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Section 1: DRS

DRS
Table of Contents

As confidentially submitted to the Securities and Exchange Commission on July 31, 2017

No. 333-

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

PagSeguro Digital Ltd.

(Exact name of Registrant as specified in its charter)

 

 

 

The Cayman Islands

(State or other jurisdiction of incorporation or organization)

 

7374

(Primary Standard Industrial Classification Code Number)

 

Not applicable

(I.R.S. Employer Identification No.)

Av. Brigadeiro Faria Lima, 1384, 4º andar, parte A

São Paulo, SP, 01451-001, Brazil

+55 11 3038 8127

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

Cogency Global Inc.

10 East 40th Street, 10th Floor

New York, NY 10016

(212) 947-7200

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies of all communications, including communications sent to agent for service, should be sent to:

 

Robert M. Ellison, Esq.

Jonathan E. Kellner, Esq.

Shearman & Sterling LLP

Av. Brigadeiro Faria Lima, 3400, 17th Floor

São Paulo, SP, 04538-132, Brazil

 

Manuel Garciadiaz, Esq.

Davis Polk & Wardwell LLP

Av. Presidente Juscelino Kubitschek 2041,

Torre E

São Paulo, SP, 04543-011, Brazil

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box:    

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    

Indicate by a check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933. Emerging growth company.    

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 7(a)(2)(B) of the Securities Act.    

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

 

CALCULATION OF REGISTRATION FEE

 

Title of each class of securities to be registered

   Proposed Maximum
Aggregate Offering  Price
(1)
     Amount of registration fee  

Class A common shares

   US$ 100,000,000      US$ 11,590  

 

 

(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933.

 

 

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Commission, acting pursuant to such Section 8(a), may determine.

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the U.S. Securities and Exchange Commission is effective. This prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

PRELIMINARY PROSPECTUS (Subject to completion, dated                     , 2017)

Class A Common Shares

LOGO

PAGSEGURO DIGITAL LTD.

(incorporated in the Cayman Islands)

 

 

This is an initial public offering by us and the selling shareholder referred to in this prospectus, or the Selling Shareholder, of                      of our Class A common shares, of which                      Class A common shares will be offered by us and                      Class A common shares will be offered by the Selling Shareholder.    This prospectus relates to the offering by the underwriters of Class A common shares in the United States and elsewhere.

No public market currently exists for our Class A common shares.    We anticipate that the initial public offering price will be between US$                      and US$                      per Class A common share.    We have applied to list our Class A common shares on the Nasdaq Global Select Market under the symbol “                    ”.

We are an “emerging growth company” under the federal securities laws as that term is used in the Jumpstart Our Business Startups Act of 2012 and, as a result, have elected to comply with certain reduced public company disclosure and financial reporting requirements.

 

 

Investing in our Class A common shares involves risks.    See “Risk Factors” beginning on page 15 of this prospectus.

 

     Per Common Share      Total  

Public offering price

   US$                           US$                       

Underwriting discounts and commissions(1)

   US$      US$  

Proceeds, before expenses, to us

   US$      US$  

 

 

(1) See “Underwriters” for a description of all compensation payable to the underwriters.

 

 

The underwriters may also exercise their option to purchase up to an additional                      Class A common shares from the Selling Shareholder, or the overallotment option, at the public offering price, for 30 days after the date of this prospectus to cover overallotments.    See “Underwriters—Option to Purchase Additional Class A Common Shares.”

Neither the Securities and Exchange Commission, or the SEC, nor any state securities commission has approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the Class A common shares against payment in New York, New York on or about                    , 2017.

 

 

 

Goldman Sachs & Co. LLC

  Morgan Stanley

The date of this prospectus is                     , 2017


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TABLE OF CONTENTS

 

GLOSSARY OF TERMS

     iii  

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

     vi  

PROSPECTUS SUMMARY

     1  

RISK FACTORS

     15  

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     46  

USE OF PROCEEDS

     48  

DIVIDENDS AND DIVIDEND POLICY

     49  

EXCHANGE RATES

     50  

CAPITALIZATION

     51  

DILUTION

     53  

MARKET INFORMATION

     55  

SELECTED FINANCIAL INFORMATION OF PAGSEGURO BRAZIL

     56  

INDUSTRY

     58  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS  OF OPERATIONS OF PAGSEGURO BRAZIL

     61  

BUSINESS

     89  

MANAGEMENT

     134  

PRINCIPAL AND SELLING SHAREHOLDER

     140  

RELATED PARTY TRANSACTIONS

     142  

TAXATION

     163  

COMMON SHARES ELIGIBLE FOR FUTURE SALE

     169  

UNDERWRITERS

     170  

EXPENSES OF THE OFFERING

     178  

VALIDITY OF SECURITIES

     179  

EXPERTS

     180  

WHERE YOU CAN FIND MORE INFORMATION

     181  

ENFORCEABILITY OF CIVIL LIABILITIES

     182  

INDEX TO FINANCIAL STATEMENTS

     F-1  

 

 

This prospectus has been prepared by us solely for use in connection with the proposed offering of Class A common shares in the United States and elsewhere outside Brazil. Goldman Sachs & Co. LLC and Morgan Stanley & Co. LLC will collectively act as underwriters.

 

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Neither we, the Selling Shareholder, or the underwriters nor any of their respective agents, have authorized anyone to provide any information other than that contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we may have referred you. We, the Selling Shareholder, the underwriters and their respective agents take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. Neither we, the Selling Shareholder, nor the underwriters have authorized any other person to provide you with different or additional information. Neither we, the Selling Shareholder or the underwriters, nor their respective agents, are making an offer to sell the Class A common shares in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus (except as otherwise indicated), regardless of the time of delivery of this prospectus or any sale of the Class A common shares. Our business, financial condition, results of operations, cash flows and prospects may have changed since the date on the front cover of this prospectus.

The offering is made in the United States and elsewhere solely on the basis of the information contained in this prospectus. Investors should take this into account when making investment decisions.

 

 

The following references in this prospectus have the meanings shown below:

 

    “PagSeguro Digital” or the “Company” mean PagSeguro Digital Ltd., the company whose shares are being offered by this prospectus. PagSeguro Digital Ltd. is an exempted company with limited liability incorporated under the laws of the Cayman Islands.

 

    “PagSeguro Brazil” means Pagseguro Internet S.A., our operating company, a sociedade anônima incorporated in Brazil. Pagseguro Internet S.A. will be owned by PagSeguro Digital Ltd. prior to this offering.

 

    “We,” “us” and “our” mean PagSeguro Digital, PagSeguro Brazil and PagSeguro Brazil’s subsidiaries on a consolidated basis.

 

    “PagSeguro” means our digital payments business, which is operated by PagSeguro Brazil.

 

    “UOL” or the “Selling Shareholder” mean Universo Online S.A., the controlling shareholder, of PagSeguro Digital. UOL is selling                      existing Class A common shares of PagSeguro Digital in this offering, in addition to the                      new Class A common shares being issued and sold by PagSeguro Digital itself. For more information regarding UOL, see “Principal and Selling Shareholder.”

 

    The “Underwriters” means Goldman Sachs & Co. LLC and Morgan Stanley & Co. LLC, who will together act as the underwriters of this offering.

The term “Brazil” refers to the Federative Republic of Brazil and the phrase “Brazilian government” refers to the federal government of Brazil. “Central Bank” refers to Banco Central do Brasil. References in the prospectus to “real,” “reais” or “R$” refer to the Brazilian real, the official currency of Brazil and references to “U.S. dollar,” “U.S. dollars” or “US$” refer to U.S. dollars, the official currency of the United States.

This prospectus contains various illustrations of our products and services. For convenience, we have translated the text in those illustrations into English. The actual products and services are generally presented to our customers in Portuguese only.

 

 

 

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GLOSSARY OF TERMS

The following is a glossary of industry and other defined terms used in this prospectus:

“ABECS” means the Brazilian Association of Credit Card and Services Companies (Associação Brasileira de Empresas de Cartões de Crédito e Serviços).

“ABRANET” means the Brazilian Internet Association (Associação Brasileira de Internet).

“acquirer” means a payment institution that does not manage payment accounts, but enables merchants to accept payment cards issued by a payment institution or by a financial institution that participates in a card scheme. The acquirer receives the card transaction details from the merchant’s terminal, passes them to the card issuer via the card scheme for authorization, and completes the processing of the transaction. The acquirer arranges settlement of the card transaction and credits the merchant’s bank account with the funds in accordance with its service agreement with the merchant. The acquirer also deals with any chargebacks that may be received via the card issuer regarding consumer transactions with merchants.

boleto” means a printable document issued by merchants that is used to make payments in Brazil. Boletos can be used to pay bills for products or services, utilities or taxes. Each boleto refers to a specific merchant and customer transaction, and includes the merchant’s name, customer information, expiration date and total amount due, plus a serial number that identifies the account to be credited and a barcode so the entire document can be read and processed by a Brazilian ATM. A boleto can be paid in cash at a bank teller, at an ATM, or by bank transfer. PagSeguro’s payment platform and merchant account can be used to pay boletos.

“Brazilian Payments System” (Sistema de Pagamentos Brasileiro, or SPB) refers to all the entities, systems and procedures related to the clearing and settlement of funds transfer, foreign currency operations, financial assets, and securities transactions in Brazil. The SPB includes systems in charge of check clearing; the clearing and settlement of electronic debit and credit orders, funds transfer, and other financial assets; the clearing and settlement of securities transactions; the clearing and settlement of commodities and futures transactions; and, since the introduction of Law No. 12,865/13 of May 17, 2013, payment schemes and payment institutions.

“card scheme” means a payment network using payment cards, such as debit or credit cards. Any bank or any other eligible institution can become a member of a card scheme, allowing it to issue payment cards operating on the card scheme. The card scheme passes card transaction details from the acquirer to the issuer and passes payments back to the acquirer, which in turn pays the merchant. MasterCard and Visa are major card schemes.

“Chargeback” refers to a dispute where the consumer makes a purchase using a payment card and subsequently requests a refund from the card issuer on the basis of a commercial claim (for example, if the goods are not delivered, or are delivered damaged). Chargebacks occur more frequently in online transactions than in in-person transactions, and more frequently for goods than for services.

“Chargeback fraud” refers to chargebacks where the consumer’s request for a refund is not justified by a legitimate commercial disagreement.

“comScore” means comScore, Inc., a cross-platform measurement company that measures audiences, brands and consumer behavior, and provides market and analytical data to clients.

 

 

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“Datafolha” is a research institute created by Grupo Folha, which conducts statistical surveys, election polling and opinion and market surveys for the market at large. Datafolha is an affiliate of UOL.

“eWallet” is a digital wallet that offers customers the ability to make payments online using a variety of payment methods, including cards, without having to type in the card details each time.

“FIDC” means Fundo de Investimento em Direitos Creditórios (Fund for Investment in Receivables), a type of investment fund established under Brazilian law composed of receivables.

“GPRS” means “General Packet Radio Service,” a packet-based wireless communication service on the 2G and 3G cellular communication systems that provides continuous connection to the Internet for mobile phone and computer users.

“IBGE” means the Brazilian Institute of Geography and Statistics (Instituto Brasileiro de Geografia e Estatística).

“Individual Micro Entrepreneurs” refers to businesses operated by individuals (not through legal entities) with annual gross revenues of up to R$60,000, as determined in accordance with the standard segmentation of Brazilian businesses by size under Brazilian Law No. 123/2006, known as the General Law on Micro and Small Enterprises, as amended, and the Brazilian tax code.

“INPI” means the Brazilian Institute of Industrial Property (Instituto Nacional da Propriedade Industrial).

“Large Companies” refers to legal entities with annual gross revenues in excess of R$78 million. This commonly-used definition in Brazil refers to companies that are not eligible for the deemed profit (lucro presumido) taxation regime under Brazilian Law No. 9,718/1998, as amended.

“MDR” means merchant discount rate, a commission withheld by us from the transaction value paid to the merchant.

“meal voucher card” refers to a labor benefit included in Brazilian employment contracts, where employers provide cash for employee meals on a tax-efficient basis. The employer deposits the benefit to a prepaid card held by the employee, and the employee can use the balance on the card to make purchases in restaurants and grocery stores.

“Medium-Sized Companies” refers to legal entities with annual gross revenues of between R$3.6 million and R$78 million. This commonly-used definition in Brazil refers to companies that are eligible for the deemed profit (lucro presumido) taxation regime under Brazilian Law No. 9,718/1998, as amended.

“Micro Companies” refers to legal entities with annual gross revenues of up to R$360,000, as determined in accordance with the standard segmentation of Brazilian businesses by size under Brazilian Law No. 123/2006, known as the General Law on Micro and Small Enterprises, as amended, and the Brazilian tax code.

“Micro-Merchant” means Micro Companies and Individual Micro Entrepreneurs.

“mPOS” means mobile POS. mPOS devices are similar to POS devices, but they require the merchant’s cell phone in order to function and accept payments. mPOS devices connect to a merchant’s cell phone network by Bluetooth. As an example, the Minizinha is an mPOS device.

 

 

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“Portal do Empreendedor” means the Entrepreneur’s Portal – Individual Micro Entrepreneur (Portal do Empreendedor – Microempreendedor Individual), a Brazilian government web portal for Individual Micro Entrepreneurs.

“POS” means point of sale. POS devices allow merchants to accept payments where a sale is made, whether inside an establishment or outside on the street. POS includes mPOS, although various features differentiate the two systems. As an example, the Moderninha Pro is a POS device.

“SDK” means software development kit, which is typically a set of software development tools that allows for the creation of applications for software packages or frameworks, hardware platforms, computer or operating systems or similar development platforms.

“SEBRAE” means the Brazilian Micro and Small Businesses Support Service (Serviço Brasileiro de Apoio às Micro e Pequenas Empresas).

“Small Companies” refers to legal entities with annual gross revenues of above R$360,000 and up to R$3.6 million, as determined in accordance with the standard segmentation of Brazilian businesses by size under Brazilian Law No. 123/2006, known as the General Law on Micro and Small Enterprises, as amended, and the Brazilian tax code.

“SMEs” refers to Small Companies and Medium-Sized Companies.

“unique visitor” refers to a person who visits a website at least once in a predetermined time period, typically 30 days. Each visitor to the website is only counted once during the relevant period (i.e., if the same IP address accesses the website several times, it only counts as one visitor).

 

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PRESENTATION OF FINANCIAL AND OTHER INFORMATION

Financial Statements

PagSeguro Digital Ltd., our Cayman Islands company, which is offering its Class A common shares in this offering, was incorporated on July 19, 2017 for an indefinite term. Prior to the contribution of Pagseguro Internet S.A. to it in September 2017, PagSeguro Digital Ltd. had not commenced operations and had only nominal assets and liabilities.

We present in this prospectus the audited consolidated financial statements at December 31, 2016, 2015 and 2014 and for each of the three years ended December 31, 2016 of Pagseguro Internet S.A., our Brazilian operating company, which we refer to as PagSeguro Brazil. These audited consolidated financial statements were prepared in accordance with the International Financial Reporting Standards, or the IFRS, as issued by the International Accounting Standards Board, or the IASB. PagSeguro Brazil maintains its books and records in reais.

The financial information presented in this prospectus should be read in conjunction with the following information, all included elsewhere in this prospectus:

 

    the audited consolidated financial statements of PagSeguro Brazil and the related notes; and

 

    the section of this prospectus entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations of PagSeguro Brazil.”

Following this offering, PagSeguro Digital will begin reporting consolidated financial information to shareholders, and PagSeguro Brazil will not present consolidated financial statements. PagSeguro Digital also maintains its books and records in reais and its consolidated financial statements will be prepared in accordance with IFRS, as issued by the IASB.

Corporate Events

Our Incorporation

At the time of incorporation of PagSeguro Digital Ltd., UOL also held 524,577,214 shares of our principal operating company, PagSeguro Brazil (which were substantially all of the shares PagSeguro Brazil, the one remaining share being held by a separate shareholder, as required by Brazilian law). In                    2017, PagSeguro Brazil will carry out a reverse stock split, following which UOL will hold 262,288,606 shares in PagSeguro Brazil, the one remaining share being held by the separate shareholder.

In September 2017, prior to the launch of this initial public offering, UOL will contribute all of its shares in PagSeguro Brazil to PagSeguro Digital. As a result, PagSeguro Digital will own substantially all of the shares of PagSeguro Brazil, together with PagSeguro Brazil’s subsidiaries and activities. In return for this contribution, PagSeguro Digital will issue 262,288,606 new Class B common shares to UOL in a 1:1 exchange for the shares of PagSeguro Brazil contributed to it. Taken together with the one Class B common share of PagSeguro Digital that UOL already held prior to that contribution, UOL will then hold all of the issued shares of PagSeguro Digital immediately prior to this offering, consisting of 262,288,607 Class B common shares.

Immediately prior to this initial public offering, therefore, UOL will hold all of the 262,288,607 issued and outstanding shares in PagSeguro Digital, and PagSeguro Digital will hold all of the issued and outstanding 262,288,607 shares in PagSeguro Brazil except one.

 

 

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The 2015 Reorganization

PagSeguro Brazil was incorporated as a legal entity in 2006, although it did not operate the PagSeguro business prior to August 1, 2015 since most of the PagSeguro business activities were operated by other UOL group members prior to that date. On August 1, 2015, UOL carried out a corporate reorganization in which it segregated some of the PagSeguro activities from its other activities and contributed them to PagSeguro Brazil.

Prior to the contribution of these PagSeguro activities to PagSeguro Brazil, their financial results were recorded in UOL’s financial statements. As a result, the financial information of PagSeguro Brazil reflects a carve-out of the PagSeguro activities for periods prior to August 1, 2015. That carve-out financial information is derived from UOL’s accounting records and do not necessarily reflect the financial position, results of operations or cash flows that would have been recorded had PagSeguro Brazil been operating as a separate entity in those periods or at those dates.

From January 1, 2014 through July 31, 2015, certain of the assets and liabilities, revenues, costs and expenses directly related to the PagSeguro business were already controlled separately from UOL’s other activities. On the other hand, certain other corporate balances and transactions relating to the PagSeguro operations were not accounted for separately within UOL; these have been allocated to the audited consolidated financial statements of PagSeguro Brazil for the period from January 1, 2014 through July 31, 2015 based on assumptions similar to those used after August 1, 2015, when the PagSeguro business was transferred to PagSeguro Brazil.

UOL used centralized cash management without specific segregation by business. Consequently, all amounts received or paid in connection with the PagSeguro business in the period prior to August 1, 2015 have been recognized as balances between related parties in the audited consolidated financial statements of PagSeguro Brazil. Our cash management will be separate from UOL’s cash management starting from the date of this offering, however.

In addition, during 2016, UOL transferred its 100% interest in Net+Phone and its 75% interest in Boa Compra to PagSeguro Brazil as a capital contribution, and PagSeguro Brazil purchased the remaining 25% non-controlling interests in Boa Compra from its minority shareholders.

Effect of Rounding

Certain amounts and percentages included in this prospectus, including in the section of this prospectus entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations of PagSeguro Brazil” have been rounded for ease of presentation. Percentage figures included in this prospectus have not been calculated in all cases on the basis of the rounded figures but on the basis of the original amounts prior to rounding. For this reason, certain percentage amounts in this prospectus may vary from those obtained by performing the same calculations using the figures in the audited consolidated financial statements of PagSeguro Brazil. Certain other amounts that appear in this prospectus may not sum due to rounding.

 

 

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Market and Industry Data

This prospectus contains data related to economic conditions in the market in which we operate. The information contained in this prospectus concerning economic conditions is based on publicly available information from third-party sources that we believe to be reasonable. Data and statistics regarding the Brazilian Internet, payment solutions and e-commerce markets are based on publicly available data published by the Brazilian Association of Credit Card and Services Companies (Associação Brasileira de Empresas de Cartões de Crédito e Serviços, or ABECS), comScore, Datafolha, IBGE, the World Bank, SEBRAE, Neoway Business Solutions, Webshoppers and eMarketer, among others. We also make statements in this prospectus about the size of the Brazilian digital payments and e-commerce markets.

Although we have no reason to believe any of this information or these reports are inaccurate in any material respect and believe and act as if they are reliable, neither we, the Selling Shareholder, the underwriters, nor their respective agents have independently verified it. Governmental publications and other market sources, including those referred to above, generally state that their information was obtained from recognized and reliable sources, but the accuracy and completeness of that information is not guaranteed. Neither we, the Selling Shareholder, the underwriters, nor their respective agents can guarantee the accuracy of such information. In addition, the data that we compile internally and our estimates have not been verified by an independent source.

Financial Information in U.S. Dollars

We have translated some of the real amounts included in this prospectus into U.S. dollars. You should not construe these translations as representations by us that the amounts actually represent these U.S. dollar amounts or could be converted into U.S. dollars at the rates indicated. Unless otherwise indicated, we have translated real amounts into U.S. dollars using a rate of R$3.2591 to US$1.00, the commercial selling rate for U.S. dollars at December 31, 2016 as reported by the Central Bank.

Emerging Growth Company Status

We are an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended, or the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual revenues of at least US$1.0 billion or (c) in which we are deemed to be a large accelerated filer and (2) the date on which we have issued more than US$1.0 billion in non-convertible debt during the prior three-year period. As an emerging growth company, we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, exemptions from the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and any Public Company Accounting Oversight Board, or PCAOB, rules, including any future audit rule promulgated by the PCAOB (unless the SEC determines otherwise). Accordingly, the information about us available to you will not be the same as, and may be more limited than, the information available to shareholders of a non-emerging growth company.

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. This summary may not contain all the information that may be important to you and we urge you to read this entire prospectus carefully, including the “Risk Factors—Risks Relating to Our Business and Industry” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations of PagSeguro Brazil” sections and the consolidated financial statements of PagSeguro Brazil and notes to those statements before deciding to invest in our Class A common shares.

Our Mission

To disrupt and democratize financial services in Brazil by providing an end-to-end digital ecosystem that is safe, affordable, simple and mobile-first for both merchants and consumers.

Overview

We are a disruptive provider of financial technology solutions focused primarily on Micro-Merchants, Small Companies and Medium-Sized Companies, or SMEs, in Brazil. We are the only financial technology provider in Brazil whose business model covers all of the following five pillars:

 

    Multiple digital payment solutions

 

    In-person payments via POS devices that we sell to merchants

 

    Free digital accounts

 

    Issuer of prepaid cards to clients for spending or withdrawing account balances

 

    Operating as an acquirer.

Our end-to-end digital ecosystem enables our customers not only to accept payments, but also to grow and manage their businesses. Before PagSeguro, many of these Micro-Merchants and SMEs were overlooked or underserved by incumbent payment providers and large financial institutions in Brazil. We offer safe, affordable, simple, mobile-first solutions for merchants to accept payments and manage their cash through their PagSeguro digital accounts, without the need for a bank account. Our digital account offers more than 30 cash-in methods and a wide range of cash-out options including our PagSeguro prepaid card, all using our proprietary technology platform and backed by the trusted PagSeguro and UOL brands. Our digital ecosystem also features other digital financial services, business management tools and functionalities for our clients.

We launched PagSeguro in 2007 as an online payment platform to provide the digital payment infrastructure necessary for e-commerce to grow in Brazil. The credibility of our parent company UOL was key to this success. Founded in 1996, UOL is Brazil’s largest Internet content, digital products and services company. According to comScore, 81.2 million unique visitors (approximately 73% of Brazilian internet users) accessed a UOL website in May 2017. The PagSeguro and UOL brands together gave online consumers the confidence to share their sensitive personal and financial data with us, allowing them to shop online easily and safely. As an example, we brought trust to the online merchant-customer relationship by introducing a feature where we hold the consumer’s payment in escrow for a period of time after the purchase, as a precaution in case of any commercial disputes.

 



 

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In 2013, we expanded from online payments into point of sale, or POS, payments, allowing merchants to receive in-person payments. Focusing primarily on Micro-Merchants and SMEs, we sell a range of POS and mobile POS, or mPOS, devices specifically designed to fit their business needs. Our devices all offer competitive transaction fees and access to our end-to-end digital ecosystem, with a PagSeguro prepaid card, and without the need for a bank account. They span from our entry-level product, the Minizinha, to the Moderninha Pro, the POS device with the most connectivity features in Brazil. Unlike the incumbent payment providers in Brazil, who rent their POS devices to merchants, we innovated by allowing merchants to acquire their own POS device from us in 12 monthly installments. For the equivalent of three to six months of rental fees with the incumbents, merchants can buy a comparable device from PagSeguro.

Our digital ecosystem helps drive financial inclusion in Brazil providing business solutions primarily designed for Micro-Merchants and SMEs. Our main target markets include unbanked merchants who have been ignored or underserved by the incumbents. These merchants are attracted by our disruptive technology, which enables us to offer innovative, scalable and low-cost products and services with simpler onboarding, no paperwork and a high acceptance rate, while maintaining levels of fraud below those required by the card schemes. Once on our platform, merchants can offer consumers more than 30 cash-in methods, choose to obtain early payment of their card receivables on consumer installment transactions, and manage their cash balances on our free PagSeguro digital account, which offers a wide range of cash-out options including bank transfers, online purchasing through our eWallet, and in-person and online purchases or cash withdrawals using our PagSeguro prepaid card. Our management tools help them start or grow their business with PagSeguro as a partner, with functionalities such as sales reports and inventory control, which we believe create a strong commercial bond with our clients. We believe the combination of all these features increases our clients’ loyalty, leading them to conduct additional business with us, in a virtuous cycle. Our merchants span businesses of all types and sizes, ranging from Micro-Merchants and Small Companies such as street vendors and beauty salons, to Medium-Sized Companies and Large Companies in retail and other sectors.

At December 31, 2016, the PagSeguro network consisted of active clients in all 26 states and the federal district in Brazil. Our business has continued to grow rapidly, despite the major macroeconomic slow-down in Brazil since 2014:

 

    Our Net revenue from sales and services totaled R$740.6 million in 2016, an increase of 66.5% compared with R$444.7 million in 2015. Net revenue from sales and services in 2015 represented an increase of 113.5% from R$208.3 million in 2014.

 

    Our Income from early payment totaled R$392.4 million in 2016, an increase of 76.2% compared with R$222.7 million in 2015. Income from early payment in 2015 represented an increase of 92.3% compared with R$115.8 million in 2014.

 

    Our Net income for the year totaled R$127.8 million in 2016, an increase of 260.1% compared with R$35.5 million in 2015. Net income for the year in 2015 represented an increase of 30.2% compared with R$27.3 million in 2014.

Brazil has approximately 7.1 million Micro-Merchants and 3.9 million Micro Companies according to SEBRAE and the Portal do Empreendedor, which represents a major market opportunity, as many of them remain unbanked and seek digital payments solutions. We believe that by continuing to migrate these merchants into our ecosystem, we can continue to drive significant additional revenue growth in the coming years. At the same time, we will continue to introduce more value-added products and services targeted at larger clients. For example, in the second half of 2017 we expect to roll out an EFTPOS integration solution enabling clients to integrate their sales software directly with our electronic funds transfer system, allowing them to process large transaction volumes and issue tax receipts more easily than with traditional POS devices.

 



 

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Our merchant base is highly diversified, which shields us from dependence on a small number of business sectors or major accounts. In 2016, general retail stores, our largest volume sector, accounted for less than 15% of our overall transaction business and no other major business sector (clothing stores, food and beverage merchants, beauty parlors, or auto spares and repair shops) accounted for more than 10% of our overall transaction business.

Our Market Opportunity

The Brazilian Payments Market Is Large, Yet Underpenetrated

 

    Brazil is the largest economy in Latin America, as measured by gross domestic product, or GDP, yet digital payment penetration remains low compared to more developed economies. According to a December 2016 report by the Bank for International Settlements, or BIS, and data from the World Bank, card usage as a payment method in Brazil represented only approximately 28% of private consumption in 2015, compared to approximately 45% in the United States. According to a Datafolha survey carried out in June 2017, approximately half of the businesses surveyed did not have POS devices, and approximately half of those without POS devices (more, in the case of Individual Micro-Merchants) said they intended to obtain one in the coming six months. We believe that a significant portion of this underpenetration is due to the number of unbanked individuals, who make up a major target sector for us. According to data from the World Bank, 31.9% of the Brazilian population above 15 years old, or 65.1 million individuals, did not have a bank account in 2014.

 

    Brazil shows strong structural growth drivers for digital payments as its economy continues the transition away from cash. In 2014, according to ABECS and the Central Bank, the transaction volume for payment cards overtook the transaction volume for checks for the first time. Credit and debit card transaction volume in Brazil has increased at a compound annual growth rate of 15.2% from 2010 to 2016 according to ABECS. As a further indication of this growth, in 2017 MasterCard stated that the Brazilian real was one of its three primary revenue billing currencies.

 

    E-commerce is also underpenetrated compared to more developed economies. In Brazil, e-commerce accounted for only 3.6% of retail sales in 2016, compared to 7.8% in the United States. According to a 2017 report commissioned by ABECS and carried out by Datafolha, online purchases made up only 19.2% of the total credit card transaction volume in Brazil in 2016, an increase of 3.2% from 18.6% in 2015.

 

    Access to mobile Internet in Brazil is growing. According to the Brazilian Telecommunications Association (Associação Brasileira de Telecomunicações, or Telebrasil), 5,016 municipalities (where 98.3% of the Brazilian population resides) had access to 3G networks as of May 2017 and 372 new municipalities had received 3G networks in the prior 12 months, representing an 8% increase during that period. In addition, as access to mobile Internet has grown, so has the use of mobile banking. According to a research report prepared by Deloitte on behalf of the Brazilian Bank Federation (Federação Brasileira de Bancos, or Febraban), mobile banking increased 96% during 2016, with 34% of all online banking transactions in 2016 being made on cell phones or tablets.

 

 



 

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Micro-Merchants and SMEs Account for a Large Portion of the Brazilian Economy and Need Suitable Payments Solutions to Flourish

 

    In 2016, Micro-Merchants and SMEs accounted for 99.8% of Brazil’s 12 million businesses, and represented 35.4% of the R$5.1 trillion total annual gross revenues from businesses in the following sectors:     wholesale, retail, other commercial, electronics, pharmaceutical, hotels and food service, education, healthcare, professional and technical services, textiles and transportation. These data were compiled by Neoway Business Solutions using source data principally from SEBRAE, Brazil’s Tax Authority (Receita Federal), and the Annual Social Information Report (Relação Annual de Informações Sociais, or RAIS).

 

    Due to higher prices by banks and other incumbent providers many Micro-Merchants and SMEs remain unbanked and seek digital payments solutions. We believe that by attracting these merchants into our ecosystem with our superior value proposition, we can continue to drive significant additional revenue growth in the coming years.

 

    Demand for payment solutions by Micro-Merchants and SMEs is resilient, both during times of higher economic activity when sales increase, as well as during times of lower economic activity and higher unemployment, when more individual entrepreneurs open new small businesses, as demonstrated by our growth rates since our launch.

Micro-Merchants and SMEs Need Working Capital Financing

 

    In the standard payment cycle in Brazil, merchants receive sales revenues from credit card transactions 30 business days after the consumer transaction. In addition, Brazilian consumers expect merchants to allow them to choose at the point of purchase to have the purchase price either (i) charged to their credit card accounts in a single payment, as in other markets, or (ii) split into several payments and only charged to their credit card accounts in monthly installments. In this case, the merchant only receives the revenues after the respective monthly installment has been charged, rather than 30 business days after the original transaction. Together, the 30-day payment cycle and the installment option create working capital difficulties for merchants. We offer two services to help merchants improve their cash flow. To shorten the payment cycle, our “payment date election” service (regime de recebimento) allows our merchants to receive their credit card revenues from us either (i) in the regular 30-day payment cycle or (ii) if the merchant so elects, on the 14th or first business day. To help our merchants offer the installment payment option to consumers, we offer to pay the monthly installment receivables to our merchants either (i) when each installment is charged to the consumer’s card or (ii) if the merchant elects our early payment service, on an up-front basis. Micro-Merchants and SMEs have historically faced difficulties obtaining this service from the incumbent payment processing providers, and they often require merchants to request early payment on a transaction-by-transaction basis. We offer a solution to these bottlenecks through simpler onboarding and preapproval of a merchant’s early payments. The underlying receivables relating to these payments are owed to us by the credit card issuers, which are owned primarily by Brazil’s large retail banks. This early payment of receivables option creates an important working capital alternative for our merchants while also generating income for us.

Major Benefits for Our Customers

We offer the following major benefits for both merchants and consumers:

 

    Customers do not need a bank account to join our ecosystem. With a 100% online onboarding process, without paperwork, quick turnaround and a high acceptance rate, we offer access to our advanced digital payment processing and early payment of merchants’ installment receivables. We accept merchants who are either individuals or companies.

 

 



 

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    We offer a full suite of more than 30 cash-in options under a single contract, with security and reliability, plus a wide range of cash-out options including bank transfers, online purchasing, and spending both in-person and online as well as cash withdrawals using our PagSeguro prepaid card.

 

    Our pricing model for all of our services––whether transaction fees, early payment of installment receivables or sales of POS devices––is simple, transparent and easy to understand.

 

    Our social payment solutions, such as Pag.ae, allow both consumers and merchants to use their PagSeguro account to request payments via web links sent through e-mail, social networks or messaging services such as WhatsApp.

 

    We offer a comprehensive suite of affordable POS devices, with user-friendly features and functionalities, reliable connectivity and a five-year warranty. Our devices range from the entry-level Minizinha to the Moderninha Pro, the only single unit to offer GPRS/2G/3G/4G chip connection, plug-and-play Wi-Fi and Bluetooth connections (for commercial automation and connection to other devices) on the same device, making it the POS device with the most connectivity features in Brazil. Merchants purchase their own device through a flexible payment plan. For the equivalent of three to six months’ rental payments with incumbents, merchants can buy a comparable device from PagSeguro and avoid continuous monthly rental fees.

 

    Data protection and confidentiality for consumers, with merchant verification and transaction protection mechanisms, including escrow periods and dispute mediation services.

 

    Our payment solutions reduce the need for consumers to carry cash since more Micro-Merchants and SMEs are able to accept digital payments in-person.

Our Products and Services

We provide a wide range of affordable solutions and tools to help our merchants manage and grow their businesses. These include a variety of cash-in and cash-out options with features designed to attract and retain clients, provide them with access to working capital and help them manage their cash flow.

The PagSeguro Ecosystem

 

LOGO

 



 

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The Free PagSeguro Digital Account

The free PagSeguro digital account, which is the core of our client offering for both merchants and consumers, centralizes all cash-in options, functionalities, services and cash-out options in a single ecosystem so that our clients can grow their businesses in a safe, affordable, scalable and simple way, all without needing a bank account.

Merchants can sign up for a free PagSeguro digital account, gaining access to all of the offerings in our ecosystem, through a single online contract that can be completed in minutes without paperwork. By signing up with us, merchants can automatically start accepting more than 30 cash-in methods, all with antifraud protection, and can access our business management tools. For merchants who require more complex functionalities, we offer value-added services such as the early payment of installment receivables, accounting reconciliation and shipping solutions. With our free PagSeguro digital account, merchants may transfer their revenues to a bank account and also use our products and services to spend their revenues or other funds directly on our platform by (i) buying online, (ii) making peer-to-peer transfers or (iii) transferring their balance to the PagSeguro prepaid card, allowing them to buy goods and services in-person and online or withdraw cash at more than one million Cirrus network ATMs in Brazil and abroad.

For consumers, the free PagSeguro digital account offers not only numerous easy and safe options to pay merchants, but also the option to save their card details on our eWallet solution and to make and receive peer-to-peer payments.

We believe these products and services create a “network growth effect”. The advantages of our digital payment solutions for merchants drive growth in their businesses, and the advantages of our digital payment solutions for consumers lead them to prefer merchants who offer these solutions, resulting in the acquisition of new clients through word-of-mouth recommendations by both merchants and consumers.

Our main products and services fall into the follow categories:

 

    Cash-In Solutions

 

  o Online and in-person payment tools

 

  o Wide range of payment methods including credit cards, debit cards, meal voucher cards, boletos, bank transfers, bank debits and cash deposits

 

    Early payment of installment receivables

 

    Advanced Built-in Functionalities and Value-Added Services:    Our digital account comes with a number of advanced built-in functionalities, provided free of charge, as well as value-added services designed to protect both merchants and consumers and help our merchants successfully manage their businesses.

 

    Cash-Out Solutions

 

  o Online purchases via eWallet

 

  o PagSeguro prepaid cards

 

  o On-platform peer-to-peer transfers

 

  o Bank transfers

 

  o Cross-border remittances

 

 



 

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Our Competitive Strengths

We believe the following business strengths have allowed us to compete successfully and grow profitably in the 10 years since our launch:

Disruptive Provider of Payment Solutions to Clients

We have taken a new approach to offering digital financial services to Brazilian clients, especially Micro-Merchants and SMEs. Instead of simply processing transactions, our end-to-end digital platform creates an ecosystem where our clients can transact and manage their cash, without the need to open a bank account. We are focused on providing disruptive products and solutions that are secure, affordable, scalable and easy to use, with simple and transparent pricing. 78% of our merchants use PagSeguro as their sole electronic payments service. For larger merchants who have larger transaction volumes and require more complex controls, we offer value-added services such as (i) flexible crediting dates; (ii) payment into separate bank accounts for each card scheme; (iii) a split payment solution, which automatically segregates credits between two different companies; (iv) a seamless single-click checkout option, allowing customers to make purchases with a single click; and (v) our EFTPOS integration solution, which we expect to launch during the second half of 2017. Our innovative approach also brought trust to the online merchant-customer relationship by introducing a feature where we hold the consumer’s payment in escrow for a period after the purchase, as a precaution in case of any commercial disputes.

We have also created an innovative business model for merchants to access POS devices in Brazil, as we sell rather than rent our devices to merchants. For the equivalent of three to six months of leasing costs with our competitors, merchants can buy a comparable device from PagSeguro with no need to pay continuous rental fees.

Trusted Brand with Strong Merchant and Consumer Relationships

We have promoted transaction security since our launch. UOL is a well-known and trusted brand with a large audience. According to comScore, 81.2 million unique visitors accessed the UOL website in May 2017 (approximately 73% of Brazilian internet users). Consumers trust the PagSeguro and UOL brands with their sensitive personal and financial data. We continue to build and maintain brand recognition and trust through a variety of marketing campaigns, including advertising through traditional media, such as television, magazines and newspapers, and online advertising such as display media, videos, search results and social media.

