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Section 1: F-1 (F-1)

F-1
Table of Contents

As filed with the Securities and Exchange Commission on June 18, 2018

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, 17th Floor

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$1,265,632,500    US$157,571.25(2)

 

(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.
(2) Of this amount, US$1,163.83 has been previously paid.

 

 

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 June 18, 2018)

33,000,000

Class A Common Shares

 

LOGO

PAGSEGURO DIGITAL LTD.

(incorporated in the Cayman Islands)

 

 

This is an offering by us and our parent company Universo Online S.A., or UOL, or the Selling Shareholder, of 33,000,000 of our Class A common shares, of which 11,550,000 Class A common shares will be offered by us and 21,450,000 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.

Our Class A common shares are currently listed on the New York Stock Exchange, or NYSE, under the symbol “PAGS.” Each Class A common share will be sold to investors in this offering at an assumed offering price of US$33.35 per Class A common share, which is the closing price of our Class A common shares on the NYSE on June 15, 2018.

Following this offering, UOL will beneficially own 52.2% of our outstanding share capital, assuming no exercise of the underwriters’ option to purchase additional common shares referred to below. The shares held by UOL are Class B common shares, which carry rights that are identical to the Class A common shares being sold in this offering, except that (i) the holder of Class B common shares is entitled to 10 votes per share, whereas holders of our Class A common shares are entitled to one vote per share, (ii) Class B common shares have certain conversion rights and (iii) the holder of Class B common shares is entitled to maintain a proportional ownership interest in the event that additional Class A common shares are issued. For further information, see “Description of Share Capital.” As a result, UOL will control approximately 91.6% of the voting power of our outstanding share capital following this offering, assuming no exercise of the underwriters’ option to purchase additional common shares.

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, or the JOBS Act, 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 21 of this prospectus.

 

    Per Class A Common Share   Total                                         

Public offering price(1)

  US$   US$

Underwriting discounts and commissions(1)(2)

  US$   US$

Proceeds, before expenses, to UOL(1)

  US$   US$

Proceeds, before expenses, to us

  US$   US$

 

(1) Assumes no exercise of the underwriters’ option to purchase additional common shares.
(2) See “Underwriters” for a description of all compensation payable to the underwriters.

 

 

The underwriters also have the option, exercisable in whole or in part on a maximum of two occasions, to purchase up to an additional 4,950,000 Class A common shares from the Selling Shareholder, or the option to purchase additional common shares, at the public offering price, for 30 days after the date of this prospectus. 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                , 2018.

 

 

Global Coordinators

 

Goldman Sachs & Co. LLC   Morgan Stanley

The date of this prospectus is                , 2018


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LOGO


Table of Contents

LOGO


Table of Contents

TABLE OF CONTENTS

 

GLOSSARY OF TERMS

     ii  

PROSPECTUS SUMMARY

     1  

THE OFFERING

     14  

SUMMARY FINANCIAL AND OPERATING DATA

     16  

RISK FACTORS

     21  

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     53  

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

     55  

USE OF PROCEEDS

     61  

DIVIDENDS AND DIVIDEND POLICY

     62  

EXCHANGE RATES

     63  

CAPITALIZATION

     64  

DILUTION

     65  

MARKET INFORMATION

     67  

SELECTED FINANCIAL AND OPERATING INFORMATION

     68  

INDUSTRY

     75  

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

     78  

BUSINESS

     118  

MANAGEMENT

     169  

PRINCIPAL AND SELLING SHAREHOLDER

     176  

RELATED PARTY TRANSACTIONS

     178  

DESCRIPTION OF SHARE CAPITAL

     181  

TAXATION

     198  

COMMON SHARES ELIGIBLE FOR FUTURE SALE

     204  

UNDERWRITERS

     205  

EXPENSES OF THE OFFERING

     213  

VALIDITY OF SECURITIES

     214  

EXPERTS

     215  

WHERE YOU CAN FIND MORE INFORMATION

     216  

ENFORCEABILITY OF CIVIL LIABILITIES

     217  

INDEX TO FINANCIAL STATEMENTS

     F-1  

EXHIBIT INDEX

     EX-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 in this offering.

This offering has not been and will not be registered under any Brazilian securities law. Accordingly, our Class A common shares and the offering have not been and will not be registered with the Comissão de Valores Mobiliários.

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.

 

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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. is substantially wholly-owned by PagSeguro Digital Ltd.

 

    “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 21,450,000 existing Class A common shares of PagSeguro Digital in this offering (assuming no exercise of the underwriters’ option to purchase additional common shares from UOL), 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.

 

 

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).

 

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“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.

“active merchant” means a merchant that has completed at least one transaction during the 12 months prior to a specified date.

“average spending per active merchant” is calculated by dividing our total TPV for a specified period by the number of active merchants in such period.

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. 12,865/2013 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 claim where the consumer makes a purchase using a payment card and subsequently requests a reversal of the transaction amount 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.

“Chargebacks related to fraudulent transactions” refers to chargebacks where the consumer’s request for a reversal of the transaction amount is related to an illegitimate transaction.

“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.

 

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“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.

“Grupo Folha” means the group of companies of which PagSeguro is a part. Grupo Folha also includes the newspaper Folha de S. Paulo; the eCommerce logistics companies Transfolha and SPDL; the research company Datafolha; the printing company Plural; the digital content and products companies UOL, UOL Host and UOL Ad_Lab; the e-learning company UOL Edtech; and the cloud and information technology, or IT, infrastructure services company UOL Diveo.

“Individual Micro Entrepreneurs” refers to businesses that are classified as such 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. This classification refers to businesses with annual gross revenues of up to R$60,000 for periods through December 31, 2017.

“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 that we withhold 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.

“Mobile Payments” refers to the payment method where a mobile phone is used to complete payment (with payment information being transmitted in real-time), instead of simply as an alternative channel to send payment instructions.

“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.

“NFC” means near-field communication.

“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.

 

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“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 that are classified as such 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. This classification refers to businesses with annual gross revenues of between R$360,000 and R$3.6 million for periods through December 31, 2017.

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

“TPV” means total payment volume, being the value of payments successfully processed through our end-to-end digital ecosystem, net of payment reversals.

“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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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” sections, our audited consolidated financial statements and notes to those statements and our unaudited condensed consolidated interim financial statements before deciding to invest in our Class A common shares.

Our Mission

To disrupt and democratize financial services in Brazil, a concentrated, underpenetrated and high interest rate market, 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. Among our peers, 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. For example, according to a survey conducted by us in June 2017, 75% of merchants who own our entry-level mPOS device, the Minizinha, did not accept card payments prior to signing up with PagSeguro. 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 six 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 2006 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, Inc., or comScore, 90.4 million unique visitors (approximately 75% of Brazilian internet users) accessed a UOL website in April 2018, representing an increase of 11% from 81.2 million in May 2017 and an increase of 34.9% from 67.0 million in May 2016. In addition, according to Google Analytics (which we use to measure our audience) and Google Doubleclick for Publishers, or DFP (the adserver system that we utilize), as of April 2018, UOL achieved approximately 4.2 billion page views, provided approximately 15 billion display ads and had a potential video inventory of one billion video ads, each on a monthly average basis. Furthermore, at May 31, 2018, UOL had more than 1.4 million paid monthly subscribers and approximately 0.5 million webhosting clients who had contracted for recurring services and/or domain registrations. The



 

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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 claims.

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 six 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. We also have a growing presence in the business-to-business commerce segment.

At March 31, 2018, 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:

 

    At March 31, 2018, our active merchants totaled 3.1 million, compared with 2.7 million at year-end 2017 and 1.7 million at March 31, 2017. Our active merchants at year-end 2017 represented an increase of 92.9% compared with 1.4 million at year-end 2016. Our active merchants at year-end 2016 represented an increase of 55.6% compared with 0.9 million at year-end 2015.

 

    In the first three months of 2018, our TPV totaled R$14.4 billion, compared with R$6.0 billion in the first three months of 2017. Our TPV totaled R$38.5 billion in 2017, an increase of 173.0% compared with R$14.1 billion in 2016. Our TPV in 2016 represented an increase of 90.8% compared with R$7.4 billion in 2015. The growth in our TPV from R$2.5 billion in the first three months of 2016 to R$14.4 billion in the first three months of 2018 represented a compound annual growth rate of 138.2% for the period.

 

   

In the first three months of 2018, our average spending per active merchant totaled R$18,836, compared with R$13,843 in the first three months of 2017. Our average spending per active merchant totaled R$18,013 in 2017, an increase of 45.3% compared with R$12,401 in 2016.



 

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Our average spending per active merchant in 2016 represented an increase of 12.3% compared with R$11,046 in 2015.

 

    In the first three months of 2018, our Total revenue and income totaled R$928.0 million, compared with R$448.5 million in the first three months of 2017. Our Total revenue and income totaled R$2,523.4 million in 2017, an increase of 121.7% compared with R$1,138.4 million in 2016. Total revenue and income in 2016 represented an increase of 68.7% compared with R$674.9 million in 2015. The principal components of our Total revenue and income posted the following growth:

 

    Our two net revenue items (Net revenue from transaction activities and other services and Net revenue from sales) together totaled R$536.8 million in the first three months of 2018, compared with R$308.9 million in the first three months of 2017. These net revenue items totaled R$1,696.2 million in 2017, an increase of 129.0% compared with R$740.6 million in 2016. The total of these net revenue items in 2016 represented an increase of 66.5% compared with R$444.7 million in 2015.

 

    Our Financial income totaled R$274.8 million in the first three months of 2018, compared with R$138.8 million in the first three months of 2017. Our Financial income totaled R$818.6 million in 2017, an increase of 108.6% compared with R$392.4 million in 2016. Financial income in 2016 represented an increase of 78.8% compared with R$219.5 million in 2015.

 

    In the first three months of 2018, our Net income for the period totaled R$148.5 million, compared with R$60.6 million in the first three months of 2017. Our Net income for the year totaled R$478.8 million in 2017, an increase of 274.7% compared with R$127.8 million in 2016. Net income for the year in 2016 represented an increase of 260.1% compared with R$35.5 million in 2015. The growth in our Net income from R$26.4 million (unaudited) in the first three months of 2016 to R$148.5 million in the first three months of 2018 represented an average growth rate of 137.2% for the period.

Brazil has approximately 7.1 million Individual Micro Entrepreneurs, 3.9 million Micro Companies, 0.1 million SMEs and 0.02 million Large Companies according to SEBRAE and the Portal do Empreendedor. Individual Micro Entrepreneurs and Micro Companies represent a major market opportunity, as most of them remain unbanked and seek digital payments solutions. In addition, according to SEBRAE, the number of Individual Micro Entrepreneurs in Brazil increased by approximately one million each year from 2010 to 2016. Furthermore, according to Serasa Experian, in February 2018, 158,038 new Individual Micro Entrepreneurs were formed in Brazil, a 14.4% increase from 138,187 in February 2017. We believe that by continuing to migrate these Individual Micro Entrepreneurs and Micro Companies 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 February 2018, we announced a new functionality for our Moderninha Wi-Fi and Moderninha Pro, enabling multiple merchants to share a single POS device; in March 2018, we launched our Minizinha Chip, a POS device that combines high-end functionalities, such as Wi-Fi and GPRS connection (chip) in compact hardware that can fit in a merchant’s pocket and comes with its own SIM card and a free data plan, thus no longer requiring smartphone pairing like traditional mPOS devices; and in May 2018, we launched our Moderninha Plus, the next-generation substitute for our highly successful Moderninha Wi-Fi, now with an improved physical keyboard, a faster processor and double the battery life.

 



 

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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 the three months ended March 31, 2018, food and beverage merchants, our largest volume sector, and general retail stores, our second largest volume sector, accounted for 18.1% and 17.5%, respectively, of our overall transaction business. No other major business sector (clothing stores, beauty parlors, or auto spares and repair shops) accounted for more than 10% of our overall transaction business. We are not dependent on any individual merchants. In the three months ended March 31, 2018, our top 10 clients represented less than 3% of our TPV and our top 100 clients represented less than 5% of our TPV.

Our Market Opportunity

The Brazilian Payments Market Is Large, Yet Underpenetrated

 

    Although Brazil is the largest economy in Latin America as measured by gross domestic product, or GDP, digital payment penetration in the country remains low compared to more developed economies. In 2017, 58% of the Brazilian population above age 15 reported having made or received a digital payment in the past year, compared to 91% in the United States and 96% in the United Kingdom, according to the World Bank. In addition, according to a December 2017 report by the Bank of 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 2016, compared to approximately 46% in the United States and 69% in the United Kingdom. Credit card penetration levels are a fundamental driver for the digital payments industry, yet, according to the World Bank, in 2017, only 27% of the Brazilian population above age 15 held a credit card, compared to 66% in the United States and 65% in the United Kingdom. Furthermore, 33% of the Brazilian population above age 15 made a purchase using a debit card in 2017, compared with 68% in the United States and 82% in the United Kingdom.

 

    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 13.9% from 2010 to 2017 according to ABECS. As a further indication of this growth, MasterCard stated that the Brazilian real was one of its three primary revenue billing currencies during 2017.

 

    In e-commerce, transaction volumes in Brazil grew to R$47.4 billion in 2017 from R$18.7 billion in 2011 according to ebit, representing an average growth of 16.9% per year for the period. However, e-commerce in Brazil remains underpenetrated compared to more developed economies. In Brazil, e-commerce accounted for only 3.0% of retail sales in 2017, compared to 9.0% in the United States and 19.2% in the United Kingdom, according to the eMarketer. Furthermore, according to eMarketer, in 2017, mobile e-commerce represented 26.4% of e-commerce transactions in Brazil, compared to 34.5% in the United States and 43.3% in the United Kingdom. According to a 2018 report commissioned by ABECS and carried out by Datafolha, online purchases made up only 22.8% of the total credit card transaction volume in Brazil in 2017, an increase of 4.2% from 18.6% in 2015.

