadoptedbyPagSeguroDigitalLtd.BeneficiariesundertheLTIPwereselectedbyUOL’sLTIPCommittee,whichconsistsofourChairmanandtwoofficersofUOL.SincetheestablishmentofLTIP-GoalsonDecember18,2018,nonewrightshavebeen,norwillbe,grantedundertheLTIP.
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BeneficiariesundertheLTIPweregrantedrightsintheformofnotionalcashamountswithoutcashconsideration.Theserightsvestinfiveequalannualinstallmentsstartingoneyearafterthebeneficiary’sgrantdate.UnderthetermsoftheLTIP,uponcompletionofourIPO,thevestedportionofeachbeneficiary’sLTIPrightswasconvertedintoClassAcommonsharesofourcompanyatourIPOprice.ThenumberofClassAcommonsharesissuedwithrespecttothevestedLTIPrightswascalculated,pursuanttoeachbeneficiary’sindividualLTIPagreement,basedonourIPOpriceofUS$21.50perClassAcommonshare.Theunvestedportionsofeachbeneficiary’sLTIPrightswillbesettledoneachfutureannualvestingdate,atthediscretionoftheLTIPCommittee,byeither(i)deliveryofafixednumberofClassAcommonsharesofPagSeguroDigitalor(ii)theequivalentincashofthefixednumberofsharesatthecurrentfairvalue.ThevestingconditionsoftheLTIPawardsincludethecompletionofourIPOandtheattainmentofcertainserviceconditions.UponcompletionofourIPOinJanuary2018,paymentoffutureLTIPrightsbecameprobable,resultinginuscommencingtorecognizecompensationexpensesrelatedtoeachbeneficiary’sLTIPrights.
AtMarch31,2019,atotalof3,123,676newClassAcommonshareswereissuedwithoutcashconsiderationtocertainmembersofourmanagementwhoarebeneficiariesundertheLTIP,uponclosingofourIPOandinthefollowingmonths.
AllofthedirectorsofPagSeguroDigitalLtd.,exceptforNoemiaGushiken,MarcosdeBarrosLisboaandClevelandPratesTeixeira,arebeneficiariesundertheLTIP.
Ifabeneficiaryisdismissedbyus,resigns,retiresordies,theportionofhisorherrightsundertheLTIPthathasvestedatthatdatewillbedelivered,butthenon-vestedportionwillbecancelled.Ifabeneficiaryisterminatedforcause,allofhisorherrightsundertheLTIPwillbecancelled.
ThesharesissuedundertheLTIPuponcompletionofourIPOweresubjecttoaone-yearlock-upperiodunderthetermsoftheLTIP.AnysharesthatwereissuedonasubsequentvestingdateduringthefirstyearafterourIPOweresubjecttotheremainderofthatsamelock-upperiod,expiringoneyearaftertheclosingofourIPO.Afterthecloseofthatone-yearperiod,sharesissuedortobeissuedundertheLTIParenolongerbesubjecttoalock-up.Assuch,sharesissuedundertheLTIParenowfreelytradablewithoutrestrictionorfurtherregistrationundertheSecuritiesActbypersonsotherthanouraffiliateswithinthemeaningofRule144oftheSecuritiesAct.Forfurtherinformation,see“Item3.KeyInformation—RiskFactors—RisksRelatingtoourBusinessandIndustry—ClassAcommonshareseligibleforfuturesalemaycausethemarketpriceofourClassAcommonsharestodropsignificantly.”
ThemaximumnumberofClassAcommonsharesthatcanbedeliveredtobeneficiariesundertheLTIPmaynotexceed3%ofourissuedsharecapitalatanytime.
Share Ownership
ThetotalnumberofcommonsharesownedbyourmanagementasofMarch31,2019was162,267,064ClassAcommonshares(includingtreasuryshares)and165,620,861ClassBcommonshares.Nomemberofourmanagementbeneficiallyownsonepercentormoreofourcommonshares.
Our Team
WebelievethatourteamisoneofPagSeguro’smostimportantassets.OurculturereflectsUOL’steamworkandinnovation-drivenfocus,instillinginourprofessionalsapassionforourcustomersandmerchants.AtDecember31,2018,ourtotalteamconsistedof1,807people,including653employeesplusoutsourcedstaff,alllocatedinBrazil.AtDecember31,2018,ouremployeeshadanaverageageof33,84%ofwhomheldabachelor’sdegreeorhigherand40%ofwhomwerewomen,with65%ofouremployeesspecializinginproductsandengineering.Thefollowingtablesetsforththenumberofouremployeesandabreakdownofemployeesbycategoryofactivityasofthedatesindicatedineachareaofouroperations. As of December 31, 2018 2017 2016 ProductsandEngineering 515 327 229CommercialandMarketing 245 137 85Operations 254 165 82Administrative 140 87 50
Total 1,154 716 446
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Together,ourmanagementteamandemployeesrepresentexperienceinallareasoftheBrazilianpaymentsmarket,within-depthknowledgeofonlinepayments,retailandfinancialservices,technology,paymentprocessing,in-personelectronicpayments,acquiringandcardissuance.Theythereforerepresentacompletepictureofallofourcustomers’needsandcanpreparethefutureofourorganization.
Weseektoattractandtrainthebestprofessionalsinthemarket.Weseektomotivateouremployeestoprovidenext-generationpaymentcapabilitiesthroughacorporateresults-sharingplanforallemployeesandalong-termmotivationplanforkeyprofessionals.Ourcorporateresults-sharingplanincludessalarymultiplesoftwoforcoordinators,threeformanagers,3.5forgeneralmanagers,4.1ormorefordirectorsandoneforotheremployeesandisbasedonannualtargetsformetricssuchasfreecashflow,netincome,revenues,workingcapitalandTPV.ThroughtheLTIP-Goals,partorallofabeneficiary’sawardunderourcorporateresults-sharingplanmaybepaidinClassAcommonshares.See“—Long-TermIncentivePlan-Goals”and“—Long-TermIncentivePlan.”Webelievethatweoffercompetitivecompensationpackagesandadynamicculture,andhavethereforebeenabletoattractandretainqualifiedpersonnelandastablemanagementteam.Wealsoofferouremployeesmedicalanddentalinsurance,lifeinsurance,mealvouchercardsandaretirementsavingsplan,amongotherbenefits.Ina2017surveycarriedoutbythewebsiteLinkedIn,UOLwasnamedasthesecondbestplacetoworkinBrazil.Weareaware,however,thatourcontinuedsuccesswilldependonourabilitytocontinuetoattractandretainthesequalifiedprofessionals.See“Item3.KeyInformation—RiskFactors—RisksRelatingtoourBusinessandIndustry—Thelossofanymemberofourmanagementteamandourinabilitytomakeupforsuchlosswithaqualifiedreplacement,couldharmourbusiness.”
WetrainourteamsintheuseofmodernmanagementtoolssuchasAgile,Lean,KanbanandManagement3.0.
OuremployeesarerepresentedbytheUnionofEmployeesofInformationTechnologyBusinessesandCourseProvidersoftheStateofSãoPaulo(Sindicato dosTrabalhadores nas Empresas e Cursos de Informática do Estado de São Paulo—SINDIESP ).Weconsiderourrelationswithouremployeestobegood.Wehavenotexperiencedanysignificantlabordisputes.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
Major Shareholders
ThetablebelowcontainsinformationregardingthebeneficialownershipofPagSeguroDigital’sClassAcommonsharesandClassBcommonsharesbyUOL(ourcontrollingshareholderandparentcompany),ourmajorshareholdersandmembersofourmanagement,asasinglegroup,asofMarch31,2019.
Beneficialownership,whichisdeterminedunderSECrules,generallyincludesvotingorinvestmentpoweroversecuritiesortherighttoreceivetheeconomicbenefitofownershipofthesecurities.WebelievethateachshareholderidentifiedinthetablebelowpossessessolevotingandinvestmentpoweroveralltheClassAcommonsharesorClassBcommonsharesshownasbeneficiallyownedbytheshareholderinthetable.Commonsharessubjecttooptions,warrantsorrightsthatareexercisableatthedateofthisannualreport,orthatwillbeexercisablewithin60daysthereafter(whichinthecaseoftheCompany,onlyconsistofClassAcommonshares),areconsideredtobeoutstandingandbeneficiallyownedbythepersonwhoholdssuchoptions,warrantsorrightsforpurposesofcomputingthatperson’scommonshareownership,butarenottreatedasoutstandingforthepurposeofcomputingthepercentageownershipofanyotherperson.
Thepercentagesofbeneficialownershipinthetablebelowarebasedon162,267,064outstandingClassAcommonshares(includingtreasuryshares)and165,620,861outstandingClassBcommonshares.AsofMarch31,2019,approximately83.3%ofourClassAcommonshares(includingtreasuryshares)wereheldofrecordby151recordholdersintheUnitedStates,and0%ofourClassBcommonshareswereheldofrecordintheUnitedStates.
TheholdersofourClassAcommonsharesandClassBcommonshareshaveidenticalrights,exceptthatUOLasholderofClassBcommonshares(i)isentitledto10votespershare,whereasholdersofourClassAcommonsharesareentitledtoonevotepershare(ii)hascertainconversionrightsand(iii)isentitledtomaintainaproportionalownershipinterestintheeventthatadditionalClassAcommonsharesareissued.Formoreinformation,see“Item10.AdditionalInformation—MemorandumandArticlesofAssociation—PreemptiveorSimilarRights”and“Item10.AdditionalInformation—MemorandumandArticlesofAssociation—Conversion.”EachClassBcommonshareisconvertibleintooneClassAcommonshare.
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Shares Beneficially Owned
% of Total Voting Power
(1) Class A Class B Name Shares % Share % UniversoOnlineS.A.(2) — — 165,620,861 100.0% 91.1%CapitalWorldInvestors(3) 43,985,860 27.1% — — 2.4%AmeripriseFinancialInc.(4) 9,666,089 6.0% — — 0.5%ArtisanPartnersLP(5) 9,173,839 5.7% — — 0.5%MelvinCapitalManagementL.P.(6) 8,241,440 5.1% — — 0.5%Treasury 503,642 0.3% — — 0.0%Others 90,696,194 55.9% — — 5.0%
Total 162,267,064 100% 100% 100% 100%
(1) PercentageoftotalvotingpowerrepresentsvotingpowerwithrespecttoallofourClassAcommonsharesandClassBcommonshares,asasingleclass.UOLasholderofourClassBcommonshares
isentitledto10votespershare,whereasholdersofourClassAcommonsharesareentitledtoonevotepershare.FormoreinformationaboutthevotingrightsofourClassAcommonsharesandClassBcommonshares,see“Item10.AdditionalInformation—MemorandumandArticlesofAssociation—VotingRights.”
(2) Thefollowingpersonsarebeneficialownersof5%ormoreofPagSeguroDigital’sClassAcommonsharesandClassBcommonsharesindirectlythroughtheirownershipinterestsinUOL,consideringUOL’ssharecapitalonafullydilutedbasis(excludingUOL’streasuryshares):((i)FolhaparS.A.,whichholdsa64.46%ownershipinterestinUOLonafullydilutedbasis(notconsideringtreasuryshares),(ii)JoãoAlvesdeQueirozFilho,whoholdsa14.90%ownershipinterestinUOLonafullydilutedbasis(notconsideringtreasuryshares),(iii)NegotioMagni,S.A.deC.V.,whichholdsa10.81%ownershipinterestinUOLonafullydilutedbasis(notconsideringtreasuryshares),and(iv)BTGPactualPrincipalInvestmentsFundodeInvestimentoemParticipações,whichholdsa6.46%ownershipinterestinUOLonafullydilutedbasis(notconsideringtreasuryshares).ThefollowingpersonsholdownershipinterestsinFolhaparS.A.:(i)EmpresaFolhadaManhãS.A.,whichholdsa33.23%non-votingdirectownershipinterestinFolhaparS.A.,and(ii)LuizFrias,whoholdsa66.27%votingdirectownershipinterestanda8.76%non-votingindirectownershipinterestinFolhaparS.A.LuizFriasalsoholdsa2.04%directownershipinterestinUOL.TheprincipalbusinessaddressofUniversoOnlineS.A.andLuizFriasisAvenidaBrigadeiroFariaLima,1384,01452-002SãoPaulo–SP,Brazil.TheprincipalbusinessaddressofFolhaparS.A.isAvenidaBrigadeiroFariaLima,1384,Andar11,SalaF,01452-002SãoPaulo—SP,Brazil.TheprincipalbusinessaddressofJoãoAlvesdeQueirozFilhoisAv.BrigadeiroFariaLima,2277,6thfloor,SãoPaulo–SP,Brazil,01452-000.TheprincipalbusinessaddressofNegotioMagni,S.A.deC.V.isAv.Chapultepec,218,Col.RomaNorte,MexicoCity,DF06700–Mexico.TheprincipalbusinessaddressofBTGPactualPrincipalInvestmentsFundodeInvestimentoemParticipaçõesisAv.BrigadeiroFariaLima,3729,SãoPaulo–SP,Brazil,04538-133.
(3) ConsistsofsharesbeneficiallyownedbyCapitalWorldInvestors,adivisionofCapitalResearchandManagementCompany,orCRMC.CapitalWorldInvestorsdivisionsofCRMCandCapitalInternationalLimitedcollectivelyprovideinvestmentmanagementservicesunderthenameCapitalWorldInvestors.AsofJanuary31,2018,NewWorldFund,Inc.,aclientofCapitalWorldInvestorshastherighttoreceiveorthepowertodirectthereceiptofdividendsfrom,ortheproceedsfromthesaleof,ourClassAcommonshares.TheaddressforCapitalWorldInvestorsis333SouthHopeStreet,LosAngeles,CA,USA90071.
(4) ConsistsofsharesbeneficiallyownedbyAmeripriseFinancial,Inc.ThesesharesareheldofrecordbyAmeripriseFinancial,Inc.anditssubsidiaryColumbiaManagementInvestmentAdvisers,LLC.TheaddressofColumbiaManagementInvestmentAdvisers,LLCis225FranklinSt.,Boston,MA02110.TheaddressofAmeripriseFinancial,Inc.is145AmeripriseFinancialCenter,Minneapolis,MN55474.
( 5) ConsistsofsharesbeneficiallyownedbyArtisanPartnersLP.TheaddressofArtisanPartnersLPis875EastWisconsinAvenue,Suite800,Milwaukee,WI53202.( 6) ConsistsofsharesbeneficiallyownedbyMelvinCapitalManagementLP.TheaddressofMelvinCapitalManagementLPis537MadisonAvenue,25thFloor,NewYork,NY10022.
PriortoourIPO,UOLheld100%ofouroutstandingcommonshares,totaling262,288,607ClassBcommonshares.InourIPO,UOLconverted70,267,746ClassBcommonsharestoClassAcommonshares.SuchconvertedsharesweresubsequentlysoldinourIPO,bringingUOL’stotalnumberofClassBcommonsharesheldto192,020,861.InourJune2018follow-onoffering,UOLconverted26,400,000ClassBcommonsharestoClassAcommonshares.SuchconvertedsharesweresubsequentlysoldinourJune2018follow-onofferingbringingUOL’stotalnumberofClassBcommonsharesheldto165,620,861.
Thereiscurrentlynoshareholders’agreementinplace.
Related Party Transactions
Allofourrelatedpartytransactionsareconductedatarms’length,basedontermsthatreflectthosethatwouldapplytotransactionswiththirdparties,otherthanourcentralizedcashmanagementwithUOL,describedbelow.ThetotalamountofcostsandexpensesincurredbyPagSeguroDigitalforsharedservicesandsalesofservicesprovidedbyUOLandotheraffiliatedcompaniesintheyearendedDecember31,2018undersuchoftheseagreementsaswereinforceduringtheyearendedDecember31,2018wasR$204.0million,representing6.5%ofourtotalexpensesfortheyear.OfthetotalamountofcostsandexpensesincurredbyPagSeguroDigitalforsharedservicesandsalesofservicesprovidedbyaffiliatedcompaniesduringtheyear,77.2%wereprovidedbyUOL,13.5%wereprovidedbyUOLDiveoand9.3%wereprovidedbyTransfolha.PagSeguroalsoprovidedservicestoUOLandcertainUOLaffiliatesduringtheyearendedDecember31,2018foranamountofR$3.2million.Formoreinformation,seeNote9toourauditedconsolidatedfinancialstatements.
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PriortoourIPO,PagSeguro’scashmanagementwascentralizedwithUOL,leadingtopositiveornegativebalanceswithUOLfromtimetotimeasreferredtoinNote9toourauditedconsolidatedfinancialstatements.WhenPagSeguroprovidedcashtoUOLorUOLprovidedcashtoPagSeguro,thesetransactionswerenotcarriedoutatarms’lengthbecausenointerestwasrecordedineithercompany’sincomestatement.OurcashmanagementwasseparatedfromUOL’scashmanagementstartingfromthedateofcompletionofourIPO.Anyremainingbalancesthatrelatetopriorcashmanagementactivitiesbeganaccruinginterestonarms’lengthtermsfromthedateofcompletionofourIPO,andanysuchbalanceswererepaidbyUOLfollowingcompletionofourIPO.
Agreements with Our Management and Directors
CertainofourdirectorsandofficersreceivecompensationfromUOLforservicestheyprovidetoPagSeguro.ThecostisapportionedbetweenUOLandPagSeguroinaccordancewiththeservicesprovided.Inaddition,wehaveenteredintoindemnificationagreementswithourdirectorsandofficers,asdescribedbelow.
Indemnification Agreements
Wehaveenteredintoorwillenterintoindemnificationagreementswitheachofourdirectorsandofficers.Pursuanttotheseagreements,wehaveagreedtoindemnifyandholdharmlesseachdirectorandofficertothefullextentpermittedbyapplicablelawintheeventofanyclaimmadeagainsthimorherinanyproceedingduetothefactthatheorsheisorwasadirectororofficerofourcompanyorservedatourrequestasadirector,officer,employeeoragentofanothercorporation,partnership,jointventure,trustorotherenterprise.
Inaddition,underthetermsoftheseagreementswehaveagreedtocoverallexpensesactuallyandreasonablyincurredbyeachdirectorandofficerinconnectionwithanysuchproceeding,withcertainlimitedexceptions.
Theindemnificationextendstothebeneficiary’sservicesasadirectororofficerpriortothedateoftheindemnificationagreementaswellasafterward.Itcontinuesafterthebeneficiaryceasestobeadirectororofficer.
Agreements with UOL and UOL Subsidiaries
PagSeguroBrazilwasincorporatedasalegalentityin2006,althoughitdidnotoperatethePagSegurobusinesspriortoAugust1,2015sincemostofthePagSegurobusinessactivitieswereoperatedbyotherUOLgroupmemberspriortothatdate.OnAugust1,2015,UOLcarriedoutacorporatereorganizationinwhichitsegregatedsomeofthePagSeguroBrazilactivitiesfromitsotheractivitiesandcontributedthemtoPagSeguroBrazil.Followingthisreorganization,PagSeguroBrazilenteredintothecontractssummarizedbelowgoverningitsrelationshipwithUOLanditssubsidiaries.
Advertising Space Assignment Agreement
Underthisagreement,UOLmayassigntoPagSeguroBrazilcertainadvertisingandmediaspaceonUOL’sownwebsite,aswellasotherspacethatUOLobtainsfromunrelatedthirdparties.WepayUOLmonthlyfeesforthisspace,basedontheactualamountofadvertisingandmediaspaceweuse.ForadvertisingandmediaspaceonUOL’sownwebsite,UOLchargesusapricethatitdeterminesonmarketterms.ForspacethatUOLobtainsfromunrelatedthirdparties,UOLchargesusthesamepriceasitpaysforthespace.
Cost-Sharing Agreements
PagSeguroBrazilispartytotwoagreementswithUOLunderwhichUOLapportionstoPagSeguroBraziltheexpensesofcertainservicesandpersonnelhiredbyUOLforthebenefitofPagSeguroBrazilandexpensesrelatedtoourheadofficeandoperationscenterinSãoPaulo,whichareprovidedbyUOL.Underoneagreement,UOLapportionstoPagSeguroBrazilexpensesrelatingtocallcenterservices,marketingactivities,certainordinarycoursecorporateservices,andcertaincontingencyexpensesrelatedtolitigation.Allinsurancepolicieslistedunder“Business–Insurance”arecontractedbyUOLunderthisagreement.Undertheotheragreement,UOLapportionstoPagSeguroBrazilexpensesrelatingtocertainback-officepersonnelwhoareemployedbyUOLbutallocatedtoworkonmattersrelatedtoourbusiness.
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ThetwoagreementsapportionthecostsandexpensesfortheseservicesasbetweenPagSeguroBrazilandUOL.TheamountsPagSeguroBrazilpaystoUOLarebasedondifferentcriteriadependingonthetypeofservice:
• formarketing,financialandlegalservices,theamountpayableisbasedonthenumberofhoursactuallyworkedbyUOLpersonnelonPagSeguroBrazil’sbehalf;
• forhumanresourcesservices,theamountpayableisbasedonthenumberofhoursactuallyworkedbyUOLpersonnelonPagSeguroBrazil’sbehalfandonthenumberofUOLpersonneldedicatedtoPagSeguroBrazilmatters;
• forcallcenterservices,theamountpayableisbasedonthenumberofUOLpersonneldedicatedtoPagSeguroBrazilmatters;
• fortechnologyservices,theamountpayableisbasedontheexpensesincurredbyUOLonPagSeguroBrazil’sbehalf.
Platform Licensing Agreements
PagSeguroBrazilandUOLarepartytoanagreementunderwhichUOLprovidesservicesrelatedtothedevelopment,maintenanceandmanagementofthesoftwareusedtoconductPagSeguroBrazil’sbusiness.Theservicesincludethedevelopmentofnewsoftware,analysisandimprovementoftheefficiencyofexistingsoftwareandresolutionoftechnicalissues.TheservicesareprovidedinaccordancewithparameterssetbyPagSeguroBrazil.TheamountpayableunderthisagreementisbasedonthenumberofhoursactuallyworkedbyUOLpersonnel.
BoaCompraandUOLarepartytoanagreementunderwhichUOLprovidesservicesrelatedtosoftwareforBoaCompra’sbusinessonsubstantiallythesameterms.
UOL Diveo Agreements
Cloud Services Agreement
PagSeguroBrazilispartytotwoagreementswithUOLDiveounderwhichUOLresellscloudservicesprovidedbyAmazonWebServices,Inc.,orAWS,andMicrosoftIrelandOperationsLimited,orMicrosoft,toPagSeguroBrazil.ThesecloudservicesincludethestorageofPagSeguroBrazildataonthecloudmanagedbytherespectiveservicesprovidersandrelatedtechnicalsupport.PagSeguroBrazilmaymanageitsdatathroughonlineaccessorspecificsoftwareprovidedbyAWSandMicrosoft.UOLDiveo,asareselleroftheservices,isnotresponsibleforthequality,warranty,technicalsupport,efficiencyorresultsoftheservicesorforanylossesincurredbyPagSeguroBrazilderivingfromtheseservices.
Hosting and Colocation Agreements
PagSeguroBrazilandUOLDiveoarepartytoahostingagreementandacolocationagreementunderwhichUOLDiveoprovidesdatastorageservicestoPagSeguroBrazil.Theseservicesincludetheleaseofequipment,softwarelicenses,assignmentofinformationtechnologyinfrastructureandprovisionofspaceandinternetaccesstoPagSeguroBrazil’sdatacenter.Inaddition,undertechnicalproposalOPT-17-21638relatedtothehostingagreement,UOLDiveoalsoprovidesPagSeguroBrazilwithpaymentmethodsmonitoringandinvoiceissuingservices.
Telecommunication Services Agreement
PagSeguroBrazilandUOLDiveoarepartytoanagreementunderwhichUOLDiveoprovidestelecommunicationservicesthatallowPagSeguroBraziltooffernationalandinternationaltransmissioncapacity(voice,dataandimages)andthesubmissionandreceptionofmultimediainformationtoitscustomersthroughoutthetelecommunicationsnetworkofUOLDiveoorthirdparties.
Internet Security Agreements
PagSeguroBrazilispartytothreeagreementswithUOLDiveounderwhichUOLDiveoprovidesinternetsecurityservicestoPagSeguroBrazil.Thepaymentsundertheseagreementsaremadeonamonthlybasisinfixedamountspreviouslyagreedbetweentheparties.
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Underthefirstagreement,UOLDiveoprovidesbrandprotectionservicesregardingthemanagementofthreatsandtheimproperuseofPagSeguroBrazil’sbrandontheinternet,includingonsocialnetworks,domainnames,maliciousemails,suchasphishingandspam,piracyandotherthreatsinvolvingPagSeguroBrazil’sintellectualproperty.
Underthesecondagreement,UOLDiveoprovidesinternetsecurityservicesagainstdenial-of-servicesattacks(DoSattacks)thatmayimpactPagSeguroBrazil’stechnologicalinfrastructureoronlineservices.ThisserviceusestechnologytopreventandmitigatesuchattacksthoroughthebehavioralanalysisofthedataflowingthroughPagSeguroBrazil’sdatacenterandnetwork.
Underthethirdagreement,UOLDiveoprovidesapplicationfirewallagainstthreatsoffraud,unavailabilityandtheftofinformationonPagSeguroBrazilnetwork,aswellastheprotectionofPagSeguroBrazil’ssecurityoperationanddatacenters.
ITEM 8. FINANCIAL INFORMATION
Consolidated Statements and Other Financial Information
SeeItem18.FinancialStatements.
Legal Proceedings
Fromtimetotime,weareinvolvedinproceedingsthatariseintheordinarycourseofourbusiness.Anyclaimsagainstus,whetherornottheyhavemerit,canbetimeconsuming,resultincostlylitigation,andrequiresignificantmanagementtimeandoperationalresources.
WearesubjecttoanumberofproceedingsintheBrazilianjudicialandadministrativecourtsystems,relatingtocivil,taxandlaborlawclaims.WebelievetheseproceedingsarenormalandincidentaltotheoperationofabusinessinBrazil.Werecognizeprovisionsforlegalproceedingsinourfinancialstatementswhenweareadvisedbyindependentoutsidecounselthat(i)itisprobablethatanoutflowofresourceswillberequiredtosettletheobligation,and(ii)areliableestimatecanbemadeoftheamountoftheobligation.Theassessmentofthelikelihoodoflossincludesanalysisbyoutsidecounselofavailableevidence,thehierarchyoflaws,availablecaselaw,recentcourtrulingsandtheirrelevanceinthelegalsystem.Ourprovisionsforprobablelossesarisingfromthesemattersareestimatedandperiodicallyadjustedbymanagement.Inmakingtheseadjustmentsourmanagementreliesontheopinionsofourexternallegaladvisors.
TheamountswehadaccruedinourfinancialstatementsasatDecember31,2018foralltypesoflegalproceedingsforwhichwebelievealossisprobablewereR$7.0million.However,legalproceedingsareinherentlyunpredictableandsubjecttosignificantuncertainties.Ifoneormorecasesweretoresultinajudgmentagainstusinanyreportingperiodforamountsthatexceededourmanagement’sexpectations,theimpactonouroperatingresultsorfinancialconditionforthatreportingperiodcouldbematerial.See“Item3.KeyInformation—RiskFactors—RisksRelatingtoourBusinessandIndustry—Unfavorableoutcomesinlitigationorourinabilitytopostjudicialcollateralorprovideguaranteesinpendinglegaloradministrativeproceedingscouldhaveamaterialadverseeffectonourbusiness,financialconditionandResultsofOperationsofPagSeguroDigital.”
Wemakejudicialdeposits,whicharecourt-ordereddepositsthatserveascollateraluntilthefinalsettlementofthedisputestowhichtheyarerelated,inconnectionwithcertainofthesecivilproceedings.AtDecember31,2018,wehadjudicialdepositsinanaggregateamountofR$0.9million.
Civil Proceedings
Thecivilclaimstowhichwearepartygenerallyrelatetocustomerclaims,includingthoserelatedtonon-deliveryofproductsbymerchants,denialsbyPagSeguroofrequestsforwithdrawalofdigitalaccountbalancesandallegationsofPOSdevicedefects.
AtDecember31,2018,wewerepartytoapproximately3,500proceedingsofacivilnature(consistingofproceedingswithPROCONsandsmallclaimscourtsrelatingtoconsumerrights).PagSegurodoesnotappearintherankingsofcompanieswithlargenumbersofconsumerclaimspublishedbythePROCON.AtDecember31,2018,wehadrecordedR$6.6millioninprovisionsforcurrentcivilproceedingsandnoprovisionsfornon-currentcivilproceedings.Mostoftheseproceedingsarerelatedtoconsumerallegationsofnon-deliveryofproductsbymerchantsandrequestsforthewithdrawalofdigitalaccountbalancesthatwereblockedbyPagSegurobecausetheywereunderinvestigationforfraudorundergoingclaimresolution.
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AtDecember31,2018,wewerenotapartytoanycivillawsuitsinvolvingrisksclassifiedbymanagementaspossiblelosses.Formoreinformation,seeNote16ofourauditedconsolidatedfinancialstatements.
Wemakejudicialdeposits,whicharecourt-ordereddepositsthatserveascollateraluntilthefinalsettlementofthedisputestowhichtheyarerelated,inconnectionwithcertainofthesecivilproceedings.AtDecember31,2018,wehadjudicialdepositsforcivilproceedingsinanaggregateamountofR$0.9million.
Labor Proceedings
AtDecember31,2018,wewerepartytoapproximately30labor-relatedjudicialandadministrativeproceedingsforwhichwerecordedaprovisionofR$0.3million.Ingeneral,thelaborclaimstowhichweareapartywerefiledbyformeremployeesofthird-partyserviceprovidershiredbyusaspartoftheoutsourcingofcertainofournon-coreactivities.
Wearenotapartytoanylaborlawsuitsinvolvingrisksclassifiedbymanagementaspossiblelosses.Formoreinformation,seeNote16ofourauditedconsolidatedfinancialstatements.
Tax and Social Security Proceedings
AtDecember31,2018,wehadmadejudicialdepositsofR$17.1millionrelatedtotheBraziliangovernment’sSocialIntegrationProgram(Programa IntegraçãoSocial ,orPIS),R$105.2millionrelatedtoBraziliansocialsecurity(Contribuição para o Financiamento da Seguridade Social ,orCOFINS)relatingtoourfinancialincome,R$52.2millionrelatedtoISSandR$19.5millionrelatedtoICMStaxes.OurPISandCOFINSjudicialdepositsrelatetoataxproceedingfiledbyustochallengecertainBrazilianregulationsthatchangedthePIS/COFINStaxationregime.Laws10,637/2002and10,833/2003increasedthePISandCOFINScalculationbasis,whichwaspreviouslyassessedonoperatingrevenuesandexpandedtocoveralltypesofrevenue,includingrevenuesgeneratedbyfinancialinvestments,withafewexceptions.SincetheissuanceofDecreeNo.5,164/2004,taxpayerssubjecttothenon-cumulativePIS/COFINSmethodology,likeourcompany,weresubjecttoPISandCOFINSata0%taxrateonfinancialincome.OnApril1,2015,theBrazilianfederalgovernmentpublishedDecreeNo.8,426/2015,whichincreasedthePISandCOFINSratesleviedonfinancialincomebylegalentitiessubjecttothenon-cumulativemethodologyto0.65%and4%,respectively.InDecember2015,wefiledataxproceedingallegingtheunconstitutionalityofthePIS/COFINSincreaseonfinancialincomebyDecreeNo.8,426/2015,basedonviolationoftheconstitutionalprincipleoflegality,whichprovidesthatanincreaseinexistingtaxescanonlybeimplementedbyfederallaw.Asanalternativerequest,weaskedthecourttorecognizeourrighttodiscountPIS/COFINStaxcreditsfromfinancialexpensesincurredbyus.Aswewerenotgrantedinjunctiverelief,wehaveobtainedacourtdecisionallowingustodeposittheamountrelatedtothesePIS/COFINSpaymentsinescrowwhilethispaymentobligationisdiscussedincourt.Formoreinformation,seeNote15toourauditedconsolidatedfinancialstatementsand“Item3.KeyInformation—RiskFactors—RisksRelatingtoourBusinessandIndustry—Changesintaxlaws,taxincentives,benefitsordifferinginterpretationsoftaxlawsmayharmourResultsofOperations.”
OurISSjudicialdepositsrelatetoataxproceedingfiledbyusagainsttheSãoPaulomunicipalitytochallengecertainregulationsrecentlyenactedthatchangedthemunicipalitytowhichtheISSisduefromthemunicipalitywheretheserviceproviderislocated(PagSeguro)tothemunicipalitywheretheclientsarelocated(whichinourcasemeansthemunicipalitywherethePOSdeviceisused).GiventhatthisnewISScollectionruleisbeingchallenged,wearecurrentlymakingjudicialdepositsoftheamountssupposedlyduetotheSãoPaulomunicipalityandrecognizingaprovisionfordifferenceswiththeISSchargedbyothermunicipalities.Formoreinformation,seeNote15toourauditedconsolidatedfinancialstatements.
OurICMSjudicialdepositsrelatetoataxproceedingfiledbyNet+PhoneagainstseveralBrazilianstatestochallengethelegalityofcertainconstitutionalamendmentswhichrequirethatICMStaxesbecollectedbythosewhoshipgoodstofinalcustomersininterstateoperations,atataxdifferentialcorrespondingtothedifferencebetweentherateofthedestinationstateandtheinterstaterate.Aswewerenotgrantedinjunctiverelief,wehaveobtainedacourtdecisionallowingustodeposittheamountrelatedtotheseICMSpaymentsinescrowwhilethispaymentobligationisdiscussedincourt.Formoreinformation,seeNote15toourauditedconsolidatedfinancialstatements.
AsDecember31,2018,wewerepartytotaxlawsuitsclassifiedbylegaladvisorsaspossiblelosseswhichinvolvedanaggregateamountofR$47.2millionandforwhichnoprovisionhasbeenmade.
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Dividend Policy
Forourpolicyondividenddistributions,see“Item10.AdditionalInformation—MemorandumandArticlesofAssociation—DividendsandCapitalizationofProfits.”
ITEM 9. THE OFFER AND LISTING
Plan of Distribution
Notapplicable.
Trading Markets
OurClassAcommonsharesarelistedontheNYSEunderthesymbol“PAGS.”OurClassAcommonsharesarelistedinregisteredformandarenotcertificated.TheClassAcommonsharescommencedtradingontheNYSEonJanuary24,2018.AtMarch31,2019,theClassAcommonsharesrepresented49.5%ofoursharesand100%ofourcurrentglobalpublicfloat.
IfyoursharesareregisteredinthenameofTheDepositoryTrustCompany,orDTC,youarenotbeashareholderormemberofthecompany.EachpersonowningClassAcommonsharesheldthroughDTCmustrelyontheproceduresthereofandoninstitutionsthathaveaccountstherewithtoexerciseanyrightsofaholderoftheClassAcommonshares.
Selling Shareholders
Notapplicable.
Dilution
Notapplicable.
Expenses of the Issue
Notapplicable.
ITEM 10. ADDITIONAL INFORMATION
Share Capital
Notapplicable.
Memorandum and Articles of Association
Corporate Purpose
ThecorporateobjectsofPagSeguroDigital,asstatedintheMemorandumofAssociation,areunrestrictedandPagSeguroDigitalhastheauthoritytocarryoutanyobjectnotprohibitedbyanylaw,asprovidedbySection7(4)oftheCompaniesLaw.
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Issuance of Shares
ExceptasexpresslyprovidedinPagSeguroDigital’sMemorandumandArticlesofAssociation,PagSeguroDigital’sboardofdirectorshasgeneralandunconditionalauthoritytoallot,grantoptionsover,offerorotherwisedealwithordisposeofanyunissuedsharesinthecompany’scapitalwithouttheapprovalofourshareholders(whetherformingpartoftheoriginaloranyincreasedsharecapital),eitheratapremiumoratpar,withorwithoutpreferred,deferredorotherspecialrightsorrestrictions,whetherinregardtodividend,voting,returnofcapitalorotherwiseandtosuchpersons,onsuchtermsandconditions,andatsuchtimesasthedirectorsmaydecide,butsothatnoshareshallbeissuedatadiscount,exceptinaccordancewiththeprovisionsoftheCompaniesLaw.PagSeguroDigitalwillnotissuebearershares.
PagSeguroDigital’sArticlesofAssociationprovidethatatanytimethatthereareClassAcommonsharesinissueadditionalClassBcommonsharesmayonlybeissuedpursuantto(1)asharesplit,subdivisionofsharesorsimilartransactionorwhereadividendorotherdistributionispaidbytheissueofsharesorrightstoacquiresharesorfollowingcapitalizationofprofit,(2)amerger,consolidation,orotherbusinesscombinationinvolvingtheissuanceofClassBcommonsharesasfullorpartialconsideration,or(3)anissuanceofClassAcommonshares,wherebyholdersoftheClassBcommonsharesareentitledtoreceiveanumberofClassBcommonsharesthatwouldallowthemtomaintaintheirproportionalownershipinterestsinPagSeguroDigital.Formoreinformationsee“—PreemptiveorSimilarRights.”
PagSeguroDigital’sArticlesofAssociationalsoprovidethattheissuanceofnon-votingcommonsharesrequirestheaffirmativevoteofamajorityoftheofthenoutstandingClassAcommonshares.
Fiscal Year
PagSeguroDigital’sfiscalyearbeginsonJanuary1ofeachyearandendsonDecember31ofthesameyear.
Voting Rights
TheholdersoftheClassAcommonsharesandClassBcommonshareshaveidenticalrights,exceptthat(i)theholderofClassBcommonsharesisentitledto10votespershare,whereasholdersofClassAcommonsharesareentitledtoonevotepershare,(ii)ClassBcommonshareshavecertainconversionrightsand(iii)theholderofClassBcommonsharesisentitledtomaintainaproportionalownershipinterestintheeventthatadditionalClassAcommonsharesareissued.Formoreinformationsee“—PreemptiveorSimilarRights”and“—Conversion.”TheholdersofClassAcommonsharesandClassBcommonsharesvotetogetherasasingleclassonallmatters(includingtheelectionofdirectors)submittedtoavoteofshareholders,exceptasprovidedbelowandasotherwiserequiredbylaw.
PagSeguroDigital’sArticlesofAssociationprovideasfollowsregardingtherespectiverightsofholdersofClassAcommonsharesandClassBcommonshares:
(i) ClassconsentsfromtheholdersofClassAcommonsharesorClassBcommonshares,asapplicable,shallberequiredforanyvariationtotherightsattachedtotheirrespectiveclassofshares,however,theDirectorsmaytreatanytwoormoreclassesofsharesasformingoneclassiftheyconsiderthatallsuchclasseswouldbeaffectedinthesamewaybytheproposal;
(ii) therightsconferredonholdersofClassAcommonsharesshallnotbedeemedtobevariedbythecreationorissueoffurtherClassBcommonsharesandviceversa;and
(iii) therightsattachingtotheClassAcommonsharesandtheClassBcommonsharesshallnotbedeemedtobevariedbythecreationorissueofshareswithpreferredorotherrights,including,withoutlimitation,shareswithenhancedorweightedvotingrights.
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AssetforthintheArticlesofAssociation,theholdersofClassAcommonsharesandClassBcommonshares,respectively,donothavetherighttovoteseparatelyifthenumberofauthorizedsharesofsuchclassisincreasedordecreased.Rather,thenumberofauthorizedClassAcommonsharesandClassBcommonsharesmaybeincreasedordecreased(butnotbelowthenumberofsharesofsuchclassthenoutstanding)bytheaffirmativevoteoftheholdersofamajorityofthevotingpoweroftheissuedandoutstandingClassAcommonsharesandClassBcommonshares,votingtogetherinageneralmeeting.
Preemptive or Similar Rights
TheClassAcommonsharesandClassBcommonsharesarenotentitledtopreemptiverightsupontransferandarenotsubjecttoconversion(exceptasdescribedbelowunder“—Conversion”),redemptionorsinkingfundprovisions.
TheClassBcommonsharesareentitledtomaintainaproportionalownershipinterestintheeventthatadditionalClassAcommonsharesareissued.Assuch,exceptforcertainexceptions,ifPagSeguroDigitalissuesClassAcommonshares,itmustfirstmakeanoffertoeachholderofClassBcommonsharestoissuetosuchholderonthesameeconomictermssuchnumberofClassBcommonsharesaswouldensuresuchholdermaymaintainaproportionalownershipinterestinPagSeguroDigital.ThisrighttomaintainaproportionalownershipinterestmaybewaivedbyamajorityoftheholdersofClassBcommonshares.
Conversion
TheoutstandingClassBcommonsharesareconvertibleatanytimeasfollows:(1)attheoptionoftheholder,aClassBcommonsharemaybeconvertedatanytimeintooneClassAcommonshareor(2)upontheelectionoftheholdersofamajorityofthethenoutstandingClassBcommonshares,alloutstandingClassBcommonsharesmaybeconvertedintoalikenumberofClassAcommonshares.Inaddition,eachClassBcommonsharewillconvertautomaticallyintooneClassAcommonshareuponanytransfer,whetherornotforvalue,exceptforcertaintransfersdescribedintheArticlesofAssociation,includingtransferstoaffiliates,trustssolelyforthebenefitoftheshareholderortheiraffiliates,andpartnerships,corporationsandotherentitiesexclusivelyownedbytheshareholderortheiraffiliatesandcertaintransferstoorganizationsthatareexemptfromtaxationunderSection501(c)(3)oftheInternalRevenueCodeof1986,asamended.Furthermore,eachClassBcommonsharewillconvertautomaticallyintooneClassAcommonshareandnoClassBcommonshareswillbeissuedthereafterif,atanytime,thevotingpoweroftheoutstandingClassBcommonsharesrepresentslessthan10%ofthecombinedvotingpoweroftheClassAcommonsharesandClassBcommonsharesthenoutstanding.
NoclassofPagSeguroDigital’scommonsharesmaybesubdividedorcombinedunlesstheotherclassofcommonsharesisconcurrentlysubdividedorcombinedinthesameproportionandinthesamemanner.
Equal Status
ExceptasexpresslyprovidedinPagSeguroDigital’sMemorandumandArticlesofAssociation,ClassAcommonsharesandClassBcommonshareshavethesamerightsandprivilegesandrankequally,shareratablyandareidenticalinallrespectsastoallmatters.Intheeventofanymerger,consolidation,scheme,arrangementorotherbusinesscombinationrequiringtheapprovalofourshareholdersentitledtovotethereon(whetherornotPagSeguroDigitalisthesurvivingentity),theholdersofClassAcommonsharesshallhavetherighttoreceive,ortherighttoelecttoreceive,thesameformofconsiderationastheholdersofClassBcommonshares,andtheholdersofClassAcommonsharesshallhavetherighttoreceive,ortherighttoelecttoreceive,atleastthesameamountofconsiderationonapersharebasisastheholdersofClassBcommonshares.Intheeventofany(1)tenderorexchangeoffertoacquireanyClassAcommonsharesorClassBcommonsharesbyanythirdpartypursuanttoanagreementtowhichPagSeguroDigitalisaparty,or(2)anytenderorexchangeofferbyPagSeguroDigitaltoacquireanyClassAcommonsharesorClassBcommonshares,theholdersofClassAcommonsharesshallhavetherighttoreceive,ortherighttoelecttoreceive,thesameformofconsiderationastheholdersofClassBcommonshares,andtheholdersofClassAcommonsharesshallhavetherighttoreceive,ortherighttoelecttoreceive,atleastthesameamountofconsiderationonapersharebasisastheholdersofClassBcommonshares.
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Record Dates
Forthepurposeofdeterminingshareholdersentitledtonoticeof,ortovoteatanygeneralmeetingofshareholdersoranyadjournmentthereof,orshareholdersentitledtoreceivedividendorotherdistributionpayments,orinordertomakeadeterminationofshareholdersforanyotherpurpose,PagSeguroDigital’sboardofdirectorsmaysetarecorddatewhichshallnotexceedforty(40)cleardayspriortothedatewherethedeterminationwillbemade.
General Meetings of Shareholders
Asaconditionofadmissiontoashareholders’meeting,ashareholdermustbedulyregisteredasashareholderofPagSeguroDigitalattheapplicablerecorddateforthatmeetingand,inordertovote,allcallsorinstallmentsthenpayablebysuchshareholdertoPagSeguroDigitalinrespectofthesharesthatsuchshareholderholdsmusthavebeenpaid.
Subjecttoanyspecialrightsorrestrictionsastovotingthenattachedtoanyshares,atanygeneralmeetingeveryshareholderwhoispresentinpersonorbyproxy(or,inthecaseofashareholderbeingacorporation,byitsdulyauthorizedrepresentativenotbeinghimselforherselfashareholderentitledtovote)shallhaveonevoteperClassAcommonshareand10votesperClassBcommonshare.
AsaCaymanIslandsexemptedcompany,PagSeguroDigitalisnotobligedbytheCompaniesLawtocallannualgeneralmeetings;however,theArticlesofAssociationprovidethatineachyearthecompanywillholdanannualgeneralmeetingofshareholders,atatimedeterminedbytheboardofdirectors.Fortheannualgeneralmeetingofshareholderstheagendawillinclude,amongotherthings,thepresentationoftheannualaccountsandthereportofthedirectors.Inaddition,theagendaforanannualgeneralmeetingofshareholderswillonlyincludesuchitemsashavebeenincludedthereinbytheboardofdirectors.
Also,PagSeguroDigitalmay,butisnotrequired(unlessrequiredbythelawsoftheCaymanIslands),toholdotherextraordinarygeneralmeetingsduringtheyear.GeneralmeetingsofshareholdersaregenerallyexpectedtotakeplaceinSãoPaulo,Brazil,butmaybeheldelsewhereifthedirectorssodecide.
TheCompaniesLawprovidesshareholdersalimitedrighttorequestageneralmeeting,anddoesnotprovideshareholderswithanyrighttoputanyproposalbeforeageneralmeetingindefaultofacompany’sarticlesofassociation.However,theserightsmaybeprovidedinacompany’sarticlesofassociation.PagSeguroDigital’sArticlesofAssociationprovidethatupontherequisitionofoneormoreshareholdersrepresentingnotlessthanone-thirdofthevotingrightsentitledtovoteatgeneralmeetings,theboardwillconveneanextraordinarygeneralmeetingandputtheresolutionssorequisitionedtoavoteatsuchmeeting.TheArticlesofAssociationprovidenootherrighttoputanyproposalsbeforeannualgeneralmeetingsorextraordinarygeneralmeetings.