In addition, we continually invest in our merchant and consumer relationships by providing continuous customer service, account support and business solutions.

The strength of our brand, products and services has been recognized in a number of awards, including:

 

    Named as one of the “Best Companies for Consumers” for electronic payments in both 2016 and 2015 by Época magazine and Reclame Aqui, a consumer protection service.

 

    Recognized in the digital industry category by Exame magazine’s Maiores e Melhores in 2009 and 2010.

 

    Recognized as the best company in our industry in terms of client service excellence by the XVI Consumidor Moderno Award in 2015.

 

    Recognized for leading performance in Brazilian retail by Prêmio BR Week in 2016.

 



 

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Customer-Centric Approach Focused on Innovation and Disruption of Incumbents

We have an in-depth understanding of our clients, the issues they face and the markets in which they operate. As a pioneer in the Brazilian digital payments market, we are able to anticipate trends and translate them into products and solutions that meet our customers’ needs more efficiently than global competitors operating in Brazil. The Brazilian market expects payment providers to offer a number of country-specific features, such as boletos and early payment of merchants’ receivables when consumers purchase in installments by credit card, all of which are central to Brazilian financial culture. We built our payments ecosystem and our merchant services offering around these specificities, offering tailor-made solutions for the Brazilian market.

Although all our solutions also work for desktop and other non-mobile platforms, we design our solutions on a mobile-first basis so that our clients can be self-sufficient at all times. This is important for us since, according to a client survey that we conducted, 49% of our new clients do not do business in a “bricks and mortar” location. All of our transaction systems are fully compatible with the mobile environment. We also maintain a strict focus on ongoing innovation, selecting and developing new products and services with a high level of speed to market. This is evidenced by our investment of R$68.6 million in capitalized research and development in 2016, equal to 9.3% of our Net revenue from sales and services for the year. Additionally, we believe our distribution platform and marketing strategies are well-suited to reaching Micro-Merchants and SMEs in Brazil.

Innovative, Reliable and Scalable Proprietary Technology Platform

We manage large volumes of system access data and transactions, with more than 99.9% availability using Internet data centers provided by UOL Diveo, a UOL group company that focuses on IT outsourcing, data centers, cloud computing and other managed IT services. Backed by UOL Diveo, we are able to scale up our services while retaining high availability for peak-volume occasions such as Christmas, Mother’s Day and Black Friday. This high-availability and continuously deployed platform ensures that all of our clients are able to operate with the latest features and the newest innovations without needing to patch or upgrade their software. Our scale as a UOL group company allows us to establish favorable partnerships with several suppliers, including software developers and hardware manufacturers. With our specialized team of more than 400 people focused on developing reliable and scalable systems and new products and features, we regularly roll out innovative and disruptive solutions that are tailored to the Brazilian market.

In addition, our IT background combined with the 10 years of historical transaction data we have amassed since our launch allow us to develop proprietary technology and gain expertise against online and chargeback fraud in Brazil. Our antifraud platform combines proprietary features, such as internal risk modeling and scoring through artificial intelligence and risk assessment tools that collect public and private market information, as well as front-line third-party solutions such as Feedzai, Emailage and Threatmetrics.

Highly Experienced Management Team, Innovation-Driven Culture

Our highly experienced management team has extensive experience in all areas of the Brazilian payments market, with in-depth knowledge of online payments, retail, financial services, technology, payment processing, in-person electronic payments, acquiring and card issuance. Together, this management experience covers all of our customers’ needs, allowing us to plan the future of PagSeguro.

 



 

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Our culture reflects UOL’s innovation-driven focus, instilling in our professionals a passion for serving consumers and merchants and motivating them to provide next-generation payment capabilities in Brazil. At December 31, 2016 the average age of our employees was 34 years, and 90% of them had a bachelor’s degree or higher as of June 2017. We also offer a long-term motivation plan for key professionals and apply meritocratic methods to engage all our professionals, recognize their value and keep them motivated.

Our Growth Strategies

We aim to continue to drive rapid profitable growth and generate further shareholder value by implementing the following strategic initiatives:

Expand Our Customer Base and Deepen Our Relationships with Existing Accounts

Our focus is to continue acquiring new clients in our target markets by investing strategically in our brand and solutions, targeting the business sectors and geographic regions where there are still significant opportunities to reach new customers, expanding transaction volumes and, consequently, generating more revenues. We believe there remains a significant unmet need in these markets that our solutions can fulfill. We are focused on cultivating our ecosystem to address these everyday electronic payment needs. At the same time, we will introduce further value-added products and services aimed at larger clients, leveraging our lean, technological, scalable and secure infrastructure.

We will continue to invest in retaining and deepening relationships with our existing clients, offering new cash-in and cash-out solutions to drive additional revenues and increasingly replacing bank accounts for customers that already have them. Many of our merchants have grown within our platform, for example from purchasing a single POS device to choosing to receive early payment of their card receivables on consumer installment transactions, and we believe our business management tools can be further leveraged to increase customer engagement. We intend to continue to be a first mover, extending our platform to offer a full integrated suite of financial products and services, further enhancing customer experience.

Continuous Innovation and Focus on Technology

Technology and innovation are in the DNA of the UOL group and are at the core of our business success, with research and development personnel representing 40% of the total headcount of PagSeguro as at December 31, 2016. We will continue to invest in research and development to strengthen and extend our digital solutions. Using our qualified product and service design teams and research and development team, we intend to roll out a portfolio of new solutions, for both merchants and consumers, based on mobile apps, in order to drive more revenues while further strengthening our mobile-first commitment and simplifying our clients’ lives.

Our efficiencies of scale, relentless cost discipline, and ongoing improvements to systems and processes allow us to continue lowering our costs. As our scale has expanded over the past three years, our expenses have declined when compared to our Net revenues from sales and services:    for example, our Selling expenses and Administrative expenses, taken together, decreased to 38.7% of our Net revenue from sales and services in 2016 from 63.7% in 2014. By maintaining our spirit of innovation combined with our cost focus, we intend to continue to drive costs down to achieve further profitable growth.

 



 

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Seize Opportunities from Ongoing Amendments to Regulation

The Brazilian Central Bank’s regulatory program seeks to increase competition in the payments industry. Recently it terminated the exclusive banking arrangements between banks and some card and meal voucher schemes. By seizing these opportunities, disruptive product offerings like our PagSeguro prepaid cards gave unbanked customers access to a card payment solution. We were also the first payments provider in Brazil, other than the incumbent acquirers controlled by banks, to obtain accreditation from MasterCard and Visa as an acquirer, and we have also signed partnerships with Elo, American Express and other card schemes. We will continue using our local knowledge and proximity to customers to seize new business opportunities as the market continues to open.

Corporate Information

PagSeguro Digital is incorporated as an exempted company with limited liability in the Cayman Islands. Our principal executive office is located at Avenida Brigadeiro Faria Lima, 1384, 01452-002 São Paulo – SP, Brazil. Our investor relations office can be reached at +55 (11) 3038-8123 and our website address is www.pagseguro.uol.com.br. Information provided on our website is not part of this prospectus and is not incorporated by reference herein.

 



 

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The Offering

This summary highlights information presented in greater detail elsewhere in this prospectus. This summary is not complete and does not contain all the information you should consider before investing in our Class A common shares. You should carefully read this entire prospectus before investing in our Class A common shares including “Risk Factors” and the audited consolidated financial statements of PagSeguro Brazil.

 

Issuer

PagSeguro Digital Ltd.

 

Offering

We are offering                     Class A common shares and UOL, the Selling Shareholder, is offering                     Class A common shares.

 

Offering price range

Between US$             and US$             per Class A common share.

 

Voting rights

The Class A common shares will be entitled to one vote per share, whereas the Class B common shares (which are not being sold in this offering) will be entitled to 10 votes per share.

 

Option to purchase additional Class A common shares

UOL, the Selling Shareholder, has granted the underwriters the right to purchase up to an additional                     Class A common shares of PagSeguro Digital from UOL within 30 days from the date of this prospectus.

 

Listing

We intend to apply to list the Class A common shares on the Nasdaq Global Select Market, or Nasdaq, under the symbol “                    ”.

 

Use of proceeds

We estimate that the net proceeds to PagSeguro Digital from the offering will be approximately US$            . We currently plan to use the net proceeds from this offering (i) to finance our working capital, especially in connection with our early payment of receivables service for merchant and (ii) to invest in research and development to further improve our technological expertise. We may also use a portion of the net proceeds from this offering to fund future selective acquisitions of our investments in businesses, technologies or products that are complementary to our business. Any remaining net proceeds will be used for other general corporate purposes. Our management will have broad discretion in allocating the net proceeds from this offering. See “Use of Proceeds.”

 



 

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Share capital before and after offering

As of the date of this prospectus, the authorized share capital of PagSeguro Digital is US$50,000 consisting of 2,000,000,000 shares of par value US$0.000025 each. Of those authorized shares,                     are designated as Class A common shares and                     are designated as Class B common shares. The remaining authorized shares are as yet undesignated and may be issued as common shares or shares with preferred rights.

Immediately after this offering, PagSeguro Digital will have                     Class A common shares and                     Class B common shares outstanding (assuming no exercise of the underwriters’ option to purchase additional shares from UOL, which shares would convert from Class B common shares to Class A common shares upon such sale).

 

Dividend policy

We have not adopted a dividend policy with respect to future dividends. The amount of any distributions will depend on many factors such as our results of operations, financial condition, cash requirements, prospects and other factors deemed relevant by our board of directors and, where applicable, our shareholders. See “Description of Share Capital—Dividends and Capitalization of Profits.”

 

Lock-up agreements

PagSeguro Digital has agreed with the underwriters, subject to certain exceptions, not to offer, sell or dispose of any shares in its share capital or securities convertible into or exchangeable or exercisable for any shares in its share capital during the 180-day period following the date of this prospectus. PagSeguro Digital’s executive officers and the members of its board of directors, as well as UOL, have agreed to substantially similar lock-up provisions, subject to certain exceptions. See “Common Shares Eligible for Future Sale.”

 

Risk factors

See “Risk Factors” and the other information included in this prospectus for a discussion of factors you should consider before deciding to invest in Class A common shares.

Unless otherwise indicated, all information contained in this prospectus assumes no exercise of the option granted by UOL to the underwriters to purchase up to                     additional Class A common shares of PagSeguro Digital from UOL in connection with this offering.

 



 

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Summary Financial Data of Pagseguro Brazil

The following tables summarize financial and operating data of PagSeguro Brazil for each of the periods indicated. You should read this information in conjunction with the audited consolidated financial statements and related notes for PagSeguro Brazil, the information included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations of PagSeguro Brazil”, all included elsewhere in this prospectus.

This summary financial data at and for the years ended December 31, 2016, 2015 and 2014 has been derived from the audited consolidated financial statements of PagSeguro Brazil, which are included elsewhere in this prospectus, all of which have been prepared in accordance with IFRS.

Statements of Operations Data

 

     For the Years Ended December 31,  
     2016     2016     2015     2014  
     (US$)(1)     (R$)     (R$)     (R$)  
     (in millions, except amounts per share
and %)
 

Net revenue from sales and services

     227.2       740.6       444.7       208.3  

Cost of sales and services

     (193.2     (629.8     (381.6     (142.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross Profit

     34.0       110.8       63.2       65.8  

Selling expenses

     (61.3     (199.9     (162.6     (81.4

Administrative expenses

     (26.5     (86.4     (62.4     (51.3

Other operating income (expenses), net

     0.4       1.4       1.7       (3.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating Loss

     (53.4     (174.1     (160.2     (70.3
        

Finance Result

        

Income from early payment

     120.4       392.4       222.7       115.8  

Financial expenses

     (21.0     (68.3     (29.7     (11.1

Other finance income

     0.9       3.0       6.7       1.8  

Foreign exchange variation, net

     0.7       2.3       0.8       (0.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Profit before Income Taxes

     47.7       155.4       40.3       36.2  

 

Current income tax and social contribution

     (2.3     (7.4     (2.6     (9.9

Deferred income tax and social contribution

     (6.2     (20.1     (2.2     1.0  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income Tax and Social Contribution

     (8.5     (27.6     (4.8     (8.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income for the Year

     39.2       127.8       35.5       27.3  
  

 

 

   

 

 

   

 

 

   

 

 

 

Attributable to:

        

Owners of PagSeguro Brazil

     39.0       127.2       35.1       26.0  

Non-controlling interests

     0.2       0.6       0.4       1.3  

 

Basic and diluted earnings per common share – R$

     0.0744       0.2425       0.0669       0.0495  

 

(1) For convenience purposes only, amounts in reais for the year ended December 31, 2016 have been translated to U.S. dollars using a rate of R$3.2591 to US$1.00, the commercial selling rate for U.S. dollars at December 31, 2016 as reported by the Central Bank. These translations should not be considered representations that any such amounts have been, could have been or could be converted into U.S. dollars at that or at any other exchange rate. See “Exchange Rates” for further information about recent fluctuations in exchange rates.

 



 

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Balance Sheet Data

The following table presents key line items from our consolidated balance sheet data:

 

     At December 31,  
     2016      2016      2015      2014  
     (US$)(1)      (R$)      (R$)      (R$)  
     (in millions)  

Total Current Assets

     696.7        2,270.8        1,240.8        778.6  

Total Non-Current Assets

     30.6        99.7        59.9        39.0  
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL ASSETS

     727.3        2,370.4        1,300.7        817.6  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     At December 31,  
     2016      2016      2015      2014  
     (US$)(1)      (R$)      (R$)      (R$)  
     (in millions)  

Total Current Liabilities

     527.5        1,719.2        832.5        385.3  

Total Non-Current Liabilities

     7.5        24.4        6.3        5.7  
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL LIABILITIES

     535.0        1,743.5        838.8        391.0  

EQUITY

     192.3        626.9        461.9        426.6  
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL LIABILITIES AND EQUITY

     727.3        2,370.4        1,300.7        817.6  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) For convenience purposes only, amounts in reais for the year ended December 31, 2016 have been translated to U.S. dollars using a rate of R$3.2591 to US$1.00, the commercial selling rate for U.S. dollars at December 31, 2016 as reported by the Central Bank. These translations should not be considered representations that any such amounts have been, could have been or could be converted into U.S. dollars at that or at any other exchange rate. See “Exchange Rates” for further information about recent fluctuations in exchange rates.

 



 

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RISK FACTORS

This initial public offering and an investment in our Class A common shares involves a high degree of risk. You should carefully consider the risks and uncertainties described below and the other information in this prospectus before making an investment decision regarding our Class A common shares. The risks described below are those that we currently believe may harm our business or the trading price of our Class A common shares. In general, investing in the securities of issuers whose operations are located in emerging market countries such as Brazil involves a higher degree of risk than investing in the securities of U.S. companies and companies located in other countries with more developed capital markets.

If any of the risks discussed in this prospectus actually occur, alone or together with additional risks and uncertainties that we are not currently aware of or do not currently deem material, our business, financial condition, results of operations and prospects may be seriously harmed. If this were to occur, the value of our Class A common shares may decline and you may lose all or part of your investment. When determining whether to invest, you should also refer to the other information contained in this prospectus, including our financial statements and the related notes thereto. You should also carefully review the cautionary statements referred to under “Special Note Regarding Forward-Looking Statements.” Our actual results could be materially lower than those anticipated in this prospectus.

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 for transactions on mobile devices, the use of our product and services and, consequently, our revenues could decline.

Rapid, significant and disruptive technological changes continue to impact the industries in which we operate, including developments in payment card tokenization, mobile payments, social commerce (i.e., e-commerce through social networks), authentication, virtual currencies, distributed ledger or blockchain technologies, near field communication and other proximity or contactless payment methods, virtual reality, machine learning and artificial intelligence.

For instance, mobile devices are increasingly used for e-commerce transactions and payments. A significant and growing portion of our customers access our platforms through mobile devices, including for regular online shopping as well as for in-person transactions. We may lose customers if we are not able to continue to meet our customers’ mobile and multi-screen experience expectations. Different mobile devices and platforms use a wide variety of technical and other configurations, which increase the challenges involved in providing payments in the mobile environment. In addition, a number of other companies with significant resources and a number of innovative startups have introduced products and services focusing on mobile markets. We cannot guarantee that we will be able to continue to meet customer expectations in the mobile environment or increase our volume of mobile transactions.

 

 

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We cannot predict the effects of technological changes on our business. In addition to our own initiatives and innovations, we rely in part on third parties for the development of and access to new technologies. We expect that new services and technologies applicable to the industries in which we operate will continue to emerge and may be superior to, or render obsolete, the technologies we currently use in our products and services. Developing and incorporating new technologies into our products and services may require substantial expenditures, take considerable time, and ultimately may not be successful. In addition, our ability to adopt new products and services and develop new technologies may be inhibited by industry-wide standards, payment networks, changes to laws and regulations, resistance to change from consumers or merchants, third-party intellectual property rights, or other factors. Our success will depend on our ability to develop and incorporate new technologies, address the challenges posed by the rapidly evolving market for mobile transactions through our platforms and adapt to technological changes and evolving industry standards; if we are unable to do so in a timely or cost-effective manner, our business could be harmed.

Substantial and increasingly intense competition, both within our industry and from other payment methods, may harm our business.

We compete in markets characterized by vigorous competition, changing technology, changing customer needs, evolving industry standards and frequent introductions of new products and services. We compete with existing providers of digital payment solutions, in-person payments via POS, free digital accounts, prepaid cards and acquisition activities. Our competitors include, among others, banks, other acquirers such as Cielo and Rede, and other providers of traditional payment methods, particularly credit cards, checks and digital bank deposits; online payment services such as PayPal and MercadoPago; money remitters such as Western Union; payments in cash, which remain common in Brazil; and offline funding alternatives such as cash deposit and money transfer services.

We expect competition to intensify in the future as existing and new competitors introduce new services or enhance existing services. We compete against many companies to attract customers, and some of these companies have greater financial resources and substantially larger bases of customers than we do, which may provide them with significant competitive advantages. These companies may devote greater resources than we do to the development, promotion and sale of products and services, and they may be more effective in introducing innovative products and services that hinder our growth. Competing services tied to established banks and other financial institutions may offer greater liquidity and create greater consumer confidence in the safety and efficiency of their services than PagSeguro. Mergers and acquisitions by or among these companies may lead to even larger competitors with more resources. We also expect new entrants to offer competitive products and services. For example, established banks and other financial institutions currently offer online payments and those which do not yet provide such services could quickly and easily develop them. Certain merchants have longstanding exclusive, or nearly exclusive, relationships with our competitors to accept payment cards and other services that we offer. These relationships may make it difficult or cost prohibitive for us to conduct material amounts of business with them. If we are unable to differentiate ourselves from and successfully compete with our competitors, our business will suffer serious harm.

We may also face pricing pressures from competitors. Certain competitors are able to offer lower prices to merchants for similar services by cross-subsidizing their digital payments services using other services they offer. This competition may mean we need to reduce our pricing, which could reduce our profits. As they grow, merchants may demand more customized and favorable pricing from us, and competitive pressures may require us to agree to this, further reducing our profits. If market conditions require us to increase the discounts or incentives we provide, our business could suffer serious harm.

 

 

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Interruption or failure of our information technology and communications systems could impair our operations, which could damage our reputation and harm our results of operations.

Our success and ability to process payments and provide high quality customer service depend on the efficient and uninterrupted operation of our computer and information technology systems. Any failure of our computer systems and information technology to operate effectively or to integrate with other systems, performance inadequacy or breach in security may cause interruptions in the availability of our sites, delays in product fulfillment and reduced efficiency of our operations. Any failures, problems or security breaches may mean that fewer customers are willing to purchase the products we offer in the future. Factors that could occur and significantly disrupt our operations include:    system failures and outages caused by fire, floods, earthquakes, power loss, telecommunications failures, sabotage, vandalism, terrorist attacks and similar events, software errors, computer viruses, worms, physical or electronic break-ins and similar disruptions from unauthorized tampering with our computer systems and data centers; in addition, security breaches related to the storage and transmission of proprietary information or customer information, such as credit card numbers or other personal information. Also, if too many customers access our sites within a short period of time due to any reason, we have experienced in the past and may in the future experience system interruptions that make our sites unavailable or prevent us from efficiently completing payment transactions, which may reduce the attractiveness of our products and services. We cannot assure you that such events will not occur. While we have backup systems and contingency plans for certain aspects of our operations and business processes, our planning does not account for all possible scenarios.

Specifically, we have contracted with one party, UOL Diveo, to provide us with Internet data centers to host our sites and keep them operational, and we rely on it and its operational, privacy and security procedures and controls and its ability to keep our sites operational. UOL Diveo is controlled by our parent company UOL and is therefore an affiliate of our company. Failure by UOL Diveo to adequately keep our sites operational, including any prolonged or unscheduled service disruption that affects our customers’ ability to utilize our sites, could result in the loss of sales and customers and/or increased costs, which could materially affect our reputation, operations or financial results. In addition, we rely in part on UOL Diveo to advise us of any security breaches. If UOL Diveo does not provide notice on a timely basis, our reputation and results of operations may be harmed. We may not be able to timely replace UOL Diveo, or find a replacement on a cost-efficient basis, in the event of disruptions, failures to provide services or other issues with it that may harm our business. For more information on our agreement with UOL Diveo, see “Related Party Transactions.”

Any disruptions or service interruptions that affect our sites could damage our reputation, require us to spend significant capital and other resources and expose us to a risk of loss or litigation and possible liability. We do not carry any business interruption insurance to compensate for losses that may occur as a result of any of these events and some of our agreements with third-party service providers do not require those providers to indemnify us for losses resulting from any disruption in service. Any of the above disruptions could seriously harm our results of operations.

Our business is subject to cyberattacks and security and privacy breaches.

Our business involves the collection, storage, processing and transmission of customers’ personal data, including financial information. In addition, a significant number of our customers authorize us to bill their payment card or bank accounts directly for all transaction and other fees charged by us. We have built our reputation on the premise that our platform offers customers a secure way to make payments. An increasing number of organizations, including large merchants and businesses, other large technology companies, financial institutions and government institutions, have disclosed breaches of their information security systems, some of which have involved sophisticated and highly targeted attacks, including on portions of their websites or infrastructure.

 

 

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The techniques used to obtain unauthorized, improper or illegal access to our systems, our data or our customers’ data, to disable or degrade service, or to sabotage systems are constantly evolving, may be difficult to detect quickly, and often are not recognized until launched against a target. Unauthorized parties may attempt to gain access to our systems or facilities through various means, including, among others, hacking into our systems or those of our customers, partners or vendors, or attempting to fraudulently induce our employees, customers, partners, vendors or other users of our systems into disclosing user names, passwords, payment card information or other sensitive information, which may in turn be used to access our information technology systems. Certain efforts may be supported by significant financial and technological resources, making them even more sophisticated and difficult to detect. Although we have developed systems and processes that are designed to protect our data and customer data and to prevent data loss and other security breaches, and expect to continue to expend significant additional resources to bolster these protections, these security measures cannot provide absolute security. Our information technology and infrastructure may be vulnerable to cyberattacks or security breaches, and third parties may be able to access our customers’ personal or proprietary information and card data that are stored on or accessible through those systems. Our security measures may also be breached due to human error, malfeasance, system errors or vulnerabilities, or other irregularities. Any actual or perceived breach of our security could interrupt our operations, result in our systems or services being unavailable, result in improper disclosure of data, materially harm our reputation and brand, result in significant legal and financial exposure, lead to loss of customer confidence in, or decreased use of, our products and services, and adversely affect our business and results of operations. In addition, any breaches of network or data security at our customers, partners or vendors (including data center and cloud computing providers) could have similar negative effects. Actual or perceived vulnerabilities or data breaches may lead to claims against us.

In addition, under card rules and our contracts with our card processors, if there is a breach of card information that we store, we could be liable to the payment card issuers for their cost of issuing new cards and related expenses. We also expect to spend significant additional resources to protect against security or privacy breaches, and may be required to address problems caused by breaches. Additionally, while we maintain insurance policies, they may not be adequate to reimburse us for losses caused by security breaches, and we may not be able to collect fully, if at all, under these insurance policies.

Our services must integrate with a variety of operating systems and networks, and the hardware that enables merchants to accept payment cards must interoperate with mobile networks offered by telecom operators and third-party mobile devices utilizing those operating systems. If we are unable to ensure that our services or hardware interoperate with such networks, operating systems and devices, our business may be seriously harmed.

We are dependent on the ability of our products and services to integrate with a variety of operating systems and networks, as well as web browsers that we do not control. Any changes in these systems or networks that degrade the functionality of our products and services, impose additional costs or requirements on us, or give preferential treatment to competitive services, including their own services, could seriously harm the levels of usage of our products and services. We also rely on bank platforms to process some of our transactions. If there are any issues with or service interruptions in these bank platforms, users may be unable to have their transactions completed, which would seriously harm our business.

In addition, our hardware interoperates with mobile networks offered by telecom operators and mobile devices developed by third parties. Changes in these networks or in the design of these mobile devices may limit the interoperability of our hardware with such networks and devices and require modifications to our hardware. If we are unable to ensure that our hardware continues to interoperate effectively with such networks and devices, or if doing so is costly, our business may be seriously harmed.

 

 

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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.

We have developed a strong and trusted brand, highly linked to the reputation and public image of UOL, our controlling shareholder, which has contributed significantly to the success of our business. Our brand is predicated on the idea that sellers and buyers will trust us and find value in building and growing their businesses with our products and services. Maintaining, protecting and enhancing our brand are critical to expanding our base of sellers, buyers and other third-party partners, as well as increasing engagement with our products and services. This will depend largely on our ability to maintain trust, be a technology leader, and continue to provide high-quality and secure products and services. Any negative publicity about our industry, our company or UOL, our controlling shareholder, the quality and reliability of our products and services, our risk management processes, changes to our products and services, our ability to effectively manage and resolve seller and buyer complaints, our privacy and security practices, litigation, regulatory activity, the experience of sellers and buyers with our products or services, and changes in the public opinion of UOL, could harm our reputation and the confidence in and use of our products and services. Harm to our brand can arise from many sources, including failure by us or our partners to satisfy expectations of service and quality; inadequate protection of sensitive information; compliance failures and claims; litigation and other claims; employee misconduct; and misconduct by our partners, service providers or other counterparties. If we do not successfully maintain a strong and trusted brand, our business could be seriously harmed.

Our business is subject to extensive government regulation and oversight and our status under these regulations may change. Violation of or compliance with present or future 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 and results of operations.

In December 2014 PagSeguro Brazil applied for authorizations from the Brazilian Central Bank relating to three of our digital payments activities, and we have not yet received those authorizations. The activities involved are the PagSeguro digital account, our issuance of PagSeguro prepaid cards, and our activities as an acquirer. We applied for these authorizations because those businesses began to be regulated by Brazilian Federal Law No. 12,865/13, which took effect on October 9, 2013. Although the Central Bank regulations permit us to continue carrying on these activities pending grant of the authorizations because we were already operating these activities before Law No. 12,865/13 became effective, there can be no assurance that we will obtain the authorizations. If we do not obtain them, or if we are found to be in violation of any current or future regulations, we could be (i) required to pay substantial fines (including per transaction fines) and disgorgement of our profits, (ii) required to change our business practices or (iii) subjected to insolvency procedures such as an intervention by the Central Bank and the out-of-court liquidation of PagSeguro Brazil. We could also be subject to private lawsuits. Any of these consequences could seriously harm our business and results of operations.

In addition, our early payment of receivables service makes up a significant portion of our activities. Law No. 12,865/13 prohibits payment institutions such as PagSeguro Brazil from performing activities that are restricted to financial institutions. There is some debate under Brazilian law as to whether providing early payment of receivables to merchants could be characterized as “lending”, which is an activity that is restricted to financial institutions. Similarly, there is some debate as to whether the discount rates applicable to this early payment service should be considered as “interest,” in which case the limits set by the Brazilian Usury Law would apply to these rates. If new laws are enacted or the courts’ interpretation of this activity changes, either preventing us from performing this activity or limiting the fees we usually charge, our financial performance could be negatively affected.

For further information regarding these regulatory matters, see “Business—Regulation—Regulation by the Brazilian Central Bank.”

 

 

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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 consumer products. Specifically, developments in data protection and privacy laws could harm our business, financial condition or results or operations.

We operate in a complex regulatory and legal environment that exposes us to compliance and litigation risks and that could materially affect our operations and financial results. These laws may change, sometimes significantly, as a result of political, economic or social events. Some of the federal, state or local laws and regulations that affect us include:    those relating to consumer products, product liability or consumer protection; those relating to the manner in which we advertise, market or sell products; labor and employment laws, including wage and hour laws; tax laws or interpretations thereof; data protection and privacy laws and regulations; and securities and exchange laws and regulations. For instance, data protection and privacy laws are developing to take into account the changes in cultural and consumer attitudes towards the protection of personal data. There can be no guarantee that we will have sufficient financial resources to comply with any new regulations or successfully compete in the context of a shifting regulatory environment. Any additional privacy laws or regulations could seriously harm our business, financial condition or results of operations.

Changes in tax laws, tax incentives, benefits or differing interpretations of tax laws may harm our results of operations.

Changes in tax laws, regulations, related interpretations and tax accounting standards in Brazil, the Cayman Islands or the United States may result in a higher tax rate on our earnings, which may significantly reduce our profits and cash flows from operations. Also, our results of operations and financial condition may decline if certain tax incentives are not retained or renewed. For example, Brazilian Law No. 11,196 currently grants tax benefits to companies that invest in research and development, which significantly reduces our annual income tax expense. If these tax benefits are revoked and we cannot alter our cost structure to pass our tax increases on to customers, our financial condition, results of operations and cash flows could be seriously harmed. Our payment processing activities are also subject to a Municipal Tax on Services (Imposto Sobre Serviços, or ISS). Any increases in ISS rates would also harm our profitability.

In addition, Brazilian government authorities at the federal, state and local levels are considering changes in tax laws in order to cover budgetary shortfalls resulting from the recent economic downturn in Brazil. If these proposals are enacted they may harm our profitability by increasing our tax burden, increasing our tax compliance costs, or otherwise affecting our financial condition, results of operations and cash flows. Tax rules in Brazil, particularly at the local level, can change without notice. We may not always be aware of all such changes that affect our business and we may therefore fail to pay the applicable taxes or otherwise comply with tax regulations, which may result in additional tax assessments and penalties for our company.

Furthermore, we are involved in tax proceedings based on differences of interpretation between us and the Brazilian tax authorities regarding tax laws and regulations. For further information, see “Business—Legal and Administrative Proceedings—Tax and Social Security Matters.”

 

 

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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 the proportion of our business funded using less profitable methods goes up.

We pay transaction fees to card schemes, banks and other intermediaries that vary according to the method chosen by consumers to fund payment transactions. These transaction fees are higher when consumers fund payments using credit cards, and lower when consumers fund payments with debit cards. Transaction fees are nominal when customers fund payment transactions by digital transfer of funds from bank accounts, and we pay no fees when customers fund payment transactions from an existing PagSeguro account balance. Our financial success is therefore sensitive to changes in the proportion of our business funded by consumers using credit and debit cards, which would increase our costs if we were unable to adjust the rates we charge our customers accordingly. Consumers may resist funding payments by digital transfer from bank accounts because of the incentives offered by credit cards, for exemple, or general concerns about providing bank account information to a third party.

Failure to deal effectively with fraud, fictitious transactions, bad transactions or negative customer experiences would increase our loss rate and harm our business, and could severely diminish merchant and consumer confidence in and use of our services.

We incur losses and expenses due to claims from consumers that merchants have not performed or that their goods or services do not match the merchant’s description. We seek to recover these losses and expenses from the merchant, but may not be able to recover them in full when the merchant is unwilling or unable to pay. We also incur losses and expenses from claims that the consumer did not authorize the purchase, from consumer fraud and from erroneous transmissions. In addition, if the losses we incur related to card transactions become excessive, they could potentially result in a loss of our right to accept cards for payment. In the event that we were unable to accept cards, the number of transactions processed through our platform would decrease substantially and our business would be harmed. We are also subject to the risk of fraudulent activity by merchants, consumers of products purchased through our platform, or third parties handling our user information. We take measures to detect and reduce the risk of fraud, but these measures need to be continually improved and may not be effective against new and continually evolving forms of fraud or in connection with new product offerings. If these measures do not succeed, our business could be harmed.

We rely on third parties in many aspects of our business, which creates additional risk.

We rely on third parties in many aspects of our business, including, among others:

 

    networks, banks, payment processors, and payment gateways that link us to the payment card and bank clearing networks to process transactions;

 

    third parties that provide certain outsourced customer support and product development functions, which are critical to our operations; and

 

    third parties that provide facilities, infrastructure, components and services, including data center facilities and cloud computing.

The third parties that we rely on to process transactions may fail or refuse to process transactions adequately. Any of the third parties we use may breach their agreements with us, refuse to renew these agreements on commercially reasonable terms, take actions that degrade the functionality of our services, impose additional costs or requirements on us, or give preferential treatment to competing services. Financial or regulatory issues, labor issues, or other problems that prevent these third parties from providing services to us or our customers could harm our business. If our service providers do not perform satisfactorily, our operations could be disrupted, which could result in customer dissatisfaction, damage our reputation, and harm our business.

 

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In particular, we rely on UOL, our largest shareholder, and its subsidiaries for a number of business services, particularly:    data storage services; telecommunications services; internet security services; software development, maintenance and management; and call center, marketing, corporate, litigation and back-office services. UOL and its subsidiaries also provide us with advertising and media space and resell cloud services to us. For further details of these services, see “Related Party Transactions.”

Our failure to manage the assets underlying our customer funds properly could harm our business.

Our ability to manage and account accurately for the assets underlying our customer funds requires a high level of internal controls. As our business continues to grow and we expand our product offerings, we must continue to strengthen our internal controls accordingly. Our success requires significant public confidence in our ability to handle large and growing transaction volumes and amounts of customer funds. Any failure to maintain the necessary controls or to manage the assets underlying our customer funds accurately could severely diminish customer use of our products and/or result in penalties and fines, which could harm our business.

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.

Our future revenues from digital payments depend substantially on consumers’ widespread acceptance and use of the Internet as a way to conduct commerce. Rapid growth in the use of the Internet (particularly as a way to provide and purchase products and services) is a relatively recent phenomenon in Brazil and we cannot assure you that this acceptance and usage will continue or increase. Furthermore, if the penetration of Internet access in Brazil does not increase quickly, it may limit our potential growth, particularly in regions with low levels of Internet quality and access and/or low levels of income.

Internet penetration in Brazil may never reach the levels seen in more developed countries for reasons that are beyond our control, including the lack of necessary network infrastructure or delayed development of enabling technologies, performance improvements and security measures. The infrastructure for the Internet in Brazil may not be able to support continued growth in the number of users, their frequency of use or their bandwidth requirements. Delays in telecommunication and infrastructure development or other technology shortfalls may impede improvements in Internet reliability in Brazil. If telecommunications services are not sufficiently available to support the growth of the Internet in Brazil, response times could be slower, which would reduce Internet usage and harm our services. In addition, even if Internet penetration in Brazil increases, this may not lead to growth in e-commerce due to a number of factors, including lack of confidence by users in online security.

Furthermore, the price of Internet access and Internet-connected devices, such as personal computers, tablets, mobile phones and other portable devices, may limit our growth, particularly in parts of Brazil with low levels of income. Income levels in Brazil are significantly lower than in the United States and other more developed countries, while prices of both portable devices and Internet access in Brazil are higher than in those countries. Income levels in Brazil may decline and device and access prices may increase in the future.

Any of these factors could limit our ability to generate revenues in future.

 

 

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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 A common shares being unpredictable or declining.

Our quarterly results of operations may vary significantly and are not necessarily an indication of future performance. These fluctuations may be due to a variety of factors, some of which are outside of our control and may not fully reflect the underlying performance of our business. In addition, we operate in a somewhat seasonal industry, which tends to experience relatively fewer transactions in the first quarters of the year, increased activity as the year-end holiday shopping season initiates, and fewer transactions after the year-end holidays.

Factors that may cause fluctuations in our quarterly financial results include our ability to attract and retain customers; the timing, effectiveness and costs of expansion and upgrades of our systems and infrastructure, as well as the success of those expansions and upgrades; the outcomes of legal proceedings and claims; our ability to maintain or increase revenue, gross margins and operating margins; our ability to continue introducing new services and to continue convincing customers to adopt additional offerings; increases in and timing of expenses that we may incur to grow and expand our operations and to remain competitive; period-to-period volatility related to fraud and risk losses; system failures resulting in the inaccessibility of our products and services; changes in the regulatory environment, including with respect to security, privacy or enforcement of laws and regulations by regulators, including fines, orders, or consent decrees; changes in global business or macroeconomic enforcement of laws and regulations by regulators, including fines, orders, or consent decrees; changes in global business conditions; general retail buying patterns; and the other risks described in this prospectus. Future fluctuations in quarterly results may mean that our business is less predictable and may harm the trading price of our Class A common shares.

Our business could be harmed if we are unable to forecast demand for our products accurately or to manage our product inventory adequately.

With the goal of increasing our transaction business and POS device sales, we invest broadly in our POS unit technology. Our products, such as the Moderninha and the Minizinha, often require investments with long lead times. An inability to forecast the success of a particular product correctly could harm our business. We must forecast inventory needs and expenses and place orders sufficiently in advance with our third-party suppliers and contract manufacturers based on our estimates of future demand for particular products. Our ability to forecast demand for our products accurately could be affected by many factors, including an increase or decrease in demand for our products or for our competitors’ products, unanticipated changes in general market conditions, and the change in economic conditions.

If we underestimate demand for a particular product, our contract manufacturers and suppliers may not be able to deliver sufficient quantities of that product to meet our requirements, and we may experience a shortage of that product available for sale or distribution. The shortage of a popular product could seriously harm our brand, our seller relationships, the acquisition of additional sellers and our total transaction business. If we overestimate demand for a particular product, we may have excess inventory for that product and the excess inventory may become obsolete or out of date. Inventory levels in excess of demand may lead us to write down or write off the inventory or sell excess inventory at further discounted prices, which could harm our gross profit and our business.