 



 

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    Access to Internet in Brazil is growing. According to data from International Telecommunications Union and the World Bank, Brazil had the fourth largest online audience in the world with 139 million Internet users in 2016, representing penetration of 67% of the population, compared with penetration of 89% in the United States. Furthermore, according to the World Bank, Brazil has a high penetration of mobile phones, with a weighted average of 118 mobile phones per 100 inhabitants at December 31, 2016, compared to 118 in Organisation for Economic Cooperation and Development, or OECD, member countries and 101 worldwide. This trend is driven in part by the rollout of 3G and 4G networks. According to the Brazilian Telecommunications Association (Associação Brasileira de Telecomunicações, or Telebrasil), in March 2018, 5,168 municipalities (where 99.0% of the Brazilian population resides) had access to 3G networks and 151 new municipalities had received 3G networks in the prior 12 months, representing a 3% increase during that period. Access to 4G networks also continues to grow, reaching 93% of the Brazilian population during the first quarter of 2018, an increase of 117 percentage points from the first quarter of 2017, according to data from Telebrasil.

 

    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 51% from 2015 to 2017, with 35% of all online banking transactions in 2017 being made on cell phones or tablets. However, mobile banking and mobile e-commerce remain underpenetrated in Brazil. According to information from eMarketer, the mobile payments purchase volume in Brazil increased to US$4.7 billion in 2017 from US$1.0 billion in 2014, while in the United States the volume was US$157.0 billion in 2017; yet only 18% of the Brazilian population above age 15 reported having paid bills or made a purchase online in 2017, compared to 77% in the United States and 81% in the United Kingdom, according to the World Bank.

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

 

    According to SEBRAE and the Portal do Empreendedor, in 2016, Micro-Merchants and SMEs accounted for 99.8% of Brazil’s 12 million businesses. According to data compiled by Neoway Business Solutions in 2017, Micro-Merchants and SMEs represented 35.4%, or R$1.8 trillion, of the R$5.1 trillion total annual TPV 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.

 

    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.

 



 

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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 feature, 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 feature 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.

 

    We offer a full suite of more than 30 cash-in options under a single contract, with security and reliability, plus six 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. We also offer promotions on our MDR pricing.

 

    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 first single unit to offer GPRS/2G/3G chip connection, NFC, 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.

 



 

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    Data protection and confidentiality for consumers, with merchant verification and transaction protection mechanisms, including escrow periods and claim 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

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 and features 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.

 



 

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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

 

    Online and in-person payment tools

 

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

 

    Cash-Out Solutions

 

    Online purchases via eWallet

 

    PagSeguro prepaid cards

 

    On-platform peer-to-peer transfers

 

    Bank transfers

 

    Cross-border remittances

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. According to a survey conducted by us in October 2016, 81% of our merchants used PagSeguro as their sole electronic payments service and according to a survey conducted by us in June 2017, 75% of Minizinha owners did not accept cards before signing up with us. For larger merchants who have larger transaction volumes and require more complex controls, we offer value-added services and features 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. 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 claims.

 



 

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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, 90.4 million unique visitors accessed the UOL website in April 2018 (approximately 75% 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:

 

    Recognized for having the most easily memorizable commercial in April 2017 by Forebrain, a consumer opinions research company;

 

    Named as the “Best Company for Consumers” for electronic payments in both 2017 and 2016 and for online payments in 2015 by Época magazine and Reclame Aqui, a consumer protection service;

 

    Recognized for “Best Payment Processing” in 2015 by Afiliados Brasil, a marketing company;

 

    Recognized as the best company in our industry in terms of client service excellence by Consumidor Moderno, a customer service magazine, in 2015 and 2017; and

 

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

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$50.2 million in expenditures on software and technology in the three months ended March 31, 2018, equal to 5.4% of our Total revenue and income for the period. Additionally, we believe our distribution platform and marketing strategies are well-suited to reaching Micro-Merchants and SMEs in Brazil.

 



 

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Innovative, Reliable and Scalable Proprietary Technology Platform

We manage large volumes of system access data and transactions, with more than 99.9% availability from March 2017 to February 2018, using Internet data centers provided by UOL Diveo, a UOL group company that provides IT, outsourcing, data centers, cloud computing and other managed IT services to UOL, PagSeguro and 1,200 other large clients, including Amazon, with which UOL Diveo has an eight-year colocation contract, renewable for four more years. Our transactions per second monthly peak increased by a multiple of 39 between May 2015 and August 2017 and our monthly deployments increased by a multiple of 49 from January 2016 to January 2017. 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 733 people focused on developing reliable, scalable and proprietary 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 fraud and chargebacks related to fraudulent transactions 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 Threatmetrix.

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.

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 March 31, 2018, the average age of our employees was 33, 86% of them had a bachelor’s degree or higher and 39% were women. 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, while retaining and advancing our competitive position in the long-tail market. We intend to do this 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, capitalizing on our local knowledge, expanding TPV 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, proprietary and secure infrastructure.



 

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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 and improving 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 products and engineering personnel representing 62% of the total headcount of PagSeguro as at March 31, 2018. 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 Total revenue and income: for example, although our Cost of sales and services and Administrative expenses, taken together, increased to 71.6% of our Total revenue and income in the three months ended March 31, 2018 from 61.4% in the three months ended March 31, 2017, our non-GAAP Cost of sales and services and non-GAAP Administrative expenses, taken together, amounted to 54.1% of our non-GAAP Total revenue and income in the three months ended March 31, 2018.

For a reconciliation of our non-GAAP financial measures to the most directly comparable GAAP measures, see “Summary Financial and Operating Data—Reconciliation of Non-GAAP Financial Measures.”

As a further example, our Cost of sales and services and Administrative expenses, taken together, was 58.6% of our Total revenue and income in 2017, compared with 65.7% in 2015. By maintaining our spirit of innovation combined with our cost focus, we intend to continue to drive costs down to achieve further profitable growth.

Seize Opportunities from Ongoing Amendments to Regulation

The 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.

 



 

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Recent Developments

In January 2018, we had our initial public offering, or IPO, in which we offered our Class A common shares. Our Class A common shares are listed on the NYSE. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations Corporate Events—Our Incorporation and IPO.” In February 2018, we announced a new functionality for our Moderninha Wi-Fi and Moderninha Pro, enabling multiple merchants to share a single POS device, and in March 2018, we launched our Minizinha Chip, an mPOS device that combines high-end functionalities, such as Wi-Fi and GPRS connection (chip) in compact hardware that can fit in a merchant’s pocket and comes with its own SIM card and a free data plan, thus no longer requiring smartphone pairing like traditional mPOS devices. In May 2018, we launched our bill payment functionality through which all customers can pay their bills using our i-Banking app PagSeguro Minha Conta. In May 2018, we launched our Moderninha Plus, the next-generation substitute for our highly successful Moderninha Wi-Fi, now with an improved physical keyboard, a faster processor and double the battery life. For more information, see “Business—Our History,” “Business—Our Products and Services—The PagSeguro Ecosystem—The Free PagSeguro Digital Account—In-Person Payment Tools” and “Business—Our Products and Services—The PagSeguro Ecosystem—The Free PagSeguro Digital Account—Advanced Built-In Functionalities and Value-Added Services and Features.”

Summary of Risk Factors

An investment in our Class A common shares is subject to a number of risks, including risks relating to our business and industry, risks relating to Brazil and risks relating to the offering and our Class A common shares. The following list summarizes some, but not all, of these risks. Please read the information in the section entitled “Risk Factors” for a more thorough description of these and other risks.

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.

 

    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.

 

    Our business depends on a strong and trusted brand, and any failure to maintain, protect and enhance our brand would harm our business.

 

    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.

 

    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.

 

    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.


 

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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.

 

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

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.

 

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

 

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

Risks Relating to the Offering and our Class A Common Shares

 

    UOL, our largest shareholder, will own 100% of our outstanding Class B common shares, which represent approximately 91.6% 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 dual class capital structure means our stock will not be included in certain indices.

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,” our audited consolidated financial statements and our unaudited condensed consolidated interim financial statements.

 

Issuer

 

PagSeguro Digital Ltd.

 

Offering

 

We are offering 11,550,000 Class A common shares and UOL, the Selling Shareholder, is offering 21,450,000 Class A common shares.

 

Assumed public offering price

 

US$33.35 per Class A common share.

 

Voting rights

 

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

 

Option to purchase additional Class A common shares

 

UOL, the Selling Shareholder, has granted the underwriters the right, exercisable in whole or in part on a maximum of two occasions, to purchase up to an additional 4,950,000 Class A common shares of PagSeguro Digital from UOL within 30 days from the date of this prospectus.

 

Listing

 

Our Class A common shares are currently listed on the New York Stock Exchange, or NYSE, under the symbol “PAGS”.

 

Use of proceeds

  We estimate that the net proceeds to our company from the sale by us of new Class A common shares in this offering will be approximately US$374.6 million, after deducting commissions and estimated expenses payable by us. We currently plan to use the net proceeds from this offering to continue taking advantage of new market opportunities by ramping up investments in new technologies, products and services for our digital ecosystem, which we believe will allow us to further distance ourselves from competitors. 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 Class A common shares by the Selling Shareholder. See “Use of Proceeds.”

 

Shares outstanding immediately before and after this offering

  Immediately prior to this offering, we have 315,134,418 common shares outstanding with par value US$0.000025 each. Of those outstanding shares, 123,113,557 are Class A common shares and 192,020,861 are Class B common shares.


 

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After accounting for the 11,550,000 Class A common shares to be issued and sold by us and the 21,450,000 Class B common shares to be converted and sold by UOL in this offering, we will have a total of 326,684,418 common shares issued and outstanding immediately following this offering. 170,570,861 of these shares will be Class B common shares beneficially owned by UOL, and 156,113,557 shares will be Class A common shares beneficially owned by investors. (Numbers of shares in this paragraph assume no exercise of the underwriters’ option to purchase up to 4,950,000 additional common shares from UOL, which shares would convert from Class B common shares to Class A common shares upon such sale.)

 

Authorized share capital

 

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, 1,000,000,000 are designated as Class A common shares and 500,000,000 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.

 

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 90-day period following the date of this prospectus. PagSeguro Digital’s executive officers and the members of its board of directors who will hold shares upon completion of this offering, 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 4,950,000 additional Class A common shares of PagSeguro Digital from UOL in connection with this offering.



 

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SUMMARY FINANCIAL AND OPERATING DATA

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

This summary financial data at and for the years ended December 31, 2017, 2016 and 2015 has been derived from our audited consolidated financial statements, which have been prepared in accordance with the International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board, or the IASB. The selected financial data at December 31, 2017 and 2016 and for each of the three years ended December 31, 2017 has been derived from our audited consolidated financial statements, which are included elsewhere in this prospectus. The selected financial data at and for the year ended December 31, 2014 has been derived from the audited consolidated financial statements of PagSeguro Brazil, which are not included in this prospectus.

This summary financial data at and for the three months ended March 31, 2018 and 2017 has been derived from our unaudited condensed consolidated interim financial statements, which are included elsewhere in this prospectus and which have been prepared in accordance with Accounting Standard IAS 34 Interim Financial Reporting, or IAS 34.

Statements of Operations Data

 

     For the Years Ended December 31,  
     2017     2017     2016     2015     2014  
     (US$)(1)     (R$)     (R$)     (R$)     (R$)  
     (in millions, except amounts per share and%)  

Net revenue from transaction activities and other services

     324.4       1,224.3       480.0       268.2       160.1  

Net revenue from sales

     125.0       471.9       260.6       176.5       48.2  

Financial income

     216.9       818.6       392.4       219.5       115.8  

Other financial income

     2.3       8.6       5.3       10.7       1.8  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue and income

     668.7       2,523.4       1,138.4       674.9       325.8  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of sales and services

     (350.9     (1,324.4     (623.7     (382.5     (142.5

Selling expenses

     (65.1     (245.8     (199.9     (162.6     (81.4

Administrative expenses

     (40.6     (153.2     (84.5     (61.1     (51.3

Financial expenses

     (27.7     (104.5     (68.3     (29.7     (11.1

Other (expenses) income, net

     (3.2     (12.0     (6.7     1.3       (3.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit before Income Taxes

     181.1       683.5       155.4       40.3       36.2  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Current income tax and social contribution

     (57.0     (215.0     (7.4     (2.6     (9.9

Deferred income tax and social contribution

     2.7       10.3       (20.1     (2.2     1.0  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income Tax and Social Contribution

     (54.2     (204.7     (27.6     (4.8     (8.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income for the Year

     126.9       478.8       127.8       35.5       27.2  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Attributable to:

          

Owners of PagSeguro Digital

     126.9       478.8       127.2       35.1       26.0  

Non-controlling interests

     —         —         0.6       0.4       1.3  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted earnings per common share — R$

     0.4837       1.8254       0.4849       0.1338       0.0990  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) For convenience purposes only, amounts in reais for the year ended December 31, 2017 have been translated to U.S. dollars using a rate of R$3.7738 to US$1.00, the commercial selling rate for U.S. dollars at June 15, 2018 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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     For the Three Months Ended
March 31,
 
     2018     2018     2017  
     (US$)(1)     (R$)     (R$)  
     (in millions, except %)  

Net revenue from transaction activities and other services

     117.3       442.8       190.4  

Net revenue from sales

     24.9       94.0       118.4  

Financial income

     72.8       274.8       138.8  

Other financial income

     30.8       116.4       0.8  
  

 

 

   

 

 

   

 

 

 

Total revenue and income

     245.9       928.0       448.5  
  

 

 

   

 

 

   

 

 

 

Cost of sales and services

     (117.9     (444.8     (242.9

Selling expenses

     (22.2     (83.6     (71.1

Administrative expenses

     (58.0     (219.0     (32.5

Financial expenses

     (4.4     (16.5     (19.2

Other (expenses) income, net

     (0.3     (1.1     (0.6
  

 

 

   

 

 

   

 

 

 

Profit before Income Taxes

     43.2       163.0       82.2  
  

 

 

   

 

 

   

 

 

 

Current income tax and social contribution

     (5.5     (20.9     (19.1

Deferred income tax and social contribution

     1.7       6.4       (2.5
  

 

 

   

 

 

   

 

 

 

Income Tax and Social Contribution

     (3.8     (14.5     (21.6
  

 

 

   

 

 

   

 

 

 

Net Income for the Period

     39.4       148.5       60.6  
  

 

 

   

 

 

   

 

 

 

Attributable to:

      

Owners of PagSeguro Digital

     39.4       148.4       60.6  

Non-controlling interests

     0.0       0.1       —    

Basic earnings per common share — R$

     0.1322       0.4988       0.2311  

Diluted earnings per common share — R$

     0.1317       0.4969       0.2311  

 

(1) For convenience purposes only, amounts in reais for the three months ended March 31, 2018 have been translated to U.S. dollars using a rate of R$3.7738 to US$1.00, the commercial selling rate for U.S. dollars at June 15, 2018 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.