Subjecttoregulatoryrequirements,theannualgeneralmeetingandanyextraordinarygeneralmeetingsmustbecalledbynotlessthanten(10)cleardays’noticepriortotherelevantshareholdersmeetingandconvenedbyanoticediscussedbelow.Alternatively,uponthepriorconsentofallholdersentitledtoreceivenotice,withregardstotheannualgeneralmeeting,andtheholdersof95%inparvalueofthesharesentitledtoattendandvoteatanextraordinarygeneralmeeting,thatmeetingmaybeconvenedbyashorternoticeandinamannerdeemedappropriatebythoseholders.
PagSeguroDigitalwillgivenoticeofeachgeneralmeetingofshareholdersbypublicationonitswebsiteandinanyothermannerthatitmayberequiredtofollowinordertocomplywithCaymanIslandslaw,NYSEandSECrequirements.Theholdersofregisteredsharesmaybegivennoticeofashareholders’meetingbymeansofletterssenttotheaddressesofthoseshareholdersasregisteredinourshareholders’register,or,subjecttocertainstatutoryrequirements,byelectronicmeans.
Holders whose shares are registered in the name of DTC or its nominee, which is currently the case for all holders of Class A common shares, will not be ashareholder or member of the company and must rely on the procedures of DTC regarding notice of shareholders’ meetings and the exercise of rights of a holder of theClass A common shares.
Aquorumforageneralmeetingconsistsofanyoneormorepersonsholdingorrepresentingbyproxynotlessthanone-thirdoftheaggregatevotingpowerofallsharesinissueandentitledtovoteuponthebusinesstobetransacted.
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Aresolutionputtoavoteatageneralmeetingshallbedecidedonapoll.Anordinaryresolutiontobepassedbytheshareholdersatageneralmeetingrequirestheaffirmativevoteofasimplemajorityofthevotescastby,oronbehalfof,theshareholdersentitledtovote,presentinpersonorbyproxyandvotingatthemeeting.Aspecialresolutionrequirestheaffirmativevoteonapollofnolessthantwo-thirdsofthevotescastbytheshareholdersentitledtovotewhoarepresentinpersonorbyproxyatageneralmeeting.BothordinaryresolutionsandspecialresolutionsmayalsobepassedbyaunanimouswrittenresolutionsignedbyalltheshareholdersofourCompany,aspermittedbytheCompaniesLawandourArticlesofAssociation.
PursuanttoPagSeguroDigital’sArticlesofAssociation,generalmeetingsofshareholdersaretobechairedbythechairmanofourboardofdirectors.Ifthechairmanofourboardofdirectorsisabsent,thedirectorspresentatthemeetingshallappointoneofthemtobechairmanofthegeneralmeeting.Ifneitherthechairmannoranotherdirectorispresentatthegeneralmeetingwithinfifteenminutesafterthetimeappointedforholdingthemeeting,theshareholderspresentinpersonorbyproxyandentitledtovotemayelectanyoneoftheshareholderstobechairman.Theorderofbusinessateachmeetingshallbedeterminedbythechairmanofthemeeting,andheorsheshallhavetherightandauthoritytoprescribesuchrules,regulationsandproceduresandtodoallsuchactsandthingsasarenecessaryordesirablefortheproperconductofthemeeting,including,withoutlimitation,theestablishmentofproceduresforthemaintenanceoforderandsafety,limitationsonthetimeallottedtoquestionsorcommentsontheaffairsoftheCompany,restrictionsonentrytosuchmeetingafterthetimeprescribedforthecommencementthereof,andtheopeningandclosingofthepolls.
Liquidation Rights
IfPagSeguroDigitalisvoluntarilywoundup,theliquidator,aftertakingintoaccountandgivingeffecttotherightsofpreferredandsecuredcreditorsandtoanyagreementbetweenPagSeguroDigitalandanycreditorsthattheclaimsofsuchcreditorsshallbesubordinatedorotherwisedeferredtotheclaimsofanyothercreditorsandtoanycontractualrightsofset-offornettingofclaimsbetweenPagSeguroDigitalandanypersonorpersons(includingwithoutlimitationanybilateraloranymulti-lateralset-offornettingarrangementsbetweenthecompanyandanypersonorpersons)andsubjecttoanyagreementbetweenPagSeguroDigitalandanypersonorpersonstowaiveorlimitthesame,shallapplyPagSeguroDigital’spropertyinsatisfactionofitsliabilitiespari passu andsubjecttheretoshalldistributethepropertyamongsttheshareholdersaccordingtotheirrightsandinterestsinPagSeguroDigital.
Changes to Capital
PursuanttotheArticlesofAssociation,PagSeguroDigitalmayfromtimetotimebyordinaryresolution:
• increaseitssharecapitalbysuchsum,tobedividedintosharesofsuchamount,astheresolutionshallprescribe;
• consolidateanddividealloranyofitssharecapitalintosharesofalargeramountthanitsexistingshares;
• convertalloranyofitspaid-upsharesintostockandreconvertthatstockintopaidupsharesofanydenomination;
• subdivideitsexistingsharesoranyofthemintosharesofasmalleramount,providedthatinthesubdivisiontheproportionbetweentheamountpaidandtheamount,ifany,unpaidoneachreducedshareshallbethesameasitwasinthecaseofthesharefromwhichthereducedshareisderived;or
• cancelanyshareswhich,atthedateofthepassingoftheresolution,havenotbeentakenoragreedtobetakenbyanypersonanddiminishtheamountofitssharecapitalbytheamountofthesharessocancelled.
PagSeguroDigital’sshareholdersmaybyspecialresolution,subjecttoconfirmationbytheGrandCourtoftheCaymanIslandsonanapplicationbytheCompanyforanorderconfirmingsuchreduction,reduceitssharecapitaloranycapitalredemptionreserveinanymannerpermittedbylaw.
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Inaddition,subjecttotheprovisionsoftheCompaniesLawandourArticlesofAssociation,PagSeguroDigitalmay:
• issuesharesontermsthattheyaretoberedeemedorareliabletoberedeemed;
• purchaseitsownshares(includinganyredeemableshares);and
• makeapaymentinrespectoftheredemptionorpurchaseofitsownsharesinanymannerauthorizedbytheCompaniesLaw,includingoutofitsowncapital.
Transfer of Shares
SubjecttoanyapplicablerestrictionssetforthintheArticlesofAssociation,anyshareholderofPagSeguroDigitalmaytransferalloranyofhisorhercommonsharesbyaninstrumentoftransferintheusualorcommonformorintheformprescribedbytheNYSEoranyotherformapprovedbytheCompany’sboardofdirectors.
OurClassAcommonsharesaretradedontheNYSEinbook-entryformandmaybetransferredinaccordancewithPagSeguroDigital’sArticlesofAssociationandNYSE’srulesandregulations.
However,PagSeguroDigital’sboardofdirectorsmay,initsabsolutediscretion,declinetoregisteranytransferofanycommonsharewhichiseithernotfullypaiduptoapersonofwhomitdoesnotapproveorisissuedunderanyshareincentiveschemeforemployeeswhichcontainsatransferrestrictionthatisstillapplicabletosuchcommonshare.Theboardofdirectorsmayalsodeclinetoregisteranytransferofanyordinaryshareunless:
• afeeofsuchmaximumsumastheNYSEmaydeterminetobepayableorsuchlessersumastheboardofdirectorsmayfromtimetotimerequireispaidtoPagSeguroDigitalinrespectthereof;
• theinstrumentoftransferislodgedwithPagSeguroDigital,accompaniedbythecertificate(ifany)forthecommonsharestowhichitrelatesandsuchotherevidenceasourboardofdirectorsmayreasonablyrequiretoshowtherightofthetransferortomakethetransfer;
• theinstrumentoftransferisinrespectofonlyoneclassofshares;
• theinstrumentoftransferisproperlystamped,ifrequired;
• thecommonsharestransferredarefreeofanylieninfavorofPagSeguroDigital;and
• inthecaseofatransfertojointholders,thetransferisnottomorethanfourjointholders.
Ifthedirectorsrefusetoregisteratransfertheyarerequired,withintwomonthsafterthedateonwhichtheinstrumentoftransferwaslodged,tosendtothetransfereenoticeofsuchrefusal.
Share Repurchase
TheCompaniesLawandtheArticlesofAssociationpermitPagSeguroDigitaltopurchaseitsownshares,subjecttocertainrestrictions.TheboardofdirectorsmayonlyexercisethispoweronbehalfofPagSeguroDigital,subjecttotheCompaniesLaw,theArticlesofAssociationandtoanyapplicablerequirementsimposedfromtimetotimebytheSEC,theNYSE,orbyanyrecognizedstockexchangeonwhichoursecuritiesarelisted.
Dividends and Capitalization of Profits
WehavenotadoptedadividendpolicywithrespecttopaymentsofanyfuturedividendsbyPagSeguroDigital.SubjecttotheCompaniesLaw,PagSeguroDigital’sshareholdersmay,byresolutionpassedbyasimplemajorityofthevotingrightsentitledtovoteatageneralmeeting,declaredividends(includinginterimdividends)tobepaidtoshareholdersbutnodividendshallbedeclaredinexcessoftheamountrecommendedbytheboardofdirectors.Theboardofdirectorsmayalsodeclaredividends.DividendsmaybedeclaredandpaidoutoffundslawfullyavailabletoPagSeguroDigital.ExceptasotherwiseprovidedbytherightsattachedtosharesandtheArticlesofAssociationofPagSeguroDigital,alldividendsshallbepaidinproportiontothenumberofClassAcommonsharesorClassBcommonsharesashareholderholdsatthedatethedividendisdeclared(orsuchotherdateasmaybesetasarecorddate);but,(i)ifanyshareisissuedontermsprovidingthatitshallrankfordividendasfromaparticulardate,thatshareshallrankfordividendaccordingly,and(ii)wherewehavesharesinissuewhicharenotfullypaidup(astoparvalue)wemaypaydividendsinproportiontotheamountspaiduponeachshare.
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TheholdersofClassAcommonsharesandClassBcommonsharesshallbeentitledtoshareequallyinanydividendsthatmaybedeclaredinrespectofPagSeguroDigital’scommonsharesfromtimetotime.IntheeventthatadividendispaidintheformofClassAcommonsharesorClassBcommonshares,orrightstoacquireClassAcommonsharesorClassBcommonshares,(1)theholdersofClassAcommonsharesshallreceiveClassAcommonshares,orrightstoacquireClassAcommonshares,asthecasemaybe;and(2)theholdersofClassBcommonsharesshallreceiveClassBcommonshares,orrightstoacquireClassBcommonshares,asthecasemaybe.
OnSeptember29,2017,PagSeguroBrazil’sshareholdersapprovedadistributionofR$238.8millionindividends.Thisamountconsistedof(i)R$142.8millionofdividendsrelatedtothesix-monthperiodendedJune30,2017and(ii)R$96.0millionindividendsrelatedtotheyearendedDecember31,2016.Formoreinformationregardingthe2016dividend,seeNote18toourauditedconsolidatedfinancialstatements.Nodividendsweredeclaredorpaidin2018.
TheR$238.8millionindividendsweredistributedonSeptember29,2017inthefollowingmanner:(i)R$54.3millionpaidincashand(ii)R$184.5millionoffsetagainstamountsthenduetoPagSeguroBrazilandBoaCompraunderourcentralizedcashmanagementwithUOL.ForfurtherinformationonourcentralizedcashmanagementwithUOL,see“PresentationofFinancialandOtherInformation—CorporateEvents—The2015Reorganization.”
Inaddition,subjecttocertainlimitations,Braziliancompaniesgenerallyalsodistributeamountsinrespectofinterestonowncapital,whichiscalculatedbasedonagovernmentinterestrate.Inits2016financialstatementsPagSeguroDigitalrecordedanamountofR$22.2millionininterestonowncapitalpayabletoUOL.ThisamountwaspaidtoUOLonApril30,2017,althoughthepaymentwasoffsetinfullagainstamountsthenduetoPagSeguroBrazilandBoaCompraunderourcentralizedcashmanagementwithUOL,ratherthanbeingpaidincash.Nointerestonowncapitalwasdeclaredorpaidin2018.
Appointment, Disqualification and Removal of Directors
PagSeguroDigitalismanagedbyitsboardofdirectors.TheArticlesofAssociationprovidethat,unlessotherwisedeterminedbyaspecialresolutionofshareholders,theboardofdirectorswillbecomposedoffourto11directors,withthenumberbeingdeterminedbyamajorityofthedirectorstheninoffice.Therearenoprovisionsrelatingtoretirementofdirectorsuponreachinganyagelimit.TheArticlesofAssociationalsoprovidethat,whilePagSeguroDigital’ssharesareadmittedtotradingonNYSE,theboardofdirectorsmustalwayscomplywiththeresidencyandcitizenshiprequirementsoftheU.S.securitieslawsapplicabletoforeignprivateissuers.
TheArticlesofAssociationprovidethatdirectorsshallbeelectedbyanordinaryresolutionofourshareholders,whichrequirestheaffirmativevoteofasimplemajorityofthevotescastontheresolutionbytheshareholdersentitledtovotewhoarepresent,inpersonorbyproxy,atthemeeting.Eachdirectorshallbeappointedandelectedforsuchtermastheresolutionappointinghimorhermaydetermineoruntilhisorherdeath,resignationorremoval.
OurdirectorsareLuizFrias,EduardoAlcaro,MariaJudithdeBrito,RicardoDutradaSilva,NoemiaGushiken,MarcosdeBarrosLisboaandClevelandPratesTeixeira.Ms.Gushiken,Mr.LisboaandMr.Teixeiraare“independent”asthattermisdefinedundertheapplicablerulesandregulationsoftheSECandthelistingstandardsoftheNYSE.
Anyvacanciesontheboardofdirectorsthatariseotherthanupontheremovalofadirectorbyresolutionpassedatageneralmeetingcanbefilledbytheremainingdirectors(notwithstandingthattheymayconstitutelessthanaquorum).Anysuchappointmentshallbeasaninterimdirectortofillsuchvacancyuntilthenextannualgeneralmeetingofshareholders.
Additionstotheexistingboard(withinthelimitssetpursuanttotheArticlesofAssociation)maybemadebyordinaryresolutionoftheshareholders.
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UponthecompletionofourIPO,theboardofdirectorsputinplaceanauditcommittee.See“Item6.Directors,SeniorManagementandEmployees—AuditCommittee.”
Grounds for Removing a Director
Adirectormayberemovedwithorwithoutcausebyordinaryresolution.Thenoticeofgeneralmeetingmustcontainastatementoftheintentiontoremovethedirectorandmustbeservedonthedirectornotlessthantencalendardaysbeforethemeeting.Thedirectorisentitledtoattendthemeetingandbeheardonthemotionforhisremoval.
Theofficeofadirectorwillbevacatedautomaticallyifheorshe(1)becomesprohibitedbylawfrombeingadirector,(2)becomesbankruptormakesanarrangementorcompositionwithhiscreditors,(3)diesorisintheopinionofallhisco-directors,incapablebyreasonofmentaldisorderofdischarginghisdutiesasdirector,(4)resignshisofficebynoticetousor(5)hasformorethansixmonthsbeenabsentwithoutpermissionofthedirectorsfrommeetingsoftheboardofdirectorsheldduringthatperiod,andtheremainingdirectorsresolvethathisorherofficebevacated.
Proceedings of the Board of Directors
TheArticlesofAssociationprovidethatPagSeguroDigital’sbusinessistobemanagedandconductedbytheboardofdirectors.Thequorumnecessaryfortheboardmeetingshallbeasimplemajorityofthedirectorstheninoffice(subjecttotherebeingaminimumoftwodirectorspresent)andbusinessatanymeetingshallbedecidedbyamajorityofvotes.Inthecaseofanequalityofvotes,thechairmanshallhaveacastingvote.
SubjecttotheprovisionsoftheArticlesofAssociation,theboardofdirectorsmayregulateitsproceedingsastheydetermineisappropriate.BoardmeetingsshallbeheldatleastonceeverycalendarquarterandshalltakeplaceeitherinSãoPaulo,Braziloratsuchotherplaceasthedirectorsmaydetermine.
SubjecttotheprovisionsoftheMemorandumandArticlesofAssociation,toanydirectionsgivenbyordinaryresolutionoftheshareholdersandthelistingrulesoftheNYSE,theboardofdirectorsmayfromtimetotimeatitsdiscretionexerciseallpowersofPagSeguroDigital,including,subjecttotheCompaniesLaw,thepowertoissuedebentures,bondsandothersecuritiesofthecompany,whetheroutrightorascollateralsecurityforanydebt,liabilityorobligationofourcompanyorofanythirdparty.
Inspection of Books and Records
HoldersofPagSeguroDigitalshareswillhavenogeneralrightunderCaymanIslandslawtoinspectorobtaincopiesofthelistofshareholdersorcorporaterecordsoftheCompany.However,theboardofdirectorsmaydeterminefromtimetotimewhetherandtowhatextentPagSeguroDigital’saccountingrecordsandbooksshallbeopentoinspectionbyshareholderswhoarenotmembersoftheboardofdirectors.Notwithstandingtheabove,theArticlesofAssociationprovideshareholderswiththerighttoreceiveannualfinancialstatements.Suchrighttoreceiveannualfinancialstatementsmaybesatisfiedbypublishingthesameonthecompany’swebsiteorfilingsuchannualreportsaswearerequiredtofilewiththeSEC.
Register of Shareholders
OurregisteredClassAcommonsharesareheldthroughDTC,andDTCorCede&Co.,asnomineeforDTC,isrecordedintheshareholders’registerastheholderofourClassAcommonshares.
UnderCaymanIslandslaw,PagSeguroDigitalmustkeeparegisterofshareholdersthatincludes:
• thenamesandaddressesoftheshareholders,astatementofthesharesheldbyeachmember,andoftheamountpaidoragreedtobeconsideredaspaid,onthesharesofeachmember;
• thedateonwhichthenameofanypersonwasenteredontheregisterasamember;and
• thedateonwhichanypersonceasedtobeamember.
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UnderCaymanIslandslaw,theregisterofshareholdersofPagSeguroDigitalisprima facie evidenceofthematterssetouttherein(i.e.,theregisterofshareholderswillraiseapresumptionoffactonthemattersreferredtoaboveunlessrebutted)andashareholderregisteredintheregisterofshareholdersisdeemedasamatterofCaymanIslandslawtohaveprima facie legaltitletothesharesassetagainsthisorhernameintheregisterofshareholders.Theshareholdersrecordedintheregisterofshareholdersshouldbedeemedtohavelegaltitletothesharessetagainsttheirname.
Ifthenameofanypersonisincorrectlyenteredinoromittedfromtheregisterofshareholders,orifthereisanydefaultorunnecessarydelayinenteringontheregisterthefactofanypersonhavingceasedtobeashareholderofPagSeguroDigital,thepersonormemberaggrieved(oranyshareholderofPagSeguroDigital,orPagSeguroDigitalitself)mayapplytotheCaymanIslandsGrandCourtforanorderthattheregisterberectified,andtheCourtmayeitherrefusesuchapplicationoritmay,ifsatisfiedofthejusticeofthecase,makeanorderfortherectificationoftheregister.
Exempted Company
PagSeguroDigitalisanexemptedcompanywithlimitedliabilityundertheCompaniesLaw.TheCompaniesLawdistinguishesbetweenordinaryresidentcompaniesandexemptedcompanies.AnycompanythatisregisteredintheCaymanIslandsbutconductsbusinessmainlyoutsideoftheCaymanIslandsmayapplytoberegisteredasanexemptedcompany.Therequirementsforanexemptedcompanyareessentiallythesameasforanordinarycompanyexceptfortheexemptionsandprivilegeslistedbelow:
• anexemptedcompanydoesnothavetofileanannualreturnofitsshareholderswiththeRegistrarofCompanies;
• anexemptedcompany’sregisterofshareholdersisnotopentoinspection;
• anexemptedcompanydoesnothavetoholdanannualgeneralmeeting;
• anexemptedcompanymayobtainanundertakingagainsttheimpositionofanyfuturetaxation(suchundertakingsareusuallygivenfor20yearsinthefirstinstance);
• anexemptedcompanymayregisterbywayofcontinuationinanotherjurisdictionandbederegisteredintheCaymanIslands;
• anexemptedcompanymayregisterasalimiteddurationcompany;and
• anexemptedcompanymayregisterasasegregatedportfoliocompany.
“Limitedliability”meansthattheliabilityofeachshareholderislimitedtotheamountunpaidbytheshareholderonthesharesofthecompany(exceptinexceptionalcircumstances,suchasinvolvingfraud,theestablishmentofanagencyrelationshiporanillegalorimproperpurposeorothercircumstancesinwhichacourtmaybepreparedtopierceorliftthecorporateveil).
PagSeguroDigitalissubjecttoreportingandotherinformationalrequirementsoftheExchangeAct,asapplicabletoforeignprivateissuers.Exceptasotherwisedisclosedinthisannualreport,PagSeguroDigitalcomplieswiththeNYSErulesinlieuoffollowinghomecountrypractice.
Anti-Takeover Provisions in our Memorandum and Articles of Association
SomeprovisionsoftheMemorandumandArticlesofAssociationmaydiscourage,delayorpreventachangeincontrolofPagSeguroDigitalormanagementthatshareholdersmayconsiderfavorable.Inparticular,thecapitalstructureofPagSeguroDigitalconcentratesownershipofvotingrightsinthehandsofUOL.Theseprovisions,whicharesummarizedbelow,areexpectedtodiscouragecoercivetakeoverpracticesandinadequatetakeoverbids.TheseprovisionsarealsodesignedtoencouragepersonsseekingtoacquirecontrolofPagSeguroDigitaltofirstnegotiatewiththeboardofdirectors.However,theseprovisionscouldalsohavetheeffectofdiscouragingothersfromattemptinghostiletakeoversand,asaconsequence,theymayalsoinhibittemporaryfluctuationsinthemarketpriceoftheClassAcommonsharesthatoftenresultfromactualorrumoredhostiletakeoverattempts.TheseprovisionsmayalsohavetheeffectofpreventingchangesinthemanagementofPagSeguroDigital.Itispossiblethattheseprovisionscouldmakeitmoredifficulttoaccomplishtransactionsthatshareholdersmayotherwisedeemtobeintheirbestinterests.
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Two Classes of Common Shares
TheClassBcommonsharesofPagSeguroDigitalareentitledto10votespershare,whiletheClassAcommonsharesareentitledtoonevotepershare.SinceitownsofalloftheClassBcommonsharesofPagSeguroDigital,UOLcurrentlyhastheabilitytoelectalldirectorsandtodeterminetheoutcomeofmostmatterssubmittedforavoteofshareholders.Thisconcentratedvotingcontrolcoulddiscourageothersfrominitiatinganypotentialmerger,takeover,orotherchangeofcontroltransactionthatothershareholdersmayviewasbeneficial.
SolongasUOLhastheabilitytodeterminetheoutcomeofmostmatterssubmittedtoavoteofshareholdersaswellastheoverallmanagementanddirectionofPagSeguroDigital,thirdpartiesmaybedeterredintheirwillingnesstomakeanunsolicitedmerger,takeover,orotherchangeofcontrolproposal,ortoengageinaproxycontestfortheelectionofdirectors.Asaresult,thefactthatPagSeguroDigitalhastwoclassesofcommonsharesmayhavetheeffectofdeprivingyouasaholderofClassAcommonsharesofanopportunitytosellyourClassAcommonsharesatapremiumoverprevailingmarketpricesandmakeitmoredifficulttoreplacethedirectorsandmanagementofPagSeguroDigital.
Preferred Shares
PagSeguroDigital’sboardofdirectorsisgivenwidepowerstoissueoneormoreclassesorseriesofshareswithpreferredrights.Suchpreferencesmayinclude,forexample,dividendrights,conversionrights,redemptionprivileges,enhancedvotingpowersandliquidationpreferences.
Despitetheanti-takeoverprovisionsdescribedabove,underCaymanIslandslaw,PagSeguroDigital’sboardofdirectorsmayonlyexercisetherightsandpowersgrantedtothemundertheMemorandumandArticlesofAssociation,forwhattheybelieveingoodfaithtobeinthebestinterestsofPagSeguroDigital.
Protection of Non-Controlling Shareholders
TheGrandCourtoftheCaymanIslandsmay,ontheapplicationofshareholdersholdingnotlessthanonefifthofthesharesofPagSeguroDigitalinissue,appointaninspectortoexaminetheCompany’saffairsandreportthereoninamannerastheGrandCourtshalldirect.
SubjecttotheprovisionsoftheCompaniesLaw,anyshareholdermaypetitiontheGrandCourtoftheCaymanIslandswhichmaymakeawindinguporder,ifthecourtisoftheopinionthatthiswindingupisjustandequitable.
NotwithstandingtheU.S.securitieslawsandregulationsthatareapplicabletoPagSeguroDigital,generalcorporateclaimsagainstPagSeguroDigitalbyitsshareholdersmust,asageneralrule,bebasedonthegenerallawsofcontractortortapplicableintheCaymanIslandsortheirindividualrightsasshareholdersasestablishedbyPagSeguroDigital’sMemorandumandArticlesofAssociation.
TheCaymanIslandscourtsordinarilywouldbeexpectedtofollowEnglishcaselawprecedents,whichpermitaminorityshareholdertocommencearepresentativeactionagainstPagSeguroDigital,orderivativeactionsinPagSeguroDigital’sname,tochallenge(1)anactwhichisultra vires orillegal,(2)anactwhichconstitutesafraudagainsttheminorityandthewrongdoersthemselvescontrolPagSeguroDigital,and(3)anirregularityinthepassingofaresolutionthatrequiresaqualified(orspecial)majority.
Registration Rights and Restricted Shares
AlthoughnoshareholdersofPagSeguroDigitalhaveformalregistrationrights,theyorentitiescontrolledbythemortheirpermittedtransfereeswillbeabletoselltheirsharesinthepublicmarketfromtimetotimewithoutregisteringthem,subjecttocertainlimitationsonthetiming,amountandmethodofthosesalesimposedbyregulationspromulgatedbytheSEC.PagSeguroDigitalhasagreedtolock-upprovisionsthatrestrictus,subjecttospecifiedexceptions,includingtherightforPagSeguroDigitaltoissuenewsharesifwecarryoutanacquisitionorenterintoamerger,jointventureorstrategicparticipation,fromsellingorotherwisedisposingofanysharesforaperiodof12monthsafterthedateofourJune2018follow-onoffering.UOLhasalsoagreedtolock-uprestrictionsfor12monthsfollowingthedateofourJune2018follow-onofferinginsubstantiallysimilarterms,exceptthatthelock-uprestrictionsapplicabletoUOLarenotsubjecttoanyexceptions.Thelock-uprestrictionsapplicabletoPagSeguroDigitalandUOLarenotsubjecttowaiverbytheunderwritersofourJune2018follow-onoffering.Formoreinformation,see“Item10.AdditionalInformation—Lock-upAgreements.”
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Principal Differences between Cayman Islands and U.S. Corporate Law
TheCompaniesLawwasmodelledoriginallyaftersimilarlawsinEnglandandWalesbutdoesnotfollowsubsequentstatutoryenactmentsinEnglandandWales.Inaddition,theCompaniesLawdiffersfromlawsapplicabletoU.S.corporationsandtheirshareholders.SetforthbelowisasummaryofthesignificantdifferencesbetweentheprovisionsoftheCompaniesLawapplicabletoPagSeguroDigitalandthelawsapplicabletocompaniesincorporatedintheUnitedStatesandtheirshareholders.
Mergers and Similar Arrangements
TheCompaniesLawpermitsmergersandconsolidationsbetweenCaymanIslandscompaniesandbetweenCaymanIslandscompaniesandnon-CaymanIslandscompanies.
Forthesepurposes,(a)“merger”meansthemergingoftwoormoreconstituentcompaniesandthevestingoftheirundertaking,propertyandliabilitiesinoneofsuchcompaniesasthesurvivingcompanyand(b)a“consolidation”meansthecombinationoftwoormoreconstituentcompaniesintoaconsolidatedcompanyandthevestingoftheundertaking,propertyandliabilitiesofsuchcompaniesintheconsolidatedcompany.Inordertoeffectsuchamergerorconsolidation,thedirectorsofeachconstituentcompanymustapproveawrittenplanofmergerorconsolidation,whichmustthenbeauthorizedby(a)aspecialresolutionoftheshareholdersofeachconstituentcompany;and(b)suchotherauthorization,ifany,asmaybespecifiedinsuchconstituentcompany’sarticlesofassociation.TheplanmustbeapprovedbythedirectorsofeachconstituentcompanyandfiledwiththeRegistrarofCompaniestogetherwithadeclarationasto:(1)thesolvencyoftheconsolidatedorsurvivingcompany,(2)themergerorconsolidationisbonafideandnotintendedtodefraudunsecuredcreditorsoftheconstituentcompanies;(3)nopetitionorothersimilarproceedinghasbeenfiledandremainsoutstandingandnoorderorresolutiontowindupthecompanyinanyjurisdiction,(4)noreceiver,trustee,administratororsimilarpersonhasbeenappointedinanyjurisdictionandisactinginrespectoftheconstituentcompany,itsaffairsorproperty,(5)noscheme,order,compromiseorsimilararrangementhasbeenenteredintoormadeinanyjurisdictionwithcreditors;(6)alistoftheassetsandliabilitiesofeachconstituentcompany;(7)thenon-survivingconstituentcompanyhasretiredfromanyfiduciaryofficeheldorwilldoso;(8)thattheconstituentcompanyhascompliedwithanyrequirementsundertheregulatorylaws,whererelevant;and(9)anundertakingthatacopyofthecertificateofmergerorconsolidationwillbegiventothemembersandcreditorsofeachconstituentcompanyandpublishedintheCaymanIslandsGazette.
Dissentingshareholdershavetherighttobepaidthefairvalueoftheirshares(which,ifnotagreedbetweentheparties,maybedeterminedbytheCaymanIslands’court)iftheyfollowtherequiredprocedures,subjecttocertainexceptions.Courtapprovalisnotrequiredforamergerorconsolidationwhichiseffectedincompliancewiththesestatutoryprocedures.
Inaddition,therearestatutoryprovisionsthatfacilitatethereconstructionandamalgamationofcompanies,providedthatthearrangementinquestionisapprovedbyamajorityinnumberofeachclassofshareholdersandcreditorswithwhomthearrangementistobemade,andwhomustinadditionrepresentthree-fourthsinvalueofeachsuchclassofshareholdersorcreditors,asthecasemaybe,thatarepresentandvotingeitherinpersonorbyproxyatameeting,ormeetingsconvenedforthatpurpose.TheconveningofthemeetingsandsubsequentlythearrangementmustbesanctionedbytheGrandCourtoftheCaymanIslands.Whileadissentingshareholderwouldhavetherighttoexpresstothecourttheviewthatthetransactionshouldnotbeapproved,thecourtcanbeexpectedtoapprovethearrangementifitsatisfiesitselfthat:
• PagSeguroDigitalisnotproposingtoactillegallyorultraviresandthestatutoryprovisionsastomajorityvotehavebeencompliedwith;
• theshareholdershavebeenfairlyrepresentedatthemeetinginquestion;
• thearrangementissuchthatmaybereasonablyapprovedbyanintelligentandhonestmanofthatclassactinginrespectofhisinterest;and
• thearrangementisnotonethatwouldmoreproperlybesanctionedundersomeotherprovisionoftheCompaniesLaworthatwouldamounttoa“fraudontheminority.”
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Whenatakeoverofferismadeandacceptedbyholdersof90.0%invalueofthesharesaffectedwithinfourmonths,theofferormay,withinatwo-monthperiod,requiretheholdersoftheremainingsharestotransfersuchsharesonthetermsoftheoffer.AnobjectionmaybemadetotheGrandCourtoftheCaymanIslandsbutisunlikelytosucceedunlessthereisevidenceoffraud,badfaithorcollusion.
Ifthearrangementandreconstructionarethusapproved,anydissentingshareholderswouldhavenorightscomparabletoappraisalrights,whichmightotherwiseordinarilybeavailabletodissentingshareholdersofU.S.corporationsandallowsuchdissentingshareholderstoreceivepaymentincashforthejudiciallydeterminedvalueoftheirshares.
Shareholders’ Suits
ClassactionsarenotrecognizedintheCaymanIslands,butgroupsofshareholderswithidenticalinterestsmaybringrepresentativeproceedings,whicharesimilar.However,aclassactionsuitcouldnonethelessbebroughtinaU.S.courtpursuanttoanallegedviolationofU.S.securitieslawsandregulations.
Inprinciple,PagSeguroDigitalitselfwouldnormallybetheproperplaintiffandasageneralrule,whilstaderivativeactionmaybeinitiatedbyaminorityshareholderonbehalfofPagSeguroDigitalinaCaymanIslandscourt,suchshareholderwillnotbeabletocontinuethoseproceedingswithoutthepermissionofaGrandCourtjudge,whowillonlyallowtheactiontocontinueiftheshareholdercandemonstratethatPagSeguroDigitalhasagoodcaseagainsttheDefendant,andthatitisproperfortheshareholdertocontinuetheactionratherthantheCompany’sboardofdirectors.Examplesofcircumstancesinwhichderivativeactionswouldbepermittedtocontinuearewhere:
• acompanyisactingorproposingtoactillegallyorbeyondthescopeofitsauthority;
• theactcomplainedof,althoughnotbeyondthescopeofitsauthority,couldbeeffecteddulyifauthorizedbymorethanasimplemajorityvotethathasnotbeenobtained;and
• thosewhocontrolthecompanyareperpetratinga“fraudontheminority.”
Corporate Governance
CaymanIslandslawrestrictstransactionsbetweenacompanyanditsdirectorsunlessthereareprovisionsintheMemorandumandArticlesofAssociationwhichprovideamechanismtoalleviatepossibleconflictsofinterest.Additionally,CaymanIslandslawimposesondirectors’dutiesofcareandskillandfiduciarydutiestothecompanieswhichtheyserve.UnderPagSeguroDigital’sArticlesofAssociation,adirectormustdisclosethenatureandextentofhisinterestinanycontractorarrangement,andfollowingsuchdisclosureandsubjecttoanyseparaterequirementunderapplicablelaworthelistingrulesoftheNYSE,andunlessdisqualifiedbythechairmanoftherelevantmeeting,theinteresteddirectormayvoteinrespectofanytransactionorarrangementinwhichheorsheisinterested.Theinteresteddirectorshallbecountedinthequorumatsuchmeetingandtheresolutionmaybepassedbyamajorityofthedirectorspresentatthemeeting.
Indemnification of Directors and Executive Officers and Limitation of Liability
TheCompaniesLawdoesnotlimittheextenttowhichacompany’sarticlesofassociationmayprovideforindemnificationofdirectorsandofficers,excepttotheextentthatitmaybeheldbytheCaymanIslandscourtstobecontrarytopublicpolicy,suchastoprovideindemnificationagainstcivilfraudortheconsequencesofcommittingacrime.PagSeguroDigital’sArticlesofAssociationprovidethatweshallindemnifyandholdharmlessourdirectorsandofficersagainstallactions,proceedings,costs,charges,expenses,losses,damages,liabilities,judgments,fines,settlementsandotheramountsincurredorsustainedbysuchdirectorsorofficers,otherthanbyreasonofsuchperson’sdishonesty,willfuldefaultorfraud,inorabouttheconductofourcompany’sbusinessoraffairs(includingasaresultofanymistakeofjudgment)orintheexecutionordischargeofhisduties,powers,authoritiesordiscretions,includingwithoutprejudicetothegeneralityoftheforegoing,anycosts,expenses,lossesorliabilitiesincurredbysuchdirectororofficerindefending(whethersuccessfullyorotherwise)anycivil,criminalorotherproceedingsconcerningPagSeguroDigitalorouraffairsinanycourtwhetherintheCaymanIslandsorelsewhere.ThisstandardofconductisgenerallythesameaspermittedundertheDelawareGeneralCorporationLawforaDelawarecorporation.
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InsofarasindemnificationforliabilitiesarisingundertheSecuritiesActmaybepermittedtoPagSeguroDigital’sdirectors,officersorpersonscontrollingtheCompanyundertheforegoingprovisions,wehavebeeninformedthat,intheopinionoftheSEC,thisindemnificationisagainstpublicpolicyasexpressedintheSecuritiesActandisthereforeunenforceable.
Directors’ Fiduciary Duties
AsamatterofCaymanIslandslaw,adirectorofaCaymanIslandscompanyisinthepositionofafiduciarywithrespecttothecompany.Accordingly,directorsowefiduciarydutiestotheircompaniestoactbonafideinwhattheyconsidertobethebestinterestsofthecompany,toexercisetheirpowersforthepurposesforwhichtheyareconferredandnottoplacethemselvesinapositionwherethereisaconflictbetweentheirpersonalinterestsandtheirdutytothecompany.Accordingly,adirectorowesacompanyadutynottomakeaprofitbasedonhisorherpositionasdirector(unlessthecompanypermitshimorhertodoso)andadutynottoputhimselforherselfinapositionwheretheinterestsofthecompanyconflictwithhisorherpersonalinterestorhisorherdutytoathirdparty.However,thisobligationmaybevariedbythecompany’sarticlesofassociation,whichmaypermitadirectortovoteonamatterinwhichhehasapersonalinterestprovidedthathehasdisclosedthatnatureofhisinteresttotheboardofdirectors.PagSeguroDigital’sArticlesofAssociationprovidesthatadirectormustdisclosethenatureandextentofhisorherinterestinanycontractorarrangement,andfollowingsuchdisclosureandsubjecttoanyseparaterequirementunderapplicablelaworthelistingrulesoftheNYSE,andunlessdisqualifiedbythechairmanoftherelevantmeeting,suchdirectormayvoteinrespectofanytransactionorarrangementinwhichheorsheisinterestedandmaybecountedinthequorumatthemeeting.
AdirectorofaCaymanIslandscompanyalsoowestothecompanydutiestoexerciseindependentjudgmentincarryingouthisfunctionsandtoexercisereasonableskill,careanddiligence,whichhasbothobjectiveandsubjectiveelements.RecentCaymanIslandscaselawconfirmedthatdirectorsmustexercisethecare,skillanddiligencethatwouldbeexercisedbyareasonablydiligentpersonhavingthegeneralknowledge,skillandexperiencereasonablytobeexpectedofapersonactingasadirector.Additionally,adirectormustexercisetheknowledge,skillandexperiencewhichheorsheactuallypossesses.
Ageneralnoticemaybegiventotheboardofdirectorstotheeffectthat(1)thedirectorisamemberorofficerofaspecifiedcompanyorfirmandistoberegardedasinterestedinanycontractorarrangementwhichmayafterthedateofthenoticebemadewiththatcompanyorfirm;or(2)heorsheistoberegardedasinterestedinanycontractorarrangementwhichmayafterthedateofthenoticetotheboardofdirectorsbemadewithaspecifiedpersonwhoisconnectedwithhimorher,willbedeemedsufficientdeclarationofinterest.Thisnoticeshallspecifythenatureoftheinterestinquestion.FollowingthedisclosurebeingmadepursuanttoPagSeguroDigital’sArticlesofAssociationandsubjecttoanyseparaterequirementunderapplicablelaworthelistingrulesoftheNYSE,andunlessdisqualifiedbythechairmanoftherelevantmeeting,adirectormayvoteinrespectofanytransactionorarrangementinwhichheorsheisinterestedandmaybecountedinthequorumatthemeeting.
Incomparison,underDelawarecorporatelaw,adirectorofaDelawarecorporationhasafiduciarydutytothecorporationanditsshareholders.Thisdutyhastwocomponents:thedutyofcareandthedutyofloyalty.Thedutyofcarerequiresthatadirectoractingoodfaith,withthecarethatanordinarilyprudentpersonwouldexerciseundersimilarcircumstances.Underthisduty,adirectormustinformhimselforherselfof,anddisclosetoshareholders,allmaterialinformationreasonablyavailableregardingasignificanttransaction.Thedutyofloyaltyrequiresthatadirectoractinamannerheorshereasonablybelievestobeinthebestinterestsofthecorporation.Heorshemustnotusehisorhercorporatepositionforpersonalgainoradvantage.Thisdutyprohibitsself-dealingbyadirectorandmandatesthatthebestinterestofthecorporationanditsshareholderstakeprecedenceoveranyinterestpossessedbyadirector,officerorcontrollingshareholderandnotsharedbytheshareholdersgenerally.Ingeneral,actionsofadirectorarepresumedtohavebeenmadeonaninformedbasis,ingoodfaithandinthehonestbeliefthattheactiontakenwasinthebestinterestsofthecorporation.However,thispresumptionmayberebuttedbyevidenceofabreachofoneofthefiduciaryduties.Shouldsuchevidencebepresentedconcerningatransactionbyadirector,adirectormustprovetheproceduralfairnessofthetransaction,andthatthetransactionwasoffairvaluetothecorporation.
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Shareholder Proposals
UndertheDelawareGeneralCorporationLaw,ashareholderhastherighttoputanyproposalbeforetheannualmeetingofshareholders,provideditcomplieswiththenoticeprovisionsinthegoverningdocuments.TheDelawareGeneralCorporationLawdoesnotprovideshareholdersanexpressrighttoputanyproposalbeforetheannualmeetingofshareholders,butDelawarecorporationsgenerallyaffordshareholdersanopportunitytomakeproposalsandnominationsprovidedthattheycomplywiththenoticeprovisionsinthecertificateofincorporationorbylaws.Aspecialmeetingmaybecalledbytheboardofdirectorsoranyotherpersonauthorizedtodosointhegoverningdocuments,butshareholdersmaybeprecludedfromcallingspecialmeetings.
TheCompaniesLawprovidesshareholderswithonlylimitedrightstorequisitionageneralmeeting,anddoesnotprovideshareholderswithanyrighttoputanyproposalbeforeageneralmeeting.However,theserightsmaybeprovidedinacompany’sarticlesofassociation.PagSeguroDigital’sArticlesofAssociationprovidethatupontherequisitionofoneormoreshareholdersrepresentingnotlessthanone-thirdofthevotingrightsentitledtovoteatgeneralmeetings,theboardwillconveneanextraordinarygeneralmeetingandputtheresolutionssorequisitionedtoavoteatsuchmeeting.TheMemorandumandArticlesofAssociationprovidenootherrighttoputanyproposalsbeforeannualgeneralmeetingsorextraordinarygeneralmeetings.
Cumulative Voting
UndertheDelawareGeneralCorporationLaw,cumulativevotingforelectionsofdirectorsisnotpermittedunlessthecorporation’scertificateofincorporationspecificallyprovidesforit.Cumulativevotingpotentiallyfacilitatestherepresentationofminorityshareholdersonaboardofdirectorssinceitpermitstheminorityshareholdertocastallthevotestowhichtheshareholderisentitledonasingledirector,whichincreasestheshareholder’svotingpowerwithrespecttoelectingsuchdirector.AspermittedunderCaymanIslandslaw,PagSeguroDigital’sArticlesofAssociationdonotprovideforcumulativevoting.Asaresult,theshareholdersofPagSeguroDigitalarenotaffordedanylessprotectionsorrightsonthisissuethanshareholdersofaDelawarecorporation.
Removal of Directors
Theofficeofadirectorshallbevacatedautomaticallyif,amongotherthings,heorshe(1)becomesprohibitedbylawfrombeingadirector,(2)becomesbankruptormakesanarrangementorcompositionwithhiscreditors,(3)diesorisintheopinionofallhisco-directors,incapablebyreasonofmentaldisorderofdischarginghisdutiesasdirector(4)resignshisofficebynoticetousor(5)hasformorethansixmonthsbeenabsentwithoutpermissionofthedirectorsfrommeetingsoftheboardofdirectorsheldduringthatperiod,andtheremainingdirectorsresolvethathis/herofficebevacated.
Transaction with Interested Shareholders
TheDelawareGeneralCorporationLawprovidesthat;unlessthecorporationhasspecificallyelectednottobegovernedbythisstatute,itisprohibitedfromengagingincertainbusinesscombinationswithan“interestedshareholder”forthreeyearsfollowingthedatethatthispersonbecomesaninterestedshareholder.Aninterestedshareholdergenerallyisapersonoragroupwhoorwhichownsorowned15%ormoreofthetarget’soutstandingvotingsharesorwhoorwhichisanaffiliateorassociateofthecorporationandowned15%ormoreofthecorporation’soutstandingvotingshareswithinthepastthreeyears.Thishastheeffectoflimitingtheabilityofapotentialacquirertomakeatwo-tieredbidforthetargetinwhichallshareholderswouldnotbetreatedequally.Thestatutedoesnotapplyif,amongotherthings,priortothedateonwhichtheshareholderbecomesaninterestedshareholder,theboardofdirectorsapproveseitherthebusinesscombinationorthetransactionwhichresultedinthepersonbecominganinterestedshareholder.ThisencouragesanypotentialacquirerofaDelawarecorporationtonegotiatethetermsofanyacquisitiontransactionwiththetarget’sboardofdirectors.
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CaymanIslandslawhasnocomparablestatute.Asaresult,PagSeguroDigitalcannotavailitselfofthetypesofprotectionsaffordedbytheDelawarebusinesscombinationstatute.However,althoughCaymanIslandslawdoesnotregulatetransactionsbetweenacompanyanditssignificantshareholders,itdoesprovidethattheboardofdirectorsowedutiestoensurethatthesetransactionsareenteredintobonafideinthebestinterestsofthecompanyandforapropercorporatepurposeand,asnotedabove,atransactionmaybesubjecttochallengeifithastheeffectofconstitutingafraudontheminorityshareholders.
Dissolution; Winding Up
UndertheDelawareGeneralCorporationLaw,unlesstheboardofdirectorsapprovestheproposaltodissolve,dissolutionmustbeapprovedbyshareholdersholding100%ofthetotalvotingpowerofthecorporation.Ifthedissolutionisinitiatedbytheboardofdirectorsitmaybeapprovedbyasimplemajorityofthecorporation’soutstandingshares.DelawarelawallowsaDelawarecorporationtoincludeinitscertificateofincorporationasupermajorityvotingrequirementinconnectionwithdissolutionsinitiatedbytheboard.UnderCaymanIslandslaw,acompanymaybewoundupbyeitheranorderofthecourtsoftheCaymanIslandsorbyaspecialresolutionofitsmembersor,ifthecompanyresolvesbyordinaryresolutionthatitbewoundupbecauseitisunabletopayitsdebtsastheyfalldue.Thecourthasauthoritytoorderwindingupinanumberofspecifiedcircumstancesincludingwhereitis,intheopinionofthecourt,justandequitabletodoso.