 

 

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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 or discontinuation of key components, which could disrupt and harm our business.

Some of the key components used to manufacture our POS devices, such as the chip and pin reader, come from limited sources of supply. In addition, we currently rely on one manufacturer to manufacture, test and assemble a significant amount of our POS devices.

Due to reliance of our POS manufacturers on these components, we are subject to the risk of shortages and long lead times in the supply of certain products. If our manufacturers cannot find alternative sources of supply, we could be subject to components shortages or delays or other problems in product assembly. In addition, various sources of supply-chain risk, including strikes or shutdowns, or loss of or damage to our products while they are in transit or storage, could limit the supply of our POS devices. Any interruption or delay in component supply, any increases in component costs, the inability of our manufacturers to obtain these parts or components from alternate sources at acceptable prices and within a reasonable amount of time, and/or difficulties in fulfilling obligations in connection with the warranties we provide for our POS devices, would harm our ability to provide our POS devices or other services to our merchants on a timely basis. This could hurt our relationships with our customers, prevent us from acquiring new customers, and seriously harm our business.

We are subject to anticorruption, anti-bribery and anti-money laundering laws and regulations.

We are subject to various anticorruption, anti-bribery and anti-money laundering laws and regulations that prohibit, among other things, our involvement in improper payments to certain public officials for the purpose of obtaining advantages or in transferring the proceeds of criminal activities. We have programs designed to comply with new and existing legal and regulatory requirements. However, any errors, failures, or delays in complying with anticorruption, anti-bribery and anti-money laundering laws and regulations could result in significant criminal and civil lawsuits, penalties, forfeiture of significant assets, or other enforcement actions, as well as reputational harm.

Regulators may increase enforcement of these obligations, which may require us to further revise or expand our compliance program, including the procedures we use to verify the identity of our customers and to monitor our transactions. Regulators regularly reexamine the transaction volume thresholds at which we must obtain and keep applicable records or verify identities of customers and any change in such thresholds could result in greater costs for compliance. Costs associated with fines or enforcement actions, changes in compliance requirements, or limitations on our ability to grow could harm our business and any new requirements or changes to existing requirements could impose significant costs, result in delays to planned product improvements, make it more difficult for new customers to join our network and reduce the attractiveness of our products and services.

 

 

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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.

Our business depends upon the efforts and skill of our senior management, who has played an important role in shaping our company culture. Our future success depends to a significant extent on the continued service of our senior management team, who are critical to the development and the execution of our business strategies. Any member of our senior management team may leave us to set up or work in businesses that compete with ours. There is no guarantee that the compensation arrangements and noncompetition agreements we have entered into with our senior management team are sufficiently broad or effective to prevent them from resigning in order to set up or join a competitor, or that the noncompetition agreements would be upheld in a court of law. In the event that a number of our senior management members leave our company, we may have difficulty finding suitable replacements, which could seriously harm us.

Our future success also depends on our ability to identify, attract, hire, train, retain, motivate and manage other highly skilled technical, managerial, information technology, marketing, product, risk management and customer service personnel. Competition for these personnel is intense, and we may not be able to successfully attract, hire, train, retain, motivate and manage sufficiently qualified personnel.

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.

We partially rely on card issuers or card schemes to process our transactions, and must pay a fee for this service. From time to time, card schemes such as MasterCard and Visa may increase the interchange fees that they charge for each transaction using one of their cards. Credit card processors have the right to pass any increases in interchange fees on to us as well as increase their own fees for processing. In addition, card schemes have imposed and may again impose special assessments for transactions that are executed through a “digital wallet,” and these fees could particularly affect us and significantly increase our costs. These increased fees increase our operating costs and reduce our profit margins.

We are also required by credit card schemes to comply with their operating rules. The credit card schemes and their member banks set and interpret these rules. The bank accounts offered by those member banks compete with our digital account services. Visa, MasterCard, American Express or other credit card companies could adopt new operating rules or reinterpret existing rules that we or our processors might find difficult or even impossible to follow. As a result, we could lose our ability to provide our customers the option of using credit cards to fund their payments and our users the option to pay their fees using a credit card. If we were unable to accept credit cards, our business would be seriously harmed.

We could lose the right to accept credit cards or could be required to pay fines if credit card schemes such as MasterCard or Visa determine that users are using our platform to engage in illegal or “high risk” activities, or if users generate a large volume of chargeback fraud. Additionally, we may be unable to access financing in the credit and capital markets at reasonable rates to fund our operations and for that reason our profitability and total transaction business could decline significantly.

 

 

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We might not successfully implement strategies to increase adoption of our digital payment methods, which would limit our growth.

Our future profitability will depend, in part, on our ability to successfully implement our strategy to increase adoption of our digital payment methods. We cannot assure you that the market for digital payments will continue to grow or will remain viable. We expect to invest substantial amounts to:

 

    drive consumer and merchant awareness of digital payments;

 

    encourage consumers and merchants to sign up for and use our digital payment products;

 

    enhance our infrastructure to handle seamless processing of transactions;

 

    continue to develop state of the art, easy-to-use technology;

 

    expand our operations;

 

    increase the number of users who collect and pay digitally; and

 

    grow and diversify our customer base.

Despite these investments, we may fail to implement these programs successfully or to increase substantially the number of customers who pay for our digital payment methods. This would hold back any growth in our revenues and harm our business.

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 be harmed.

After this offering, we will be subject to the Sarbanes-Oxley Act, which requires, among other things, that we establish and maintain effective internal controls over financial reporting and disclosure controls and procedures. Under the SEC’s current rules, starting in 2019 we will be required to perform system and process evaluation and testing of our internal controls over financial reporting to allow management to assess the effectiveness of our internal controls. Our testing may reveal deficiencies in our internal controls that are deemed to be material weaknesses or significant deficiencies and render our internal controls over financial reporting ineffective. We expect to incur additional accounting and auditing expenses and to spend significant management time in complying with these requirements. If we are not able to comply with these requirements in a timely manner, or if we or our management identifies material weaknesses or significant deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses, the market price of our Class A common shares may decline and we may be subject to investigations or sanctions by the SEC, the Financial Industry Regulatory Authority, Inc., or FINRA, or other regulatory authorities. In addition, we may be required to expend significant management time and financial resources to correct any material weaknesses that may be identified or to respond to any regulatory investigations or proceedings.

Our operating results are affected by decreases in consumer discretionary spending. Changes in macroeconomic conditions may reduce the volume and prices of transactions on our payments platforms and harm our growth strategies and business prospects.

Our operating results are affected by the condition of the economy. Our business and financial performance may be harmed by current and future economic conditions that cause a decline in business and consumer spending, including a reduction in the availability of credit, increased unemployment levels, higher energy and fuel costs, rising interest rates, financial market volatility and recession. Additionally, we may experience difficulties in operating and growing our operations as a result of economic pressures.

 

 

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As a business that depends on consumer discretionary spending, we may suffer harm if our merchants’ customers reduce their purchases due to continued job losses, foreclosures, bankruptcies, higher consumer debt and interest rates, reduced access to credit, lower consumer confidence, uncertainty or changes in tax policies and tax rates. Decreases in customer traffic or average value per transaction negatively affect our financial performance, and a prolonged period of depressed consumer spending could seriously harm our business. Promotional activities and decreased demand for consumer products, particularly higher-end products, could affect our profitability. The potential effects of the ongoing economic crisis in Brazil are difficult to forecast and mitigate. Any of the foregoing could seriously harm our business, results of operations and financial condition and could cause the trading price of our Class A common shares to decline.

 

Increases in interest rates may harm our business.

Processing consumer transactions made using credit cards, as well as providing early payment of receivables to merchants when consumers make credit card purchases in installments, both make up a significant portion of our activities. If Brazilian interest rates increase, consumers may choose to make fewer purchases using credit cards; and fewer merchants may decide to use our early payment of receivables service if our overall financing costs require us to increase the discount rate we charge for this service. Either of these factors could cause our business activity levels to decrease.

Customer complaints or negative publicity about our customer service could reduce usage of our products and, as a result, our business could suffer.

Customer complaints or negative publicity about our customer service could severely diminish consumer confidence in and use of our product. Breaches of our customers’ privacy and our security measures could have the same effect. Measures we sometimes take to combat risks of fraud and breaches of privacy and security, such as freezing customer funds, can damage relations with our customers. These measures heighten the need for prompt and accurate customer service to resolve irregularities. Effective customer service requires significant expenses, which, if not managed properly, could impact our profitability significantly. Any inability by us to manage or train our customer service representatives properly could compromise our ability to handle customer complaints effectively. If we do not handle customer complaints effectively, our reputation may suffer and we may lose our customers’ confidence.

We are susceptible to illegal or improper uses of our platform, which could expose us to additional liability and harm our business.

We, like our platforms, are susceptible to potentially illegal or improper uses. These may include illegal online gambling, fraudulent sales of goods or services, illicit sales of prescription medications or controlled substances, software and other intellectual property piracy, money laundering, bank fraud, child pornography trafficking, terrorist financing, prohibited sales of alcoholic beverages and tobacco products and online securities fraud. The owners of intellectual property rights or government authorities may seek to bring legal action against us if our platform is used for the sale of infringing items. These claims could result in reputational harm and any resulting liabilities, loss of transaction volume or increased costs could harm our business.

 

 

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In addition, our services could be subject to unauthorized credit card use, identity theft, employee fraud or other internal security breaches. We may incur significant costs to protect against the threat of information security breaches or to respond to or alleviate problems caused by any breaches. Laws may require us to notify regulators, customers or employees of security breaches and we may be required to reimburse customers or banks for any funds stolen as a result of any breaches or to provide credit monitoring or identity theft protection in the event of a privacy breach. These requirements, as well as any additional restrictions that may be imposed by credit card companies, could raise our costs significantly and reduce our attractiveness.

In addition to the direct costs of such losses, if they are related to credit card transactions and become excessive they could result in us losing the right to accept credit cards for payment. Since credit cards are the most widely used method for our customers to pay for the products we sell, our business will be harmed if we are unable to accept credit cards.

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 or properly address privacy concerns could harm our business and standing with our customers.

We collect, store, process, and use certain personal information and other user data in our business. A significant risk associated with e-commerce and communications is the secure transmission of confidential information over public networks. The perception of privacy concerns, whether or not valid, may harm our business and results of operations. We must ensure that all processing, collection, use, storage, dissemination, transfer and disposal of data for which we are responsible comply with relevant data protection and privacy laws. The protection of our customer, employee and company data is critical to us. Currently, a number of our users authorize us to bill their credit card accounts directly. We rely on commercially available systems, software, tools and monitoring to provide secure processing, transmission and storage of confidential customer information, such as credit card and other personal information. Despite the security measures we have in place, our facilities and systems, and those of our third-party service providers, may be vulnerable to security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming or human errors, or other similar events. Any security breach, or any perceived failure involving the misappropriation, loss or other unauthorized disclosure of confidential information, as well as any failure or perceived failure to comply with laws, policies, legal obligations or industry standards regarding data privacy and protection, whether by us or our vendors, could damage our reputation, expose us to litigation risk and liability, subject us to negative publicity, disrupt our operations and harm our business. Our security measures may fail to prevent security breaches, which could harm our business.

We have only a limited ability to protect our intellectual property rights, which are important to our success.

We believe the protection of our intellectual property, including our trademarks, patents, copyrights, domain names, trade dress, and trade secrets, is critical to our success. We seek to protect our intellectual property rights by relying on applicable laws and regulations, as well as a variety of administrative procedures. We also rely on contractual restrictions to protect our proprietary rights when offering or procuring products and services, including confidentiality agreements with parties with whom we conduct business.

 

 

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However, contractual arrangements and other steps we have taken to protect our intellectual property may not prevent third parties from infringing or misappropriating our intellectual property or deter independent development of equivalent or superior intellectual property rights by others. Trademark, copyright, patent, domain name, trade dress and trade secret protection is expensive to maintain and may require litigation. Protecting our intellectual property rights and other proprietary rights is expensive and time-consuming and may not be successful in every jurisdiction. Also, we may not be able to discover or determine the extent of any unauthorized use of our proprietary rights. We have licensed certain of our proprietary rights, such as trademarks or copyrighted material, to others in the past, and expect to do so in the future. These licensees may take actions that diminish the value of our proprietary rights or harm our reputation. Any failure to protect or enforce our intellectual property rights adequately, or significant costs incurred in doing so, could materially harm our business.

As the number of products in the software industry increases and the functionalities of these products further overlap, and as we acquire technology through acquisitions or licenses, we may become increasingly subject to infringement claims, including patent, copyright, and trademark infringement claims. We may be required to enter into litigation to determine the validity and scope of the patents or other intellectual property rights of others. The ultimate outcome of any allegation is uncertain and, regardless of the outcome, any such claim, with or without merit, may be time-consuming, result in costly litigation, divert management’s time and attention from our business, require us to stop selling, delay shipping, or redesign our products, or require us to pay substantial amounts to satisfy judgments or settle claims or lawsuits or to pay substantial royalty or licensing fees, or to satisfy indemnification obligations that we have with some of our customers. Our failure to obtain necessary license or other rights, or litigation or claims arising out of intellectual property matters, may harm our business.

If we continue to grow, we may not be able to appropriately manage the increased size of our business.

We are currently experiencing a period of significant expansion and anticipate that further expansion will be required to address potential growth in our customer base and market opportunities.

We must constantly add new hardware, update software, enhance and improve our billing and transaction systems, and add and train new engineers and other personnel to accommodate the increased use of our platforms and the new products and features we regularly introduce. This upgrade process is expensive, and the increasing complexity and enhancement of our website results in higher costs. Failure to upgrade our technology, features, transaction processing systems, security infrastructure, or network infrastructure to accommodate increased traffic or transaction volume could harm our business. Adverse consequences could include unanticipated system disruptions, slower response times, degradation in levels of customer support, impaired quality of users’ experiences of our services and delays in reporting accurate financial information.

Our revenues depend on prompt and accurate transaction processes. Our failure to grow our transaction-processing capabilities to accommodate the increasing number of transactions that must be billed on our website would harm our business and our ability to collect revenue. Furthermore, we may need to enter into relationships with various strategic partners, websites and other online service providers and other third parties necessary to our business. The increased complexity of managing multiple commercial relationships could lead to execution problems that can affect current and future revenues, and operating margins.

We cannot assure you that our current and planned systems, procedures and controls, personnel and third-party relationships will be adequate to support our future operations. In addition, our current expansion has placed a significant strain on management and on our operational and financial resources, and this strain is expected to continue. Our failure to manage growth effectively could seriously harm our business, results of operations and financial condition.

 

 

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Failure to maintain sufficient working capital could limit our growth and harm our business, financial condition and results of operations.

We have significant working capital requirements, primarily driven by payment terms agreed with our merchant clients and the extended payment terms that they offer their customers. Differences between the date when we pay our merchant clients and the date when we receive payments from financial institutions may harm our liquidity and our cash flows. We expect our working capital needs to increase as our total transaction business increases. In order to finance our working capital needs, we have recently been entering into financing arrangements that decrease the amount of time it takes for us to collect our accounts receivable, and to increase the amount of time we have to pay our accounts payable. We believe these financing arrangements allow us to gain access to capital faster and more cheaply than we would otherwise be able to. There can be no assurance that these types of financing arrangements will continue to be available to us on acceptable terms, or at all. If we do not have sufficient working capital, we may not be able to pursue our growth strategy, respond to competitive pressures or fund key strategic initiatives, such as the development of our sites, which may harm our business, financial condition and results of operations.

We may face restrictions and penalties under the Brazilian Consumer Protection Code in the future.

Brazil has a series of strict consumer protection laws, referred to together as the Consumer Protection Code (Código de Defesa do Consumidor). These laws apply to all companies in Brazil that supply products or services to Brazilian consumers. They include protection against misleading and deceptive advertising, protection against coercive or unfair business practices and protection in the formation and interpretation of contracts, usually in the form of civil liabilities and administrative penalties for violations. These penalties are often levied by the Brazilian Consumer Protection Agencies (Fundação de Proteção e Defesa do Consumidor, or PROCONs), which oversee consumer issues on a district-by-district basis. Companies that operate across Brazil may face penalties from multiple PROCONs, as well as from the National Secretariat for Consumers (Secretaria Nacional do Consumidor, or SENACON). Companies may settle claims made by consumers via PROCONs by paying compensation for violations directly to consumers and through a mechanism that allows them to adjust their conduct, called a conduct adjustment agreement (Termo de Ajustamento de Conduta, or TAC). Brazilian Public Prosecutors may also commence investigations of alleged violations of consumer rights, and the TAC mechanism is also available as a sanction in those proceedings. Companies that violate TACs face potential automatic fines. Brazilian Public Prosecutors may also file public civil actions against companies who violate consumer rights, seeking strict observation of the consumer protection laws and compensation for any damages to consumers.

At December 31, 2016, we had approximately 4,000 active judicial proceedings and proceedings with PROCONs and small claims courts relating to consumer rights. Most of these disputes are related to consumer allegations of non-delivery of products by merchants and denials by PagSeguro of requests for withdrawal of digital account balances. To the extent consumers file such claims against us in the future, we may face reduced revenue due to refunds and fines for noncompliance that could harm our results of operations.

 

 

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We are subject to regulatory activity and antitrust litigation under competition laws.

We receive scrutiny from various governmental agencies under competition laws. Other companies or governmental agencies may allege that our actions violate antitrust or competition laws, or otherwise constitute unfair competition. Contractual agreements with buyers, sellers, or other companies could give rise to regulatory action or antitrust investigations or litigation. Also, our unilateral business practices could give rise to regulatory action or antitrust investigations or litigation. Any such claims and investigations, even if they are unfounded, are usually very expensive to defend, involve negative publicity and substantial diversion of management time and effort, and could result in significant judgments against us.

Unfavorable outcomes in litigation or our inability to post judicial collateral or provide guarantees in pending legal or administrative proceedings could have a material adverse effect on our business, financial condition and results of operations.

We are defendants in a significant number of judicial proceedings, including indemnity, labor and tax proceedings. At December 31, 2016, we had recorded R$0.6 million in provisions for current civil proceedings and no provisions for non-current civil proceedings. We have not recorded any provisions with respect to our proceedings in which our chance of loss has been deemed possible. We cannot guarantee that such proceedings will have favorable outcomes for us or that the provisions made will be sufficient to pay any amounts due. Any proceedings that require us to make substantial payments, affect our reputation or otherwise interfere with our business operations could have a material adverse effect on our business, financial condition and operating results.

Additionally, we may not have sufficient funds to post collateral or provide guarantees in judicial or administrative proceedings that claim substantial amounts. Even if we do not post such collateral or provide guarantees, we will be liable for paying any amounts due pursuant to any unfavorable outcomes in legal proceedings. We cannot assure you that, if we cannot make such payments, our assets, including financial assets, will not be attached, or that we will be able to obtain tax good standing certificates, all of which may have a material adverse effect on our business, financial condition and results of operations.

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 acquired company fully, could harm our business.

We may from time to time acquire or invest in complementary companies or businesses. The success of an acquisition or investment will depend on our ability to make accurate assumptions regarding the valuation, operations, growth potential, integration and other factors related to that business. We cannot assure you that our acquisitions or investments will produce the results that we expect at the time we enter into or complete a given transaction. Furthermore, acquisitions may result in difficulties integrating the acquired companies, and may result in the diversion of our capital and our management’s attention from other business issues and opportunities. We may not be able to integrate successfully the operations that we acquire, including their personnel, financial systems, distribution or operating procedures. If we fail to integrate acquisitions successfully, our business could suffer. In addition, the expense of integrating any acquired business and their financial results may harm our operating results.

 

 

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Our developer platforms, which are open to merchants and third-party developers, subject us to additional risks.

We provide third-party developers with access to application programming interfaces, software development kits and other tools designed to allow them to produce applications for use, with a particular focus on mobile applications. There can be no assurance that merchants or third-party developers will develop and maintain applications and services on our open platforms on a timely basis or at all. A number of factors could cause them to curtail or stop development for our platforms. In addition, our business is subject to many regulatory restrictions. It is possible that merchants and third-party developers who utilize our development platforms or tools could violate these regulatory restrictions and we may be held responsible for such violations, which could harm our business.

We are a holding company and do not have any material assets other than the shares of our subsidiaries.

We are a Cayman Islands exempted company with limited liability. Our material assets are our direct and indirect equity interests in our subsidiaries, particularly Pagseguro Internet S.A., our Brazilian operating company, which we refer to as PagSeguro Brazil. We are, therefore, dependent upon payments, dividends and distributions from our subsidiaries for funds to pay our operating and other expenses and to pay future cash dividends or distributions, if any, to holders of our Class A common shares or Class B common shares, and we may have tax costs in connection with any dividend or distribution. Furthermore, exchange rate fluctuations will affect the U.S. dollar value of any distributions our subsidiaries make with respect to our equity interests in those subsidiaries. See “—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 political and economic conditions could harm us and the price of our Class A common shares,” “—Risks Relating to the Offering and our Class A Common Shares—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 our Class A common shares in order to achieve a return on your investment.” and “Dividends and Dividend Policy.”

An occurrence of a natural disaster, widespread health epidemic or other outbreaks could seriously harm our business, financial condition and results of operations.

Natural disasters, such as fires or floods, the outbreak of a widespread health epidemic, or other events, such as wars, acts of terrorism, political events, environmental accidents, power shortages or communication interruptions could seriously harm our business. The occurrence of a disaster or similar event could materially disrupt our business and operations. These events could also cause us to close our operating facilities temporarily, which would severely disrupt our operations and seriously harm our business, financial condition and results of operations. In addition, our net sales could be significantly reduced to the extent that a natural disaster, health epidemic or other major event harms the economy of Brazil or any other jurisdictions where we may operate. Our operations could also be severely disrupted if our consumers, merchants or other participants were affected by natural disasters, health epidemics or other major events.

 

 

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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 political and economic conditions could harm us and the price of our Class A common shares.

The Brazilian federal government frequently exercises significant influence over the Brazilian economy and occasionally makes significant changes in policy and regulations. The Brazilian government’s actions to control inflation and other policies and regulations have often involved, among other measures, increases in interest rates, changes in tax policies, price controls, foreign exchange rate controls, currency devaluations, capital controls and limits on imports. We have no control over and cannot predict what measures or policies the Brazilian government may take in the future. We and the market price of our securities may be harmed by changes in Brazilian government policies, as well as general economic factors, including, without limitation:

 

    growth or downturn of the Brazilian economy;

 

    interest rates and monetary policies;

 

    exchange rates and currency fluctuations;

 

    inflation;

 

    liquidity of the domestic capital and lending markets;

 

    import and export controls;

 

    exchange controls and restrictions on remittances abroad;

 

    modifications to laws and regulations according to political, social and economic interests;

 

    fiscal policy and changes in tax laws;

 

    economic, political and social instability;

 

    labor and social security regulations;

 

    energy and water shortages and rationing; and

 

    other political, social and economic developments in or affecting Brazil.

In addition, Brazil is currently experiencing a recession and weak macroeconomic conditions are expected to continue in 2017, see “Management’s Discussion and Analysis of Financial Condition and Results of Operation—Principal Factors Affecting Our Financial Condition and Results of Operations of PagSeguro Brazil.” We cannot predict what measures the Brazilian federal government will take in the face of mounting macroeconomic pressures or otherwise.

Uncertainty over whether the Brazilian federal government will implement changes in policy or regulation affecting these or other factors in the future may affect economic performance and contribute to economic uncertainty in Brazil, which may have an adverse effect on us and our Class A common shares. Recent economic and political instability has led to a negative perception of the Brazilian economy and higher volatility in the Brazilian securities markets, which also may adversely affect us and our Class A common shares. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations of PagSeguro Brazil—Brazilian political environment and macroeconomic conditions, interest rates, consumer credit and consumer spending.”

 

 

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The ongoing economic uncertainty and political instability in Brazil may harm us and the price of our Class A common shares.

Brazil’s political environment has historically influenced, and continues to influence, the performance of the country’s economy. Political crises have affected and continue to affect the confidence of investors and the general public, which have historically resulted in economic deceleration and heightened volatility in the securities issued by Brazilian companies.

The recent economic instability in Brazil has contributed to a decline in market confidence in the Brazilian economy as well as to a deteriorating political environment. Weak macroeconomic conditions in Brazil are expected to continue in 2017. In addition, various ongoing investigations into allegations of money laundering and corruption being conducted by the Office of the Brazilian Federal Prosecutor, including the largest such investigation, known as “Operação Lava Jato”, have negatively impacted the Brazilian economy and political environment. Members of the Brazilian government as well as senior officers of large state-owned companies have faced or are currently facing allegations of corruption and money laundering as a result of these investigations. These individuals are alleged to have accepted bribes by means of kickbacks on contracts granted by the government to several infrastructure, oil and gas and construction companies. The profits of these kickbacks allegedly financed the political campaigns of political parties forming the previous government’s coalition that was led by former President Dilma Rousseff, which funds were unaccounted for or not publicly disclosed. These funds were also allegedly destined toward the personal enrichment of certain individuals. A number of senior politicians, including members of Congress, and high-ranking executives officers of major corporations and state-owned companies in Brazil have been arrested, convicted of various charges relating to corruption, entered into plea agreements with federal prosecutors and/or have resigned or been removed from their positions. The potential outcome of Operação Lava Jato as well as other ongoing corruption-related investigations is uncertain, but they have already hurt the image and reputation of those companies that have been implicated as well as the general market perception of the Brazilian economy, political environment and the Brazilian capital markets. We have no control over, and cannot predict, whether such investigations or allegations will lead to further political and economic instability or whether new allegations against government officials will arise in the future.

President Dilma Rousseff was suspended from office on May 12, 2016, when the Brazilian Senate voted to hold a trial on impeachment charges against her. President Rousseff was replaced by Vice-President Michel Temer, who served as acting President until Ms. Rousseff was permanently removed from office by the Senate on August 31, 2016. Although President Temer has been appointed to serve as President until December 2018, there is an ongoing proceeding before the Brazilian Supreme Electoral Court (TSE – Tribunal Superior Eleitoral) where allegations of illegal campaign financing are under review, which could, in theory, remove President Temer from office. We cannot predict how the ongoing investigations and proceedings will affect us or the price of our Class A common shares. Furthermore, uncertainty over whether the acting Brazilian government will implement changes in policy or regulation in the future may contribute to economic uncertainty in Brazil and to heightened volatility in the securities issued abroad by Brazilian companies.

In addition, political demonstrations in Brazil over the last few years have affected the development of the Brazilian economy and investors’ perceptions of Brazil. For example, street protests, which started in mid-2013 and continued through 2016, demonstrated the public’s dissatisfaction with the worsening Brazilian economic condition (including an increase in inflation and fuel prices as well as rising unemployment), the perception of widespread corruption, as well as the potential for severe water and electricity rationing following a decrease in rainfall and water reservoir levels throughout Brazil in early 2016.

 

 

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Any of the above factors may create additional political uncertainty, which could harm the Brazilian economy and, consequently, our business and the price of our Class A common shares.

Inflation and certain measures by the Brazilian government to curb inflation have historically harmed the Brazilian economy and Brazilian capital market, and high levels of inflation in the future would harm our business and the price of our Class A common shares.

In the past, Brazil has experienced extremely high rates of inflation. Inflation and some of the measures taken by the Brazilian government in an attempt to curb inflation have had significant negative effects on the Brazilian economy generally. Inflation, policies adopted to curb inflationary pressures and uncertainties regarding possible future governmental intervention have contributed to economic uncertainty and heightened volatility in the Brazilian capital markets.

According to the National Consumer Price Index (Índice Nacional de Preços ao Consumidor Amplo), or IPCA, Brazilian inflation rates were 6.3%, 10.7% and 6.4% in 2016, 2015 and 2014, respectively. Brazil may experience high levels of inflation in the future and inflationary pressures may lead to the Brazilian government’s intervening in the economy and introducing policies that could harm our business and the price of our Class A common shares. In the past, the Brazilian government’s interventions included the maintenance of a restrictive monetary policy with high interest rates that restricted credit availability and reduced economic growth, causing volatility in interest rates. For example, the official interest rate in Brazil oscillated from 7.25% in 2014 to 13.75% in 2016, as established by the Monetary Policy Committee (Comitê de Política Monetária do Banco Central do Brasil—COPOM). Conversely, more lenient government and Central Bank policies and interest rate decreases have triggered and may continue to trigger increases in inflation, and, consequently, growth volatility and the need for sudden and significant interest rate increases, which could negatively affect us and increase our indebtedness.

Exchange rate instability may have adverse effects on the Brazilian economy, us and the price of our Class A common shares.

The Brazilian currency has been historically volatile and has been devalued frequently over the past three decades. Throughout this period, the Brazilian government has implemented various economic plans and used various exchange rate policies, including sudden devaluations, periodic mini-devaluations (during which the frequency of adjustments has ranged from daily to monthly), exchange controls, dual exchange rate markets and a floating exchange rate system. Although long-term depreciation of the real is generally linked to the rate of inflation in Brazil, depreciation of the real occurring over shorter periods of time has resulted in significant variations in the exchange rate between the real, the U.S. dollar and other currencies. The real depreciated against the U.S. dollar by 32.0% at year-end 2015 as compared to year-end 2014, and by 11.8% at year-end 2014 as compared to year-end 2013. The real/U.S. dollar exchange rate reported by the Central Bank was R$3.9048 per U.S. dollar on December 31, 2015 and R$3.2591 per U.S. dollar on December 31, 2016, which reflected a 19.8% appreciation in the real against the U.S. dollar during 2016, but there can be no assurance that the real will not again depreciate against the U.S. dollar or other currencies in the future.

 

 

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A devaluation of the real relative to the U.S. dollar could create inflationary pressures in Brazil and cause the Brazilian government to, among other measures, increase interest rates. Any depreciation of the real may generally restrict access to the international capital markets. It would also reduce the U.S. dollar value of our results. Restrictive macroeconomic policies could reduce the stability of the Brazilian economy and harm our results of operations and profitability. In addition, domestic and international reactions to restrictive economic policies could have a negative impact on the Brazilian economy. These policies and any reactions to them may harm us by curtailing access to foreign financial markets and prompting further government intervention. A devaluation of the real relative to the U.S. dollar may also, as in the context of the current economic slowdown, decrease consumer spending, increase deflationary pressures and reduce economic growth.

On the other hand, an appreciation of the real relative to the U.S. dollar and other foreign currencies may deteriorate the Brazilian foreign exchange current accounts. We and certain of our suppliers purchase goods and services from countries outside Brazil, and thus changes in the value of the U.S. dollar compared to other currencies may affect the costs of goods and services that we purchase. Depending on the circumstances, either devaluation or appreciation of the real relative to the U.S. dollar and other foreign currencies could restrict the growth of the Brazilian economy, as well as our business, results of operations and profitability.

Infrastructure and workforce deficiency in Brazil may impact economic growth and have a material adverse effect on us.

Our performance depends on the overall health and growth of the Brazilian economy. Brazilian GDP growth has fluctuated over the past few years, with growth of 3.0% in 2013 but decreasing to 0.5% in 2014, a contraction of 3.8% in 2015 and a contraction of 3.6% in 2016. Growth is limited by inadequate infrastructure, including potential energy shortages and deficient transportation, logistics and telecommunication sectors, the lack of a qualified labor force, and the lack of private and public investments in these areas, which limit productivity and efficiency. Any of these factors could lead to labor market volatility and generally impact income, purchasing power and consumption levels, which could limit growth and ultimately have a material adverse effect on us.

Developments and the perceptions of risks in other countries, including other emerging markets, the United States and Europe, may harm the Brazilian economy and the price of Brazilian securities, including the price of our Class A common shares.

The market for securities issued by Brazilian companies is influenced by economic and market conditions in Brazil and, to varying degrees, market conditions in other Latin American and emerging markets, as well as the United States, Europe and other countries. To the extent the conditions of the global markets or economy deteriorate, the business of Brazilian companies may be harmed. The weakness in the global economy has been marked by, among other adverse factors, lower levels of consumer and corporate confidence, decreased business investment and consumer spending, increased unemployment, reduced income and asset values in many areas, reduction of China’s growth rate, currency volatility and limited availability of credit and access to capital. Developments or economic conditions in other emerging market countries have at times significantly affected the availability of credit to Brazilian companies and resulted in considerable outflows of funds from Brazil, decreasing the amount of foreign investments in Brazil.

 

 

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Crises and political instability in other emerging market countries, the United States, Europe or other countries could decrease investor demand for Brazilian securities, such as our Class A common shares. In June 2016, the United Kingdom had a referendum in which the majority voted to leave the European Union. We have no control over and cannot predict the effect of the United Kingdom’s exit from the European Union nor over whether and to which effect any other member state will decide to exit the European Union in the future. On January 20, 2017, Donald Trump became the President of the United States. We have no control over and cannot predict the effect of Donald Trump’s administration or policies. These developments, as well as potential crises and forms of political instability arising therefrom or any other as of yet unforeseen development, may harm our business and the price of our Class A common shares.

Any further downgrading of Brazil’s credit rating could reduce the trading price of our Class A common shares.

We may be harmed by investors’ perceptions of risks related to Brazil’s sovereign debt credit rating. Rating agencies regularly evaluate Brazil and its sovereign ratings, which are based on a number of factors including macroeconomic trends, fiscal and budgetary conditions, indebtedness metrics and the perspective of changes in any of these factors.

Brazil has lost its investment grade sovereign debt credit rating by the three main U.S. based credit rating agencies, Standard & Poor’s, Moody’s and Fitch. Standard & Poor’s downgraded Brazil’s sovereign debt credit rating from BBB- to BB+ in September 2015, subsequently reduced it to BB in February 2016, and maintained its negative outlook on the rating, citing Brazil’s fiscal difficulties and economic contraction as signs of a worsening credit situation. In December 2015, Moody’s placed Brazil’s Baa3 sovereign debt credit rating on review and downgraded Brazil’s sovereign credit rating in February 2016 to Ba2 with a negative outlook, citing the prospect for further deterioration in Brazil’s indebtedness figures amid a recession and challenging political environment. Fitch downgraded Brazil’s sovereign credit rating to BB+ with a negative outlook in December 2015, citing the country’s rapidly expanding budget deficit and worse-than-expected recession, and further downgraded Brazil’s sovereign debt credit rating in May 2016 to BB with a negative outlook.

Brazil’s sovereign credit rating is currently rated below investment grade by the three main credit rating agencies. Consequently the prices of securities issued by Brazilian companies have been negatively affected. A prolongation or worsening of the current Brazilian recession and continued political uncertainty, among other factors, could lead to further ratings downgrades. Any further downgrade of Brazil’s sovereign credit ratings could heighten investors’ perception of risk and, as a result, cause the trading price of our Class A common shares to decline.

Internet regulation in Brazil is recent and still limited and several legal issues related to the Internet are uncertain.

In 2014, Brazil enacted a law, which we refer to as the Internet Act, setting forth principles, guarantees, rights and duties for the use of the Internet in Brazil, including provisions about Internet service provider liability, Internet user privacy and Internet neutrality. In May 2016, further regulations were passed in connection with the Internet Act. However, unlike in the United States, little case law exists around the Internet Act and existing jurisprudence has not been consistent. Legal uncertainty arising from the limited guidance provided by current laws in force allows for different judges or courts to decide very similar claims in different ways and establish contradictory jurisprudence. This legal uncertainty allows for rulings against us and could set adverse precedents, which individually or in the aggregate could seriously harm our business, results of operations and financial condition. In addition, legal uncertainty may harm our customers’ perception and use of our service.

 

 

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Risks Relating to the Offering and Our Class A Common Shares

Our Class A common shares have not previously been traded on any stock exchange and, therefore, an active and liquid trading market for such securities may not develop, which could potentially depress the trading price of our Class A common shares after this offering.

Before this offering, none of our Class A common shares have ever been traded on any stock exchange. In connection with the offering, we will apply to list Class A common shares on the Nasdaq. An active and liquid public trading market for our Class A common shares may not develop or, if it develops, may not be sufficiently liquid. Active, liquid trading markets generally result in lower price volatility and more efficient purchases and sales of shares.

The initial public offering price for our Class A common shares will be determined by negotiation between us and the underwriters based upon several factors, and the price of our Class A common shares after this offering may decline below the initial public offering price. The market price of our Class A common shares could vary significantly as a result of a number of factors, some of which are beyond our control. As a result, investors may experience a significant decrease in the market price of our Class A common shares. If an active trading market does not develop or is not maintained, the liquidity and price of our Class A common shares could be seriously harmed.

UOL, our largest shareholder, will own 100% of our outstanding Class B common shares, which represent approximately                    % of the voting power of our issued share capital following the offering, and will control all matters requiring shareholder approval. This concentration of ownership and voting power limits your ability to influence corporate matters.

Our Class B common shares are entitled to 10 votes per share and our Class A common shares, which are the common shares we are offering in this offering, are entitled to one vote per share. Our Class B common shares are convertible into an equivalent number of Class A common shares and generally convert into Class A common shares upon transfer subject to limited exceptions. Following this offering, UOL will control our company and will hold all of our outstanding Class B common shares, representing                    % of our issued share capital, or                    % if the underwriters’ option to purchase additional common shares from UOL is exercised in full. Because of the ten-to-one voting ratio between our Class B common shares and Class A common shares, these Class B common shares will give UOL approximately                    % of the voting power of our issued share capital, or                    % if the underwriters’ option to purchase additional common shares from UOL is exercised in full. UOL will therefore control the outcome of all decisions at our shareholders’ meetings, and will be able to elect a majority of the members of our board of directors. It will also be able to direct our actions in areas such as business strategy, financing, distributions, acquisitions and dispositions of assets or businesses. UOL’s decisions on these matters may be contrary to your expectations or preferences, and it may take actions that could be contrary to your interests. It will be able to prevent any other shareholders, including you, from blocking these actions. For further information regarding shareholdings in our company, see “Principal and Selling Shareholder.”

If UOL sells or transfers any of its Class B common shares, they will generally convert automatically into Class A common shares, subject to limited exceptions, such as transfers to affiliates, to trustees for the holder or its affiliates and certain transfers to U.S. tax exempt organizations. The fact that any Class B common shares convert into Class A common shares if UOL sells or transfers them means that UOL will in many situations continue to control a majority of the combined voting power of our outstanding share capital, due to the voting rights of any Class B common shares that it retains. If our Class B common shares at any time represent less than 10% of the combined voting power of our Class A common shares and Class B common shares together, however, the Class B common shares then outstanding will automatically convert into Class A common shares. For a description of the dual class structure, see “Description of Share Capital.”