Operating Data

 

     At and For the Years Ended December 31,  
     2017(1)      2017      2016      2015      2014  

Operating Statistics:

              

Active merchants at year-end (in millions)

     —          2.7        1.4        0.9        0.5  

TPV (in billions)

     US$10.2        R$38.5        R$14.1        R$7.4        R$3.7  

Average spending per active merchant

     US$4,773        R$18,013        R$12,401        R$11,046        R$10,449  

 

(1) For convenience purposes only, amounts in reais for the year ended December 31, 2017 have been translated to U.S. dollars using a rate of R$3.7738 to US$1.00, the commercial selling rate for U.S. dollars at June 15, 2018 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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     At and For the Three Months Ended
March 31,
 
     2018(1)      2018      2017  

Operating Statistics:

        

Active merchants at period-end (in millions)

     —          3.1        1.7  

TPV (in billions)

     US$3.8        R$14.4        R$6.0  

Average spending per active merchant

     US$4,991        R$18,836        R$13,843  

 

(1) For convenience purposes only, amounts in reais for the three months ended March 31, 2018 have been translated to U.S. dollars using a rate of R$3.7738 to US$1.00, the commercial selling rate for U.S. dollars at June 15, 2018 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.

Balance Sheet Data

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

 

     At December 31,  
     2017      2017      2016      2015      2014  
     (US$)(1)      (R$)      (R$)      (R$)      (R$)  
     (in millions)  

Total Current Assets

     1,067.4        4,028.0        2,270.8        1,240.8        778.6  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-Current Assets

     55.1        207.8        99.7        59.9        39.0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL ASSETS

     1,122.4        4,235.8        2,370.4        1,300.7        817.6  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     At December 31,  
     2017      2017      2016      2015      2014  
     (US$)(1)      (R$)      (R$)      (R$)      R$  
     (in millions)  

Total Current Liabilities

     879.5        3,319.0        1,719.2        832.5        385.3  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-Current Liabilities

     12.3        46.4        24.4        6.3        5.7  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL LIABILITIES

     891.8        3,365.4        1,743.5        838.8        391.0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL EQUITY

     230.6        870.4        626.9        461.9        426.6  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL LIABILITIES AND EQUITY

     1,122.4        4,235.8        2,370.4        1,300.7        817.6  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) For convenience purposes only, amounts in reais for the year ended December 31, 2017 have been translated to U.S. dollars using a rate of R$3.7738 to US$1.00, the commercial selling rate for U.S. dollars at June 15, 2018 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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     At March 31,
(Unaudited)
     At December 31,
(Audited)
 
     2018      2018      2017  
     (US$)(1)      (R$)      (R$)  
     (in millions)  

Total Current Assets

     1,994.8        7,528.1        4,028.0  

Total Non-Current Assets

     70.8        267.2        207.8  
  

 

 

    

 

 

    

 

 

 

TOTAL ASSETS

     2,065.6        7,795.3        4,235.8  
  

 

 

    

 

 

    

 

 

 

 

     At March 31,
(Unaudited)
     At December 31,
(Audited)
 
     2018      2018      2017  
     (US$)(1)      (R$)      (R$)  
     (in millions)  

Total Current Liabilities

     861.7        3,251.7        3,319.0  

Total Non-Current Liabilities

     17.7        66.9        46.4  

TOTAL LIABILITIES

     879.4        3,318.6        3,365.4  

TOTAL EQUITY

     1,186.3        4,476.7        870.4  
  

 

 

    

 

 

    

 

 

 

TOTAL LIABILITIES AND EQUITY

     2,065.6        7,795.3        4,235.8  
  

 

 

    

 

 

    

 

 

 

 

(1) For convenience purposes only, amounts in reais for the three months ended March 31, 2018 have been translated to U.S. dollars using a rate of R$3.7738 to US$1.00, the commercial selling rate for U.S. dollars at June 15, 2018 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.

Reconciliation of Non-GAAP Measures

The following table presents a reconciliation of our non-GAAP financial measures to the most directly comparable GAAP measures for the three months ended March 31, 2018:

 

     For the Three Months Ended
March 31,
 
     2018  
    

(in millions of reais, except

for amounts per share)

 

Total revenue and income

     928.0  

Less: Foreign exchange gain on IPO primary share proceeds

     (89.8
  

 

 

 

Non-GAAP total revenue and income(1)

     838.2  
  

 

 

 

Total expenses

     (765.0

Less: Share-based long-term incentive plan (LTIP)

     210.6  

Less: Tax related to remittance of IPO primary share proceeds (IOF tax)

     13.1  
  

 

 

 

Non-GAAP total expenses(2)

     (541.3
  

 

 

 

Profit before taxes

     163.0  

Plus: Total Non-GAAP Adjustments

     133.9  
  

 

 

 

Non-GAAP profit before taxes(3)

     296.9  
  

 

 

 

Income tax and social contribution

     (14.5

Less: Income tax and social contribution on non-GAAP adjustments

     (69.5
  

 

 

 


 

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     For the Three Months Ended
March 31,
 
     2018  
    

(in millions of reais, except

for amounts per share)

 

Non-GAAP deferred income tax(4)

     (84.0
  

 

 

 

Net income

     148.5  

Plus: Total Non-GAAP adjustments

     64.4  
  

 

 

 

Non-GAAP net income(5)

     212.9  
  

 

 

 

Basic earnings per common share - R$

     0.4988  

Diluted earnings per common share - R$

     0.4969  
  

 

 

 

Non-GAAP basic earnings per common share - R$(6)

     0.7153  

Non-GAAP diluted earnings per common share - R$(6)

     0.7126  
  

 

 

 

 

(1) Non-GAAP total revenue and income excludes a foreign exchange gain on our IPO primary proceeds in the amount of R$89.8 million in the three months ended March 31, 2018, which relates to the impact of exchange rate variation on the conversion from U.S. dollars into Brazilian reais of the proceeds from our sale of new shares in the IPO. We exclude this foreign exchange variation from our non-GAAP measures primarily because it is unusual income. The foreign exchange gain on our IPO primary proceeds is included within Other financial income. Other financial income in the amount of R$116.4 million is therefore adjusted by excluding the foreign exchange gain on our IPO primary proceeds, resulting in Non-GAAP Other financial income in the amount of R$26.6 million.
(2) Non-GAAP total expenses excludes:
  (a) stock-based compensation expenses in the total amount of R$210.6 million, consisting of expenses for equity awards under our LTIP. We exclude stock-based compensation expenses from our non-GAAP measures primarily because they are non-cash expenses, and the related employer payroll taxes depend on our stock price and the timing and size of exercises and vesting of equity awards, over which management has limited to no control, and as such management does not believe these expenses correlate to the operation of our business. The largest portion of this expense amount was recognized upon the closing of our IPO with the issuance of 1.8 million shares under our LTIP awards that vested on the IPO date. The total of stock-based compensation expenses is allocated between Cost of sales and services and Administrative expenses. Excluding the stock-based compensation expenses, Cost of sales and services in the amount of R$444.8 million is adjusted by R$38.2 million resulting in a Non-GAAP Cost of sales and services of R$406.5 million; and Administrative Expenses in the amount of R$219.0 million is adjusted by R$172.4 million resulting in Non-GAAP Administrative expenses of R$46.7 million.
  (b) tax related to remittance of IPO primary share proceeds (IOF tax) in the amount of R$13.1 million in the three months ended March 31, 2018, which represents the impact of Brazilian IOF tax (currency remittance tax) payable when we remitted the proceeds from our sale of new shares in the IPO from the Cayman Islands to Brazil. We exclude this IOF tax on the remittance of IPO primary share proceeds from our Non-GAAP measures primarily because it is an unusual expense. The IOF tax is fully allocated to Financial expenses. Financial expenses in the amount of R$16.5 million is therefore adjusted by excluding the IOF tax, resulting in Non-GAAP Financial expenses in the amount of R$3.4 million.
(3) Non-GAAP profit before taxes is equal to the sum of the adjustments described in footnotes (1) and (2) above.
(4) Non-GAAP income tax and social contribution consists of income tax at the rate of 34% calculated on the Non-GAAP adjustments described in footnotes (1) and (2) above, other than the foreign exchange gain on IPO primary share proceeds of R$89.8 million, which is not taxable, and the tax benefits related to other Non-GAAP adjustments.
(5) Non-GAAP net income is equal to the sum of the adjustments described in footnotes (1), (2) and (4) above.
(6) Non-GAAP basic earnings per common share and Non-GAAP diluted earnings per common share reflect the adjustments to Non-GAAP net income, which is allocated in full to Owners of the Company.


 

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RISK FACTORS

This 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 products 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. In the first three months of 2018, 45% of our customers accessed our platforms through mobile devices, compared with 36% in the first three months of 2017. 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.

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.

 

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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. 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/Wirecard. In the POS payments market, we compete primarily with international players, such as SumUp/Payleven, and regional players, such as MercadoPago from MercadoLibre. As is the case with 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 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.

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.

 

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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 or results of operations. 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. 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.

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.

 

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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, we do not maintain insurance policies specifically for cyber-attacks and our current insurance policies 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.

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.

 

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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 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. 12,865/2013, which took effect on October 9, 2013. The Central Bank regulations permit us to continue carrying on these activities pending grant of the authorizations. 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, the early payment of receivables feature that we offer merchants makes up a significant portion of our activities. Law No. 12,865/2013 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 feature 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 providing this feature 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 of the digital payments industry in Brazil.”

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 results of operations. 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.

 

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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. For example, in 2015 the Brazilian government increased the rate of PIS/COFINS tax (which is a social contribution on gross revenues) from 0% to 4.65% on financial income realized by Brazilian companies that are taxed under the non-cumulative regime (which is the tax regime that applies to us). In addition, 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 the taxes applicable to our business increase or any 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, change regularly, and it is common for taxpayers to challenge such changes, which may result in additional tax assessments and penalties for our company.

In this sense, 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 Proceedings—Tax and Social Security Proceedings.”

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 example, or general concerns about providing bank account information to a third party.

 

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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.

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.

 

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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.

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. In addition, businesses operating in Brazil, such as ours, tend to experience relatively fewer transactions during certain international sporting events, such as the soccer World Cup.

 

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Factors that may cause fluctuations in our quarterly results of operations 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 profit and our business.

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. The agreements for the components used to manufacture our POS devices are entered into directly by the manufacturer of our POS devices and we do not have agreements with these suppliers.

 

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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.

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.

 

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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 chargebacks related to fraudulent transactions. 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.

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.

 

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If we fail to establish and maintain proper and effective internal controls over financial reporting, our results of operations and our ability to operate our business may be harmed.

We are 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 2018 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.

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 feature if our overall financing costs require us to increase the discount rate we charge for this feature. Either of these factors could cause our business activity levels to decrease.

 

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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.

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.

 

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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.

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.

 

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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 March 31, 2018, we had approximately 3,200 active judicial proceedings and proceedings with PROCONs and small claims courts relating to consumer rights. Most of these proceedings are related to consumer allegations of non-delivery of products by merchants and requests for withdrawal of digital account balances that were blocked by PagSeguro because they were under investigation for fraud or undergoing claim resolution. To the extent consumers file such claims against us in the future, we may be required to pay 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 March 31, 2018, we had recorded R$4.9 million in provisions for current civil proceedings and no provisions for non-current civil proceedings; and at March 31, 2017, we had recorded R$0.8 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 results of operations 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 through at least the first six months of 2018, see “Management’s Discussion and Analysis of Financial Condition and Results of Operation—Principal Factors Affecting Our Financial Condition and Results of Operations.” 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—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 through at least the first six months of 2018. 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, former President Luiz Inácio Lula da Silva, and high-ranking executives officers of major state-owned and private 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 for infringing budgetary laws. Michel Temer then became President for the remainder of the presidential term, which is due to end in October 2018. In June 2017, the Brazilian Higher Electoral Court (Tribunal Superior Eleitoral) cleared the electoral alliance formed by Ms. Rousseff and Mr. Temer of charges that it had violated campaign finance laws in the 2014 election. President Temer remains the subject of investigations by the Brazilian Federal Police and the Office of the Brazilian Federal Prosecutor relating to allegations of corruption, however, and may ultimately be subject to impeachment proceedings before his presidential term ends. We cannot predict how the ongoing investigations and proceedings will affect us or the price of our Class A common shares. Further, presidential elections are to be held in Brazil in the second half of 2018. We cannot predict the outcome of those elections, including whether any successor to Mr. Temer will adopt policies or changes to current policies which may have a material adverse effect on us. Furthermore, the political uncertainty resulting from the Brazilian presidential elections may contribute to economic uncertainty in Brazil and to heightened volatility in the securities issued abroad by Brazilian companies.