UndertheCompaniesLaw,PagSeguroDigitalmaybedissolved,liquidatedorwoundupbyaspecialresolutionofshareholders(requiringatwo-thirdsmajorityvote).PagSeguroDigital’sArticlesofAssociationalsogiveitsboardofdirectorsauthoritytopetitiontheCaymanIslandsCourttowindupPagSeguroDigital.
Variation of Rights of Shares
UndertheDelawareGeneralCorporationLaw,acorporationmayvarytherightsofaclassofshareswiththeapprovalofamajorityoftheoutstandingsharesofthatclass,unlessthecertificateofincorporationprovidesotherwise.UnderPagSeguroDigital’sArticlesofAssociation,ifthesharecapitalisdividedintomorethanoneclassofshares,therightsattachedtoanyclassmayonlybevariedwiththewrittenconsentoftheholdersoftwo-thirdsofthesharesofthatclassorthesanctionofaspecialresolutionpassedataseparatemeetingoftheholdersofthesharesofthatclass.
Also,exceptwithrespecttosharecapital(asdescribedabove),alterationstoPagSeguroDigital’sMemorandumandArticlesofAssociationmayonlybemadebyspecialresolutionofshareholders(requiringatwo-thirdsmajorityvote).
Amendment of Governing Documents
UndertheDelawareGeneralCorporationLaw,acorporation’scertificateofincorporationmaybeamendedonlyifadoptedanddeclaredadvisablebytheboardofdirectorsandapprovedbyamajorityoftheoutstandingsharesentitledtovote,andthebylawsmaybeamendedwiththeapprovalofamajorityoftheoutstandingsharesentitledtovoteandmay,ifsoprovidedinthecertificateofincorporation,alsobeamendedbytheboardofdirectors.UnderCaymanIslandslaw,PagSeguroDigital’sMemorandumandArticlesofAssociationgenerally(andsaveforcertainamendmentstosharecapitaldescribedinthissection)mayonlybeamendedbyspecialresolutionofshareholders(requiringatwo-thirdsmajorityvote).
Rights of Non-Resident or Foreign Shareholders
TherearenolimitationsimposedbyPagSeguroDigital’sMemorandumandArticlesofAssociationontherightsofnon-residentorforeignshareholderstoholdorexercisevotingrightsonPagSeguroDigital’sshares.Inaddition,therearenoprovisionsintheMemorandumandArticlesofAssociationgoverningtheownershipthresholdabovewhichshareholderownershipmustbedisclosed.
Transfer Agent and Registrar
AmericanStockTransfer&TrustCompany,LLCmaintainsourshareholders’registerandactsasourtransferagent,registrarandpayingagentfortheClassAcommonshares.TheClassAcommonsharesaretradedontheNYSEinbook-entryform.Thetransferagent,registrarandpayingagent’saddressis620115thAvenue,Brooklyn,NY,11219,anditstelephonenumberis+1(800)937-5449or+1(718)921-8124.
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Material Contracts
Forinformationconcerningourmaterialcontracts,see“Item4.InformationontheCompany,”“Item5.OperatingandFinancialReviewandProspects,”“Item6.Directors,SeniorManagementandEmployees—Compensation”andItem7.MajorShareholdersandRelatedPartyTransactions—RelatedPartyTransactions.”
Exchange Controls and Other Limitations Affecting Security Holders
TheCaymanIslandscurrentlyhasnoexchangecontrolrestrictions.
Taxation
ThefollowingsummarycontainsadescriptionofcertainCaymanIslandsandU.S.federalincometaxconsequencesoftheacquisition,ownershipanddispositionofourClassAcommonsharesbutitdoesnotpurporttobeacomprehensivedescriptionofallthetaxconsiderationsthatmayberelevanttoadecisiontopurchase,ownordisposeofClassAcommonshares.ThesummaryisbaseduponthetaxlawsoftheCaymanIslandsandregulationsthereunderandonthetaxlawsoftheUnitedStatesandregulationsthereunderatthedatehereof,whicharesubjecttochange.Holders of our Class A common shares should consult their own tax advisors as to the tax consequences ofthe acquisition, ownership and disposition of Class A common shares.
Cayman Islands Tax Considerations
TheCaymanIslandslawscurrentlylevynotaxesonindividualsorcorporationsbaseduponprofits,income,gainsorappreciationandthereisnotaxationinthenatureofinheritancetaxorestatedutyorwithholdingtaxapplicabletousortoanyholderofClassAcommonshares.TherearenoothertaxeslikelytobematerialtousleviedbythegovernmentoftheCaymanIslandsexceptforstampdutieswhichmaybeapplicableoninstrumentsexecutedin,orafterexecutionbroughtwithinthejurisdictionoftheCaymanIslands.NostampdutyispayableintheCaymanIslandsontransfersofsharesofCaymanIslandscompaniesexceptthosewhichholdinterestsinlandintheCaymanIslands.TheCaymanIslandsisnotpartytoanydoubletaxtreatieswhichareapplicabletoanypaymentsmadebyortoourcompany.TherearenoexchangecontrolregulationsorcurrencyrestrictionsintheCaymanIslands.
AsaCaymanIslandsexemptedcompanywithlimitedliability,wehavereceivedanundertakingfromtheCabinetOfficeoftheCaymanIslands,datedAugust10,2017,astotaxconcessionspursuanttoSection6oftheTaxConcessionsLaw(1999Revision).Thisundertakingprovidesthat,foraperiodof20yearsfromthedateofissueoftheundertaking,nolawthereafterenactedintheCaymanIslandsimposinganytaxestobeleviedonprofits,income,gainsorappreciationwillapplytousorouroperationsand,inaddition,nosuchtaxshallbepayable:
(a) onorinrespectofourshares(includingourClassAcommonshares),debenturesorotherobligations;or
(b) bywayofwithholdinginwholeorinpartofanypaymentofdividendorotherdistributionofincomeorcapitaltoanyholderofourshares(includingourClassAcommonshares)oranypaymentofinterestorothersumsdueunderourdebenturesorotherobligations.
ThereisnoincometaxtreatyorconventioncurrentlyineffectbetweentheUnitedStatesandtheCaymanIslands.
U.S. Federal Income Tax Considerations
ThefollowingdiscussiondescribescertainU.S.federalincometaxconsequencesofthepurchase,ownershipanddispositionofourClassAcommonshares.ThisdiscussiondealsonlywithClassAcommonsharesthatareheldascapitalassetsbyaUnitedStatesHolder(generallypropertyheldforinvestment).
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Asusedherein,theterm“UnitedStatesHolder”meansabeneficialownerofourClassAcommonsharesthatis,forU.S.federalincometaxpurposes,anyofthefollowing:
• anindividualwhoisacitizenorresidentoftheUnitedStates;
• acorporation(orotherentitytreatedasacorporationforU.S.federalincometaxpurposes)createdororganizedinorunderthelawsoftheUnitedStates,anystatethereofortheDistrictofColumbia;
• anestatetheincomeofwhichissubjecttoU.S.federalincometaxationregardlessofitssource;or
• atrustifit(1)issubjecttotheprimarysupervisionofacourtwithintheUnitedStatesandoneormoreUnitedStatespersonshavetheauthoritytocontrolallsubstantialdecisionsofthetrustor(2)hasavalidelectionineffectunderapplicableUnitedStatesTreasuryregulationstobetreatedasaUnitedStatesperson.
ThisdiscussionisbaseduponprovisionsoftheInternalRevenueCodeof1986,asamended,ortheCode,andregulations,rulingsandjudicialdecisionsthereunderatthedatehereof.Thoseauthoritiesmaybechanged,perhapsretroactively,soastoresultinU.S.federalincometaxconsequencesdifferentfromthosesummarizedbelow.
ThisdiscussiondoesnotrepresentadetaileddescriptionoftheU.S.federalincometaxconsequencesapplicabletoyouifyouaresubjecttospecialtreatmentundertheU.S.federalincometaxlaws,includingifyouare:
• adealerinsecuritiesorcurrencies;
• afinancialinstitution;
• aregulatedinvestmentcompany;
• arealestateinvestmenttrust;
• aninsurancecompany;
• apersonholdingourClassAcommonsharesinaretirementaccountorothertax-deferredaccount;
• atax-exemptorganization;
• apersonholdingourClassAcommonsharesaspartofahedging,integratedorconversiontransaction,aconstructivesaleorastraddle;
• atraderinsecuritiesthathaselectedthemark-to-marketmethodofaccountingforyoursecurities;
• apersonliableforalternativeminimumtax;
• apersonwhoownsorisdeemedtoown10%ormoreofourstockbyvoteorvalue;
• apartnershiporotherpass-throughentityforU.S.federalincometaxpurposes;or
• apersonwhose“functionalcurrency”isnottheUnitedStatesdollar.
Ifapartnership(orotherentityorarrangementtreatedasapartnershipforU.S.federalincometaxpurposes)holdsourClassAcommonshares,thetaxtreatmentofapartnergenerallywilldependuponthestatusofthepartnerandtheactivitiesofthepartnership.IfyouareapartnerofapartnershipholdingourClassAcommonshares,youshouldconsultyourtaxadvisors.
Exceptwherespecificallydescribedbelow,thisdiscussionassumesthatwearenotapassiveforeigninvestmentcompany,orPFIC,forU.S.federalincometaxpurposes.Seethediscussionunder“—PassiveForeignInvestmentCompany”below.
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ThisdiscussiondoesnotcontainadetaileddescriptionofalltheU.S.federalincometaxconsequencestoyouinlightofyourparticularcircumstancesanddoesnotaddresstheMedicaretaxonnetinvestmentincomeortheeffectsofanystate,localornon-UnitedStatestaxlaws.IfyouareconsideringthepurchaseofourClassAcommonshares,youshouldconsultyourowntaxadvisorsconcerningtheparticularU.S.federalincometaxconsequencestoyouofthepurchase,ownershipanddispositionofourClassAcommonshares,aswellastheconsequencestoyouarisingunderotherU.S.federaltaxlawsandthelawsofanyothertaxingjurisdiction.
TaxationofDividends
Subjecttothediscussionunder“—PassiveForeignInvestmentCompany”below,thegrossamountofdistributionsontheClassAcommonshareswillbetaxableasdividendstotheextentpaidoutofourcurrentoraccumulatedearningsandprofits,asdeterminedunderU.S.federalincometaxprinciples.Totheextentthattheamountofanydistributionexceedsourcurrentandaccumulatedearningsandprofitsforataxableyear,thedistributionwillfirstbetreatedasatax-freereturnofcapital,causingareductioninthetaxbasisoftheClassAcommonshares,andtotheextenttheamountofthedistributionexceedsyourtaxbasis,theexcesswillbetaxedascapitalgainrecognizedonasaleorexchange.Wedonot,however,expecttodetermineearningsandprofitsinaccordancewithU.S.federalincometaxprinciples.Therefore,youshouldexpectthatadistributiongenerallywillbereportedasadividend.
Withrespecttonon-corporateUnitedStatesHolders,certaindividendsreceivedfromaqualifiedforeigncorporationmaybesubjecttoreducedratesoftaxationsolongascertainholdingperiodandotherrequirementsaremet.Aforeigncorporationistreatedasaqualifiedforeigncorporationprovidedthat(i)thecorporationwasnot,intheyearpriortotheyearinwhichthedividendwaspaid,andisnot,intheyearinwhichthedividendispaid,aPFIC(asdiscussedbelow),and(ii)either(A)thecorporationiseligibleforthebenefitsofacomprehensiveincometaxtreatywiththeUnitedStatesthattheIRShasapprovedforpurposesofthequalifieddividendrulesor(B)thestockwithrespecttodividendspaidbythatcorporationisreadilytradableonanestablishedsecuritiesmarketintheUnitedStates,suchastheNYSE.OurClassAcommonsharesarelistedontheNYSE.
WebelievethatdividendswepayonourClassAcommonshareswillmeettheconditionsrequiredforthereducedtaxrate.Therecanbenoassurance,however,thatourClassAcommonshareswillbeconsideredreadilytradableonanestablishedsecuritiesmarketinlateryears.Non-corporateUnitedStatesHoldersthatdonotmeetaminimumholdingperiodrequirementduringwhichtheyarenotprotectedfromtheriskoflossorthatelecttotreatthedividendincomeas“investmentincome”pursuanttoSection163(d)(4)oftheCodewillnotbeeligibleforthereducedratesoftaxationregardlessofourstatusasaqualifiedforeigncorporation.Inaddition,theratereductionwillnotapplytodividendsiftherecipientofadividendisobligatedtomakerelatedpaymentswithrespecttopositionsinsubstantiallysimilarorrelatedproperty.Thisdisallowanceapplieseveniftheminimumholdingperiodhasbeenmet.Youshouldconsultyourowntaxadvisorsregardingtheapplicationoftheserulestoyourparticularcircumstances.
Anydividendsthatyoureceivewillbeincludableinyourgrossincomeasordinaryincomeonthedayactuallyorconstructivelyreceivedbyyou.SuchdividendswillnotbeeligibleforthedividendsreceiveddeductionallowedtocorporationsundertheCode.
PassiveForeignInvestmentCompany
WedonotexpecttobeaPFICforthecurrenttaxableyearoranyfutureyear,basedonourcurrentbusinessplans.However,whetherweareaPFICwillbedeterminedannuallybaseduponthecompositionandnatureofourincomeandthecomposition,natureandvaluationofourassets(includinggoodwill),allofwhicharesubjecttochange,andwhichmaybedeterminedinlargepartbyreferencetothemarketvalueofourshares,whichmaybevolatile.ThedeterminationofwhetherweareaPFICwillalsodependupontheapplicationofcomplexU.S.federalincometaxrulesconcerningtheclassificationofourassets(includinggoodwill)andincomeforthispurpose,andtheapplicationoftheserulesisuncertaininsomerespects.OurstatusasaPFICmayalsodepend,inpart,onhowweutilizethecashproceedsfromourJanuary2018IPOandJune2018follow-onoffering,inourbusiness.Accordingly,therecanbenoassurancethattheIRSwillnotchallengeanydeterminationbyusthatwearenotaPFIC.
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UndertheCode,wewillbeaPFICforanytaxableyearinwhich,aftertheapplicationofcertain“look-through”ruleswithrespecttosubsidiaries,either(i)50%ormoreoftheaveragequarterlyvalueofourassetsconsistofassetsthatproduce,orareheldfortheproductionof,passiveincome(the“assettest”)or(ii)75%ormoreofourgrossincomeconsistsofpassiveincome(the“incometest”).Forpurposesoftheassettest,anycash,includingproceedsfromthepublicoffering,willgenerallybetreatedasapassiveassetandtheamountofcashheldbyusinanyyearwilldepend,inpart,onwhenwespendthecashraisedfromthepublicofferingandgeneratedinouroperations.Furthermore,totheextentanyofourreceivablesareconsideredtogiverisetopassiveincome,suchreceivableswillbeconsideredpassiveassetsforpurposesoftheassettest.Inaddition,thedeterminationofourPFICstatuswilldependuponthenatureoftheassetsacquiredbyus.Moreover,thedeterminationofthevalueofourassetsmaydependonourmarketcapitalization,andthatmarketcapitalizationmayfluctuate.Accordingly,therecanbenoassurancethatwewillsatisfytheassettestinthecurrentoranyfutureyear.
Forpurposesoftheincometest,passiveincomegenerallyincludesdividends,interest(includingcertaintypesofincomethatareequivalenttointerest),royaltiesandrents(otherthanroyaltiesandrentsderivedintheactiveconductofatradeorbusinessandnotderivedfromarelatedperson),aswellasgainsfromthesaleofassets(suchasstock)thatproducepassiveincome,foreigncurrencygains,andcertainothercategoriesofincome.Ifweownatleast25%(byvalue)ofthestockofanothercorporation,wewillbetreated,forpurposesofdeterminingwhetherweareaPFIC,asowningourproportionateshareoftheothercorporation’sassetsandreceivingourproportionateshareoftheothercorporation’sincome.
Althoughweconsiderourselvestobeactivelyengagedinanactivebusinesswithrespecttoanumberofbusinesslinesandtobeengagedinanactivefinancingactivitywithrespecttotheearlypaymentofreceivablesfeaturethatweoffermerchantsregardingcreditcardtransactionsininstallmentsinparticular,andwebelievethatincomefromsuchbusinessesandfeaturesislikelynottreatedaspassiveincomeforpurposesofthePFICrules,itisnotentirelyclearhowsuchincomewillbetreatedforthesepurposes.Inparticular,certainofourincomemaybetreatedaspassiveincomeunlesssuchincomeiseligibleforanexceptionforcertainincomederivedintheactiveconductofafinancingbusinessunderSection954(h)oftheCode(the“activefinancingexception”),andrelatedassetsmaybeconsideredpassiveassetsunlesstheactivefinancingexceptionapplies.Webelievethattheactivefinancingexceptionwilllikelyapplytotreatsuchincomeasactive,butifitisdetermined,contrarytoourview,thattheincomefromthesebusinessesandfeaturesispassiveforU.S.federalincometaxpurposes,thatwouldalterthecompositionofourincomeandassetsforpurposesoftestingourPFICstatus,andmaycauseustobetreatedasaPFIC.
IfweareaPFICforanytaxableyearduringwhichyouholdourClassAcommonsharesandyoudonotmakeatimelymark-to-marketelection,asdescribedbelow,youwillbesubjecttospecialtaxruleswithrespecttoany“excessdistribution”receivedandanygainrealizedfromasaleorotherdisposition,includingapledge,ofClassAcommonshares.Distributionsreceivedinataxableyearwillbetreatedasexcessdistributionstotheextentthattheyaregreaterthan125%oftheaverageannualdistributionsreceivedduringtheshorterofthethreeprecedingtaxableyearsoryourholdingperiodfortheClassAcommonshares.Underthesespecialtaxrules:
• theexcessdistributionorgainwillbeallocatedratablyoveryourholdingperiodfortheClassAcommonshares,
• theamountallocatedtothecurrenttaxableyear,andanytaxableyearpriortothefirsttaxableyearinwhichwewereaPFIC,willbetreatedasordinaryincome,and
• theamountallocatedtoeachotheryearwillbesubjecttotaxatthehighesttaxrateineffectforthatyearforindividualsorcorporations,asapplicable,andtheinterestchargegenerallyapplicabletounderpaymentsoftaxwillbeimposedontheresultingtaxattributabletoeachsuchyear.
AlthoughthedeterminationofwhetherweareaPFICismadeannually,ifweareaPFICforanytaxableyearinwhichyouholdourClassAcommonshares,yougenerallywillbesubjecttothespecialtaxrulesdescribedaboveforthatyearandforeachsubsequentyearinwhichyouholdtheClassAcommonshares(evenifwedonotqualifyasaPFICinsuchsubsequentyears).However,ifweceasetobeaPFIC,youcanavoidthecontinuingimpactofthePFICrulesbymakingaspecialelectiontorecognizegainasifyouhadsoldourClassAcommonsharesonthelastdayofthelasttaxableyearduringwhichwewereaPFIC.Youareurgedtoconsultyourowntaxadvisoraboutthiselection.
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Inlieuofbeingsubjecttothespecialtaxrulesdiscussedabove,youmaymakeamark-to-marketelectionwithrespecttoourClassAcommonsharesprovidedsuchClassAcommonsharesaretreatedas“marketablestock.”TheClassAcommonsharesgenerallywillbetreatedasmarketablestockiftheyare“regularlytraded”ona“qualifiedexchangeorothermarket”(withinthemeaningoftheapplicableTreasuryregulations),suchastheNYSE.
Ifyoumakeaneffectivemark-to-marketelection,foreachtaxableyearthatweareaPFICyouwillincludeasordinaryincometheexcessofthefairmarketvalueofourClassAcommonsharesattheendoftheyearoveryouradjustedtaxbasisintheClassAcommonshares.YouwillbeentitledtodeductasanordinarylossineachsuchyeartheexcessofyouradjustedtaxbasisintheClassAcommonsharesovertheirfairmarketvalueattheendoftheyear,butonlytotheextentofthenetamountpreviouslyincludedinincomeasaresultofthemark-to-marketelection.YouradjustedtaxbasisintheClassAcommonshareswillbeincreasedbytheamountofanyincomeinclusionanddecreasedbytheamountofanydeductionsunderthemark-to-marketrules.Inaddition,uponthesaleorotherdispositionofourClassAcommonsharesinayearthatweareaPFIC,anygainwillbetreatedasordinaryincomeandanylosswillbetreatedasordinaryloss,butonlytotheextentofthenetamountofpreviouslyincludedincomeasaresultofthemark-to-marketelection.Ifyoumakeamark-to-marketelection,thetaxrulesthatapplytodistributionsbycorporationsthatarenotPFICswouldapplytodistributionsbyus,exceptthatthereducedratediscussedaboveunder“—TaxationofDividends”wouldnotapply.
Ifyoumakeamark-to-marketelection,itwillbeeffectiveforthetaxableyearforwhichtheelectionismadeandallsubsequenttaxableyearsunlesstheClassAcommonsharesarenolongerregularlytradedonaqualifiedexchangeorothermarket,ortheInternalRevenueServiceconsentstotherevocationoftheelection.Youareurgedtoconsultyourtaxadvisorabouttheavailabilityofthemark-to-marketelection,andwhethermakingtheelectionwouldbeadvisableinyourparticularcircumstances.
Alternatively,youcansometimesavoidthespecialtaxrulesdescribedabovebyelectingtotreataPFICasa“qualifiedelectingfund”underSection1295oftheCode.However,thisoptionisnotavailabletoyoubecausewedonotintendtocomplywiththerequirementsnecessarytopermityoutomakethiselection.
IfweareaPFICforanytaxableyearduringwhichyouholdourClassAcommonsharesandanyofournon-UnitedStatessubsidiariesisalsoaPFIC,youwillbetreatedasowningaproportionateamount(byvalue)ofthesharesofthelower-tierPFICforpurposesoftheapplicationofthePFICrules.
YouareurgedtoconsultyourtaxadvisorsabouttheapplicationofthePFICrulestoanyofoursubsidiaries.
YougenerallywillberequiredtofileInternalRevenueServiceForm8621ifyouholdourClassAcommonsharesinanyyearinwhichweareclassifiedasaPFIC.YouareurgedtoconsultyourtaxadvisorsconcerningtheU.S.federalincometaxconsequencesofholdingClassAcommonsharesifweareconsideredaPFICinanytaxableyear.
TaxationofCapitalGains
ForU.S.federalincometaxpurposes,youwillrecognizetaxablegainorlossonanysaleorexchangeoftheClassAcommonsharesinanamountequaltothedifferencebetweentheamountrealizedfortheClassAcommonsharesandyourtaxbasisintheClassAcommonshares.YourinitialtaxbasisintheClassAcommonshareswillbetheU.S.dollarvalueofthepurchasepricedeterminedonthedateofpurchase.Subjecttothediscussionunder“—PassiveForeignInvestmentCompany”above,suchgainorlossgenerallywillbecapitalgainorlossandgenerallywillbelong-termcapitalgainorlossifyouhaveheldtheClassAcommonsharesformorethanoneyear.Long-termcapitalgainsofnoncorporateUnitedStatesHolders(includingindividuals)areeligibleforreducedratesoftaxation.Thedeductibilityofcapitallossesissubjecttolimitations.AnygainorlossrecognizedbyyougenerallywillbetreatedasUnitedStatessourcegainorloss.
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InformationReportingandBackupWithholding
Ingeneral,informationreportingwillapplytodividendsinrespectofourClassAcommonsharesandtheproceedsfromthesale,exchangeorotherdispositionofourClassAcommonsharesthatarepaidtoyouwithintheUnitedStates(andincertaincases,outsidetheUnitedStates),unlessyouareanexemptrecipient.Backupwithholdingmayapplytosuchpaymentsifyoufailtoprovideataxpayeridentificationnumberorcertificationofexemptstatusorfailtoreportinfulldividendandinterestincome.BackupwithholdingisnotanadditionaltaxandanyamountswithheldunderthebackupwithholdingruleswillbeallowedasarefundoracreditagainstyourU.S.federalincometaxliabilityprovidedtherequiredinformationistimelyfurnishedtotheIRS.
Inaddition,youshouldbeawarethatadditionalreportingrequirementsapply(includingarequirementtofileIRSForm8938,StatementofSpecifiedForeignAssets)withrespecttotheholdingofcertainforeignfinancialassets,includingstockofforeignissuerswhichisnotheldinanaccountmaintainedbycertainfinancialinstitutions,iftheaggregatevalueofallofsuchassetsexceedsUS$50,000attheendofthetaxableyearorUS$75,000atanytimeduringthetaxableyear.ThethresholdsarehigherforindividualslivingoutsideoftheUnitedStatesandmarriedcouplesfilingjointly.YouareencouragedtoconsultyourowntaxadvisorsregardingtheapplicationoftheinformationreportingrulestotheClassAcommonsharesandtheapplicationoftheseadditionalreportingrequirementsforforeignfinancialassetstoyourparticularsituation.
YOU ARE ENCOURAGED TO CONSULT YOUR OWN INDEPENDENT TAX ADVISORS TO DETERMINE THE U.S. FEDERAL, STATE, LOCAL,AND FOREIGN TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF CLASS A COMMON SHARES.
Dividends and Payments Agents
Notapplicable.
Statements by Experts
Notapplicable.
Documents on Display
Statementscontainedinthisannualreportregardingthecontentsofanycontractorotherdocumentarenotnecessarilycomplete,and,wherethecontractorotherdocumentisanexhibittotheannualreport,eachofthesestatementsisqualifiedinallrespectsbytheprovisionsoftheactualcontractorotherdocuments.
WearesubjecttotheinformationalrequirementsoftheExchangeActthatareapplicabletoforeignprivateissuers.Accordingly,wearerequiredtofilereportsandotherinformationwiththeSEC,includingannualreportsonForm20-FandreportsonForm6-K.YoumayinspectandcopythereportsandotherinformationtobefiledwiththeSECatthepublicreferencefacilitiesmaintainedbytheSECat100FStreet,N.E.,WashingtonD.C.20549.CopiesofthematerialsmaybeobtainedfromthePublicReferenceRoomoftheSECat100FStreet,N.E.,Washington,D.C.20549atprescribedrates.ThepublicmayobtaininformationontheoperationoftheSEC’sPublicReferenceRoombycallingtheSECintheUnitedStatesat1-800-SEC-0330.Inaddition,theSECmaintainsanInternetwebsiteathttp://www.sec.gov,fromwhichyoucanelectronicallyaccesstheregistrationstatementanditsmaterials.
Asaforeignprivateissuer,weareexemptundertheExchangeActfrom,amongotherthings,therulesprescribingthefurnishingandcontentofproxystatementsandourexecutiveofficers,directorsandprincipalshareholdersareexemptfromreportingandshortswingprofitrecoveryprovisionscontainedinSection16oftheExchangeAct.InadditionwearenotrequiredundertheExchangeActtofileperiodicreportsandfinancialstatementswiththeSECasfrequentlyoraspromptlyasU.S.companieswhosesecuritiesareregisteredundertheExchangeAct.
YoumayrequestacopyofourSECfilings,atnocost,bycontactingusatourheadquartersatAv.BrigadeiroFariaLima,1384,4ºandar,parteA,SãoPaulo,SP,01451-001,Brazil.Ourinvestorrelationsofficecanbereachedat+55113038-8127.
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Subsidiary Information
Notapplicable.
Common Shares Eligible for Future Sale
AsofMarch31,2019,PagSeguroDigitalhad162,267,064ClassAcommonshares(includingtreasuryshares)issuedandoutstanding,and165,620,861ClassBcommonsharesissuedandoutstanding.
Lock-up Agreements
Lock-up Agreement of PagSeguro Digital
InconnectionwithourJune2018follow-onoffering,PagSeguroDigitalhasagreednottocarryoutanyofthefollowingactionsregardingourClassAcommonsharesofPagSeguroDigitalfor12monthsafterJune21,2018,thedateofourfollow-onoffering:
• offer,pledge,sellorcontracttosellanyClassAcommonshares;
• sellanyoptionorcontracttopurchaseanyClassAcommonshares;
• purchaseanyoptionorcontracttosellanyClassAcommonshares;
• grantanyoption,rightorwarranttopurchase,lendorotherwisetransferordisposeofanyClassAcommonsharesoranyothersecuritiessoownedconvertibleintoorexercisableorexchangeableforClassAcommonshares;
• enterintoanyswaporotheragreementthattransferstoanother,inwholeorinpart,anyoftheeconomicconsequencesofownershipofClassAcommonshares
(whetheranyofthetransactionsdescribedabovearetobesettledbydeliveryofClassAcommonsharesorothersecuritiesofourcompany,incash,orotherwise),orfilearegistrationstatementwiththeSECrelatedtoanyofourClassAcommonshares.
Theselock-uprestrictionsapplytoClassAcommonsharesofPagSeguroDigitalandtosecuritiesconvertibleintoorexercisableorexchangeableforClassAcommonsharesofPagSeguroDigital.
Theselock-uprestrictionsare,however,subjecttocertainexceptions,includinganyissuanceofClassAcommonsharesbyPagSeguroDigitalinconnectionwithamerger,acquisition,jointventureorstrategicparticipationenteredintobyus,providedthat(i)theaggregatenumberofClassAcommonsharesissuedorissuablethereundershallnotexceed10%ofthetotalnumberofClassAcommonsharesissuedandoutstandingasofthedateofsuchmerger,acquisition,jointventureorstrategicparticipation,and(ii)therecipientofsuchClassAcommonsharesshallhaveagreedwiththerepresentativesoftheunderwritersnottocarryoutanyoftheactionsdescribedaboveregardingsuchClassAcommonshares.
Thelock-uprestrictionsapplicabletoPagSeguroDigitalarenotsubjecttowaiverbytheunderwritersofourJune2018follow-onoffering.
Lock-up Agreement of UOL
InconnectionwithourJune2018follow-onoffering,UOLhasagreednottocarryoutanyofthefollowingactionsregardingClassAcommonsharesofPagSeguroDigitalfor12monthsafterJune21,2018,thedateofourfollow-onoffering:
• offer,pledge,sellorcontracttosellanyClassAcommonshares;
• sellanyoptionorcontracttopurchaseanyClassAcommonshares;
• purchaseanyoptionorcontracttosellanyClassAcommonshares;
• grantanyoption,rightorwarranttopurchase,lendorotherwisetransferordisposeofanyClassAcommonsharesoranyothersecuritiessoownedconvertibleintoorexercisableorexchangeableforClassAcommonshares;
• enterintoanyswaporotheragreementthattransferstoanother,inwholeorinpart,anyoftheeconomicconsequencesofownershipofClassAcommonshares
(whetheranyofthetransactionsdescribedabovearetobesettledbydeliveryofClassAcommonsharesorothersecuritiesofourcompany,incash,orotherwise),orrequestthatPagSeguroDigitalfilearegistrationstatementwiththeSECrelatedtothesalebyUOLofanyClassAcommonshares.
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Theselock-uprestrictionsapplytoClassAcommonsharesofPagSeguroDigitalandtosecuritiesconvertibleintoorexercisableorexchangeableforClassAcommonsharesofPagSeguroDigital.
Thelock-uprestrictionsapplicabletoUOLarenotsubjecttowaiverbytheunderwritersofourJune2018follow-onofferingortoanyexceptions.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General
Ouractivitiesexposeustoavarietyoffinancialrisks:foreignexchangerisk,fraudrisk(chargebacks),creditriskandliquidityrisk.Ouroverallriskmanagementprogramfocusesontheunpredictabilityoffinancialmarketsandseekstominimizepotentialadverseeffectsonourfinancialperformance.Weusederivativefinancialinstrumentstohedgecertainriskexposures,whenapplicable.See,Note11toourauditedconsolidatedfinancialstatements.
AmongthemainmarketriskfactorsthatmayaffectthePagSegurobusinessarethefollowing:
Foreign Exchange Risk
Foreignexchangeriskariseswhenfuturecommercialtransactionsorrecognizedassetsorliabilitiesaredenominatedinacurrencythatisnottheentity’sfunctionalcurrency.AtDecember31,2018and2017,wedidnothaveanyborrowings.AtDecember31,2016,wehadborrowingsdenominatedinforeigncurrencythatwerelinkedtoderivatives(swaps).
Fraud Risk (Chargebacks)
Oursalestransactionsaresusceptibletopotentiallyfraudulentorimpropersales.Weusethefollowingtwomainprocedurestocontrolfraudrisk:
Thefirstprocedureconsistsofmonitoring,onarealtimebasis,transactionscarriedoutusingcreditanddebitcardsandboletos throughananti-fraudsystem.Thisprocessapprovesorrejectssuspicioustransactionsatthetimeoftheauthorization,basedonstatisticalmodelsthatarerevisedonanongoingbasis.
Thesecondproceduredetectschargebacksanddisputesnotidentifiedbythefirstprocedure.Thisisacomplementaryprocedureandincreasesourabilitytoavoidandmanagechargebacks.
Credit Risk
Creditriskismanagedonagroupbasis.Thisriskislimitedtothepossibilityofdefaultby(a)cardissuers,whoarerequiredtotransferthefeeschargedfortransactionscarriedoutbytheircardholderstothecreditanddebitcardschemes,and/or(b)acquirers,whichweusetoapprovetransactionswithcardissuers.
Inordertomitigatethisrisk,PagSeguroBrazilhasestablishedaCreditandLiquidityRiskCommittee,whoseresponsibilityistoassessthelevelofriskofeachcardissuerservedbyus,classifyingthemintothreegroups:
(i) cardissuerspresentingalowlevelofrisk,whohavecreditratingsassignedbyFitch,S&PorMoody’sandwhodonotrequireadditionalmonitoring;
(ii) cardissuerspresentingamediumlevelofrisk,whoaremonitoredinaccordancewithBaselrequirementsandproperty,plantsandequipmentratios;and
(iii) cardissuerspresentingahighlevelofrisk,whoareassessedbytheCreditandLiquidityRiskCommitteeatmonthlymeetings.
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Nocreditlimitswereexceededin2018,2017or2016.Managementdoesnotexpectanylossesfromnon-performancebythesecounterpartiesinadditiontotheamountsalreadyrecognizedaschargebacks,presentedasfraudrisk.
Liquidity Risk
Wemanageliquidityriskbymaintainingreserves,bankandcreditlinestoobtainborrowingswhendeemedappropriate.Wecontinuouslymonitoractualandprojectedcashflows,andmatchthematurityprofileofourfinancialassetsandliabilitiesinordertoensurewehavesufficientfundstohonorourobligationstothirdpartiesandmeetouroperationalneeds.
Weinvestsurpluscashininterest-bearingfinancialinvestments,choosinginstrumentswithappropriatematurityorsufficientliquiditytoprovideadequatemarginsasdeterminedbytheforecasts.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
None.
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
OnJanuary23,2018,wecommencedourIPO.OnJanuary26,2018,weclosedourIPO,pursuanttowhichweissuedandsold50,925,642ClassAcommonsharesandUOLsold70,267,746ClassAcommonshares.GoldmanSachs&Co.LLCandMorganStanley&Co.LLCactedastherepresentativesoftheunderwritersinourIPO.The121,193,388registeredClassAcommonsharesweresoldtothepublicatapriceofUS$21.50perClassAcommonshare,foranaggregatepriceofUS$2,265,789,433.WeincurredapproximatelyUS$5.3millioninexpensesrelatedtoourIPOandpaidapproximatelyUS$91.2millioninunderwritingdiscountsandcommissions.
OnJune18,2018,wecommencedourfollow-onoffering.OnJune26,2018,weclosedourfollow-onoffering,pursuanttowhichweissuedandsold11,550,000ClassAcommonsharesandUOLsold24,400,000ClassAcommonshares.GoldmanSachs&Co.LLCandMorganStanley&Co.LLCactedastheunderwritersinourJune2018follow-onoffering.The35,950,000registeredClassAcommonsharesweresoldtothepublicatapriceofUS$29.25perClassAcommonshare,foranaggregatepriceofUS$1,110,037,500.WeincurredapproximatelyUS$1.8millioninexpensesrelatedtoourJune2018follow-onofferingandpaidapproximatleyUS$7.9millioninunderwritingdiscountsandcommissions.
ThenetproceedstoPagSeguroDigitalfromthesaleofClassAcommonsharesinourJanuary2018IPOandJune2018follow-onofferingwereapproximatelyUS$1,045.8millionandUS$328.1million,respectively,afterdeductingunderwritingdiscountsandcommissionsandestimatedexpensespayablebyus.
Todate,wehaveusedournetproceedsfromourJanuary2018IPOandJune2018follow-onofferingtofinanceworkingcapital,particularlytheearlypaymentofreceivablesfeaturethatweoffermerchants,andtofundfutureselectiveacquisitionsandinvestmentsinbusinesses,technologiesorproductsthatarecomplementarytoourbusiness.WecurrentlyplantocontinueusingournetproceedsfromourJanuary2018IPOandJune2018follow-onofferingforthesamepurposes.Anyremainingnetproceedswillbeusedforothergeneralcorporatepurposes.OurmanagementwillhavebroaddiscretioninallocatingthenetproceedsfromourJanuary2018IPOandJune2018follow-onoffering.
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WedidnotreceiveanyproceedsfromthesaleofcommonsharesbyUOLinourJanuary2018IPOandJune2018follow-onoffering.
ITEM 15. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Wehaveevaluated,withtheparticipationofourchiefexecutiveofficerandchieffinancialofficer,theeffectivenessofourdisclosurecontrolsandproceduresasofDecember31,2018.Thereareinherentlimitationstotheeffectivenessofanysystemofdisclosurecontrolsandprocedures,includingthepossibilityofhumanerrorandthecircumventionoroverridingofthecontrolsandprocedures.Accordingly,eveneffectivedisclosurecontrolsandprocedurescanonlyprovidereasonableassuranceofachievingtheircontrolobjectives.Baseduponourevaluation,ourchiefexecutiveofficerandchieffinancialofficerconcludedthatourdisclosurecontrolsandprocedureswereeffectiveasofDecember31,2018toprovidereasonableassurancethatinformationrequiredtobedisclosedbyusinthereportsthatwefileorsubmitundertheExchangeActisrecorded,processed,summarizedandreported,withinthetimeperiodsspecifiedintheapplicablerulesandforms,andthatitisaccumulatedandcommunicatedtoourManagement,includingourchiefexecutiveofficerandchieffinancialofficer,asappropriatetoallowtimelydecisionsregardingrequireddisclosure.
Management’s Report on Internal Control over Financial Reporting
Ourmanagementisresponsibleforestablishingandmaintainingadequateinternalcontroloverfinancialreportingandforassessingtheeffectivenessofinternalcontroloverfinancialreporting.
Ourinternalcontroloverfinancialreportingisaprocessdesignedby,orunderthesupervisionof,ourPrincipalExecutiveOfficerandourChiefFinancialandInvestorRelationsOfficerandChiefAccountingOfficer,andeffectedbyourboardofdirectors,managementandotheremployees,andisdesignedtoprovidereasonableassuranceregardingthereliabilityoffinancialreportingandofthepreparationofourconsolidatedfinancialstatementsforexternalpurposes,inaccordancewithIFRSasissuedbytheIASB.
Duetoitsinherentlimitations,internalcontroloverfinancialreportingmaynotpreventordetectmisstatements.Also,projectionsofanyevaluationofeffectivenessofinternalcontroloverfinancialreportingtofutureperiodsaresubjecttotheriskthatcontrolsmaybecomeinadequatebecauseofchangesinconditions,orthatthedegreeofcompliancewithourpoliciesorproceduresmaydeteriorate.
OurmanagementhasassessedtheeffectivenessofourinternalcontroloverfinancialreportingasofDecember31,2018,baseduponthecriteriaestablishedinInternalControls—IntegratedFramework(2013),issuedbytheCommitteeofSponsoringOrganizationsofTreadwayCommission(COSO).Basedonthisassessmentandcriteria,ourmanagementhasconcludedthatourinternalcontroloverfinancialreportingwaseffectiveasofDecember31,2018.
Attestation Report of the Registered Public Accounting Firm
Thisannualreportdoesnotincludeanattestationreportofourindependentregisteredpublicaccountingfirmonourinternalcontroloverfinancialreporting.
Changes in internal control over financial reporting
Notapplicable.
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ITEM 16. [RESERVED]
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
AtourboardmeetingheldonJanuary8,2018,weestablishedanauditcommittee,asdefinedundersection3(a)(58)oftheExchangeAct.OurboardofdirectorshasdeterminedthatNoemiaGushikenqualifiesasan“auditcommitteefinancialexpert”asdefinedforthepurposesofthisItem16AinItem16ofForm20F.NoemiaGushikenisan“independentdirector”withinthemeaningoftheSECrules.Formoreinformation,see“Item6.Directors,SeniorManagementandEmployees—AuditCommittee.”
ITEM 16B. CODE OF ETHICS
Weconsiderethicstobeanessentialvalueforourreputationandlongevity.PagSeguroDigital,includingallofouremployees,issubjecttoUOL’sCodeofEthicsandConduct,ortheCodeofEthics.WewillreporteachyearunderItem16BofourannualreportonForm20-FanywaiversoftheCodeofEthics,infavorofourprincipalexecutiveofficer,chieffinancialofficer,principalaccountingofficerandpersonsperformingsimilarfunctions.TheCodeofEthicsgovernsallrelationsbetweencompaniesintheUOLgroupandtheirstakeholders(shareholders,clients,employees,suppliers,serviceproviders,governments,communitiesandsociety).AcopyoftheCodeofEthicsisavailableonourwebsiteathttp://investors.pagseguro.com/Cache/1500109327.PDF?O=PDF&T=&Y=&D=&FID=1500109327&iid=9282297(ThisURLisintendedtobeaninactivetextualreferenceonly.Itisnotintendedtobeanactivehyperlinktoourwebsite.Theinformationonourwebsite,whichmightbeaccessiblethroughahyperlinkresultingfromthisURL,isnotandshallnotbedeemedtobe,incorporatedintothisannualreport).
ITEM 16C. Principal Accountant Fees and Services
Audit and Non-Audit Fees
ThefollowingtablesetsforththefeesbilledtousbyourindependentregisteredandpublicaccountingfirmduringtheyearsendedDecember31,2018and2017.OurindependentaccountingfirmwasPricewaterhouseCoopersAuditoresIndependentesfortheyearsendedDecember31,2018and2017.
Year ended December 31,
2018 2017
(in thousands of
reais ) Auditfees(1) 2,687.6 4,211.6Audit-relatedfees — —Taxfees — —Allotherfees(2) — 196.0
Total 2,687.6 4,407.6
(1) “AuditFees”includefeesfor(i)theauditofourannualconsolidatedfinancialstatementsfortheyearsendedDecember31,2018,2017and2016,preparedinaccordancewithIFRS,asissuedbythe
IASB,(ii)thereviewofourinterimfinancialstatementsforthethree-monthperiodsendedMarch31,2018and2017,forthesix-monthperiodsendedJune30,2018and2017andforthenine-monthperiodsSeptember30,2018and2017and(iii)thepreparationandissuanceofcomfortlettersinconnectionwithourJanuary2018IPOandJune2018follow-onoffering.
(2) “Allotherfees”includefeesforservicesrelatedtothereconciliationoftransactionsandamountswithcreditcardissuers.
Audit Committee Pre-Approval Policies and Procedures
InaccordancewiththerequirementsoftheUSSarbanes-OxleyActof2002andrulesissuedbytheSEC,inconnectionwiththeestablishmentofourauditcommittee(whichwasundertakenasaresultofourIPOinJanuary2018),weintroducedaprocedureforthereviewandpre-approvalofanyservicesperformedbyPricewaterhouseCoopersAuditoresIndependentes,includingauditservices,auditrelatedservices,taxservicesandotherservices.TheprocedurerequiresthatallproposedengagementsofPricewaterhouseCoopersAuditoresIndependentesforauditandpermittednon-auditservicesaresubmittedtotheauditcommitteeforapprovalpriortothebeginningofanysuchservices.
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ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Notapplicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
OnOctober30,2018,weannouncedtheadoptionofoursharerepurchaseprograminanaggregateamountofuptoUS$250million.Oursharerepurchaseprogramwentintoeffectinthefourthquarterof2018anddoesnothaveafixedexpirationdate.TheprogrammaybeexecutedincompliancewithRule10b-18undertheExchangeAct.
Thetablebelowsummarizestherepurchaseswemadeintheperiodsindicated.
Month
Total Number of Class A Common Shares Purchased
Average PricePaid Per Class A
Common Share (R$)
Total Number of Class A Common
Shares Purchased as Part of Share
Repurchase Program
Approximate DollarValue of Class A Common Shares that May Yet Be Purchased Under Share Repurchase
Program (1) (US$, in millions)
January2018 — — — —February2018 — — — —March2018 — — — —April2018 — — — —May2018 — — — —June2018 — — — —July2018 — — — —August2018 — — — —September2018 — — — —October2018 — — — —November2018 3,400 91.87095 3,400 249.9December2018 500,242 77.97326 500,242 239.9(1) Oursharerepurchaseprogram,whichwasadoptedinOctober2018authorizedtherepurchaseinanaggregateamountofuptoUS$250millionwithnofixedexpirationdate.
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
PricewaterhouseCoopersAuditoresIndependenteswasappointedtoactasourindependentpublicaccountingfirmtoauditourconsolidatedfinancialstatementsforthefiscalyearsendedDecember31,2017and2018,untilthefilingofthisForm20-FwiththeSEC.OnMarch14,2019,wedismissedPricewaterhouseCoopersAuditoresIndependentesasourindependentpublicaccountingfirm,effectiveuponthefilingofthisannualreport.OnMarch2,2019ourauditcommitteeapprovedtheappointmentofErnst&YoungAuditoresIndependentesS.S.toactasourindependentpublicaccountingfirmbeginningwithareviewofourquarterlyinformationforthefirstquarterof2019.
ThereportsofPricewaterhouseCoopersAuditoresIndependentesonourfinancialstatementsforeachofthefiscalyearsendedonDecember31,2017and2018containednoadverseopinionordisclaimerofopinionandwerenotqualifiedormodifiedastouncertainty,auditscopeoraccountingprinciples.DuringthefiscalyearsendedDecember31,2017and2018andthesubsequentinterimperiodthroughMarch14,2019,therehavebeennodisagreementswithPricewaterhouseCoopersAuditoresIndependentesonanymatterofaccountingprinciplesorpractices,financialstatementdisclosure,orauditingscopeorprocedures,whichdisagreement,ifnotresolvedtothesatisfactionofPricewaterhouseCoopersAuditoresIndependentes,wouldhavecausedPricewaterhouseCoopersAuditoresIndependentestomakeareferencetothesubjectmatterofthedisagreementinconnectionwithitsauditreportsforsuchfiscalyears,andtherewereno“reportableevents”asthattermisdefinedinItem16F(a)(1)(v)ofForm20-F.