 

 

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Investors in this offering will experience immediate and substantial dilution in the book value of their investment.

The assumed initial public offering price of US$                    per Class A common share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, when converted into reais is substantially higher than the pro forma net tangible book value per Class A common share in reais upon the completion of this offering. Therefore, if you purchase Class A common shares in this offering, you will incur immediate dilution of R$                    in the net tangible book value per share from the price you paid. In addition, investors purchasing our Class A common shares from us in this offering will have contributed                     % of the total consideration paid to us by all shareholders who purchased our common shares, in exchange for acquiring approximately                    % of our outstanding Class A common shares, after giving effect to this offering. See “Dilution” for more information.

Class A common shares eligible for future sale may cause the market price of our Class A common shares to drop significantly.

The market price of our Class A common shares may decline as a result of sales of a large number of our Class A common shares in the market after this offering (including Class A common shares issuable upon conversion of Class B common shares) or the perception that these sales may occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

After the consummation of this offering, we will have outstanding                    Class A common shares and                     Class B common shares (or                    Class A common shares and                    Class B common shares, if the underwriters exercise in full their option to purchase additional shares from UOL, which shares would convert from Class B common shares to Class A common shares upon such sale). Subject to the lock-up agreements described below, the Class A common shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act by persons other than our affiliates within the meaning of Rule 144 of the Securities Act.

Our shareholders or entities controlled by them or their permitted transferees will, subject to the lock-up agreements described below, be able to sell their shares in the public market from time to time without registering them, subject to certain limitations on the timing, amount and method of those sales imposed by regulations promulgated by the SEC. If any of our shareholders, the affiliated entities controlled by them or their respective permitted transferees were to sell a large number of their Class A common shares, the market price of our Class A common shares may decline significantly. In addition, the perception in the public markets that sales by them might occur may also cause the trading price of our Class A common shares to decline.

PagSeguro Digital has agreed with the underwriters, subject to certain exceptions, not to offer, sell or dispose of any shares in its share capital or securities convertible into or exchangeable or exercisable for any shares in its share capital during the 180-day period following the date of this prospectus. PagSeguro Digital’s executive officers and the members of its board of directors, as well as UOL, have agreed to substantially similar lock-up provisions. However, the underwriters may, in their sole discretion and without notice, release all or any portion of the shares from the restrictions in any of the lock-up agreements described above. In addition, these lock-up agreements are subject to the exceptions described in “Common Shares Eligible for Future Sale,” including the right for our company to issue new shares if we carry out an acquisition or enter into a merger, joint venture or strategic participation.

 

 

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In addition, any shares issued under our Long-Term Incentive Plan, or LTIP, upon completion of this offering will be subject to a one-year lock-up period under the terms of the LTIP. Any shares that are issued on a subsequent vesting date during the first year after our initial public offering will be subject to the remainder of that same lock-up period, expiring one year after the closing of this offering. After the close of that one-year period, shares to be issued under the LTIP will no longer be subject to a lock-up. For further information on our LTIP, see “Description of Share Capital—Long-Term Incentive Plan.”

Sales of a substantial number of our common shares upon expiration of the lock-up agreements and the lock-up period in our LTIP, the perception that such sales may occur, or early release of these lock-up periods, could cause our market price to fall or make it more difficult for you to sell your Class A common shares at a time and price that you deem appropriate.

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 our Class A common shares in order to achieve a return on your investment.

We have not adopted a dividend policy with respect to future dividends. The amount of any distributions will depend on many factors such as our results of operations, financial condition, cash requirements, prospects and other factors deemed relevant by our board of directors or, where applicable, our shareholders. Accordingly, if we do not declare dividends in the future, investors will most likely have to rely on sales of their Class A common shares, which may increase or decrease in value, as the only way to realize cash from their investment. There is no guarantee that the price of our Class A common shares will ever exceed the price that you pay.

Our management will have broad discretion over the use of proceeds and may apply the proceeds of this offering in ways that may not improve our business or increase the value of your investments.

We intend to use the net proceeds to us from this offering (i) to finance our working capital, especially in connection with our early payment of receivables service for merchants and (ii) to invest in research and development to further improve our technological expertise. We may also use a portion of the net proceeds from this offering to fund future selective acquisitions of our investments in businesses, technologies or products that are complementary to our business. Any remaining net proceeds will be used for other general corporate purposes. We cannot specify with certainty the particular purposes for which we will use our net proceeds from this offering, however. Accordingly, our management will have considerable discretion in the application of these net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. Until we use the net proceeds we may place them in investments that do not produce significant income or that may lose value.

We may raise additional capital in the future by issuing equity securities, which may result in a potential dilution of your equity interest.

We may issue additional equity securities to raise capital, make acquisitions, or for a variety of other purposes. Additional issuances of our shares may be made pursuant to the exercise or conversion of convertible debt securities, warrants, stock options or other equity incentive awards. Any strategic partnership, issuance or placement of shares and/or securities convertible into or exchangeable for shares may affect the market price of our shares and could result in dilution of your equity interest.

 

 

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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 trading volume of our Class A common shares could decline.

The trading market for our Class A common shares depends in part on the research and reports that securities or industry analysts publish about us or our business. If one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our Class A common shares could decline, which might cause the market price and trading volume of our Class A common shares to decline.

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 of U.S. jurisdictions.

We are a Cayman Islands exempted company with limited liability. Our corporate affairs are governed by our Memorandum and Articles of Association and by the laws of the Cayman Islands. The rights of shareholders and the responsibilities of members of our board of directors may be different from the rights of shareholders and responsibilities of directors in companies governed by the laws of U.S. jurisdictions. In the performance of its duties, the board of directors of a solvent Cayman Islands exempted company is required to consider the company’s interests, which is generally defined with reference to the interests of its shareholders (both present and future) as a whole, which may differ from the interests of one or more of its individual shareholders. See “Description of Share Capital—Principal Differences between Cayman Islands and U.S. Corporate Law.”

Our shareholders may face difficulties in protecting their interests because we are a Cayman Islands exempted company.

Our corporate affairs are governed by our Memorandum and Articles of Association, by the Companies Law (as amended) of the Cayman Islands and the common law of the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under the laws of the Cayman Islands are not as clearly defined as under statutes or judicial precedent in existence in jurisdictions in the United States. Therefore, you may have more difficulty protecting your interests than would shareholders of a corporation incorporated in a jurisdiction in the United States, due to the comparatively less formal nature of Cayman Islands law in this area.

While Cayman Islands law allows a dissenting shareholder to express a shareholder’s view that a court sanctioned reorganization of a Cayman Islands company would not provide fair value for the shareholder’s shares, Cayman Islands statutory law in respect of schemes of arrangement does not specifically provide for shareholder appraisal rights in connection with a merger or consolidation effected by a scheme of arrangement of a company. This may make it more difficult for you to assess the value of any consideration you may receive in a merger or consolidation or to require that the acquirer gives you additional consideration if you believe the consideration offered is insufficient. However, Cayman Islands statutory law, which permits a merger/consolidation without a court order, provides a mechanism for a dissenting shareholder in a merger or consolidation to apply to the Grand Court for a determination of the fair value of the dissenter’s shares if it is not possible for the company and the dissenter to agree on a fair price within the time limits prescribed.

 

 

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Shareholders of Cayman Islands exempted companies (such as us) have no general rights under Cayman Islands law to inspect corporate records and accounts or to obtain copies of lists of shareholders. Our directors have discretion under our Articles of Association to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.

Subject to limited exceptions, under Cayman Islands law, a minority shareholder may not bring a derivative action against the board of directors. Class actions are not recognized in the Cayman Islands, but groups of shareholders with identical interests may bring representative proceedings, which are similar.

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 of our Class A common shares.

Our Memorandum and Articles of Association contain certain provisions that could limit the ability of others to acquire our control, including a provision that grants authority to our board of directors to issue new shares in our company from time to time (including common shares and preferred shares) without action by our shareholders. These provisions could have the effect of depriving our shareholders of the opportunity to sell their Class A common shares at a premium over the prevailing market price by discouraging third parties from seeking to obtain our control in a tender offer or similar transactions. See “Description of Share Capital—Anti-Takeover Provisions in our Memorandum and Articles of Association.”

United States civil liabilities and certain judgments obtained against us by our shareholders may not be enforceable.

PagSeguro Digital is a Cayman Islands exempted company and substantially all of our assets are located outside of the United States. In addition, all of our current directors and officers are residents of Brazil, and a substantial portion of their assets is located outside of the United States. As a result, it may be difficult to effect service of process within the United States upon these persons. It may also be difficult to enforce in U.S. courts judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against us and those officers and directors.

Further, it is unclear if original actions predicated on civil liabilities based solely upon U.S. federal securities laws are enforceable in courts outside the United States, including in the Cayman Islands and Brazil. Courts of the Cayman Islands may not, in an original action in the Cayman Islands, recognize or enforce judgments of U.S. courts predicated upon the civil liability provisions of the securities laws of the United States or any state of the United States on the grounds that such provisions are penal in nature. Although there is no statutory enforcement in the Cayman Islands of judgments obtained in the United States, courts of the Cayman Islands will recognize a foreign judgment in personam of a court of competent jurisdiction and give a judgment based thereon if such judgment is final, for a liquidated sum, provided it is not in respect of taxes or a fine or penalty, is not inconsistent with a Cayman Islands’ judgment in respect of the same matters, and was not obtained in a manner which is contrary to the public policy of the Cayman Islands. In addition, a Cayman Islands court may stay proceedings if concurrent proceedings are being brought elsewhere.

 

 

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Judgments of Brazilian courts to enforce our obligations with respect to our Class A common shares may be payable only in reais.

Most of our assets are located in Brazil. If proceedings are brought in the courts of Brazil seeking to enforce our obligations in respect of our Class A common shares, we may not be required to discharge our obligations in a currency other than the real. Under Brazilian exchange control laws, an obligation in Brazil to pay amounts denominated in a currency other than the real may only be satisfied in Brazilian currency at the exchange rate in effect on the date the judgment is obtained as determined by the Central Bank. These amounts are then adjusted to reflect exchange rate variations through the effective payment date. The exchange rate at that time may not afford non-Brazilian investors with full compensation for any claim arising out of or related to our obligations under the Class A common shares.

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 other requirements are different from those applicable to U.S. domestic registrants and non-emerging growth companies.

As a foreign private issuer and emerging growth company, the disclosure requirements that we must comply with and other requirements are different from those applicable to U.S. domestic registrants and non-emerging growth companies. For example, as a foreign private issuer for U.S. purposes, we are not subject to the same disclosure requirements as a domestic U.S. registrant under the Exchange Act, including the requirements to prepare and issue quarterly reports on Form 10-Q or to file current reports on Form 8-K upon the occurrence of specified significant events, the proxy rules applicable to domestic U.S. registrants under Section 14 of the Exchange Act or the insider reporting and short-swing profit rules applicable to domestic U.S. registrants under Section 16 of the Exchange Act. In addition, we intend to rely on exemptions from certain U.S. rules which will permit us to follow Cayman Islands legal requirements rather than certain of the requirements that are applicable to U.S. domestic registrants.

We will follow the Cayman Islands laws and regulations that are applicable to Cayman Islands companies. However, these laws and regulations do not contain any provisions comparable to the U.S. proxy rules, the U.S. rules relating to the filing of reports on Form 10-Q or 8-K or the U.S. rules relating to liability for insiders who profit from trades made in a short period of time, as referred to above.

Furthermore, foreign private issuers are required to file their annual report on Form 20-F within 120 days after the end of each fiscal year, while U.S. domestic issuers that are accelerated filers are required to file their annual report on Form 10-K within 75 days after the end of each fiscal year. Foreign private issuers are also exempt from Regulation Fair Disclosure, aimed at preventing issuers from making selective disclosures of material information, although we will be subject to Cayman Islands laws and regulations that have substantially the same effect as Regulation Fair Disclosure. As a result of the above, even though we are required to file reports on Form 6-K disclosing the limited information that is material to us and which we make public pursuant to Cayman Islands law, or are required to distribute to shareholders generally, you may not receive information of the same type or amount that is required to be disclosed to shareholders of a U.S. company.

 

 

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The JOBS Act contains provisions that, among other things, relax certain reporting requirements for emerging growth companies. Under this act, as an emerging growth company, we will not be subject to the same disclosure and financial reporting requirements as non-emerging growth companies. For example, as an emerging growth company we are permitted to, and intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. Also, our auditors will not have to comply with any new auditing standards promulgated by the PCAOB (unless the SEC determines otherwise) or attest to our internal controls under Section 404(b) of the Sarbanes-Oxley Act. We may follow these reporting exemptions until we are no longer an emerging growth company. As a result, our shareholders may not have access to certain information that they deem important. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual revenues of at least US$1.07 billion or (c) in which we are deemed to be a large accelerated filer and (2) the date on which we have issued more than US$1.00 billion in nonconvertible debt during the prior three-year period. Accordingly, the information about us available to you will not be the same as, and may be more limited than, the information available to shareholders of a company that is not an emerging growth company.

We cannot predict if investors will find our Class A common shares less attractive because we will rely on these exemptions. If some investors find our Class A common shares less attractive as a result, there may be a less active trading market for our Class A common shares and our share price may be more volatile.

We rely on the “controlled company” exemptions from certain corporate governance requirements under Nasdaq Stock Market Rules.

PagSeguro Brazil is a “controlled company” as defined under the Nasdaq Stock Market Rules because UOL beneficially owns, and will own after this offering, more than 50% of our voting power for the election of directors. For so long as we remain a controlled company under that definition, we are permitted to elect to rely, and will rely, on certain exemptions from corporate governance rules, including:

 

    an exemption from the rule that a majority of our board of directors must be independent directors;

 

    an exemption from the rule that the compensation of principal chief executive officer must be determined or recommended solely by independent directors; and

 

    an exemption from the rule that our director nominees must be selected or recommended by independent directors.

As a result, you will not have the same protection afforded to shareholders of companies that are subject to these corporate governance requirements.

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 financial losses.

The investment in our Class A common shares is subject to risks. Investors who wish to invest in our Class A common shares are thus subject to asset losses, including loss of the entire value of their investment, as well as other risks, including those related to our Class A common shares, the company, the sector in which we operate, our shareholders and the general macroeconomic environment in Brazil, among other risks.

 

 

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Each potential investor in our Class A common shares must therefore determine the suitability of that investment in light of its own circumstances. In particular, each potential investor should:

 

    have sufficient knowledge and experience to make a meaningful evaluation of our Class A common shares, the merits and risks of investing in our Class A common shares and the information contained in this prospectus;

 

    have access to, and knowledge of, appropriate analytical tools to evaluate, in the context of its particular financial situation, an investment in our Class A common shares and the impact our Class A common shares will have on its overall investment portfolio;

 

    have sufficient financial resources and liquidity to bear all of the risks of an investment in our Class A common shares;

 

    understand thoroughly the terms of our Class A common shares and be familiar with the behavior of any relevant indices and financial markets; and

 

    be able to evaluate (either alone or with the help of a financial adviser) possible scenarios for economic, interest rate and other factors that may affect its investment and its ability to bear the applicable risks.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus includes estimates and forward-looking statements principally under the captions “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations of PagSeguro Brazil” and “Business.”

These estimates and forward-looking statements are based mainly on our current expectations and estimates of future events and trends that affect or may affect our business, financial condition, results of operations, cash flow, liquidity, prospects and the trading price of our Class A common shares. Although we believe that these estimates and forward-looking statements are based upon reasonable assumptions, they are subject to many significant risks, uncertainties and assumptions and are made in light of information currently available to us.

These statements appear throughout this prospectus and include statements regarding our intent, belief or current expectations in connection with:

 

    the inherent risks related to the digital payments market, such as the interruption or failure of our computer or information technology systems;

 

    our ability to innovate and respond to technological advances and changing customer demands;

 

    the maintenance of tax incentives;

 

    our ability to attract and retain qualified personnel;

 

    our ability to maintain our classification as an emerging growth company under the JOBS Act;

 

    general economic, political and business conditions in Brazil, particularly in the geographic markets we serve as well as any other countries we may serve in the future and their impact on our business, notably with respect to inflation;

 

    labor disputes, employee strikes and other labor-related disruptions, including in connection with negotiations with unions;

 

    management’s expectations and estimates concerning our future financial performance and financing plans and programs;

 

    our interest rates and our level of debt and other fixed obligations;

 

    inflation, appreciation, depreciation and devaluation of the real;

 

    expenses, ability to generate cash flow, and ability to achieve, and maintain, future profitability;

 

    our ability to anticipate market needs and develop and introduce new and enhanced products and service functionality to adapt to changes in our industry;

 

    our anticipated growth and growth strategies and our ability to effectively manage that growth;

 

    the impact of increased competition in our market, innovation by our competitors, and our ability to compete effectively;

 

    our ability to successfully enter new markets and manage our expansion;

 

    our ability to further penetrate our existing client base to grow our ecosystem;

 

    our expectations concerning relationships with third parties and key suppliers;

 

    our ability to maintain, protect and enhance our brand and intellectual property;

 

 

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    the sufficiency of our cash and cash equivalents and cash generated from operations to meet our working capital and capital expenditure requirements, as well as our plans for the net proceeds from this offering;

 

    our compliance with applicable regulatory and legislative developments and regulations and legislation that currently apply or become applicable to our business;

 

    other factors that may affect our financial condition, liquidity and results of operations; and

 

    other risk factors discussed under “Risk Factors.”

The words “believe,” “understand,” “may,” “will,” “aim,” “estimate,” “continue,” “anticipate,” “seek,” “intend,” “expect,” “should,” “could,” “forecast” and similar words are intended to identify forward-looking statements. You should not place undue reliance on such statements, which speak only as of the date they were made. Neither we nor the Selling Shareholder undertake any obligation to update publicly or to revise any forward-looking statements after we distribute this prospectus because of new information, future events or other factors. Our independent public auditors have neither examined nor compiled the forward-looking statements and, accordingly, do not provide any assurance with respect to such statements. In light of the risks and uncertainties described above, the future events and circumstances discussed in this prospectus might not occur and are not guarantees of future performance. Because of these uncertainties, you should not make any investment decision based upon these estimates and forward-looking statements.

 

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USE OF PROCEEDS

We estimate that the net proceeds to PagSeguro Digital from the sale of Class A common shares in this offering will be approximately US$                    million, after deducting commissions and estimated expenses payable by us, and assuming an initial public offering of US$                    per Class A common share, which is the midpoint of the range set forth on the cover of this prospectus.

We currently plan to use the net proceeds from this offering (i) to finance our working capital, especially in connection with our early payment of receivables service for merchants and (ii) to invest in research and development to further improve our technological expertise. We may also use a portion of the net proceeds from this offering to fund future selective acquisitions of our investments in businesses, technologies or products that are complementary to our business. Any remaining net proceeds will be used for other general corporate purposes. Our management will have broad discretion in allocating the net proceeds from this offering.

We will not receive any proceeds from the sale of common shares by UOL.

The total amount of estimated proceeds from this offering excludes any proceeds resulting from the exercise of stock options that will be vested and exercisable following completion of this offering. See “Management—Long-Term Incentive Plan.”

 

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DIVIDENDS AND DIVIDEND POLICY

PagSeguro Digital has not adopted a dividend policy with respect to future dividends. The amount of any distributions will depend on many factors such as our results of operations, financial condition, cash requirements, prospects and other factors deemed relevant by our board of directors and, where applicable, our shareholders.

 

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EXCHANGE RATES

PagSeguro Brazil, our principal operating company, generates substantially all of its revenues in reais and maintains its books and records in reais.

The Brazilian foreign exchange system allows the purchase and sale of foreign currency and the international transfer of reais by any person or legal entity, regardless of the amount, subject to certain regulatory procedures.

Since 1999, the Central Bank has allowed the real/U.S. dollar exchange rate to float freely, which resulted in increasing exchange rate volatility. Until early 2003, the real declined against the U.S. dollar. Between 2004 and 2008, the real strengthened against the U.S. dollar, except in the most severe periods of the global economic crisis. Given the recent turmoil in international markets and the current Brazilian macroeconomic outlook, the real depreciated against the U.S. dollar from mid-2011 to early 2016. Beginning in early 2016 through the end of 2016, the real appreciated against the U.S. dollar, primarily as a result of Brazil’s changing political conditions. In the past, the Central Bank has intervened occasionally to control high volatility in the foreign exchange rates. We cannot predict whether the Central Bank or the Brazilian government will continue to permit the real to float freely or will intervene in the exchange rate market through the return of a currency band system or otherwise. In the future, the real may fluctuate substantially against the U.S. dollar. See “Risk Factors—Risks Relating to Brazil—Exchange rate instability may have adverse effects on the Brazilian economy, us and the price of our Class A common shares.”

Furthermore, Brazilian law provides that, whenever there is a serious imbalance in Brazil’s balance of payments or there are serious reasons to foresee a serious imbalance, temporary restrictions may be imposed on remittances of foreign capital abroad. We cannot assure you that such measures will not be taken by the Brazilian government in the future.

The following table shows the low, high, average and period-end commercial selling rates for the real as against the U.S. dollar, as reported by the Central Bank on its website for the periods and dates indicated.

 

     R$ per US$1.00  

Year Ended December 31,

   Low      High      Average(1)      Period End  

2012

     2.11        1.70        1.95        2.04  

2013

     2.45        1.95        2.16        2.34  

2014

     2.74        2.20        2.35        2.66  

2015

     4.19        2.58        3.34        3.90  

2016

     4.16        3.12        3.48        3.26  

 

Month Ended

   Low      High      Average(2)      Period End  

January 2017

     3.27        3.13        3.20        3.13  

February 2017

     3.15        3.05        3.10        3.10  

March 2017

     3.17        3.08        3.13        3.17  

April 2017

     3.20        3.09        3.14        3.20  

May 2017

     3.38        3.09        3.21        3.24  

June 2017

     3.34        3.23        3.30        3.31  

July 2017 (through July 28, 2017)

     3.32        3.13        3.21        3.15  

 

(1)  Represents the average of exchange rates on each day of each month during the periods indicated.
(2)  Represents the average of the daily exchange rates during each day of the respective month indicated.

 

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CAPITALIZATION

The table below presents our consolidated cash and cash equivalents, financial investments and capitalization as follows:

 

  (a) historical financial information of PagSeguro Brazil, on an actual basis;

 

  (b) PagSeguro Digital, as adjusted to give effect to (i) the constitution of PagSeguro Digital and (ii) the contribution of PagSeguro Brazil to PagSeguro Digital by UOL; and

 

  (c) PagSeguro Digital, as further adjusted to give effect to (i) the constitution of PagSeguro Digital, (ii) the contribution of PagSeguro Brazil to PagSeguro Digital by UOL and (iii) the issuance and sale by PagSeguro Digital of                    Class A common shares in this offering at an assumed initial public offering price of US$                    per Class A common share (the midpoint of the indicative price range set forth on the cover page of this prospectus, translated into reais using a rate of R$3.2591 to US$1.00, the commercial selling rate for U.S. dollars at December 31, 2016 as reported by the Central Bank), after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by PagSeguro Digital.

You should read this table together with the sections of this prospectus entitled “Selected Financial Information of PagSeguro Brazil” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations of PagSeguro Brazil,” and the audited consolidated financial statements of PagSeguro Brazil included elsewhere in this prospectus.

 

    

At December 31, 2016

 
    

PagSeguro Brazil,
actual

   PagSeguro Digital, as
adjusted for the
contribution(1)
     PagSeguro Digital, as
further adjusted for the
contribution and this
offering (2)
 
    

R$ millions

 

Cash and cash equivalents

   80.0      

Financial investments

   131.2      
  

 

  

 

 

    

 

 

 

Borrowings

   205.2      

Derivative financial instruments

   6.6      

Total equity

   626.9      
  

 

  

 

 

    

 

 

 

Total capitalization(3)

   838.7      
  

 

  

 

 

    

 

 

 

 

(1)  As adjusted to reflect (i) the constitution of PagSeguro Digital and (ii) the contribution of PagSeguro Brazil to PagSeguro Digital by UOL.
(2)  As further adjusted to reflect (i) the constitution of PagSeguro Digital, (ii) the contribution of PagSeguro Brazil to PagSeguro Digital by UOL and (iii) the issuance and sale by PagSeguro Digital of                    Class A common shares in this offering at an assumed initial public offering price of US$                    per Class A common share (the midpoint of the indicative price range set forth on the cover page of this prospectus, translated into reais using a rate of R$3.2591 to US$1.00, the commercial selling rate for U.S. dollars at December 31, 2016 as reported by the Central Bank), after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by PagSeguro Digital.
(3)  Total capitalization is the sum of Borrowings, Derivative financial instruments and Total equity.

 

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The calculations above assume that no holders of stock options under our LTIP will exercise their options to receive Class A common shares.

Except as described above, there have been no material changes to the capitalization of PagSeguro Brazil or PagSeguro Digital since December 31, 2016.

 

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DILUTION

In September 2017, prior to the launch of this initial public offering, UOL contributed its shares in PagSeguro Brazil to PagSeguro Digital in exchange for new shares in PagSeguro Digital, following which UOL holds all of the issued 262,288,607 Class B common shares of PagSeguro Digital. Prior to that contribution (and after accounting for the reverse stock split carried out by PagSeguro Brazil in 2017, which reduced the total number of its common shares outstanding from 524,577,215 to 262,288,607), UOL held 262,288,606 shares of PagSeguro Brazil, which represented substantially all of the shares of PagSeguro Brazil (the one remaining share being held by a separate shareholder, as required by Brazilian law).

We have presented the dilution calculation below on the basis of PagSeguro Brazil’s net tangible book value at December 31, 2016 because (i) PagSeguro Digital had not commenced operations and had nominal assets and liabilities prior to the contribution of PagSeguro Brazil to it; (ii) we present the historical financial statements of PagSeguro Brazil in this prospectus; and (iii) the number of common shares of PagSeguro Digital in issuance prior to this offering was the same as the number of shares of PagSeguro Brazil in issuance at December 31, 2016 (after accounting for the reverse stock split).

If you invest in our Class A common shares, your interest will be diluted to the extent of the difference between the initial public offering price per Class A common share (when converted into reais) and the pro forma net tangible book value per Class A common share after accounting for the issuance and sale of new common shares in this offering. Because the Class A common shares and Class B common shares of PagSeguro Digital have the same dividend and other rights, except for voting and conversion rights, we have counted the Class A common shares and Class B common shares equally for purposes of the dilution calculations below.

 

    The historical net tangible book value at December 31, 2016 was R$540.8 million. Net tangible book value consists of total tangible assets less total liabilities.

 

    The historical net tangible book value per common share at December 31, 2016 was R$2.06. Net tangible book value per share is the net tangible book value divided by the number of common shares outstanding at December 31, 2016 (262,288,607 shares, after giving effect to the reverse stock split carried out by PagSeguro Brazil in                     2017).

 

    Pro forma net tangible book value is equal to the historical net tangible book value plus the proceeds of this offering to PagSeguro Digital, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by PagSeguro Digital. PagSeguro Digital will issue and sell                    new common shares at an assumed initial public offering price equivalent to R$                    per common share (which is the equivalent in reais of US$                    per common share, the midpoint of the indicative price range set forth on the cover page of this prospectus, translated into reais using a rate of R$3.2591 to US$1.00, the commercial selling rate for U.S. dollars at December 31, 2016 as reported by the Central Bank). Accordingly, the pro forma net tangible book value, after accounting for the issuance and sale of the new common shares in this offering, less the underwriting discounts and commissions and estimated offering expenses payable by PagSeguro Digital, is R$                     million.

 

    The pro forma net tangible book value per common share at December 31, 2016 would have been R$                    , based on the 262,288,607 common shares outstanding prior to this offering plus the                    new common shares to be issued and sold in this offering.

 

 

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These figures represent an immediate increase in net tangible book value per common share on a pro forma basis of R$                    per common share to UOL, and a dilution in the net tangible book value per common share of R$                    to new shareholders purchasing in this offering. Dilution is the difference between the offering price per common share paid by the new shareholders and the pro forma net tangible book value per common share.

The following table illustrates this dilution to new investors per common share:

 

     R$ (except
for %)
 

Assumed initial offering price per common share

  

Historical net tangible book value per common share at December 31, 2016

     2.06  

Pro forma net tangible book value per common share after completion of this offering

  

Increase in net tangible book value per common share to UOL on pro forma basis

  

Dilution in net tangible book value per common share to new shareholders

  

Percentage of dilution per share to new investors

     %  

The actual offering price per Class A common share is not based on the pro forma net tangible book value of our common shares, but will be established based through a bookbuilding process.

The following table summarizes, on the same pro forma as adjusted basis at December 31, 2016, the number of common shares acquired from PagSeguro Digital, the total cash consideration paid and the average price per common share paid to PagSeguro Digital, by UOL and by the new shareholders purchasing Class A common shares in this offering. This information is based on the assumed initial public offering price of R$                     per Class A common share, before deducting the underwriting discounts and commissions and estimated offering expenses payable by PagSeguro Digital in connection with this offering.

 

    

Common Shares Purchased

  

Total Consideration

  

Average
Price per
Common
Share
(R$)

    

Class B

  

Class A

  

Percentage
of total
common
shares

  

Amount
(R$ millions)

  

Percentage

  

UOL

                 

New shareholders

                 
  

 

  

 

  

 

  

 

  

 

  

 

Total

                 
  

 

  

 

  

 

  

 

  

 

  

 

An increase (decrease) of US$1.00 in the assumed initial public offering price of US$ per Class A common share (the midpoint of the indicative price range per Class A common share indicated on the cover page of this prospectus, translated into reais at the exchange rate used above), would, after the conclusion of this offering, increase (decrease) (1) the value of our shareholders’ equity by R$                    million, and (2) the value of our pro forma net tangible book value per common share to new investors by R$                    , assuming that the number of Class A common shares offered herein, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by PagSeguro Digital.

The discussion and tables above do not reflect the exercise of any rights to receive new common shares by beneficiaries under our LTIP. To the extent any beneficiaries under our LTIP exercise their rights to receive common shares, new investors will experience further dilution.

 

 

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MARKET INFORMATION

Prior to this offering, there has been no public market for our Class A common shares. We cannot assure you that an active trading market will develop for our Class A common shares, or that our Class A common shares will trade on the public market subsequent to this offering at or above the initial public offering price.

 

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SELECTED FINANCIAL INFORMATION OF PAGSEGURO BRAZIL

The following tables summarize financial data for PagSeguro Brazil for each of the periods indicated. You should read this information in conjunction with the following other information included elsewhere in this prospectus:

 

    the audited consolidated financial statements of PagSeguro Brazil at December 31, 2016, 2015 and 2014 and for each of the three years ended December 31, 2016 and the related notes; and

 

    the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations of PagSeguro Brazil.”

The selected financial data for PagSeguro Brazil at and for the years ended December 31, 2016, 2015 and 2014 included below is derived from the audited consolidated financial statements of PagSeguro Brazil included elsewhere in this prospectus, which were prepared in accordance with IFRS.

Statements of Operations Data

 

     For the Years Ended December 31,  
     2016     2016     2015     2014  
     (US$)(1)     (R$)     (R$)     (R$)  
     (in millions, except amounts per
share and %)
 

Net revenue from sales and services

     227.2       740.6       444.7       208.3  

Cost of sales and services

     (193.2     (629.8     (381.6     (142.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross Profit

     34.0       110.8       63.2       65.8  

Selling expenses

     (61.3     (199.9     (162.6     (81.4

Administrative expenses

     (26.5     (86.4     (62.4     (51.3

Other operating income (expenses), net

     0.4       1.4       1.7       (3.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating Loss

     (53.4     (174.1     (160.2     (70.3

Finance Result

        

Income from early payment

     120.4       392.4       222.7       115.8  

Financial expenses

     (21.0     (68.3     (29.7     (11.1

Other finance income

     0.9       3.0       6.7       1.8  

Foreign exchange variation, net

     0.7       2.3       0.8       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Profit before Income Taxes

     47.7       155.4       40.3       36.2  

Current income tax and social contribution

     (2.3     (7.4     (2.6     (9.9

Deferred income tax and social contribution

     (6.2     (20.1     (2.2     1.0  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income Tax and Social Contribution

     (8.5     (27.6     (4.8     (8.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income for the Year

     39.2       127.8       35.5       27.3  
  

 

 

   

 

 

   

 

 

   

 

 

 

Attributable to:

        

Owners of PagSeguro Brazil

     39.0       127.2       35.1       26.0  

Non-controlling interests

     0.2       0.6       0.4       1.3  

Basic and diluted earnings per common share – R$

     0.0744       0.2425       0.0669       0.0495  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) For convenience purposes only, amounts in reais for the year ended December 31, 2016 have been translated to U.S. dollars using a rate of R$3.2591 to US$1.00, the commercial selling rate for U.S. dollars at December 31, 2016 as reported by the Central Bank. These translations should not be considered representations that any such amounts have been, could have been or could be converted into U.S. dollars at that or at any other exchange rate. See “Exchange Rates” for further information about recent fluctuations in exchange rates.

 

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Balance Sheet Data

The following table presents key line items from PagSeguro Brazil’s consolidated balance sheet data:

 

     At December 31,  
     2016      2016      2015      2014  
     (US$)(1)      (R$)      (R$)      (R$)  
     (in millions)  

Current Assets

           

Cash and cash equivalents

     24.5        80.0        6.9        1.2  

Financial investments

     40.3        131.2        –          –    

Note receivables

     526.4        1,715.5        1,110.0        665.9  

Receivables from related parties

     92.3        300.8        55.9        84.3  

Inventories

     6.4        21.0        41.2        16.1  

Taxes recoverable

     5.4        17.7        5.8        6.7  

Other receivables

     1.4        4.5        21.0        4.3  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Current Assets

     696.7        2,270.8        1,240.8        778.6  
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-Current Assets

           

Judicial deposits

     0.2        0.5        0.4        0.5  

Prepaid expenses

     –          0.1        0.4        –    

Deferred income tax and social contribution

     2.5        8.3        6.7        8.1  

Property and equipment

     1.4        4.6        3.8        1.9  

Intangible assets

     26.4        86.1        48.6        28.5  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-Current Assets

     30.6        99.7        59.9        39.0  
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL ASSETS

     727.3        2,370.4        1,300.7        817.6  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     At December 31,  
     2016      2016      2015      2014  
     (US$)(1)      (R$)      (R$)      (R$)  
     (in millions)  

Current Liabilities

           

Payables to third parties

     400.2        1,304.0        683.1        369.9  

Trade payables

     18.9        61.7        35.3        3.5  

Payables to related parties

     23.4        76.2        92.4        –    

Derivative financial instruments

     2.0        6.6        –          –    

Borrowings

     63.0        205.2        –          –    

Salaries and social charges

     6.2        20.3        13.7        0.4  

Taxes and contributions

     2.1        6.9        3.0        2.8  

Provision for contingencies

     0.2        0.7        –          1.6  

Dividends payable and interest on own capital

     6.8        22.2        3.2        3.1  

Other payables

     4.7        15.2        1.8        4.0  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Current Liabilities

     527.5        1,719.2        832.5        385.3  

Non-Current Liabilities

           

Deferred income tax and social contribution

     7.5        24.4        6.3        5.4  

Provision for contingencies

     –          –          –          0.3  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-Current Liabilities

     7.5        24.4        6.3        5.7  
  

 

 

    

 

 

    

 

 

    

 

 

 
           

TOTAL LIABILITIES

     535.0        1,743.5        838.8        391.0  

EQUITY

     192.3        626.9        461.9        426.6  
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL LIABILITIES AND EQUITY

     727.3        2,370.4        1,300.7        817.6  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) For convenience purposes only, amounts in reais for the year ended December 31, 2016 have been translated to U.S. dollars using a rate of R$3.2591 to US$1.00, the commercial selling rate for U.S. dollars at December 31, 2016 as reported by the Central Bank. These translations should not be considered representations that any such amounts have been, could have been or could be converted into U.S. dollars at that or at any other exchange rate. See “Exchange Rates” for further information about recent fluctuations in exchange rates.

 

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INDUSTRY

Micro-Merchants and Small and Medium Businesses Drive the Brazilian Economy

According to information compiled from SEBRAE, Brazil’s tax authority (the Receita Federal) and the Annual Social Information Report (Relação Annual de Informações Sociais, or RAIS), Brazil had approximately 12 million businesses at December 31, 2016, of which Micro-Merchants and SMEs made up more than 99.8% and generated annual gross revenues of approximately R$1.8 trillion. SEBRAE and Brazil’s General Registry of the Employed and Unemployed Workers (Cadastro Geral de Empregados e Desempregados, or CAGED) report Micro-Merchants and Small Companies created more than 170,000 new jobs in the first six months of 2017.

Significant Room for Growth of Alternative and Digital Payment Methods

Business and consumers in developed economies are moving away from cash and paper payments at a slow but steady rate and migrating to electronic payment mechanisms. Since this trend has not yet fully impacted the Brazilian economy, the opportunity for expansion of digital payments in Brazil remains significant. In 2015, for example, 59% of the Brazilian population reported having made or received a digital payment in 2015, compared to 92% in the United States. In the same year, cash and other physical payment means represented 48% of total consumer payments by transaction volume in Brazil, compared to 37% in the United States.

The migration away from checks, in particular, creates efficiencies for businesses, who can reduce cost and accelerate cash flow if their accounts payable and accounts receivable functions are automated through electronic payments and reconciliation. Similar opportunities exist for consumer bill payment, direct deposit, and person-to-person payments.

Brazil has been an early adopter of disruptive innovation in a number of areas, being the third largest market for Uber, the second largest market for Waze and the third largest market for Facebook worldwide. In e-commerce, transaction volumes in Brazil grew to R$44.4 billion in 2016 from R$18.7 billion in 2011 according to Webshoppers, representing average growth of 18.9% per year for the period. In addition, the growth of e-commerce over mobile devices creates new payments options for both sellers and buyers, bringing business opportunities for acquirers and digital payments providers. This trend is driven by (i) the rollout of 3G and 4G networks (98% of the Brazilian population had access to 3G at year-end 2016); (ii) increased smartphone penetration (the number of smartphones in Brazil represented 96% of the population at year-end 2016); and (iii) the increasing accessibility of mobile data plans.