 

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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. In May 2018, there was also a nationwide truckers’ strike in which truck drivers, dissatisfied by the increase in fuel prices, blocked roads throughout the country, preventing the delivery of goods and gasoline to Brazilian businesses, which resulted in a general slowdown in commercial transactions, including those performed by users of our products and services, during the strike.

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 markets, 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 2.9%, 6.3% and 10.7% in 2017, 2016 and 2015, 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 SELIC, as established by the Monetary Policy Committee (Comitê de Política Monetária do Banco Central do Brasil), or COPOM, increased from 10.00% at the beginning of 2014 to a high point of 14.25% in 2016 before a series of rate reductions in 2017, bringing the SELIC rate down to 7.00% as of December 7, 2017, where it remained at year end 2017. The COPOM reduced the SELIC rate to 6.75% on February 7, 2018, and further reduced it to 6.50% on March 21, 2018. The COPOM reconfirmed the SELIC rate on May 16, 2018. 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.

 

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

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. Between year-end 2016 and year-end 2017, the real remained relatively stable, depreciating 1.5% against the U.S. dollar. From January 1 through June 15, 2018, however, the real depreciated 15.4% against the U.S. dollar, primarily as a result of lower interest rates in Brazil, which reduced the volume of foreign currency deposited in Brazil in the “carry trade,” as well as uncertainty regarding the results of the Brazilian presidential elections due to be held in October 2018. The real/U.S. dollar exchange rate reported by the Central Bank was R$3.7738 per U.S. dollar on June 15, 2018. There can be no assurance that the real will not again appreciate or depreciate against the U.S. dollar or other currencies in the future.

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, a contraction of 3.6% in 2016 and growth of 1.0% in 2017. 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.

 

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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.

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 with 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 further reduced it to BB- in January 2018 with a stable outlook. 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. In April 2018, Moody’s reaffirmed the Ba2 rating, but raised the outlook from negative to stable, citing expectations that the winner of the October 2018 presidential elections will pass fiscal reforms. 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 and further reduced it in February 2018 to BB- with a stable outlook.

 

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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.

Risks Relating to the Offering and Our Class A Common Shares

UOL, our largest shareholder, owns 100% of our outstanding Class B common shares, which will represent approximately 91.6% of the voting power of our issued share capital following this offering, and controls 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. UOL controls our company and holds all of our outstanding Class B common shares, representing 94.0% of our issued share capital immediately prior to this offering. Following this offering, UOL will continue to control our company and will continue to hold all of our outstanding Class B common shares, representing 52.2% of our issued share capital, or 50.7% 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 91.6% of the voting power of our issued share capital, or 91.1% if the underwriters’ option to purchase additional common shares from UOL is exercised in full. UOL will therefore continue to control the outcome of all decisions at our shareholders’ meetings, and will continue to be able to elect a majority of the members of our board of directors. It will also continue to 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.”

 

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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.”

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

The assumed offering price of US$33.35 per Class A common share, which is the closing price of our Class A common shares on June 15, 2018, 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 86.1%. In addition, investors purchasing our Class A common shares from us in this offering will have contributed 32.5% of the total consideration paid to us by all shareholders who purchased our common shares, in exchange for acquiring approximately 10.1% of our outstanding 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 156,113,557 Class A common shares and 170,570,861 Class B common shares (or 161,063,557 Class A common shares and 165,620,861 Class B common shares, if the underwriters exercise in full their option to purchase additional common 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.

 

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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 90-day period following the date of this prospectus. PagSeguro Digital’s executive officers and the members of its board of directors who will hold shares upon completion of this offering, as well as UOL, have agreed to substantially similar lock-up provisions. However, the representatives of 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.

In addition, the shares issued to certain members of our management under our Long-Term Incentive Plan, or LTIP, after the completion of our IPO are subject to a one-year lock-up period under the terms of the LTIP. Any shares that are issued under the LTIP on subsequent vesting dates during the first year after our IPO will be subject to the remainder of that same lock-up period, expiring one year after the closing of our IPO. 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, 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 to continue taking advantage of new market opportunities by ramping up investments in new technologies, products and services for our digital ecosystem. 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.

 

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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 such as LTIP. 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.

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.

Our dual class capital structure means our stock will not be included in certain indices. We cannot predict the impact this may have on our stock price.

In July 2017, S&P Dow Jones, a provider of widely followed stock indices, announced that companies with multiple share classes, such as ours, will not be eligible for inclusion in certain of their indices. As result, our Class A common shares are not eligible for these stock indices. Additionally, since September 2017, FTSE Russell, another provider of widely followed stock indices, requires new constituents of its indices to have at least five percent of their voting rights in the hands of public stockholders. UOL will control approximately 91.6% of the voting power of our outstanding share capital following this offering, assuming no exercise of the underwriters’ option to purchase additional common shares, or 91.1% assuming full exercise of the underwriters’ option to purchase additional common shares. Many investment funds are precluded from investing in companies that are not included in such indices, and these funds would be unable to purchase our Class A common shares if we were not included in such indices. We cannot assure you that other stock indices will not take a similar approach to S&P Dow Jones and FTSE Russell in the future. Exclusion from indices could make our Class A common shares less attractive to investors and, as a result, the market price of our Class A common shares could be adversely affected.

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.”

 

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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 of the Cayman Islands (as amended), or the Companies Law, 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 require us 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.

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.”

 

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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.

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 Securities Exchange Act of 1934, as amended, or 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 rely on exemptions from certain U.S. rules which permit us to follow Cayman Islands legal requirements rather than certain of the requirements that are applicable to U.S. domestic registrants.

 

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We 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. 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.

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 are not 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 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 do 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 our IPO, (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.

PagSeguro Digital is a foreign private issuer and, as a result, in accordance with the listing requirements of the NYSE we rely on certain home country governance practices from the Cayman Islands, rather than the corporate governance requirements of the NYSE.

We report under the Exchange Act as a non-U.S. company with foreign private issuer status. The NYSE rules provide that foreign private issuers are permitted to follow home country practice in lieu of certain NYSE corporate governance standards. The standards applicable to us are considerably different from the standards applied to U.S. domestic issuers. For instance, we are not required to:

 

    have a majority of independent members on our board of directors (other than as may result from the requirements for the audit committee member independence under the Exchange Act);

 

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    have a minimum of three members on our audit committee;

 

    have a compensation committee or a nominating and corporate governance committee;

 

    have regularly scheduled executive sessions of our board that consist of independent directors only; or

 

    adopt and disclose a code of business conduct and ethics for directors, officers and employees.

As a foreign private issuer, we may follow home country practice from the Cayman Islands in lieu of the above requirements. Therefore, the approach to governance adopted by our board of directors may be different from that of a board of directors consisting of a majority of independent directors, and, as a result, our management oversight may be more limited than if we were subject to all of the NYSE corporate governance standards. Accordingly, you may not have the same protections afforded to shareholders of companies that are not foreign private issuers.

Although we do not expect to be a passive foreign investment company, or PFIC, for U.S. federal income tax purposes, there can be no assurance that we will not be a PFIC for any taxable year, which could subject United States investors in our shares to significant adverse U.S. federal income tax consequences.

We do not expect to be a PFIC for the current taxable year or any future year, based on our current business plans. However, whether we are a PFIC will be determined annually based upon the composition and nature of our income and the composition, nature and valuation of our assets, all of which are subject to change. The determination of whether we are a PFIC will also depend upon the application of complex U.S. federal income tax rules concerning the classification of our assets and income for this purpose, and the application of these rules is uncertain in some respects. Accordingly, there can be no assurance that the IRS will not challenge any determination by us that we are not a PFIC.

If we were classified as a PFIC, special adverse U.S. federal tax rules would generally apply to a United States Holder (as defined in “Taxation—U.S. Federal Income Tax Considerations”) that holds our Class A common shares. United States Holders are urged to consult their own tax advisors with respect to the potential tax consequences of the PFIC rules to their particular circumstances.

Although we consider ourselves to be actively engaged in an active business with respect to a number of business lines, and to be engaged in an active financing activity with respect to the early payment of receivables feature that we offer merchants regarding credit card transactions in installments in particular, and we believe that income from such businesses and features is likely not treated as passive income for purposes of the PFIC rules, it is not entirely clear how such income will be treated for these purposes. In particular, certain of our income may be treated as passive income unless such income is eligible for an exception for certain income derived in the active conduct of a financing business under Section 954(h) of the Code (the “active financing exception”), and related assets may be considered passive assets unless the active financing exception applies. We believe that the active financing exception will likely apply to treat such income as active, but if it is determined, contrary to our view, that the income from these businesses and features is passive for such purposes, that would alter the composition of our income and assets for purposes of testing our PFIC status, and may cause us to be treated as a PFIC. For more information on the application of the PFIC rules to us, see “Taxation—U.S. Federal Income Tax Considerations—Passive Foreign Investment Company.”

 

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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.

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 advisor) 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” 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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PRESENTATION OF FINANCIAL AND OTHER INFORMATION

Financial Statements

We present in this prospectus our audited consolidated financial statements at December 31, 2017 and 2016 and for each of the three years ended December 31, 2017. These audited consolidated financial statements were prepared in accordance with IFRS, as issued by the IASB. We maintain our books and records in reais.

In addition, we present our unaudited condensed consolidated interim financial statements at March 31, 2018 and for the three-month periods ended March 31, 2018 and 2017, which have been prepared in accordance with IAS 34.

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

 

    our audited consolidated financial statements and the related notes;

 

    our unaudited condensed consolidated interim financial statements and the related notes; and

 

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

Corporate Events

Our Incorporation and IPO

At the time of incorporation of PagSeguro Digital Ltd., UOL 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). On August 1, 2017, PagSeguro Brazil carried out a reverse stock split, following which UOL held 262,288,606 shares in PagSeguro Brazil, the one remaining share being held by the separate shareholder.

On January 4, 2018, prior to the launch of our IPO, UOL contributed all of its shares in PagSeguro Brazil to PagSeguro Digital. As a result, PagSeguro Digital now owns substantially all of the shares of PagSeguro Brazil, together with PagSeguro Brazil’s subsidiaries and activities. In return for this contribution, PagSeguro Digital issued 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 held all of the issued shares of PagSeguro Digital immediately prior to our IPO, consisting of 262,288,607 Class B common shares.

Immediately prior to our IPO on January 23, 2018, therefore, UOL held all of the 262,288,607 issued and outstanding shares in PagSeguro Digital, and PagSeguro Digital held all of the 262,288,607 issued and outstanding shares in PagSeguro Brazil except one.

After accounting for the 50,925,642 new Class A common shares issued and sold by PagSeguro Digital in our IPO, plus the additional new Class A common shares issued without cash consideration to certain members of our management who are beneficiaries under our LTIP (upon closing of our IPO as well as in the following months), we had a total of 315,134,418 common shares issued and outstanding immediately prior to this offering. 192,020,861 of these shares are Class B common shares beneficially owned by UOL, 121,193,388 of these shares are Class A common shares beneficially owned by investors who purchased shares in our IPO and 1,920,169 are Class A common shares beneficially owned by members of our management.

 

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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 results of operations were recorded in UOL’s financial statements. As a result, the financial information of PagSeguro Digital 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 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.

Prior to the completion of our IPO, PagSeguro used centralized cash management with UOL. Consequently, all amounts received or paid in connection with the PagSeguro business were recognized as balances between related parties in our audited consolidated financial statements. This approach is consistent with the treatment of our audited consolidated financial statements prior to August 1, 2015, which were prepared on a carve-out basis. PagSeguro’s cash management was separated from UOL’s cash management starting from the date of completion of our IPO. Any remaining balances that related to prior cash management activities began accruing interest on arms’ length terms from the date of completion of our IPO, and all such balances were repaid by UOL following completion of our IPO.

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.

Non-GAAP Financial Measures

This prospectus includes certain non-GAAP measures, being: non-GAAP Total revenue and income, non-GAAP Other financial income, non-GAAP Total expenses, non-GAAP Cost of sales and services, non-GAAP Administrative expenses, non-GAAP Profit before taxes, non-GAAP Deferred income tax, non-GAAP Net income, non-GAAP Basic earnings per common share and non-GAAP Diluted earnings per common share. We present non-GAAP measures when we believe that the additional information is useful and meaningful to investors. These non-GAAP measures are provided to enhance investors’ overall understanding of our current financial performance and its prospects for the future. Specifically, we believe the non-GAAP measures provide useful information to both management and investors by excluding certain expenses, gains and losses, as the case may be, that may not be indicative of our core operating results and business outlook.

 

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These measures may be different from non-GAAP financial measures used by other companies. The presentation of this non-GAAP financial information, which is not prepared under any comprehensive set of accounting rules or principles, is not intended to be considered separately from, or as a substitute for, our financial information prepared and presented in accordance with IFRS. Non-GAAP measures have limitations in that they do not reflect all of the amounts associated with our results of operations as determined in accordance with IFRS. These measures should only be used to evaluate our results of operations in conjunction with the corresponding GAAP measures.