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WehaveprovidedPricewaterhouseCoopersAuditoresIndependenteswithacopyoftheforegoingdisclosure,andhaverequestedthatitfurnishuswithaletteraddressedtotheSECstatingwhetherornotitagreeswithsuchdisclosure.AcopyofthisletterisfiledasExhibit15.1tothisForm20F.
DuringthefiscalyearsendedDecember31,2017and2018andthesubsequentinterimperiodthroughMarch14,2019,wedidnotconsultErnst&YoungAuditoresIndependentesS.S.astotheapplicationofaccountingprinciplestoaspecifiedtransaction,eithercompletedorproposed,thetypeofauditopinionthatmightberenderedonourfinancialstatementsoranymatterthatwaseitherthesubjectofadisagreement(asdefinedinItem16F(a)(1)(iv)ofForm20F)ora“reportableevent”(asdescribedinItem16F(a)(1)(v)ofForm20F).
ITEM 16G. CORPORATE GOVERNANCE
Significant Differences between our Current Corporate Governance Practices and the U.S. Corporate Governance Standards
WearesubjecttotheNYSEcorporategovernancelistingstandards.Asaforeignprivateissuer,however,thestandardsapplicabletousareconsiderablydifferentfromthestandardsthatapplytoU.S.listedcompanies.UndertheNYSErules,asaforeignprivateissuer,wemayfollowthe“homecountry”practiceoftheCaymanIslands,exceptthatwearerequired(a)tohaveanauditcommitteeorauditboardthatmeetscertainrequirements,pursuanttoanexemptionavailabletoforeignprivateissuers(subjecttothephase-inrulesdescribedaboveunder“Item6.Directors,SeniorManagementandEmployees—AuditCommittee”)(b)toprovidepromptcertificationbyourchiefexecutiveofficerofanymaterialnon-compliancewithanycorporategovernancerules;and(c)toprovideabriefdescriptionofthesignificantdifferencesbetweenourcorporategovernancepracticesandtheNYSEcorporategovernancepracticerequiredtobefollowedbyU.S.listedcompanies.
AsummaryofthesignificantdifferencesbetweenourcorporategovernancepracticesandthoserequiredofU.S.listedcompaniesisincludedbelow.
Majority of Independent Directors
TheNYSErulesapplicabletoU.S.companiesrequireamajorityoftheboardofdirectorstobecomprisedofIndependentDirectors.Independenceisdefinedbyvariouscriteria,includingtheabsenceofamaterialrelationshipbetweenthedirectorandthelistedcompany.ThisisnotrequiredbythelawsoftheCaymanIslands.WhileourdirectorsmeetthequalificationrequirementsofCaymancorporatelaw,wedonotbelievethatamajorityofourdirectorswouldbeconsideredindependentundertheNYSEtestfordirectorindependence.Currently,threeofourdirectors,NoemiaGushiken,MarcosdeBarrosLisboaandClevelandPratesTeixeira,areindependent.
Compensation committee
TheNYSErulesapplicabletoU.S.companiesrequirethecompanytohave,andtocertifythatithasandwillcontinuetohave,acompensationcommitteecomposedentirelyofindependentdirectorsandgovernedbyawrittencharteraddressingthecommittee’srequiredpurposeanddetailingitsrequiredresponsibilities.ThisisnotrequiredbythelawsoftheCaymanIslands.Ourboardofdirectorsisresponsiblefordeterminingtheindividualcompensationofeachexecutiveofficer,aswellasthecompensationofourboardandcommitteemembers.Inmakingsuchdeterminations,theboardwillreviewtheperformanceofourexecutiveofficers,includingtheperformanceofourprincipalexecutiveofficer,whowillberequiredtoexcusehim-orherselffromdiscussionsregardinghisorherperformanceandcompensation.
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ITEM 16H. MINE SAFETY DISCLOSURE
Notapplicable.
ITEM 17. FINANCIAL STATEMENTS
Notapplicable.
ITEM 18. FINANCIAL STATEMENTS
SeepagesF-1throughF-47,incorporatedhereinbyreference.
Item 19. EXHIBITSNo. Description1.1
MemorandumandArticlesofAssociationoftheRegistrant(incorporatedbyreferencetoExhibit3.1ofFormF-1/AfiledonJanuary10,2018).
4.1†
EnglishtranslationoftheAgreementfortheSupplyofEquipment–PINpadTerminals,datedasofJune26,2014,amongPAXBRComerciodeEquipamentosdeInformáticaLtda.,CISEletrônicaIndústriaeComércioLtda.,andNet+PhoneTelecomunicaçõesLtda.,including1stAddendumtotheAgreementfortheSupplyofEquipment,datedasofOctober21,2014,amongPAXBRComerciodeEquipamentosdeInformáticaLtda.,CISEletrônicaIndústriaeComércioLtda.,DensamdaAmazôniaIndustriaEletrônicaLtda.,andNet+PhoneTelecomunicaçõesLtda.;2ndAddendumtotheAgreementfortheSupplyofEquipment,datedasofJuly3,2015,amongPAXBRComerciodeEquipamentosdeInformáticaLtda.,CISEletrônicaIndústriaeComércioLtda.,DensamdaAmazôniaIndustriaEletrônicaLtda.,TransireFabricaçãodeComponentesEletrônicosLtda.,andNet+PhoneTelecomunicaçõesLtda.;3rdAddendumtotheAgreementfortheSupplyofEquipment,datedasofOctober8,2015,amongPAXBRComerciodeEquipamentosdeInformáticaLtda.,TransireFabricaçãodeComponentesEletrônicosLtda.,andNet+PhoneTelecomunicaçõesLtda.;StatementofLiabilityfortheApplicationSigner’sUseonPAXTerminals,datedasofMarch9,2016,amongPAXBRComerciodeEquipamentosdeInformáticaLtda.andNet+PhoneTelecomunicaçõesLtda.;4thAddendumtotheAgreementfortheSupplyofEquipment,datedasofMay20,2016,amongPAXBRComerciodeEquipamentosdeInformáticaLtda.,TransireFabricaçãodeComponentesEletrônicosLtda.,andNet+PhoneTelecomunicaçõesLtda.;5thAddendumtotheAgreementfortheSupplyofEquipment,datedasofDecember9,2016,amongPAXBRComerciodeEquipamentosdeInformáticaLtda.,TransireFabricaçãodeComponentesEletrônicosLtda.,andNet+PhoneTelecomunicaçõesLtda.;6thAddendumtotheAgreementfortheSupplyofEquipment,datedasofFebruary6,2017,amongPAXBRComerciodeEquipamentosdeInformáticaLtda.,TransireFabricaçãodeComponentesEletrônicosLtda.,andNet+PhoneTelecomunicaçõesLtda.(incorporatedbyreferencetoExhibit10.1ofFormF-1filedonDecember26,2017).
4.2†
Englishtranslationof7thAddendumtotheAgreementfortheSupplyofEquipment,datedasofAugust25,2017,amongNet+PhoneTelecomunicaçõesLtda.,PAXBRComércioeServiçosdeEquipamentosdeInformáticaLtda.andTransireFabricaçãodeComponentesEletrônicosLtda.
4.3†
EnglishtranslationoftheColocationAgreement,datedasofJanuary1,2017,betweenPagseguroInternetS.A.andUOLDiveoTecnologiaLtda.,includingCommercialProposal–ColocationCenter–OPT-17/21630,datedasofJanuary1,2017,fromUOLDiveoTecnologiaLtda.toPagseguroInternetLtda.;TechnicalProposal–GleteColocationDatacenter,datedasofJanuary1,2017,fromUOLDiveoTecnologiaLtda.toPagseguroInternetLtda.;CommercialProposal–TamboréColocationCenter–OPT-17-17/21632,datedasofJanuary1,2017,fromUOLDiveoTecnologiaLtda.toPagseguroInternetLtda.;andTechnicalProposal–TamboréColocationDatacenter,datedasofJanuary1,2017,fromUOLDiveoTecnologiaLtda.toPagseguroInternetLtda.(incorporatedbyreferencetoExhibit10.2ofFormF-1filedonDecember26,2017).
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No. Description4.4†
EnglishtranslationoftheHostingAgreement,datedasofJanuary1,2017,betweenPagseguroInternetS.A.andUOLDiveoTecnologiaLtda.,includingCommercialProposal–Hosting/APM–OPT-17/21629,datedasofJanuary1,2017,fromUOLDiveoTecnologiaLtda.toPagseguroInternetLtda.;TechnicalProposal–Hosting–TamboréDTC&LicensingServiceandDynatraceSupport–RUXIT,datedasofJanuary1,2017,fromUOLDiveoTecnologiaLtda.toPagseguroInternetLtda.;CommercialProposal–DDosProtection–OPT-17/21631,datedasofJanuary1,2017,fromUOLDiveoTecnologiaLtda.toPagseguroInternetLtda.;TechnicalProposal–DDoSProtection,datedasofJanuary1,2017,fromUOLDiveoTecnologiaLtda.toPagseguroInternetLtda.;CommercialProposal–WAF–WebApplicationFirewall–OPT-17/21635,datedasofJanuary1,2017,fromUOLDiveoTecnologiaLtda.toPagseguroInternetLtda.;TechnicalProposal–WAF–WebApplicationFirewall,datedasofJanuary1,2017,fromUOLDiveoTecnologiaLtda.toPagseguroInternetLtda.;CommercialProposal–BrandProtection–OPT-17/21636,datedasofJanuary1,2017,fromUOLDiveoTecnologiaLtda.toPagseguroInternetLtda.;TechnicalProposal–BrandProtection,datedasofJanuary1,2017,fromUOLDiveoTecnologiaLtda.toPagseguroInternetLtda.;CommercialProposal–BPAG&NOTANET–OPT-17/21638,datedasofJanuary1,2017,fromUOLDiveoTecnologiaLtda.toPagseguroInternetLtda.;andTechnicalProposal–PaymentMeansManagementServices,datedasofJanuary1,2017,fromUOLDiveoTecnologiaLtda.toPagseguroInternetLtda.(incorporatedbyreferencetoExhibit10.3ofFormF-1filedonDecember26,2017).
4.5†
EnglishtranslationoftheServiceAgreement,datedasofJanuary1,2017,betweenPagseguroInternetS.A.andUOLDiveoTecnologiaLtda.,includingCommercialProposal–AllocationofResources–OPT-17/21087,datedasofJanuary1,2017,fromUOLDiveoTecnologiaLtda.toPagseguroInternetLtda.;andTechnicalProposal–AllocationofResources,datedasofJanuary1,2017,fromUOLDiveoTecnologiaLtda.toPagseguroInternetLtda.(incorporatedbyreferencetoExhibit10.4ofFormF-1filedonDecember26,2017).
4.6†
EnglishtranslationoftheTelecommunicationsServiceAgreement,datedasofJanuary1,2017,betweenPagseguroInternetS.A.andUOLDiveoTecnologiaLtda.,includingCommercialProposal–TELECOMServices,datedasofJanuary1,2017,fromUOLDiveoTecnologiaLtda.toPagseguroInternetLtda.;andTechnicalProposal–Lan-to-LanbetweenDataCenters–Lan-to-Lan,datedasofJanuary1,2017,fromUOLDiveoTecnologiaLtda.toPagseguroInternetLtda.(incorporatedbyreferencetoExhibit10.5ofFormF-1filedonDecember26,2017).
4.7†
LicenseAgreement,datedasofJune18,2015,betweenMasterCardInternationalIncorporatedandPagseguroInternetLtda.,includingtheAcceptanceLetter,datedasofJune18,2015,fromMasterCardInternationalIncorporatedtoPagseguroInternetLtda.;theSummaryofLicensesGranted,datedasofJune18,2015;andSupplementtoMasterCardLicenseAgreement,effectiveasofMarch11,2015,betweenMasterCardInternationalIncorporatedandPagseguroS.A.(incorporatedbyreferencetoExhibit10.6ofFormF-1filedonDecember26,2017).
4.8†
EnglishtranslationoftheServiceAgreement,datedasofJanuary1,2017,betweenPagseguroInternetS.A.andUOLDiveoTecnologiaLtda.,includingCommercialProposal–ManagedServices–OPT-17/21628,datedasofJanuary1,2017,fromUOLDiveoTecnologiaLtda.toPagseguroInternetLtda.;andTechnicalProposal–ITAssetManagementandMonitoring,datedasofJanuary1,2017,fromUOLDiveoTecnologiaLtda.toPagseguroInternetLtda.(incorporatedbyreferencetoExhibit10.7ofFormF-1filedonDecember26,2017).
4.9
VisaPaymentArrangementsParticipationandTrademarkLicenseAgreement,datedasofAugust24,2015,betweenVisadoBrasilEmpreendimentosLtda.andPagseguroInternetLtda.(incorporatedbyreferencetoExhibit10.8ofFormF-1filedonDecember26,2017).
4.10
FirstAmendmenttotheVisaPaymentArrangementsParticipationandTrademarkLicenseAgreement,datedasofJuly3,2017,betweenVisadoBrasilEmpreendimentosLtda.andPagseguroInternetLtda.
4.11
AdvertisingSpaceAssignmentAgreementforInsertionofAdvertisements,datedasofAugust1,2015,byandbetweenUniversoOnlineS.A.andPagseguroInternetLtda.,including1stAddendumtotheAdvertisingSpaceAssignmentAgreementforInsertionofAdvertisements,datedasofJanuary1,2017andUOL–TableofPrices–August2016.(incorporatedbyreferencetoExhibit10.9ofFormF-1filedonDecember26,2017).
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No. Description4.12
EnglishtranslationoftheLong-TermIncentivePlan(LTIP)RestrictedSharesPlan–UniversoOnlineS.A.,datedasofJuly29,2015.(incorporatedbyreferencetoExhibit10.10ofFormF-1filedonDecember26,2017).
4.13
FormofIndemnificationAgreement(incorporatedbyreferencetoExhibit10.11ofFormF-1filedonDecember26,2017).
4.14
EnglishtranslationoftheLong-TermIncentivePlan–Goals(LTIP-Goals)–PagseguroInternetS.A.,datedasofDecember18,2018.
4.15
EnglishtranslationoftheAgreementforAccreditorParticipationinELOPaymentArrangements,datedasofFebruary13,2019,betweenEloServiçosS.A.andPagSeguroInternetS.A.
8.1
SubsidiariesoftheRegistrant.
11.1
EnglishtranslationoftheUOLCodeofEthicsandConduct(incorporatedbyreferencetoExhibit11.1ofForm20-FfiledonApril6,2018).
12.1
CertificationofLuizFrias,PrincipalExecutiveOfficer,PursuanttoSection302oftheSarbanes-OxleyActof2002.
12.2
CertificationofEduardoAlcaro,ChiefFinancialandInvestorRelationsOfficerandChiefAccountingOfficer,PursuanttoSection302oftheSarbanes-OxleyActof2002.
13.1
CertificationofLuizFrias,PrincipalExecutiveOfficer,PursuanttoSection906oftheSarbanes-OxleyActof2002.
13.2
CertificationofEduardoAlcaro,ChiefFinancialandInvestorRelationsOfficerandChiefAccountingOfficer,PursuanttoSection906oftheSarbanes-OxleyActof2002.
15.1
LetterfromPricewaterhouseCoopersAuditoresIndependentestotheSEC,datedApril15,2019,regardingthechangeinindependentaccountingfirm.
99.1
ConsentofDatafolha(incorporatedbyreferencetoExhibit99.1ofFormF-1filedonDecember26,2017).
101.INS
XBRLInstanceDocument
101.SCH
XBRLTaxonomyExtensionSchemaDocument
101.CAL
XBRLTaxonomyExtensionCalculationLinkbaseDocument
101.DEF
XBRLTaxonomyExtensionDefinitionLinkbaseDocument
101.LAB
XBRLTaxonomyExtensionLabelLinkbaseDocument
101.PRE
XBRLTaxonomyExtensionPresentationLinkbaseDocument
(†) Certainidentifiedconfidentialinformationhasbeenredactedfromthisexhibitbecauseitisboth(i)notmaterialand(ii)wouldbecompetitivelyharmfulifpubliclydisclosed.
GLOSSARY OF TERMS
“ABECS”meanstheBrazilianAssociationofCreditCardandServicesCompanies(Associação Brasileira de Empresas de Cartões de Crédito e Serviços ).
“ABRANET”meanstheBrazilianInternetAssociation(Associação Brasileira de Internet ).
“acquirer”meansapaymentinstitutionthatdoesnotmanagepaymentaccounts,butenablesmerchantstoacceptpaymentcardsissuedbyapaymentinstitutionorbyafinancialinstitutionthatparticipatesinacardscheme.Theacquirerreceivesthecardtransactiondetailsfromthemerchant’sterminal,passesthemtothecardissuerviathecardschemeforauthorization,andcompletestheprocessingofthetransaction.Theacquirerarrangessettlementofthecardtransactionandcreditsthemerchant’sbankaccountwiththefundsinaccordancewithitsserviceagreementwiththemerchant.Theacquireralsodealswithanychargebacksthatmaybereceivedviathecardissuerregardingconsumertransactionswithmerchants.
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“activemerchant”meansamerchantthathascompletedatleastonetransactionduringthe12monthspriortoaspecifieddate.
“averagespendingperactivemerchant”iscalculatedbydividingourtotalTPVforaspecifiedperiodbythenumberofactivemerchantsinsuchperiod.
“boleto ”meansaprintabledocumentissuedbymerchantsthatisusedtomakepaymentsinBrazil.Boletos canbeusedtopaybillsforproductsorservices,utilitiesortaxes.Eachboleto referstoaspecificmerchantandcustomertransaction,andincludesthemerchant’sname,customerinformation,expirationdateandtotalamountdue,plusaserialnumberthatidentifiestheaccounttobecreditedandabarcodesotheentiredocumentcanbereadandprocessedbyaBrazilianATM.Aboleto canbepaidincashatabankteller,atanATM,orbybanktransfer.PagSeguro’spaymentplatformandmerchantaccountcanbeusedtopayboletos .
“BrazilianPaymentsSystem”(Sistema de Pagamentos Brasileiro, orSPB)referstoalltheentities,systemsandproceduresrelatedtotheclearingandsettlementoffundstransfer,foreigncurrencyoperations,financialassets,andsecuritiestransactionsinBrazil.TheSPBincludessystemsinchargeofcheckclearing;theclearingandsettlementofelectronicdebitandcreditorders,fundstransfer,andotherfinancialassets;theclearingandsettlementofsecuritiestransactions;theclearingandsettlementofcommoditiesandfuturestransactions;and,sincetheintroductionofLawNo.12,865/13ofMay17,2013,paymentschemesandpaymentinstitutions.
“cardscheme”meansapaymentnetworkusingpaymentcards,suchasdebitorcreditcards.Anybankoranyothereligibleinstitutioncanbecomeamemberofacardscheme,allowingittoissuepaymentcardsoperatingonthecardscheme.Thecardschemepassescardtransactiondetailsfromtheacquirertotheissuerandpassespaymentsbacktotheacquirer,whichinturnpaysthemerchant.MasterCardandVisaaremajorcardschemes.
“Chargeback”referstoaclaimwheretheconsumermakesapurchaseusingapaymentcardandsubsequentlyrequestsareversalofthetransactionamountfromthecardissueronthebasisofacommercialclaim(forexample,ifthegoodsarenotdelivered,oraredelivereddamaged).Chargebacksoccurmorefrequentlyinonlinetransactionsthaninin-persontransactions,andmorefrequentlyforgoodsthanforservices.
“Chargebacksrelatedtofraudulenttransactions”referstochargebackswheretheconsumer’srequestforareversalofthetransactionamountisrelatedtoanillegitimatetransaction.
“eWallet”isadigitalwalletthatofferscustomerstheabilitytomakepaymentsonlineusingavarietyofpaymentmethods,includingcards,withouthavingtotypeinthecarddetailseachtime.
“FIDC”meansFundo de Investimento em Direitos Creditórios (FundforInvestmentinReceivables),atypeofinvestmentfundestablishedunderBrazilianlawcomposedofreceivables.
“GPRS”means“GeneralPacketRadioService,”apacket-basedwirelesscommunicationserviceonthe2Gand3GcellularcommunicationsystemsthatprovidescontinuousconnectiontotheInternetformobilephoneandcomputerusers.
“GrupoFolha”meansthegroupofcompaniesofwhichPagSeguroisapart.GrupoFolhaalsoincludesthenewspaperFolhadeS.Paulo;theeCommercelogisticscompaniesTransfolhaandSPDL;theresearchcompanyDatafolha;theprintingcompanyPlural;thedigitalcontentandproductscompaniesUOL,UOLHostandUOLAd_Lab;thee-learningcompanyUOLEdtech;andthecloudandinformationtechnology,orIT,infrastructureservicescompanyUOLDiveo.
“IndividualMicroEntrepreneurs”referstobusinessesthatareclassifiedassuchinaccordancewiththestandardsegmentationofBrazilianbusinessesbysizeunderBrazilianLawNo.123/2006,knownastheGeneralLawonMicroandSmallEnterprises,asamended,andtheBraziliantaxcode.ThisclassificationreferstobusinesseswithannualgrossrevenuesofuptoR$81,000forperiodsthroughDecember31,2018.
“LargeCompanies”referstolegalentitieswithannualgrossrevenuesinexcessofR$78million.Thiscommonly-useddefinitioninBrazilreferstocompaniesthatarenoteligibleforthedeemedprofit(lucro presumido )taxationregimeunderBrazilianLawNo.9,718/1998,asamended.
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“MDR”meansmerchantdiscountrate,acommissionthatwewithholdfromthetransactionvaluepaidtothemerchant.
“mealvouchercard”referstoalaborbenefitincludedinBrazilianemploymentcontracts,whereemployersprovidecashforemployeemealsonatax-efficientbasis.Theemployerdepositsthebenefittoaprepaidcardheldbytheemployee,andtheemployeecanusethebalanceonthecardtomakepurchasesinrestaurantsandgrocerystores.
“Medium-SizedCompanies”referstolegalentitieswithannualgrossrevenuesofbetweenR$3.6millionandR$78million.Thiscommonly-useddefinitioninBrazilreferstocompaniesthatareeligibleforthedeemedprofit(lucro presumido )taxationregimeunderBrazilianLawNo.9,718/1998,asamended.
“MicroCompanies”referstolegalentitieswithannualgrossrevenuesofuptoR$360,000,asdeterminedinaccordancewiththestandardsegmentationofBrazilianbusinessesbysizeunderBrazilianLawNo.123/2006,knownastheGeneralLawonMicroandSmallEnterprises,asamended,andtheBraziliantaxcode.
“Micro-Merchant”meansMicroCompaniesandIndividualMicroEntrepreneurs.
“MobilePayments”referstothepaymentmethodwhereamobilephoneisusedtocompletepayment(withpaymentinformationbeingtransmittedinreal-time),insteadofsimplyasanalternativechanneltosendpaymentinstructions.
“mPOS”meansmobilePOS.mPOSdevicesaresimilartoPOSdevices,buttheyrequirethemerchant’scellphoneinordertofunctionandacceptpayments.mPOSdevicesconnecttoamerchant’scellphonenetworkbyBluetooth.Asanexample,theMinizinhaisanmPOSdevice.
“NFC”meansnear-fieldcommunication.
“PortaldoEmpreendedor”meanstheEntrepreneur’sPortal–IndividualMicroEntrepreneur(Portal do Empreendedor – Microempreendedor Individual ),aBraziliangovernmentwebportalforIndividualMicroEntrepreneurs.
“POS”meanspointofsale.POSdevicesallowmerchantstoacceptpaymentswhereasaleismade,whetherinsideanestablishmentoroutsideonthestreet.POSincludesmPOS,althoughvariousfeaturesdifferentiatethetwosystems.Asanexample,theModerninhaProisaPOSdevice.
“SDK”meanssoftwaredevelopmentkit,whichistypicallyasetofsoftwaredevelopmenttoolsthatallowsforthecreationofapplicationsforsoftwarepackagesorframeworks,hardwareplatforms,computeroroperatingsystemsorsimilardevelopmentplatforms.
“SEBRAE”meanstheBrazilianMicroandSmallBusinessesSupportService(Serviço Brasileiro de Apoio às Micro e Pequenas Empresas ).
“SmallCompanies”referstolegalentitiesthatareclassifiedassuchinaccordancewiththestandardsegmentationofBrazilianbusinessesbysizeunderBrazilianLawNo.123/2006,knownastheGeneralLawonMicroandSmallEnterprises,asamended,andtheBraziliantaxcode.ThisclassificationreferstobusinesseswithannualgrossrevenuesofbetweenR$360,000andR$4.8millionforperiodsthroughDecember31,2018.
“SMEs”referstoSmallCompaniesandMedium-SizedCompanies.
“TPV”meanstotalpaymentvolume,beingthevalueofpaymentssuccessfullyprocessedthroughourend-to-enddigitalecosystem,netofpaymentreversals.
“uniquevisitor”referstoapersonwhovisitsawebsiteatleastonceinapredeterminedtimeperiod,typically30days.Eachvisitortothewebsiteisonlycountedonceduringtherelevantperiod(i.e.,ifthesameIPaddressaccessesthewebsiteseveraltimes,itonlycountsasonevisitor).
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SIGNATURES
PursuanttotherequirementsofSection12oftheSecuritiesExchangeActof1934,theregistrant,PagSeguroDigitalLtd.,herebycertifiesthatitmeetsalloftherequirementsforfilingonForm20-Fandthatithasdulycausedthisannualreporttobesignedonitsbehalfbytheundersigned,thereuntodulyauthorized,inthecityofSãoPaulo,Brazil,onApril15,2019.
PagSeguro Digital Ltd.
By: /s/EduardoAlcaroName: EduardoAlcaroTitle:
ChiefFinancialandInvestorRelationsOfficer,ChiefAccountingOfficerandDirector
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PagSeguro Digital Ltd.Consolidated Financial Statements atDecember 31, 2018 and 2017and Report of Independent RegisteredPublic Accounting Firm
F-1
Table of Contents
PagSeguro Digital Ltd.Consolidated financial statementsat December 31, 2018 and 2017
ContentsManagement’sReportonInternalControloverFinancialReporting
F-3
Reportofindependentregisteredpublicaccountingfirm
F-4
Consolidatedfinancialstatements Consolidatedbalancesheets
F-6
Consolidatedstatementsofincome
F-7
Consolidatedstatementsofcomprehensiveincome
F-8
Consolidatedstatementsofchangesinequity
F-9
Consolidatedstatementsofcashflows
F-10
Notestotheconsolidatedfinancialstatements
F-11
F-2
Table of Contents
Management’s Report on Internal Control over Financial Reporting
Ourmanagementisresponsibleforestablishingandmaintainingadequateinternalcontroloverfinancialreportingandforassessingtheeffectivenessofinternalcontroloverfinancialreporting.
Ourinternalcontroloverfinancialreportingisaprocessdesignedby,orunderthesupervisionof,ourPrincipalExecutiveOfficerandourChiefFinancialandInvestorRelationsOfficerandChiefAccountingOfficer,andeffectedbyourboardofdirectors,managementandotheremployees,andisdesignedtoprovidereasonableassuranceregardingthereliabilityoffinancialreportingandofthepreparationofourconsolidatedfinancialstatementsforexternalpurposes,inaccordancewithInternationalFinancialReportingStandards(“IFRS”)asissuedbytheInternationalAccountingStandardsBoard(“IASB”).
Duetoitsinherentlimitations,internalcontroloverfinancialreportingmaynotpreventordetectmisstatements.Also,projectionsofanyevaluationofeffectivenessofinternalcontroloverfinancialreportingtofutureperiodsaresubjecttotheriskthatcontrolsmaybecomeinadequatebecauseofchangesinconditions,orthatthedegreeofcompliancewithourpoliciesorproceduresmaydeteriorate.
OurmanagementhasassessedtheeffectivenessofourinternalcontroloverfinancialreportingasofDecember31,2018,baseduponthecriteriaestablishedinInternalControls—IntegratedFramework(2013),issuedbytheCommitteeofSponsoringOrganizationsofTreadwayCommission(COSO).Basedonthisassessmentandcriteria,ourmanagementhasconcludedthatourinternalcontroloverfinancialreportingwaseffectiveasofDecember31,2018.
Thismanagement’sreportwasnotsubjecttoattestationbyourregisteredpublicaccountingfirmpursuanttorulesoftheSecuritiesandExchangeCommissionthatpermitustoprovideonlymanagement’sreportthisyear.
February18,2019
/s/EduardoAlcaroEduardoAlcaroChiefFinancialandInvestorRelationsOfficer,ChiefAccountingOfficerandDirector
F-3
Table of Contents
Report of independent registeredpublic accounting firm
TotheBoardofDirectorsandStockholdersPagSeguroDigitalLtd.
Opinion on the financial statements
WehaveauditedtheaccompanyingconsolidatedbalancesheetsofPagSeguroDigitalLtd.anditssubsidiaries(the“Company”)asofDecember31,2018and2017,andtherelatedconsolidatedstatementsofincome,ofcomprehensiveincome,ofchangesinequityandofcashflowsforeachofthethreeyearsintheperiodendedDecember31,2018,includingtherelatednotes(collectivelyreferredtoasthe“consolidatedfinancialstatements”).Inouropinion,theconsolidatedfinancialstatementspresentfairly,inallmaterialrespects,thefinancialpositionoftheCompanyasofDecember31,2018and2017,andtheresultsoftheiroperationsandtheircashflowsforeachofthethreeyearsintheperiodendedDecember31,2018inconformitywithInternationalFinancialReportingStandardsasissuedbytheInternationalAccountingStandardsBoard.
Basis for opinion
TheseconsolidatedfinancialstatementsaretheresponsibilityoftheCompany’smanagement.OurresponsibilityistoexpressanopinionontheCompany’sconsolidatedfinancialstatementsbasedonouraudits.WeareapublicaccountingfirmregisteredwiththePublicCompanyAccountingOversightBoard(UnitedStates)(“PCAOB”)andarerequiredtobeindependentwithrespecttotheCompanyinaccordancewiththeU.S.federalsecuritieslawsandtheapplicablerulesandregulationsoftheSecuritiesandExchangeCommissionandthePCAOB.
WeconductedourauditsoftheseconsolidatedfinancialstatementsinaccordancewiththestandardsofthePCAOB.Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhethertheconsolidatedfinancialstatementsarefreeofmaterialmisstatement,whetherduetoerrororfraud.TheCompanyisnotrequiredtohave,norwereweengagedtoperform,anauditofitsinternalcontroloverfinancialreporting.AspartofourauditswearerequiredtoobtainanunderstandingofinternalcontroloverfinancialreportingbutnotforthepurposeofexpressinganopinionontheeffectivenessoftheCompany’sinternalcontroloverfinancialreporting.Accordingly,weexpressnosuchopinion.
F-4
Table of Contents
PagSeguroDigitalLtd.
Ourauditsincludedperformingprocedurestoassesstherisksofmaterialmisstatementoftheconsolidatedfinancialstatements,whetherduetoerrororfraud,andperformingproceduresthatrespondtothoserisks.Suchproceduresincludedexamining,onatestbasis,evidenceregardingtheamountsanddisclosuresintheconsolidatedfinancialstatements.Ourauditsalsoincludedevaluatingtheaccountingprinciplesusedandsignificantestimatesmadebymanagement,aswellasevaluatingtheoverallpresentationoftheconsolidatedfinancialstatements.Webelievethatourauditsprovideareasonablebasisforouropinion.
SãoPaulo,Brazil,February19,2019/s/PricewaterhouseCoopersAuditoresIndependentes
WehaveservedastheCompany’sauditorsince2015.
F-5
Table of Contents
PagSeguro Digital Ltd.Consolidated balance sheetsAt December 31(All amounts in thousands of reais )CURRENT ASSETS Cashandcashequivalents 6 2,763,050 66,767Financialinvestments 7 — 210,103Notereceivables 8 8,104,679 3,522,349Receivablesfromrelatedparties 9 — 124,723Inventories 88,551 61,609Taxesrecoverable 65,653 14,446Otherreceivables 20,148 27,956
Total current assets 11,042,081 4,027,953
NON-CURRENT ASSETS Judicialdeposits 1,511 872Prepaidexpenses 968 160Deferredincometaxandsocialcontribution 17 — 37,015Propertyandequipment 11 67,104 10,889Intangibleassets 12 305,614 158,868
Total non-current assets 375,197 207,804
TOTAL ASSETS 11,417,278 4,235,757
CURRENT LIABILITIES Payablestothirdparties 13 4,324,198 3,080,569Tradepayables 165,246 92,444Payablestorelatedparties 9 30,797 39,101Salariesandsocialcharges 14 73,936 34,269Taxesandcontributions 15 80,093 52,064Provisionforcontingencies 16 7,004 4,648Otherpayables 29,501 15,872
Total current liabilities 4,710,775 3,318,967
NON-CURRENT LIABILITIES Deferredincometaxandsocialcontribution 17 132,125 42,809Otherpayables — 3,590
Total non-current liabilities 132,125 46,399
TOTAL LIABILITIES 4,842,900 3,365,366
EQUITY Sharecapital 18 26 524,577Legalreserve 18 — 30,216Capitalreserve 18 5,688,134 —Equityvaluationadjustments 18 (7,325) 55Profitretentionreserve 18 909,267 312,047Treasuryshares 18 (39,532) —
6,550,570 866,895
Non-controlling interests 23,806 3,496
TOTAL EQUITY 6,574,376 870,391
TOTAL LIABILITIES AND EQUITY 11,417,278 4,235,757
Theaccompanyingnotesareanintegralpartoftheseconsolidatedfinancialstatements.
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Table of Contents
PagSeguro Digital Ltd.Consolidated statements of incomeYear ended December 31(All amounts in thousands of reais unless otherwise stated) Note
December 31,2018
December 31,2017
December 31,2016
Netrevenuefromtransactionactivitiesandotherservices 20 2,267,103 1,224,261 480,025Netrevenuefromsales 20 374,612 471,924 260,594Financialincome 20 1,414,532 818,624 392,429Otherfinancialincome 20 278,445 8,576 5,337
Totalrevenueandincome 4,334,692 2,523,385 1,138,385 Costofsalesandservices 21 (2,144,699) (1,324,380) (623,667)Sellingexpenses 21 (351,439) (245,759) (199,937)Administrativeexpenses 21 (581,668) (153,177) (84,461)Financialexpenses 21 (31,209) (104,544) (68,301)Otherexpenses,net 21 (8,054) (12,021) (6,660)
PROFIT BEFORE INCOME TAXES 1,217,623 683,504 155,359 Currentincometaxandsocialcontribution 17 (180,884) (214,988) (7,431)Deferredincometaxandsocialcontribution 17 (126,331) 10,278 (20,149)
INCOME TAX AND SOCIAL CONTRIBUTION (307,215) (204,710) (27,580)
NET INCOME FOR THE YEAR 910,408 478,794 127,779
Attributableto: OwnersoftheCompany 909,267 478,781 127,186Non-controllinginterests 1,141 13 593
Basicearningspercommonshare—R$ 19 2.8625 1.8254 0.4849Dilutedearningspercommonshare—R$ 19 2.8582 1.8254 0.4849
Theaccompanyingnotesareanintegralpartoftheseconsolidatedfinancialstatements.
F-7
Table of Contents
PagSeguro Digital Ltd.
Consolidated statements of comprehensive incomeYears ended December 31(All amounts in thousands of reais ) 2018 2017 2016 NET INCOME FOR THE YEAR 910,408 478,794 127,779Currencytranslationadjustment 208 55 —
Totalcomprehensiveincomefortheyear 910,616 478,849 127,779
Attributable to OwnersoftheCompany 909,475 478,836 127,186
Non-controllinginterests 1,141 13 593
Totalcomprehensiveincomefortheyear 910,616 478,849 127,779
Theaccompanyingnotesareanintegralpartoftheseconsolidatedfinancialstatements.
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PagSeguro Digital Ltd.
Consolidated statements of changes in equity(All amounts in thousands of reais ) Capital reserve Profit reserve
NoteShare capital
Net parentInvestment
Treasuryshares
Capital reserve
Share-based long-term incentive
plan (LTIP) Legal reserve
Profit retentionreserve
Retainedearnings
Equity valuationadjustments Total
Non-controlling interests
Total equity
At December 31, 2015 441,616 9,730 — — — 757 7,588 — — 459,691 2,186 461,877
Netincomefortheperiod 18 — — — — — — — 127,186 — 127,186 593 127,779Non-controllingacquisition 18 — — — — — — — 2,779 — 2,779 (2,779) —Capitalincrease 18 26,610 36,654 — — — — — — — 63,264 — 63,264Payoutcapitalization 56,351 (46,384) — — — (267) 4,539 (14,239) — — — —Constitutionoflegalreserve 18 — — — — — 5,787 — (5,787) — — — —
Distributionofinterestonowncapital — — — — — — — (26,059) — (26,059) — (26,059)
Profitretentionreserve 18 — — — — — — 83,881 (83,881) — — — —
At December 31, 2016 524,577 — — — — 6,277 96,008 — — 626,862 — 626,862
Netincomefortheperiod 18 — — — — — — — 478,781 — 478,781 13 478,794Currencytranslationadjustment 18 — — — — — — — — 55 55 — 55
Non-controllingacquisition 18 — — — — — — — — — — 3,483 3,483Constitutionoflegalreserve 18 — — — — — 23,939 — (23,939) — — — —
Equityvaluationadjustments 18 — — — — — — — — — — — —
Distributionofdividends 18 — — — — — — (96,008)(142,795) — (238,803) — (238,803)Profitretentionreserve 18 — — — — — — 312,047 (312,047) — — — —
At December 31, 2017 524,577 — — — 30,216 312,047 — 55 866,895 3,496 870,391
Conversionofprofitreservetocommonshares 1.1 (524,556) — — 866,819 — (30,216) (312,047) — — — — —
Netincomefortheperiod 18 — — — — — — — 909,267 — 909,267 1,141 910,408Currencytranslationadjustment 18 — — — — — — — — 208 208 — 208
Non-controllingacquisition 18 — — — — — — — — (7,588) (7,588) 19,169 11,581Issuranceofcommonsharesininitialpublicoffering,netofofferingcosts 18 5 — — 4,522,278 — — — — — 4,522,283 — 4,522,283
Sharesissued—Sharebasedlongtermincentiveplan(LTIP) 18 — — — 258,166 (258,166) — — — — — — —
Sharebasedlongtermincentiveplan(LTIP) 18 — — — — 299,037 — — — — 299,037 — 299,037
Acquisitionoftreasuryshares 18 — — (39,532) — — — — — — (39,532) — (39,532)
At December 31, 2018 26 — (39,532) 5,647,263 40,871 — — 909,267 (7,325) 6,550,570 23,806 6,574,376
Theaccompanyingnotesareanintegralpartoftheseconsolidatedfinancialstatements.
F-9
Table of Contents
PagSeguro Digital Ltd.
Consolidated statements of cash flowsYears ended December 31(All amounts in thousands of reais )
December 31,2018
December 31,2017
December 31,2016
CASH FLOWS FROM OPERATING ACTIVITIES Profit before income taxes 1,217,623 683,504 155,359
Expenses (revenues) not affecting cash: Depreciationandamortization 95,363 51,571 31,246Lossonsaleofproperty — 49 —Chargebacks 71,491 47,854 31,557Accrualofprovisionforcontingencies 3,745 3,538 603Sharebasedlongtermincentiveplan(LTIP) 264,179 — —Unrealizesonderivativeinstruments — — 6,613Inventoryprovisions 20,070 — —Otherfinancialcost,net 1 660 5,549
Changes in operating assets and liabilities Notereceivables (5,048,464) (2,066,867) (783,954)
Changesinreceivablessubjecttoearlypayment (1,737,545) 1,161,430 406,159Changesinreceivablesnotsubjecttoearlypayment (3,310,919) (3,228,297) (1,190,113)
Inventories (47,012) (40,586) 20,181Taxesrecoverable (22,936) 8,055 8,579Otherreceivables 773 (23,495) 17,214Otherpayables (7,330) (2,046) 13,491Payablestothirdparties 1,243,629 1,776,538 620,940Tradepayables 72,579 29,531 25,430Receivablesfrom(payablesto)relatedparties 112,790 (64,400) (214,549)Salariesandsocialcharges 39,312 13,341 6,618Taxesandcontributions 31,764 (3,109) 3,867Provisionforcontingencies (1,792) 486 (42)
(1,954,212) 414,624 (51,298)
Incometaxandsocialcontributionpaid (203,631) (166,389) (18,059)Interestincomereceived 394,643 214,555 146,346Interestpaid — (9,175) —
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (1,763,200) 453,615 76,989
CASH FLOWS FROM INVESTING ACTIVITIES Amountpaidonacquisitions,netofcashacquired (1,813) (22,225) —Purchasesofpropertyandequipment (61,560) (7,873) (1,996)Purchasesanddevelopmentofintangibleassets (192,048) (99,673) (70,394)Acquisitionoffinancialinvestments — (209,569) (337,098)Redemptionoffinancialinvestments 211,116 132,107 206,190
NET CASH USED IN INVESTING ACTIVITIES (44,305) (207,233) (203,298)
CASH FLOWS FROM FINANCING ACTIVITIES Paymentofborrowings — (199,480) —Proceedsfromborrowings — — 199,390Paymentofderivativefinancialinstruments — (5,831) —Distributionofdividends — (54,273) —Proceedsfromofferingofshares 4,717,875 — —Transactioncosts (189,852) — —Acquisitionoftreasuryshares (39,532) — —Transactionwithnon-controllinginterest (5,389) — —Capitalincreasebynon-controllingshareholders 20,686 — —
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 4,503,788 (259,584) 199,390
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,696,283 (13,202) 73,081
Cashandcashequivalentsatthebeginningoftheyear 66,767 79,969 6,888Cashandcashequivalentsattheendoftheyear 2,763,050 66,767 79,969
Theaccompanyingnotesareanintegralpartoftheseconsolidatedfinancialstatements.
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Notes to the consolidated financialstatements at December 31, 2018(All amounts in thousands of reais unless otherwise stated)1. General information
PagSeguroDigitalLtd.(“PagSeguroDigital”orthe“Company”)isaholdingcompany,subsidiaryofUniversoOnlineS.A.(“UOL”),referredtotogetherwithitssubsidiariesasthe“PagSeguroGroup”,wasincorporatedonJuly19,201799.99%ofthesharesofPagseguroInternetS.A.(“PagSeguroBrazil”)werecontributedtoPagSeguroDigitalonJanuary4,2018and,PagSeguroDigitalmaintainscontrolofPagSeguroBrazil.
PagSeguroBrazilisaprivately-heldcorporationestablishedonJanuary20,2006,headquarteredinthecityofSãoPaulo,Brazil,andengagedinprovidingfinancialtechnologysolutionsandservicesandcorrespondingrelatedactivities,focusedprincipallyonmicro-merchantsandsmallandmedium-sizedbusinesses(“SMEs”).
PagSeguroBrazil’ssubsidiariesareNet+PhoneTelecomunicaçõesLtda.(“Net+Phone”),BoaCompraLtda.(“BoaCompra”),BCPSOnlineServicesLDA.(“BCPS”),R2TECHInformáticaS.A.(“R2TECH”),BIVACOHoldingS.A(“BIVA”),FundodeInvestimentoemDireitosCreditórios—PagSeguro(“FIDC”)andTilixDigitalS.A.(“TILIX”).
TheseconsolidatedfinancialstatementsincludePagSeguroBrazilanditssubsidiariesNet+Phone,BoaCompra,BCPS,R2TECH,BIVA,FIDCandTILIX.
1.1 Initial Public Offering (“IPO”)
OnJanuary26,2018,PagSeguroDigitalcompleteditsInitialPublicOffering(“IPO”).50,925,642newshareswereofferedbyPagSeguroDigitaland70,267,746shareswereofferedbythecontrollingshareholderUOL.
TheinitialofferingpricewasUS$21,50percommonshare,forgrossproceedsofUS$1,095.2million(orR$3,444.2million).TheCompanyreceivednetproceedsofUS$1,046.0million(orR$3,289.8million),afterdeductingUS$43.8million(orR$137.8million)inunderwritingdiscountsandcommissionsandUS$5.2million(orR$16.7million)ofotherofferingexpenses.
ThesharesofferedandsoldintheIPOwereregisteredundertheSecuritiesActof1933,asamended,pursuanttotheCompany’sRegistrationStatementonFormF-1(RegistrationNo333-222292)whichwasdeclaredeffectivebytheSecuritiesandExchangeCommissiononJanuary26,2018.ThecommonstockhasbeentradedontheNewYorkStockExchange(NYSE)sinceJanuary26,2018,underthesymbol“PAGS”.
1.2 Follow-on public offering
OnJune26,2018,PagSeguroDigitalcompleteditsfollow-onpublicoffering.11,550,000newshareswereofferedbyPagSeguroDigitaland26,400,000shareswereofferedbythecontrollingshareholderUOL.
TheofferingpricewasUS$29,25percommonshare,forgrossproceedsofUS$337.8million(orR$1,274.4million).TheCompanyreceivednetproceedsofUS$326.8million(orR$1,232.6million),afterdeductingUS$7.9million(orR$29.9million)inunderwritingdiscountsandcommissionsandUS$3.1million(orR$11.9million)ofotherofferingexpenses.
1.3 Long-Term Incentive Plan (“LTIP”)
MembersofmanagementparticipateinaLong-TermIncentivePlan,orLTIP,whichwasestablishedbyUOLforitsgroupcompaniesonJuly29,2015andhasbeenadoptedbyPagSeguroDigital.BeneficiariesundertheLTIPareselectedbyUOL’sLTIPCommittee,whichconsistsoftheChairmanandtwoofficersofUOL,andaresubmittedtoourBoardofDirectorsforadoption.
Thepolicyforrecognizingandmeasuringshare-basedpaymentsintheinterimperiodisdescribedinNote18.
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Notes to the consolidated financialstatements at December 31, 2018(All amounts in thousands of reais unless otherwise stated)2. Preparation of the consolidated financial statements and significant accounting policies
2.1 Basis of financial statements
TheseconsolidatedfinancialstatementshavebeenpreparedinaccordancewiththeInternationalFinancialReportingStandards(“IFRS”),asissuedbytheInternationalAccountingStandardsBoard(“IASB”).TheconsolidatedfinancialstatementsarepresentedinthousandsofBrazilianreais,unlessotherwiseindicated,whichisthefunctionalcurrencyofPagSeguroDigitalanditssubsidiaries.