The Structure of the Brazilian Financial Market Creates Significant Opportunities for Disruption

The structure of the Brazilian financial market creates significant opportunities for technology-driven disruption, particularly when compared to more developed markets. The banking market is relatively concentrated for global standards. For example, a World Bank report using 2015 data rated principal banking markets using the Herfindahl-Hirschman Index, or HHI, which expresses market concentration of gross loans, where 10,000 represents a perfect monopoly and 1 represents perfect competition. According to this report, Brazil had HHI concentration of 1,248 in 2015, making it the 18th most concentrated market in the world on this measure. In the same year the United States had HHI concentration of 714, making it the 36th most concentrated market; and the United Kingdom had HHI concentration of 432, making it the 42nd most concentrated market. The same report showed that banking penetration in Brazil lags more developed markets in terms of the percentage of the population that had a bank account, had a credit card, or had made or received a digital payment. Brazil’s relative lack of penetration was even greater with respect to e-commerce and mobile payments. These lower penetration measures are amplified among the lower income classes in Brazil.

 

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LOGO

 

Source:    World Bank

Payment card use also remains relatively low in Brazil compared to more developed markets. According to a December 2016 report by the BIS, and data from the World Bank, debit and credit card payments accounted for 28.4% of Brazilian household consumption in 2015, compared with 45.0% in the United States and 54.9% in the United Kingdom, representing significant growth potential for acquirers in Brazil. Credit card penetration levels are a fundamental driver for the digital payments industry.

Commerce Is Increasingly Digital and Mobile Worldwide

According to the International Telecommunications Union, an estimated 3.3 billion people, or 44.6% of the total global population, used the Internet in 2016, compared with 2.1 billion people, or 30.7% of the total global population, in 2011. Of this user base, 58.3% carried out e-commerce transactions in 2016, compared with 37.2% in 2011, showing significant growth in e-commerce. This growth is supported by the global increase in mobile device penetration, reductions in the cost of Internet access in various markets, and improving telecommunications network infrastructure.

The increasing number of businesses offering online shopping is fueling consumer demand for faster and more reliable payment methods. We believe these trends create an environment where merchants feel compelled to interact more closely with a broader range of customers, through the use of online stores, mobile-friendly technologies and extensive compatibility with digital payment methods, such as cards and e-wallets.

We believe that there is a significant market opportunity for growth in e-commerce in Brazil. As mentioned above, e-commerce transaction volumes in Brazil grew to R$44.4 billion in 2016 from R$18.7 billion in 2011 according to Webshoppers. According to eMarketer, Brazil had the fifth largest online audience in the world with 120 million Internet users in 2016, representing penetration of 58.2% of the population, compared with penetration of 82.5% in the United States. Regionally, e-commerce in Latin America grew at an average growth rate of 28.9% per year from 2012 to 2015 according to data prepared by eMarketer, despite recent macroeconomic volatility in certain countries, particularly Brazil.

 

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Businesses Are Shifting Towards Increasingly Non-Bureaucratic, Friendly and All-in-One Services

As technology and the regulatory environment evolve, sellers of all types and sizes face a continuous need for new solutions. Significant number of businesses in Brazil remain unserved or underserved in terms of online payments, POS and mPOS services as well as value-added financial services tools for a number of reasons, including:

 

    Lack of access:    According to a Datafolha survey carried out in June 2017, more than half of the Micro-Merchants and SMEs in Brazil did not accept payment cards in 2016, and only one in 10 operates via a digital platform.

 

    Lack of all-in-one offerings:    Given the low availability of integrated, end-to-end ecosystems, merchants frequently have to assemble hardware, software, and payment services from a number of third parties in order to run their businesses.

 

    Time-consuming, limited access to conventional funds:    Micro-Merchants and SMEs have historically faced difficulties accessing early payment of installment receivables from the incumbent payment processing providers in Brazil. In addition, when they provide the service, the incumbents often require customers to request early payment on a transaction-by-transaction basis.

 

    Lack of transparency:    Certain incumbent payment processing providers in Brazil offer terms and pricing that can be complex and unpredictable. The process for obtaining a POS device can be time-consuming and complex, since the larger acquirers are linked to major banks and require the merchant to become a bank client in order to receive the device. Partly for these reasons, a significant portion of Micro-Merchants remain unbanked and therefore represent a market opportunity for digital payment solutions, particularly from a provider who can offer simpler onboarding and preapproved early payment of installment receivables.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS OF PAGSEGURO BRAZIL

You should read the following discussion of PagSeguro Brazil’s financial condition and results of operations in conjunction with the audited consolidated financial statements of PagSeguro Brazil and the notes thereto included elsewhere in this prospectus, as well as the data set forth in “Summary Financial Data of PagSeguro Brazil” and “Selected Financial Information of PagSeguro Brazil.” The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in “Risk Factors.”

In this Management’s Discussion and Analysis of Financial Condition and Results of Operations of PagSeguro Brazil, the words “we,” “us” and “our” mean PagSeguro Brazil and its subsidiaries on a consolidated basis. Prior to receiving the shares of PagSeguro Brazil from UOL in a contribution transaction in September 2017, PagSeguro Digital Ltd., the Company whose shares are being offering by this prospectus, had not commenced operations and had only nominal assets and liabilities.

Overview

We are a disruptive provider of financial technology solutions focused primarily on Micro-Merchants, Small Companies and Medium-Sized Companies, or SMEs, in Brazil. We are the only financial technology provider in Brazil whose business model covers all of the following five pillars:

 

    Multiple digital payment solutions

 

    In-person payments via POS devices that we sell to clients

 

    Free digital accounts

 

    Issuer of prepaid cards to clients for spending or withdrawing account balances

 

    Operating as an acquirer.

Our end-to-end digital ecosystem enables our customers not only to accept payments, but also to grow and manage their businesses. Before PagSeguro, many of these Micro-Merchants and SMEs were overlooked or underserved by incumbent payment providers and large financial institutions in Brazil. We offer safe, affordable, simple, mobile-first solutions for merchants to accept payments and manage their cash through their PagSeguro digital accounts, without the need for a bank account. Our digital account offers more than 30 payment methods and a wide range of cash-out options including our PagSeguro prepaid card, all using our proprietary technology platform and backed by the trusted PagSeguro and UOL brands. Our digital ecosystem also features other digital financial services, business management tools and functionalities for our clients.

Corporate Events

Our Incorporation

PagSeguro Digital Ltd. was incorporated in July 2017 by UOL. At that time UOL also held 524,577,214 shares of our principal operating company, PagSeguro Brazil (which were substantially all of the shares PagSeguro Brazil, the one remaining share being held by a separate shareholder, as required by Brazilian law). In                    2017, PagSeguro Brazil will carry out a reverse stock split, following which UOL will hold 262,288,606 shares in PagSeguro Brazil, the one remaining share being held by the separate shareholder.

 

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In September 2017, prior to the launch of this initial public offering, UOL will contribute all of its shares in PagSeguro Brazil to PagSeguro Digital. As a result, PagSeguro Digital will own substantially all of the shares of PagSeguro Brazil, together with PagSeguro Brazil’s subsidiaries and activities. In return for this contribution, PagSeguro Digital will issue 262.288.606 new Class B common shares to UOL in a 1:1 exchange for the shares of PagSeguro Brazil contributed to it. Taken together with the one Class B common share of PagSeguro Digital that UOL already held prior to that contribution, UOL will then hold all of the issued shares of PagSeguro Digital immediately prior to this offering, consisting of 262,288,607 Class B common shares.

Immediately prior to this initial public offering, therefore, UOL will hold all of the issued and outstanding 262,288,607 shares in PagSeguro Digital, and PagSeguro Digital will hold all of the issued and outstanding 262,288,607 shares in PagSeguro Brazil except one.

The 2015 Reorganization

PagSeguro Brazil was incorporated as a legal entity in 2006, although it did not operate the PagSeguro business prior to August 1, 2015 since most of the PagSeguro business activities were operated by other UOL group members prior to that date. On August 1, 2015, UOL carried out a corporate reorganization in which it segregated some of the PagSeguro activities from its other activities and contributed them to PagSeguro Brazil.

Prior to the contribution of these PagSeguro activities to PagSeguro Brazil, their financial results were recorded in UOL’s financial statements. As a result, the financial information of PagSeguro Brazil reflects a carve-out of our PagSeguro activities for periods prior to August 1, 2015. This carve-out financial information is derived from UOL’s accounting records and does not necessarily reflect the financial position, results of operations or cash flows that would have been recorded had PagSeguro Brazil been operating as a separate entity in those periods or at those dates.

From January 1, 2014 through July 31, 2015, certain of the assets and liabilities, revenues, costs and expenses directly related to the PagSeguro business were already controlled separately from UOL’s other activities. On the other hand, certain other corporate balances and transactions relating to the PagSeguro operations were not accounted for separately within UOL; these have been allocated to the audited consolidated financial statements of PagSeguro Brazil for the period from January 1, 2014 through July 31, 2015 based on assumptions similar to those used after August 1, 2015, when the PagSeguro business was transferred to PagSeguro Brazil.

UOL used centralized cash management without specific segregation by business. Consequently, all amounts received or paid in connection with the PagSeguro business in the period prior to August 1, 2015 have been recognized as balances between related parties in the audited consolidated financial statements of PagSeguro Brazil. Our cash management will be separate from UOL’s cash management starting from the date of this offering, however.

In addition, during 2016, UOL transferred its 100% interest in Net+Phone and its 75% interest in Boa Compra to PagSeguro Brazil as a capital contribution, and PagSeguro Brazil purchased the remaining 25% non-controlling interests in Boa Compra from its minority shareholders.

Financial Presentation and Accounting Practices

For information on our consolidated financial statements, see “Presentation of Financial and Other Information.”

 

 

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Principal Factors Affecting Our Financial Condition and Results of Operations

We believe our operating and business performance is driven by various factors that affect the global and Brazilian economy, the Brazilian digital payments market, trends affecting the broader Brazilian financial technology solutions industry, and trends affecting the specific markets and customer base that we target, particularly Micro-Merchants and SMEs in Brazil. The following key factors may affect our future performance.

Adoption of our digital payment services and POS devices

We believe our digital platform, digital payment services and POS devices are the foundation of our relationship with our clients. We generate revenue through the commissions and other fees that we charge for electronic payment intermediation, as well as fees for other services and revenues from sales of POS devices and related items. We intend to continue to drive growth in our digital payment services, POS devices and early payment of receivables service by scaling our solutions to meet the needs of our clients.

Our digital payment solutions and POS devices are the principal way in which our clients become familiar with our full range of products and services. We seek to leverage the familiarity generated by these services and devices to encourage merchants to sign up for our other services, which can help them increase their sales and, in turn, generate incremental revenue for us. As a result, the number of new merchants who adopt our digital payment services and purchase our POS devices will affect our growth.

Increased use of credit and debit cards and expanded card payments network

The results of our operations depend to a significant degree on the use of credit and debit cards to make digital payments in Brazil. In 2014, according to ABECS and the Central Bank, the transaction volume for payment cards overtook the transaction volume for checks for the first time. Credit and debit card transaction volume in Brazil has increased at a compound annual growth rate of 15.2% from 2010 to 2016 according to ABECS. As a further indication of this growth, in 2017 MasterCard stated that the Brazilian real was one of its three primary revenue billing currencies.

Growth of e-Commerce

Our financial results depend in part on consumers’ widespread acceptance and use of the Internet as a way to conduct commerce and financial transactions. E-commerce is also underpenetrated compared to e-commerce levels in more developed economies. In Brazil, e-commerce accounted for only 3.6% of retail sales in 2016, compared to 7.8% in the United States. According to a 2017 report commissioned by ABECS and carried out by Datafolha, online purchases made up only 19.2% of the total credit card transaction volume in Brazil in 2016, an increase of 3.2% from 18.6% in 2015. Since we view commerce via mobile devices as a key driver of growth going forward, we focus on maintaining a mobile-first digital platform, and we design our solutions on a mobile-first basis so that our merchants can be self-sufficient at all times.

 

 

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Launch of new products and services and cross-selling to our clients

We strive to stay on the cutting edge of the financial technology solutions industry by developing and launching new products and services to offer to both new and existing clients and intend to continue to invest in product development to build new products and services and to bring them to market. This allows us to continue to meet the needs of our clients, as these needs grow and change over time. While we expect our total operating expenses to increase in the short term as we plan for growth, we expect these expenses to decline as a percentage of Net revenue from sales and services over the medium term as these investments benefit our business and our business grows.

Our existing clients represent a sizable opportunity to cross-sell products and services with relatively low incremental sales and marketing expenses for us. We believe that our range of services, many of which can be used for both business and personal needs, represents an opportunity to further increase engagement with our existing clients. We plan to continually invest in product development so as to maintain and increase the attractiveness of our products and services. To the extent that we are able to cross-sell these products and services and develop and introduce new products and services to our existing clients and attract new clients, we expect our revenues and financial income to continue to grow and our margins to increase.

Sales and marketing investment

Our marketing strategy is designed to grow our platform by reinforcing brand recognition and confidence associated with the PagSeguro brand, attracting new users and increasing frequency of use by our existing users. We continue to build and maintain brand recognition and awareness, while generating demand for our products and services through a variety of marketing campaigns, including advertising through traditional media, such as television, magazines and newspapers, online advertising and sponsored blogs. Marketing initiatives that specifically aim to recruit merchants to our ecosystem currently focus on our POS and mPOS devices, web checkout solutions and other online payment solutions, such as Pag.ae. We believe that introducing our digital payment solutions to merchants who are not yet our clients is the most efficient and cost-effective strategy to sustain our growth among both merchants and consumers, creating a “network effect” where existing clients recruit new clients for us through word-of-mouth recommendations. Given the nature of our revenue streams, which are distributed over time as merchants process transactions, purchase POS devices and/or request early payments of their receivables from credit card installments, our investments in sales and marketing campaigns do not realize returns in the same period in which they are made but over subsequent periods, which could adversely affect our short-term results.

Merchant size

We benefit from our primary focus on Micro-Merchants and SMEs, who we believe were overlooked or underserved by incumbent payment providers and large financial institutions in Brazil before PagSeguro. As our existing merchants grow and as we serve increasingly larger merchants we expect our transaction volume to grow accordingly, while we will remain focused on Micro-Merchants and SMEs. Serving an increasing number of larger merchants also presents an opportunity to cross-sell value-added services such as accounting reconciliation, which generate incremental revenues and profit with low or no customer acquisition costs. Over time, we expect an increasing portion of our growth to come from increased revenue per merchant.

 

 

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Consumer adoption of our products and services

Many of our products and services reach consumers directly. Our escrow period service for consumer protection and mediation services make e-commerce safer for consumers, and we believe our digital account and PagSeguro prepaid cards provide easy, attractive alternatives for consumers who do not have bank accounts. In addition, our social payment solutions, such as Pag.ae, allow our clients to use their PagSeguro account for either business or personal needs. We have made significant investments in the development of these consumer-facing products and services, and our ability to grow our consumer network going forward will be important for strengthening our ecosystem and driving our growth.

Currency fluctuations

We do not generate material revenues in foreign currencies that could substantially affect our results of operations. Certain of our expenses are subject to currency fluctuation, as the prices of the POS devices we purchase are set in U.S. dollars (both for the devices we imported from outside Brazil prior to mid-2015, and for the locally-made devices we have been purchasing since then).

Inflation

Inflation, government policies adopted to curb inflationary pressures and uncertainties regarding possible future governmental intervention have contributed to economic uncertainty in Brazil. According to the IPCA, Brazilian inflation rates were 6.3%, 10.7% and 6.4% in 2016, 2015 and 2014, respectively, while the official interest rate increased from 7.25% in 2014 to 13.75% in 2016. For more information, see “—Brazilian political environment and macroeconomic conditions, interest rates, consumer credit and consumer spending” and “Risk Factors—Risks Relating to Brazil—Inflation and certain measures by the Brazilian government to curb inflation have historically harmed the Brazilian economy and Brazilian capital market, and high levels of inflation in the future would harm our business and the price of our Class A common shares.”

Inflation has a direct effect on our contracts with certain suppliers, such as telecommunications operators, whose costs are indexed to the IPCA, and data processors, whose labor costs are adjusted according to inflation. While inflation may cause our suppliers to increase their prices, we are generally able to offset this effect by increasing the prices we charge for our products and services.

When merchants adjust their prices for inflation, the purchasing power of consumers may be reduced, which may adversely affect our revenue if it results in a reduction in the number and volume of transactions. However, if our merchants raise their prices due to inflation, the amount we receive on each transaction also increases.

 

 

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Pricing and revenue mix in our payment processing services

We generate revenue in the form of commissions and fees on the capture, transmission, processing and settlement of transactions carried out using credit, debit and meal voucher cards, as well as fees for other services. Credit and debit cards generate commissions in the form of the merchant discount rate, or MDR, which is a percentage fee paid by the merchant charged on the amount of the captured transaction. The MDR for debit cards is lower than that for credit cards, and the MDR for in-person transactions is generally lower than that for online transactions. Payments made using meal voucher cards and other payment methods generate per-transaction and/or percentage commissions at various rates. We also charge fees for our payment date election service, at rates that vary according to whether the merchant has opted for the 14-day or one-day payment service. Our revenues are therefore impacted by the mix of these types of services that we sell, as well as any changes in the pricing for each service.

We face competition in all of our payment services and sales of POS devices, and we expect this competition to intensify in the future. For further information, see “Risk Factors—Substantial and increasingly intense competition, both within our industry and from other payment methods, may harm our business.” In addition, we currently offer lower pricing to certain of our larger clients who generate higher transaction volume, and we may be required to extend this pricing to other clients as our merchant base expands to include a greater proportion of larger merchants.

Financing of our early payment of merchants’ receivables service

We receive significant financial income from offering our merchants the option to obtain early payment of their receivables from credit card installments. We also incur significant financial expenses in order to fund this service. Through the date of this initial public offering, we have funded this service (i) principally by obtaining early payment of receivables due to us from the card issuers and acquirers, enabling us to provide the related early payment service to merchants, as well as (ii) through our general third party borrowings and own capital. We plan to use a portion of the proceeds from this offering in order to reduce our recourse to outside funding for this early payment service. Our ability to maintain adequate funding for this early payment service is important for our operations and future income generation. For further information, see “Principal Components of Our Results of Operations—Financial Expenses.”

Interchange fees

We rely on card issuers and card schemes to process our transactions, and we are required to pay fees for this service. In addition, although we are accredited as an acquirer, we also use third-party acquirers. From time to time, card schemes such as MasterCard and Visa may increase the interchange fees that they charge for each transaction using one of their cards. Credit card schemes have the right to pass any increases in interchange fees on to us as well as increase their own fees for processing. In addition, card schemes have imposed and may again impose special assessments for transactions that are executed through a “digital wallet,” and these fees could particularly affect us and significantly increase our costs. These increased fees increase our operating costs and reduce our profit margins.

The interchange fee, which we record as Transaction costs within Cost of Sales and Services, has a direct impact on our revenues as an increase in interchange fees reduces the net MDR we receive. We cannot predict if or when the card schemes will increase their interchange fees, or what the amount of any such increases may be. For further information, see “Risk Factors—Risks Relating to Our Business and Industry—We partially rely on card issuers or payment schemes to process our transactions, and changes to credit card scheme fees, rules or practices may harm our business.”

 

 

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Brazilian political environment and macroeconomic conditions, interest rates, consumer credit and consumer spending

Substantially all of our operations are located in Brazil. As a result, our revenues and profitability are affected by political and economic developments in Brazil and the effect that these factors have on the availability of credit, disposable income, employment rates and average wages in Brazil. Our operations, and the financial technology solutions industry in general, are particularly sensitive to changes in economic conditions.

Our results of operations are affected by levels of consumer spending, interest rates and the expansion or retraction of consumer credit in Brazil, each of which impact the number and overall value of payment transactions. The interest rates charged on consumer credit transactions have an indirect effect on us to the extent that lower interest rates can lead to increases in private consumption, and therefore increases in the number of credit and debit card transactions or decreases in the number of installments consumers elect when making a purchase. Increases in interest rates, on the other hand, may lead to a decrease in private consumption or an increase in the number of installments consumers elect when making a purchase. Increases in interest rates may also cause fewer merchants to decide to use our early payment of receivables service if our overall financing costs require us to increase the discount rate we charge for this service.

The recent economic instability in Brazil has contributed to a decline in market confidence in the Brazilian economy as well as to a deteriorating political environment, and weak macroeconomic conditions are expected to continue through at least the end of 2017. For more information, see “Risk Factors—Risks Relating to Brazil—The ongoing economic uncertainty and political instability in Brazil may harm us and the price of our Class A common shares.”

Brazil is the largest economy in Latin America, as measured by gross domestic product, or GDP, yet digital payment penetration remains low compared to more developed economies. According to a December 2016 report by BIS and BEA, card usage as a payment method in Brazil represented only approximately 28% of private consumption in 2015, compared to approximately 45% in the United States. According to Datafolha, out of the 53% of entrepreneurs who do not POS devices, 26% intend to acquire one in the next six months, this percentage being even higher among Micro-Merchants. We believe that a significant portion of this underpenetration is due to the number of unbanked individuals, who make up a major target sector for us. According to data from the World Bank, as of 2014, 31.9% of the Brazilian population above 15 years old, or 65.1 million individuals, did not have a bank account.

 

 

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The following table shows data for real GDP, inflation and interest rates in Brazil and the U.S. dollar/real exchange rate at the dates and for the periods indicated.

 

     For the Years Ended
December 31,
 
     2016     2015     2014  

Real growth (contraction) in gross domestic product

     (4.0 )%      (3.8 )%      0.1

Inflation (IGP-M)(1)

     7.2     10.5     3.7

Inflation (IPCA)(2)

     6.3     10.7     6.4

Long-term interest rates – TJLP (average)(3)

     7.5     6.3     5.0

CDI interest rate (average)(4)

     14.0     13.4     10.8

LIBOR(5)

     0.7     0.3     0.2

Period-end exchange rate—reais per US$ 1.00

     3.259       3.905       2.656  

Average exchange rate—reais per US$ 1.00(6)

     3.485       3.339       2.355  

Change in average exchange rate of the real vs. US$

     (4.2 )%      (29.5 )%      (8.4 )% 

Unemployment rate(7)

     11.5     8.5     6.8

 

Source:    FGV, IBGE, Central Bank and Bloomberg

(1) Inflation (IGP-M) is the general market price index measured by the FGV.
(2) Inflation (IPCA) is a broad consumer price index measured by the IBGE.
(3) TJLP is the Brazilian long-term interest rate (average of monthly rates for the period).
(4) The CDI interest rate is an average of interbank overnight rates in Brazil (daily average for the period).
(5) Average US dollar three-month London Interbank Offer Rate.
(6) Average of the exchange rate on each business day of the year.
(7) Average unemployment rate for year as measured by the IGBE.

The Brazilian political and economic scenario has recently been characterized by high levels of uncertainty and instability, including a contraction of economic growth, despite a recent appreciation, an overall sharp depreciation of the real against the U.S. dollar, increased levels of unemployment and depressed levels of consumer confidence and spending. Brazil entered a recession in 2014 due in part to a decrease in global commodities prices as well as wide-scale corruption probes focused on certain state-owned companies and uncertainty surrounding the presidency of President Dilma Rousseff, which culminated in impeachment in 2016. For further information, see “Risk Factors—The ongoing economic uncertainty and political instability in Brazil may harm us and the price of our Class A common shares.”

Our business has grown rapidly, driven by new clients and increased transaction volume, with our Net revenue from sales and services increasing to R$740.6 million in 2016 from R$208.3 million in 2014, and our Income from early payment increasing to R$392.4 million in 2016 from R$115.8 million in 2014. In addition to continuing to grow our client base, we believe that our business model will allow us to benefit from Brazil’s economic growth potential, particularly among Micro-Merchants, SMEs and individuals without bank accounts.

Seasonality

We operate in a somewhat seasonal industry, which tends to experience relatively fewer transactions in the first quarter of the year, increased activity as the year-end holiday shopping season initiates, and fewer transactions after the year-end holidays. While we have not experienced significant seasonality in our results as of the date of this prospectus due to our ongoing growth, this could change in the future. For additional information, see “Risk Factors—Risks Relating to Our Business and Industry—Our quarterly Results of Operations of PagSeguro Brazil and operating metrics may fluctuate and are unpredictable and subject to seasonality, which could result in the price of our Class A common shares being unpredictable or declining.”

 

 

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Trend Information

We believe that demand for our products and services will remain strong in coming years, since our addressable market remains significant. We believe that this market opportunity will continue to fuel volume growth in our business, supported by increasing levels of penetration and usage of credit cards among the Brazilian population and the introduction of new products and services.

New IFRS standards that may affect our future results of operations

Certain IFRS standards and interpretations that have been issued but are not yet in effect could impact the presentation of our financial position or performance once they become effective. For further information, see Note 2.17 to the audited consolidated financial statements of PagSeguro Brazil.

Principal Components of Our Results of Operations

The following is a summary of the items comprising our statements of income:

Net Revenue from Sales and Services

Our Net revenue from sales and services consists of gross revenues less deductions from those revenues.

Our gross revenues consist mainly of (i) commissions and other fees that we charge for electronic payment intermediation as well as fees for other services, which we recognize as Gross revenue from transaction activities and other services; and (ii) sales of POS devices and related items, which we recognize as Gross revenue from sales.

In order to arrive at our Net revenue from sales and services, we make certain deductions from our Gross revenue. These deductions consist principally of Brazilian sales taxes as well as returns of defective POS devices and cancelled purchases.

In addition, remuneration from our service of allowing merchants to obtain early payment of their receivables from credit card installments makes up a significant portion of our overall income. We generate this remuneration in the form of a discount that we withhold from the transaction value of the receivables that we pay to merchants in advance. We account for this discount as Income from early payment, a line item within our Finance results, and not as Net revenue from sales and services. As a result, you should not consider our Operating loss alone as a measure of our performance since it does not capture the significant income from this early payment of receivables service (or the related financial expenses).

Gross revenue from transaction activities and other services

Our main source of revenue is commissions and fees on the capture, transmission, processing and settlement of transactions carried out using credit, debit and meal voucher cards and fees for other services. Depending on the type of cash-in payment or transaction, these commissions and fees consist of the MDR which is a percentage fee paid by the merchant charged on the amount of the captured transaction, and/or other commissions or per-transaction fees. This line item also includes the fees we charge for other services. We recognize revenues from these commissions and fees when the purchase is approved by the financial institution that issued the payment card, in the case of cash-in payments made via payment cards; when the transaction is carried out, in the case of payments made via other cash-in payment methods; or when the service is rendered, in the case of services.

 

 

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Gross revenue from sales

We also earn revenue from the sale to merchants of our POS devices. We currently offer the Minizinha for a purchase price of 12 monthly installments of R$9.90, the Moderninha Wifi for a purchase price of 12 monthly installments of R$39.90 and the Moderninha Pro for 12 monthly installments of R$69.90. This line item also includes revenues from sales of POS device peripherals such as charging bases and protective covers. We recognize these revenues upon delivery of the equipment to the merchant.

Deductions from gross revenue from transaction activities and other services

The amounts deducted from our Gross revenue from transaction activities and other services consist principally of the applicable Brazilian sales taxes and social security contributions:    service tax (Imposto sobre Serviços, or ISS); contributions to the Brazilian government’s Social Integration Program (Programa Integração Social, or PIS); and contributions to the Brazilian government’s social security program (Contribuição para o Financiamento da Seguridade Social, or COFINS). We are required to collect each of these on our transaction activities and other services.

Deductions from gross revenue from sales

The amounts deducted from our Gross revenues from sales consist of (i) PIS and COFINS, as well as the Imposto sobre Circulação de Mercadorias e Serviços tax, or ICMS, that we are required to collect on sales of devices and peripherals, and (ii) amounts corresponding to defective POS devices that are returned to us and purchases that are cancelled by merchants.

The applicable taxes and contributions vary according to whether the device and peripheral was manufactured in Brazil or imported. For locally-made devices, when we purchase the device we pay the taxes and contributions to the supplier at standard rates; and when we sell the device to our clients, we collect these taxes at the same rates on the selling price, record the tax on the sale in this line item as a deduction, and remit the difference between the taxes on or input cost and our selling price to the taxing authorities. For imported devices, we pay a lower rate of tax in place of ICMS on the purchase, and are not required to charge ICMS when we sell the device to our clients, meaning that the amount recorded in this deductions line item is relatively lower for imported devices. Prior to mid-2015 we purchased significant numbers of imported POS devices, but since mid-2015 substantially all of the POS devices we sell have been manufactured in Brazil.

Cost of Sales and Services

Our Cost of sales and services represents the amounts that make up the cost of the services and devices we sell. These amounts are divided into Transaction costs, Card reader costs, Personnel expenses, Customer support, Depreciation and amortization and Other costs. For further information on these costs, see Note 21 to the audited consolidated financial statements of PagSeguro Brazil.

 

    Transaction costs consist of:    interchange fees set by card schemes that are paid to the financial institution that is the issuer of the card; assessment fees paid to card schemes; fees paid to third-party payment processors; fees paid to acquirers; and bank settlement fees. All of the Transaction costs shown in Note 21 to the audited consolidated financial statements of PagSeguro Brazil are accounted for within our Cost of sales and services.

 

    Card reader costs consist of the amounts we spend in purchasing POS devices and peripherals from our suppliers, together with the related shipping charges and applicable purchase tax. All of the Card reader costs shown in Note 21 to the audited consolidated financial statements of PagSeguro Brazil are accounted for within our Cost of sales and services.

 

 

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    Personnel expenses consist of wages, overtime, benefits (such as meal vouchers, transportation vouchers and medical insurance, among others), profit sharing, and social contribution and payroll taxes. In Brazil, social contribution and payroll taxes consist of the Brazilian Social Security Institute (Instituto Nacional de Seguridade Social – INSS) contribution and the Brazilian Unemployment Compensation Fund (Fundo de Garantia por Tempo de Serviço – FGTS) contribution. The total Personnel costs shown in Note 21 to the audited consolidated financial statements of PagSeguro Brazil are divided between our Cost of sales and services as well as our Selling expenses and our Administrative expenses. Of this total, the portion of our Personnel expenses that is accounted for within our Cost of sales and services refers to employees engaged in activities related to the cost of goods and services that we sell, such as technology, customer support, logistics, antifraud activities and mediation services.

 

    The total Customer support costs shown in Note 21 to the audited consolidated financial statements of PagSeguro Brazil are divided between our Cost of sales and services as well as our Selling expenses. Of this total, the portion of our Customer support expenses that is accounted for within our Cost of sales and services relates to amounts that we spend on consulting services and call centers for providing mediation services to our clients, and technical and after-sales support.

 

    The total Depreciation and amortization charges shown in Note 21 to the audited consolidated financial statements of PagSeguro Brazil are divided between our Cost of sales and services as well as our Selling expenses and our Administrative expenses. Of this total, the portion of our Depreciation and amortization charge that form part of our Cost of sales and services consists mainly of (i) the depreciation of equipment, furniture, technology and installations that form part of the cost of the goods and services that we sell, and (ii) the amortization of software that we develop internally for use in our operations, which is shown in Note 11 to the audited consolidated financial statements of PagSeguro Brazil.

 

    The total Other expenses shown in Note 21 to the audited consolidated financial statements of PagSeguro Brazil are divided between our Cost of sales and services as well as our Selling expenses and our Administrative expenses. Of this total, the portion of our Other expenses that form part of our Cost of sales and services consists mainly of items such as travel expenses and office supplies that form part of the cost of the goods and services that we sell.

Selling Expenses

Our Selling expenses represent the amounts that we spend on publicity, marketing, quality control and direct or indirect relations with our clients. These amounts are divided into Marketing and advertising expenses, Personnel expenses, Customer support expenses, Chargebacks, Depreciation charges and Other costs. For further information on these expenses, see Note 21 to the audited consolidated financial statements of PagSeguro Brazil.

 

    Marketing and advertising expenses consist of the expenses incurred in the production and distribution of our marketing and advertising campaigns on traditional offline media, traditional online advertising, the positioning of our products in search platforms, telemarketing related to POS device sales, commissions to our third-party sales force and partners such as platforms, bloggers and developers, and expenses incurred in relation to trade marketing at events. All of the Marketing and advertising expenses shown in Note 21 to the audited consolidated financial statements of PagSeguro Brazil are accounted for within our Selling expenses.

 

    The portion of our Personnel expenses that form part of our Selling expenses relates to employees engaged in sales and marketing of our services and POS devices.

 

 

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    The portion of our Customer support expenses that form part of our Selling expenses relates to amounts that we spend on consulting services and call centers for our telemarketing campaigns.

 

    Chargebacks consist of transaction losses arising from chargeback fraud, which occurs, principally in online transactions, when a consumer makes a purchase via credit card and then requests a chargeback from the issuing bank after receiving the goods or services purchased. All of the Chargeback expenses shown in Note 21 to the audited consolidated financial statements of PagSeguro Brazil are accounted for within our Selling expenses.

 

    The portion of our Depreciation charge that forms part of our Selling expenses consists of the depreciation of equipment used for client relationships.

 

    The portion of our Other expenses that form part of our Selling expenses consist of expenses related to travel, lodging and insurance, facilities, rent, consultancy fees and office supplies relating to sales and marketing of our services and POS devices.

Administrative Expenses

Our Administrative expenses represent the amounts that we spend on back office and overhead expenses. These amounts are divided into Personnel expenses, Depreciation and amortization charge and Other expenses. While we expect our Administrative expenses to increase in the short term as we plan for growth and as we incur costs of compliance associated with being a public company, we expect these expenses to decline as a percentage of Net revenue from sales and services over the medium term as our business grows.

 

    The portion of our Personnel expenses that form part of our Administrative expenses relates to our finance, legal, human resources, and administrative personnel, as well as fees paid for professional services, including legal, tax and accounting services.

 

    The portion of our Depreciation and amortization charge that form part of our Administrative expenses relates to (i) the depreciation of the equipment, furniture, tools and technology used in our head office and back-office operations and (ii) the amortization of software developed internally to support our head office and back-office needs, which is shown in Note 11 to the audited consolidated financial statements of PagSeguro Brazil.

 

    The portion of our Other expenses that form part of our Administrative expenses includes items such as bank charges, travel, reimbursement of staff expenses and office supplies.

Other Operating Income (Expenses), Net

Our Other operating income (expenses), net consist of various contingencies and income or expense items.

Operating Loss

Our Operating loss consists of our Net revenue from sales and services, less our Cost of sales and services, our Selling expenses and our Administrative expenses, and after taking account of the net effect of our Other operating income (expenses), net.

As discussed above, you should not consider our Operating loss alone as a measure of our performance since it does not capture the significant income from our early payment of receivables service (or the related financial expenses), both of which are accounted for within our Finance Result.

 

 

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Income from Early Payment

As described under “Business—Our Products and Services—Cash-in Solutions—Credit Cards”, our early payment of receivables service consists of paying our merchants their installment receivables upfront when consumers paying by credit card choose to pay the merchant in installments.

Our Income from early payment consists of our remuneration in the form of a discount that we withhold from the transaction value of the receivables that we pay to merchants in advance. We recognize this discount as Income from early payment (separate from and in addition to the MDR fee for the payment processing transaction, which we recognize as Gross revenue from transaction activities and other services). We recognize the discount amount as Income from early payment at the time a sale transaction is approved involving a merchant who has opted to receive early payments of the receivables from their credit card installment sales.

In addition, this line item does not include the fees we charge for the merchant’s payment date election, which are part of the MDR and are accounted for in Gross revenue from transaction activities and other services.

Our Income from early payment relates only to receivables from purchase transactions that have been approved by the card issuer and the card scheme. The underlying receivables are mainly owed to us by Brazilian credit card issuers such as Bank Itaú, Banco Bradesco, Banco do Brasil and Nubank.

The financial expenses we incur in funding our early payment of receivables service are accounted for in our Financial expenses, discussed below.

For more information regarding the early payment of receivables service we offer to merchants and our plans to form a FIDC to finance a portion of this service, see “Business—Our Products and Services—Advanced Integrated Functionalities and Value-Added Services—Early Payment of Receivables.”

Financial Expenses

Our financial expenses include (i) the charges we incur to obtain early payment of receivables owed to us by card issuers and acquirers in order to finance our early payment of receivables services for merchants, (ii) interest expense on our other borrowings and (iii) the cost of swaps relating to our foreign currency borrowings.

Through the date of this initial public offering, we have funded our early payment of receivables service for merchants (i) principally by obtaining early payment of receivables owed to us by card issuers and acquirers, as well as (ii) through our general third party borrowings and own capital. We plan to use a significant portion of the proceeds from this offering to fund our early payment of receivables service for merchants. In addition, we are currently in the process of setting up a Brazilian investment fund to purchase and hold receivables known as a Fundo de Investimento em Direitos Creditórios (a Fund for Investment in Credit Rights, or FIDC) through which we may raise debt to finance this line of business. The FIDC will be controlled by our Brazilian operating company (by virtue of owning its subordinated quotas) but will raise capital by issuing senior quotas in the fund to outside investors, who will receive interest on these investments from the FIDC. The FIDC will use the capital it raises to finance the growth of our early payment of receivables to merchants service. The results of our early payment of receivables to merchants service will continue to be reflected as financial income in the audited consolidated financial statements of PagSeguro Brazil. For further information regarding the FIDC, see “—Organizational Structure.”

 

 

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All of our third-party borrowings at December 31, 2016 were denominated in U.S. dollars and therefore exposed to currency fluctuations. We contracted derivative financial instruments known as swaps in order to protect us against this exposure. We did not have any outstanding borrowings at December 31, 2015 and 2014. For further information on our borrowings, see “—Loans and Financing” and Note 13 to the audited consolidated financial statements of PagSeguro Brazil.

Other Finance Income

Our Other finance income consists principally of interest generated by bank savings accounts and by deposits we make with Brazilian courts, known as judicial deposits, which guarantee any compensation we may be required to pay in litigation matters.