The following table presents a reconciliation of our non-GAAP financial measures to the most directly comparable GAAP measures for the three months ended March 31, 2018:

 

     For the Three Months Ended
March 31,
 
     2018  
    

(in millions of reais, except

for amounts per share)

 

Total revenue and income

     928.0  

Less: Foreign exchange gain on IPO primary share proceeds

     (89.8
  

 

 

 

Non-GAAP total revenue and income(1)

     838.2  
  

 

 

 

Total expenses

     (765.0

Less: Share-based long-term incentive plan (LTIP)

     210.6  

Less: Tax related to remittance of IPO primary share proceeds (IOF tax)

     13.1  
  

 

 

 

Non-GAAP total expenses(2)

     (541.3
  

 

 

 

Profit before taxes

     163.0  

Plus: Total Non-GAAP Adjustments

     133.9  
  

 

 

 

Non-GAAP profit before taxes(3)

     296.9  
  

 

 

 

Income tax and social contribution

     (14.5

Less: Income tax and social contribution on non-GAAP adjustments

     (69.5
  

 

 

 

Non-GAAP deferred income tax(4)

     (84.0
  

 

 

 

Net income

     148.5  

Plus: Total Non-GAAP adjustments

     64.4  
  

 

 

 

Non-GAAP net income(5)

     212.9  
  

 

 

 

Basic earnings per common share - R$

     0.4988  

Diluted earnings per common share - R$

     0.4969  
  

 

 

 

Non-GAAP basic earnings per common share - R$(6)

     0.7153  

Non-GAAP diluted earnings per common share - R$(6)

     0.7126  
  

 

 

 

 

(1) Non-GAAP total revenue and income excludes a foreign exchange gain on our IPO primary proceeds in the amount of R$89.8 million in the three months ended March 31, 2018, which relates to the impact of exchange rate variation on the conversion from U.S. dollars into Brazilian reais of the proceeds from our sale of new shares in the IPO. We exclude this foreign exchange variation from our non-GAAP measures primarily because it is unusual income. The foreign exchange gain on our IPO primary proceeds is included within Other financial income. Other financial income in the amount of R$116.4 million is therefore adjusted by excluding the foreign exchange gain on our IPO primary proceeds, resulting in Non-GAAP Other financial income in the amount of R$26.6 million.
(2) Non-GAAP total expenses excludes:

 

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  (a) stock-based compensation expenses in the total amount of R$210.6 million, consisting of expenses for equity awards under our LTIP. We exclude stock-based compensation expenses from our non-GAAP measures primarily because they are non-cash expenses, and the related employer payroll taxes depend on our stock price and the timing and size of exercises and vesting of equity awards, over which management has limited to no control, and as such management does not believe these expenses correlate to the operation of our business. The largest portion of this expense amount was recognized upon the closing of our IPO with the issuance of 1.8 million shares under our LTIP awards that vested on the IPO date. The total of stock-based compensation expenses is allocated between Cost of sales and services and Administrative expenses. Excluding the stock-based compensation expenses, Cost of sales and services in the amount of R$444.8 million is adjusted by R$38.2 million resulting in a Non-GAAP Cost of sales and services of R$406.5 million; and Administrative Expenses in the amount of R$219.0 million is adjusted by R$172.4 million resulting in Non-GAAP Administrative expenses of R$46.7 million.
  (b) tax related to remittance of IPO primary share proceeds (IOF tax) in the amount of R$13.1 million in the three months ended March 31, 2018, which represents the impact of Brazilian IOF tax (currency remittance tax) payable when we remitted the proceeds from our sale of new shares in the IPO from the Cayman Islands to Brazil. We exclude this IOF tax on the remittance of IPO primary share proceeds from our Non-GAAP measures primarily because it is an unusual expense. The IOF tax is fully allocated to Financial expenses. Financial expenses in the amount of R$16.5 million is therefore adjusted by excluding the IOF tax, resulting in Non-GAAP Financial expenses in the amount of R$3.4 million.
(3) Non-GAAP profit before taxes is equal to the sum of the adjustments described in footnotes (1) and (2) above.
(4) Non-GAAP income tax and social contribution consists of income tax at the rate of 34% calculated on the Non-GAAP adjustments described in footnotes (1) and (2) above, other than the foreign exchange gain on IPO primary share proceeds of R$89.8 million, which is not taxable, and the tax benefits related to other Non-GAAP adjustments.
(5) Non-GAAP net income is equal to the sum of the adjustments described in footnotes (1), (2) and (4) above.
(6) Non-GAAP basic earnings per common share and Non-GAAP diluted earnings per common share reflect the adjustments to Non-GAAP net income, which is allocated in full to Owners of the Company.

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” 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 our audited consolidated financial statements and our unaudited condensed consolidated interim financial statements. Certain other amounts that appear in this prospectus may not sum due to rounding.

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, a cross-platform measurement company that measures audiences, brands and consumer behavior, and provides market and analytical data to clients; Datafolha, a research institute and affiliate of UOL created by Grupo Folha, which conducts statistical surveys, election polling and opinion and market surveys for the market at large; the Brazilian Institute of Geography and Statistics (Instituto Brasileiro de Geografia e Estatistica, or IBGE); the World Bank; SEBRAE; Neoway Business Solutions; Webshoppers; and eMarketer; among others. We also make statements in this prospectus about our competitive position and the size of the Brazilian digital payments and e-commerce markets.

 

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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. In addition, the data that we compile internally and our estimates have not been verified by an independent source. Except as disclosed in this prospectus, none of the publications, reports or other published industry sources referred to in this prospectus were commissioned by us or prepared at our request. Except as disclosed in this prospectus, we have not sought or obtained the consent of any of these sources to include such market data in this prospectus.

The sources of market and industry data contained in this prospectus are listed below:

 

  (1) Bank of International Settlements, Statistics on Payment, Clearing and Settlement Systems in the CPMI Countries, December 2017.

 

  (2) ABECS, 2017 Sector Balance (Balanço do Setor 2017), March 2018. (Maria Judith de Brito, a member of our board of directors, is currently a member of the board of ABECS.)

 

  (3) eMarketer, Worldwide Retail Ecommerce Sales, February 2018.

 

  (4) eMarketer, Worldwide Internet and Mobile Users—eMarketer’s Estimates for 2016–2021, April 2017.

 

  (5) eMarketer, Worldwide Mcommerce Sales Penetration by Country, February 2018.

 

  (6) Ebit, Webshoppers 2018.

 

  (7) Deloitte, FEBRABAN Bank Technology Report (Pesquisa FEBRABAN de Tecnologia Bancária), 2018.

 

  (8) BCG and Google, Digital Payments 2020: The Making of a $500 Billion Ecosystem in India, July 2016.

 

  (9) World Bank, The Global Findex Database 2017: Measuring Financial Inclusion Around the World, April 2018.

 

  (10) Serasa Experian, Number of New Individual Micro Entrepreneurs Increased 14.4% in February, dated April 2018.

 

  (11) Worldpay, Global Payments Report, November 2017.

 

  (12) Datafolha, The Payment Methods Market (O Mercado dos Meios de Pagamento), June 2017. (Datafolha is a member of Grupo Folha. This report was commissioned by us and Datafolha has consented to our inclusion of this market data in this prospectus.)

 

  (13) Neoway Business Solutions, using source data principally from SEBRAE, Brazil’s Tax Authority (Receita Federal), and RAIS, June 2017.

 

  (14) eMarketer, Netflix Subscribers in Latin America, by Country for Q4 2016, June 2017.

 

  (15) eMarketer, Paid Netflix Subscribers in Select Countries in Western Europe, 2012-2020, September 2016.

 

  (16) eMarketer, Subscription Video-on Demand (SVOD) Subscribers in North America, by Country, 2016-2022, August 2017.

 

  (17) Veja, São Paulo is the city with the most Uber rides in the world, August 2017.

 

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  (18) Brazilian Association of Companies with Rotate Offset (Associação Brasileira de Empresas com Rotativa Offset, or ABRO), Sector Analysis, 2015.

 

  (19) Hostmapper Brasil, Panorama of the Brazilian Shared Hosting Market, May 2017.

 

  (20) Panrotas, Rio is the fourth largest market for Airbnb, January 2017.

 

  (21) Forebrain, Clipping – Media & Message: The brands with the most emotional engagement, May 2017.

 

  (22) Telebrasil, Performance of the Telecommunications Sector in Brazil, March 2018.

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$3.7738 to US$1.00, the commercial selling rate for U.S. dollars at June 15, 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 our IPO, (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$1.0 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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USE OF PROCEEDS

Based on a price per Class A common share of US$33.35, which is the closing price of our Class A common shares on June 15, 2018, we estimate that the net proceeds to our company from the sale of Class A common shares in this offering will be approximately US$374.6 million, after deducting commissions and estimated expenses payable by us.

We currently plan to use the net proceeds from this offering to continue taking advantage of new market opportunities by ramping up investments in new technologies, products and services for our digital ecosystem, which we believe will allow us to futher distance ourselves from competitors. 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 Class A common shares by UOL.

 

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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.

On September 29, 2017, PagSeguro Brazil’s shareholders approved a distribution of R$238.8 million in dividends. This amount consisted of (i) R$142.8 million of dividends related to the six-month period ended June 30, 2017 and (ii) R$96.0 million in dividends related to the year ended December 31, 2016. For more information regarding the 2016 dividend, see Note 19 to our audited consolidated financial statements and our unaudited condensed consolidated interim financial statements.

The R$238.8 million in dividends were distributed on September 29, 2017 in the following manner: (i) R$54.3 million paid in cash and (ii) R$184.5 million offset against amounts then due to PagSeguro Brazil and Boa Compra under our centralized cash management with UOL. For further information on our centralized cash management with UOL, see “Presentation of Financial and Other Information—Corporate Events—The 2015 Reorganization.”

In addition, subject to certain limitations, Brazilian companies generally also distribute amounts in respect of interest on own capital, which is calculated based on a government interest rate. In its 2016 financial statements PagSeguro Brazil recorded an amount of R$22.2 million in interest on own capital payable to UOL. This amount was paid to UOL on April 30, 2017, although the payment was offset in full against amounts then due to PagSeguro Brazil and Boa Compra under our centralized cash management with UOL, rather than being paid in cash.

 

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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. Between year-end 2016 and year-end 2017, the real remained relatively stable, depreciating 1.5% against the U.S. dollar. From January 1 through June 15, 2018, however, the real depreciated 15.4% against the U.S. dollar, primarily as a result of lower interest rates in Brazil, which reduced the volume of foreign currency deposited in Brazil in the “carry trade,” as well as uncertainty regarding the results of the Brazilian presidential elections due to be held in October 2018. 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  

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  

2017

     3.38        3.05        3.19        3.31  

 

Month Ended

   Low      High      Average(2)      Period End  

December 2017

     3.33        3.23        3.29        3.31  

January 2018

     3.27        3.14        3.21        3.16  

February 2018

     3.28        3.17        3.24        3.25  

March 2018

     3.34        3.22        3.28        3.32  

April 2018

     3.50        3.31        3.40        3.48  

May 2018

     3.75        3.53        3.64        3.74  

June 2018 (through June 15)

     3.90        3.69        3.76        3.77  

 

(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, equity and total capitalization as follows:

 

  (a) our historical financial information, on an actual basis;

 

  (b) our historical financial information as adjusted to give effect to the issuance and sale by us of 11,550,000 Class A common shares in this offering at an assumed offering price of US$33.35 per Class A common share (the closing price of our Class A common shares on June 15, 2018, translated into reais using a rate of R$3.7738 to US$1.00, the commercial selling rate for U.S. dollars at June 15, 2018 as reported by the Central Bank), after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us as set forth under “Expenses of the Offering”.

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

 

     At March 31, 2018
     Actual      As
adjusted
for this
offering(1)
     (in millions)      (in millions)
     (R$)      (R$)

Cash and cash equivalents

     2,545.4      3,959.2

Total equity

     4,476.7      5,890.5
  

 

 

    

 

Total capitalization(2)

     4,476.7      5,890.5
  

 

 

    

 

 

(1) As adjusted to reflect the issuance and sale by us of 11,550,000 Class A common shares in this offering at an assumed offering price of US$33.35 per Class A common share (the closing price of our Class A common shares on June 15, 2018, translated into reais to U.S. dollars using a rate of R$3.7738 to US$1.00, the commercial selling rate for U.S. dollars at June 15, 2018 as reported by the Central Bank), after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
(2) Total capitalization equals Total equity.

Except as described above, there have been no material changes to our capitalization since March 31, 2018.

 

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DILUTION

If you invest in our Class A common shares, your interest will be diluted to the extent of the difference between the assumed 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 (as well as the issuance of new shares to beneficiaries under the LTIP in April 2018). Because our Class A common shares and Class B common shares have the same dividend and other rights, except for voting, preemption and conversion rights, we have counted the Class A common shares and Class B common shares equally for purposes of the dilution calculations below.

 

    Our historical net tangible book value at March 31, 2018 was R$4,286.1 million. Net tangible book value consists of total tangible assets less total liabilities.

 

    Our historical net tangible book value per common share at March 31, 2018 was R$13.61.    Net tangible book value per share is the net tangible book value divided by the number of common shares outstanding at March 31, 2018.

 

    Pro forma net tangible book value is equal to our historical net tangible book value plus the proceeds of this offering to us, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, as well as the issuance of 96,455 new shares without consideration to beneficiaries under the LTIP in April 2018. We will issue and sell 11,550,000 new Class A common shares at an assumed offering price equivalent to R$125.86 per common share (which is the equivalent in reais of US$33.35 per common share, the closing price of our Class A common shares on June 15, 2018, translated into reais to U.S. dollars using a rate of R$3.7738 to US$1.00, the commercial selling rate for U.S. dollars at June 15, 2018 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 us, as well as the issuance of 96,455 new shares without consideration to beneficiaries under the LTIP in April 2018, is R$5,699.9 million.

 

    The pro forma net tangible book value per common share at March 31, 2018 would have been R$17.45, based on the common shares outstanding as of March 31, 2018, plus the issuance of Class A common shares in April 2018 under the LTIP and the 11,550,000 new common shares to be issued and sold in this offering.