Theconsolidatedfinancialstatementshavebeenpreparedunderthehistoricalcostconvention,whichismodifiedforcertainfinancialassetsandliabilities(includingderivativeinstruments)measuredatfairvalue.
Thepreparationoffinancialstatementsrequirestheuseofcertaincriticalaccountingestimates.ItalsorequiresmanagementtoexerciseitsjudgmentintheprocessofapplyingPagSeguroGroup’saccountingpolicies.Theareasinvolvingahigherdegreeofjudgmentorcomplexity,orareaswhereassumptionsandestimatesaresignificanttothefinancialstatements,aredisclosedinNote3.
PagSeguroGrouphasadoptedallpronouncementsandinterpretationsissuedbyIASBthatwereineffectatDecember31,2018.
TheseconsolidatedfinancialstatementsfortheyearsendedDecember31,2018,2017and2016wereapprovedbyPagSeguroDigital’sBoardofDirectorsatameetingheldonFebruary15,2019.
2.2 Basis of consolidation
Consolidatedfinancialstatements
PagSeguroGroupconsolidatesallentitiesoverwhichPagSeguroDigitalhascontrol,whenitisexposedorhasrightstovariablereturnsonitsinterestintheinvestee,andhastheabilitytogoverntheinvestee’srelevantactivities.
ThesubsidiariesincludedintheconsolidationaredescribedinNote4.
Subsidiaries
SubsidiariesareallentitiesoverwhichPagSeguroDigitalhascontrol.SubsidiariesarefullyconsolidatedfromthedateonwhichcontrolistransferredtoPagSeguroDigital.Theyaredeconsolidatedfromthedatethatcontrolceases.
Identifiableassetsacquiredandliabilitiesandcontingentliabilitiesassumedfortheacquisitionofsubsidiariesinabusinesscombinationaremeasuredinitiallyattheirfairvaluesattheacquisitiondate.PagSeguroGrouprecognizesanynon-controllinginterestintheacquireeeitheratfairvalueoratthenon-controllinginterest’sproportionateshareofthefairvalueoftheacquiree’sidentifiablenetassets.Non-controllinginterestsaredetermineduponeachacquisition.Acquisition-relatedcostsareaccountedforinthestatementofincomeasincurred.Theseaccountingpracticesdonotapplytotransactionsundercommoncontrol.
Transactions,balancesandunrealizedgainsonintercompanytransactionsareeliminated.Unrealizedlossesarealsoeliminated,unlessthetransactionprovidesevidenceofimpairmentoftheassettransferred.Theaccountingpoliciesofthesubsidiariesarechanged,wherenecessary,toensureconsistencywiththepoliciesadoptedbyPagSeguroGroup.
2.3 Foreign currency translation
Foreigncurrencytransactionsaretranslatedintothefunctionalcurrencyusingtheexchangeratesprevailingatthedatesofthetransactionsorthedatesofvaluationwhereitemsareremeasured.Foreignexchangegainsandlossesresultingfromthesettlementofthesetransactionsandfromthetranslationatyear-endexchangeratesofmonetaryassetsandliabilitiesdenominatedinforeigncurrenciesarerecognizedinthestatementofincome.
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Notes to the consolidated financialstatements at December 31, 2018(All amounts in thousands of reais unless otherwise stated)2.4 Cash and cash equivalents
Cashandcashequivalentsareheldforthepurposeofmeetingshort-termcashneedsandnotforinvestmentoranyotherpurposes.PagSeguroGroupclassifiesascashequivalentsafinancialinvestmentthatcanbeimmediatelyconvertedintoaknownamountofcashandissubjecttoimmaterialriskofchangeinvalue.PagSeguroGroupclassifiesfinancialinstrumentswithoriginalmaturitiesofthreemonthsorlessascashequivalents.
2.5 Financial instruments—initial recognition and subsequent measurement
i)Financialassets
Initial recognition and measurement
Financialassetsareclassifiedinthefollowingcategories:financialassetsatfairvaluethroughprofitoramortizedcost.Theclassificationdependsonthepurposeforwhichthefinancialassetswereacquired.PagSeguroGroupdoesnotclassifyitsfinancialassetsatfairvaluethroughcomprehensiveincome.
Financialassetscarriedatfairvaluethroughprofitorlossareinitiallyrecognizedatfairvalue,andtransactioncostsareexpensedinthestatementofincome.Financialassetsincludecashandcashequivalents,currentfinancialinvestments,notereceivables,receivablesfromrelatedparties,andotherreceivables.
Subsequent measurement
Thesubsequentmeasurementoffinancialassetsdependsontheirclassification,whichmaybeasfollows:
Loansandreceivables
Loansandreceivablesarecarriedatamortizedcostusingtheeffectiveinterestratemethod.
Financialassetsatfairvaluethroughprofitorloss
ThiscategoryincludesderivativefinancialinstrumentswhichdonotmeetthehedgeaccountingcriteriadefinedbyIFRS9–FinancialInstruments.
Financialassetsatfairvaluethroughprofitorlossarepresentedatfairvalueinthebalancesheet,withthecorrespondinggainsorlossesrecognizedinthestatementofincome.
PagSeguroGroupvaluesitsfinancialassetsatfairvaluethroughprofitorloss,asitintendstotradethemwithinashortperiodoftime.Reclassificationtoloansandreceivablesdependsonthenatureoftheasset.Thisvaluationdoesnotaffectanyfinancialassetsdesignatedatfairvaluethroughprofitorlossatinitialrecognition,whichcannotbesubsequentlyreclassified.
Derecognition
Afinancialassetor,whereapplicable,apartofafinancialassetorpartofagroupofsimilarfinancialassets,isderecognizedwhen:
• Therightstoreceivecashflowsfromtheassetexpire;
• PagSeguroGrouptransfersitsrightstoreceivecashflowsfromtheasset,orassumesanobligationtopaythereceivedcashflowsinfulltoathirdpartyundera
“pass-through”arrangement;and(a)transfersvirtuallyalltherisksandbenefitsoftheasset,or(b)neithertransfersnorretainsvirtuallyalltherisksandbenefitsoftheasset,buttransferscontroloftheasset.
WhenPagSeguroGrouphastransferreditsrightstoreceivecashflowsfromanassetandhasnottransferredorretainedsubstantiallyalltherisksandbenefitsoftheasset,thisassetisrecognizedtotheextentofPagSeguroGroup’scontinuinginvolvementintheasset.Insuchcase,PagSeguroGroupalsorecognizesanassociatedliability.
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Notes to the consolidated financialstatements at December 31, 2018(All amounts in thousands of reais unless otherwise stated)
ThetransferredassetandtheassociatedliabilityaremeasuredonabasisthatreflectstherightsandobligationsthatPagSeguroGrouphasretained.
ContinuinginvolvementthattakestheformofaguaranteeoverthetransferredassetismeasuredattheloweroftheoriginalcarryingamountoftheassetandthemaximumamountoftheconsiderationthatPagSeguroGroupmayberequiredtorepay.
ii)Impairmentoffinancialassets
PagSeguroGroupassesses,atthebalancesheetdate,ifthereisobjectiveevidencethatafinancialassetoragroupoffinancialassetsisimpaired.
Afinancialassetoragroupoffinancialassetsisimpairedandimpairmentlossesareincurredonlyifthereisobjectiveevidenceofimpairmentasaresultofoneormoreeventsthatoccurredaftertheinitialrecognitionoftheasset(a“lossevent”)andthatlossevent(orevents)hasanimpactontheestimatedfuturecashflowsofthefinancialassetorgroupoffinancialassetsthatcanbereliablyestimated.
Evidenceofimpairmentmayincludeanindicationthatthedebtorsareexperiencingsignificantfinancialdifficulty,probabilitythatthedebtorwillenterbankruptcyorotherfinancialreorganization,defaultordelinquencyininterestorprincipalpayments,andanindicationofasubstantialdeclineintheestimatedfuturecashflows,suchaschangesinmaturitydatesoreconomicconditionsrelatedtodefault.
iii)Financialliabilities
Initial recognition and measurement
Financialliabilitiesareclassifiedasfinancialliabilitiesatfairvaluethroughprofitorloss,otherfinancialliabilities,orasderivativesdesignatedusedforhedge,whenappropriate.PagSeguroGroupdeterminestheclassificationofitsfinancialliabilitiesatinitialrecognition.
Financialliabilitiesareinitiallyrecognizedatfairvalueplus,inthecaseofotherfinancialliabilities,directlyrelatedtransactioncosts.
Financialliabilitiesincludepayablestothirdparties,payablestothirdpartiesofrelatedparties,tradepayables,tradepayablesofrelatedparties,borrowings,andotherpayables.
Subsequent measurement
Thesubsequentmeasurementoffinancialliabilitiesdependsontheirclassification,whichmaybeasfollows:
Financialliabilitiesatfairvaluethroughprofitorloss
Financialliabilitiesatfairvaluethroughprofitorlossincludeheld-for-tradingfinancialliabilitiesandfinancialliabilitiesdesignatedatfairvaluethroughprofitorlossatinitialrecognition.
Financialliabilitiesareclassifiedasheld-for-tradingifacquiredforsaleintheshortterm.ThiscategoryincludesderivativefinancialinstrumentswhichdonotmeetthehedgeaccountingcriteriadefinedbyIFRS9–FinancialInstruments.
Gainsandlossesonheld-for-tradingliabilitiesarerecognizedinthestatementofincome.
Otherfinancialliabilities
Afterinitialrecognition,interest-bearingborrowingsaresubsequentlymeasuredatamortizedcost,usingtheeffectiveinterestratemethod,andarerecognizedinthestatementofincome.
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Notes to the consolidated financialstatements at December 31, 2018(All amounts in thousands of reais unless otherwise stated)
Amortizedcostiscalculatedbytakingintoaccountanydiscountorpremiumonacquisitionandfeesorcoststhatareanintegralpartoftheeffectiveinterestrate.Theeffectiveinterestrateamortizationisincludedin“Financialexpenses”inthestatementofincome.
Derecognition
Afinancialliabilityisderecognizedwhentheobligationisdischarged,canceledorexpires.
Whenanexistingfinancialliabilityisreplacedbyanotherfromthesamelenderonsubstantiallydifferentterms,orthetermsofanexistingliabilityaresubstantiallymodified,suchanexchangeormodificationistreatedasaderecognitionoftheoriginalliabilityandrecognitionofanewliability,andthedifferenceintherespectivecarryingamountsisrecognizedinthestatementofincome.
iv)Financialinstruments—offsetting
Financialassetsandliabilitiesarepresentednetinthebalancesheetif,andonlyif,thereisanexistingandenforceablelegalrighttooffsettheamountsrecognizedandanintentiontooffsetortorealizetheassetandsettletheliabilitysimultaneously.
v)Fairvalueoffinancialinstruments
Thefairvalueoffinancialinstrumentsactivelytradedinorganizedmarketsisdeterminedbasedonquotedmarketpricesatthebalancesheetdate,withoutadeductionoftransactioncosts.
Thefairvalueoffinancialinstrumentsthatarenottradedinanactivemarketisdeterminedbyusingvaluationtechniques.Thesetechniquesincludetheuseofrecentarm’slengthtransactions,referencetoothersimilarinstruments,discountedcashflowanalysisorothervaluationmethods.
2.6 Note receivables
Theamountsaremainlyrelatedtoreceivablesfromcredit/debitcardissuersandacquirersoriginatedfromtransactionsthroughPagSeguroGroupplatform,andfromsalesofcredit/debitcardreaders.Ifcollectionisexpectedinoneyearorless,theyareclassifiedascurrentassets.Otherwise,theyarepresentedasnon-currentassets.
Howevertheprovisionforimpairmentofnotereceivables,basedonPagSeguroBrazil’sriskassessment,isimmaterialbecausethenotereceivablesaremainlycomprisedoftransactionsapprovedbylargefinancialinstitutionsthathavealowrisklevelbasedonratingsreceivedfrommajorcreditratingagencies.Additionally,thesefinancialinstitutionsarethelegalobligorstothenotereceivables.SeeNote23.
Notereceivablesareinitiallyrecordedatthepresentvalueofexpectedfuturecashflows.Thenotereceivablesfrominstallmenttransactionsareestimatedbasedonthepresentvalueofthefuturecashflows,usingaverageappropriatetermsandrates,whichareinaccordancewiththetermsofthesetransactions.
PagSeguroGroupincursfinancialexpenseswhenanelectiontoreceiveearlypaymentofnotereceivablesfromfinancialinstitutionsismade.Thisfinancialexpenseisrecognizedatthetimethefinancialinstitutionagreestoliquidateanotereceivabledueininstallmentsonaprepaidbasis,anditisrecordedasFinancialexpensesinthestatementofincome.
2.7 Inventories
Inventoriesconsistofdebitandcreditcardreaders.Inventoriesarestatedatthelowerofcostandnetrealizablevalue.Thecostmethodusedforinventoriesistheweightedmovingaveragemethod.Netrealizablevalueistheestimatedsellingpriceintheordinarycourseofbusiness,lesstheestimatedcostsnecessarytomakethesale.
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Notes to the consolidated financialstatements at December 31, 2018(All amounts in thousands of reais unless otherwise stated)2.8 Property and equipment
Propertyandequipmentarestatedathistoricalcostlessaccumulateddepreciation.Historicalcostincludesexpendituresthataredirectlyattributabletotheacquisitionoftheitemsandmayalsoincludefinancecostsrelatedtotheacquisitionofqualifyingassets.
Subsequentcostsareincludedintheasset’scarryingamountorrecognizedasaseparateasset,asappropriate,onlywhenitisprobablethatfutureeconomicbenefitsassociatedwiththesecostswillflowtoPagSeguroGroupandthatsuchbenefitscanbereliablymeasured.Thecarryingamountofreplaceditemsorpartsisderecognized.Allotherrepairsandmaintenanceexpensesarechargedtothestatementofincomeduringtheyearinwhichtheyareincurred.
Theassets’residualvaluesandusefullivesarereviewedattheendofeachreportingperiod,andadjustedonaprospectivebasis,ifappropriate.Depreciationiscalculatedunderthestraight-linemethod,basedontheestimatedusefullives,asshownbelow(inyears):
Dataprocessingequipment 2.5to5yearsFurnitureandfittings 10yearsFacilities 10yearsBuildingimprovements 10yearsMachineryandequipment 5to10yearsVehicles 5years
Anasset’scarryingamountisimmediatelywrittendowntoitsrecoverableamountwhentheasset’scarryingamountisgreaterthanitsestimatedrecoverableamount.
Gainsandlossesondisposalsaredeterminedbycomparingtheproceedswiththecarryingamounts,andarerecognizedwithin“Other(expenses)income,net”inthestatementofincome.
2.9 Intangible assets
Softwarelicensesarecapitalizedonthebasisofthecostsincurredtoacquirethesoftwareandbringittouse.Thesecostsareamortizedonthestraight-linebasisovertheestimatedusefullifeofthesoftware(threetofiveyears).
Costsassociatedwithmaintainingcomputersoftwareprogramsarerecognizedasanexpenseasincurred.DevelopmentcoststhataredirectlyattributabletothedesignandtestingofidentifiableanduniquesoftwareproductscontrolledbyPagSeguroGrouparerecognizedasintangibleassets.
Directlyattributablecosts,whicharecapitalizedaspartofthesoftwareproduct,includecostsincurredwithemployeesandexpensesallocatedtosoftwaredevelopment.Borrowingcostsincurredduringthesoftwaredevelopmentperiodmayalsobecapitalized.
Otherdevelopmentexpendituresthatdonotmeetthecapitalizationcriteriaareexpensedasincurred.Developmentcostspreviouslyrecordedasanexpensearenotrecognizedasanassetinasubsequentperiod,andarepresentedwithin“Advisoryandconsultingservices”.
Computersoftwaredevelopmentcostsrecognizedasassetsareamortizedovertheestimatedusefullife,whichdoesnotexceedfiveyearsfromthedatethattechnologicalfeasibilityismet.
2.10 Impairment of non-financial assets
Non-financialassetsareatleastannuallyreviewedforimpairmenttodeterminewhetherthereareanyeventsorchangesineconomicandtechnologicalconditionsorinoperationsthatmayindicatethatanassetisimpaired.Whenapplicable,suchevidenceisidentifiedthroughtheannualimpairmenttest.Inordertoassessanon-financialasset,itisnecessarytoestimateitsrecoverableamount.Therecoverableamountofanassetorcashgeneratingunitisthegreaterofitsvalueinuseanditsfairvaluelesscoststosell.Whenthecarryingamountofanassetorcashgeneratingunitexceedsitsrecoverableamount,aprovisionforimpairmentisestablished.
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Notes to the consolidated financialstatements at December 31, 2018(All amounts in thousands of reais unless otherwise stated)
Whenestimatingthevalueinuseofanasset,thefutureestimatedcashflowsarediscountedtotheirpresentvalueusingapre-taxdiscountratethatreflectstheweightedaveragecostofcapitalforthecashgeneratingunit.Thenetsalespriceisdetermined,wheneverpossible,basedonafirmsalescontractenteredintoonanarm’slengthbasis,betweenwell-informedandwillingparties,adjustedbyexpensesattributabletotheassetsale,or,whenthereisnofirmsalescontract,basedonthepriceinanactivemarket,orthemostrecenttransactionpriceforsimilarassets.
PagSeguroGroupannuallyassesseswhetherthereisanyindicationthatapreviouslyrecognizedimpairmentlossnolongerexistsorhasdecreased.Ifthereissuchindication,theasset’srecoverableamountisestimated.Apreviouslyrecognizedimpairmentlossisreversedonlyiftherehasbeenachangeintheassumptionsusedtodeterminetheasset’srecoverableamountsincethelastimpairmentlosswasrecognized.Thereversalislimitedsothattheasset’scarryingamountdoesnotexceeditsrecoverableamount,norexceedsthecarryingamountthatwouldhavebeendetermined,netofdepreciationoramortization,hadnoimpairmentlossbeenrecognizedfortheassetinprioryears.
2.11 Payables to third parties
PayablestothirdpartiesrefertofundspayableandamountsduetomerchantsthatusePagSeguroBrazilplatform.PagSeguroGrouprecognizesthefairvalueofthetransactionwhichisthetransactionamount,netofthetransactioncost.
2.12 Provisions
ProvisionsarerecognizedwhenPagSeguroGrouphasapresentlegalorconstructiveobligationasaresultofpastevents,itisprobablethatanoutflowofresourceswillberequiredtosettletheobligationandtheamountcanbereliablyestimated.WhenPagSeguroGroupexpectsthevalueofaprovisiontobereimbursed,inwholeorinpart(forexample,duetoaninsurancecontract)thereimbursementisrecognizedasaseparateasset,butonlywhenthereimbursementisvirtuallycertain.Expensesassociatedwithanyprovisionsarepresentedinthestatementofincome,netofanyreimbursements.
PagSeguroGroupisapartytolegalandadministrativeproceedings.Provisionsareestablishedforallcontingenciesrelatedtolawsuitsforwhichitisprobablethatanoutflowoffundswillbenecessarytosettlethecontingency/obligationandareasonableestimatecanbemade.Theassessmentofthelikelihoodoflossincludestheevaluationofavailableevidence,thehierarchyoflaws,availablecaselaw,recentcourtdecisionsandtheirimportanceinthelegalsystem,aswellastheopinionofoutsidelegalcounsel.Theprovisionsarereviewedandadjustedtoreflectchangesincircumstances.
2.13 Revenue recognition
RevenuecomprisesthefairvalueoftheconsiderationreceivedorreceivablefortransferringgoodsorservicestoacustomerintheordinarycourseofPagSeguroGroup’sactivities.Revenueispresentednetofsalesandexcisetaxesandreturns.
PagSeguroGroup’srevenuesubstantiallycomprises:
• Revenuefromtransactionactivitiesandotherservices:Revenuefromfeeschargedforintermediationofelectronicpayments,andotherservicessuchasprepaidcards,whicharerecognizedatthetimethepurchaseisapprovedbythefinancialinstitution.RevenuesfromfeeschargedforintermediationofelectronicpaymentsarerecognizedonagrossbasisandrelatedtransactioncostsarerecognizedasCostofsalesandservices,sincePagSeguroGroupisconsideredtobetheprincipalintheintermediationtransaction.PagSeguroGrouphasprimaryresponsibilityforprovidingtheservicestocustomersandalsodirectlysetsthepricesforsuchservices,independentlyfromtherelatedtransactioncostsagreedbetweenPagSeguroGroupandthecardschemesorcardissuers;
• Revenuefromsales:Revenuefromsalesofcreditanddebitcardreadersandsimilaritems,whichisrecognizedwhencontrolofagoodistransferredtothe
customers,i.e.,ondeliveryoftheequipment.UnderBrazilianconsumerlaw,clientshavesevendaysafterorderingPointofSaleequipment(“POSdevices”)tocancelthepurchase.Returnsofdevicesareaccountedforasdeductionsfromrevenuefromsalesatthetimetheequipmentisreturned;
• Financialincome:RecognizedasaresultofthediscountratechargedontheearlypaymentsofPayablestothirdparties(merchants).Theincomeisrecognizedatthetimethemerchantagreestoreceiveasaleininstallmentsonanearlypaymentbasis,anditisrecordedasFinancialincomeinthestatementofincome.
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Notes to the consolidated financialstatements at December 31, 2018(All amounts in thousands of reais unless otherwise stated)2.14 Current and deferred income tax and social contribution
Currentincometaxandsocialcontribution
Taxassetsandliabilitiesforthecurrentyeararecalculatedbasedontheexpectedrecoverableamountortheamountpayabletothetaxauthorities.ThetaxratesandtaxlawsusedtocalculatetheamountarethoseenactedorsubstantivelyenactedatthebalancesheetdateinthecountrieswherePagSeguroGroupoperatesandgeneratestaxableincome.
Currentincometaxandsocialcontributionrelatedtoitemsrecognizeddirectlyinequityarerecognizedinequity.PagSeguroGroupperiodicallyevaluatesthetaxpositionsinvolvinginterpretationoftaxregulationsandestablishesprovisionswhenappropriate.
Deferredtaxes
Deferredtaxesarisefromtemporarydifferencesbetweenthetaxbasesofassetsandliabilitiesandtheircarryingamountsatthebalancesheetdate.
Deferredtaxliabilitiesarerecognizedforalltemporarytaxabledifferences,exceptinthefollowingsituations:
• Whenthedeferredtaxliabilityarisesfromtheinitialrecognitionofanassetorliabilityinatransactionotherthanabusinesscombinationthat,atthetimeofthetransaction,affectsneitheraccountingnortaxableprofit;and
• Ontemporarytaxdifferencesrelatedtoinvestmentsinsubsidiaries,whenthetimingofthereversalofthetemporarydifferencescanbecontrolledanditisprobablethatthetemporarydifferenceswillnotreverseintheforeseeablefuture.
Deferredtaxassetsarerecognizedonalldeductibletemporarydifferencesandtaxlosscarryforwards,totheextentthatitisprobablethattaxableprofitwillbeavailableagainstwhichtheycanbeoffset,except:
• Whenthedeferredtaxassetrelatedtothedeductibletemporarydifferencearisesfromtheinitialrecognitionofanassetorliabilityinatransactionotherthanabusinesscombinationthat,atthetimeofthetransaction,affectsneitheraccountingnortaxableprofitorloss;and
• Onthedeductibletemporarydifferencesassociatedwithinvestmentsinsubsidiaries.Deferredtaxassetsarerecognizedonlytotheextentthatitisprobablethatthetemporarydifferenceswillreverseintheforeseeablefutureandthattaxableprofitwillbeavailableagainstwhichthetemporarydifferencescanbeutilized.
Thecarryingamountofdeferredtaxassetsisreviewedateachreportingdateandadeferredtaxassetisrecognizedtotheextentthatitisprobablethatsufficienttaxableprofitwillbeavailabletoallowallorpartofthedeferredtaxassetstobeutilized.Unrecognizeddeferredtaxassetsarere-assessed,ateachreportingdateandarerecognizedtotheextentthatithasbecomeprobablethatfuturetaxableprofitswillbeavailabletoallowtheirutilization.
BasedonthelocallawoftheCaymanIslands(specifically,theCompaniesLawof1960),thereisnotaxationontheincomeearnedbycompaniesorganizedinthisjurisdiction.Therefore,PagSeguroDigitalhasnoincometaximpactsintheCaymanIslands.
ForthesubsidiariesofPagSeguroDigital,deferredtaxassetsandliabilitiesaremeasuredusingtheprevailingtaxratesintheyearinwhichtheassetswillberealizedandtheliabilitieswillbesettled.Thecurrentlydefinedtaxratesof25%forincometaxand9%forsocialcontributionareusedtocalculatedeferredtaxes.
Deferredtaxassetsandliabilitiesarepresentedonanetbasiswhenthereislegallyorcontractuallyenforceablerighttooffsetthetaxassetagainstthetaxliability,andthedeferredtaxesarerelatedtothesametaxableentityandsubjecttothesametaxauthority.
2.15 Employee benefits – Profit sharing
PagSeguroGrouprecognizesaliabilityandanexpenseforprofitsharingsubjecttoachievementofoperationaltargetsandperformanceestablishedandapprovedatthebeginningofeachfiscalyear.PagSeguroGrouprecognizesaprovisionwhencontractuallyobligedorwhenthereisapastpracticethathascreatedaconstructiveobligation.
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Notes to the consolidated financialstatements at December 31, 2018(All amounts in thousands of reais unless otherwise stated)2.16 Business combination and goodwill
PagSeguroGroupaccountsforbusinesscombinationsusingtheacquisitionmethod.Thecostofanacquisitionismeasuredasthesumoftheconsiderationtransferred,basedonitsfairvalueontheacquisitiondate.Costsdirectlyattributabletotheacquisitionareexpensedasincurred.Theassetsacquired,andliabilitiesassumedaremeasuredatfairvalue,classifiedandallocatedaccordingtothecontractualterms,economiccircumstancesandrelevantconditionsontheacquisitiondate.Goodwillismeasuredastheexcessoftheconsiderationtransferredoverthefairvalueofnetassetsacquired.Iftheconsiderationtransferredissmallerthanthefairvalueofnetassetsacquired,thedifferenceisrecognizedasagainonbargainpurchaseinthestatementofincome.Afterinitialrecognition,goodwillismeasuredatcostlessanyaccumulatedimpairmentlosses.
2.17 Treasury shares
Ownequityinstrumentsthatarereacquired(treasuryshares)arerecognisedatcostanddeductedfromequity.Nogainorlossisrecognisedinprofitorlossonthepurchase,sale,issueorcancellationofthePagSeguroGroup’sownequityinstruments.Anydifferencebetweenthecarryingamountandtheconsideration,ifreissued,isrecognisedinequity.
2.18 Distribution of dividends and interest on own capital
DistributionsofdividendsandinterestonowncapitaltoPagSeguroBrazil’sshareholdersarerecognizedasaliabilityinthefinancialstatementsatyear-end,basedonthePagSeguroBrazil’sbylaws,whichrequirethedistributionofaminimumof1%oftheprofitfortheyearasdividends.AnyamountthatexceedstheminimumrequiredisonlyaccruedonthedatesuchdistributionisapprovedbytheshareholdersataGeneralMedeting.However,theseprovisionsdonotexistunderPagSeguroDigitalMemorandumofAssociation.
Thetaxbenefitofinterestonowncapitalisrecognizedinthestatementofincome.
2.19 New standards and interpretations
(i) Effective for periods beginning on or after January 1, 2018
IFRS9–FinancialInstruments
IFRS9addressestheclassification,measurementandrecognitionoffinancialassetsandliabilities.ThecompleteversionofIFRS9wasissuedinJuly2014andiseffectiveasoffJanuary1,2018.ItreplacestheguidanceincludedinIAS39relatedtotheclassificationandmeasurementoffinancialinstruments.ThemainamendmentsbroughtbyIFRS9are:(i)newcriteriafortheclassificationoffinancialassets;(ii)newimpairmentmodelforfinancialassetsbasedonexpectedlosses,replacingthecurrentmodelbasedonincurredlosses;and(iii)relaxationoftherequirementsfortheadoptionofhedgeaccounting.
BeginningJanuary1,2018,managementimplementedthenewguidelinesintroducedbyIFRS9andthereisnorelevantimpactforthePagSeguroGroup.
IFRS15—RevenuefromContractswithCustomers
IFRS15,effectiveasofJanuary1,2018,supersedesIAS11ConstructionContracts,IAS18RevenueandrelatedInterpretationsanditapplies,withlimitedexceptions,toallrevenuearisingfromcontractswithcustomers.Thestandardestablishesafive-stepmodeltoaccountforrevenuearisingfromcontractswithcustomersandrequiresthatrevenueberecognisedatanamountthatreflectstheconsiderationtowhichanentityexpectstobeentitledinexchangefortransferringgoodsorservicestoacustomer.
ManagementevaluatedthenewguidelinesintroducedbyIFRS15andappliedthefive-stepmodelinordertoreassessitsrevenuerecognitioncriteria.BegginingJanuary1,2018,managementimplementedthenewguidelinesintroducedbyIFRS15andthereisnorelevantimpactforthePagSeguroGroup.
TherearenoothernewstandardsorinterpretationsthatcouldhaveamaterialimpactonthePagSeguroGroup’sfinancialstatements.
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Notes to the consolidated financialstatements at December 31, 2018(All amounts in thousands of reais unless otherwise stated) (ii) Standards issued but not yet effective
IFRS16—Leases
IFRS16wasissuedinJanuary2016andiseffectiveasofJanuary1,2019,replaceingIAS17Leases,IFRIC4DeterminingwhetheranArrangementcontainsaLease,SIC-15OperatingLeases-IncentivesandSIC-27EvaluatingtheSubstanceofTransactionsInvolvingtheLegalFormofaLease.IFRS16setsouttheprinciplesfortherecognition,measurement,presentationanddisclosureofleasesandrequireslesseestoaccountforallleasesunderasingleon-balancesheetmodelsimilartotheaccountingforfinanceleasesunderIAS17.Thestandardincludestworecognitionexemptionsforlessees–leasesof‘low-value’assets(e.g.,personalcomputers)andshort-termleases(i.e.,leaseswithaleasetermof12monthsorless).Atthecommencementdateofalease,alesseewillrecognisealiabilitytomakeleasepayments(i.e.,theleaseliability)andanassetrepresentingtherighttousetheunderlyingassetduringtheleaseterm(i.e.,theright-of-useasset).Lesseeswillberequiredtoseparatelyrecognizetheinterestexpenseontheleaseliabilityandthedepreciationexpenseontheright-of-useasset.
ManagementevaluatedthenewguidelinesintroducedbyIFRS16anddidnotidentifyanymaterialimpactforthePagSeguroGroup.
TherearenootherstandardsorinterpretationsnotyeteffectivethatcouldhaveamaterialimpactonthePagSeguroGroup’sfinancialstatements.
3. Critical accounting estimates and judgments
Accountingestimatesandjudgmentsarecontinuallyevaluatedandarebasedonhistoricalexperienceandotherfactors,includingexpectationsoffutureeventsthatarebelievedtobereasonableunderthecircumstances.
Basedonassumptions,PagSeguroGroupmakesestimatesconcerningthefuture.Theresultingaccountingestimateswill,bydefinition,seldomequaltherelatedactualresults.Theestimatesandassumptionsthathaveasignificantriskofcausingamaterialadjustmenttothecarryingamountsofassetsandliabilitieswithinthenextfinancialyearareaddressedbelow:
3.1 Estimated useful life of intangible assets
PagSeguroGroupusesanestimatedusefullifetocalculateandrecordtheamortizationappliedtoitsintangibleassetswhichmaydifferfromtheactualtermoverwhichtheintangibleassetsareexpectedtogeneratebenefitsforPagSeguroGroup.
Theamortizationofsoftwareusagerightsisdefinedbasedontheeffectiveperiodofthelicensecontracted.
TheamortizationofinternallydevelopedsoftwareisdefinedbasedontheperiodoverwhichthesoftwarewillgeneratefutureeconomicbenefitsforPagSeguroGroup.
3.2 Deferred income tax and social contribution
PagSeguroGrouprecognizesdeferredincometaxandsocialcontributionbasedonfuturetaxableprofitestimatesforthenexttenyears.Theseprojectionsareperiodicallyreviewedandapprovedbymanagement.
3.3 Provision for contingencies
PagSeguroGrouprecognizesprovisionsforcivil,taxandlaborlawsuits.Theassessmentofprobabilityoflossincludesassessingtheavailableevidenceandjurisprudence,thehierarchyoflawsandmostrecentcourtdecisions.Provisionsarereviewedandadjustedtotakeintoaccountchangesincircumstancessuchastheapplicablelimitationperiod,findingsoftaxinspectionsandadditionalexposuresidentifiedbasedonnewissuesorcourtdecisions.
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Notes to the consolidated financialstatements at December 31, 2018(All amounts in thousands of reais unless otherwise stated)4. Consolidation of subsidiaries
At December 31, 2018
Company Assets Liabilities Equity
Net income (loss) for the
year Ownership
—% Level PagseguroBrazil 12,060,765 5,790,122 6,270,643 776,889 99.99 Direct Net+Phone 1,440,534 1,411,587 28,948 (15,010) 99.99 IndirectBoaCompra 980,529 953,979 26,549 6,588 99.99 IndirectBCPS 2,447 373 2,074 911 99.50 IndirectR2TECH 5,813 1,944 3,868 2,691 51.00 IndirectBIVA 1,882 5,349 (3,468) (4,394) 77.35 IndirectFIDC 745,236 212,760 532,476 331,179 100.00 IndirectTILIX 4,410 3,975 435 — 100.00 Indirect
Operationsofthesubsidiaries
• PagSeguroBrazil:isengagedinprovidingfinancialtechnologysolutionsandservicesandthecorrespondingrelatedactivities.PagSeguroBrazilhasinvestmentsinthefollowingcompanies:
• Net+Phone:IsmainlyengagedinacquisitionandsellingPOSdevicesandsimilaritems.OnJuly29,2016,UOLtransferreditsinvestmentinNet+PhonetoPagSeguroBrazil,asacapitalcontribution,intheamountofR$44,317.
• BoaCompra:Allowsitsclientstooperateincross-bordertransactionswherethemerchantandconsumerarelocatedindifferentcountriesacrossLatinAmerica,Spain,PortugalandTurkey.OnApril5,2011,UBNInternetLtda.(“UBN”),asubsidiaryofUOL,acquireda51%equityinterestinBoaCompra.OnJuly26,2013,UBNacquiredanadditional24%equityinterest,increasingitstotalownershipinBoaComprato75%.InMay2016,UBNacquiredtheremaining25%equityinterest,becomingtheownerof100%ofBoaCompra.OnJuly29,2016,UBN’sequityinterestinBoaComprawasspunofftoitsparentcompanyUOL.Subsequently,UOLtransferredits99.9%equityinterestinBoaCompratoPagSeguroBrazilasacapitalcontribution,inthetotalamountofR$12,034.
• BCPS:OnJanuary1,2017,PagSeguroBrazilacquired99.5%ofthesharecapitalandobtainedthecontrolofBCPS.BCPS’smainactivityistoserveasBoaCompra’shubinPortugalandhandlespartofitsaccountmanagement.
• R2TECH:OnMay2,2017,PagSeguroBrazilacquired51.0%ofthesharecapitalandobtainedthecontrolofR2TECH.R2TECH’smainactivityisin
theinformationtechnologyindustry,focusedontheprocessingofback-officesolutions,includingsalesreconciliation,gatewaysolutionsandservicesandthecaptureofcreditcardswithacquirersandsubacquirers.
• BIVA:OnOctober3,2017,PagSeguroBrazilacquiredacontrollinginterestof51.4%inBIVACOHoldingsS.A.,whosemainobjectiveistoacquireparticipationsinothercompanies,commercialorcivil,aspartner,shareholderorquotaholder,aswellasthemanagementoftheseholdings.
InNovember2017,PagSeguroBrazilacquiredanadditionalinterestinBIVA,bringingourtotalinterestto59.3%ofBIVA’stotalsharecapital.
InJanuary15,March12andApril27,2018,PagSeguroBrazilacquiredadditionalinterestsinBIVA(15.1%,0.5%and2.4%,respectively),bringingitstotalinterestto77.35%ofBIVA’stotalsharecapital(59.3%asofDecember31,2017).
BIVAhasinvestmentsinthefollowingsubsidiaries:
• BivaServiçosFinanceirosS.A:whosemainobjectiveistheintermediationamonginvestors,financialinstitutionsandcreditborrowersviaanelectronicplatform;
• BivaCorrespondenteBancárioLtda:whosemainobjectiveistostructurepeer-to-peerfinancingforsmallandmediumenterprisesfollowingthecrowdfundingmodel.
• BivaSecuritizadoradeCréditosS.A.:whosemainobjectiveistoacquireandsecuritizefinancialcredits.
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Notes to the consolidated financialstatements at December 31, 2018(All amounts in thousands of reais unless otherwise stated)
• FIDC:OnOctober4,2017,FIDCisaninvestmentfundwichwasformedtofinancethegrowthofPagSeguroBrazil’searlypaymentofreceivablesfeaturebyacquiringpayablestothirdpartiesheldbyPagSeguroBrazil(“Assignor”).PagSeguroBrazilconsolidatesthefinancialstatementsofFIDC.TheconsolidationisjustifiedbythefactthattherisksofdefaultandtheresponsibilityforexpensesandadministrationrelatedtotheFIDCarelinkedtosubordinatedquotasheldbythePagSeguroBrazil.
InMarch29,2018,twoinvestorscontributedcapitalintheamountofR$20millioninFIDC,acquiringonlyseniorandmezzaninequotasoftheFIDC.Theseniorandmezzaninequotespay107%oftheInterbankDepositCertificate(CDI)withannualamortizationofinterest.
AtDecember31,2018,thesharecapitalofFIDCiscomposedofsubordinatedquotas,seniorquotasandmezzaninequotas.PagSeguroBrasilowns100%ofthesubordinatedquotas.
• TILIX:OnDecember5,2018,PagSeguroBrazilacquired100%ofthesharecapitalandobtainedthecontrolofTILIX.ThecompanyprovidessoftwaredevelopmentformanagingpaymentsolutionsforB2CandB2B.
5. Segment reporting
OperatingsegmentsarereportedconsistentlytotheBoardofDirectors,whichisresponsibleforallocatingresourcesandassessingtheperformanceoftheoperatingsegmentsandtotakePagSeguroGroup’sstrategicdecisions.
Consideringthatalldecisionsarebasedonconsolidatedreports,andthatalldecisionsrelatedtostrategicandfinancialplanning,purchases,investmentsandtheallocationoffundsaremadeonaconsolidatedbasis,thePagSeguroGroupoperateinasinglesegment,aspaymentarrangementagents.
PagSeguroGrouphasrevenuearisingfromBraziliandomesticcustomersandcustomerslocatedabroad.ThemainrevenueisrelatedtosalesfromtheBraziliandomesticmarket.Theinternationalmarketrepresents1%,2%and5%fortheyears2018,2017and2016,respectively.
6. Cash and cash equivalents
December 31, 2018 December 31, 2017Short-termbankdeposits 405,227 66,767Short-terminvestments 2,357,823 —
2,763,050 66,767
Cashandcashequivalentsareheldforthepurposeofmeetingshort-termcashneedsandincludecashonhand,depositswithbanksandothershort-termhighlyliquidinvestmentswithoriginalmaturitiesofthree-monthorless,andwithimmaterialriskofchangeinvalue.ThebalanceasatDecember31,2018isrelatatedtoanexcessofcashandcashequivalentsproceedsoriginatedfromtheIPOandthefollow-onofferingmentionedinNotes1.1and1.2,respectively.
7. Financial investments
December 31, 2018 December 31, 2017Short-terminvestments — 210,103
— 210,103
Short-terminvestmentsconsistedoftworepurchaseagreements,withanaveragereturnof96.0%oftheInterbankDepositCertificate(CDI).Thisfinancialassetwasclassifiedasfairvaluethroughprofitandloss.
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Notes to the consolidated financialstatements at December 31, 2018(All amounts in thousands of reais unless otherwise stated)8. Note receivables December 31, 2018 December 31, 2017 Legal obligors Visa Master Hipercard Total Visa Master Hipercard Total Itaú 570,463 1,979,994 514,627 3,065,084 237,335 751,542 250,817 1,239,694Bradesco 735,784 170,497 — 906,281 333,108 83,160 — 416,268BancodoBrasil 566,537 153,633 — 720,170 287,334 84,504 — 371,838CEF 133,882 173,208 — 307,090 69,974 83,684 — 153,658Santander 247,950 871,976 — 1,119,926 122,614 310,946 — 433,560Other(*) 386,808 1,069,323 — 1,456,131 141,802 393,999 — 535,801Totalcardissuers(i) 2,641,424 4,418,631 514,627 7,574,682 1,192,167 1,707,835 250,817 3,150,819
Cielo—Elo — — — 366,619 — — — 151,851Cielo — — — 91,402 — — — 80,464Redecard — — — 5,502 — — — 45,289Amex — — — 1,188 — — — 39,608Vero — — — 4,396 — — — 21,463Other — — — 34,367 — — — 31,864Totalacquirers(ii) — — — 503,474 — — — 370,539
Other — — — 26,523 — — — 991Totalother — — — 26,523 — — — 991
Total note receivables 2,641,424 4,418,631 514,627 8,104,679 1,192,167 1,707,835 250,817 3,522,349
(*) Referstootherpulverizedreceivablesfromlegalobligors.(i) Cardissuers:receivablesderivedfromtransactionswherePagSeguroBrazilactsasthefinancialintermediaryinoperationswiththeissuingbanks,relatedtotheintermediationagreementsbetween
PagSeguroBrazilandVisa,MastercardorHipercard.However,PagSeguroBrazil’scontractualnotereceivablesarewiththefinancialinstitutions,whicharethelegalobligorsofthenotereceivables.Additionally,amountsduewithin27daysoftheoriginaltransactiondate,includingthosethatfallduewiththefirstinstallmentofinstallmentreceivables,areguaranteedbyVisa,MastercardorHipercard,asapplicable,intheeventthatthelegalobligorsdonotmakepayment.PagSeguroBrazilstartedoperatingdirectlyasafinancialintermediaryin2016.
(ii) Acquirers:referstocardprocessingtransactionstobereceivedfromtheacquirers,whicharethirdpartiesactingasfinancialintermediariesbetweentheissuingbankandPagSeguroBrazil.Thisbalancealsoincludesthereceivablesfromsalesofdebitandcreditcardreaders.
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Notes to the consolidated financialstatements at December 31, 2018(All amounts in thousands of reais unless otherwise stated)
Thematurityanalysisofnotereceivablesisasfollows:
December 31, 2018 December 31, 2017Duewithin30days 4,323,893 2,213,929Duewithin31to120days 3,135,358 1,045,825Duewithin121to180days 468,913 114,953Duewithin181to360days 176,515 147,642
8,104,679 3,522,349
9. Related-party balances and transactions
PagSeguroGroupiscontrolledbyUOL(incorporatedinBrazil).
i. Balancesandtransactionswithrelatedparties:
December 31,2018 December 31, 2017 Payables Receivables PayablesImmediateparent
UOL—cashmanagement(a) — 124,721 —UOL—salesofservices(b) 9,822 — 32,286UOL—sharedservicecosts 10,234 — —
Affiliatedcompanies UOLDiveo—cashmanagement(a) — 2 —UOLDiveo—salesofservices(b) 3,290 — 621UOLDiveo—sharedservicecosts 126 — —ConcursoVirtualS.A. — — 1,522TransfolhaTransportadoraeDistribuiçãoLtda. 4,336 — 745LivrariadaFolhaLtda. 32 — 1,078EmpresaFolhadaManhãS/A 2,073 — 2,320Others 884 — 529
30,797 124,723 39,101
(a) Thereceivablestransactionswithrelatedpartiesarisingfromcashmanagement.TheremainingbalancewasfullypaidinApril2018. (b) Salesofservicesrefersmainlytothepurchaseof(i)advertisingservicesfromUOLand(ii)servicesrelatedtotechnicalsupportinhostingfromUOLDiveoTecnologiaLtda.(“UOLDiveo”).
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Notes to the consolidated financialstatements at December 31, 2018(All amounts in thousands of reais unless otherwise stated) December 31, 2018 December 31, 2017 December 31, 2016 Revenue Expense Revenue Expense Revenue Expense Immediateparent
UOL—sharedservicecosts(a) — 105,433 — 58,375 — 31,498UOL—salesofservices(b) 2,233 52,115 689 46,976 — 81,007
Affiliatedcompanies UOLDiveo—sharedservicecosts(c) — 534 — 24 — 1,710UOLDiveo—salesofservices(d) — 26,943 — 28,953 — 18,069TransfolhaTransportadoraeDistribuiçãoLtda. 374 18,889 39 15,405 — 5,500LivrariadaFolhaLtda. 160 — 319 — 349 —Others 401 54 433 130 395 101
3,168 203,967 1,480 149,863 744 137,885
(a) Sharedservicescostsmainlyrelatedto(i)payroll,(ii)ITstructure/softwareand(iii)propertyrentalwhichareincurredbytheparentcompanyUOLandarechargedtoPagSeguroBrazilpursuantto
costsharingcontractualagreements.Suchcostsareincludedinadministrativeexpenses.TheincreaseinthebalancereferstopayrolltaxesrelatedtoLTIPpaymentsmadeintheyearendedDecember31,2018whichamountedtoR$61,713,andwhicharepaidbytheparentcompanyUOLandreimbursedbythePagSeguroGroup.
(b) SalesofadvertisingservicesareincurredbytheparentcompanyUOLandarechargedtoPagSeguroBrazilpursuanttocontractualagreements.(c) SharedservicescostsareincurredbytheaffiliatedcompanyUOLDiveoandarechargedtoPagSeguroBrazilpursuanttocontractualagreements.ThemaincostsarerelatedtoITstructure/software.(d) SalesofservicesfromtheaffiliatedcompanyUOLDiveorelatedtotechnicalsupportinhostingservices(startedin2016)andarechargedtoPagSeguroBrazilpursuanttocontractualagreements.
i. Keymanagementcompensation
KeymanagementcompensationincludesshortandlongtermbenefitsofPagSeguroBrazil’sexecutiveofficers.Theshortandlongtermcompensationrelatedtotheexecutiveofficersin2018amountedtoR$99,331(R$3,487andR$2,658in2017and2016,respectively,includesonlyshort-termbenefits).