Foreign Exchange Variation, Net

Foreign exchange variation, net is the net gain or loss on our assets and liabilities related to the appreciation or depreciation of the real against foreign currencies and has limited impact on our cash position. We contracted swaps to protect us against exposure to currency fluctuations on all of our borrowings in foreign currencies during the three years under review.

Current Income Tax and Social Contribution

Current income tax and social contribution consists of tax assets and liabilities for the current year. Our liability to income tax principally reflects the level of our profit before income taxes; this line item also varies, however, to the extent that we are entitled to defer tax on certain investments in technological innovation, in which case our tax base for income tax for the year is reduced and the related deferred tax liability is accounted for in the Deferred income tax and social contribution line item below.

Our tax assets for the current year are calculated based on the expected recoverable amount, and tax liabilities for the current year are calculated based on the amount payable to the applicable tax authorities. The tax rates and tax laws used to calculate this amount are those enacted or substantially enacted at the balance sheet date. Current income tax and social contribution related to items recognized directly in equity is also recognized in equity. We periodically evaluate our tax positions with respect to interpreting tax regulations and, when appropriate, establish provisions.

Deferred Income Tax and Social Contribution

Deferred income tax and social contribution consists of temporary differences between the tax bases of assets and liabilities and their carrying amounts at the balance sheet date. This line item refers principally to deferrals of tax liability that we are entitled to take on capital investments that we make in technological innovation under Brazilian Law No. 11,196/2005, known as the Technological Innovation Law or “Lei do Bem.” We are able to use this tax deferral law principally for the investments we make in developing software internally, where we capitalize the labor and other costs involved as an intangible asset rather than accounting for these amounts as expenses, and we depreciate the accounting value of the intangible asset over its useful life. The Lei do Bem allows us to defer our tax liability on these investments. Other Brazilian tax rules also allow us to defer tax on certain items, for example on unpaid amounts due from creditors. The Deferred income tax and social contribution line item consists of our liability to future tax under the Lei do Bem and these other tax laws, less the depreciation and amortization that we take during the year on the respective capitalized assets, and less the tax losses carried forward from prior years that we are able to offset against our tax liability during the year. For further information on this line item, see Note 17 to the audited consolidated financial statements of PagSeguro Brazil.

 

 

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Deferred tax liabilities are recognized for all taxable temporary differences, except in certain situations explained in Note 2.15 of the audited consolidated financial statements of PagSeguro Brazil. The carrying amount of deferred tax assets is reviewed at each balance sheet date and impairment is recognized to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax assets to be utilized. Unrecognized deferred tax assets are reviewed, at each balance sheet date, and recognized to the extent that it is probable that future taxable profit will be available to allow for their utilization.

Deferred tax assets and liabilities are measured using the prevailing tax rates in the year in which the assets will be realized and the liabilities will be settled. The currently defined tax rates of 25% for income tax and 9% for social contribution are used to calculate deferred taxes.

Deferred tax assets and liabilities are presented on a net basis when there is a legally or contractually enforceable right to offset the tax asset against the tax liability, and the deferred taxes are related to the same taxable entity and subject to the same tax authority.

Results of Operations

The following discussion of our results of operations is based on the financial information derived from the audited consolidated financial statements of PagSeguro Brazil included elsewhere in this prospectus.

Results of Operations in 2016, 2015 and 2014

 

     For the Years Ended December 31,  
     2016      Percent
Change
     2015      Percent
Change
     2014  
     (in millions of reais, with the exception of
percentages and per-share amounts
 

Net revenue from sales and services

     740.6        66.5%        444.7        113.5%        208.3  

Cost of sales and services

     (629.8)        65.1%        (381.6)        167.8%        (142.5)  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Gross Profit

     110.8        75.5%        63.2        (4.0)%        65.8  

 

Selling expenses

     (199.9)        22.9%        (162.6)        99.7%        (81.4)  

Administrative expenses

     (86.4)        38.4%        (62.4)        21.5%        (51.3)  

Other operating income (expenses), net

     1.4        (17.4)%        1.7        (150.9)%        (3.3)  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Operating Loss

     (174.1)        8.7%        (160.2)        127.8%        (70.3)  

 

Finance Result

              

Income from early payment

     392.4        76.2%        222.7        92.3%        115.8  

Financial expenses

     (68.3)        130.0%        (29.7)        167.9%        (11.1)  

Other finance income

     3.0        (55.1)%        6.7        276.6%        1.8  

Foreign exchange variation, net

     2.3        194.2%        0.8        (2559.4)%        -    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Profit before Income Taxes

     155.4        285.4%        40.3        11.5%        36.2  

 

Current income tax and social contribution

     (7.4)        187.2%        (2.6)        (73.9)%        (9.9)  

Deferred income tax and social contribution

     (20.1)        799.9%        (2.2)        (319.7)%        1.0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income Tax and Social Contribution

     (27.6)        471.5%        (4.8)        (45.8)%        (8.9)  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Net Income for the Year

     127.8        260.1%        35.5        30.2%        27.3  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Attributable to:

              

Owners of PagSeguro Brazil

     127.2        262.5%        35.1        35.1%        26.0  

Non-controlling interests

     0.6        46.1%        0.4        (68.2)%        1.3  

 

Basic and diluted earnings per common share – R$

 

     0.2425        262.5%        0.0669        35.2%        0.0495  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

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Net revenue from sales and services

Our Net revenue from sales and services in 2016 amounted to R$740.6 million, an increase of R$295.9 million, or 66.5%, from R$444.7 million in 2015. Our Net revenue from sales and services in 2015 represented an increase of R$236.4 million, or 113.5%, from R$208.3 million in 2014.

Our Gross revenue from transaction activities and other services in 2016 amounted to R$543.8 million, an increase of R$238.5 million, or 78.1%, from R$305.3 million in 2015. Gross revenue from transaction activities and other services in 2015 represented an increase of R$120.5 million, or 65.2%, from R$184.8 million in 2014. These year-on-year increases were principally due to continued increases in our customer base and transaction volume.

The increase in gross revenue from transaction activities and other services in 2016 was principally due to an increase in transaction volume during the period. This increase was partially offset by a change in mix in 2016 as cash-in payments from debit cards, which generate lower MDR fees, increased in proportion to cash-in payments from credit cards, which generate higher MDR fees.

The growth in our business in 2015 and 2016 was fueled by the launch of the Moderninha POS device in March 2015, which (in addition to the Gross revenues from sales discussed below) generated further growth in our transaction revenues by providing increased sources of in-person transactions. As discussed above, however, this also altered the mix of our revenues, since in-person transactions include payments made via debit cards, which generate lower MDR than credit card transactions.

Our Deductions from gross revenue from transaction activities and other services, which consist principally of sales taxes, amounted to R$63.8 million in 2016, or 11.7% of our Gross revenue from transaction activities and other services for the year. In 2015, Deductions from gross revenue from transaction activities and other services totaled R$37.1 million, or 12.2% of Gross revenue from transaction activities and other services for the year. In 2014 Deductions from gross revenue from transaction activities and other services totaled R$24.7 million, or 13.4% of Gross revenue from transaction activities and other services for the year. This gradual year-on-year decrease in Deductions as a percentage of our Gross revenue from transaction activities and other services was principally due to the fact that when our digital payments business was carried out by other subsidiaries within the UOL group, this line item also included Brazilian employer social security contributions, known as INSS. UOL benefited from a specific tax provision in force at the time allowing companies to pay INSS on revenues, rather than on employee salaries, and consequently the INSS was accounted for in this line item. Commencing August 1, 2015, the date of the corporate reorganization in which our PagSeguro activities were transferred to PagSeguro Brazil, we began to pay INSS on employee salaries rather than on revenue, and the INSS was accounted for in Personnel expenses. In addition, our ISS registration changed during 2015, leading to a lower applicable ISS rate.

Our Gross revenues from sales in 2016 amounted to R$371.5 million, an increase of R$132.6 million, or 55.5%, from R$238.9 million in 2015. Gross revenue from sales in 2015 represented an increase of R$183.0 million, or 327.7%, from R$55.9 million in 2014. The significant growth in this item was due to the rapid ramp-up of our POS device sales, and our rollout of an increasingly broad range of POS devices. Prior to March 2014, our POS device offering, which had commenced in April 2013, consisted of a magnetic strip card reader that plugged into a smartphone jack combined with a digital app. In March 2014, we launched our first standalone POS device that allowed merchants to process debit and credit cards using chips, which resulted in an increase in sales in the final three quarters of 2014. In March 2015, we launched the Moderninha, which spurred the significant growth in sales in 2015 compared to 2014. In 2016, we launched the Moderninha Wi-Fi and Moderninha Pro standalone POS devices.

 

 

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Our Deductions from revenues from sales in 2016 amounted to R$110.9 million, or 29.9% of our Gross revenues from sales for the year. In 2015, these Deductions totaled R$62.4 million, or 26.1% of Gross revenues from sales for the year. In 2014 these Deductions totaled R$7.7 million, or only 13.8% of Gross revenues from sales for the year. This significant increase in these Deductions as a percentage of our Gross revenues from sales in 2016 and 2015 as compared to 2014 is due to the fact that since mid-2015, substantially all of the POS devices we sell are manufactured in Brazil. As noted above, the deductions for sales taxes on imported devices are significantly lower than for locally-manufactured devices.

As discussed above, you should not consider our Net revenue from sales and services alone as a measure of the level of our business activity since it does not capture the significant income from our early payment of receivables service, which is accounted for as Income from early payment within our Finance result, discussed below.

Cost of sales and services

Our Cost of sales and services amounted to R$629.8 million in 2016, an increase of R$248.2 million, or 65.1%, from R$381.6 million in 2015. As a percentage of our Net revenue from sales and services, our Cost of sales and services remained relatively stable, posting a decrease of 0.8 percentage point to 85.0% in 2016 from 85.8% in 2015. Our transaction costs decreased in 2016 as we became an acquirer in the second half of the year, which reduced the fees we paid to third party acquirers.

Our Cost of sales and services in 2015 increased by R$239.1 million, or 167.8%, from R$142.5 million in 2014. As a percentage of Net revenue from sales and services, our cost of sales and services increased by 17.4 percentage points, to 85.8% in 2015 from 68.4% in 2014. The increase in Cost of sales and services as a percentage of Net revenue from sales and services in 2015 reflected the change in our product mix, with a significant increase during the year in the proportion of sales of higher-value POS devices that have correspondingly higher purchase costs.

Gross profit

Our Gross profit in 2016 increased by R$47.6 million, or 75.5%, to R$110.8 million compared with the R$63.2 million posted in 2015. As a percentage of our Net revenue from sales and services, our Gross profit remained relatively stable at 15.0% in 2016 compared to 14.2% in 2015.

Our Gross profit in 2015 decreased by R$2.6 million, or 4.0%, from the R$65.8 million posted in 2014. As a percentage of our Net revenue from sales and services, our Gross profit decreased to 14.2% in 2015 compared to 31.6% in 2014. This decrease was due to the significant increase in our Cost of sales and services as a percentage of our Net revenue from sales and services in 2015, driven principally by the increase in purchases of higher-value POS devices in our cost mix and the higher proportion of debit card transactions in our revenue mix, as discussed above.

Selling expenses

Our Selling expenses amounted to R$199.9 million in 2016, an increase of R$37.3 million, or 22.9%, from R$162.6 million in 2015. As a percentage of our Net revenue from sales and services, our Selling expenses decreased by 9.6 percentage points, to 27.0% in 2016 from 36.6% in 2015. This reduction in our Selling expenses as a percentage of our Net revenue from sales and services was driven by the fact that we had incurred expenses in connection with a major marketing campaign in 2015 to promote the launch of the Moderninha POS device. While our marketing expenses continued to increase in 2016, the increase was significantly outpaced by growth in our net revenue during the year. In addition, our Chargebacks expense declined as a percentage of our net revenue since chip-&-pin transactions involve significantly lower chargebacks.

 

 

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Our Selling expenses in 2015 increased by R$81.2 million, or 99.7%, compared with R$81.4 million in 2014, due to the expenses we incurred in 2015 in connection with the major marketing campaign to promote the launch of the Moderninha POS device. As a percentage of Net revenue from sales and services, our Selling expenses remained relatively stable, posting a decrease of 2.5 percentage points, to 36.6% in 2015 compared with 39.1% in 2014.

Administrative expenses

Our Administrative expenses amounted to R$86.4 million in 2016, an increase of R$24.0 million, or 38.4%, from R$62.4 million in 2015. This increase was mainly due to an increase in employee costs and bank charges. As a percentage of our Net revenue from sales and services, our Administrative expenses remained relatively stable, posting a decrease of 2.3 percentage points, to 11.7% in 2016 from 14.0% in 2015.

In 2015, our Administrative expenses increased by R$11.1 million, or 21.5%, compared with R$51.3 million in 2014. This increase was mainly due to an increase in employee costs and bank charges. As a percentage of our Net revenue from sales and services, however, our Administrative expenses decreased by 10.7 percentage points, to 14.0% in 2015 from 24.7% in 2014.

The decline in the relative level of our Administrative expenses as a percentage of net revenue over the three years reflects the scalable nature of our business from a relatively fixed overhead base.

Other operating income (expenses), net

Our Other operating income (expenses), net, recorded income of R$1.4 million in 2016. This net amount reflects expenses related to civil litigation proceedings during the year, which were largely offset by the effect of a successful renegotiation with our principal supplier of POS devices.

In 2015, our Other operating income (expenses), net, recorded income of R$1.7 million. This net amount principally reflected expenses related to civil litigation proceedings during the year.

In 2014, our Other operating income (expenses), net, recorded expenses of R$3.3 million, which consisted entirely of expenses incurred in connection with civil litigation proceedings.

Operating loss

As a result of the revenue and expense items discussed above, our Operating loss amounted to R$174.1 million in 2016, an increase in operating losses of R$13.9 million, or 8.7%, compared with R$160.2 million in 2015. As a percentage of our Net revenue from sales and services, however, our Operating loss declined to 23.5% in 2016 compared to 36.0% in 2015. This reduction in our Operating loss as a percentage of our Net revenue from sales and services was primarily driven by our relatively lower Selling expenses in light of the growth in our net revenue.

Our Operating loss in 2015 increased by R$89.9 million, or 127.8%, when compared to R$70.3 million in 2014. As a percentage of our Net revenue from sales and services, our Operating loss increased, however, to 36.0% in 2015 compared to 33.8% in 2014. This increase reflected the increase in our Cost of sales as a percentage of net revenue due to the change in our business mix, partly offset by the reductions in our Selling expenses and Administrative expenses as a percentage of revenues.

 

 

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As discussed above, you should not consider our Operating loss alone as a measure of our performance since it does not capture the significant income from our early payment of receivables service (or the related financial expenses), both of which are accounted for within our Finance Result, discussed below.

Finance result

Our overall Finance results amounted to R$329.5 million in 2016, an increase of R$129.0 million, or 64.3%, compared with R$200.5 million in 2015. Our Finance result in 2015 represented an increase of R$94.0 million, or 88.3% compared with R$106.5 million in 2014. Our Finance results consist mainly of the items discussed below, and are substantially driven by the results of our early payment of receivables service.

Income from early payment

Our Income from early payment, which represents the volume of the discount fees we withhold from transaction volumes in our early payment of receivables service for merchants, amounted to R$392.4 million in 2016, an increase of R$169.7 million, or 76.2%, from R$222.7 million in 2015. In 2015 this item represented an increase of R$106.9 million, or 92.3%, compared with R$115.8 million in 2014. The year-on-year growth in this activity was due to growth in transaction volumes.

Financial expenses

Our Financial expenses amounted to R$68.3 million in 2016, an increase in expense of R$38.6 million, or 130.0%, from expenses of R$29.7 million in 2015. The same item in 2015 reflected an increase in expense of R$18.6 million, or 167.9%, compared with expenses of R$11.1 million in 2014. The year-on-year increase in financial expenses was driven by charges we incurred when we obtained early payment of our receivables from card issuers and acquirers in order to finance our early payment of receivables service to merchants, as well as interest expense on the borrowings we incurred in 2016. In 2014, a significant portion of our business financing was provided by related parties, principally UOL. In 2015 we began to increase the portion of our financing that we obtained in the form of early payment of the receivables due to us from acquirers. In 2016, in addition to our existing financing sources, we further increased our levels of external financing, with early payment of the receivables due to us from card issuers as well as acquirers, and we incurred the two borrowings shown in Note 13 to the audited consolidated financial statements of PagSeguro Brazil.

Other finance income

Our Other finance income amounted to R$3.0 million in 2016, a decrease of R$3.7 million, or 55.1%, from R$6.7 million in 2015. Our Other finance income of R$6.7 million in 2015 represented an increase of R$4.9 million, or 276.6%, compared with R$1.8 million in 2014.

Foreign exchange variation, net

Our Foreign exchange variation, net recorded a positive amount of R$2.3 million in 2016, an increase of R$1.5 million from R$0.8 million in 2015. These variations reflect the effect of exchange rate fluctuations in our foreign currency accounts located outside of Brazil. In 2014 and 2015, this line item related only to Boa Compra’s international operations, while in 2016 it also included cash-out payments using PagSeguro prepaid cards outside of Brazil and cash-in payments via international cards in Brazil, both of which are settled in foreign currency.

 

 

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Profit before income taxes

Our Profit before income taxes amounted to R$155.4 million in 2016, an increase of R$115.1 million, or 285.4%, from R$40.3 million in 2015. The increase was due to significant volume growth in both our net revenues and our early payment of receivables service for merchants. As noted above, the increase in our Operating losses during the year does not reflect the positive results of our early payment of receivables service.

In 2015, our Profit before income tax increased by R$4.1 million, or 11.5%, compared with R$36.2 million in 2014. This increase was also mainly due to the increase in our transaction volumes.

Income tax and social contribution

Income and social contributions tax amounted to expenses of R$27.6 million in 2016, an increase of R$22.8 million from expenses of R$4.8 million in 2015. In 2014, our total Income and social contributions tax amounted to expenses of R$8.9 million. This total item consists of Current income tax and social contribution and deferred income tax and social contribution, which relates principally to the tax benefit under the Lei do Bem, which applies to investments made in innovation and technology by PagSeguro Brazil.

Our Current income tax and social contribution expense in 2016 amounted to R$7.4 million, an increase of R$4.8 million, or 187.2%, from R$2.6 million in 2015. In 2015, our Current income tax and social contribution decreased by R$7.3 million, or 73.9%, compared with R$9.9 million in 2014. The increase in 2016 is mainly due to the growth in our profit before income taxes, partly offset by the tax benefit under the Lei do Bem and the tax benefit on payment of interest on PagSeguro Brazil’s share capital (which is a form of mandatory dividend under Brazilian law). In 2015, while our profit before income taxes remained relatively stable compared with 2014, the decrease in Current income tax and social contribution reflected an increase in the tax benefit under the Lei do Bem.

Our Deferred income tax and social contribution in 2016 amounted to an expense of R$20.1 million, an increase of R$17.9 million compared with an expense of R$2.2 million in 2015. In 2014, our Deferred income tax and social contribution posted a tax benefit of R$1.0 million.

The amount of Deferred income tax and social contribution recorded in 2016 principally reflected (i) the tax benefit on our significant new capital investments in software and technology during the year, less the depreciation and amortization charges that we recorded against those assets during the year and (ii) the tax benefit on payment of interest on PagSeguro Brazil’s share capital.

In 2015, the transfer of our activities from the UOL group to PagSeguro Brazil as part of the corporate reorganization led to a tax event under Brazilian tax law, requiring UOL to pay all existing tax liabilities that had been deferred from prior years under the Lei do Bem. The amount of Deferred income tax and social contribution recorded for the year therefore reflects deferred tax liabilities on our capital investments in software and technology after August 1, 2015, less the depreciation and amortization charges that we recorded against those assets during those months.

In 2014, the reduction in our deferred tax liability on accrued amounts due from creditors more than offset the new deferred tax liability on our capital investments in software and technology, resulting in the positive amount for this line item.

Our total effective tax rate was 17.8% in 2016, compared with 11.9% in 2015 and 24.6% in 2014. The increase in 2016 was due to the increase in our profits before taxes while the amount of our Lei do Bem tax benefits remained stable. The decrease observed in 2015 was mainly due to the transfer of our activities from the UOL group to PagSeguro Brazil, enabling PagSeguro Brazil to benefit from the Lei do Bem as discussed above.

 

 

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Net income for the year

Our Net income for the year in 2016 amounted to R$127.8 million, an increase of R$92.3 million, or 260.1%, from R$35.5 million in 2015. As a percentage of Net revenue from sales and services, our Net income for the year increased by 9.3 percentage points, to 17.3% in 2016 compared with 8.0% in 2015. This increase was principally driven by the growth in our transaction volumes, as discussed above.

Our Net income for the year in 2015 increased by R$8.2 million, or 30.2%, compared with R$27.3 million in 2014. As a percentage of Net revenue from sales and services, our Net income for the year decreased to 8.0% in 2015 compared with 13.1% in 2014.

Liquidity and Capital Resources

The following discussion of our liquidity and capital resources is based on the financial information derived from the audited consolidated financial statements of PagSeguro Brazil included elsewhere in this prospectus.

General

Our principal liquidity requirements relate to our early payment of receivables service. We believe our current working capital is sufficient for present requirements. Through the date of this offering, we have satisfied our funding and working capital requirements (i) through the cash generated by our businesses, (ii) by obtaining early payment of receivables due to us from the card issuers and acquirers, as well as (iii) through our general third party borrowings and own capital. We plan to use a portion of the proceeds from this offering in order to reduce our recourse to third-party funding.

The table below presents our cash position at the beginning of each period, and our net cash provided by operating activities, net cash used in investing activities and net cash provided by financing activities during the periods indicated:

 

     At and for the Year
Ended December 31,
 
     (in millions of reais)  
     2016     2015     2014  

Liquidity and Capital Resources

      

Cash and cash equivalents

     80.0       6.9       1.2  

Financial investments

     131.2       -         -    

Net cash provided by operating activities

     80.5       47.8       15.5  

Net cash used in investing activities

     (203.3     (42.1     (22.6

Net cash provided by financing activities

     195.9       -         -    

Our cash and cash equivalents include cash on hand, deposits with banks and other short-term highly liquid investments with original maturities of three months or less, and with immaterial risk of change in value. For more information, see Note 2.4 to the audited consolidated financial statements of PagSeguro Brazil. Our short-term investments refer to Brazilian debentures, which produce a return of between 50% and 65% of the Brazilian Interbank Deposit Certificate, or CDI.

Cash Flows

Our Net Cash provided by operating activities consists of (i) our profit before income taxes for the year, (ii) amounts that are recorded as expenses in our statement of income but which do not affect cash, (iii) amounts representing changes in our operating assets and liabilities that do not affect cash, and (iv) the cash amounts of income taxes and social contributions that we pay during the year.

 

 

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Our Cash flows used in investing activities consist of our purchases of property and equipment, our purchases of intangible assets, and our new financial investments less the payments we make to redeem existing financial investments.

Our Cash flows from financing activities consist of the cash proceeds from our borrowings, which for the periods under review refer only to the loans of US$40.0 million (approximately R$129.4 million) and US$21.8 million (approximately R$70.0 million) that we obtained during 2016 and repaid during the first half of 2017. For further information on these borrowings, see “—Loans and Financings.”

Cash Flows in 2016

Our cash and cash equivalents at the beginning of 2016 amounted to R$6.9 million.

Our Profit before income taxes in 2016, as discussed above, generated R$155.4 million.

The adjustments for expenses recorded in our statement of income in 2016 but which did not affect our cash flows totaled R$72.2 million, principally the R$31.6 million of Chargebacks expenses and R$31.2 million of Depreciation and amortization recorded in our statement of income, which are detailed in Note 21 to the audited consolidated financial statements of PagSeguro Brazil. Chargebacks expenses relate to amounts that we initially recorded as revenues but for which we did not receive the related cash payment due to the chargeback. Also in 2016, we recorded an unrealized loss of R$6.6 million on derivative instruments (swaps), consisting principally of a R$5.3 million unrealized loss on the foreign exchange derivatives relating to our borrowing due in January 2017 as well as, to a lesser extent, an unrealized loss on the foreign exchange derivative relating to our borrowing due in March 2017, as shown in Note 24 to the audited consolidated financial statements of PagSeguro Brazil.

The adjustments for changes in our operating assets and liabilities in 2016 amounted to negative cash flows of R$129.0 million:

 

    Our Note receivables item consists of the difference between the opening and closing balances of the Note receivables item of Current Assets on our balance sheet (R$1,715.5 million at year-end 2016 versus R$1,110.0 million at year-end 2015), which refers to amounts that the acquirers owed us at year-end (being the total transaction volume on our platform that is outstanding with acquirers at that date). This item represented negative cash flow of R$634.3 million in 2016.

 

    Our Payables to third parties item consists of the difference between the opening and closing balances of the Payables to third parties item of Current Liabilities on our balance sheet (R$1,304.0 million at year-end 2016 versus R$683.1 million at year-end 2015), which refers to amounts that we owe to merchants at those dates (being our total transaction volume that is outstanding with our merchant clients at that date). This item represented positive cash flow of R$620.9 million in 2016.

 

    Our Receivables from (payables to) related parties item consists of the difference between the opening and closing balances of the Receivables from related parties item (i.e., UOL) of Current Assets on our balance sheet (R$300.8 million at year-end 2016 versus R$55.9 million at year-end 2015) offset by the difference between the opening and closing balances of the Payables to related parties item (i.e., UOL) of Current Liabilities on our balance sheet (R$76.2 million at year-end 2016 versus R$92.4 million at year-end 2015), representing movements in our treasury cash position with UOL during the period. This item represented negative cash flow of R$211.0 million in 2016. For more information on our treasury cash position with UOL, see Note 9 to the audited consolidated financial statements of PagSeguro Brazil. Our cash management will be separate from UOL’s cash management starting from the date of this offering, however.

 

 

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    Our Inventories item represents changes in the accounting value of the Inventories item of Current Assets on our balance sheet. This item represented positive cash flow of R$20.2 million in 2016.

 

    Our Salaries and social charges item represents amounts that were recorded on our statement of income, but which remained unpaid at year-end, principally because they related to the final month of the year. This item represented positive cash flow of R$6.6 million in 2016.

 

    Our Taxes and contributions item represents sales taxes (ISS, ICMS, PIS and COFINS) that were recorded on our statement of income, but which remained unpaid at year-end. This item represented positive cash flow of R$3.9 million in 2016.

Since our statement of cash flows begins with our Profit before income taxes, it also adjusts for cash amounts paid in respect of our corporate income tax and social contribution, which totaled R$18.1 million during the year.

As a result of the above, our Net Cash provided by operating activities in 2016 totaled R$80.5 million.

Our Cash flows used in investing activities in 2016 totaled R$203.3 million. This amount consisted of acquisition of financial investments of R$337.1 million, representing total cash that we invested in short-term deposits during the year, less R$206.2 million in redemptions of financial investments, representing total cash that we withdrew from these short-term deposits during the year. We also invested R$70.4 million in purchases and development of intangible assets, which represent purchases of third party software and the salaries and other amounts that we paid to develop internally the software and technology, which we capitalize as intangible assets. For more information on our intangible assets, see Note 11 to the audited consolidated financial statements of PagSeguro Brazil.

Our Cash flows from financing activities in 2016 provided total cash flows of R$195.9 million, consisting principally of R$199.4 million that we received as the proceeds of the borrowings we incurred during the year, discussed in Note 13 to the audited consolidated financial statements of PagSeguro Brazil. We also paid R$3.5 million in cash for the acquisition of the non-controlling interests in Boa Compra. When UOL contributed Boa Compra to PagSeguro Brazil in return for new shares in PagSeguro Brazil in July 2016, UOL owned 75% of Boa Compra’s share capital. The remaining 25% of Boa Compra was held by two other shareholders, and we purchased these shares from those shareholders for R$3.5 million in cash. For further information on the Boa Compra transaction, see Note 4 to the audited consolidated financial statements of PagSeguro Brazil.

After accounting for the total increase in Cash and cash equivalents of R$73.1 million discussed above, our Cash and cash equivalents at the close of 2016 amounted to R$80.0 million.

Cash Flows in 2015

Our cash and cash equivalents at the beginning of 2015 amounted to R$1.2 million.

Our Profit before income taxes in 2015, as discussed above, generated R$40.3 million.

The adjustments for expenses recorded in our statement of income for 2015 but which did not affect cash totaled R$46.0 million, principally R$27.5 million in Chargebacks expenses and R$18.9 million in depreciation and amortization detailed in Note 21 to the audited consolidated financial statements of PagSeguro Brazil. We also recorded R$1.7 million in income from financial investments and foreign exchange variation, net, representing other finance income on investments that we did not receive in cash, and foreign exchange variations.

 

 

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The adjustments for changes in our operating assets and liabilities for 2015 amounted to negative cash flows of R$35.8 million. Our Note receivables cash item represented reduction of cash flow of R$474.3 million (Note receivables on our balance sheet were R$1,110.0 million at year-end 2015 versus R$665.9 million at year-end 2014). Our Payables to third parties cash item represented positive cash flow of R$313.6 million (Payables to third parties on our balance sheet were R$683.1 million at year-end 2015 versus R$369.9 million at year-end 2014). Our Receivables from (payables to) related parties cash item represented positive cash flow of R$119.2 million (Receivables from related parties, i.e. UOL, were R$55.9 million at year-end 2015 versus R$84.3 million at year-end 2014; and payables to related parties, i.e. UOL, were R$92.4 million at year-end 2015 versus R$0 at year-end 2014). Inventories represented negative cash flow of R$25.1 million; and Salaries and social charges represented positive cash flow of R$13.3 million.

We paid corporate income taxes and social contributions in cash totaling R$2.7 million during the year.

As a result of the above, our Net cash provided by operating activities in 2015 totaled R$47.8 million.

Our Cash flows used in investing activities in 2015 totaled R$42.1 million, consisting principally of Purchases and development of intangible assets of R$38.9 million. Our cash flows in 2015 show no movement of cash into financial investments, and a non-material amount of redemptions from financial investments. Prior to the transfer of our activities to our PagSeguro Brazil entity on August 1, 2015, any such investments were carried out within the UOL group but these cash movements regarding the PagSeguro business were not controlled separately. Following the transfer of our activities to our PagSeguro Brazil entity on August 1, 2015, any cash movements by the PagSeguro Brazil Group have been controlled separately, but we did not make any such financial investments during the last five months of the year.

We incurred no new borrowings and therefore did not generate Cash flows from financing activities in 2015.

After accounting for the total increase in Cash and cash equivalents of R$5.7 million discussed above, our Cash and cash equivalents at the close of 2015 amounted to R$6.9 million.

Cash Flows in 2014

Our cash and cash equivalents at the beginning of 2014 amounted to R$8.3 million.

Our profit before income taxes in 2014, as discussed above, generated R$36.2 million.

The adjustments for expenses recorded in our statement of income in 2014 but which did not affect cash totaled R$26.6 million, principally R$14.8 million in Chargebacks expenses and R$11.6 million in depreciation and amortization detailed in Note 21 to the audited consolidated financial statements of PagSeguro Brazil.

The adjustments for changes in our operating assets and liabilities in 2014 amounted to negative cash flows of R$42.3 million. Our Note receivables cash item represented negative cash flow of R$426.1 million. Our Payables to third parties cash item represented positive cash flow of R$145.5 million. The Note receivables item is relatively greater when compared to Payables to third parties in 2014 than in later years, because we were obtaining relatively less financing through early payment of the receivables owed to us from acquirers in 2014 when compared to 2015 and 2016. Our Receivables from (payables to) related parties cash item, i.e. UOL, represented positive cash flow of R$253.6 million. Inventories represented negative cash flow of R$13.8 million; and Taxes and contributions represented positive cash flow of R$1.9 million.

 

 

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We paid corporate income taxes and social contribution totaling R$4.9 million during the year.

As a result of the above, our Net Cash provided by operating activities in 2014 totaled R$15.5 million.

Our Cash flows used in investing activities in 2014 totaled R$22.6 million, consisting principally of Purchases and development of intangible assets of R$21.0 million. As in the first seven months of 2015, any movements of cash into financial investments were carried out within the UOL group but any such cash movements regarding the PagSeguro business were not controlled separately.

We incurred no new borrowings and therefore did not generate Cash flows from financing activities in 2014.

After accounting for the total decrease in Cash and cash equivalents of R$7.1 million discussed above, our Cash and cash equivalents at the close of 2014 amounted to R$1.2 million.

Loans and Financings

Our total third-party borrowings amounted to R$205.2 million at December 31, 2016, discussed below. We had no third-party borrowings in 2015 or 2014, since we satisfied our funding and working capital requirements in those years (i) through the cash generated by our businesses, (ii) by obtaining early payment of receivables due to us from the card issuers and acquirers, as well as (iii) through our own capital.

The following table sets forth the balance and principal terms of our debt at December 31, 2016:

 

At December 31, 2016  
Type    Interest rate      Average annual
interest rate %
    Maturity      Amount
(R$ million)
 

Borrowings in foreign currency

       

Bank Borrowings

     Fixed interest rates        2.36365%       January 2017        133.9  

Bank Borrowings

     Fixed interest rates        2.86450%       March 2017        71.3  
          

 

 

 

Total:

 

        205.2  
          

 

 

 

In July 2016, we obtained a loan in the amount of US$40.0 million (approximately R$129.4 million applying exchange rates in effect at the time), which matured in January 2017. In September 2016, we obtained a further loan in the amount of US$21.8 million (approximately R$70.0 million applying exchange rates in effect at the time), which matured in March 2017. We purchased swaps to provide protection against exchange rate fluctuations for both loans. Neither of these credit agreements contains any provisions requiring us to provide collateral or comply with any financial covenants.

These loans were repaid on schedule in the first half of 2017 and we have incurred no new borrowings since then. As discussed above, we are increasingly financing our services by obtaining early payment of receivables owed to us from acquirers and card issuers, in order to finance our early payment of receivables service to merchants.

For further information on our financing activities, see Note 13 to the audited consolidated financial statements of PagSeguro Brazil.

 

 

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Capital Expenditures

The capital expenditures (acquisitions of property and equipment, capitalized software and technology and software licenses expenditures), for each of the years ended December 31, 2016, 2015 and 2014 were R$72.4 million, R$42.1 million and R$22.8 million, respectively, most of which related to data processing equipment, facilities, machinery and equipment, furniture and fittings, leasehold improvements, software and technology.

For further information on our capital expenditures, see Notes 10 and 11 to the audited consolidated financial statements of PagSeguro Brazil.

Commitments and Contractual Obligations

Our contractual obligations at December 31, 2016 consisted of obligations to purchase POS devices and platform technology for our acquirer operations as follows:

 

     At December 31, 2016  
     Less than 1
year
     1 to 3 years      3 to 5 years      More than
5 years
     Total  
     (R$ millions)  

POS device purchases

     235.9        -          -          -          235.9  

Acquirer platform technology

     1.4        2.3        3.4        2.0        9.2  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     237.4        2.3        3.4        2.0        245.1  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Off-Balance Sheet Arrangements

Other than the contractual obligations shown above, we do not have any off-balance sheet arrangements and did not have any such arrangements for the years ended December 31, 2016, 2015 or 2014.

Critical Accounting Estimates and Judgments

The preparation of financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying our accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements, are described below and in Note 3 to the audited consolidated financial statements of PagSeguro Brazil.

Accounting estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Based on assumptions, PagSeguro Brazil makes estimates concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below:

Estimated useful life of intangible assets

PagSeguro Brazil uses an estimated useful life to calculate and record the amortization applied to its intangible assets which may differ from the actual term over which the intangible assets are expected to generate benefits for PagSeguro Brazil.

The amortization of software usage rights is defined based on the effective period of the license contracted.

 

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The amortization of internally developed software is defined based on the period over which the software will generate future economic benefits.

Deferred income tax and social contribution

PagSeguro Brazil recognizes deferred income tax and social contribution based on future taxable profit estimates for the next ten years. These projections are periodically reviewed and approved by management.

Quantitative and Qualitative Disclosures about Market Risk

General

PagSeguro Brazil’s activities expose it to a variety of financial risks:    market risk (including currency risk and cash flow or fair value interest rate risk), fraud risk (chargebacks), credit risk and liquidity risk. PagSeguro Brazil’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on its financial performance. PagSeguro Brazil uses derivative financial instruments to hedge certain risk exposures.

Among the main market risk factors that may affect the PagSeguro business are the following:

Foreign Exchange Risk

Foreign exchange risk arises when future commercial transactions or recognized assets or liabilities are denominated in a currency that is not the entity’s functional currency. At December 31, 2016, PagSeguro Brazil had borrowings denominated in foreign currency that were linked to derivatives (swaps).

In accordance with policies of PagSeguro Brazil’s management, derivative transactions are allowed, as long as they are hedged by a swap entered into with prime financial institutions, for the sole purpose of hedging against risks of fluctuation in exchange or interest rates.

The amounts of derivative financial instruments are summarized as follows:

 

     At December 31, 2016
(in millions of reais)
 
     Maturity      Notional value     Fair
value
 

Foreign exchange and interest

     January 2017        129.5       132.8  

Interbank Deposit Certificate (CDI)

     January 2017        (129.5     (138.0
     

 

 

   

 

 

 
        -         (5.3
     

 

 

   

 

 

 

Foreign exchange and interest

     March 2017        70.0       71.5  

Interbank Deposit Certificate (CDI)

     March 2017        (70.0     (72.9
     

 

 

   

 

 

 
        -         (1.3
     

 

 

   

 

 

 

Total Fair Value

        -         (6.6 ) 
     

 

 

   

 

 

 

Cash Flow and Fair Value Interest Rate Risk

This risk arises from the derivative financial instrument (the swap) that replaces the risk of exchange and interest rate variation associated with borrowings by the CDI. In this case, the swap’s liability leg is the CDI, exposing PagSeguro Brazil to variations in this interest rate. For better risk management, PagSeguro Brazil chooses to enter into borrowings and derivatives with short-term maturities, which enable a better management of the rates.

 

 

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At December 31, 2016, if CDI interest rates had been 0.25% higher/lower with all other variables held constant, profit for the year would have been R$0.5 million lower/higher, as a result of higher/lower interest expenses linked to the swap’s liability leg. The equivalent lower/higher values for both 2015 and 2014 would have been zero, since no swaps were in place during those periods.