These figures represent an immediate increase in net tangible book value per common share on a pro forma basis of R$3.84 per common share to our existing shareholders, and a dilution in the net tangible book value per common share of R$108.41 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 offering price per common share(1)

     125.86  

Historical net tangible book value per common share at March 31, 2018

     13.61  

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

     17.45  

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

     3.84  

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

     108.41  

Percentage of dilution per share to new investors

     86.1%  

 

(1) Calculated based on a price per share of R$125.86 per common share (which is the equivalent in reais of US$33.35 per common share, the closing price of our Class A common shares on June 15, 2018, translated into reais to U.S. dollars using a rate of R$3.7738 to US$1.00, the commercial selling rate for U.S. dollars at June 15, 2018 as reported by the Central Bank.

 

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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 on a bookbuilding process and may be different from recent trading prices of our common shares.

The following table summarizes, on the same pro forma as adjusted basis at March 31, 2018, the number of common shares acquired from us, and the total cash consideration paid and the average price per common share paid to us by UOL, by the shareholders who purchased Class A common shares in our IPO in January 2018, and by the new shareholders purchasing Class A common shares in this offering. This information is based on the assumed offering price of R$125.86 per Class A common share, before deducting the underwriting discounts and commissions and estimated offering expenses payable by us 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

     170,570,861        —          52.2%        359.9        2.8%        2.11  

IPO Shareholders

     —          121,193,388        37.1%        8,254.5        64.7%        68.11  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Management

     —          1,920,169        0.6%        0.0        0.0%        0.0  

New shareholders

     —          33,000,000        10.1%        4,153.3        32.5%        125.86  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     170,570,861        156,113,557        100.0%        12,767.6        100.0%        196.08  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

An increase (decrease) of US$1.00 in the assumed offering price of US$33.35 per Class A common share (the closing price of our Class A common shares on June 15, 2018), translated into an increase (decrease) of R$3.77 using the exchange rate above, would, after the conclusion of this offering, increase (decrease) (1) the value of our shareholders’ equity by R$233.2 million, and (2) the value of our pro forma net tangible book value per common share to new investors by R$0.13, 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 us.

 

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MARKET INFORMATION

General Information

Our Class A common shares are listed on the NYSE under the symbol “PAGS”. Our Class A common shares are listed in registered form and are not certificated. The Class A common shares commenced trading on the NYSE on January 24, 2018. After our IPO, the Class A common shares represented 38.5% of our shares and 100% of our global public float. Immediately after this offering, the Class A common shares will represent 47.8% of our shares (assuming no exercise of the underwriters’ option to purchase additional common shares from UOL) or 49.3% of our shares (assuming full exercise of the underwriters’ option to purchase additional common shares from UOL) and 100% of our global public float.

If your shares are registered in the name of The Depository Trust Company, or DTC, you are not a shareholder or member of the company. Each person owning Class A common shares held through DTC must rely on the procedures thereof and on institutions that have accounts therewith to exercise any rights of a holder of the Class A common shares.

Price of Our Class A Common Shares

The table below sets forth reported high and low closing sale prices in U.S. dollars per Class A common share for the periods indicated based on information available from the NYSE.

 

     U.S. dollars per
Class A common share
 
     High      Low  

2018:

     

First Quarter (starting January 24)

     38.32        27.43  

Most Recent Six Months:

     

December 2017

     N/A        N/A  

January 2018 (starting January 24)

     29.30        27.47  

February 2018

     32.46        27.43  

March 2018

     38.32        32.12  

April 2018

     39.10        32.53  

May 2018

     35.40        31.24  

June 2018 (through June 15)

     34.50        29.81  

The offering price per Class A common share in this offering will be set based on a bookbuilding process and may be different from recent trading prices of our common shares.

 

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SELECTED FINANCIAL AND OPERATING INFORMATION

PagSeguro Digital, our Cayman Islands exempted company, was incorporated on July 19, 2017 for an indefinite term. Prior to the contribution of Pagseguro Brazil to it on January 4, 2018, PagSeguro Digital had not commenced operations and had only nominal assets and liabilities.

Following our IPO on January 23, 2018, PagSeguro Digital began reporting consolidated financial information to shareholders, and PagSeguro Brazil no longer presents consolidated financial statements.

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

 

    our audited consolidated financial statements at December 31, 2017 and 2016 and for each of the three years ended December 31, 2017 and the related notes;

 

    our unaudited condensed consolidated interim financial statements at March 31, 2018 and for the three-month periods ended March 31, 2018 and 2017 and the related notes; and

 

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

The selected financial data at and for the years ended December 31, 2017, 2016 and 2015 has been derived from our audited consolidated financial statements, which have been prepared in accordance with IFRS, as issued by the IASB. The selected financial data at December 31, 2017 and 2016 and for each of the three years ended December 31, 2017 has been derived from our audited consolidated financial statements, which are included elsewhere in this prospectus. The selected financial data at and for the year ended December 31, 2014 has been derived from the audited consolidated financial statements of PagSeguro Brazil, which are not included in this prospectus.

The selected financial data at and for the three months ended March 31, 2018 and 2017 has been derived from our unaudited condensed consolidated interim financial statements, which are included elsewhere in this prospectus and which have been prepared in accordance with IAS 34 and which include, in the opinion of management, all adjustments considered necessary to present fairly our results of operations and financial position for the periods and dates presented. The results of operations for these interim periods are not necessarily indicative of our results for the full year or any other interim period.

 

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Statements of Operations Data

 

     For the Years Ended December 31,  
     2017     2017     2016     2015     2014  
     (US$)(1)     (R$)     (R$)     (R$)     (R$)  
     (in millions, except amounts per share and %)  

Net revenue from transaction activities and other services

     324.4       1,224.3       480.0       268.2       160.1  

Net revenue from sales

     125.0       471.9       260.6       176.5       48.2  

Financial income

     216.9       818.6       392.4       219.5       115.8  

Other financial income

     2.3       8.6       5.3       10.7       1.8  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue and income

     668.7       2,523.4       1,138.4       674.9       325.8  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of sales and services

     (350.9     (1,324.4     (623.7     (382.5     (142.5

Selling expenses

     (65.1     (245.8     (199.9     (162.6     (81.4

Administrative expenses

     (40.6     (153.2     (84.5     (61.1     (51.3

Financial expenses

     (27.7     (104.5     (68.3     (29.7     (11.1

Other (expenses) income, net

     (3.2     (12.0     (6.7     1.3       (3.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit before Income Taxes

     181.1       683.5       155.4       40.3       36.2  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Current income tax and social contribution

     (57.0     (215.0     (7.4     (2.6     (9.9

Deferred income tax and social contribution

     2.7       (10.3     (20.1     (2.2     1.0  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income Tax and Social Contribution

     (54.2     (204.7     (27.6     (4.8     (8.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income for the Year

     126.9       478.8       127.8       35.5       27.2  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Attributable to:

          

Owners of PagSeguro Digital

     126.9       478.8       127.2       35.1       26.0  

Non-controlling interests

     —         —         0.6       0.4       1.3  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted earnings per common share — R$

     0.4837       1.8254       0.4849       0.1338       0.0990  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) For convenience purposes only, amounts in reais for the year ended December 31, 2017 have been translated to U.S. dollars using a rate of R$3.7738 to US$1.00, the commercial selling rate for U.S. dollars at June 15, 2018 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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     For the Three Months Ended
March 31,
 
     2018     2018     2017  
     (US$)(1)     (R$)     (R$)  
     (in millions, except %)  

Net revenue from transaction activities and other services

     117.3       442.8       190.4  

Net revenue from sales

     24.9       94.0       118.4  

Financial income

     72.8       274.8       138.8  

Other financial income

     30.8       116.4       0.8  
  

 

 

   

 

 

   

 

 

 

Total revenue and income

     245.9       928.0       448.5  
  

 

 

   

 

 

   

 

 

 

Cost of sales and services

     (117.9     (444.8     (242.9

Selling expenses

     (22.2     (83.6     (71.1

Administrative expenses

     (58.0     (219.0     (32.5

Financial expenses

     (4.4     (16.5     (19.2

Other (expenses) income, net

     (0.3     (1.1     (0.6
  

 

 

   

 

 

   

 

 

 

Profit before Income Taxes

     43.2       163.0       82.2  
  

 

 

   

 

 

   

 

 

 

Current income tax and social contribution

     (5.5     (20.9     (19.1

Deferred income tax and social contribution

     1.7       6.4       (2.5
  

 

 

   

 

 

   

 

 

 

Income Tax and Social Contribution

     (3.8     (14.5     (21.6
  

 

 

   

 

 

   

 

 

 

Net Income for the Period

     39.4       148.5       60.6  
  

 

 

   

 

 

   

 

 

 

Attributable to:

      

Owners of PagSeguro Digital

     39.4       148.4       60.6  

Non-controlling interests

     0.0       0.1       —    

Basic earnings per common share — R$

     0.1322       0.4988       0.2311  

Diluted earnings per common share — R$

     0.1317       0.4969       0.2311  

 

(1) For convenience purposes only, amounts in reais for the three months ended March 31, 2018 have been translated to U.S. dollars using a rate of R$3.7738 to US$1.00, the commercial selling rate for U.S. dollars at June 15, 2018 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.

Operating Data

 

    At and For the Years Ended December 31,  
    2017(1)     2017     2016     2015     2014  

Operating Statistics:

         

Active merchants at year-end (in millions)

    —         2.7       1.4       0.9       0.5  

TPV (in billions)

    US$10.2       R$38.5       R$14.1       R$7.4       R$3.7  

Average spending per active merchant

    US$4,773       R$18,013       R$12,401       R$11,046       R$10,449  

 

(1) For convenience purposes only, amounts in reais for the year ended December 31, 2017 have been translated to U.S. dollars using a rate of R$3.7738 to US$1.00, the commercial selling rate for U.S. dollars at June 15, 2018 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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     At and For the Three Months Ended
March 31,
 
     2018(1)      2018      2017  

Operating Statistics:

        

Active merchants at period-end (in millions)

     —          3.1        1.7  

TPV (in billions)

     US$3.8        R$14.4        R$6.0  

Average spending per active merchant

     US$4,991        R$18,836        R$13,843  

 

(1) For convenience purposes only, amounts in reais for the three months ended March 31, 2018 have been translated to U.S. dollars using a rate of R$3.7738 to US$1.00, the commercial selling rate for U.S. dollars at June 15, 2018 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.

Balance Sheet Data

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

 

     At December 31,  
     2017      2017      2016      2015      2014  
     (US$)(1)      (R$)      (R$)      (R$)      (R$)  
     (in millions)  

Current Assets

              

Cash and cash equivalents

     17.7        66.8        80.0        6.9        1.2  

Financial investments

     55.7        210.1        131.2        —          —    

Note receivables

     933.4        3,522.3        1,715.5        1,110.0        665.9  

Receivables from related parties

     33.0        124.7        300.8        55.9        84.3  

Inventories

     16.3        61.6        21.0        41.2        16.1  

Taxes recoverable

     3.8        14.4        17.7        5.8        6.7  

Other receivables

     7.4        28.0        4.5        21.0        4.3  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Current Assets

     1,067.4        4,028.0        2,270.8        1,240.8        778.6  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Non-Current Assets

              

Judicial deposits

     0.2        0.9        0.5        0.4        0.5  

Prepaid expenses

     0.0        0.1        0.1        0.4        —    

Deferred income tax and social contribution

     9.8        37.0        8.3        6.7        8.1  

Property and equipment

     2.9        10.9        4.6        3.8        1.9  

Intangible assets

     42.1        158.9        86.1        48.6        28.5  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-Current Assets

     55.1        207.8        99.7        59.9        39.0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL ASSETS

     1,122.4        4,235.8        2,370.4        1,300.7        817.6  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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     At December 31,  
     2017      2017      2016      2015      2014  
     (US$)(1)      (R$)      (R$)      (R$)      R$  
     (in millions)  

Current Liabilities

              

Payables to third parties

     816.3        3,080.6        1,304.0        683.1        369.9  

Trade payables

     24.5        92.4        61.7        35.3        3.5  

Payables to related parties

     10.4        39.1        76.2        92.4        —    

Derivative financial instruments

     —          —          6.6        —          —    

Borrowings

     —          —          205.2        —          —    

Salaries and social charges

     9.1        34.3        20.3        13.7        0.4  

Taxes and contributions

     13.8        52.1        6.9        3.0        2.8  

Provision for contingencies

     1.2        4.6        0.7        —          1.6  

Dividends payable and interest on own capital

     —          —          22.2        3.2        3.1  

Other payables

     4.2        15.9        15.2        1.8        4.0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Current Liabilities

     879.5        3,319.0        1,719.2        832.5        385.3  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Non-Current Liabilities

              

Deferred income tax and social contribution

     11.3        42.8        24.4        6.3        5.4  

Provision for contingencies

     1.0        3.6        —          —          0.3  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-Current Liabilities

     12.3        46.4        24.4        6.3        5.7  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL LIABILITIES

     891.8        3,365.4        1,743.5        838.8        391.0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL EQUITY

     230.6        870.4        626.9        461.9        426.6  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL LIABILITIES AND EQUITY

     1,122.4        4,235.8        2,370.4        1,300.7        817.6  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) For convenience purposes only, amounts in reais for the year ended December 31, 2017 have been translated to U.S. dollars using a rate of R$3.7738 to US$1.00, the commercial selling rate for U.S. dollars at June 15, 2018 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.