10. Business combinations
Acquisitions for the year ended December 31, 2017
Amount ofpurchased
books Evaluationadjustment
Fair value ofassets and liabilities acquired
Theassetsandliabilitiesarisingfromtheacquisitions Cashandcashequivalents 51 — 51Liquidworkingcapital, Assetsacquired 2,598 — 2,598Liabilitiesassumed (1,312) — (1,312)Property,plantandequipmentandintangibleassets 643 2,498 3,141
Valueofnetassets 1,980 2,498 4,478
Goodwill 26,184 (2,498) 23,686
Bargainpurchasegain (87) — (87)
Purchasecost 28,077 — 28,077
Considerationforthepurchasesettledincash 22,276
Cashandcashequivalentsatthesubsidiaryacquired (51)
Amountpaidonacquisitionslesscashandcashequivalentsacquired 22,225
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Notes to the consolidated financialstatements at December 31, 2018(All amounts in thousands of reais unless otherwise stated)
Acquisition for the year ended December 31, 2018
Amount ofpurchased
books
Evaluationadjustment
(*)
Fair value ofassets and liabilities acquired
Theassetsandliabilitiesarisingfromtheacquisition Cashandcashequivalents 1,996 — 1,996Liquidworkingcapital, Assetsacquired 130 — 130Liabilitiesassumed (3,975) — (3,975)Property,plantandequipmentandintangibleassets 2,284 — 2,284
Valueofnetassets 435 — 435
Goodwill 19,175 — 19,175
Purchasecost 19,610 — 19,610
Considerationforthepurchasesettledincash 3,810
Cashandcashequivalentsatthesubsidiaryacquired (1,996)
Amountpaidonacquisitionslesscashandcashequivalentsacquired 1,813
(*) ThepurchasepriceallocationmaybesubjecttochangesinthemeasurementperiodasdefinedinIFRS.
TheacquisitionsdescribedbelowareinaccordancewithPagSeguroGroup’sbusinessstrategies,aswellastheproductsofferedbythemandtheirclientportfolio.
a)BCPS
OnJanuary1,2017,PagSeguroBrazilacquired99.5%ofthesharecapitalandobtainedcontrolofBCPS.
TheamountpaidintheacquisitionwasR$407,whichwassettledincashonthatdate.Thefairvalueoftheacquiredassets,amountingR$568,andtheassumedliabilitiesamountingtoR$75attheacquisitiondatearesubstantiallysimilartotheirbookvalue.AbargainpurchasegainofR$87arosefromtheacquisitionofBCPS.TheimpactsoftheacquisitionwerenotconsideredmaterialtoPagSeguroBrazil.
b)R2TECH
OnMay2,2017,PagSeguroBrazilacquired51.0%ofthesharecapitalandobtainedcontrolofR2TECH.TheconsiderationforthepurchasewasR$9,200,ofwhichR$3,500isavariableinstallment,subjecttotheattainmentofspecifictargetsfortheyear2018,establishedintheacquisitionagreement,aftertheconclusionoftheCompany’sauditedfinancialstatements.Basedoncurrentmanagementexpectations,thisperformancegoalwillbeachieved.
c)BIVA
InOctober,2017,PagSeguroBrazilacquiredcontrolofBIVAwiththeacquisitionofa51.4%interest.
ThetotalconsiderationpaidfortheinitialpurchasewasR$18,470,whichwassettledincashontheacquisitiondate.Thefairvalueoftheassetsacquired,intheamountofR$2,350andtheliabilitiesassumed,intheamountofR$997,ontheacquisitiondate,aresubstantiallysimilartotheirbookvalue.
ThegoodwillofR$17,117arisingfromtheacquisitionisattributabletothefutureprofitabilityofthebusinessinsynergywiththeproductsofferedbythePagSeguroGroup.
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Notes to the consolidated financialstatements at December 31, 2018(All amounts in thousands of reais unless otherwise stated)
OnNovember30,2017,PagSeguroBrazilacquiredanadditionalinterestof7.9%oftheissuedsharesforapurchaseconsiderationofR$2,394,increasingPagSeguroBrazil’sinterestto59.3%.OnJanuary15,March12andApril27,2018,PagSeguroBrazilacquiredadditionalinterestsofBIVA(15.12%,0.5%and2.42%,respectively),bringingitstotalinterestto77.3%ofBIVA’stotalsharecapital(59.3%asofDecember31,2017).ThetotalamountpaidfortheseacquisitionswasR$5,389.
d)TILIX
OnDecember5,2018,PagSeguroBrazilacquired100.0%ofthesharecapitalandobtainedthecontrolofTILIX.ThetotalconsiderationforthepurchasewasR$19,610,ofwhichR$3,810wassettledincashandR$15,800invariableinstallments,subjecttotheattainmentofspecifictargetsin2020(R$4,100)and2021(R$11,700),establishedintheacquisitionagreementThefairvalueoftheassetsacquiredandtheliabilitiesassumedontheacquisitiondate,aresubstantiallysimilartotheirbookvalue.Basedoncurrentmanagementexpectations,thisperformancegoalwillbeachieved.
ThepurchasepriceallocationmaybesubjecttochangesinthemeasurementperiodasdefinedinIFRS.ThegoodwillofR$19,175arisingfromtheacquisitionisattributabletothefutureprofitabilityofthebusinessinsynergywiththeproductsofferedbythePagSeguroGroup.
11. Property and equipment
(a) Propertyandequipmentiscomposedasfollows:
December 31, 2018
Cost Accumulateddepreciation Net
Dataprocessingequipment 23,334 (7,815) 15,519Facilities 38 (27) 11Machineryandequipment 44,757 (3,096) 41,661Furnitureandfittings 2,153 (148) 2,005Buildingimprovements 6,954 (195) 6,759Vehicles 1,371 (222) 1,149
78,607 (11,503) 67,104
December 31, 2017
Cost Accumulateddepreciation Net
Dataprocessingequipment 11,024 (5,114) 5,910Facilities 53 (23) 30Machineryandequipment 4,738 (444) 4,294Furnitureandfittings 397 (66) 331Buildingimprovements 263 (29) 234Vehicles 132 (42) 90
16,607 (5,718) 10,889
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Notes to the consolidated financialstatements at December 31, 2018(All amounts in thousands of reais unless otherwise stated)(b) Thechangesincostandaccumulateddepreciationwereasfollows:
Data processingequipment Facilities
Machineryand
equipment
Furnitureand
fittings Building
improvements Vehicles Total AtDecember31,2017 Cost 11,024 53 4,738 397 263 132 16,607Accumulateddepreciation (5,114) (23) (444) (66) (29) (42) (5,718)
Netbookvalue 5,910 30 4,294 331 234 90 10,889
AtDecember31,2018 Cost
Purchases 12,310 — 40,019 1,667 6,341 1,238 61,575Disposals — (15) — — — — (15)Acquisitionofsubsidiary — — — 89 351 — 440Depreciation (2,701) (4) (2,652) (82) (166) (180) (5,785)
Netbookvalue 15,519 11 41,661 2,005 6,759 1,149 67,104
AtDecember31,2018 Cost 23,334 38 44,757 2,153 6,954 1,371 78,607Accumulateddepreciation (7,815) (27) (3,096) (148) (195) (222) (11,503)
Netbookvalue 15,519 11 41,661 2,005 6,759 1,149 67,104
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Notes to the consolidated financialstatements at December 31, 2018(All amounts in thousands of reais unless otherwise stated)12. Intangible assets
(a) Intangibleassetsarecomposedasfollows:
December 31, 2018
Cost Accumulatedamortization Net
Expendituresrelatedtosoftwareandtechnology(i) 462,282 (211,929) 250,353Softwarelicenses 17,227 (4,073) 13,154Customerrelationships 1,981 (448) 1,533Goodwill(ii) 40,574 — 40,574
522,064 (216,450) 305,614
December 31, 2017
Cost Accumulatedamortization Net
Expendituresrelatedtosoftwareandtechnology(i) 241,490 (115,665) 125,825Softwarelicenses 9,510 (2,043) 7,467Customerrelationships 1,981 (91) 1,890Goodwill(ii) 23,686 — 23,686
276,667 (117,799) 158,868
(i) PagSeguroGroupcapitalizestheexpensesincurredwiththedevelopmentofplatforms,whichareamortizedovertheirusefullives,withinarangefromthreetofiveyears. (ii) GoodwillprovidedontheacquisitionofthecompaniesR2TECH,BIVAandTILIX.
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Notes to the consolidated financialstatements at December 31, 2018(All amounts in thousands of reais unless otherwise stated)(b) Thechangesincostandaccumulatedamortizationwereasfollows:
Expenditureswith
software andtechnology
Softwarelicenses
Customer relationships Goodwill Total
AtDecember31,2017 Cost 241,490 9,510 1,981 23,686 276,667Accumulatedamortization (115,665) (2,043) (91) — (117,799)
Netbookvalue 125,825 7,467 1,890 23,686 158,868
AtDecember31,2018 Cost
Additions 218,947 7,717 — — 226,665Acquisitionofsubsidiary 1,845 — — 16,888 18,733Amortization (96,264) (2,030) (357) — (98,651)
Netbookvalue 250,353 13,154 1,533 40,574 305,614
AtDecember31,2018 Cost 462,282 17,227 1,981 40,574 522,065Accumulatedamortization (211,929) (4,073) (448) — (216,450)
Netbookvalue 250,353 13,154 1,533 40,574 305,614
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Notes to the consolidated financialstatements at December 31, 2018(All amounts in thousands of reais unless otherwise stated)13. Payables to third parties
December 31,
2018 December 31,
2017 Payablestothirdparties 4,324,198 3,080,569
4,324,198 3,080,569
Payablestothirdpartiescorrespondtoamountstobepaidtocommercialestablishmentswithrespecttotransactionscarriedoutbytheircardholders,netoftheintermediationfeesanddiscountsapplied.PagSeguroBrazil’saveragesettlementtermsagreeduponwithcommercialestablishmentsisupto30days.
14. Salaries and social charges
December 31,
2018 December 31,
2017 Profitsharing 20,653 15,237Salariespayable 4,378 2,758Socialcharges 8,421 5,102Payrollaccruals 14,601 9,807Payrolltaxes(LTIP) 23,816 —Other 2,067 1,365
73,936 34,269
15. Taxes and contributions
December 31,
2018 December 31,
2017 Taxes
Servicestax(i) 122,241 14,837Value-addedtaxonsalesandservices(ii) 23,796 3,830Socialintegrationprogram(iii) 17,530 9,918Socialcontributiononrevenues(iii) 107,872 59,358Incometaxandsocialcontribution(iv) 685 35,474Other 1,919 1,264
274,043 124,681
Judicial deposits (v) Servicestax(i) (52,226) (11,375)Value-addedtaxonsalesandservices(ii) (19,476) (2,665)Socialintegrationprogram(iii) (17,088) (8,188)Socialcontributiononrevenues(iii) (105,160) (50,389)
(193,950) (72,617)
80,093 52,064
(i) Referstotaxesonrevenuefromtransactionactivities. (ii) ReferstotheValue-addedTaxonSalesandServices(ICMS)amountsduebyNet+Phone,relatedtotaxsubstitutionandtaxratedifferential,appliedonsalesofcreditanddebitcardreaders. (iii) RefersmainlytoSocialIntegrationProgram(PIS)andSocialContributiononRevenues(COFINS)chargedonfinancialincome. (iv) Referstotheincometaxandsocialcontributionpayableoncurrentincometaxesandcontribution. (v) PagSeguroGroupobtainedcourtdecisionstodeposittheamountrelatedtothepaymentsinescrowformattersdiscussedinitems“i”,“ii”and“iii”above.
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Notes to the consolidated financialstatements at December 31, 2018(All amounts in thousands of reais unless otherwise stated)16. Provision for contingencies
SomecompaniesofPagSeguroGrouparepartytolaborandcivillitigationinprogressandarediscussingsuchmattersattheadministrativeandjudiciallevels,which,whenapplicable,aresupportedbyjudicialdeposits.Theprovisionsforprobablelossesarisingfromthesemattersareestimatedandperiodicallyadjustedbymanagement,supportedbytheopinionofitsexternallegaladvisors.
December 31,2018
December 31,2017
Civil 6,680 4,326Labor 324 322
Current 7,004 4,648
SomecompaniesofPagSeguroGrouparepartytotaxlawsuitsinvolvingrisksclassifiedbylegaladvisorsaspossiblelosses,forwhich\noprovisionwasrecognizedatDecember31,2018,totalingapproximatelyR$50,978(December31,2017-R$25,800).PagSeguroGroupcompaniesarenotpartytocivilandlaborlawsuitsinvolvingrisksclassifiedbymanagementaspossiblelosses.
17. Income tax and social contribution
(a) Reconciliationofthedeferredincometaxandsocialcontribution:
Tax losses
Tax credit
Technologicalinovation (i)
Other temporarydifferences-ASSETS
Other temporary differences -LIABILITY Total
Deferred tax AtDecember31,2016 1,051 3,606 (24,378) 3,648 — (16,074)Includedinthestatementofincome 436 (721) (16,814) 28,995 (1,616) 10,280
AtDecember31,2017 1,487 2,885 (41,192) 32,642 (1,616) (5,794)
Includedinthestatementofincome 1,424 (712) (41,987) 32,073 (117,129) (126,331)
AtDecember31,2018 2,911 2,173 (83,179) 64,715 (118,745) (132,125)
(i) ThemaintemporarydifferencesrepresentingthebalanceofthedeferredtaxliabilityreferstothebenefitgrantedbytheTechnologicalInnovationLaw(Lei do Bem) .
Taxlosscarry-forwardsarerecognizedasdeferredtaxassetstotheextentthattherealizationoftherelatedtaxbenefitthroughfuturetaxableprofitsisprobable.Taxlossesdonothaveanexpirationdate.
Theestimatedrealizationofdeferredtaxassetsinnon-currentassetsandliabilitiesisasfollows:
December 31, 2018 December 31,2017 Liability Assets Liability 2018 (8,508) 8,895 (20,728)2019 (13,659) 4,040 (18,008)2020 (15,420) 2,111 (2,454)2021 10,556 982 (1,434)2022 (105,094) 20,987 (185)
(132,125) 37,015 (42,809)
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Notes to the consolidated financialstatements at December 31, 2018(All amounts in thousands of reais unless otherwise stated)(b) Reconciliationoftheincometaxandsocialcontributionexpense:
PagSeguroGroupcomputedincometaxandsocialcontributionunderthetaxableincomemethod.ThefollowingisareconciliationofthedifferencebetweentheactualincometaxandsocialcontributionexpenseandtheexpensecomputedbyapplyingtheBrazilianfederalstatutoryratefortheyearsendedDecember31,2018,2017and2016:
December 31,2018
December 31,2017
December 31,2016
Profitfortheyearbeforetaxes 1,217,623 683,504 155,359Statutoryrate 34% 34% 34%
Expectedincometaxandsocialcontribution (413,992) (232,391) (52,822)Income tax and social contribution effect on: Permanentadditions(exclusions)
Gifts (352) (375) —R&Dandtechnologicalinnovationbenefit—Law11.196/05(i) 58,893 24,987 15,898Interestonowncapital — — 8,860
Taxationofincomeabroad(ii) 45,008 — —Otheradditions 3,309 3,069 485
Incometaxandsocialcontributionexpense (307,134) (204,711) (27,580)
Effectiverate 25% 30% 18%Incometaxandsocialcontribution—current (180,884) (214,988) (7,431)Incometaxandsocialcontribution—deferred (126,331) 10,278 (20,149)
(i) ReferstothebenefitgrantedbytheTechnologicalInnovationLaw(Lei do Bem ),whichreducestheincometaxcharges,basedontheamountinvestedbyPagSeguroGrouponspecific
intangibleassets,seeNote11. (ii) ReferstothebenefitbasedonthelocallawoftheCaymanIslands(specifically,theCompaniesLawof1960).Thereisnotaxationontheincomeearnedinthecompaniesbasedinthis
jurisdiction.Asaresultofthelocaltaxregulations,alltheexchangevariantionsfromU.S.dollarstoreaiswhichgenerateincomehavenotaximpactsforPagSeguroDigital.
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Notes to the consolidated financialstatements at December 31, 2018(All amounts in thousands of reais unless otherwise stated)18. Equity
a)Sharecapital
AtDecember31,2018,sharecapitalisrepresentedby327,285,232commonshares,parvalueofUS$0.000025.SharecapitaliscomposedofthefollowingsharesfortheyearsendedDecember31,2018and2017:
December31,2017sharesoutstanding 262,288,607
PrimarysharesofferedintheIPO 50,925,642Primarysharesofferedinthefollow-onoffering 11,550,000Long-TermIncentivePlan 3,024,625Repurchaseofcommonshares(Note18(f)) (503,642)
December31,2018sharesoutstanding 327,285,232
DuringtheyearendedDecember31,2018,sharesofPagSeguroDigitalwereissuedasaresultoftheIPO,follow-onofferingandlong-termincentiveplan,seedetailsinNotes1.1,1.2,1.3and18(c).
Incrementalcostsdirectlyattributabletotheissuanceofnewsharesoroptionsareshowninequityasadeduction,netoftax,fromtheIPOandfollow-onofferinggrossproceeds.
b)Capitalreserve
Thecapitalreservecanonlybeusedtoincreasecapital,offsetlosses,redeem,reimburseorpurchasesharesorpaycumulativedividendsonpreferredshares.
OnJanuary26,2018,50,925,642newshareswereissuedatapriceofUS$21.50persharerepresentingnetproceedsofUS$1,046.0million(orR$3,289.8million).RefertoNote1.1forfurtherdetails.
OnJune26,2018,11,550,000newshareswereissuedatapriceofUS$29.25persharerepresentingnetproceedsofUS$326.8million(orR$1,232.6million).RefertoNote1.2forfurtherdetails.
c)Sharebasedlongtermincentiveplan(LTIP)
MembersofmanagementparticipateintheLTIP,whichwasestablishedbyUOLforitsgroupcompaniesonJuly29,2015andhasbeenadoptedbyPagSeguroDigital.BeneficiariesundertheLTIPareselectedbyUOL’sLTIPCommittee,whichconsistsoftheChairmanandtwoofficersofUOL,andaresubmittedtoourBoardofDirectorsforadoption.
OnJanuary26,2018,beneficiariesundertheLTIPweregrantedrightsintheformofnotionalcashamountswithoutcashconsideration.TheserightsvestinfiveequalannualinstallmentsstartingontheearlierofJuly29,2015andthebeneficiary’semploymentstartdate.UnderthetermsoftheLTIP,uponcompletionoftheIPO,thevestedportionofeachbeneficiary’sLTIPrightswasconvertedintoClassAcommonsharesofPagSeguroDigitalattheIPOprice(US$21.50)whichistheassessedfairvalueatthegrantdate.Asaresult,thebeneficiariesofthetheLTIPreceivedatotalof1,823,727newClassAcommonsharesuponcompletionoftheIPO.
Theunvestedportionsofeachbeneficiary’sLTIPrightswillbesettledoneachfutureannualvestingdate.
ThesharesgrantedundertheLTIPweresubjecttoaone-yearlock-upperiod,expiringonthefirstanniversaryoftheIPO.AnysharesthatareissuedonasubsequentvestingdateduringthefirstyearaftertheIPOwillbesubjecttotheremainderofthatsamelock-upperiod.Afterthecloseofthatone-yearperiod,sharestobegrantedundertheLTIParenolongerbesubjecttoalock-up.
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Notes to the consolidated financialstatements at December 31, 2018(All amounts in thousands of reais unless otherwise stated)
Thisarrangementisclassifiedasequity-settled.FortheyearendedDecember31,2018,theCompanyrecognizedcompensationexpensesrelatedtotheLTIPinthetotalamountofR$299,036.
ThemaximumnumberofcommonsharesthatcanbedeliveredtobeneficiariesundertheLTIPmaynotexceed3%ofourissuedsharecapitalatanytime.AtDecember31,2018,totalsharesgrantedwere5,896,861,andthetotalsharesissuedwere3,024,625.TherewerenoforfeituresorexpirationsintheyearendedDecember31,2018.
d)Dividends
AttheExtraordinaryGeneralShareholdersMeetingheldonSeptember29,2017,PagSeguroBrazil’sshareholdersapprovedthedistributionof(i)R$142,797ofdividendsrelatedtothesix-monthperiodendedJune30,2017and(ii)R$96,008inadditionaldividendsrelatedtotheyearendedDecember31,2016.ThetotaldividendsdistributedamountedtoR$238,803,ofwhichR$184,530wasoffsetagainstreceivablesunderthecentralizedcashmanagementwithUOLandthebalanceofR$54,272waspaidincashbyPagSeguroBraziltoUOL.
e)Equityvaluationadjustments
TheCompanyrecognizesinthisaccounttheaccumulatedeffectoftheforeignexchangevariationresultingfromtheconversionofthefinancialstatementsoftheforeignsubsidiaryBCPS,representedbytheaccumulatedamountofR$263asofDecember31,2018(R$55asofDecember31,2017).Thisaccumulatedeffectwillberevertedtotheresultoftheyearasgainorlossonlyincaseofdisposalorwrite-offoftheinvestment.
TheCompanyalsorecognizedthedifferencebetweenthebookvalueandtheamountspaidintheacquisitionsofadditionalinterestsofthenon-controllingshareholdersofthesubsidiaryBIVA,intheamountofR$7,588,inthisaccount.
f)Treasuryshares
OnOctober30,2018,PagSeguroDigital’sboardofdirectorsauthorizedasharerepurchaseprogram,underwhichtheCompanymayrepurchaseuptoUS$250millioninoutstandingClassAcommonsharestradedontheNewYorkStockExchange(NYSE).TheCompany’smanagementisresponsiblefordefiningthetimingandthenumberofsharestobeacquired,withinauthorizedlimits.
DuringtheyearendedDecember31,2018anumberof503,642shareswererepurchasedforatotalofUS$10,119,425(averageofUS$20.09pershare)whichcorrespondstoR$39,532.
19. Earnings per share
a)Basic
BasicearningspersharearecalculatedbydividingtheprofitattributabletoshareholdersofPagSeguroDigitalbytheweightedaveragenumberofcommonsharesissuedandoutstandingduringtheyearsendedDecember31,2018,2017and2016:
December 31, 2018
December 31, 2017
December 31, 2016
ProfitattributabletoshareholdersoftheCompany 909,267 478,781 127,186Weightedaveragenumberofoutstandingcommonshares 317,647,562 262,288,607 262,288,607
Basicearningspershare—R$ 2.8625 1.8254 0.4849
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Notes to the consolidated financialstatements at December 31, 2018(All amounts in thousands of reais unless otherwise stated)
b)Diluted
Dilutedearningspershareiscalculatedbyadjustingtheweightedaveragenumberofcommonsharesoutstandingtoassumetheconversionofallpotentialcommonshareswithdilutiveeffects.ThesharebasedLTIPistheCompany’sonlycategoryofpotentialcommonshareswithdilutiveeffects.Inthiscase,acalculationisdonetodeterminethenumberofsharesthatcouldhavebeenacquiredatfairvalue.
December 31, 2018
December 31, 2017
December 31, 2016
Profitusedtodeterminedilutedearningspershare 909,267 478,781 127,186
Weightedaveragenumberofoutstandingcommonshares 317,647,562 262,288,607 262,288,607Weightedaveragenumberofsharesunderoptions 2,581,716 — —Weightedaveragenumberofsharesthatwouldhavebeenissuedataveragemarketprice (2,102,607) — —
Adjustednumberofshares 318,126,671 262,288,607 262,288,607
Dilutedearningspershare—R$ 2.8582 1.8254 0.4849
20. Total revenue and income
December 31,
2018 December 31,
2017 December 31,
2016 Grossrevenuefromtransactionactivitiesandotherservices 2,638,103 1,391,381 543,818
Grossrevenuefromsales 513,795 655,153 371,517Grossfinancialincome(i) 1,464,877 858,410 411,413Otherfinancialincome(ii) 278,445 8,576 5,337
Totalgrossrevenueandincome 4,895,220 2,913,520 1,332,085
Deductionsfromgrossrevenuefromtransactionsactivitiesandotherservices(iii) (371,000) (167,120) (63,793)Deductionsfromgrossrevenuefromsales(iv) (139,183) (183,229) (110,923)Deductionsfromgrossfinancialincome(v) (50,345) (39,786) (18,984)
Totaldeductionsfromgrossrevenueandincome (560,528) (390,135) (193,700)
Totalrevenueandincome 4,334,692 2,523,385 1,138,385
(i) Includes(a)interestincomefromearlypaymentofnotespayabletothirdpartiesand(b)interestonnotereceivablesdueininstallments.
(ii) TheincreaseintheperiodreferstoforeignexchangegainonthecurrencyconversionoftheIPOandfollow-onofferingproceedsfortheyearendedDecember31,2018intheamountofR$
131,212andfinancialincomeonfinancialinvestmentsclassifiedascashandcashequivalentsfortheyearendedonDecember31,2018intheamountofR$138,027(December31,2017-R$6,722)
(iii) Deductionsconsistofsalestaxes. (iv) Deductionsarecomposedofsalestaxesandreturns. (v) Deductionsconsistoftaxesonfinancialincome.
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Notes to the consolidated financialstatements at December 31, 2018(All amounts in thousands of reais unless otherwise stated)21. Expenses by nature
December 31,
2018 December 31,
2017 December 31,
2016 Transactionscosts (1,246,480) (661,067) (283,630)Costofgoodssold (567,807) (451,635) (233,419)Marketingandadvertising (375,519) (275,394) (204,857)Personnelexpenses(i) (546,826) (105,794) (63,280)Financialexpenses(ii) (31,209) (104,544) (68,301)Chargebacks(iii) (71,491) (47,854) (31,557)Depreciationandamortization(iv) (95,362) (51,571) (31,246)Other (182,375) (142,022) (66,737)
(3,117,069) (1,839,881) (983,027)
Classifiedas: Costofservices (1,510,770) (829,661) (357,811)Costofsales (633,929) (494,719) (265,856)Sellingexpenses (351,439) (245,759) (199,937)Administrativeexpenses (581,668) (153,177) (84,461)Financialexpenses (31,209) (104,544) (68,301)Other(expenses)income,net (8,054) (12,021) (6,660)
(3,117,069) (1,839,881) (983,027)
(i) TheincreasereferstocompensationexpensesrelatedtotheLTIPfortheyearendedDecember31,2018intheamountofR$264,179,andtherespectivepayrolltaxesintheamountofR$
154,843.
(ii) Ourfinancialexpensesinclude(a)FinancialOperationsTax(IOF)relatedtotheremittanceofcashfromtheCaymanIslandstoBrazilintheamountofR$17,975fortheyearended
December31,2018(December31,2017-R$0),(b)chargestoobtainearlypaymentofreceivablesowedtousbycardissuerstofinanceourearlypaymentofreceivablesfeatureintheamountofR$1,476fortheyearendedDecember31,2018(December31,2017-R$95,878).
(iii) Chargebacksrefertolossesrecognizedintheperiodreflectingtherisksoffraudassociatedwithcardprocessingoperations,asdetailedinNote23(ii). (iv) Thedepreciationandamortizationamountsincurredintheperiodaresegregatedbetweencostsandexpensesaspresentedbelow:
December 31,
2018 December 31,
2017 December 31,
2016 Depreciation Costofsalesandservices (4,012) (1,088) (895)Sellingexpenses (13) (10) (11)Administrativeexpenses (1,760) (714) (371)
(5,785) (1,812) (1,277)
Amortization Costofsalesandservices (97,856) (54,151) (32,846)Administrativeexpenses (795) (375) (59)
(98,651) (54,526) (32,905)
PISandCOFINScredits(*) 9,073 4,767 2,936
Depreciationandamortizationexpense,net (95,362) (51,571) (31,246)
(*) PagSeguroBrazilhasataxbenefitonPISandCOFINSthatallowsittoreducedepreciationandamortizationexpenseswhenincurred.Thistaxbenefitisrecognizeddirectlyasareductionof
depreciationandamortizationexpense.
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Notes to the consolidated financialstatements at December 31, 2018(All amounts in thousands of reais unless otherwise stated)22. Financial instruments by category
PagSeguroGroupestimatesthefairvalueofitsfinancialinstrumentsusingavailablemarketinformationandappropriatevaluationmethodologiesforeachsituation.
Theinterpretationofmarketdata,asregardsthechoiceofmethodologies,requiresconsiderablejudgmentandtheestablishmentofestimatestoreachanamountconsideredappropriateforeachsituation.Therefore,theestimatespresentedmaynotnecessarilyindicatetheamountsthatcouldbeobtainedinthecurrentmarket.Theuseofdifferenthypothesestocalculatemarketvalueorfairvaluemayhaveamaterialimpactontheamountsobtained.TheassetsandliabilitiespresentedinthisNotewereselectedbasedontheirrelevance.
PagSeguroGroupbelievesthatthefinancialinstrumentsrecognizedintheseconsolidatedfinancialstatementsattheircarryingamountaresubstantiallysimilartotheirfairvalue.However,sincetheydonothaveanactivemarket,variationscouldoccurintheeventPagSeguroGroupweretodecidetosettleorrealizetheminadvance.
PagSeguroGroupclassifiesitsfinancialinstrumentsintothefollowingcategories:
December 31,
2018 December 31,
2017 Financial assets Measuredatfairvaluethroughprofitorloss:
Financialinvestments — 210,103Loansandreceivables:
Cashandcashequivalents 2,763,050 66,767Notereceivables 8,104,679 3,522,349Receivablesfromrelatedparties — 124,723Otherreceivables 20,148 27,956
10,887,877 3,951,898
December 31,2018
December 31,2017
Financial liabilities Amortizedcost:
Payablestothirdparties 4,324,198 3,080,569Tradepayables 165,246 92,444Tradepayablestorelatedparties 30,797 39,101Otherpayables 29,501 19,462
4,549,742 3,231,576
23. Financial risk management
PagSeguroGroup’sactivitiesexposeittoavarietyoffinancialrisks:marketrisk(includingcurrencyriskandcashfloworfairvalueinterestraterisk),fraudrisk(chargebacks),creditriskandliquidityrisk.PagSeguroGroup’soverallriskmanagementprogramfocusesontheunpredictabilityoffinancialmarketsandseekstominimizepotentialadverseeffectsonPagSeguroGroup’sfinancialperformance.PagSeguroGroupusesderivativefinancialinstrumentstohedgecertainriskexposures,whenapplicable.
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Notes to the consolidated financialstatements at December 31, 2018(All amounts in thousands of reais unless otherwise stated)
AmongthemainmarketriskfactorsthatmayaffectPagSeguroGroup’sbusinessarethefollowing:
(i) Foreignexchangerisk
Foreignexchangeriskariseswhenfuturecommercialtransactionsorrecognizedassetsorliabilitiesaredenominatedinacurrencythatisnottheentity’sfunctionalcurrency.AsofDecember31,2018andDecember31,2017,PagSeguroGroupisnotmateriallyexposedtoforeignexchangerisk.
(ii) FraudRisk(chargeback)
PagSeguroGroup’ssalestransactionsaresusceptibletopotentiallyfraudulentorimpropersalesanditusesthefollowingtwoprocessestocontrolfraudrisk:
Thefirstprocessconsistsofmonitoring,onarealtimebasis,thetransactionscarriedoutwithcreditanddebitcardsandpaymentslips,throughananti-fraudecosystem.Thisprocessapprovesorrejectssuspicioustransactionsatthetimeoftheauthorization,basedonstatisticalmodelsthatarerevisedonaperiodicbasis.
Thesecondprocessdetectschargebacksanddisputesnotidentifiedbythefirstprocess.ThisisacomplementaryprocessandincreasesPagSeguroGroup’sabilitytoavoidnewinstancesoffraud.
(iii) Creditrisk
Creditriskismanagedonagroupbasisandislimitedtothepossibilityofdefaultby:(a)thecardissuers,whichhavetheobligationoftransferringtothecreditanddebitcardlabelsthefeeschargedforthetransactionscarriedoutbytheircardholders,and/or(b)theacquirers,whichareusedbyPagSeguroGrouptoapprovetransactionswiththeissuers.
Inordertomitigatethisrisk,PagSeguroBrazilhasestablishedaCreditandLiquidityRiskCommittee,whoseresponsibilityistoassessthelevelofriskofeachofthecardissuersservedbyPagSeguroGroup,classifyingthemintothreegroups:
(i) cardissuerswithalowlevelofrisk,withcreditratingsassignedbyFITCH,S&PandMoody’s,whichdonotrequireadditionalmonitoring;
(ii) cardissuerswithamediumlevelofrisk,whicharealsomonitoredinaccordancewiththeBaselandproperty,plantandequipmentratios;and
(iii) cardissuerswithahighlevelofrisk,whichareassessedbythecommitteeatmonthlymeetings.
Nocreditlimitswereexceededduringthereportingperiod,andmanagementdoesnotexpectanylossesfromnon-performancebythesecounterpartiesinadditiontotheamountsalreadyrecognizedaschargebacks,presentedunderfraudrisk.
(iv) Liquidityrisk
PagSeguroGroupmanagesliquidityriskbymaintainingreserves,bankandcreditlinesfortheobtainingborrowings,whendeemedappropriate.PagSeguroGroupcontinuouslymonitorsactualandprojectedcashflows,andmatchesthematurityprofileofitsfinancialassetsandliabilitiesinordertoensurethatPagSeguroGrouphassufficientfundstohonoritsobligationstothirdpartiesandmeetitsoperationalneeds.
PagSeguroGroupinvestssurpluscashininterestbearingsfinancialinvestments,choosinginstrumentswithappropriatematurityorsufficientliquiditytoprovideadequatemarginasdeterminedbytheforecasts.
AtDecember31,2018,PagSeguroGroupheldcashandcashequivalentsofR$2,763,050(R$66,767atDecember31,2017).
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Notes to the consolidated financialstatements at December 31, 2018(All amounts in thousands of reais unless otherwise stated)
ThetablebelowshowsPagSeguroGroup’snon-derivativefinancialliabilitiesdividedintotherelevantmaturitygroupbasedontheremainingperiodfromthebalancesheetdateandthecontractualmaturitydate.Theamountsdisclosedinthetablearethecontractualundiscountedcashflows.
Due within
30 days
Due within31 to 120
days
Due within121 to 180
days
Due within181 to 360
days
Due to 361days or
more days At December 31, 2018
Payablestothirdparties 3,968,125 233,694 66,967 55,412 —Tradepayables 141,958 18,744 1,358 3,186 —Tradepayablestorelatedparties — 28,869 — — —Otherpayables — — — 29,501 —
At December 31, 2017 Payablestothirdparties 2,890,080 133,070 31,081 26,338 —Tradepayables 81,152 6,032 1,740 1,083 2,437Tradepayablestorelatedparties — — — 39,101 —Otherpayables — — — 15,872 —
24. Capital management
PagSeguroGroupmonitorscapitalonthebasisofthegearingratiowhichcorrespondstonetdebtdividedbytotalcapital.Netdebtiscalculatedastotalborrowings(includingcurrentandnon-currentborrowingsasshownintheconsolidatedbalancesheet)lesscashandbanks.Totalcapitaliscalculatedasequityasshownintheconsolidatedbalancesheetplusnetdebt.
PagSeguroGrouphadnoloansatDecember31,2018,andDecember31,2017.Thereforenogearingratioispresented.
25. Fair value measurement
Fairvalueisthepricethatwouldbereceivedtosellanassetorpaidtotransferaliability(exitprice)intheprincipalormostadvantageousmarketfortheassetorliability,inanorderlytransactionbetweenmarketparticipantsatthemeasurementdate.Athree-levelhierarchyisusedtomeasurefairvalue,asshownbelow:
• Level1—Quotedprices(unadjusted)inactivemarketsforidenticalassetsandliabilities.
• Level2—InputsotherthanquotedpricesincludedwithinLevel1thatareobservablefortheassetorliability,eitherdirectly(thatis,asprices)orindirectly(thatis,derivedfromprices).
• Level3—Inputsfortheassetsandliabilitiesthatarenotbasedonobservablemarketdata(thatis,unobservableinputs).
AtDecember31,2017,PagSeguroGrouphadfinancialinvestmentswhosefairvalueadjustmentsisclassifiedasLevel1.PagSeguroGroupdidnothaveanyotherassetsmeasuredatfairvaluein2017.
TherewerenotransfersbetweenLevels1,2and3duringtheyearendedDecember31,2018.
26. Events after the reporting period
OnJanuary4,2019,PagseguroGroupacquired100%ofthesharecapitalandobtainedcontrolofBBNBancodeNegociosS.A.TotalconsiderationpaidamountedtoR$58,820andthetotalnetassetsacquiredamounttoR$44,162.ThisacquisitionisinaccordancewithPagSeguroGroup’sbusinessstrategies,rampingupinvestmentsonnewtechnologies,productsandservicesforourdigitalecosystem.
***
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Exhibit 4.2
REDACTED COPYCertain identified confidential information has been redacted from this exhibit becauseit is both (i) not material and (ii) would be competitively harmful if publicly disclosed.
Confidential portions of this Exhibit are designated by [*****].
Agreement No. ADT:02767/17
7th AMENDMENT TO THE EQUIPMENT SUPPLY AGREEMENTEntered Into on June 26, 2014.
NET+PHONE TELECOMUNICAÇÕES LTDA., alimitedliabilitybusinesssociety,withheadquartersatAvenidaBrigadeiroFariaLima,no.1.384,7thfloor,PartA,inthecityofSãoPaulo,StateofSãoPaulo,enrolledattheCorporateTaxpayerRegistryoftheMinistryofFinance(CNPJ/MF)underno.06.066.832/0001-97,hereinrepresentedasprovidedforinitsBy-Laws,hereinafterreferredtoas“CLIENT”;
PAX BR COMÉRCIO E SERVIÇOS DE EQUIPAMENTOS DE INFORMÁTICA LTDA., alimitedliabilitybusinesssociety,withheadquartersatRuaSantaMônica,no.1.391,Lot03,BlockAH,IndustrialParkSanJose,intheCityofCotia,StateofSãoPaulo,ZipCode(CEP)06.715-865,enrolledatCNPJ/MFunderno.11.603.135/0001-68,hereinrepresentedasprovidedforinitsArticlesofIncorporation,hereinafterreferredtosimplyas“PAX”;and
TRANSIRE FABRICAÇÃO DE COMPONENTES ELETRÔNICOS LTDA., alimitedliabilitybusinesssociety,withitscurrentheadquartersinthecityofManaus,StateofAmazonas,atAvenidadosOitis,no.2.449,DistrictArmandoMendes,CEP69.089-035,enrolledatCNPJ/MFunderno.21.785.364/0001-02,hereinrepresentedasprovidedforinitsArticlesofIncorporation,hereinafterreferredtosimplyas“TRANSIRE”.
WHEREAS:
(i)ThePartiesenteredintotheEquipmentSupplyAgreement(“Agreement”)onJune26,2014,dulyamendedonOctober21,2014,July3,2015,October8,2015,May20,2016,May20,2016,December9,2016,February6,2017;and
(ii)ThePartieswishtoincludethecompanyPAGSEGURO INTERNET S.A. aspartoftheAgreement.
ThePartieshavemutuallyadjustedandagreedtoenterintothepresent7thAmendmenttotheEquipmentSupplyAgreement(“AmendmentTerm”),underthefollowingtermsandconditions:
1. AMENDMENT
1.1. ThePartiesresolve,bymutualagreement,toincludethecompanyPAGSEGURO INTERNET S.A. asacontractingpartyintheAgreement,withthepreambleoftheAgreementbeingfromnowoninforcewiththefollowingwording:
“NET+PHONE TELECOMUNICAÇÕES LTDA., a limited liability business society, with headquarters at Avenida Brigadeiro Faria Lima, no. 1.384, 7 th floor, PartA, in the city of São Paulo, State of São Paulo, enrolled at the Corporate Taxpayer Registry of the Ministry of Finance (CNPJ/MF) under no. 06.066.832/0001-97,herein represented as provided for in its By-Laws, hereinafter referred to as “CLIENT 1”;
PAGSEGURO INTERNET S.A., a corporation with headquarters at Avenida Brigadeiro Faria Lima, 1384, 4 th floor, Part A, in the City of São Paulo, State of SãoPaulo, enrolled at CNPJ/MF under no. 08.561.701/0001-01, herein represented as provided for in its By-Laws, hereinafter referred to simply as “CLIENT 2”, being,CLIENT 1 and CLIENT 2, jointly, also referred to simply as “CLIENTS”;
PAX BR COMÉRCIO E SERVIÇOS DE EQUIPAMENTOS DE INFORMÁTICA LTDA., alimited liability business society, with headquarters at Rua SantaMônica, no. 1.391, Lot 03, Block AH, Industrial Park San Jose, in the City of Cotia, State of São Paulo, Zip Code (CEP) 06.715-865, enrolled at CNPJ/MF under no.11.603.135/0001-68, herein represented as provided for in its Articles of Incorporation, hereinafter referred to simply as “PAX” and
TRANSIRE FABRICAÇÃO DE COMPONENTES ELETRÔNICOS LTDA., a limited liability business society, with its current headquarters in the city of Manaus,State of Amazonas, at Avenida dos Oitis, no. 2.449, District Armando Mendes, CEP 69.089-035, enrolled at CNPJ/MF under no. 21.785.364/0001-02, hereinrepresented as provided for in its Articles of Incorporation, hereinafter referred to simply as “TRANSIRE”.
BeingCLIENT1,CLIENT2,PAXandTRANSIREhereinafteralsoreferredto,separately,“Party”and,jointly,as“Parties”.
1.2. Inviewoftheaboveinclusion,thePartiesresolvetoadjustclause10.2oftheAgreement,whichshallbeinforcewiththefollowingwording:
“10.2. The PRICE of the orders carried out shall be paid by the respective purchasing CLIENT(S), within [*****], upon the issuance of an individualized FiscalDocument/Invoice against the purchasing CLIENT(S), where the CLIENT information shown in the preamble of the Agreement must be observed.”
1.3. Finally,wherethereisreferenceonlytotheCLIENTNET+PHONETELECOMUNICAÇÕESLTDA.intheAgreement,inwhateverisnotspecific,asintheabovepaymentclause,itshouldbeunderstoodasbeingareferencealsototheCLIENTSNET+PHONETELECOMUNICAÇÕESLTDA.andPAGSEGUROINTERNETS.A.
2. RATIFICATION
2.1. ThePartieshaveratifiedalltheothertermsandconditionsoftheAgreement,beingclearthatthetermsandconditionswhichhavenotexpresslybeenamendedbythepresentInstrumentremainunchangedandinfullforce.
Andinwitnesswhereof,thePartiessignthepresentinstrument,in3(three)counterpartsofsamecontent,inthepresenceoftwowitnesses.
/s/ Marcelo Ivaldo da Silva/s/ Siomar de Almeida Torres
/s/ Marcelo Ivaldo da Silva/s/ Siomar de Almeida Torres
NET+PHONE TELECOMUNICAÇÕES LTDA. PAGSEGURO INTERNET S.A.
Marcelo Ivaldo da SilvaControllership Director
RG: 30.034.79CPF: 497.058.224.69
Siomar de Almeida TorresFinance DirectorRG: 19.713.792
CPF: 125.591.238-55
Marcelo Ivaldo da SilvaControllership Director
RG: 30.034.79CPF: 497.058.224.69
Siomar de Almeida TorresFinance DirectorRG: 19.713.792
CPF: 125.591.238-55
/s/ Rejane Novaes /s/ Rejane Novaes
PAX BR COMÉRCIO E SERVIÇOS DE EQUIPAMENTOS DE INFORMÁTICA LTDA.
TRANSIRE FABRICAÇÃO DE COMPONENTES ELETRÔNICOS LTDA.
Rejane NovaesRG: 21.213.546-6
CPF: 129.306.928-04
Rejane NovaesRG: 21.213.546-6
CPF: 129.306.928-04
Witnesses:
1. /s/LuizCarlosM.deJesus 2. /s/FabianaA.AlgavesName: LuizCarlosM.deJesus Name: FabianaA.AlgavesCPF: 0l0.320.138-69 CPF: 369.450.098-74RG: 10.614.703-1 RG: 41.880.120-4[*****]Confidentialinformationredacted.
Exhibit 4.10
PRIMEIRO ADITIVO AO CONTRATO DE PARTICIPAÇÃO NOSARRANJOS DE PAGAMENTO DA VISA DO BRASIL E LICENCIAMENTO
DE MARCA REGISTRADA
ESTEPRIMEIROADITIVOAOCONTRATODEPARTICIPAÇÃONOSARRANJOSDEPAGAMENTODAVISADOBRASILELICENCIAMENTODEMARCAREGISTRADA(“Contrato ”)écelebradoentreaVISA DO BRASILEMPREENDIMENTOS LTDA. ,sociedadeconstituídaeemfuncionamentosobasleisdoBrasil,comsedenacidadedeSãoPaulo,estadodeSãoPaulo,naAv.PresidenteJuscelinoKubitschek,1909,TorreNorte/3ºandar,Brasil,inscritanoCadastroNacionaldaPessoaJurídica,doMinistériodaFazenda(CNPJ/MF)sobonº31.551.765/0001-43(“VISA DO BRASIL ”),VISA INTERNATIONAL SERVICEASSOCIATION, sociedadeconstituídaeemfuncionamentosobasleisdosEstadosUnidosdaAméricaedoestadodeDelawarecomsedenaMetroCenterBoulevard,900,FosterCity,Califórnia94404(VISA INTERNATIONAL ”)(VISADOBRASILEVISAINTERNATIONALdesignadasconjuntamentecomo“VISA ”),e
FIRST AMENDMENT TO THE VISA PAYMENT ARRANGEMENTS
PARTICIPATION AND TRADEMARK LICENSE AGREEMENT
THISFIRSTTOTHEVISAPAYMENTARRANGEMENTPARTICIPATIONANDTRADEMARKLICENSEAGREEMENT(“Agreement ”)isenteredintobyandbetweenVISA DO BRASIL EMPREENDIMENTOS LTDA. ,acorporationorganizedandexistingunderthelawsofBrazil,withitsheadofficesintheCityofSãoPaulo,EstateofSãoPauloatAv.PresidenteJuscelinoKubitschek,1909,NorthTower/3ºfloor,Brazil,enrolledwiththeBrazilianTaxpayerRegistryoftheMinistryofFinance(“CNPJ/MF”)underNº31.551.765/0001-43(VISA DO BRASIL ”),VISA INTERNATIONALSERVICE ASSOCIATIO N,acompanyorganizedandexistingunderthelawsoftheUnitedStatesandthestateofDelawarewithitsheadofficesat900MetroCenterBoulevard,FosterCity,California94404(“VISA INTERNATIONAL ”)(“VISADOBRASILANDVISAINTERNATIONALcollectivelyreferredtoas“VISA ”),and
Nomedoparticipante(doravantedenominado“PARTICIPANTE ”)/Nameofparticipant(hereinaftercalled“Participant”):PAGSEGUROINTERNETS.A.