Fraud Risk (Chargebacks)

PagSeguro Brazil’s sales transactions are susceptible to potentially fraudulent or improper sales. PagSeguro Brazil uses the following two main procedures to control fraud risk:

The first procedure consists of monitoring, on a real time basis, transactions carried out using credit and debit cards and boletos through an anti-fraud system. This process approves or rejects suspicious transactions at the time of the authorization, based on statistical models that are revised on a periodic basis.

The second procedure, which occurs after approval of the transaction, consists of a reconciliation process in which PagSeguro Brazil follows up on all chargebacks with the card issuers and, where appropriate, opens a dispute process to seek reversal of the chargeback. This is a complementary procedure and increases PagSeguro Brazil’s ability to avoid and manage chargebacks.

Credit Risk

Credit risk is managed on a group basis. This risk is limited to the possibility of default by (a) card issuers, who are required to transfer the fees charged for transactions carried out by their card holders to the credit and debit card schemes, and/or (b) acquirers, which PagSeguro Brazil uses to approve transactions with card issuers.

In order to mitigate this risk, PagSeguro Brazil has established a Credit and Liquidity Risk Committee, whose responsibility is to assess the level of risk of each card issuer served by PagSeguro Brazil, classifying them into three groups:

 

  (i) card issuers presenting a low level of risk, who have credit ratings assigned by Fitch, S&P or Moody’s and who do not require additional monitoring;

 

  (ii) card issuers presenting a medium level of risk, who are monitored in accordance with Basel requirements and property, plant and equipment ratios; and

 

  (iii) card issuers presenting a high level of risk, who are assessed by the Credit and Liquidity Risk Committee at monthly meetings.

No credit limits were exceeded in 2016, 2015 or 2014, and management does not expect any losses from non-performance by these counterparties in addition to the amounts already recognized as chargebacks, presented as fraud risk.

Liquidity Risk

PagSeguro Brazil manages liquidity risk by maintaining reserves, bank and credit lines to obtain borrowings when deemed appropriate. PagSeguro Brazil continuously monitors actual and projected cash flows, and matches the maturity profile of its financial assets and liabilities in order to ensure it has sufficient funds to honor its obligations to third parties and meet its operational needs.

PagSeguro Brazil invests surplus cash in interest-bearing financial investments, choosing instruments with appropriate maturity or sufficient liquidity to provide adequate margins as determined by the forecasts.

 

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BUSINESS

Overview

We are a disruptive provider of financial technology solutions focused primarily on Micro-Merchants, Small Companies and Medium-Sized Companies, or SMEs, in Brazil. We are the only financial technology provider in Brazil whose business model covers all of the following five pillars:

 

    Multiple digital payment solutions

 

    In-person payments via POS devices that we sell to clients

 

    Free digital accounts

 

    Issuer of prepaid cards to clients for spending or withdrawing account balances

 

    Operating as an acquirer.

Our end-to-end digital ecosystem enables our customers not only to accept payments, but also to grow and manage their businesses. Before PagSeguro, many of these Micro-Merchants and SMEs were overlooked or underserved by incumbent payment providers and large financial institutions in Brazil. We offer safe, affordable, simple, mobile-first solutions for merchants to accept payments and manage their cash through their PagSeguro digital accounts, without the need for a bank account. Our digital account offers more than 30 cash-in methods and a wide range of cash-out options including our PagSeguro prepaid card, all using our proprietary technology platform and backed by the trusted PagSeguro and UOL brands. Our digital ecosystem also features other digital financial services, business management tools and functionalities for our clients.

At December 31, 2016, the PagSeguro network consisted of active clients in all 26 states and the federal district in Brazil. Our business has continued to grow rapidly, despite the major macroeconomic slow-down in Brazil since 2014:

 

    Our Net revenue from sales and services totaled R$740.6 million in 2016, an increase of 66.5% compared with R$444.7 million in 2015. Net revenue from sales and services in 2015 represented an increase of 113.5% from R$208.3 million in 2014.

 

    Our Income from early payment totaled R$392.4 million in 2016, an increase of 76.2% compared with R$222.7 million in 2015. Income from early payment in 2015 represented an increase of 92.3% compared with R$115.8 million in 2014.

 

    Our Net income for the year totaled R$127.8 million in 2016, an increase of 260.1% compared with R$35.5 million in 2015. Net income for the year in 2015 represented an increase of 30.2% compared with R$27.3 million in 2014.

Brazil has approximately 7.1 million Micro-Merchants and 3.9 million Micro Companies according to SEBRAE and the Portal do Empreendedor, which represents a major market opportunity, as most of them remain unbanked and seek digital payments solutions. We believe that by continuing to migrate these merchants into our ecosystem, we can continue to drive significant additional revenue growth in the coming years. At the same time, we will continue to introduce more value-added products and services targeted at larger clients. For example, in the second half of 2017 we expect to roll out a solution enabling clients to integrate their sales software directly with our electronic funds transfer system, allowing them to process large transaction volumes and issue tax receipts more easily than with traditional POS devices.

 

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Our History

UOL launched PagSeguro in 2007, acquiring a Brazilian digital payments startup and combining it with UOL’s own know-how in Internet services. Initially launched as an online payment platform, PagSeguro aimed to provide the digital payment infrastructure necessary to support the growth of e-commerce in Brazil. That same year, approximately 8,000 stores and approximately 200,000 consumers carried out transactions over the PagSeguro platform. UOL’s credibility in the Brazilian Internet sector was key to this successful launch, and remains so today. Founded in 1996, UOL is Brazil’s largest Internet content, digital products and services company. According to comScore, 81.2 million unique visitors (approximately 73% of Brazilian internet users) accessed a UOL website in May 2017. The PagSeguro and UOL brands together gave Brazilian online consumers the confidence to use their sensitive personal and financial data on our payments platform, in order to shop online easily and safely. As an example of our commercial initiatives to instill trust and safety in online shopping, we introduced our escrow service where we hold the consumer’s payment for a set period of time following the purchase, as a precaution in case of a commercial dispute.

In 2008, the first full year after our launch, PagSeguro was named “Preferred E-commerce Company” by Info Exame magazine. Customer numbers continued to grow, with 20,000 stores and approximately 600,000 consumers carrying out transactions through the PagSeguro platform during the year.

In 2009, we strengthened our presence in digital payments by acquiring Boldcron Technologies, a gateway payment company linked to the main acquisition providers in Brazil, which offered payment programs and networks. In the same year, Exame magazine named us in the Digital Industry category as one 1000 Melhores e Maiores (“biggest and best”) companies in Brazil.

In 2010, approximately 70,000 stores and approximately 5,000,000 consumers carried out transactions through the PagSeguro platform.

In 2011, we acquired Boa Compra, a company focused on online gaming licenses and digital payment solutions in various countries.

In 2013, the Brazilian Central Bank amended regulations to terminate the exclusive banking arrangements between banks and some card and meal voucher schemes, ending the effective duopoly in the acquirer industry in Brazil. This move was part of a concerted focus by the Central Bank on concentration in the market, following a report issued by it in 2010 on the effective duopoly between two acquirers, both of which were owned by some of the largest banks in Brazil:    RedeCard (now known as Rede, which had exclusive accreditation with MasterCard) and Visanet (now known as Cielo, which had exclusive accreditation with Visa).

Also in 2013, we expanded from online payments into point of sale, or POS, payments, which enable merchants to receive in-person payments from payment cards. Our first POS, a magnetic strip card reader that plugged into a smartphone headphone jack combined with an app, was released in April 2013. In the same year, we became accredited with Sorocred, a local card scheme, as an acquirer, and we also received PCI-DSS Certificate-Data Security Standard Certification.

In 2014, we applied to the Central Bank to become an authorized payment institution under Brazilian Federal Law No. 12,865 of 2013. Since we were already operating as an acquirer, the Central Bank regulations permit us to continue carrying out our activities until the authorization is granted, as further described in “– Regulation – Regulation by the Brazilian Central Bank.”

In March 2014, we launched our first POS device that allowed merchants to process debit and credit cards using chips; and in March 2015 we launched the Moderninha, our first standalone POS device branded with its own nickname.

 

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In 2015, we launched our PagSeguro prepaid card under the MasterCard scheme. In the same year we became the first payments provider in Brazil, other than the incumbent acquirers, to obtain accreditation as an acquirer with MasterCard and Visa.

In 2016, we established partnerships with major meal voucher card schemes including Sodexo, Ticket and VR. We also launched our Moderninha Wi-Fi and Moderninha Pro standalone POS devices.

In 2017, we launched PlugPag and other new services such as our Facebook chatbot, reconciliation services and one-day approval for merchants who wish to obtain early payment of their installment receivables.

Our Products and Services

We provide a wide range of affordable solutions and tools to help our merchants manage and grow their businesses. These include a variety of cash-in and cash-out options with features designed to attract and retain clients, provide them with access to working capital and help them manage their cash flow.

We have an in-depth understanding of our clients, the issues they face and the markets in which they operate. As a pioneer in the Brazilian digital payments market, we are able to anticipate trends and translate them into new products and solutions that meet our clients’ needs more efficiently than foreign competitors operating in Brazil. For example, the Brazilian market expects digital payments providers to offer a number of country-specific features, such as installment payments on credit cards, early payment of installment receivables and payments via boletos, all of which are central to Brazilian financial culture. We built our end-to-end digital ecosystem and our digital financial services offering around these local specificities.

With the increased adoption of mobile devices by merchants and consumers as a form of payment, we design all our solutions on a mobile-first basis so that our merchants can be self-sufficient at all times and offer payment options to consumers using mobile devices.

The PagSeguro Ecosystem

Our end-to-end digital ecosystem operates as a closed loop where our clients are able to address their main day to day financial needs, including receiving and spending funds and managing and growing their businesses. Our main products and services fall into the following categories, described in further detail below:

 

    the free PagSeguro digital account, around which all our functionalities and services are designed

 

    more than 30 cash-in solutions

 

    early payment of merchants’ installment receivables

 

    advanced built-in functionalities as well as value-added services

 

    a variety of cash-out methods

 

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The diagram below shows our main cash-in and cash-out solutions:

 

LOGO

The Free PagSeguro Digital Account

The free PagSeguro digital account, which is the core of our client offering for both merchants and consumers, centralizes all cash-in options, functionalities, services and cash-out options in a single ecosystem so that our clients can grow their business in a safe, affordable, scalable and simple way, all without needing a bank account. As a “closed-loop domestic” payment scheme for Brazilian regulatory purposes, the PagSeguro digital account does not provide credit facilities or enable holders to incur negative balances, however.

Merchants can sign up for a free PagSeguro digital account, gaining access to all of the offerings in our ecosystem, through a single online contract that can be completed in minutes without paperwork. By signing up with us, merchants can automatically start accepting more than 30 cash-in methods, all with antifraud protection, and can begin accessing our business management tools. For merchants who require more complex functionalities, we offer value-added services such as the early payment of installment receivables, accounting reconciliation and shipping solutions. With our free PagSeguro digital account, merchants may transfer their revenues to a bank account and also use our products and services to spend their revenues or other funds directly on our platform by (i) buying online, (ii) making peer-to-peer transfers or (iii) transferring their balance to the PagSeguro prepaid card, allowing them to buy goods and services in-person and online or withdraw cash at more than one million Cirrus network ATMs in Brazil and abroad.

For consumers, the free PagSeguro digital account offers not only numerous simple and safe options to pay merchants, but also the option to save their card details on our eWallet solution and to make and receive payments on a peer-to-peer basis.

We believe that these products and services create a “network growth effect.” The advantages of our digital payment solutions for merchants drive growth in their businesses, and the advantages of our digital payment solutions for consumers lead them to prefer merchants who offer these solutions, resulting in the acquisition of new clients through word-of-mouth recommendations by both merchants and consumers.

 

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  Cash-In Solutions

Our cash-in methods can be accepted through web checkout, in-app checkout or in-person using our POS devices. They include credit and debit cards, meal vouchers, boletos, bank transfers, bank debits, transfers between PagSeguro digital accounts and cash deposits.

 

  Online and In-Person Payment Tools

Our merchants can choose to accept payments from consumers through various online and in-person payment tools. For our merchants conducting business online, we offer web checkout solutions and in-app payment options. For merchants conducting in-person transactions, we offer a range of POS devices.

 

    Online Payment Tools

We offer a variety of online payment tools that enable merchants to integrate sophisticated checkout and payment processes into their online business. These include (i) three web checkout options for merchants conducting business over browsers (whether desktop or mobile), (ii) an in-app payment tool for merchants conducting business using mobile apps and (iii) social payment tools.

 

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Web Checkout:    Our web checkout options offer tokenization, advanced handling of shipping information, management of subscriptions and automatic billing and order tracking. We offer three different levels of web checkout integration:    “Redirect”, “Lightbox” and “Transparent”, all of which are easy to set up and customize. We supply our code and documentation to the merchant free of charge, allowing the merchant to select and implement the web checkout solution that best meets his or her needs.

 

LOGO    Redirect:    With Redirect, upon clicking on the
payment option, the consumer is redirected away
from the merchant’s website to the PagSeguro
secure domain, where the payment is processed.
After payment, the consumer is redirected to the
merchant’s website.

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   Lightbox:    With Lightbox, the payment is processed on the merchant’s own website but using the PagSeguro secure domain. The consumer sees both interfaces during the online checkout process, with a PagSeguro pop-up overlaying the merchant’s website. After completing the purchase, the pop-up will close and the consumer can continue navigating on the merchant’s website.

 

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   Transparent:    The Transparent checkout solution allows the merchant to create a fully customized consumer experience. Payments are processed by us under the merchant’s domain while still benefiting from the features and functionalities of the PagSeguro ecosystem, such as antifraud and consumer data protection.

 

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In-App Checkout:    Our in-app checkout is a payment tool developed to be integrated in our merchants’ mobile apps which allows payment processing via the PagSeguro secure domain, while offering single-click checkout within the merchant’s mobile app.

 

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Social Payment Tools (Pag.ae):    Our innovative “social payment” tools allow our clients to request payments by sending a web link via social media straight to the person paying, creating a fast and easy way for anyone to send and receive money electronically. Users can request payments even if they do not have a website, and the person paying does not need to register with PagSeguro and may pay through a variety of options, including credit card, boleto or bank deposit. With our Pag.ae social payment tool, our customer can request payments using a link and can send this link to one or more payer(s) via e-mail, social network or messaging service such as WhatsApp, using the recipient’s phone number or e-mail address. The payer clicks on the link and can make the payment easily in various ways (credit card, boleto or bank deposit). Pag.ae allows the recipient to pay in up to 12 installments.

We believe these social payment tools drive organic growth in our customer base, establishing relationships with potential PagSeguro customers and encouraging them to join our platform when they make a payment.

 

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    In-Person Payment Tools

Our range of affordable POS devices allows merchants to accept credit, debit and meal voucher card payments on an in-person basis. Our POS devices can be set up in less than five minutes. They are designed to be easy to use and have high levels of system availability, efficient back-up solutions, value-added functionalities and a five-year warranty.

 

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With PagSeguro, merchants can purchase their own device with a flexible payment plan and no monthly rental or other recurring fees. For the equivalent of three to six months’ rental payments to an incumbent, merchants can buy a comparable or better device from PagSeguro, freeing them from the incumbents’ continuous monthly rental fees. No credit checks on the merchant are required. All of our POS devices come with a free PagSeguro prepaid card to give the merchant an immediate cash-out option without needing a bank account.

We offer a comprehensive suite of POS devices, from our entry-level Minizinha to the Moderninha Pro:

 

    The Minizinha mPOS device connects via Bluetooth to our free POS app PagSeguro Vendas installed on the merchant’s smartphone and provides a simple yet secure means to accept payment cards. The Minizinha provides receipts via SMS for the consumer. We offer the Minizinha for a purchase price of 12 monthly installments of only R$9.90 (or US$3.00), appealing to the Micro-Merchants and SMEs who plan their own business expenses on a monthly basis.

 

    For businesses with greater needs we offer two more sophisticated units, the Moderninha Wi-Fi (priced at 12 monthly installments of R$39.90 (or US$12.09)) and the Moderninha Pro (priced at 12 monthly installments of R$69.90 (or US$21.12)). The Moderninha Wi-Fi, which provides consumer receipts via SMS, is aimed at merchants who generate lower transaction volumes; while the Moderninha Pro, which provides consumer receipts via SMS or in paper form, is aimed at merchants who generate higher transaction volumes. The Moderninha Pro is the only single unit to offer GPRS/2G/3G/4G chip connection, plug-and-play Wi-Fi and Bluetooth connections (for commercial automation and connection to other devices) on the same device, making it the POS device with the most connectivity features in Brazil. The device switches automatically between the various connection formats.

 

    Our devices range from the entry-level Minizinha to the Moderninha Pro, the only single unit to offer GPRS/2G/3G/4G chip connection, plug-and-play Wi-Fi and Bluetooth connections (for commercial automation and connection to other devices) on the same device, making it the POS device with the most connectivity features in Brazil.

 

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We also offer a virtual POS terminal via our free Android and iOS app that enables the merchant’s smartphone to be used as a POS device for credit card payments with no external hardware. The merchant types the consumer’s card number into the app, with security provided via network encryption.

We generate revenues from our sales of POS devices to merchants, in addition to the commissions generated on the credit, debit and meal voucher card transactions processed through the device. All POS devices are set up to offer up to 12 monthly installments on credit card payments at the point of purchase if the consumer chooses.

 

  Payment Methods

The free PagSeguro digital account provides more than 30 cash-in methods, including the items listed below. Our cash-in methods can be accepted through web checkout, in-app checkout, or in-person using our POS devices. For debit card transactions, card issuers in Brazil pay us as acquirer on the first business day following the consumer transaction; and for credit card transactions, card issuers in Brazil pay us as acquirer on the 30th business day following the consumer transaction.

 

    Credit cards

We accept card payments, through our online and in-person POS payment tools, from all the major credit card schemes active in Brazil, including Visa, MasterCard, Elo, American Express, Hiper and regional schemes. The credit card schemes accepted on our platform together represent 98% of the total payment volume carried out using credit cards in Brazil in 2016, according to the Brazilian Central Bank. We generate revenue from credit card transactions by charging a merchant discount rate, or MDR, a commission withheld by us from the transaction value paid to the merchant. The transaction amount, less the MDR, is credited to the merchant’s PagSeguro digital account. Our MDR pricing model is standardized, easy to understand and transparent. We also offer customized MDR pricing for certain merchants who process large payment volumes. We recognize the MDR fees in our financial statements as revenue.

In the standard payment cycle in Brazil, merchants receive sales revenues from credit card transactions 30 business days after the consumer transaction. We offer our merchants the option to receive their credit card revenues from us earlier, on either the first or the 14th business day following the consumer transaction. We refer to this option as the merchant’s “payment date election” service (regime de recebimento). If the merchant selects the one-day or 14-day payment date election, the fees for this service are included in the merchant’s overall MDR fee. This service is separate from our early payment of receivables service, which is described in the following paragraph.

Except when merchants choose early repayment of their receivables on credit card installments, and/or when merchants select the 14-day or one-day payment date election service, we pay the amount of the consumer transaction (less our commission) to the merchant three days after we receive the underlying payment from the credit card issuer.

 

 

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In addition, Brazilian consumers expect merchants to allow them to choose at the point of purchase to have the purchase price either (i) charged to their credit card accounts in a single payment, as in other markets, or (ii) split into several payments and only charged to their credit card accounts in monthly installments. In this case, the merchant only receives the revenues after the respective monthly installment has been charged, rather than 30 business days after the original transaction. To help our merchants offer the installment payment option to consumers, we offer to pay the monthly installment receivables to our merchants up-front when the consumer choses to pay in installments. Micro-Merchants and SMEs have historically faced difficulties obtaining this service from the incumbent payment processing providers, and they often require merchants to request early payment on a transaction-by-transaction basis. We offer a solution to these bottlenecks through simpler onboarding and preapproval of a merchant’s early payments. The underlying receivables relating to these payments are owed to us by the credit card issuers, which are owned primarily by Brazil’s large retail banks.

When merchants choose to make use of this early payment of receivables service we charge them a finance fee, which is additional to the MDR fee payable by the merchant. The finance fee is also deducted from the amounts payable to the merchant, but is recognized in our financial statements as financial income rather than revenues. (The receivables less the finance fee are then credited to the merchant on the 30th, 14th or 1st business day after the transaction, according to the merchant’s “payment date election” described in the paragraph above.)

Merchants who choose not to make use of our early payment of receivables service only receive the amount payable to them under the consumer transaction (after deduction of the MDR fee) after the monthly installments are charged to the consumer’s credit card and the card issuer has paid us.

 

    Debit cards

We accept debit cards from all the major card schemes active in Brazil, including Maestro (MasterCard), Visa Electron and Elo, for in-person payments. The debit card schemes accepted on our platform together represent 98% of the total payment volume carried out using debit cards in Brazil in 2016, according to the Brazilian Central Bank. Merchants receive payment from debit card transactions on the first business day following the transaction, and we generate revenues in the form of MDR commissions using a standardized, easy to understand and transparent pricing model. Unlike credit cards, Brazilian debit cards do not offer an installment payment option.

For debit card transactions, we pay the amount of the consumer transaction (less our commission) to the merchant on the same day as we receive the underlying payment from the debit card issuer.

 

    Meal voucher cards

Meal voucher cards are a labor benefit included in Brazilian employment contracts. The employer simply credits the employee’s card on a prepaid basis, and the employee can use the prepaid balance on the card to make purchases in restaurants and grocery stores. We accept in-person card payments from the principal meal voucher card issuers active in Brazil, generating revenues in the form of a value added network, or VAN, commission, which is currently charged at a flat rate per transaction. Meal voucher cards do not offer an installment payment option.

 

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    Boletos

Boletos are payment slip documents issued by Brazilian businesses and utilities through banks to enable consumers to pay their bills. Boletos can be used for products or services, utilities or taxes. Each boleto refers to a specific merchant and customer transaction, and includes the merchant’s name, customer information, expiration date and total amount due, plus a serial number that identifies the account to be credited and a barcode so that the entire document can be read and processed. The consumer can pay the boleto through his or her bank either online, over the phone, at a branch or at an ATM. Merchants can receive credits from boletos directly into their PagSeguro digital account. We generate MDR commissions on cash-in payments made via boletos to a merchant’s PagSeguro digital account.

 

    Bank transfers and bank debits

Consumers can make transfers from bank accounts, either to their own PagSeguro digital account in order to add funds to their account balance that can then be used anywhere on our ecosystem, or to a merchant’s digital account to pay for a product or service. These payments can be made via any bank transfer or, in the case of payments to merchants, via an online bank debit tool. We generate MDR commissions on payments made via bank transfer or bank debit to a merchant’s PagSeguro digital account. There is no MDR or any other commission charged by us when consumers add funds to their own PagSeguro digital account.

 

    Cash deposits

Similar to bank transfers, consumers can make cash deposits at a bank branch or ATM directly to PagSeguro digital accounts – either to a merchant’s digital account to pay for a product or service, or to the consumer’s own digital account. We generate MDR commissions on payments made via cash deposit to a merchant’s PagSeguro digital account. There is no MDR or any other commission charged by us when consumers add funds to their own PagSeguro digital account.

 

    Early payment of installment receivables

As described under “—Cash-in Solutions—Credit Cards” above, our early payment of installment receivables service helps our merchants offer the installment payment option to their consumers paying by credit card, without sacrificing their own cash flow. In addition to generating financial income for us, this early payment service is an important source of working capital for merchants, in particular for our Micro-Merchants and SMEs, who may not otherwise have efficient access to capital from banks or traditional financial institutions. We believe that by offering this service, we can strengthen our business partnerships with our merchants by providing this capital to help them grow their businesses.

We generate financial income through this early payment service by charging a finance fee, in addition to the agreed MDR fee. The finance fee is deducted from the amounts payable to the merchant, but is recognized in our financial statements as financial income rather than revenues. Our financial income from this service amounted to R$392.4 million in 2016, R$222.7 million in 2015 and R$115.8 million in 2014.

 

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Prior to this initial public offering, we funded the working capital for this early payment service using debt incurred by us. We plan to use a portion of the proceeds from this initial public offering to finance this activity through equity capitalization. In addition, we are currently in the process of setting up a Brazilian investment fund to purchase and hold receivables known as a Fundo de Investimento em Direitos Creditórios (a Fund for Investment in Receivables, or FIDC) through which we may raise debt to finance this line of business. The FIDC will be controlled by our Brazilian operating company (by virtue of owning its subordinated quotas) but will raise capital by issuing senior quotas in the fund to outside investors, who will receive interest on these investments from the FIDC. The FIDC will use the capital it raises to finance the growth of our early payment of receivables to merchants service. The results of our early payment of receivables to merchants service will continue to be reflected as financial income in the consolidated financial statements of PagSeguro Brazil. For further information regarding the FIDC, see “—Organizational Structure.”

 

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    Advanced Built-In Functionalities and Value-Added Services

Our PagSeguro digital account comes with a number of advanced built-in functionalities, provided free of charge, as well as value-added services that are designed to protect both merchants and consumers and help our merchants better manage their businesses. These functionalities and value-added services include purchase protection mechanisms, antifraud platform, account and business management tools, eWallet and our POS App. Our platform also provides solutions such as PlugPag, a free tool, aimed at our medium-sized and larger merchants, enabling them to connect their POS device directly to their enterprise resource planning (ERP) software or sales automation system via Bluetooth; cart recovery solutions to improve sales conversion rates on e-commerce websites; and developer platforms allowing merchants to give third-party developers access to their PagSeguro digital accounts on a secure basis using application programming interfaces, or APIs; among other functionalities.

 

  Purchase Protection

Our Purchase Protection solution adds multiple layers of security for online purchases made on our platform. As a payment card industry, or PCI, compliant company, we do not share consumer credit card data or sensitive information with merchants, helping to prevent fraud and data misuse. For added protection to online consumers, our ecosystem holds consumer payments in escrow for a set period after purchase. If there is no consumer complaint, the funds are typically released to the merchant in two weeks from the purchase date. If a problem occurs with the purchase and the transaction is eligible for Purchase Protection, the consumer can file a claim and, if requested, we will act as mediator to help resolve the issue with the merchant. If the issue is not resolved, we reimburse the consumer for the full purchase price plus shipping costs. In 2016, only 0.1% of our transactions required dispute mediation and for those that did, the average time for dispute mediation settlement was 14 days. 84% of the disagreements related to non-receipt of a purchase, and 66% were resolved in favor of the merchant.

 

  Antifraud platform

In addition, our IT background combined with the 10 years of historical transaction data we have amassed since our launch allow us to develop proprietary technology and gain expertise against online and chargeback fraud in Brazil. Our antifraud platform combines proprietary features, such as internal risk modeling and scoring through artificial intelligence and risk assessment tools that collect public and private market information, as well as front-line third-party solutions such as Feedzai, Emailage and Threatmetrics. The antifraud platform is fully integrated into our ecosystem, and features processes designed to monitor potential fraud in real time, tracking transaction approvals and denials, enabling us to maintain high transaction approval rates and low incidences of fraud.

When a client requests a chargeback from the card issuer, we verify whether the sale occurred and whether the product or service was delivered by the merchant. If the chargeback claim was fraudulent, we pay the amount due to the merchant and we contest the attempted chargeback with the card issuer by providing the supporting documentation. If the chargeback claim was justified, we pass on the cost to the merchant. For information on dispute mediation requests filed by our clients on our platform, see “—Protecting Our Clients—Transaction Security.”

 

  Account management tools

We aim to help our merchants expand their businesses by offering free tools such as account statements for their PagSeguro digital account, customized digital invoicing, sales data reports, simulations of early payment of merchants’ receivables, and revenue management.

 

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  Business management tools

For merchants who generate larger transaction volumes and require more complex controls, we offer services such as flexible crediting dates, payment into separate bank accounts for each card scheme, and a split payment solution that automatically segregates credits between two different companies. Our split payment solution allows merchants to generate payments, integrate employees, manage receivables and receive commissions in real time. We offer these services by providing our merchants with the code and documentation to implement these tools.

 

  eWallet

With our eWallet, users can save their credit card information directly to our ecosystem, allowing them to make online payments to merchants without having to type in the credit card details for each purchase. This improves user experience and makes the payment process faster, easier and more secure. Our eWallet allows users to save multiple credit cards. Credit card transactions made using credit cards stored in eWallet generate MDR fees in the normal way.

 

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  POS App (PagSeguro Vendas)

Our free sales app PagSeguro Vendas is a POS software app available for smartphones and tablets running iOS or Android that integrates seamlessly with our payment processing solution but can also be used on a stand-alone basis. The tablet version of the app allows merchants using POS devices to improve their business operations by registering and itemizing their services and products, selling merchandise on customizable terms, tracking business data and allowing for faster in-app checkout. Items can be grouped, categorized, sorted, and linked to inventory management. PagSeguro Vendas is user-friendly and secure, and fully integrated with our merchants’ free PagSeguro digital accounts and the Moderninha Pro, Moderninha and Minizinha POS devices. PagSeguro Vendas is rated 4.5 stars by 643 reviewers in Apple’s Brazilian app store and 4.2 stars by 41,852 reviewers in the Android app store.

 

  PlugPag

PlugPag is a free tool, aimed at our medium-sized and larger merchants, enabling them to connect their POS device directly to their enterprise resource planning (ERP) software or sales automation system via Bluetooth. The PlugPag feature offers various advantages such as a direct connection between the merchant’s software and the POS device, which automates the flow of information, avoiding human intervention so as to minimize potential mistakes and fraud. By sending the confirmation or rejection of each sale directly to the merchant’s software, this tool facilitates automatic reconciliation of sales records, a common requirement of larger merchants.

 

  Accounting reconciliation

We offer merchants a platform for reconciling their digital transaction revenues and the related fees with their bank account balance and accounting records. This service offering ramped up significantly with our acquisition of 51% of the shares of R2Tech, a company specialized in reconciliation, in May 2017, and is backed by our expertise in middleware and back-office solutions processing. We generate revenues from this service in the form of a flat commission per transaction reconciled for the client.

 

  Cart recovery

Our cart recovery solution aims to improve sales conversion rates on e-commerce websites. If the consumer accesses a merchant website, places items in the website’s virtual cart, continues to our web checkout but then leaves the website before finalizing the purchase, this tool keeps the items in the cart, saving the consumer time if he or she later returns to the merchant’s website to complete the purchase. It also features e-mail reminders and remarketing to direct the consumer back to the merchant’s web checkout.

 

  Subscription service and automatic billing

Our Merchants can provide subscription services and automatic billing for their consumers. This tool enables the merchant to manage, cancel or renew subscriptions and manage and cancel automatic billings, all through the free PagSeguro digital account.

 

  Smart Supply

Our Moderninha Pro has built-in technology that measures the consumption of POS receipt paper. This technology, combined with an advanced logistics system, allows us to deliver replacement paper rolls to the merchant automatically in advance. We believe this tool increases merchant satisfaction while reducing inquiries and the related customer service costs. We consider this service a loyalty initiative and provide it free of charge.

 

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  POS Assistance

All of our POS devices have a five-year warranty. In order to reduce the inconvenience of waiting for repair to or replacement of a POS device, we offer eligible merchants three levels of assistance:    (i) standard service, where the replacement device is delivered via mail, (ii) express service, where the replacement device is delivered via courier service, and (iii) quarterly preventive assistance for larger clients, where our field technicians visit the merchant periodically to carry out maintenance on a preventive basis.

 

  Developer platform

We enable merchants to give third-party developers access to their PagSeguro digital accounts on a secure basis using application programming interfaces, or APIs. Our APIs are designed to allow developers a plug-and-play service to create integrated websites and software applications that connect to the PagSeguro platform, allowing merchants to benefit fully from the features and value-added services available on our ecosystem, while keeping our customers’ financial information confidential. Our developer platform offers integration tests and guides (including modules and a virtual library) and community and GitHub forums.

 

  Shipping solutions

Through a partnership with the Brazilian Post Office, we offer integrated shipping solutions enabling online merchants to send, insure and track their packages at lower overall shipping rates than the Brazilian Post Office’s standard prices. Delivery fees can be included in the online sales transaction or paid separately by the purchaser. Merchants can choose to offer (i) a fixed freight rate based on the number of items shipped, (ii) a weight-based rate or (iii) a customized rate based on a fixed amount plus an incremental rate for each additional item. We monitor and review the Brazilian Post Office’s performance and compliance with our contractual terms.

 

  EFTPOS Integration Solution

Our EFTPOS integration solution, which we expect to launch in the second half of 2017, will offer solutions that integrate EFTPOS technology with merchant software, secured via PIN pad. This service will allow merchants to process of large transaction volumes and issue tax receipts more easily than with traditional POS devices.

 

  Single-Click

Our Single-Click service is a functionality offered across our e-commerce platforms that enables merchants to request customer approval to save their payment information, simplifying future purchases. Once approved, e-commerce merchants can provide a seamless checkout option, allowing customers to make purchases with a single click.

 

  Promotional engine

Our promotional engine is a marketing tool that allows merchants to advertise across our client base. For example, a merchant can offer promotional discounts to other PagSeguro customers in specific sectors.

 

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  Cash-Out Solutions

Our cash-out solutions enable our clients to transfer or spend the balance on their PagSeguro digital account securely by a variety of means including online purchases via eWallet, in-person and online purchases or cash withdrawals using our PagSeguro prepaid card, on-platform peer-to-peer transfers, transfers to bank accounts and cross-border remittances.

 

  Online purchases via eWallet

Users can save information for multiple credit cards directly to our ecosystem using our eWallet solution, allowing them to make online payments to merchants on a secure basis without having to type in the credit card details for each purchase. This improves user experience and makes the payment process faster and easier. For further information regarding our eWallet solution, see “—Our Products and Services—The Free PagSeguro Digital Account—Advanced Built-In Functionalities and Value-Added Services—eWallet.”

 

  PagSeguro prepaid cards

Our PagSeguro MasterCard prepaid cards allow merchants or consumers to use the balance from their free PagSeguro digital account to buy goods and services in-person and online or withdraw cash at more than one million Cirrus network ATMs in Brazil and abroad. Merchants can therefore receive payments from sales transactions into their PagSeguro digital account and spend that money directly using the PagSeguro prepaid card, without needing a bank account. With a modest initial purchase cost, the card comes with no annual fees or interest rates – and we provide it free to merchants who purchase a PagSeguro POS or mPOS device. The PagSeguro prepaid card does not require credit checks on the merchant or preapproval for issuance. At December 31, 2016, more than 749,000 PagSeguro prepaid cards had been issued.

We generate revenues from (i) the issuance fees for PagSeguro prepaid cards, (ii) interchange fees we receive, as a card issuer, from each transaction made through PagSeguro prepaid cards, and (iii) a flat fee for cash withdrawals at ATMs using PagSeguro prepaid cards. After the initial issuance fee, the cardholder does not pay an annual fee or other fees for using the card.

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  On-platform peer-to-peer transfers

Our clients can use the balance on their PagSeguro digital account to transfer funds to other digital accounts on our platform. We charge a commission paid by the recipient of the payment.

 

  Bank transfers

Clients can make transfers from their PagSeguro digital account directly to a bank account. We believe, however, that our numerous direct cash-out options are increasingly reducing the need for our merchants to transfer balances out of our digital platform. We do not receive revenues from cash-out bank transfers.

 

  Cross-border remittance

Our “Boa Compra” platform allows our clients to operate cross-border transactions when consumers are located in different countries across Latin America, Spain, Portugal and Turkey (for example, for foreign merchants selling to Brazilian consumers, or for Brazilian merchants selling to foreign consumers – although the platform is also used for transactions where neither party is Brazilian). Boa Compra has been particularly attractive to clients in the online gaming industry, among other areas. Boa Compra enables international checkout by offering users more than 150 payment methods in multiple currencies, including our proprietary digital currency Go4Gold. When Brazilian consumers, for instance, make a purchase abroad using Boa Compra, we organize the remittance of the funds outside Brazil on behalf of each customer in accordance with Central Bank regulations using the consumer’s Brazilian taxpayer identification number.

Our Customers

We offer our clients free digital accounts which they can use to sell products as merchants, or to buy products as consumers. There is no division between the two categories, since the same digital account serves both types of clients – indeed, our merchants are also consumers when they spend their digital account balance using our cash-out features, and our consumer clients can also be merchants.

We offer the following major benefits for both merchants and consumers:

 

    Customers do not need a bank account to join our ecosystem. With a 100% online onboarding process, without paperwork, quick turnaround and a high acceptance rate, we offer access to our advanced digital payment processing and receivables early payment services. We accept merchants who are either individuals or companies.

 

    We offer a full suite of more than 30 cash-in options under a single contract, with security and reliability, plus a wide range of cash-out options including bank transfers, online purchasing, and spending both in-person and online as well as cash withdrawals using our PagSeguro prepaid card.

 

    Our pricing model for all of our services – whether transaction fees, early payment of installment receivables or sales of POS devices – is simple, transparent and easy to understand. For example, we offer the Minizinha mPOS device for a purchase price of 12 monthly installments of only R$9.90 (or US$3.04), the Moderninha Wi-Fi for a purchase price of 12 monthly installments of R$39.90 (or US$12.24) and the Moderninha Pro for a purchase price of 12 monthly installments of R$69.90 (or US$21.44).

 

    Our social payment solutions, such as Pag.ae, allow both consumers and merchants to use their PagSeguro account to request payments via web links sent through e-mail, social networks or messaging services such as WhatsApp.

 

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    We offer a comprehensive suite of affordable POS devices, with user-friendly features and functionalities, reliable connectivity and a five-year warranty. Our devices range from the entry-level Minizinha to the Moderninha Pro, the only single unit to offer GPRS/2G/3G/4G chip connection, plug-and-play Wi-Fi and Bluetooth connections (for commercial automation and connection to other devices) on the same device, making it the POS device with the most connectivity features in Brazil. Our merchants purchase their own device through a flexible payment plan. For the equivalent of three to six months’ rental payments with incumbents, merchants can buy a comparable device from PagSeguro and avoid continuous monthly rental fees.

 

    Data protection and confidentiality for consumers, with merchant verification and transaction protection mechanisms, including escrow periods and dispute mediation services.

 

    Our payment solutions reduce the need for consumers to carry cash since more Micro-Merchants and SMEs are able to accept digital payments in-person.