 

     At March 31,
(Unaudited)
     At December 31,
(Audited)
 
     2018      2018      2017  
     (US$)(1)      (R$)      (R$)  
            (in millions)         

Current Assets

        

Cash and cash equivalents

     674.5        2,545.4        66.8  

Financial investments

     —          —          210.1  

Note receivables

     1,294.0        4,883.3        3,522.3  

Receivables from related parties

     0.2        0.9        124.7  

Inventories

     16.3        61.6        61.6  

Taxes recoverable

     4.8        18.0        14.4  

Other receivables

     5.0        18.8        28.0  
  

 

 

    

 

 

    

 

 

 

Total Current Assets

     1,994.8        7,528.1        4,028.0  
  

 

 

    

 

 

    

 

 

 

Non-Current Assets

        

Judicial deposits

     0.3        1.2        0.9  

Prepaid expenses

     0.1        0.5        0.1  

Deferred income tax and social contribution

     16.9        63.8        37.0  

Property and equipment

     2.9        11.1        10.9  

Intangible assets

     50.5        190.6        158.9  
  

 

 

    

 

 

    

 

 

 

Total Non-Current Assets

     70.8        267.2        207.8  
  

 

 

    

 

 

    

 

 

 

TOTAL ASSETS

     2,065.6        7,795.3        4,235.8  
  

 

 

    

 

 

    

 

 

 

 

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     At March 31,
(Unaudited)
     At December 31,
(Audited)
 
     2018      2018      2017  
     (US$)(1)      (R$)      (R$)  
            (in millions)         

Current Liabilities

        

Payables to third parties

     788.4        2,975.3        3,080.6  

Trade payables

     31.6        119.2        92.4  

Payables to related parties

     11.9        45.0        39.1  

Salaries and social charges

     6.9        26.2        34.3  

Taxes and contributions

     15.3        57.9        52.1  

Provision for contingencies

     1.4        5.2        4.6  

Other payables

     6.1        23.0        15.9  
  

 

 

    

 

 

    

 

 

 

Total Current Liabilities

     861.7        3,251.7        3,319.0  
  

 

 

    

 

 

    

 

 

 

Non-Current Liabilities

        

Deferred income tax and social contribution

     16.7        63.2        42.8  

Other payables

     1.0        3.6        3.6  
  

 

 

    

 

 

    

 

 

 

Total Non-Current Liabilities

     17.7        66.9        46.4  
  

 

 

    

 

 

    

 

 

 

TOTAL LIABILITIES

     879.4        3,318.6        3,365.4  
  

 

 

    

 

 

    

 

 

 

TOTAL EQUITY

     1,186.3        4,476.7        870.4  
  

 

 

    

 

 

    

 

 

 

TOTAL LIABILITIES AND EQUITY

     2,065.6        7,795.3        4,235.8  
  

 

 

    

 

 

    

 

 

 

 

(1) For convenience purposes only, amounts in reais for the three months ended March 31, 2018 have been translated to U.S. dollars using a rate of R$3.7738 to US$1.00, the commercial selling rate for U.S. dollars at June 15, 2018 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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Reconciliation of Non-GAAP Measures

For a reconciliation of our non-GAAP financial measures to the most directly comparable GAAP measures, see “Summary Financial and Operating Data—Reconciliation of Non-GAAP Financial Measures.”

 

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INDUSTRY

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

According to SEBRAE and the Portal do Empreendedor, in 2016, Micro-Merchants and SMEs accounted for 99.8% of Brazil’s 12 million businesses. According to data compiled by Neoway Business Solutions in 2017, Micro-Merchants and SMEs represented 35.4%, or R$1.8 trillion, of the R$5.1 trillion total annual TPV 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. According to SEBRAE, between 2010 and 2016, the number of individual entrepreneurs in Brazil grew by approximately one million per year.

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. For example, 58% of the Brazilian population reported having made or received a digital payment in 2017, compared to 91% in the United States and 96% in the United Kingdom, according to the World Bank. In 2015, cash and other physical payment means represented 48% of total consumer payments by transaction volume in Brazil, compared to 37% in the United States and 27% in the United Kingdom.

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 (including São Paulo, the city that generated the largest annual number of Uber rides of any city worldwide as of August 11, 2017, according to Veja), the second largest market for Waze, the fourth largest market for Netflix, and the third largest market for Facebook worldwide in terms of users, in each case, according to eMarketer. In addition, the city of Rio de Janeiro was the fourth largest market for Airbnb in terms of number of registered homes during 2016, according to Panrotas. In e-commerce, transaction volumes in Brazil grew to R$47.7 billion in 2017 from R$18.7 billion in 2011 according to ebit, representing average growth of 16.9% per year for the period. In addition, the growth of e-commerce over mobile devices, which, according to eMarketer, in 2017 represented 26.4% of e-commerce transactions in Brazil, compared to 34.5% in the United States and 43.3% in the United Kingdom, creates new payments options for both sellers and buyers, bringing business opportunities for acquirers and digital payments providers. Furthermore, according to the World Bank and calculated using the weighted average, Brazil has a high penetration of mobile phones, with 118 mobile phones per 100 inhabitants at December 31, 2016, compared to 118 in OECD member countries and 101 worldwide. This trend is driven by (i) the rollout of 3G and 4G networks (99.0% of the Brazilian population had access to 3G in March 2018); (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.

 

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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.

 

LOGO

 

Source: World Bank.

  (1) Gross Loans HHI (Herfindahl-Hirschman Index) captures market concentration, with 10,000 representing a perfect monopoly and 1 representing perfect competition; data as of 2015 for financial system.
  (2) December 2017.
  (3) December 2014.

Payment card use also remains relatively low in Brazil compared to more developed markets. According to a December 2017 report by BIS, and data from the World Bank, debit and credit card payments accounted for 27.6% of Brazilian household consumption in 2016, compared with 46.0% in the United States and 68.6% 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 3.4 billion people, or 45.5% of the total global population, used the Internet in 2016, compared with 2.2 billion people, or 31.1% 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.

 

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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. For example, according to BIS the World Bank and Worldpay, in 2016, 29% of total money spent online was via credit cards, 13% was via debit cards, 17% was via bank transfer, 9% was via cash on delivery, 18% was via an e-wallet and 14% was via other payment methods.

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$44.7 billion in 2017 from R$18.7 billion in 2011 according to Webshoppers. According to data from International Telecommunications Union and the World Bank, Brazil had the fourth largest online audience in the world with 139 million Internet users in 2016, representing penetration of 67% of the population, compared with penetration of 89% in the United States. Regionally, e-commerce in Latin America grew at an average growth rate of 22% per year from 2014 to 2017 according to data prepared by eMarketer, despite recent macroeconomic volatility in certain countries, particularly Brazil.

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. A 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 feature, the incumbents often require customers to request early payment on a transaction-by-transaction basis. Furthermore, conventional funds generally involve high interest rates in Brazil. According to the Central Bank, at March 31, 2018, when the SELIC rate, the Central Bank’s overnight rate, was 6.5%, financial costs were 125% per annum for a personal loan, 325% per annum for overdraft credit for a private individual, 332% per annum for overdraft credit for a business, 334% for revolving credit for a private individual and 313% per annum for revolving credit for a business. In comparison, we offer our early payment of installment receivables feature for merchants at a rate equivalent to 42% per annum. Given these comparatively low interest rates, we believe there is a large market opportunity for our early payment of installment receivables feature.

 

    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, require the merchant to become a bank client in order to receive the device and often rely on bank branches and/or people-intensive salesforces, which are generally less profitable at the TPV levels generated by most long-tail merchants. 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

You should read the following discussion of our financial condition and results of operations in conjunction with our audited consolidated financial statements and our unaudited condensed consolidated interim financial statements and the notes thereto included elsewhere in this prospectus, as well as the data set forth in “Summary Financial and Operating Data” and “Selected Financial and Operating Information.” 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, the words “we,” “us” and “our” mean PagSeguro Digital and its subsidiaries on a consolidated basis. Prior to receiving the shares of PagSeguro Brazil from UOL in a contribution transaction in January 4, 2018, PagSeguro Digital 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. For example, according to a survey conducted by us in June 2017, 75% of merchants who own our entry-level mPOS device, the Minizinha, did not accept card payments prior to signing up with PagSeguro. 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 six 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 and IPO

At the time of incorporation of PagSeguro Digital Ltd., UOL 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). On August 1, 2017, PagSeguro Brazil carried out a reverse stock split, following which UOL held 262,288,606 shares in PagSeguro Brazil, the one remaining share being held by the separate shareholder.

 

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On January 4, 2018, prior to the launch of our IPO, UOL contributed all of its shares in PagSeguro Brazil to PagSeguro Digital. As a result, PagSeguro Digital now owns substantially all of the shares of PagSeguro Brazil, together with PagSeguro Brazil’s subsidiaries and activities. In return for this contribution, PagSeguro Digital issued 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 held all of the issued shares of PagSeguro Digital immediately prior to our IPO, consisting of 262,288,607 Class B common shares.

Immediately prior to our IPO on January 23, 2018, therefore, UOL held all of the 262,288,607 issued and outstanding shares in PagSeguro Digital, and PagSeguro Digital held all of the 262,288,607 issued and outstanding shares in PagSeguro Brazil except one.

After accounting for the 50,925,642 new Class A common shares issued and sold by PagSeguro Digital in our IPO, plus the additional new Class A common shares issued without cash consideration to certain members of our management who are beneficiaries under our LTIP (upon closing of our IPO as well as in the following months), we had a total of 315,134,418 common shares issued and outstanding immediately prior to this offering. 192,020,861 of these shares are Class B common shares beneficially owned by UOL, 121,193,388 of these shares are Class A common shares beneficially owned by investors who purchased shares in our IPO and 1,920,169 are Class A common shares beneficially owned by members of our management.

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 results of operations were recorded in UOL’s financial statements. As a result, the financial information of PagSeguro Digital 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 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.

 

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Prior to the completion of our IPO, PagSeguro used centralized cash management with UOL. Consequently, all amounts received or paid in connection with the PagSeguro business were recognized as balances between related parties in our audited consolidated financial statements. This approach is consistent with the treatment of our audited consolidated financial statements prior to August 1, 2015, which were prepared on a carve-out basis. PagSeguro’s cash management was separated from UOL’s cash management starting from the date of completion of our IPO. Any remaining balances that related to prior cash management activities began accruing interest on arms’ length terms from the date of completion of our IPO, and all such balances were repaid by UOL following completion of our IPO.

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.”

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, and usage of our early payment of receivables feature

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, and we generate financial income through the early payment of receivables feature that we offer our merchant clients. We intend to continue to drive growth in our digital payment services, POS devices and early payment of receivables feature 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, features 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.

Furthermore, our customer base consists primarily of Micro-Merchants and SMEs, who tend to generate relatively high levels of early payment of receivables from installment transactions in order to fulfill their working capital needs. These Micro-Merchants and SMEs are at the core of our strategy. In the future, however, as we sign up a greater proportion of larger merchants, we expect early payment to represent a smaller relative proportion of our overall results, since larger merchants tend to request significantly lower volumes of early payment, given their easier access to alternative funding. Hence, we believe that while our Financial income will continue to increase in absolute terms as our client base grows, it may decrease as a proportion of our Total revenues and income in the medium and longer term.

 

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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 13.9% from 2010 to 2017 according to ABECS. As a further indication of this growth, MasterCard stated that the Brazilian real was one of its three primary revenue billing currencies in 2016.

Growth of e-Commerce

Our results of operations 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 4.0% of retail sales in 2017, compared to 8.4% in the United States, according to eMarketer. According to a 2018 report commissioned by ABECS and carried out by Datafolha, online purchases made up only 22.8% of the total credit card transaction volume in Brazil in 2017, an increase of 4.2% 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.

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 expenses to increase in the short term as we plan for growth, we expect our expenses to decline as a percentage of our Total revenue and income 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 marketing and advertising 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.

 

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Marketing and advertising

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 purchase POS devices and/or process transactions, our investments in marketing and advertising 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 TPV 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 and features such as accounting reconciliation, which generate incremental revenues and margin with low or no customer acquisition costs. Over time, we expect an increasing portion of our growth to come from a combination of increased numbers of active merchants and increased average spending per active merchant.

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).

 

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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 2.9%, 6.3% and 10.7% in 2017, 2016 and 2015, respectively, while the SELIC rate, the Central Bank’s overnight rate, increased from 10.00% at the beginning of 2014 to a high point of 14.25% in 2016, before a series of rate reductions in 2017, bringing the SELIC rate down to 7.00% as of December 7, 2017, where it remained at year-end 2017. The COPOM reduced the SELIC rate to 6.75% on February 7, 2018, and further reduced it to 6.50% on March 21, 2018. The COPOM reconfirmed the SELIC rate on May 16, 2018. 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.

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 commission withheld by us from the transaction value paid to the merchant. The MDR we charge may vary over time and we may make different commercial offers for different services or for larger clients. However, overall, the MDR for debit cards is lower than that for credit cards. Our current standard MDR rates are 2.39% for POS debit card transactions, 3.19% for POS credit card transactions not paid in installments, 3.79% for POS credit card transactions paid in installments and 3.99% for online transactions, irrespective of whether such online transaction was paid in installments. Online transactions are also charged a fixed amount of R$0.40 per sale in addition to these MDR rates. Payments made using meal voucher cards and other payment methods generate per-transaction and/or percentage commissions at various rates. The MDR rates for credit card transactions vary according to whether the merchant has opted for the 14-day or one-day payment service under our payment date election service. For merchants who select the one-day payment date election, the standard MDR is 4.99% for POS credit card transactions not paid in installments and 5.59% for POS credit card transactions paid in installments. For merchants who select the 14-day payment date election, the standard MDR is 3.99% for POS credit card transactions not paid in installments and 4.59% for POS credit card transactions paid in installments. 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.

 

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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 clients who generate higher TPV, 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 feature

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 optional feature. Through the date of our IPO, we funded this feature (i) principally by obtaining early payment of note receivables due to us from the card issuers and acquirers, enabling us to provide the related early payment to merchants, as well as (ii) through our general third party borrowings and own capital. Our ability to maintain adequate funding for the early payment feature 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. Although our standard contract with our merchant clients allows us to adjust our rates and tariffs at our discretion by notice to the merchant, our ability to vary our pricing remains subject to a variety of factors, including competition from other payment providers, market conditions and, in certain cases, direct price negotiations with the merchant. As a result, we may not necessarily be able to pass through all interchange and processing fees to our merchant clients, and increases in these fees may therefore increase our Cost of sales and services and reduce our margins.