Endereço(sedeprincipal)/Streetaddress(principleplaceofbusiness):AV.BRIGADEIROFARIALIMA,1.384
Cidade/City:SÃOPAULO
Estado/StateSP
País/Country:BRASIL
Códigopostal/PostalCode:01452-002
Endereçopostal(sefordiferente)/Mailingaddress(ifdifferent):
Cidade/City:
Estado/State:
País/Country:BRASIL
Códigopostal/PostalCode:
Telefone/Telephone:
Códigodopaís/CountryCode:55
Códigodecidade/CityCode:11
Número/Number:30388260
Fax:
Códigodopaís/CountryCode:55
Códigodecidade/CityCode:
Número/Number:
Descriçãojurídica/LegalDescription:INST.DEPGTOEMISSORADEINTRUMENTOPÓS-PAGO
Constituídaeemfuncionamentosobasleisde(estadooupaísdaconstituição)/Organizedandexistingunderthelawsof(stateorcountryofincorporation):BRASIL
CONSIDERANDOqueaVISADOBRASILéinstituidoradearranjosdepagamentocontroladapelaVISAINTERNATIONAL,esededicaaogerenciamentodearranjosdepagamentonoBrasil(“Arranjos de Pagamento da Visa” ),pormeiodosEstatutos,dasRegrasBásicasdaVisaedasRegrassobreProdutoseServiçosVisa,incluindomanuaiseguiastécnicosequaisqueroutrosrequisitoscomplementaresdaVISAINTERNATIONAL(osestatutos,asregras,guiasemanuais,conjuntamentecomtodosequaisqueroutrasregrasaplicáveisparaaparticipaçãonosArranjosdePagamentodaVisa,as“RegrasdaVisa”);CONSIDERANDOQUEAVISAINTERNATIONALéaproprietáriadecertasmarcasregistradasquepodemserusadasnaoperaçãodeArranjosdePagamentodaVisaequesãodescritasnasRegrasVisa(as“Marcas de Propriedade da Visa ”);CONSIDERANDOQUEAVISADOBRASILélicenciadaesublicenciadoraautorizadadasMarcasdePropriedadedaVisaemrelaçãoaseuusonoBrasilemconexãocomosArranjosdePagamentodaVisa;CONSIDERANDOQUEAVISAINTERNATIONALoperaarranjosdepagamentoforadoBrasileprestacertosserviçosinternacionaisrelacionadosaprogramasdeserviçofinanceiro,comoprevistonasRegrasdaVisa;CONSIDERANDOqueaVISAeoPARTICIPANTEcelebraramoContratodeParticipaçãonosArranjosdePagamentodaVisadoBrasileLicenciamentodeMarcaRegistrada(o“Contrato”)datadoem24deAgostode2015pormeiodoqualregularamostermosecondiçõesparaaparticipaçãodoPARTICIPANTEnosArranjosdePagamentoAprovados;CONSIDERANDOqueoPARTICIPANTEdeseja,tambémsomentenoBrasil(o“País Aprovado ”):(i)estenderalistadeArranjosdePagamentodaVisaAprovados,conformeselecionadosaseguir;(ii)usarasMarcasdePropriedadedaVisaautorizadasparausonasRegrasdaVisaparaessesArranjosdePagamentoAprovados(“MarcasLicenciadas ”);e(iii)obterserviçosrelacionadosdaVISADOBRASILedaVISAINTERNATIONALemconexãocomessaparticipaçãonosArranjosdePagamentoAprovados,conformeprevistosnoContrato;
EM ASSIM SENDO ,combasenoscompromissosmútuosassumidosnestedocumento,VISAeoPARTICIPANTE,naintençãodeestaremlegalmentevinculados,nesteatoacordamoquantosegue:
1. TermosDefinidos.SalvosedefinidosdeoutraformanesteAditivo,ostermosiniciadoscomletramaiúsculaterãoosignificadoquelhesfoiatribuídonoContrato.
2. Confidencialidade.AsPartespermanecerãovinculadasàsobrigaçõesdeconfidencialidadeprevistasnoContrato,edeverãomanterconfidenciaistodasequaisquerinformaçõesrelacionadasaoContrato,aesteAditivo,eoutrosdocumentosaquetenhamacessoemvirtudedoContrato,deacordocomasRegrasecomoContrato.
WHEREAS,VISADOBRASILisaBrazilianpaymentarrangementsettlorcontrolledbyVISAINTERNATIONALandisengagedinthebusinessofmanagingpaymentarrangementsinBrazil(“VisaPaymentArrangements”),byvirtueoftheBy-Laws,VisaCoreRulesandVisaProductandServiceRules,includingmanualandtechnicalguidesandanyotheradditionalrequirementsofVISAINTERNATIONAL(theby-laws,rules,guidesandmanuals,collectivelywithallandanyapplicablerulefortheparticipationontheVisaPaymentArrangements,the“VisaRules”);WHEREASVISAINTERNATIONAListheownerofcertaintrademarksthatmaybeusedintheoperationoftheVisaPaymentArrangementsandthataredescribedintheVisaRules(the“Visa-OwnedMarks”);WHEREAS,VISADOBRASILislicensedandauthorizedsublicensoroftheVisa-OwnedMarksregardingitsuseinBrazilinconnectiontotheVisaPaymentArrangements;WHEREASVISAINTERNATIONALoperatespaymentarrangementsoutsideofBrazilandprovidescertaininternationalfinancialservices,asprovidedforintheVisaRules;WHEREASVISAandthePARTICIPANThaveexecutedVisaPaymentArrangementsParticipationandTrademarkLicenseAgreement(the“Agreement”)datedAugust24,2015,wherebythePartieshaveregulatedthetermsandconditionsfortheparticipationofthePARTICIPANTintheApprovedPaymentArrangement;WHEREASTHEPARTICIPANTwishes,alsoonlyinBrazil(the“ApprovedCountry ”)to:(i)extendthelistofApprovedPaymentArrangements,asselectedbelow;(ii)usetheVisa-OwnedMarksauthorizedforuseintheVisaRulesfortheseApprovedPaymentArrangements(“Licensed Marks ”);and(iii)obtainrelatedservicesfromVISADOBRASILandVISAINTERNATIONALinconnectionwiththisparticipationintheApprovedPaymentArrangements,assetforthintheAgreement:
NOW, THEREFORE, basedonthemutualpromisesmadeherein,VISAandthePARTICIPANT,intendingtobelegallybound,herebyagreeasfollows:
1. DefinedTerms.Unlessotherwisedefinedherein,allcapitalizedtermsshallhavethemeaningsascribedtothemintheAgreement.
2. Confidentiality.ThePartiesshallremainboundtotheconfidentialityobligationssetforthintheAgreement,andshallkeepconfidentialanyandallinformationrelatedtotheAgreement,thisAmendment,andotherdocumentstowhichtheyhaveaccessbyvirtueoftheAgreement,pursuanttotheRulesandtotheAgreement
3. AutorizaçãoparaparticipardosArranjosdePagamentosAprovados.AVISADOBRASILautorizaaparticipaçãodoPARTICIPANTE,deformanãoexclusiva,nosArranjosdePagamentoAprovadosnoPaísAprovado,sujeitoaostermosecondiçõesdesteContratoedasRegrasdaVisa,incluindotaxaseencargosdefinidosnaCláusula5doContrato.OPARTICIPANTEterádireitoatodososdireitoseprivilégiosaplicáveisàsuaparticipaçãonosArranjosdePagamentoAprovados,comodispostonasRegrasdaVisa,observadoqueoPARTICIPANTEseráresponsável,deformaexclusiva,portodososcustoseriscosassociadosasuaparticipaçãonosArranjosdePagamentoAprovados.NocasodeoPARTICIPANTEdesejarparticipardeumArranjodePagamentoquenãosejaumArranjodePagamentoAprovado,oPARTICIPANTEdevepreviamentenotificaraVISADOBRASIL,porescrito,eoPARTICIPANTEnãopoderádarinícioàsuaparticipaçãoemoutroArranjodePagamentonemusarquaisquerMarcasdePropriedadedaVisanãoincluídasnasMarcasLicenciadasatéquetenharecebidoconsentimentoprévioporescritodaVISADOBRASIL.OPARTICIPANTEdeclaraegarantequeobtevetodasasautorizaçõesepermissõesnecessáriassobasleiseosregulamentosdoPaísAprovadoparaparticipardosArranjosdePagamentoAprovados.SeasRegrasdaVisaexigiremumpatrocinadorparaaparticipaçãodoPARTICIPANTEemdeterminadosArranjosdePagamentodaVisa,oPARTICIPANTEdeverá(i)terenviadoàVISADOBRASILumcontratodepatrocínioplenamentecumpridoquetragaaassinaturadeumrepresentantelegaldopatrocinador;(ii)tercelebradoumcontratodeprestaçãodeserviçoscomaquelepatrocinadorparaprestarosserviçosnecessáriosaessesArranjosdePagamentoAprovados;e(iii)quenotificaráaVISADOBRASILimediatamente,porescrito,sobrearescisãoouqualquermodificaçãomaterialdosreferidoscontratos.OPARTICIPANTEtambémdeclaraqueenviouàVISADOBRASILumacópiadeseuúltimodemonstrativofinanceiro,cujosconteúdodeclaraserverdadeiro,corretoecompleto.
3. AuthorizationtoParticipateintheApprovedPaymentArrangements.SubjecttothetermsandconditionsofthisAgreementandofVisaRules,includingfeesandchargesdefinedinSection5oftheAgreement,VISADOBRASILauthorizesthePARTICIPANT’snon-exclusiveparticipationintheApprovedPaymentArrangementsintheApprovedCountry.PARTICIPANTwillhaverighttoalltherightsandprivilegesapplicabletoitsparticipationintheApprovedPaymentArrangement,assetforthintheVisRules,andPARTICIPANTwillbeexclusivelyresponsibleforallthecostsandrisksassociatedtoitsparticipationintheApprovedPaymentArrangements.IntheeventthePARTICIPANTwishestoparticipateinaPaymentArrangementthatisnotanApprovedPaymentArrangement,PARTICIPANTshallnotifyVISADOBRASILinadvance,inwriting,andPARTICIPANTwillnotbeabletoinitiateitsparticipationinotherPaymentArrangementoruseanyVisa-OwnedMarksnotincludedintheLicensedMarksuntilithasreceivedpriorwrittenconsentfromVISADOBRASIL.PARTICIPANTdeclaresandwarrantsthatithasobtainedallauthorizationsandpermissionsthatarerequiredunderthelawsandregulationsoftheApprovedCountrytoparticipateintheApprovedPaymentArrangements.IftheVisaRulesrequireasponsorforthePARTICIPANT’sparticipationincertainVisaPaymentArrangements,PARTICIPANTmust(i)havesentsoVISADOBRASILasponsorshipagreementdullyfulfilledwiththesignatureofalegalrepresentativeofthesponsor;(ii)haveenteredintoaservicecontractwiththatsponsortoprovidetheservicesneededtotheseApprovedPaymentArrangements;and(iii)notifyVISADOBRASILimmediately,inwriting,ofanymaterialmodificationorterminationofsuchagreements.PARTICIPANTalsodeclaresthatithassenttoVISADOBRASILacopyofitslatestfinancialstatement,whichcontentitclaimstobetrue,correctandcomplete.
Instruções:SelecionarcomumXosArranjosdePagamentoAprovados.Instructions:SelectwithanXtheApprovedPaymentArrangements. PARTICIPAÇÃO/PARTICIPATION1.Participante Principal Emissor / Principal Issuing Participant☒ ArranjodePagamentoVisaCrédito(DomésticoeInternacional)/VisaCredit(DomesticandInternational)PaymentArrangement☐ ArranjodePagamentoVisaElectroneVisaDébito(DomésticoeInternacional)/VisaElectronandVisaDebit(DomesticandInternational)PaymentArrangement☐ ArranjodePagamentoVisaPré-Pagos(DomésticoeInternacional)VisaPrepaid(DomesticandInternational)PaymentArrangement
2. Participante Associado Emissor / Associate Issuing Participant☐ ArranjodePagamentoVisaCrédito(DomésticoeInternacional)/VisaCredit(DomesticandInternational)PaymentArrangement☐ ArranjodePagamentoVisaElectroneVisaDébito(DomésticoeInternacional)/VisaElectronandVisaDebit(DomesticandInternational)PaymentArrangement☐ ArranjodePagamentoVisaPré-Pagos(DomésticoeInternacional)/VisaPrepaid(DomesticandInternational)PaymentArrangement
3. Participante Principal Credenciador de Estabelecimento Comercial / Merchant Acquiring Principal Participant
☐ArranjosdePagamentoVisaCrédito,ElectroneDébito,Pré-Pagos(DomésticoeInternacional)/VisaCredit,DebitandElectronandPrepaid(DomesticandInternational)PaymentArrangement.
4. Participante Associado Credenciador de Estabelecimento Comercial / Merchant Acquiring Associate Participant
☐ArranjosdePagamentoVisaCrédito,ElectroneDébito,Pré-Pagos(DomésticoeInternacional)/VisaCredit,ElectronandDebitandPrepaid(DomesticandInternational)PaymentArrangement.
Programascomplementares/SupplementaryPrograms:5. Programa Plus / Plus Program
Patrocinado(somenteumaopçãodeProgramapodeserselecionada)/Sponsored(onlyoneProgramoptionmaybeselected):
☐
EmissoreCredenciadorPlus/PlusIssuerandAcquirer
☐ SomenteEmissorPlus/OnlyPlusIssuer
☐
SomenteCredenciadorPlus/OnlyPlusAcquirer.
OPARTICIPANTEreconhecequeseaplicamàsuaparticipaçãoaosArranjosdePagamentoAprovadostodasasdisposiçõesprevistasnoContrato,inclusive,massemselimitaraodispostoemsuasCláusulas2,3,4,5,6,7,8,9,12,14e19.4. LeieForo. EsteAditivoseráregidoporeinterpretadodeacordocomasleisdo
Brasil.AspartesdesignamajurisdiçãodoforodacomarcadacidadedeSãoPaulo,estadodeSãoPaulo,Brasil,pararesolveredirimirqualquercontrovérsiadecorrentedopresenteAditivo.
5. Prazos.OprazodesteAditivoteráinícionadataemqueforassinadoportodasas
Partes(“DatadeVigência”)econtinuaráporumprazode5(cinco)anos(“Prazo”),depoisdoqualserárenovadoautomaticamenteporperíodosadicionaisde5(cinco)anos,salvose,nomínimo180(centoeoitenta)diasantesdofimdoPrazo(ouqualquerrenovaçãodeste),oPARTICIPANTEnotifiqueaVISADOBRASIL,porescrito,desuaintençãoderescindi-loporocasiãodofinaldoPrazo(oudequalquerrenovaçãodeste).
PARTICIPANTacknowledgesthatallprovisionssetforthintheAgreementareapplicabletoitsparticipationintheApprovedPaymentArrangements,includingbutnotlimitedtoitsSections2,3,4,5,6,7,8,9,12,14and19.4. Choiceoflaw.ThisAmendmentshallbegovernedbyandinterpreted
accordingtointernallawsofBrazil,withoutregardtoitsconflictoflawprovisions.ThepartiesdesignatetheForumofthecityofSãoPaulo,StateofSãoPaulo,asthevenuetosolveandsettleanydisputesthatmayarisefromthisAgreement.
5. Term.ThisAmendmentshallbecomeeffectiveasofthedateitissignedby
allParties(the“EffectiveDate”)andshallcontinueforatermoffiveyearsfromtheEffectiveDate,afterwhichthisAgreementshallautomaticallyrenewforanadditionalfiveyearperiodunless,atleast180dayspriortotheendoftheterm(oranyrenewalterm),PARTICIPANTshallhavenotifiedVISADOBRASILinwritingofitsintenttoterminatethisAgreementattheendoftheTerm(oranyrenewalterm).
6. Aditamentos;DivisibilidadeDasDisposiçõesContratuais.Estedocumentonãopoderáseraditadooumodificado,enenhumdeseustermosecondiçõespodeserrenunciado,salvopormeiodeinstrumentoporescritoassinadoportodasasPartes,ou,emcasoderenúncia,pelaParterenunciandocumprimento;desdeque,contudo,odispostoacimanãopossaserinterpretadocomoumalimitaçãodacapacidadedaVISADOBRASILoudaVISAINTERNATIONALdeaditar,suplementar,ou,deoutraforma,modificardetemposemtemposquaisquerdasRegrasdaVisasemoconsentimentodoPARTICIPANTE.Sequalquerprazo,disposição,acordo,pactoourestriçãodestedocumentoouincorporadosporreferênciaaesteContratoforemconsideradosporumtribunaldajurisdiçãocompetenteououtraautoridadecomoinválidos,nulosouinexequíveis,oremanescentedosprazos,disposições,contratos,pactoserestriçõesdestedocumentocontinuarãoemplenovigorevalidadee,denenhumaformaserãoafetados,prejudicadosouinvalidados,desdequeasubstânciaeconômicaoulegaldorelacionamentodoPARTICIPANTEsobestedocumentonãosejaafetadadequalquermaneiramaterialmenteadversaàsPartes.Nestecaso,seenamedidaemqueaposiçãonãopossaserremediadapormeiodeumaalteraçãodasRegrasdaVisadeformageraloudeformaespecíficaaoPaísAprovado,asPartesnegociarãoemboa-féparamodificarestedocumento,paraassimdarefeitoàintençãooriginaldasPartesomaisfielmentepossível,deformaaqueorelacionamentodoPARTICIPANTEsobestedocumentopossacontinuarcomocontempladooriginalmentenamedidadopossível.
7. SemInterpretaçãoRestritiva.Casohajaambiguidadeouquestionamentodas
intençõesouinterpretação,esteAditivoseráinterpretadocomosetivessesidoredigidoconjuntamentepelasPartes,enãohaverápresunçãoouônusdaprovafavorecendooudesfavorecendoqualquerparteemvirtudedaautoriadequalquerdisposiçãodesteAditivo.
8. ÍntegradoContrato.EsteAditivo,incluindoseusdocumentosreferenciados,
passaafazerparteintegrantedoContratoe,juntos,representamaíntegradoacordadoentreasPartesemrelaçãoaseuobjeto.Nãoháoutroscontratos,representações,garantiasouentendimentosentreasPartesemrelaçãoàparticipaçãodoPARTICIPANTEnosArranjosdePagamentoAprovados.EsteContratosubstituiqualqueroutrocontratoentreasPartes,escritoouverbal,emrelaçãoàparticipaçãodoPARTICIPANTEnosArranjosdePagamentoAprovados.Parafinsdeesclarecimento,esteContratoprevaleceesubstituiqualquercontratoanteriorrelacionadoàafiliaçãodoPARTICIPANTE,àsuaparticipaçãonosArranjosdePagamentodaVisaeàautorizaçãoparausodequaisquerMarcasdePropriedadedaVisa.
9. Idioma.EstedocumentoécelebradoeassinadonosidiomasInglêsePortuguês,
sendoqueemcasodedivergênciasdeinterpretação,asPartesacordamqueaversãoemPortuguêsdeveprevalecer.
EMTESTEMUNHODOQUE,asPartesassinamopresenteContratoem3(três)vias,nasdatasindicadasabaixodesuasrespectivasassinaturas.
6. Amendments;Severability.Thisdocumentmaynotbeamendedormodified,andnoneofitstermsorconditionsmaybewaived,exceptpursuanttoaninstrumentinwritingsignedbyallofthepartiesheretoor,inthecaseofawaiver,bythepartywaivingcompliance;provided,however,that,theforegoingshallnotbeconstruedasalimitationontheabilityofVISADOBRASILtoamend,supplementorotherwisemodifyanyoftheVisaRulesfromtimetotimewithouttheconsentofPARTICIPANT.Ifanyterm,provision,agreement,covenantorrestrictionofthisdocumentorincorporatedbyreferenceintothisAgreementisheldbyacourtofcompetentjurisdictionorotherauthoritytobeinvalid,voidorunenforceable,theremainderoftheterms,provisions,agreements,covenantsandrestrictionsofthisdocumentshallremaininfullforceandeffectandshallinnowaybeaffected,impairedorinvalidatedsolongastheeconomicorlegalsubstanceofthePARTICIPANTrelationshipcontemplatedherebyisnotaffectedinanymannermateriallyadversetothepartiestothisdocument.Uponsuchadetermination,ifandtotheextentthepositioncannotberemediedbyanamendmenttotheVisaRuleseithergenerallyorinrelationtotheApprovedCountry(s),thepartiesshallnegotiateingoodfaithtomodifythisdocumentsoastogiveeffecttotheoriginalintentofthepartiesascloselyaspossibleinareasonablyacceptablemannerinorderthatthePARTICIPANTrelationshipcontemplatedbythisdocumentmaycontinueasoriginallycontemplatedtothefullestextentpossible.
7. NoStrictConstruction.Intheeventanyambiguityorquestionofintentor
interpretationarises,thisAmendmentshallbeconstruedasifdraftedjointlybythepartiestothisAgreement,andnopresumptionorburdenofproofshallarisefavoringordisfavoringanypartybyvirtueoftheauthorshipofanyprovisionofthisAmendment.
8. Entireagreement.ThisAmendment,includingthereferreddocuments,is
partoftheAgreementand,together,theyconstitutetheentireagreementandunderstandingbetweenthePartiesregardingitsscope.Therearenootheragreements,representations,warranties,orunderstandingsbetweenthePartieswithrespecttothePARTICIPANT’sparticipationintheApprovedPaymentArrangements.Totheextentthatanyotheragreement,writtenorverbal,appearstoexistbetweenthePartieswithrespecttothesubjectmatterhereof,theAgreementsupersedesanysuchagreement.Forclarificationpurposes,thisAgreementprevailsandsupersedesanyprioragreementrelatedtothePARTICIPANT’saffiliationtotheVisaSystems(eitherwithVisaInternationalorVisadoBrasil)andtothetrademarklicenseofVisaOwnedMarks.
9. Language.ThisdocumentshallbeexecutedandsignedintheEnglishand
Portugueselanguages.IncaseofdiscrepanciesofinterpretationthePartiesagreethatthePortugueseversionshallprevail.
INWITNESSWHEREOF,thepartiesheretohavecausedthisAgreementtobedulyexecuted.
VISA DO BRASIL EMPREENDIMENTOS LTDA
Assinatura/Signature: /S/FERNANDOTELESNome/Name: FernandoTelesCargo/Title: GeneralOfficerData/Date:
PAGSEGURO INTERNET S.A.
Assinatura/Signature: /S/JUANFUENTESNome/Name: JuanFuentesCargo/Title: Data/Date: June2,2017
VISA INTERNATIONAL SERVICE ASSOCIATION
Assinatura/Signature: /S/EDUARDOCOELLONome/Name: EduardoCoelloCargo/Title: GroupExecutive—LACData/Date: July3,2017
Testemunhas/Witnesses:
1. /S/ILLEGIBLE 2. /S/ILLEGIBLE RG RG CPF/MF CPF/MF
Exhibit 4.14
LONG-TERM INCENTIVE PLAN – Goals (LTIP – Goals)PAGSEGURO INTERNET S.A.
1. Long-Term Incentive Plan – Goals
1.1. TheBoardofDirectorsofPagSeguroDigitalLtd.,whichhasbeenlistedontheNewYorkStockExchange(NYSE)sinceJanuary26,2018,incorporatedasanexemptedcompanywithlimitedliabilityintheCaymanIslands(“Company ”),parentcompanyoftheoperatingcompanyPagSeguroInternetS.A.,headquarteredintheCityofSãoPaulo,StateofSãoPaulo,atAvenidaBrigadeiroFariaLima,1,384,4thfloor,A,ZipCode01451-001,registeredwithCNPJ/MFunderNo.08.561.701/0001-01(“PagSeguro Brasil ”),hasapprovedthisLong-TermIncentivePlan–Goals(hereinafterreferredtoas“LTIP-Goals”),throughwhichPagSeguroBrasilmaygrantsharesoftheCompanytocertainemployees(hereinafterreferredtoas“Beneficiaries ”),providedthattheyarepreviouslyselectedandapprovedbytheLTIP-GoalsCommittee,asdefinedbelow,withinthelimitsandconditionsestablishedherein.
1.2. ThepurposeoftheLTIP-GoalsistoreinforcethealignmentofinterestsbetweentheBeneficiariesandtheCompany,givingthemtheopportunitytobecome
partnersoftheCompany,thusdeepeningtheircommitment.PagSeguroBrasilhopestoencouragetheexpansion,successandachievementofitscorporatepurposes,attractingandhiringhighly-committedprofessionalswhowishtosucceed.
1.3. ThemanagementoftheLTIP-Goals,includingtheselectionofBeneficiariesandthedeterminationoftherelevantparticipationconditions,willbeconductedbytheLTIP-Goalscommittee(“LTIP-Goals Committee ”),anadministrativebodyoftheCompanycomprisedoftheCompany’sChairmanoftheboardofdirectorsandtwo(2)otherofficersofUniversoOnlineS.A.appointedbytheCEO.PagSeguroBrasilmayonlyenterintoagreementsoramendmentswiththeBeneficiariesoftheLTIP–GoalsaspreviouslyresolvedbytheLTIP-GoalsCommittee.
1.4. ThesharesprovidedforintheLTIP-GoalsarethoseissuedbytheCompany.
1.5. TheLTIP-GoalsCommitteewillentitleeachBeneficiarytherighttoreceiveannually,aspaymentofpartofthePagSeguroBrasilCorporateResults-Sharing
Plan(“PPR-PSB ”),aGrossValue(“GV ”)inBrazilianReais,providedthatthegoalsestablishedinthePPR-PSBweremetinthepreviousyear.IfthePPR-PSBgoalswerenotmetinthepreviousyear,theBeneficiarywillnotreceiveGVforthatyear.
1.6. Iftheabovementionedconditionsaremet,theGV,netoftaxes,shallbepaidtotheBeneficiary.ThepaymentshallbemadeincashorinsharesissuedbytheCompany,atthediscretionoftheLTIP-GoalsCommittee.IfthepaymentismadeintheformofsharesissuedbytheCompany,theGV,netoftaxes,shallbeconvertedintosharesissuedbytheCompanyonthelastbusinessdayofJanuaryfollowingtheendoftherelevantyear(“Conversion Date ”),pursuanttotheconditionssetforthinSection2,below.TheshareswillbeissuedbytheCompanywithin10(ten)businessdaysfromtheConversionDate.
1.7. IftheLTIP-GoalsCommitteedecidestoincludeanewBeneficiarybytheendofOctoberofanygivenyear,andprovidedthatthegoalsofthePPR-PSBhave
beenmet,theBeneficiaryshallreceivetheGVonapro-ratatemporisbasis.IftheLTIP-GoalsCommitteedecidestoincludeanewBeneficiaryduringNovemberorDecemberofanygivenyear,thentheBeneficiaryshallreceivetheGVasiftheBeneficiaryhadbeenincludedinJanuaryofthefollowingyear.
2. GV – Conversion into Shares
2.1. GVresultingfromtheachievementofgoalsofthePPR-PSBinthepreviousyearshallbeconverted,ontheConversionDate,intosharesoftheCompany,taking
intoaccounttheGV,netoflegalchargesandtaxesleviedonsuchpayment,dividedbytheaveragevalueoftheCompany’ssharesinthelastthirty(30)tradingsessionsbeforetheConversionDate.
3. Delivery of Shares and Lockup
3.1. OncetheGVisconvertedintosharesoftheCompany,(pursuanttoSection2above),suchsharesshallbetransferredtotheBeneficiarywithin10(ten)businessdaysfromtheConversionDate.
3.2. OncetherelevantsharesoftheCompanyhavebeendelivered,theBeneficiaryshallcomplywithalllock-uprulesand/ortransferrestrictionsestablishedbytheSEC(UnitedStatesSecuritiesandExchangeCommission),bytheCompany,byPagSeguroBrasilorintheLTIP-Goalsconcerningthesaleofshares.
3.3. OncetheownershipoftheshareshasbeeneffectivelytransferredfromtheCompanytotheBeneficiary,thelattershallbesolelyresponsibleformanagingtheshares,exceptasprovidedforinSection3.2.
3.4. AsresolvedbytheLTIP-GoalsCommittee,thedeliveryoftherelevantsharesoftheCompanyshalloccurthroughsaleoftreasuryshares,issuanceofnewsharesorpaymentincashtotheBeneficiarytoacquirethesharesoftheCompanyinthemarket.
4. Events of Termination of Employment of the Beneficiary of PagSeguro or affiliated companies
4.1. Ifterminationoccursbeforetheendoftheyear:theBeneficiarywillnotbeentitledtoGV.
4.2. IfterminationoccursaftertheendoftheyearandbeforetheConversionDate:theBeneficiaryshallreceivetheGV,providedthatthePPR-PSBgoalsforthepreviousyearweremet.
5. Legal Charges and Taxes – Shares and Settlement in Cash
5.1. Theamountsdiscussedherein–paidinsharesoftheCompanyorsettledincash–arerelatedtothedevelopmentgoalsofPagSeguroBrasil,establishedineachannualPPR-PSB.Thus,theydonotresultinpaymentoflabor(FGTS,13thsalaryandholidays)orsocialsecuritycharges.
5.2. PagSeguroBrasil,aspartofacorporateresults-sharingplan,asprovidedbyLawNo.10.101/00,shallperformtheduediscountsandpaymentsprovidedbyapplicablelaw,consideringthepaymentdateasthebasisforcalculation.
6. LTIP-Goals Effectiveness
6.1. TheLTIP-GoalswasapprovedbytheCompany’sBoardofDirectorsandtheLTIP-GoalsCommitteeisauthorizedtotakeallnecessarymeasuresfortheCompanytoimplementtheLTIP-Goals.
6.2. TheLTIP-GoalsshallbeeffectiveuntiltheCompany’sBoardofDirectorsortheLTIP-GoalsCommitteedecidestoterminateit.
6.3. WithoutprejudicetotheeffectivenessandtermofthePPR-PSB,theLTIP-Goalsandtheindividualagreementsmaybeamendedorterminated,atanytime,bydecisionoftheCompany’sBoardofDirectorsortheLTIP-GoalsCommittee,intheeventofforcemajeureoradrasticfluctuationinthegeneraleconomicconditionsthatindicatesunpredictabilityorinstability,orintheeventofchangesinthelawsorregulationsapplicabletotheCompanyortoPagSeguroBrasilthatmayresultinmaterialchangestotheprovisionsoftheLTIP-Goalsandtheindividualagreement.
6.4. IntheeventofacorporaterestructuringoftheCompanyand/orPagSeguroBrasil,includingtheinvolvementofthird-parties,orintheeventofaspin-off,
merger,consolidation,orintheeventofanIPObyoneoftheirsubsidiaries,LTIP-Goalsandtheindividualagreementmaybeadjustedtosuchnewcorporatestructureandmaybeamended,asexclusivelyresolvedbytheBoardofDirectorsortheLTIP-GoalsCommittee.
7. Final Provisions
7.1. TheprovisionsoftheindividualagreementandoftheLTIP-GoalsdonotconferanyrightstotheBeneficiarythatensurehisorhercontinuedemploymentat
PagSeguroBrasiloratanyothercompanywithinPagSeguroBrasil’scorporategroup,andtheydonotinterfereinanywayinPagSeguroBrasil’srightto,atanytimeandpursuanttoapplicablelaw,removetheBeneficiaryfromhisorherdutiesandterminatethelegalrelationshipwiththeBeneficiary.
7.2. AnycircumstancesnotprovidedforinthisinstrumentshallberesolvedbytheLTIP-GoalsCommitteeorbytheCompany’sBoardofDirectors.
7.3. AlltheprovisionsofPPR-PSB,whichareavailableontheintranetoftheUOLGroup,areapplicabletotheLTIP-Goals.
ApprovedonDecember18th,2018
Exhibit 4.15
AGREEMENT FOR ACCREDITOR PARTICIPATIONIN ELO PAYMENT ARRANGEMENTS
ThepresentAgreementforAccreditorParticipationinEloPaymentArrangements(“Agreement”)isenteredintobyandbetween:
I. ELO SERVIÇOS S.A. ,abusinesscorporationdulyincorporatedandoperatingunderthelawsoftheFederativeRepublicofBrazil,withheadquartersatAlamedaXingu,no.512,5thfloor,Alphaville,intheCityofBarueri,StateofSãoPaulo,ZIPCODE(CEP):06455-030andenrolledattheCorporateTaxpayerRegistryoftheMinistryofFinance(“CNPJ/MF”)underno.09.227.084/0001-75(“Elo”);and
II. PAGSEGURO INTERNET S.A., acorporationdulyincorporatedandvalidlyoperatingunderthelawsoftheFederativeRepublicofBrazil,withheadquartersatAvenidaBrigadeiroFariaLima,no.1.384,4thfloor(PartA),intheCityofSãoPaulo,StateofSãoPaulo,CEP01451-001andenrolledatCNPJ/MFunderno.08.561.701/0001-01(“Participant”),
EloandtheParticipant,hereinrepresentedbytheirlegalrepresentative(s)identifiedinthepageofsignaturesofthepresentinstrument,arehereinafterjointlyreferredtoas“Parties”and,individually,as“Party”.
WHEREAS:
(i) Eloisaninstitutorofpaymentarrangements,asdefinedinLaw12.865/2013andintheCircular3.682/2013,currentlyintheprocessofauthorizationwiththeCentralBankofBrazil(“CentralBank”)toperformtheactivityofinstitutorofEloPaymentArrangements;
(ii) TheParticipantisapaymentinstitution,asdefinedinLaw12.865/2013andinCircular3.885/2018;
(iii) ElowishestheParticipanttobepartofEloPaymentArrangements,inthequalityofAccreditor;
(iv) TheParticipantwishestoparticipateinEloPaymentArrangements,inthequalityofAccreditor,observingthetermsoftheRegulations.
THAT SAID ,thePartiesresolvetoenterintothepresentAgreement,tobegovernedbythefollowingclausesandconditions:
CLAUSE IDefinitions and Rules of Interpretation
1.1.ForallthepurposesandeffectsoftheAgreement,theexpressionsandtermsdefined,startingwithcapitallettersshallhavethemeaningsindicatedintheGlossaryandintheRegulations.1.2. TheAgreementshallbegovernedandinterpretedinaccordancewiththefollowingprinciples:
1.2.1.TheheadingsandtitlesoftheAgreementonlyserveforreferenceconvenienceandshallnotlimitoraffectthemeaningoftheclausesoritemswhichtheyapplyto.
1.2.2.Theterms“inclusive”,“including”andothersimilartermsshallbeinterpretedasiftheywereaccompaniedbythesentence“merelyasanexample”and“withoutlimitation”.
1.2.3.Wheneverrequiredbythecontext,thedefinitionscontainedintheAgreementandintheGlossaryshallbeappliedbothinthesingularandinthepluralandthemasculinegendershallincludethefeminineandviceversa,withoutchangingtheirmeaning.
1.2.4.ReferencestoanydocumentorLawincludealltheiramendments,substitutionsandconsolidationsandrespectivecomplements,exceptwhenotherwiseexpresslyprovidedfor.
1.2.5.ExceptifotherwiseexpresslyprovidedforinthepresentAgreement,referencestoitemsorattachmentsapplytoitemsandattachmentsoftheAgreement.
1.2.6.AllthereferencestoanyPartiesincludetheirsuccessors,representativesandassigneesauthorizedbyLaworcontractualinstrument,asapplicable.
1.2.7.AllthedeadlinesprovidedforinthepresentAgreementshallbecountedasforeseeninarticle132oftheCivilCode,disregardingthestartingdayandincludingthefinalday.
CLAUSE IIObject of the Agreement
2.1.SubjecttotheclausesandconditionsofthepresentAgreement,theParticipanthereinagreestoparticipateoftheEloPaymentArrangements,intheconditionofAccreditor,beingresponsiblefor,withoutmanagingthePaymentAccount,providingservicesofaccreditationandmaintenanceofECsandparticipatingintheprocessingandliquidationoftransactionscarriedoutwiththePaymentInstruments,inconformitywiththetechnicalspecificationswhicharepartoftheArrangementManuals,andsubjecttothetermsandconditionsoftheRegulations(“Services”).
2.1.1.InadditiontotheprovisionsunderthepresentAgreement,theParticipantrepresentstohaveunderstoodthatalltheprovisionsoftheRegulationsapplytothedocumentofadhesiondeliveredtoitonthedateofsignatureofthepresentAgreement.IncaseinthefutureanyconflictbetweentheprovisionsintheRegulationsandtheParticipantbusinessmodeloccurs,thelattercanterminatetheAgreementunderthetermsofclauses5.4,10.1and10.4.
CLAUSE IIIParticipant Remuneration Fee
3.1.TheParticipantshallbeentitledtoreceiveremunerationapplicableinaccordancewiththeArrangementManuals,specifications,bulletinsandotherdocumentsonthematter.
3.2.TheremunerationsduebytheParticipanttoEloareprovidedforintheManualofTariffs.
CLAUSE IVRights/Obligations
4.1.WithoutprejudicetotheotherrightsprovidedforinthepresentAgreement,intheRegulationsandintheArrangementManuals,theParticipantrightsare:
(i) tocollecttariffsfortheservicesprovidedtoECs,respectingtheregulationsapplicable;
(ii) participateoftheEloPaymentArrangements,pursuanttothenon-discriminatorygeneralrulescontainedintheRegulations,respectingthefreedomofthebusinessmodelsandtheapplicablelawsandregulations;
(iii) toreceivefromtheECsthecontractuallyagreedamountsrelativetothePurchasePaymentTransactionscarriedout;
(iv) exercisetherulesandrightsprovidedforinChapter VII—Reasons for Rejection and Return of the Payment Transactions oftheRegulations;and
(v) conduct,atitsexpenses,bymeansofathirdpartycontractedanddulyqualified,annualaudits,betweenthemonthsofSeptemberandNovember,forverificationofthecompliance,byElo,withtheobligationsofsegregationandprotectionofitstechnologicalinfrastructure,inthehypothesisofoutsourcingoftheprocessingservicesunderElo’sresponsibility.
4.1.1.Toexercisetherightmentionedinitem(v)above,theParticipantmustinformitsintentiontoElo,uponpreviousnoticewithinaminimumof30(thirty)daysinadvance.
4.2.WithoutprejudicetotheotherobligationsprovidedforinthepresentAgreement,theParticipantbindsitselftoobserveandcomplywiththetermsandconditionsoftheRegulationsandoftheArrangementManuals,including,butnotlimitedtotheobligationof:
(i) beingaPaymentInstitution,asdefinedinLawno.12.865ofOctober09,2013andinCircularno.3.885ofMarch26,2018;
(ii) respecttherights,dutiesandresponsibilitiessetforthinChapter IX—Responsibilities within the Framework of the Arrangement; Section II—Among Participants ofElo Payment Arrangements oftheRegulations;
(iii) meettheminimumrequirementssetforthinChapter XI—Modality of Participants of the Regulations, Section II—Requirements to become a Participant, Section III—Criteria and General Participation Requirements for Issuers and Participants, Section IV—Criteria and Requirements for each Modality of Participant, Sub-sectionIV—Participants ,oftheRegulations;
(iv) adoptanadequatestructuretomanagetherisksincurredwithintheframeworkoftheEloPaymentArrangements,underthetermsofChapter XII—Risks Incurred bythe Participants oftheRegulationsandunderthetermsoftheregulationsinforce;
(v) respecttheresponsibilitiesprovidedforinChapter VII—Reasons for Rejection and Return of Payment Transactions, oftheRegulations;
(vi) sendinformationonthePurchasePaymentTransaction,asprovidedforinChapter XIII—Operating Aspects within the Framework of Elo Payment Arrangements,Section IV—Conciliation of information between the Participants, oftheRegulations;
(vii) adoptandmaintainastructurededicatedtothedetection,investigation,monitoringandreportingoftransactionsinvolvingfraud,foreignexchangefrauds,moneylaunderingandfinancingtoterrorismorotherillegalactivitiesrelatedtotheprovisionofitsservices,subjecttotheguidelinessetforthinthePolicyofPreventionagainstMoneyLaunderingandAnti-Terrorism,underthetermsdoChapter XIII—Operating Aspects within the Framework of Elo Payment Arrangements, Section V—Prevention to foreign exchange fraud, money laundering and combat to the financing of terrorism ,oftheRegulations;
(viii) notifythecompetentauthorities,underthetermsofthelegislationandregulationsapplicable,withrespecttothemeasurestobetakenasaresultofsuspectsofforeignexchangefraud,moneylaunderingandfinancingtoterrorismoranyothersuspectactivitiesrelatedtotheprovisionofitsservices,aswellastocooperatewithEloandgovernmentalorregulatoryauthority,totheextentofthelegalrequirementsapplicable,intheinvestigationofanysuspectorconfirmedactivityofmoneylaundering,financingtoterrorism,fraudoranyothersuspectactivitiesrelatedtotheprovisionofitsservices.UponElo’srequest,immediatelyinvestigateanysuspectorconfirmedactivity,includingofanyECwhichElosuspectstobeinvolvedinactivitiesofsuchnature;
(ix) reporttoEloandincludingtotheauthorities,theresultsofanyinvestigationrequestedandadoptimmediatecorrectivemeasuresincaseitbecomesaware,inanyway,thatafraudisimminent,probableorongoing;
(x) uponElo’srequest,tomakesurethatanyECassociatedtotheactivitiesforbiddenbytheRegulations,ManualsandEloPolicieshasitsagreementimmediatelyterminated;
(xi) notifyElo,inwriting,withinupto10(ten)days,preferablybye-mail,aboutthereceiptofnotificationorjudgmentwhichdealsaboutthepastorfutureperformanceofanyoftheaccreditedECs,inrelationtoanyoftheirobligationsordutiesprovidedforinthepresentAgreementorintheArrangementManuals,forviolation,oractwhichcanreasonablybecharacterizedasviolationtoanylegalrequirement,includingtoregulatoryapproval,specifically,incaseitbecomesawareof,whenthisinterfereswithorpreventstheperformanceofEloorofanyofitscommercialpartners;
(xii) beresponsible,beforetheregulatory,administrativeandlegalbodies,eithernationalandinternational,underthetermsofthelegislationandregulationsinforce,forcompliancewithitsobligationsrelativetopreventionandcombattomoneylaunderingandFinancingtoTerrorismand“knowyourclient—KYC”policies,oftheECsaccreditedbyit;
(xiii) toadoptmechanismscapableofensuringthesecurityoftheinformationrelatedtoPaymentTransactions,underthetermsofthelegislationinforceandinlinewithChapter XIII—Operating Aspects within the Framework of Elo Payment Arrangements, Section VII—Information Security, oftheRegulations,accordingtoPCIcertificationandrespectingthestateoftheartofthetechnology;
(xiv) toadoptastructurecapableofassuringbusinessmanagementandcontinuitywithintheframeworkoftheEloPaymentArrangements,underthetermsofChapter XIII—Operating Aspects within the Framework of Elo Payment Arrangements, Section VI—Management of Business Continuity, oftheRegulations;
(xv) tocomplywiththeobligationsrelatedtotheuseofEloBrand,underthetermsoftheManualofOperatingRulesandofChapter XIV—Rules on the Use of the Brand,oftheRegulations;
(xvi) toensureinteroperabilitywiththeotherParticipantsandpaymentarrangementseitherintegratingornottheBrazilianPaymentSystem,wheneverapplicable,underthetermsofChapter XV—Interoperability Mechanisms, Section I—Interoperability among Participants ,oftheRegulations;
(xvii) carryouttheaccreditationoftheECs,providestructurefortheprocessingofPurchasePaymentTransactions;
(xviii) maintainacommercialrelationshipwiththeECs,beingresponsibleforobtainingalltheECs’recordinformation,aswellasfortheobligationtokeepthemuptodate,basedontheregulationsinforceandinlinewiththepoliciesofverificationofrecordinformation,validatingthebankingdomiciledatawiththeDomicileInstitutions,makingavailablethenecessaryinformationsothatallprocessingandsettlement,withtheeffectivepaymenttotheECs,isproperlycarriedoutwithintheframeworkoftheEloPaymentArrangements;
(xix) sendtheinformationforsettlementtotheClearingandSettlementClearingHouseaccordingtothepaymentscheduleoftheestablishments,rulesandlayoutsdefinedbytheClearingandSettlementClearingHouse;
(xx) meetthepaymentpositionattheClearingandSettlementClearingHouse,todebitortocredit;
(xxi) imposetoECsandSub-accreditorsobservancetotheRegulationsandtheArrangementManualsinwhateverapplicabletothem,includingwithreferencetoinformationsecurity;
(xxii) carryoutthepaymenttotheEC,bymeansoftheClearingandSettlementClearingHouseand/orLiquidationBetweenArrangements(incaseofinteroperability,thisshalltakeplaceunderthetermsdefinedintheregulationinforce),respectingthedeadlineandthetermssetforthintheRegulationsandintheArrangementManuals;
(xxiii) presentthesupportingdocumentationtotheIssuerwithinthedeadlinerequiredbyElo,inaccordancewiththerulesapplicabletocancellations,chargebacks andreturnsofPurchasePaymentTransactions;
(xxiv) definitelycreditordebitthepaymentofthePurchasePaymentTransactiontotheEC,oncetheChargeback issolved;
(xxv) providenetworkserviceswithintheframeworkofEloPaymentArrangements;
(xxvi) refrainfrompracticinganynon-competitiveordiscriminatoryactinrelationtoElotowardsotherflags,aswellasanyactthatunderminesElo’srelationshipwiththeECandtherelationshipbetweentheParticipantsofEloPaymentArrangements,assuringsecurity,protectionoftheeconomicinterests,privacyandprotectionofECs’data;
(xxvii) adheretotheClearingandSettlementsystem,underthetermsofChapterVoftheRegulations;
(xxviii) provideElowithallandanyinformationforthegoodandfaithfulcompliancewithitsobligations,sendingthenecessaryfilesforexecutionofElo’sactivities,intheformandwithintheperiodicityinformedbyElo;
(xxix) informandmakeavailabletoElo,intheformandwithintheperiodicityshownintheRegulationsandArrangementManuals,thestatus ofthesettlementsmadeandnotcarriedoutintheaccountsoftheECs.Forunrealizedsettlements,identifytheinconsistencythatgeneratesthefailureinsettlement,providethecorrectionandresendtheinformationforsettlement;
(xxx) sendtheanalyticalinformationtotheDomicileInstitutionstomakethesettlementoperational,throughandaccordingtotheguidelinesoftheClearingandSettlementClearingHouse,withpaymentinformationtotheECs,whichshallbeusedbytheDomicileInstitutionsexclusivelyforcredittotheECs,underthetermsoftheapplicablelegislationand,whenapplicable,oftheAgreementofDomicileInstitutionParticipationinEloPaymentArrangements;
(xxxi) participateintheprocessforsettlementofthePurchasePaymentTransactionsascreditorbeforetheIssuer,inaccordancewiththerulesofEloPaymentArrangements;
(xxxii) complywithalltheaccessoryobligationssetforthintheregulationsandinthelegislationinforce;and
(xxxiii) nottodiscriminatetheEloBrandandanyofitsproducts,preventingselectiveauthorization,aswellasensuringthatnobrandshallhavemoreprominenceandvisibilitythantheEloBrandinsignalingrelativetoacceptance,exceptinpromotionalcampaignsspecificforthepromotionofanybrand,ensuringnon-discriminatoryaccesstotheservicesandtotheinfrastructuresnecessaryforthefunctioningofEloPaymentArrangements.