Our merchant base is highly diversified, which shields us from dependence on a small number of business sectors or major accounts. In 2016, general retail stores, our largest volume sector, accounted for less than 15% of our overall transaction business and no other major business sector (clothing stores, food and beverage merchants, beauty parlors, or auto spares and repair shops) accounted for more than 10% of our overall transaction business.

We principally target Micro-Merchants and SMEs, many of whom were ignored or underserved by the incumbent payment providers and financial institutions in Brazil before PagSeguro was launched. In order to cover the costs of their more expensive technological platform, these incumbents generally charge Micro-Merchants and SMEs higher overall fees and commissions because they generate lower transaction volumes. Our platform enables us to keep overall per-transaction fees lower for merchants who generate lower transaction volumes. We believe our client data supports this model:    78% of our merchants use PagSeguro as their sole electronic payments service.

 

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Our merchants tell our story for us:

 

  Mauro Maia, restaurant owner:    “I now have the new Moderninha Pro, which offers a number of interesting features. First, it has a Wi-Fi connection, which means you don’t have to rely on cellular connections where sometimes you can’t get a signal. This device involves no rental fees and accepts cards from all the main card schemes.”

 

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  Carolina Ikeda, florist:    “The device helps me sell flowers to people who don’t carry cash around, just like me!”

 

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  Luiz Augusto Pinheiro, personal trainer:    “With this device I can receive my payments easily. Before, if the client didn’t have cash I had to take a check, which meant a trip to the bank. With PagSeguro, the whole payment process is automatic.”

 

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  Karina Carneiro, e-commerce jeweler:    “For retailers like me, being able to offer customers an installment plan on their credit cards is sensational. PagSeguro has been a strong business partner. I recommend them without hesitation!”

 

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  Rafael Bauer dos Santos, fresh coconut seller:    “After lots of research, I chose the Moderninha Pro for one simple reason: no monthly rental fees. The technical support is very professional and the device has a five-year warranty. The Moderninha increased my sales, and my customers love the practicality. It also makes financial management easy.

 

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  Célia Vilas Boas, cafe owner:    “Our customer base has grown thanks to PagSeguro. Once we bought the Moderninha our revenues increased noticeably because we started accepting all major card schemes and meal vouchers.”

 

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  Marinaldo Nogueira, store owner:    “The Minizinha allowed me to accept both debit and credit cards, which increased sales and benefited my business.”

 

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  Beatriz Ribeiro, self-employed manicurist:    “The Minizinha offers plenty of advantages, and the lower fees help my bottom line.”

 

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  Juliana Toshimatsu, market stallholder:    “The Moderninha Wi-Fi, in addition to making our life easier, helped us to drive sales up!”

 

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  Ana Laura Mato, clothing store owner:    “With the Moderninha Pro, I said ciao to rental fees, and I can accept all debit and credit cards.”

 

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We strive to provide relevant products, efficient customer service, account support and protection from fraud and loss. We have developed a number of security procedures to provide protection to consumers by offering escrow periods and dispute mediation, covering issues such as non-delivery or failure to match the merchant’s description of the product sold. See, “—Protecting Our Clients” and “—Our Products and Services—The Free PagSeguro Digital Account—The PagSeguro Ecosystem—Advanced Built-In Functionalities and Value-Added Services—Purchase Protection.”

Product Development and Technology

We develop most of the software technology used by our digital payments platform in-house, although we also outsource certain projects to outside developers in order to expedite the delivery of software and keep our time-to-market advantage. Through this combination of technology, developed both in-house and by outsourced developers, we have developed a stable, reliable and highly scalable platform with intuitive user interfaces, management tools, transaction processing, APIs, and database and network applications that help our customers utilize our suite of products and services, while keeping their financial information confidential.

Our platform allows consumers to make purchases using a broad range of payment methods, regardless of where a merchant is located. For purchases made outside Brazil, we partner with local payment service providers.

We manage large volumes of system access data and transactions, with more than 99.9% availability using Internet data centers provided by UOL Diveo, a UOL group company that focuses on IT outsourcing, data centers, cloud computing and other managed IT services. Backed by UOL Diveo, we are able to scale up our services while retaining high availability for peak-volume occasions such as Christmas, Mother’s Day and Black Friday. This high-availability and continuously deployed platform ensures that all of our clients are able to operate with the latest features and the newest innovations without any need to patch or upgrade their software. Our scale as a UOL group company allows us to establish favorable partnerships with several suppliers, including software developers and hardware manufacturers. We work with these suppliers to continuously tailor our solutions and POS devices to fit the needs of our main target merchants.

At December 31, 2016, 40% of the total headcount of PagSeguro was engaged in research and development. With our specialized team of more than 400 people focused on developing reliable and scalable systems and new products and features, we regularly roll out innovative and disruptive solutions that are tailored to the Brazilian market. Our expenditure on research and development (including salaries) amounted to R$68.6 million in 2016, R$37.0 million in 2015 and R$20.1 in 2014.

We strive to offer new features and formats to improve our users’ experience on our platform. This process starts by listening to suggestions from our clients. We hold focus group meetings and conduct surveys periodically with regular and highly active customers to obtain feedback regarding our products and services, as well as suggestions and ideas for new features.

We test all new products and features rigorously in-house and with pilot groups of merchants before rolling them out. Once our internal team has ensured they are working properly, we typically roll them out first to a select group of customers on a trial basis, listening to feedback and suggestions and enhancing the final details of the product or feature before rolling out to all customers. We frequently update our software products and follow a regular software release schedule with improvements deployed periodically, ensuring our merchants get immediate access to the latest features.

 

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Managing our platform’s software architecture and hardware is as important as offering new products and features. We focus on optimizing our processes and equipment to help ensure that our systems are capable of handling our rapid growth in an efficient and cost-effective way.

Our technology infrastructure simplifies the storage and processing of large amounts of data, automates many administrative tasks, and enables us to deploy and operate products and services on a wide scale. Our technology infrastructure is designed to reduce downtime in the event of system outages or catastrophic events, with continuity features, system redundancy and protection against cyber-security threats. For further information on the measures we take to protect against cyber-security threats, see “—Protecting Our Clients.” We strive to improve our technology infrastructure and platform continuously in order to enhance the customer experience and to increase security, efficiency and scalability.

Our research and development team focuses on our ongoing pipeline of reliable and scalable systems and new products and features tailored to the current Brazilian market. Using our qualified product and service design teams and research and development team, we intend to roll out a portfolio of new solutions, for both merchants and consumers, based on mobile apps, further strengthening our mobile-first commitment and simplifying our clients’ lives. We anticipate that we will continue to devote considerable resources to research and development in the future as we add new features and functionality to our products and services. Our market is characterized by rapidly changing and disruptive technologies, as well as evolving industry and regulatory standards, and we seek to remain in the front line of these changes. We believe our ability to adapt to rapidly changing technologies, products and services in an evolving industry is the cornerstone of our future success. For further information on the technological challenges in our industry, see “Risk Factors—Risks Relating to our Business and Industry—Substantial and increasingly intense competition, both within our industry and from other payment methods, may harm our business.”

Protecting Our Clients

Trust and security are essential to success in the digital payments market. Fraud is a constant threat, involving items such as account takeover, identity theft and malicious counterparty activities. The ability to protect our clients from financial loss and data theft has been key to our competing successfully and growing our business sustainably, and we believe security will continue to be a major competitive factor in the future. We invest in providing comprehensive protection for our clients on our ecosystem, focusing on three main areas:     transaction security; platform security; and customer service.

Our investments in this area have been recognized by our customers and the industry. For example, we were recognized as one of the “Best Companies for Consumers” in digital payments in both 2016 and 2015 by Época Reclame Aqui, a consumer protection service and were recognized for client service excellence in the financial services category in 2015 and 2017 by XVI Consumidor Moderno, a customer service magazine.

 

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Transaction Security

We have focused since our launch on ensuring the security of payment transactions carried out on our ecosystem. We believe we have been a pioneer in developing technology and expertise against online and chargeback fraud in Brazil, backed by the reputation of the PagSeguro and UOL brands. As a result of our investment in protection systems, our IT background combined with our 10 years of historical transaction data available since our launch, our transaction approval rate averaged 71.6% in 2016, while in the first six months of 2017 our monthly rate transaction approval ranged from 72.4% to 75.2%. Our net chargeback rates for transactions of six months old averaged 0.26% in 2016, and the first six months of this year show that our net chargeback rates for transactions are declining. These net chargeback rates compare highly favorably with the 1.0% limit established by the card schemes. We achieve transaction security through a combination of antifraud technology, the design of our platform, and protection programs for our clients.

 

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As is the case with any digital transaction, those that take place on our digital platform are susceptible to potentially fraudulent or improper sales. We use two main processes to control this fraud risk. The first process consists of monitoring credit card, debit card and boleto transactions on a real-time basis, through systems that identify potential fraud. This process approves or rejects suspicious transactions at the time of the authorization, based on statistical models that are revised on a periodic basis. The second process, which occurs after approval of the transaction, consists of a reconciliation process in which PagSeguro Brazil follows up on all chargebacks with the card issuers and, where appropriate, opens a dispute process to seek reversal of the chargeback. This is a complementary process and increases our ability to avoid and manage chargebacks.

Our antifraud platform combines proprietary features, such as internal risk modeling and scoring through artificial intelligence and risk assessment tools that collect public and private market information, as well as front-line third-party solutions such as Feedzai, Emailage and Threatmetrics. For more information, see “—Our Products and Services—The Free PagSeguro Digital Account—The PagSeguro Ecosystem—Advanced Built-In Functionalities and Value-Added Services—Antifraud Platform.”

 

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The design of our platform also assists in preserving data confidentiality. Consumers can make payments through PagSeguro without sharing sensitive financial information such as credit card or debit card details with the merchant. Transactions on PagSeguro are tokenized and payment authorization credentials are kept separated from account holder’s information, helping us to better detect and prevent fraud when funds enter, flow through and exit our ecosystem. In addition, the ability to make and accept digital payments increases personal security in in-person transactions by reducing the need for both consumers and merchants to carry cash.

Our protection programs guard our clients from loss through fraud and counterparty non-performance. We believe the history and critical mass of our consumer database allows us to provide quicker and more reliable transaction approval when compared with smaller or more recently established digital payments providers in Brazil. Our protection programs, which apply to online purchase transactions completed through our ecosystem, aim to reassure consumers the confidence that they will only be required to pay if they receive the product in the condition as described, and merchants the confidence that they will receive payment for the product that they are delivering to the customer.

Our merchant program protects against losses for chargeback fraud and similar claims on substantially all of our online transactions. A chargeback situation may also occur if the card used was unauthorized or if there is a non-fraudulent cardholder claim. If a chargeback claim is valid, the card issuer sends the transaction back to the merchant and charges the merchant the amount of the questioned sale. If the merchant cannot remedy the chargeback, it is the merchant’s loss. If there are not sufficient funds in the merchant’s account, the chargeback amount is charged to the acquirer.

For consumers, we provide protection against losses under which they can submit a claim if there is a problem with a purchase. The consumer can file a claim through our PagSeguro website, in which case the consumer and the merchant can seek to resolve the claim together. If they cannot resolve the claim within seven days after the claim is filed, the consumer has up to 20 days after filing the claim to request our assistance, in which case we act as mediator to help resolve the issue with the merchant. If a consumer does not request mediation within 20 days after filing a claim, the claim will be resolved in favor of the merchant.

Platform Security

The architecture of our proprietary end-to-end payments platform coupled with third-party front-line solutions are key to our ability to provide consumers and merchants with continuity and security in their transactions. Through our numerous cash-in and cash-out options we are able to collect data from our clients, which allows us to save important information on customers for purposes of the approval of future transactions. The multiple layers of protection included in our platform help ensure continuity as well as addressing the cybersecurity risks discussed in “—Transaction Security” above.

 

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We have developed intuitive user interfaces, customer tools and transaction processing and database and network applications that help our users complete transactions reliably and securely, both on our platform and on merchant sites integrated with PagSeguro. Our technology infrastructure simplifies the storage and processing of large amounts of data, facilitates the deployment and operation of large-scale global products and services, and automates administrative tasks. This technology infrastructure has been designed around industry-standard architectures to reduce downtime in the event of outages or catastrophic occurrences. We work hard to improve our technology infrastructure continuously in order to enhance customer experience and increase efficiency, scalability and security. We also make use of well-known security protocols and solutions to secure user data, including, among others:    EV-SSL certificate, multiple data encryption techniques, intrusion detection (IPS/IDS), application firewalls (WAF), Anti-DDoS, Data Loss Prevention (DLP) and 2-factor authentication. We also perform security penetration tests on a regular basis and apply top-most security solutions for code and application scanning (SAST/DAST).

Our platform’s architecture enables us to connect all parties regardless of whether the transaction is occurring at a traditional physical location (such as inside a store), a nontraditional physical location (such as in a park), or online, and whether through a mobile or fixed-line device. We believe that mobile devices, in addition to being the future of e-commerce, create opportunities to make digital payments safer. For example, we are able to use location data from mobile devices to reduce risk for our clients.

 

  Customer Service

We believe in excellence in customer service. By helping our clients navigate our applications and answering their questions quickly, we have been able to grow rapidly and to build trust with our clients, which has increased their loyalty and enhanced our reputation.

We provide our customers with an array of digital self-service features including real-time online chat, chatbots, customer service e-mail and a customer service hotline. Our customer service operations are provided by a combination of PagSeguro employees and outsourced providers, which together make up approximately 800 full-time equivalent, or FTE, positions.

We maintain service quality by placing emphasis on careful selection of our customer service personnel and regular monitoring of employee performance. Our employees are trained to have in-depth product and service knowledge, professional service attitudes and communication skills to best address customer needs and inquiries.

 

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Sales and Marketing

Our marketing strategy is designed to grow our platform by building and maintaining the brand recognition and trust of the PagSeguro and UOL brands, attracting new users and generating more frequent activity by our existing users. Our marketing initiatives aiming to recruit merchants to our ecosystem currently focus on our POS devices, web checkout solutions and other online payment solutions, such as Pag.ae. We believe that introducing our digital payment solutions to merchants who are not yet our clients is the most efficient and cost-effective strategy to sustain our growth among both merchants and consumers, creating a “network growth effect.” The advantages of our digital payment solutions for merchants drive growth in their businesses, and the advantages of our digital payment solutions for consumers lead them to prefer merchants who offer these solutions, resulting in the acquisition of new clients through word-of-mouth recommendations by both merchants and consumers.

 

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Our existing clients, many of whom use PagSeguro as an exclusive payment method, enable us to grow our merchant base rapidly and organically. Each time a consumer who has not yet registered with PagSeguro visits our website or pays a merchant using one of our online or in-app checkout solutions, the consumer is invited to open a free PagSeguro digital account to make his or her next purchase with PagSeguro easy and seamless.

 

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LOGO

We strive to position PagSeguro products and services in top of mind and present them as a desirable, easy and secure means to accept and make payments in Brazil, while accompanying the consumer throughout the purchasing process, from general brand awareness through to actual purchase or account registration. As a digital company, and with the support of UOL’s audience, we continue to build and maintain brand recognition and awareness, while generating demand for our products and services through a variety of marketing campaigns, including:

 

  traditional offline media:    television advertisements and merchandising (broadcast and cable), radio, movie theaters, the printed press, festivals and events, and display media such as billboards, urban digital time and weather displays, and airport and bus station displays;

 

  traditional online advertising:    display media (including banners, rich media, interstitials, videos and native ads) on a variety of online platforms, such as premium websites, portals, video platforms such as YouTube, social media platforms such as Facebook and Instagram, mobile apps, e-mail marketing and affiliates programs; and

 

  search:     we have expertise in positioning our products in preferential placements on search platforms displayed on desktops, tablets and smartphones, using specific initiatives such as paid search (Search Engine Marketing, or SEM, which includes bid management tools and keywords analysis) and natural or organic search (Search Engine Optimization, or SEO, which includes website optimization).

Our marketing department develops all these online and offline marketing strategies using single integrated concepts, so that our campaigns include key visual characteristics and consistent messages across all channels. In line with our growth strategy, most of our campaigns focus on Micro-Merchants and SMEs, with messages that highlight our easy, safe and hassle-free way of accepting payments, such as “a single online contract that allows you to accept more than 30 cash-in methods” and “free yourself from POS rental fees.” We regularly compare our pricing to our competitors’ and point out the advantages of our products and services for new or growing businesses. At the same time, we also advertise value-added products and services targeted at larger merchants and consumers from higher income sectors, including our business management tools and commercial automation solutions.

We believe that our association with the UOL group brings experience and competitive advantages in designing, negotiating and purchasing advertising space.

 

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Through our ongoing focus on expanding our payment solutions and increasing our brand recognition, the strength of our brand, products and services has been recognized in a number of awards, including:

 

  Named as one of the “Best Companies for Consumers” for electronic payments in both 2016 and 2015 by Época magazine and Reclame Aqui, a consumer protection service;

 

  Recognized in the digital industry category by Exame magazine’s Maiores e Melhores in 2009 and 2010; and

 

  Recognized as the best company in its industry in terms of client service excellence by the XVI Consumidor Moderno Award in 2015.

 

  Recognized for leading performance in Brazilian retail by Prêmio BR Week in 2016.

As further support of the increasing strength of our brand, according to Google Trends, and as illustrated by the below chart, as of July 2017, “PagSeguro” and “Moderninha” have experienced rapid growth in search volume over the past five years (or since the March 2015 launch, in the case of Moderninha) when compared to the other digital payment solutions in Brazil.

 

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We use our proprietary tools and market measurement systems developed by third parties, such as Adobe and Google, to deepen our knowledge about consumer behavior and, consequently, optimize our marketing efforts and expenditures by customizing our sales messages to make it easier for users to understand, find and buy our products and services.

Our marketing strategy is customized and we manage our desktop sites, mobile websites and mobile applications differently, each optimized for the screens they fit and the way our customers use them.

 

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In addition to our online and offline advertising efforts described above, we developed a broad range of marketing and sales channels to access potential clients, including:

 

  our own sales team, mainly focused on sales of our POS devices and online products and solutions to larger clients, as well as on providing ongoing support to those clients;

 

  partner companies that distribute PagSeguro devices and solutions to their customer base (mostly point of sale solutions’ companies);

 

  third parties hired as independent sale organizations to distribute our POS devices across Brazil;

 

  online store platforms and web development companies, which integrate PagSeguro as an exclusive or preferred payment method to their clients; and

 

  third-party call center service provider hired to answer calls, e-mails and chat inquiries from our clients and prospects, and to sell our devices and solutions.

Organizational Structure

We are a Cayman Islands exempted company with limited liability and are a subsidiary of Universo Online S.A., or UOL. Our principal executive office is located at Avenida Brigadeiro Faria Lima, 1384, 01452-002 São Paulo – SP, Brazil. Our investor relations office can be reached at +55 (11) 3038-8127 and our website address is www.pagseguro.uol.com.br. Information provided on our website is not part of this prospectus and is not incorporated by reference herein.

UOL is a Brazilian sociedade por ações that was founded in 1996. UOL is Brazil’s largest Internet content, digital products and services company. Its majority shareholder is Grupo Folha, one of the largest media groups in Brazil and the owner of the São Paulo daily newspaper Folha de S. Paulo, Brazil’s most-read newspaper according to the Circulation Verifier Institute (Instituto Verificador de Circulação, or IVC).

We carry out our operations principally through our Brazilian operating company, Pagseguro Internet S.A., a Brazilian sociedade por ações. Pagseguro Internet S.A. carries out most operations directly, and also has four subsidiaries, each of which is substantially wholly owned:    (i) Boa Compra Tecnologia Ltda., organized in Brazil, which operates our online gaming and cross-border digital services in Latin America, Portugal, Spain and Turkey; (ii) NET+Phone Telecomunicações Ltda., organized in Brazil, which handles purchases and sales of our POS devices; (iii) BCPS – Online Services, Lda, organized in Portugal, which serves as Boa Compra’s hub in Portugal and handles part of its account management; and (iv) R2Tech Informática S.A., organized in Brazil, which manages our reconciliation product. BCPS – Online Services, Lda, and R2Tech Informática S.A. were both acquired during 2017.

We are also currently in the process of setting up a Brazilian fund for investments in receivables, or FIDC, through which we may raise debt to finance the growth of our business. The FIDC will be controlled by PagSeguro Brazil, and will raise capital by issuing senior quotas in the fund to outside investors, who will receive interest on these investments from the FIDC. The FIDC will use at least 90% of its capital to purchase merchant receivables. The FIDC will use the capital it raises to finance our early payment of receivables service for merchants. The results of this early payment of receivables service will continue to be reflected as financial income in our financial statements. The FIDC is a common structure for Brazilian payment providers who offer early payment of merchants’ receivables. In addition to broadening our financing options for this activity generally, it reduces certain regulatory constraints since the FIDC structure is specifically designed for this financing activity under Brazilian law, and we also expect it will allow us to defer certain tax obligations. For further information regarding our early payment of receivables service, see “—Our Products and Services—The Free PagSeguro Digital Account—The PagSeguro Ecosystem—Early payment of installment receivables.”

 

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The chart below shows our corporate structure after giving effect to the contemplated issuance and sale of Class A common shares in this offering, assuming no exercise of the underwriters’ over-allotment option to purchase additional common shares from UOL:

 

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Competition

The Brazilian payments industry is highly competitive and fast-changing. We compete in the online digital payments market and in the POS payments market.

In the online digital payments market, we compete primarily with international online payment services, such as PayPal, and regional players, such as MercadoPago from MercadoLibre and MoIP. In the market for in-person payments via POS devices, we compete primarily with incumbent Brazilian providers, such as Cielo, Rede, GetNet and Stone. Our business model differs from the model used by the incumbent Brazilian providers, who generally offer their POS devices under long-term monthly rental contracts with pricing that works out to be more expensive than the monthly installments for the purchase of our POS devices. These incumbent providers also target larger clients, since their business model results in more expensive products and services, while our primary target customers are currently Micro-Merchants and SMEs, who are underserved by incumbent payment providers and large financial institutions in Brazil.

Like the digital payments industry in general, we also compete with other means of payment, both digital and traditional, including cash, checks, money orders and electronic bank deposits.

We are the only financial technology provider in Brazil, however, whose business model covers all of the following five pillars:

 

    Multiple digital payment solutions

 

    In-person payments via POS devices that we sell to clients

 

    Free digital accounts

 

    Issuer of prepaid cards to clients for spending or withdrawing account balances

 

    Operating as an acquirer

 

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We seek to differentiate ourselves from our competitors primarily on the basis of this end-to-end coverage as well as our focus on transaction security, on ease of use, and on the mobile environment. While competitive factors and their relative importance vary based on the size, industry and focus of each merchant, we believe the following factors are key to competition in the digital payments market in Brazil:

 

    an ecosystem that attracts, retains and engages merchants and consumers;

 

    speed and simplicity of the customer onboarding process;

 

    consumer confidence in transaction security, including the ability for consumers to make payments without sharing their financial information with the merchant or counterparty;

 

    POS devices with affordable prices and no rental fees;

 

    quality of customer service;

 

    breadth and depth of features and functionality; and

 

    brand recognition and reputation.

For information on risks relating to increased competition in our industry, see “Risk Factors—Risks Relating to our Business and Industry—Substantial and increasingly intense competition, both within our industry and from other payment methods, may harm our business.”

Our Employees

We believe that our team is one of PagSeguro’s most important assets. Our culture reflects UOL’s teamwork and innovation-driven focus, instilling in our professionals a passion for our consumers and merchants. At December 31, 2016, we employed 444 people, on an FTE basis with an average age of 34, 90% of whom held a bachelor’s degree or higher. At December 31, 2015 and 2014, we employed 367 and 299 people, respectively, on an FTE basis. Together, our management team and employees represent experience in all areas of the Brazilian payments market, with in-depth knowledge of online payments, retail and financial services, technology, payment processing, in-person electronic payments, acquiring and card issuance. They therefore represent a complete picture of all of our customers’ needs and can prepare the future of our organization.

We seek to attract and train the best professionals in the market. We seek to motivate our employees to provide next-generation payment capabilities through a profit-sharing plan for all employees and a long-term motivation plan for key professionals. See “Management—Long-Term Incentive Plan.” We believe that we offer competitive compensation packages and a dynamic culture, and have therefore been able to attract and retain qualified personnel and a stable management team. In a 2017 survey carried out by the website LinkedIn, UOL was named as the second best place to work in Brazil. We are aware, however, that our continued success will depend on our ability to continue to attract and retain these qualified professionals. See “Risk Factors—Risks Relating to our Business and Industry—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.”

We train our teams in the use of modern management tools such as Agile, Lean, Kanban and Management 3.0.

Our employees are represented by the Union of Employees of Information Technology Businesses and Course Providers of the State of São Paulo (Sindicato dos Trabalhadores nas Empresas e Cursos de Informática do Estado de São Paulo—SINDIESP). We consider our relations with our employees to be good. We have not experienced any significant labor disputes.

 

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Insurance

We have insurance policies with reputable insurers in amounts that our management considers to be sufficient to cover potential losses arising from events that may affect our assets, as well as for any damages that we may have to pay to third parties due to our business activities. We seek coverage against risks that are appropriate for our business activities and our scale, taking into account the nature of our business, the risks we are exposed to, market practices in our industry, and advice from our insurance consultants. We currently have the following insurance policies, which were contracted by our controlling shareholder, UOL, and list our company and/or our subsidiaries as co-beneficiaries, as applicable:

 

    insurance policy for coverage of damages to property, business interruption and lost profits, which expires on December 10, 2017 and has a coverage limit of R$997.9 million;

 

    D&O insurance regarding PagSeguro Brazil, which expires on August 8, 2017, has a coverage limit of R$60 million and for which we have already received agreement from the insurer to renew on the same terms and with improved pricing;

 

    warehouse and storage facility insurance policy, which expires on November 11, 2017 and has a coverage limit of R$30 million; and

 

    general liability insurance, which covers damage awards paid by us in connection with tort claims. This policy expires on December 31, 2017 and has a coverage limit of R$10 million.

We review our coverage limits every year when the policies are renewed, to ensure that they remain consistent with the value of our assets and the liabilities linked to our business. We do not currently anticipate any difficulties in renewing any of our insurance policies.

While we believe our insurance contracts reflect standard market practices, there are certain types of risks that may not be covered by our policies (such as war, terrorism, acts of God and force majeure, liability for certain harm or interruption of certain business activities). Therefore, if any of these uncovered events occur, we may be required to incur additional costs to remedy the situation, reconstitute our assets or indemnify our customers, which may adversely affect us. In addition, even if a risk is covered by our policies, we cannot assure you that any payment from our insurers will be sufficient to cover the loss. For additional information regarding our insurance contracts, see “Management—Directors’ and Officers’ Insurance.”

Seasonality

We operate in a somewhat seasonal industry, which tends to experience relatively fewer transactions in the first quarter of the year, increased activity as the year-end holiday shopping season initiates, and fewer transactions after the year-end holidays. While we have not experienced significant seasonality in our results at the date of this prospectus due to our ongoing growth, this could change in the future. For additional information, see “Risk Factors—Risks Relating to Our Business and Industry—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 A common shares being unpredictable or declining.”

 

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Regulation

Regulation of the digital payments industry in Brazil

Our activities in Brazil are subject to Brazilian laws and regulations relating to digital payments. Law No. 12,865/13, which took effect on October 9, 2013, establishes the first set of rules regulating the digital payments industry within the overall Brazilian Payment System (the Sistema de Pagamentos Brasileiro, or SPB), which refers to all the entities, systems and procedures related to the clearing and settlement of funds transfer, foreign currency operations, financial assets, and securities transactions in Brazil). This law created the concepts of payment schemes (arranjos de pagamento), payment scheme owners (instituidores de arranjos de pagamento) and payment institutions (instituições de pagamento).

Law No. 12,865/13 gave the Brazilian Central Bank and the National Monetary Council (the Conselho Monetário Nacional, or CMN) powers to regulate entities involved in the digital payments industry. These powers cover matters such as the incorporation and operation of these entities, risk management, the opening of payment accounts, and the transfer of funds to and from payment accounts. After enactment of Law No. 12,865/13, the CMN and the Central Bank created a regulatory framework regulating the operation of payment schemes and payment institutions. The framework consists of Resolutions 4,282 and 4,283 and Circulars 3,680, 3,681, 3,682 and 3,683, all of which were published on November 4, 2013. The circulars originally became effective on May 5, 2014 and have been amended since that date.

Payment Schemes

A payment scheme, for Brazilian regulatory purposes, is a body of rules and technical standards for the execution of payment transactions through a payment system. The regulations applicable to payment schemes depend on certain features, such as the number of users and the annual cash value of transactions handled by the payment scheme:

 

    Payment schemes that exceed certain thresholds are considered to form part of the SPB and require authorization by the Central Bank.

 

    Payment schemes that operate below these thresholds are not considered to form part of the SPB and are therefore not required to obtain authorization from the Central Bank, although they are required to report certain operational information to the Central Bank on an annual basis.

 

    Certain types of payment schemes have specific exemptions from the requirement to obtain authorization from the Central Bank. This applies, for example, to limited-purpose payment schemes and payment schemes set up by governmental authorities.

Payment Scheme Owners

Payment scheme owners, for Brazilian regulatory purposes, are the legal entities responsible for managing the rules, procedures and the use of the brand associated with a payment scheme. Central Bank regulations require that payment scheme owners must be incorporated in Brazil, must have a corporate purpose compatible with payments activities, and must have the technical, operational, organizational, administrative and financial capacity to meet their obligations. They must also have clear and effective corporate governance mechanisms that are appropriate for the needs of payment institutions and the users of payment schemes.

 

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Payment Institutions

Payment institutions are classified into the following types under Brazilian regulations:

 

    Issuers of electronic currency (generally prepaid deposits):    these payment institutions manage prepaid payment accounts for cardholders or end-users. They carry out payment transactions using electronic currency deposited into these pre-paid such accounts, and convert the deposits into physical or book-entry currency or vice versa.

 

    Issuers of post-paid payment instruments (principally credit cards):    these payment institutions manage payment accounts where the cardholder or end-user intends to make payment on a post-paid basis. They carry out payment transactions using these post-paid accounts.

 

    Acquirers:    these payment institutions do not manage payment accounts, but enable merchants to accept payment instruments issued by a payment institution or by a financial institution that participates in a payment scheme. They participate in the settlement process for payment transactions by receiving the payment from the issuer of the prepaid or post-paid instrument, and settling with the merchant.

A payment institution must be incorporated in Brazil and must have a corporate purpose that is compatible with payments activities. If it operates within a payment scheme that forms part of the SPB, it must be authorized by the Central Bank. The CMN and Central Bank regulations applicable to payment institutions cover a wide variety of issues, including penalties for noncompliance; the promotion of financial inclusion; the reduction of systemic, operational and credit risks; reporting obligations; and governance.

The regulations applicable to payment institutions also cover “payment accounts” (contas de pagamento), which are the end-user accounts, in registered (i.e., book-entry) form, which are opened with payment institutions that are issuers of prepaid or post-paid instruments and used for carrying out each payment transaction. Circular No. 3,860/13 classifies payment accounts into two types:

 

    Prepaid payment accounts:    where the funds have been deposited into the payment account in advance of the intended payment transaction.

 

    Post-paid payment accounts:    where the payment transaction is intended to be performed regardless of whether or not funds have been deposited into the payment account in advance.

In order to provide protection from bankruptcy, Law No. 12,865/13 requires payment institutions that are issuers of prepaid instruments to segregate the funds deposited in prepaid payment accounts from their own assets. In addition, with respect to prepaid electronic currency, the payment institution must hold a portion of the funds deposited in the prepaid payment account in certain specified instruments:    either (i) in a specific account with the Central Bank that does not pay interest; or (ii) in federal government bonds registered with the SELIC. The portion of the prepaid electronic currency that must be held in this form is currently 60%; this will increase to 80% on January 1, 2018 and to 100% on January 1, 2018.

 

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PagSeguro Brazil’s Regulatory Position

In December 2014, PagSeguro Brazil applied to the Brazilian Central Bank for the following authorizations:

 

  1. Authorization as a payment scheme owner of a “closed-loop domestic” payment scheme, forming part of the SPB. This application relates to the PagSeguro digital account, which is a prepaid account available to our customers. The application relates to our rules applying to the PagSeguro digital account and our brand.

 

  2. Authorization as a payment institution, as an issuer of prepaid electronic money. This application relates to relates to the PagSeguro digital account and to our issuance of PagSeguro prepaid cards. The application regarding the PagSeguro digital account relates to our rules and our brand, and the application regarding our prepaid cards relates to the third-party payment schemes within which the cards are issued.

 

  3. Authorization as a payment institution, as an acquirer.

At the date of this prospectus, we are still awaiting these authorizations, although PagSeguro Brazil entitled to continue carrying on these businesses pending receipt of the authorizations because it were already operating these regulated activities before Law No. 12,865/13 took effect.

PagSeguro Brazil is also a payment scheme owner of a “closed-loop domestic” payment scheme not forming part of the SPB, which relates to peer-to-peer transfers between accounts opened by our clients within the PagSeguro digital account, using our rules applying to the PagSeguro digital account and our brand. Since this payment scheme does not form part of the SPB it does not currently require Central Bank authorization; however, we are required to report certain operational information regarding this scheme to the Central Bank on an annual basis, such as the number of users and the annual cash value of our peer-to-peer transfer transactions. If these numbers or certain other operational data exceed the relevant Central Bank thresholds in the future, we will also be required to apply for Central Bank authorization for this payment scheme.

PagSeguro Brazil has also applied to the Brazilian Central Bank for authorization as a payment institution, as an issuer of post-paid cards within third-party payment schemes. We do not currently carry on this business and will not be entitled to do so prior to receipt of the Central Bank authorization, since we did not operate this regulated activity before Law No. 12,865/13 took effect.

Law No. 12,865/13 prohibits payment institutions from performing activities that are restricted to financial institutions, which are regulated by Law No. 4,595, of December 31, 1964. There is some debate under Brazilian law as to whether providing early payment of receivables to merchants could be characterized as “lending”, which is an activity that is restricted to financial institutions. Similarly, there is some debate as to whether the discount rates applicable to this early payment service should be considered as “interest,” in which case the limits set by the Brazilian Usury Law would apply to these rates.

For transactions that form part of the Brazilian financial system, financial institutions may set interest rates freely, provided that they are not excessively burdensome to consumers. For transactions that do not form part of the Brazilian financial system, the Brazilian Usury Law (Decree-Law No. 22,623 of April 7, 1933) capped interest rates at 12% per year. Subsequently, the Brazilian Civil Code, which replaced the Usury Law, capped interest rates at two times the interest rates applicable to National Treasury (Fazenda Nacional), which is currently the SELIC rate (although there is some legal debate as to whether the Brazilian Civil Code has effectively replaced the original Usury Law). As a result, if the discount rate that we charge merchants for early payment of their receivables is considered to be “interest,” it would be capped at two times the SELIC rate. This limitation will be mitigated once we have set up our FIDC to finance our early payment of receivables service.

 

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If we fail to comply with the requirements of the Brazilian legal and regulatory frameworks, we could be prevented from carrying out our regulated activities, we could be (i) required to pay substantial fines (including per transaction fines) and disgorgement of our profits, (ii) required to change our business practices or (iii) subjected to insolvency procedures such as an intervention by the Central Bank and the out-of-court liquidation of PagSeguro Brazil. We could also be subject to private lawsuits. For additional information, see “Risk Factors—Risks Relating to Our Business and Industry—Our business is subject to extensive government regulation and oversight and our status under these regulations may change. Violation of or compliance with present or future 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 and results of operations.”

The Central Bank also regulates our international transfers of funds under foreign exchange regulations. Compliance with these rules is mandatory and any failure to comply may result in penalties against us.

The Central Bank’s regulations also allow payment schemes to set additional rules for entities that use their brands. Since we participate in these payment schemes, we must comply with their rules in order to continue accepting payments from payment instruments bearing their brands.

Anti-Money Laundering Rules

We comply with all anti-money laundering, or AML, rules applicable to us and have implemented policies and procedures to report suspicious activities to the authorities, including any suspected terrorism financing and other potentially illegal activities. We have a risk and fraud division led by a risk officer.

Our activities in Brazil are subject to Brazilian laws and regulations relating to anti-money laundering, or AML, terrorism financing and other potentially illegal activities. These rules require us to implement policies and internal procedures to monitor and identify suspicious transactions, which must be duly reported to the relevant authorities. We have implemented all the required policies and internal procedures to ensure full compliance with these rules and regulations, including structuring a risk and fraud division led by a risk officer. Our employees are informed of our policies and internal procedures and their compliance is mandatory and supervised.

The Brazilian anti-money laundering law establishes the basic framework to prevent and punish money laundering as a crime. It prohibits the concealment or dissimulation of origin, location, availability, handling or ownership of assets, rights or financial resources directly or indirectly originated from crimes, subjecting the agents of these illegal practices to imprisonment, temporary disqualification from managing enterprises up to 10 years and monetary fines.

The Brazilian anti-money laundering law also created the Financial Activities Control Council, or COAF, which is the Brazilian financial intelligence unit that operates under the jurisdiction of the Ministry of Finance. COAF performs a key role in the Brazilian anti-money laundering and counter-terrorism financing system, and its legal responsibility is to coordinate the mechanisms for international cooperation and information exchange.

In compliance with the Brazilian anti-money laundering law, payment institutions in Brazil must establish internal control and procedures aiming at:

 

    identifying and knowing their clients;

 

    checking the compatibility between the movement of funds of a client and such client’s economic and financial capacity;

 

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    checking the origin of funds;

 

    carrying out a prior analysis of new products and services, under the perspective of money laundering prevention;

 

    keeping records of all transactions;

 

    reporting to COAF, within one business day, any transaction deemed to be suspicious by the financial institution, as well as all transactions in cash equivalent to or higher than R$100,000, without informing the involved person or any third party;

 

    applying special attention to (i) unusual transactions or proposed transactions with no apparent economic or legal bases; (ii) client and transactions for which the UBO cannot be identified; and (iii) situations in which it is not possible to keep the clients’ identification records duly updated;

 

    offering anti-money laundering training for employees;

 

    monitoring transactions and situations which could be considered suspicious for anti-money laundering purposes;

 

    reporting to COAF the occurrence o