4.3WithoutprejudicetotheotherobligationsforeseeninthepresentAgreement,thePartiesbindthemselves,forallandanypurposes,nottogive,offer,pay,promise,orauthorizethepaymentof,directlyorindirectly,anymoneyoranyvaluablethingtoanygovernmentalauthority,consultants,representatives,partnersoranythirdparties,forthepurposeofhavinginfluenceonanyactordecisionofthepublicagentorofthegovernment,ortoensureanyundueadvantage,orpracticeanyactwhichviolatestherulesoftheanti-corruptionlegislations(Law12.846/2013).
4.4.ToensurecompliancewiththeobligationsreferredtointhepresentAgreementaswellasthoseattributedtotheSub-AccreditorParticipant,theAccreditorbindsitselftoprovide,tothebenefitofElo,irrevocableandirreversibleguaranteeswithinthetimingandintheformrequestedbyElo,pursuanttotheproceduresapprovedbyElo’sCreditRiskCommittee.
4.5Eloshallnotpracticeanynon-competitiveordiscriminatoryactinrelationtotheParticipant,relativetootheraccreditors,oranyactwhichharmstherelationshipbetweentheParticipantwiththeECandtheisonomybetweentheParticipantsofEloPaymentArrangements,ensuringthesecurity,protectionofeconomicinterests,privacyandprotectiontoParticipant’sdata.
4.6ElobindsitselftoimmediatelyinformtheParticipant,aboutanychangetotheRegulationsandkeeptheupdatedversionoftheRegulationsinforceavailableforconsultationatthefollowingaddressoftheworldwidenetworkofcomputerswww.eloportal.com.br/.
CLAUSE VAdditional Obligations of the Participant
5.1.FurthertotheotherconditionsandobligationsprovidedforinthepresentAgreement,intheRegulations,ArrangementManuals,Policies,specifications,bulletinsandotherdocumentsissuedbyElo,includingbymeansofitswebsite,theParticipantrecognizestheneedtocomplywiththefollowingobligationsasaconditiontoreceiveandmaintaintheauthorizationforparticipationobjectofthepresentAgreement:
(i) ComplywithalltheobligationsassumedinthepresentAgreement,aswellasrespecttheconsumerprotectionanddefenseofcompetitionnorms,aswellasthelawsandregulationsapplicabletotheactivitiesperformedbytheParticipantswithintheframeworkoftheEloPaymentArrangements;
(ii) makeavailablealltheinformationnecessarytocomplywiththeapplicableregulations,normssetforthbyElo,ArrangementManuals,specifications,bulletinsandotherdocumentsissuedbyElo,includingbymeansofitswebsite;
(iii) intermediatedisputeswiththeECsandIssuers,incasethePaymentTransactionspresentanyirregularity,underthetermsoftheRegulations;
(iv) receiveandanalyzethedisputessentbytheIssuers,aswellasthepre-arbitrationrequest,ifnecessary,withthedueargumentsorprovingdocumentationandmeettheregulatorydeadlinesetbyEloandunderthetermsoftheArrangementManuals;
(v) ensurethatthetrafficandstorageoftheEloPaymentInstrumentdata,inwhateverunderitscompetence,complywiththeapplicableinformationsecuritystandards;
(vi) observeandimplementmeasurestomitigatetheoperational,creditandliquidityrisks,asrequiredundertheregulationsinforce;
(vii) endeavoritsbesteffortstopromoteandencouragetheuseofEloPaymentInstrumentswiththeECs;
(viii) directlyprovidealltheequipment,facilitiesandinputs,includingthoseofatechnologicalnature,necessaryforthecapture,authorizationandsettlementofthePurchasePaymentTransactions,thusassuringtheintegrityofthesystemsofcapture,authorization,processing,liquidation,rejectionandreturnofthePurchasePaymentTransactions,refrainingfromgrantingorallowingtheuseofsecuritymechanismsoftheEloPaymentArrangementstothirdpartieswithoutthedueauthorizationofElo;
(ix) providetheinformationand/ormaterialsanddocumentsrequestedbyEloandwithinthedeadlinerequiredbyElo,subjecttotheobligations,thecriteriaofreasonabilityandproportionalityandobservingthetermsofthepresentAgreement;
(x) participateintheprocedureforliquidationunderthetermssetforthandagreedinthepresentAgreementandintheRegulations;
(xi) remainboundtopaymentofthePurchasePaymentTransactionsbeforetheECs,assetforthintheRegulationsandinthepresentAgreement;
(xii) forwardtoElo,wheneveroperationallypossible,alltheinformationreceivedfromtheECs,relativetojudicialdecisions,notifications,noticeswhichcanberelevantforand/orwhichimpacttheliquidationprocedure;
(xiii) previouslyinformtoEloanychangesinitsheadquartersand/oranysubstantialchangestoitscorporatestructure,ortoitsdirectorindirectcontroland/orcorporatereorganization;
(xiv) tokeepperiodicalscreeningsoftheECsinordertoverifytheirinclusionintheOfficeofForeignAssetsControl(OFAC)lists,immediatelyinformingEloabouttheexistenceofECsthatintegratesuchlistsorthatmightcometointegratethem;
(xv) proceedtotheimmediateterminationofagreementswithECsthatareorcanbeincludedintheOfficeofForeignAssetsControl(OFAC)lists;
(xvi) constitutethefollowingprocesses,susceptibletoaudit:(a)fraudcontrolprocess,(b)preventiontomoneylaunderingandcombattoterrorism,(c)contingencyanddisasterrecoveryplan,(d)contingencyplan;(e)informationsecurity;and(f)anti-corruptionpolicies;
(xvii) makeitevidentthecompliancewithCentralBanknorms,includingthoserelatedtotheprovisionofguarantee,wheneverrequestedbyElo,inordertopreventand/ormitigatetherisksrelatedtothepossibilityofdefaultofthePurchasePaymentTransactionsasdescribedintheArrangementManualsandintheRegulations;
(xviii) refundEloforalltheexpensesincurred,includinglawyers’fees,costsandpossibleconvictions,duetotheneedtodefendtheinterestsofElo,injudicialand/orextrajudicialactionsdirectlyfiledbyanythirdpartyduetotheprovisionoftheParticipant’sservicesobjectofthepresentAgreement,providedthatpreviouslyagreedbytheParticipant.AnymodificationtotheconditionsagreedontheguaranteeshallresultinterminationofthepresentAgreement,withoutprejudicetothevalidityoftheobligationtoprovideservicesanditsrespectivepayment;
(xix) ensuretheintegrityofthesystemsofcapture,authorization,processing,liquidation,rejectionandreturnofEloPaymentArrangementtransactions;and
(xx) ensurethesecurity,protectionofeconomicinterests,non-discriminatorytreatment,privacyandprotectionofthedataofCommercialEstablishments.
5.2.TheParticipantisforbiddentoprovidetheservicesobjectofthepresentAgreementonamisleading,falseformorotherwisetoreflectnegativelyonthereputationofElo’sbrandandimage,aswellasthatofanyoftheParticipantsofEloPaymentArrangementsandofElo’stradingpartners.
5.3Elobindsitself,beforetheParticipant,fortheexerciseofitsactivities,tocomplywiththeprovisionsunderthenormsandintheRegulationsinforce,inspecial:(i)theprovisionsunderChapter IX—Responsibilities within the Framework of the Arrangement, section I—Between the Institutor of the Arrangement and its Participants; (ii) inChapter XII—Risks Incurred by the Participants; (iii) Chapter XV—Interoperability Mechanisms and(iv)toinformtheParticipant,wheneverallowedbythelegislationandregulationsinforce,thecarryingout/occurrenceoffraudsbytheholdersand/orCommercialEstablishments.
CLAUSE VIRepresentations, Rights and Warranties
6.1TheParticipantherebyrepresents:(i)tohavereceivedafullcopyoftheRegulationsandtheArrangementManuals,withwhichitexpresslyagrees,assuringthatitshallalwaysobserveandcomplywiththeirterms,obligations,conditionsandrequirements,and(ii)beingawarethattheArrangementManualsaresubjecttoconstantchanges,whichshallbeavailableatElo’swebsite,bindingtheParticipantsincethecommunicationbyEloofitsavailability.
6.2.EachPartyisacompanydulyconstitutedandvalidlyoperatingunderthelawsofBrazilandhasfullcapacity,legalpowersandauthorizationstoholditsownassets,conductthebusinessinwhichitisinvolvedandcomplywiththeobligationssetforthinthepresentAgreement.
6.3.EachPartyauthorizedthesignature,havingthetechnicalandoperationalcapacity,powersandauthorizationnecessarytodeliverandcomplywiththepresentAgreement.Noothercorporatemeasure,includingapprovalfromtheshareholdersorfromthemanagement,byanyofthePartiesshallberequiredtoauthorizethesignatureandcompliancewiththepresentAgreement.
6.4.ThepresentAgreementconstitutesavalid,bindingandenforceableobligationbetweenthePartiesinaccordancewithitsterms.
6.5.ThesignatureandcompliancewiththeobligationsbytheParties,asprovidedforinthepresentAgreementdoesnotrequireobtaininganyadditionalauthorizationfromanythirdpartyoranyGovernmentalAuthority.
6.6.ThesignatureofthepresentAgreementshallnot:(i)resultinconflictorviolationtoanyLawapplicabletoanyoftheParties;(ii)relyuponanyconsent,approvalorauthorizationby,notificationto,orfilingorregistrationwith,anyPerson,entity,court,GovernmentalorRegulatoryAuthority,otherthanasexpresslyprovidedforinthepresentAgreement;(iii)resultinviolation,non-compliance,conflictnorshallitotherwiseconstitute,enableorresultintheearlyexpirationofanyobligation,terminationofanyagreementoradjustmententeredintobytheParties;(vi)resultinanyAdverseMaterialEffectinrelationtoanyoftheParties.
6.6.1.Withoutprejudicetotheaboveprovisions,Elorepresentsandwarrantsthat(i)thepresentAgreementisandshallremain,fullyinaccordancewiththeprovisionsforeseenintheRegulations,subjecttoapprovaloftheCentralBank,underthetermsoftheregulationapplicableand(ii)anychangepromotedbytheCentralBank,totheRegulationsshallbemadeongood-faith,consideringthereasonabilityintheperformanceofthebusinesses.
6.7.Theexercise,bytheParticipantandbyElo,oftheServicesprovidedforinthepresentAgreementshallbeconductedbytheWorkTeamoftheParticipantorElo’s,asapplicable,whosefiscal,socialsecurityandlaborresponsibilitiesshallbeundertheexclusiveresponsibilityofthese,includingallandanyexpenses,eitherarisingfromtransportation(byairand/orland),stayand/ormeals.By“WorkTeam”itshouldbeunderstoodtheemployees,agents,subcontractedpersonnel,directors,partnersandanyotheremployeeoftheParticipantorElo’s,involved,directlyorindirectly,intheexerciseofsuchfunction.
6.8.ThePartiesherebyrepresent,foralllegalpurposesandunderthelaw,tobethesoleemployersand/orentitiesresponsiblefortheirrespectiveworkersassignedtoperformtheservicesprovidedforwithintheframeworkofthepresentAgreementand,insuchquality,theyassumetheresponsibilityforcompliancewiththeentirelabor,socialsecurity,taxandcivillegislations,aswellasofanyothernature,includingforpaymentofallfederal,state,municipalandautarchictaxesandforcompliancewiththecollectivelabornormsalreadyexistingorwhichcometobecreatedduringthevalidityofthepresentAgreement,relativetotheperformanceofthefunctionsobjectofthepresentAgreement,exemptingtheotherPartyfromsuchresponsibility,evenifbyjudicialdecisionitcomestobedeclaredthejointandseveraland/orsubsidiaryresponsibilityofthelatter.
6.9.ThePartiesherebyrepresentandwarranttooneanotherthattheyholdthepropertyortherighttouseallandanypatents,applicationsforpatent,trademarks,eitherregisteredornot,applicationsfortrademarkregistration,copyrights,author’srights,includingcopyrightsonsoftware,industrialdrawings,utilitymodels,businessorindustrysecretsandnon-patentedknow-how ortechnologywhichconstitutebusinessorindustrysecretstobeusedunderthetermsofthepresentAgreementforthecarryingoutoftheServices(“IntellectualProperty”).TheIntellectualPropertytobeusedand/orprovidedbyeitherPartiesunderthetermsofthepresentAgreement,aswellasitsuseorutilizationforthecarryingoutoftheServices,doesnotconstitutenorshallitcharacterizeviolationtoorundueappropriationofanypatent,copyrightoranyotherIntellectualPropertyofanythirdparties.
6.10.ThepresentAgreementdoesnotgenerateanytypeofexclusivitybetweentheParties.
CLAUSE VIISecrecy and Confidentiality
7.1.GiventhenatureoftheParties’activities,theobjectofthepresentAgreementandbecauseitissoagreed,thePartiesacknowledgethat,intheexerciseoftheirattributions,theymightvoluntarilyorinvoluntarilyhaveaccess(“ReceivingParty“)toexclusiveorconfidentialinformationoftheotherParty,oftheirclientsorofthirdparties(“DisclosingParty”)and,therefore,theybindthemselvesandthepersonsrelatedtothemtomaintainthemostabsolutesecrecy,refrainingfromcopying,reproducing,selling,assigning,licensing,commercializing,alienating,transferringordisposingofallandanyConfidentialInformation,underthepenaltyofbearinganylossesanddamagesitcausesduetoviolationtotheprovisionsofthisClause,withoutprejudicetothepossibleapplicationoffine.
7.1.2ConsideringthatintheprocessingofthetransactionscarriedoutwithintheframeworkoftheEloPaymentArrangementthereshallbesharedwithEloinformationwhichisormightcometobeconsideredsensitiveintermsofcompetition,EloshallensuretotheParticipantthatitsinformationconsideredcompetitivelysensitiveshallnotbeaccessedbythirdparties,includingbyinstitutionswhichoperateinthesamesegmentastheParticipant,includingtothoseaffiliateswhichholdashareholdingrelationwithElo(“EloGroup”and“InformationBarrier”,respectively).
7.1.3ThepurposeoftheInformationBarrieristoensureadequatetreatmentoftheinformationsharedbytheParticipantwithElo,undertheguaranteethat(i)theinformationshallbeaccessedonlybypersonsauthorizedforthepurposeofprocessingthepurchasetransactionscaptured,eitherdirectlyorindirectly,bytheParticipant,beingforbiddentheutilizationforanypurposeotherthanthoseprovidedforinEloPaymentArrangements,eitherbyEloorbyanycompanyoftheEloGroup;(ii)theintegrityoftheinformationprovidedshallbemaintained;(iii)themethodsusedintheinformationprocessingshallbesecured;and(iv)theinformationshallbestoredinanenvironmentsegregatedfromEloPaymentArrangements,beingthattheaccesstotheinformationcompetitivelysensitiveshallonlybeallowedtoElo.
7.1.4.ThecompliancewiththeprovisionsinClause7.1.3.aboveshallbeensuredupontheadoptionofinformationsegregationmechanismswhichshallpreventaccessbynon-authorizedpersons,withoutprejudicetotherightattributedtotheParticipant,underthetermsofclause4.1,item(v)and4.1.1.
7.2.ThePartiesshallneitherhavenorshalltheyclaimanyrightinrelationtotheConfidentialInformationoftheotherParty.NoConfidentialInformationoftheotherPartyshallbedisclosedorassigned,atanytitle,tothirdparties,soconsideredincludingthosebelongingtothesameeconomicgroupoftheParties,eitherbyactsoromissionsofthePartywhichreceivedit,orofitsadministrators,employeesorcontractedpersonnel.Elo’sandtheParticipant’sConfidentialInformationshallnotbeusedbytheotherPartyforanypurposeotherthanforthedirectexecutionoftheServices,andforparticipationoftheParticipantinEloPaymentArrangements.ThedisclosurerestrictionprovidedforinthisClauseVIIisextendedtotheemployeesandtheParty’scontractedpersonnelwhichreceivedtheConfidentialInformation.
7.3.ThePartiesshalluseallthenecessarycaretopreventthedisclosuretothirdpartiesofanyConfidentialInformationoftheotherParty.IncaseofanydisclosureormisleadingofanyConfidentialInformationoftheDisclosingParty,theReceivingPartyshallimmediatelyinformtheDisclosingPartyassoonasitbecomesawareofsuchfact.
7.4.ThedutyofsecrecyandconfidentialityprovidedforinthisClauseshallremaininforceevenafterterminationorextinctionofthisAgreementforaperiodof60(sixty)monthsfromthedateofitsterminationorextinction,exceptforthedataandinformationoftheParticipantsofEloPaymentArrangementsand/ortheirClientsorothersprotectedbybanksecrecy,whichfortheirnaturemusthavethesecrecypreservedonapermanentbasis.
7.5.UponextinctionorterminationofthepresentAgreement,eachofthePartiesshallreturnordestroy,asinstructedbytheotherParty,allthematerialinanymediathatcontains,referstoorisrelatedtotheConfidentialInformationoftheotherParty,andcanretaincopiesonly(i)ofwhatislegallyrequiredornecessarytoprovethecompliancewiththepresentAgreement;or(ii)inaccordancewithElo’sortheParticipant’sinternalpoliciesofdocumentretention,inwhichcasetheobligationsofconfidentialityhereinprovidedforshallcontinueinforce.
7.6.ThedutyofsecrecysetforthinthisClauseshallnotapplytoanyinformationthattheReceivingPartycanprovethat(i)atthetimeofitsdisclosure,wasofpublicdomain;(ii)afteritsdisclosure,ispublishedorotherwisebecomesofpublicdomainwithoutbeingbyfaultoftheParties;(iii)hasbeenreceivedafterdisclosurebythirdpartieswithlegalrighttodisclosesuchinformationwithoutanyobligationtorestrictitsuseoradditionaldisclosure;(v)hasbeenindependentlydevelopedbytheReceivingPartywithoutreferencetoConfidentialInformationoftheDisclosingParty;or(vi)mustbedisclosedbytheReceivingPartybyforceofarequestissuedbyanyGovernmentalAuthority.
7.7.IncaseanyofthePartiesisforcedtodiscloseanyConfidentialInformationasrequiredbyanyLaworuponrequestofanyGovernmentalAuthority,theReceivingPartymust,immediatelyuponreceiptofsuchrequestandbeforedisclosingit,informsuchfacttotheDisclosingPartyandcooperate,ifrequested,topreventthedisclosureofsuchConfidentialInformationandadoptthelegalmeasuresrequestedbytheDisclosingPartywhicharenecessarytoprotecttheinformation.Incasethereferredtolegalmeasuresarenotapplicable,possibleorhavenoeffect,theReceivingPartymustinformonlywhathasbeenlegallyrequestedandshallendeavoritsbesteffortstoobtainthenecessaryprotectionoranyotherreliableguaranteethatthedisclosedinformationshallreceivethesameconfidentialtreatmentgiventotheConfidentialInformation.
7.8.WithoutprejudicetotheprovisionsofthisClausewithrespecttotheConfidentialInformationonthePurchasePaymentTransactionscarriedoutbytheUsersand/orbytheECsaccreditedbytheParticipant,thelattershallbefullyresponsibleforthesecrecyofsuchConfidentialInformationandshallhandleandstoreitinsuchawaythatalwaysprotectsit,throughtheadoptionandconstantreviewofitsinternalproceduresandthetechnologyusedandEloshallbeequallyresponsibleforthesecrecyofalltheinformationwhichithasaccessto,asprovidedforundertheregulationsinforce.
7.9.ThePartiesrepresenttobeawareofandbindthemselvestocomplywithalltheprovisionsofthedocument“SecurityAssessmentRequirementsandProcedures”issuedbythecompanyPCI Security Standards Council, LLC,irrevocablyandirreversiblyassumingfullandentireliabilityforanypersonal,moralormaterialdamagesandlossesthatmightbesufferedbytheotherPartyorbythirdpartiesasaresultofnon-observanceofthe“Securityassessmentrequirementsandprocedures”onthepartoftheParticipantorElo,theiremployeesorcontractedpersonnel.
CLAUSE VIIIElo Rights
8.1.ElomightrequiretheParticipanttoannuallycontracttheaudititindicates,attheParticipant’sexpense,providedthatatreasonablepricespracticedinthemarket,forverificationofthefullcompliancewiththerulescontainedintheArrangementManualsandRegulations.Theauditshallbecarriedoutwithinamaximumof30(thirty)workingdaysafterformalizationofElo’srequesttotheParticipant,andtheresultofsuchwork,dulyvalidatedbytheoneresponsible,shallbedeliveredtoElo,withcopytotheParticipant.
8.2.WithoutprejudicetotheprovisionsinthepreviousClause,Eloreservesitselftherighttocarryoutadditionalaudits,attheexpensesoftheParticipant,providedthatonajustifiedform,tobeconductedbyitselforbythirdpartiescontractedbyit,and/ordemandinformationandadditionaldocumentsfromtheParticipant,provenlynecessaryfortheexecutionoftheaudit.
8.3.InadditiontotheobligationscontainedinthepreviousClauses,theParticipantshallbesubjecttoanannualevaluationtobeconductedbyElo,orbythirdpartiesappointedbyit,attheParticipant’sexpense,withanaimatconfirmingthecompliancewiththetermsofthepresentAgreement.
8.4.ItisherebyassuredtoElotheright,atanytimeanduponpriornoticeaddressedtotheParticipantwithinatleast30(thirty)daysinadvance,toconduct,attheParticipant’sexpense,localassessments,duediligences,andothercertificationprocedures,includingaudits,strictlynecessarytoprovethecompliancewiththecurrentregulationsandlegislationsinforce,underthetermsofthepresentAgreement,especiallytheobligationsrelatedto(i)fraudcontrolprocess,(ii)preventiontomoneylaundering,combattoterrorismandanti-corruptionlaws,(iii)contingencyanddisasterrecoveryplan,(iv)contingencyplan;(v)informationsecurity;and(vi)periodicscreeningoftheCommercialEstablishmentstoverifytheirinclusionintheOfficeofForeignAssetsControl(OFAC)lists.
8.5.Elocan,atitssolediscretion,disaccredittheParticipantwhichmisrepresentsthepurposeofusingEloPaymentInstruments,asprovidedforinthepresentAgreement,intheRegulationsandintherulesapplicabletotheuseandcommercializationofEloPaymentInstruments,aswellastorequiretheParticipanttodisaccreditECsthatactinthatsameway.
8.5.1.IncaseofoccurrenceofanysituationwhichsupposedlycausedthedisaccreditationoftheParticipant,Eloshouldnotifyittopresentinformationandverifythegroundsofthesituationbasedontheprinciplesofthecontradictoryandoftheduelegalproceedings.
8.6.TheParticipantwhichomitsrelevantinformationorpracticesanynon-competitiveordiscriminatoryactthatimpairstheproperfunctioningoftheEloPaymentArrangementsshallbesubjecttowarning,suspension,fineand/orexclusionfromtheEloPaymentArrangements,atElo’sdiscretion,andbasedontherecurrenceandseverityofthenon-compliance.
CLAUSE IX
USE OF THE BRANDS
9.1.ThePartiesagreethat,withintheframeworkofthepresentAgreement,theirrespectiveBrandscanbeused,recognizingandagreeingthat:
(i) AllandanyformofutilizationoftheotherParty’sBrandsmustbepreviouslyapprovedbythePartywhichtherespectiveBrandbelongsto;
(ii) ItisforbiddentoonePartytoassign,license,sell,negotiateorotherwisetransfertheutilizationoftheotherParty’sBrandtoanythirdparties;
(iii) MustensurethegooduseoftheotherParty’sBrandandbindthemselvestopreventtheutilizationoftheotherParty’sBrandinoperationsorservices:(i)offensiveorinjurioustoethics,moralityandgoodmanners;and/or(ii)thatcoulddenigratetheintegrityandreputationoftheBrand;and/or(iii)thatinanywayresultinviolationtotheprovisionsoftheBrazilianlaw,especiallythosedealingwithconsumerprotectionand/orwhichinanywaydiscriminatestheBrandinanyofitsproducts;and
(iv) TheyshallnotusetheotherParty’sBranddifferentlyfromwhathasbeenapprovedbythePartywhichtherespectiveBrandbelongsto.
9.2.Withoutprejudicetowhatisdescribedabove,theParticipantbindsitselftouseElo’snameandBrandsonlyandexclusivelytopromotetheacceptanceofthePaymentInstrumentsissuedbyit,respectingthecharacteristicsoftheBrands,Elo’sintellectualpropertyrightsandtheapplicablelegislation.
CLAUSE XValidity and Rescission
10.1.ThepresentAgreemententersintoeffectonthedateofitssignatureandshallremaininforceforundeterminedtime,butcanbeterminatedatanytime,byeitherPartyandwithouttheincidenceofanychargeorpenalty,upon90(ninety)-daypreviousnotice.
10.2.ThepresentAgreementcanbeterminatedwithimmediateeffects,atanytime,byeitherParty,orwheneverrequiredunderthelaw,intheoccurrenceofanyofthefollowingcircumstances:
(i) failuretopayorlatepaymentbyElo,whichexceedsthedeadlineof30(thirty)daysfromitsrespectiveduedate;
(ii) non-compliancewithanyoftheobligationsagreedbetweenthePartiesunderthetermsofthepresentAgreement,whichisnotdulycorrectedwithin15(fifteen)daysafternotificationinwritingfromtheotherParty;
(iii) non-compliancewiththeobligationsrelativetotheuseoftheEloBrand;
(iv) violationorinaccuracyofanyrepresentationorwarrantyprovidedinthepresentAgreementnotsolvedwithin15(fifteen)daysafterwrittennotificationfromtheotherParty;
(v) actofGodormajorforcewhichpersistsforover30(thirty)days,makingtheexecutionofthepresentAgreementimpossible;
(vi) decreeofbankruptcy,(judicialorextrajudicial)recuperation,liquidationprocess,interventionorsubmissiontotheRegimeofTemporaryAdministration–RAEToranysimilarproceedinginvolvingtheotherParty;
(vii) non-compliancebytheAccreditorwithitsobligationsrelativetotheprocedureforprocessingandliquidationofECsoperations;
(viii) iftheAccreditorundergoesasignificantchangeofcontrol,mergerorconsolidationwithanyotherPartyresultinginthetransferofcontroltoacompetitorofElo;
(ix) exclusionoftheAccreditorfromtheEloPaymentArrangements,underthetermsofChapter VIII—Penalties Applied, oftheRegulations;or
(x) iftheAccreditordiscriminatestheEloBrandinanyform.ItshallnotbeconsideredasdiscriminationoftheEloBrandthecarryingoutoftradeand/orincentiveactionswiththirdparties;
10.3.TheterminationofthepresentAgreementdoesnotreleasethePartiesfromcomplyingwithanyobligationswhich,duetotheirnature,extendbeyondtheexpirationorterminationoftheAgreement,whichshallremaininforceuntiltheyarefulfilled.
10.4WithoutprejudicetothetermsandconditionsforterminationofparticipationprovidedforintheRegulationsandinthepresentAgreement,EloshallensuretotheParticipanttherighttosetaplantoconcludeitsactivitiesincaseofcontractrescission(run-off),thedeadlinesandconditionsofwhichshallbenegotiatedongood-faithbetweenEloandtheParticipant,exceptfortheapplicationofthedisaccreditationpenalty.
CLAUSE XIIndemnification
11.1.WithoutprejudicetothepenaltieswhicharepartoftheManualofTariffsofEloPaymentArrangements,applicabletothecasesofnon-compliancewiththeobligationswhicharepartoftheRegulations,oftheArrangementManualsandofthepresentAgreement,eachofthepartiesagreestoindemnifyandkeeptheotherPartyreleasedfromallandanydirectlossesanddamagesordirectlosseswhich,provenlyandexclusively,theycausetotheotherPartyasaresultoftheirparticipationintheEloPaymentArrangementsandtheserviceprovisionobjectofthepresentAgreement,includingthoseresultingfromnon-compliancewiththeobligationsrelativetotheuseoftheEloBrands.TheliabilityassumedbyeachofthePartiesbeforetheotherPartyforthelosses,damagesanddirectlossesthattheybindthemselvestoindemnifyincludestheamountsdemandedbythirdparties,anddoesnotinclude,inanyway,lossofprofitsandindirectlossesordamages,atanytitle.
11.2.TheindemnificationprovidedforinClause11.1additionallyappliestoeventsthathavespecificpenaltiesandindemnitiesprovidedforintheRegulations,suchasthepenaltiesprovidedforinChapterVIII—Penalties Applied ,oftheRegulations.
CLAUSE XIIGeneral Provisions
12.1.ThePartiesagreeandrepresentthatallthetermsandconditionsunderthepresentAgreementarevalidandbindingsincethedateofsignatureofthisAgreement,beingthePartiesboundasestablishedherein.
12.2.Thecommunicationsand/ornotificationsbetweenthePartiesarisingfromthisAgreementshallbemadebyregisteredletterorelectronicmail(e-mail)withacknowledgmentofreceipt,totheaddressesindicatedbelow.EitherPartycanchangetheaddresstowhichthecommunications/notificationsaretobeforwardedandinformtheotherPartyofthenewaddress.
IftoELO:Elo Serviços S.A.AlamedaXingu,no.512,5thfloor,Alphaville,BarueriE-mail:[email protected].:Mr.MarceloMarques
IftotheParticipant:Pagseguro Internet S.A.AvenidaBrigadeiroFariaLima,no.1384,10thfloor.CEP:01451-001E-mail:[email protected].:AlexandreMagnani
12.3.ThepresentinstrumentshallbegovernedandinterpretedundertheLawsoftheFederativeRepublicofBrazil.
12.4.Nomodification,waiverorchangetoanyterms,conditionsorprovisionsnowagreedinthepresentAgreementshallenterintoeffectexceptanduntilformalizedbyanamendmentdulysignedbythePartiesorbytheirlegalrepresentatives.
12.5.Eloisallowedtoassignortransfer,fullyorpartially,therightsandobligationsarisingfromthepresentAgreement,uponpreviouscommunicationinwritingtotheParticipant.TheassignmentoftherightsandobligationsarisingfromthepresentAgreementshallbeallowedtotheParticipanttoaRelatedPersonwithoutpreviousandexpressauthorizationinwritingbyElo.Inthiscase,Eloshallbenotifiedwithin60(sixty)daysinadvanceandtheRelatedPersonmustnecessarilybelongtoPagSeguroGroupandmeetthetechnical-operationalrequirementsstipulatedintheregulationsinforce,inthepresentAgreementandinEloManuals.Forthepurposeofthisclause,RelatedPersonshallbeconsideredcolligated,controlled,controllingcompaniesorthoseunderthesameshareholdingcontrolastheParticipant.
12.6.AnytoleranceoromissionbyanyofthePartiesshallnotimplywaiver,pardon,novationorchangetowhatisadjustedinthepresentAgreement,aswellaswaivertodemandcompliancewiththeprovisionscontainedhereinoroftherighttorequestinthefuturethecompleteexecutionofeachoftheobligationssetforthinthepresentAgreement.
12.7.NoprovisionunderthepresentinstrumentshallbeinterpretedsoastoplacethePartiesinarelationshipofpartners,associated,membersofanyconsortium,holdersofcommodatum,jointventuremembersorholdersofjointandseveralorsubsidiaryliability,aswellasneitherPartyshallbeentitledtoprovideguaranteeormakeanyrepresentationonbehalfoftheother,forcingorbindingit,exceptinrelationtowhatisagreeduponinthepresentAgreement.
12.8.IfanyprovisioninthisAgreementisdeclaredorconsideredtobeunlawful,unenforceableorvoid,underthetermsoftheapplicablelegislation,bothPartiesshallbereleasedfromcomplyingwiththeobligationssetforthinthereferredtoprovision,butonlytotheextentthatsuchprovisionisunlawful,unenforceableorvoid.Intheeventoftheforegoing,theParties,bymutualagreement,shallamendthepresentAgreement,modifyingthatprovision,totheextentnecessarytorenderitlegalandenforceable,whilepreservingitspurposeor,ifthisisnotpossible,replacingitbyanotherprovisionthatislegalandenforceable,andwhichreachesthesameobjective.
12.9.IfanyprovisioncontainedinthepresentAgreementissubsequentlyconsideredvoid,unlawfulorunenforceable,theenforceabilityoftheremainingprovisionsshallnotbeaffectedorimpaired.
12.10.ThepresentAgreement,togetherwithallitsAttachments,constitutestheentireagreementbetweenthePartieswithrespecttoitsobjectandsupersedesallpreviousproposals,negotiations,discussionsandunderstandingsbetweenthePartieswithrespecttotheobjectofthepresentAgreement.
12.11.AnylitigationarisingfromthepresentAgreementorrelatedtoitshallberesolvedbyarbitration,managedbytheCenterofArbitrationandMediationoftheChamberofCommerceBrazil-Canada,inaccordancewithitsregulations,withthearbitrationcourtbeingformedbythreearbitrators.ThearbitrationshallbeheadquarteredinSãoPaulo/SPandconductedinthePortugueselanguage,observingtheconfidentialityoftheproceeding.
12.1.1Alltheexpensesandfeesrelatedtothearbitration,aswellasarbitrators’andexperts’feesshallbebornebythedefeatedParty.
12.11.2Fortheexclusivepurposesofanycoerciveorurgentmeasure,aslongasthearbitrationtribunalisnotconstituted,thePartieselectthecourtofthedistrictofSãoPaulo/SPastheoneexclusivelycompetentforthat.
12.12TheconditionsofthepresentAgreementarealsovalidforthesuccessorsoftheParties.
Page of Signatures of the Agreement for Accreditor Participation in Elo Payment Arrangements, entered into by Elo Serviços S.A. and PagSeguro Internet S.A. on February13, 2019.
ANDINWITNESSWHEREOF,thePartiessignedthepresentAgreementin2(two)counterparts,inthepresenceoftheundersignedwitnesses.
Barueri,February13,2019.
ELO SERVIÇOS S.A.
1. /S/CARLOSALBERTOC.MOREIRAJR. 2. /S/EDUARDOCHEDIDName: Carlos Alberto C. Moreira Jr. Name: Eduardo ChedidPosition: ExecutiveDirectorofBusinessandProductDevelopment Position: President
PAGSEGURO INTERNET S.A.
1. /S/CARLOSALBERTOC.MOREIRAJR. 2. /S/RENATOBERTOZZODUARTEName: Carlos Alberto C. Moreira Jr. Name: Renato Bertozzo DuarteCPF: 289.059.258-80 CPF: 212.549.598-82
3. /S/RICARDODUTRA Name: Ricardo Dutra CPF: 194.681.388-52
Witnesses:
1. /S/NATHALIAC.R.DEFARIA 2. /S/LEANDRO[ILLEGIBLE]Name: Nathalia C. R. de Faria Name: Leandro [illegible]RG: 30533696-4 RG: 21.334.302-4
Exhibit 8.1
Subsidiaries of PagSeguro Digital Ltd.1. PagseguroInternetS.A.(Brazil)2. BoaCompraTecnologiaLtda.(SubsidiaryofPagseguroInternetS.A.)(Brazil)3. NET+PhoneTelecomunicaçõesLtda.(SubsidiaryofPagseguroInternetS.A.)(Brazil)4. BCPSOnlineServices,Lda(SubsidiaryofPagseguroInternetS.A.)(Portugal)5. R2TechInformáticaS.A.(SubsidiaryofPagseguroInternetS.A.)(Brazil)6. NetposServiçosdeInformáticaS.A.(SubsidiaryofPagseguroInternetS.A.)(Brazil)7. TilixDigitalS.A.(SubsidiaryofPagseguroInternetS.A.)(Brazil)8. BIVACOHoldingS.A.(SubsidiaryofPagseguroInternetS.A.)(Brazil)9. BivaServiçosFinanceirosS.A.(SubsidiaryofBIVACOHoldingS.A.)(Brazil)10. BivaSecuritizadoradeCréditosFinanceirosS.A.(SubsidiaryofBIVACOHoldingS.A.)(Brazil)11. BivaCorrespondenteBancárioLtda.(SubsidiaryofBIVACOHoldingS.A.)(Brazil)12. BSHoldingFinanceiraLtda.(Brazil)13. BancoseguroS.A.(SubsidiaryofBSHoldingFinanceiraLtda.)(Brazil)
Exhibit 12.1
CERTIFICATION PURSUANT TO RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES AND EXCHANGE ACT OF 1934, AS AMENDED
I,LuizFrias,certifythat:
1. IhavereviewedthisannualreportonForm20-FofPagSeguroDigitalLtd.;
2. Basedonmyknowledge,thisreportdoesnotcontainanyuntruestatementofamaterialfactoromittostateamaterialfactnecessarytomakethestatementsmade,inlightofthecircumstancesunderwhichsuchstatementsweremade,notmisleadingwithrespecttotheperiodcoveredbythisreport;
3. Basedonmyknowledge,thefinancialstatements,andotherfinancialinformationincludedinthisreport,fairlypresentinallmaterialrespectsthefinancialcondition,resultsofoperationsandcashflowsofthecompanyasof,andfor,theperiodspresentedinthisreport;
4. Thecompany’sothercertifyingofficer(s)andIareresponsibleforestablishingandmaintainingdisclosurecontrolsandprocedures(asdefinedinExchangeActRules13a-15(e)and15d-15(e))andinternalcontroloverfinancialreporting(asdefinedinExchangeActRules13a-15(f)and15d-15(f))forthecompanyandhave:
a. Designedsuchdisclosurecontrolsandprocedures,orcausedsuchdisclosurecontrolsandprocedurestobedesignedunderoursupervision,toensurethat
materialinformationrelatingtothecompany,includingitsconsolidatedsubsidiaries,ismadeknowntousbyotherswithinthoseentities,particularlyduringtheperiodinwhichthisreportisbeingprepared;
b. Designedsuchinternalcontroloverfinancialreporting,orcausedsuchinternalcontroloverfinancialreportingtobedesignedunderoursupervision,toprovide
reasonableassuranceregardingthereliabilityoffinancialreportingandthepreparationoffinancialstatementsforexternalpurposesinaccordancewithgenerallyacceptedaccountingprinciples;
c. Evaluatedtheeffectivenessofthecompany’sdisclosurecontrolsandproceduresandpresentedinthisreportourconclusionsabouttheeffectivenessofthedisclosurecontrolsandprocedures,asoftheendoftheperiodcoveredbythisreportbasedonsuchevaluation;and
d. Disclosedinthisreportanychangeinthecompany’sinternalcontroloverfinancialreportingthatoccurredduringtheperiodcoveredbytheannualreportthathasmateriallyaffected,orisreasonablylikelytomateriallyaffect,thecompany’sinternalcontroloverfinancialreporting;and
5. Thecompany’sothercertifyingofficer(s)andIhavedisclosed,basedonourmostrecentevaluationofinternalcontroloverfinancialreporting,tothecompany’sauditorsandtheauditcommitteeofthecompany’sboardofdirectors(orpersonsperformingtheequivalentfunctions):
a. Allsignificantdeficienciesandmaterialweaknessesinthedesignoroperationofinternalcontroloverfinancialreportingwhicharereasonablylikelytoadverselyaffectthecompany’sabilitytorecord,process,summarizeandreportfinancialinformation;and
b. Anyfraud,whetherornotmaterial,thatinvolvesmanagementorotheremployeeswhohaveasignificantroleinthecompany’sinternalcontroloverfinancialreporting.
Date:April15,2019
By: /s/LuizFrias
Name:LuizFriasTitle:PrincipalExecutiveOfficer
Exhibit 12.2
CERTIFICATION PURSUANT TO RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES AND EXCHANGE ACT OF 1934, AS AMENDED
I,EduardoAlcaro,certifythat:
1. IhavereviewedthisannualreportonForm20-FofPagSeguroDigitalLtd.;
2. Basedonmyknowledge,thisreportdoesnotcontainanyuntruestatementofamaterialfactoromittostateamaterialfactnecessarytomakethestatementsmade,inlightofthecircumstancesunderwhichsuchstatementsweremade,notmisleadingwithrespecttotheperiodcoveredbythisreport;
3. Basedonmyknowledge,thefinancialstatements,andotherfinancialinformationincludedinthisreport,fairlypresentinallmaterialrespectsthefinancialcondition,resultsofoperationsandcashflowsofthecompanyasof,andfor,theperiodspresentedinthisreport;
4. Thecompany’sothercertifyingofficer(s)andIareresponsibleforestablishingandmaintainingdisclosurecontrolsandprocedures(asdefinedinExchangeActRules13a-15(e)and15d-15(e))andinternalcontroloverfinancialreporting(asdefinedinExchangeActRules13a-15(f)and15d-15(f))forthecompanyandhave:
a. Designedsuchdisclosurecontrolsandprocedures,orcausedsuchdisclosurecontrolsandprocedurestobedesignedunderoursupervision,toensurethat
materialinformationrelatingtothecompany,includingitsconsolidatedsubsidiaries,ismadeknowntousbyotherswithinthoseentities,particularlyduringtheperiodinwhichthisreportisbeingprepared;
b. Designedsuchinternalcontroloverfinancialreporting,orcausedsuchinternalcontroloverfinancialreportingtobedesignedunderoursupervision,toprovide
reasonableassuranceregardingthereliabilityoffinancialreportingandthepreparationoffinancialstatementsforexternalpurposesinaccordancewithgenerallyacceptedaccountingprinciples;
c. Evaluatedtheeffectivenessofthecompany’sdisclosurecontrolsandproceduresandpresentedinthisreportourconclusionsabouttheeffectivenessofthedisclosurecontrolsandprocedures,asoftheendoftheperiodcoveredbythisreportbasedonsuchevaluation;and
d. Disclosedinthisreportanychangeinthecompany’sinternalcontroloverfinancialreportingthatoccurredduringtheperiodcoveredbytheannualreportthathasmateriallyaffected,orisreasonablylikelytomateriallyaffect,thecompany’sinternalcontroloverfinancialreporting;and
5. Thecompany’sothercertifyingofficer(s)andIhavedisclosed,basedonourmostrecentevaluationofinternalcontroloverfinancialreporting,tothecompany’sauditorsandtheauditcommitteeofthecompany’sboardofdirectors(orpersonsperformingtheequivalentfunctions):
a. Allsignificantdeficienciesandmaterialweaknessesinthedesignoroperationofinternalcontroloverfinancialreportingwhicharereasonablylikelytoadverselyaffectthecompany’sabilitytorecord,process,summarizeandreportfinancialinformation;and
b. Anyfraud,whetherornotmaterial,thatinvolvesmanagementorotheremployeeswhohaveasignificantroleinthecompany’sinternalcontroloverfinancialreporting.
Date:April15,2019
By: /s/EduardoAlcaro
Name:EduardoAlcaroTitle:ChiefFinancialandInvestorRelationsOfficerandChiefAccountingOfficer
Exhibit 13.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350UNDER THE SECURITIES AND EXCHANGE ACT OF 1934, AS AMENDED
Pursuanttosection906oftheSarbanes-OxleyActof2002(subsections(a)and(b)ofSection1350,Chapter63ofTitle18,UnitedStatesCode),theundersignedofficerofPagSeguroDigitalLtd.(the“Company ”)doesherebycertify,tosuchofficer’sknowledge,that:
TheAnnualReportonForm20-FfortheyearendedDecember31,2018oftheCompanyfullycomplieswiththerequirementsofSection13(a)or15(d)oftheSecuritiesExchangeActof1934andinformationcontainedintheForm20-Ffairlypresents,inallmaterialrespects,thefinancialconditionandresultsofoperationsoftheCompany.
Date:April15,2019
By: /s/LuizFrias
Name:LuizFriasTitle:PrincipalExecutiveOfficer
Exhibit 13.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350UNDER THE SECURITIES AND EXCHANGE ACT OF 1934, AS AMENDED
Pursuanttosection906oftheSarbanes-OxleyActof2002(subsections(a)and(b)ofSection1350,Chapter63ofTitle18,UnitedStatesCode),theundersignedofficerofPagSeguroDigitalLtd.(the“Company ”)doesherebycertify,tosuchofficer’sknowledge,that:
TheAnnualReportonForm20-FfortheyearendedDecember31,2018oftheCompanyfullycomplieswiththerequirementsofSection13(a)or15(d)oftheSecuritiesExchangeActof1934andinformationcontainedintheForm20-Ffairlypresents,inallmaterialrespects,thefinancialconditionandresultsofoperationsoftheCompany.
Date:April15,2019
By: /s/EduardoAlcaro
Name:EduardoAlcaroTitle:ChiefFinancialandInvestorRelationsOfficerandChiefAccountingOfficer
Exhibit 15.1
April 15, 2019
SecuritiesandExchangeCommission100FStreet,N.E.Washington,DC20549
Commissioners:
WehavereadthestatementsmadebyPAGSEGURODIGITALLTD.,whichweunderstandwillbefiledwiththeSecuritiesandExchangeCommission,pursuanttoItem16FofForm20-F,aspartoftheForm20-FofPAGSEGURODIGITALLTD.datedApril15,2019.WeagreewiththestatementsconcerningourFirminsuchForm20-F.
Verytrulyyours,
/s/PricewaterhouseCoopersAuditoresIndependentesSaoPaulo,Brazil