The interchange fee, which we record as Transaction costs within Cost of sales and services, has the potential to affect our margins. An increase in interchange fees will result in an increase in our Cost of sales and services and if we cannot pass the interchange fees onto customers via a corresponding increase in MDR, our margin will also be affected. Currently, the difference between interchange fees and the MDR we charge is less for debit card transactions than for credit card transactions, so our margins on credit card transactions are greater. 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 card schemes to process our transactions. Changes to credit card scheme fees, rules or practices may harm our business.”

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, financial income 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.

 

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Our Total revenue and income 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 feature if our overall financing costs require us to increase the discount rate we charge for this feature.

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 first six months of 2018. 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 2017 report by BIS and Bureau of Economic Analysis, or BEA, card usage as a payment method in Brazil represented only approximately 28% of private consumption in 2016, compared to approximately 46% in the United States. According to Datafolha, out of the 53% of entrepreneurs who do not own POS devices, 26% intended 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 2017, 30.0% of the Brazilian population above 15 years old, or 62.2 million individuals, did not have a bank account.

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 Three
Months Ended
March 31,
     For the Years Ended
December 31,
 
     2018      2017      2017      2016      2015  

Real growth (contraction) in gross domestic product

     1.2%        (0.0)%        1.0%        (3.5)%        (3.5)%  

Inflation (IGP-M)(1)

     1.5%        0.7%        (0.5)%        7.2%        10.5%  

Inflation (IPCA)(2)

     0.7%        1.0%        2.9%        6.3%        10.7%  

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

     6.8%        7.5%        7.1%        7.5%        6.3%  

CDI interest rate (average)(4)

     6.7%        12.7%        10.1%        14.1%        13.4%  

LIBOR(5)

     1.9%        1.1%        1.3%        0.7%        0.3%  

Period-end exchange rate—reais per US$ 1.00

     3.324        3.168        3.308        3.259        3.905  

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

     3.243        3.145        3.193        3.483        3.339  

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

     (3.0)%        24.1%        9.1%        (4.2)%        (29.5)%  

Unemployment rate(7)

     13.1%        13.7%        12.7%        11.5%        8.5%  

 

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 period.
(7) Average unemployment rate for year as measured by the IBGE.

 

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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 TPV, with our Total revenue and income increasing to R$928.0 million in the first three months of 2018 from R$448.5 million in the first three months of 2017, and increasing to R$2,523.4 million in 2017 from R$674.9 million in 2015. 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 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.”

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 2.18 to our audited consolidated financial statements and Note 2.2 to our unaudited condensed consolidated interim financial statements.

Principal Components of Our Results of Operations

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

Total revenue and income

Our Total revenue and income consists of the total of our Net revenue from transaction activities and other services, Net revenue from sales, Financial income and Other financial income.

 

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Net revenues

We generate revenues from transaction activities and other services, and from sales. In each case, our net revenues consist of gross revenues less deductions from those revenues.

Net revenue from transaction activities and other services

Our Net revenue from transaction activities and other services consists of Gross revenue from transaction activities and other services, less deductions from those gross revenues.

Our main source of Gross revenue from transaction activities and other services 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. We have the primary responsibility for providing the services to our clients and we also directly set the prices for such services, independently from the related transaction costs agreed between us and the card schemes or card issuers. Since we have primary responsibility for providing our merchant clients with the intermediation service, and we have price discretion to adjust the rates and tariffs we charge merchants, we are the principal in the intermediation transaction. We therefore recognize our transaction fees as revenue on a gross basis, and we recognize the transaction costs separately as discussed below. Depending on the type of cash-in payment or transaction, these commissions and fees consist of the MDR, which is a commission withheld by us from the transaction value paid to the merchant, 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 card issuer, 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 in the case of services, when the service, is rendered.

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.

Net revenue from sales

Our Net revenue from sales consists of Gross revenue from sales, less deductions from those gross revenues.

We 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 Minizinha Chip (which we launched in March 2018) for a purchase price of 12 monthly installments of R$24.90, 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.

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.

 

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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.

Financial Income

As described under “Business—Our Products and Services—Cash-in Solutions—Credit Cards”, our early payment of receivables feature consists of paying our merchants their installment receivables upfront when consumers paying by credit card choose to pay the merchant in installments. We account for the remuneration from this feature as Financial income. This Financial income makes up a significant portion of our overall Total revenue and income.

Our remuneration from the early payment of receivables feature consists 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 Financial income (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 Financial income 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. The discount that generates our Financial income relates only to the early payment of the second and successive installments of the purchase; the first installment is not paid early as it is disbursed to the merchant within the normal billing cycle, so it does not generate remuneration in the form of Financial income (although it does generate MDR, which is recognized as Gross revenue from transaction activities and other services).

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

Our Financial income relates to early payments to merchants of amounts related to receivables from purchase transactions that have been approved by the card issuer and the card scheme.

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

For more information regarding our early payment of receivables feature and the FIDC that we established in the fourth quarter of 2017 to finance a portion of our related Financial expenses, see “Business—Our Products and Services—Advanced Integrated Functionalities and Value-Added Services and Features—Early Payment of Receivables.”

Other Financial Income

Our Other financial 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.

 

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Our Other financial income also includes our net foreign exchange variations, i.e. the net gain or loss on our assets and liabilities related to the appreciation or depreciation of the real against foreign currencies, which has limited impact on our cash position. We had swaps in place to protect us against exposure to currency fluctuations on all of our borrowings in foreign currencies.

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, Cost of goods sold, Marketing and advertising, Personnel expenses, Depreciation and amortization and Other costs. For further information on these costs, see Note 22 to our audited consolidated financial statements and Note 20 to our unaudited condensed consolidated interim financial statements.

 

    Our 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 our Transaction costs are accounted for within our Cost of sales and services. Since we are the principal in the intermediation transaction, we recognize the transaction costs that we pay to third parties, such as card schemes and card issuers who process these transactions, within our Cost of sales and services separately from the transaction fees we receive, which we recognize on a gross basis. The transaction costs are agreed between the card schemes or card issuers and us, independently from the fees we charge our merchant clients.

 

    Cost of goods sold consists 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 our Cost of goods sold is accounted for within our Cost of sales and services.

 

    Our Marketing and advertising expenses are divided between our Cost of sales and services as well as our Selling expenses. Of this total, the portion of Marketing and advertising that is accounted for within our Cost of sales and services relates to customer support.

 

    Our 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. Our Personnel expenses 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.

 

    Our Depreciation and amortization expenses 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 expenses that is included in 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.

 

    Our Other expenses 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 is included in 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.

 

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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, Personnel expenses, Chargebacks, Depreciation and amortization expenses and Other expenses. For further information on these expenses, see Note 22 to our audited consolidated financial statements and Note 20 to our unaudited condensed consolidated interim financial statements.

 

    The portion of Marketing and advertising expenses included in our Selling expenses relates to 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, expenses incurred in relation to trade marketing at events, and amounts that we spend on consulting services and call centers for our telemarketing campaigns.

 

    The portion of our Personnel expenses included in our Selling expenses relates to employees engaged in marketing and advertising of our services, POS devices and features.

 

    Chargebacks consist of transaction losses arising from chargebacks related to fraudulent transactions, 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 our Chargeback expenses are accounted for within our Selling expenses.

 

    The portion of our Depreciation and amortization expense included in our Selling expenses consists of the depreciation of equipment used for client relationships.

 

    The portion of our Other costs included in our Selling expenses consist of expenses related to travel, lodging and insurance, facilities, rent, consultancy fees and office supplies relating to marketing and advertising of our services, POS devices and features.

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 expenses and Other costs. 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 our Total revenue and income 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 expenses 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 our audited consolidated financial statements and Note 10 to our unaudited condensed consolidated interim financial statements.

 

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

 

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Financial Expenses

Our financial expenses include (i) the charges we incur to obtain early payment of note receivables owed to us by card issuers and acquirers in order to finance the early payment of receivables feature that we offer merchants, (ii) interest expense on our other borrowings and (iii) the cost of swaps relating to our foreign currency borrowings. Variations in our Financial expenses when expressed as a percentage of Financial income are driven by Brazilian interest rates, which determine the cost of most of our financing, together with changes in the mix of the financing we use for our early payment of receivables feature.

Through the date of our IPO, we funded the early payment of receivables feature (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. In addition, in November 2017 we set 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 the early payment of receivables feature. The FIDC is controlled by our Brazilian operating company (by virtue of subscribing for its subordinated quotas) but raises capital by issuing senior quotas in the fund to outside investors, who receive interest on these investments from the FIDC. The FIDC uses the capital it raises to finance the growth of our early payment of receivables feature. Our remuneration from the early payment of receivables feature continues to be reflected as Financial income in our consolidated financial statements. We do not expect the establishment of the FIDC to impact the discount rate we charge in connection with the early payment of receivables feature or the expenses we incur to obtain early payment of note receivables from card issuers and acquirers. For further information regarding the FIDC, see “—Organizational Structure.”

We did not have any outstanding borrowings at March 31, 2018 or at December 31, 2017 or 2015. All of our third-party borrowings at December 31, 2016 were denominated in U.S. dollars and therefore exposed to currency fluctuations when we contracted derivative financial instruments known as swaps in order to protect us against this exposure. For further information on our borrowings, see “—Loans and Financing,” Note 14 to our audited consolidated financial statements.

Other (Expenses) Income, Net

Our Other (expenses) income, net line item consists mainly of contingencies, charges and miscellaneous income and/or expense items.

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.

 

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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 18 to our audited consolidated financial statements and Note 16 to our unaudited condensed consolidated interim financial statements.

Deferred tax liabilities are recognized for all taxable temporary differences, except in certain situations explained in Note 2.15 to our audited consolidated financial statements. 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.

There is no Cayman Islands taxation on the income earned by PagSeguro Digital and as such, we do not have any tax impact at the PagSeguro Digital level.

With respect to our subsidiaries, 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 our audited consolidated financial statements and our unaudited condensed consolidated interim financial statements included elsewhere in this prospectus.

 

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Results of Operations in the Three Months Ended March 31, 2018 and 2017

 

     For the Three Months Ended March 31,  
     2018     Percent
Change
    2017  
     (in millions of reais, with
the exception of percentages and
amounts per share) (Unaudited)
 

Net revenue from transaction activities and other services

     442.8       132.6     190.4  

Net revenue from sales

     94.0       (20.6 )%      118.4  

Financial income

     274.8       98.0     138.8  

Other financial income

     116.4       13,818.7     0.8  
  

 

 

   

 

 

   

 

 

 

Total revenue and income

     928.0       106.9     448.5  
  

 

 

   

 

 

   

 

 

 

Cost of sales and services

     (444.8     83.1     (242.9

Selling expenses

     (83.6     17.6     (71.1

Administrative expenses

     (219.0     573.5     (32.5

Financial expenses

     (16.5     (14.0 )%      (19.2

Other expenses, net

     (1.1     86.7     (0.6
  

 

 

   

 

 

   

 

 

 

Profit before Income Taxes

     163.0       98.4     82.2  
  

 

 

   

 

 

   

 

 

 

Current income tax and social contribution

     (20.9     9.7     (19.1

Deferred income tax and social contribution

     6.4       (359.0 )%      (2.5
  

 

 

   

 

 

   

 

 

 

Income Tax and Social Contribution

     (14.5     (32.5 )%      (21.6
  

 

 

   

 

 

   

 

 

 

Net Income for the Period

     148.5       144.9     60.6  
  

 

 

   

 

 

   

 

 

 

Attributable to:

      

Owners of PagSeguro Digital

     148.4       144.9     60.6  

Non-controlling interests

     0.1       100.0     —    

Basic earnings per common share - R$

     0.4988       115.8     0.2311  

Diluted earnings per common share - R$

     0.4969       115.0     0.2311  

Reconciliation of Non-GAAP Measures

The following table presents a reconciliation of our non-GAAP financial measures to the most directly comparable GAAP measures for the three months ended March 31, 2018:

 

     For the Three Months Ended
March 31,
 
     2018  
    

(in millions of reais, except

for amounts per share)

 

Total revenue and income

     928.0  

Less: Foreign exchange gain on IPO primary share proceeds

     (89.8
  

 

 

 

Non-GAAP total revenue and income(1)

     838.2  
  

 

 

 

Total expenses

     (765.0

Less: Share-based long-term incentive plan (LTIP)

     210.6  

Less: Tax related to remittance of IPO primary share proceeds (IOF tax)

     13.1  
  

 

 

 

Non-GAAP total expenses(2)

     (541.3
  

 

 

 

 

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     For the Three Months Ended
March 31,
 
     2018  
    

(in millions of reais, except

for amounts per share)

 

Profit before taxes

     163.0  

Plus: Total Non-GAAP Adjustments

     133.9  
  

 

 

 

Non-GAAP profit before taxes(3)

     296.9  
  

 

 

 

Income tax and social contribution

     (14.5

Less: Income tax and social contribution on non-GAAP adjustments

     (69.5
  

 

 

 

Non-GAAP deferred income tax(4)

     (84.0
  

 

 

 

Net income

     148.5  

Plus: Total Non-GAAP adjustments

     64.4  
  

 

 

 

Non-GAAP net income(5)

     212.9  
  

 

 

 

Basic earnings per common share - R$

     0.4988  

Diluted earnings per common share - R$

     0.4969  
  

 

 

 

Non-GAAP basic earnings per common share - R$(6)

     0.7153  

Non-GAAP diluted earnings per common share - R$(6)

     0.7126  
  

 

 

 

 

(1) Non-GAAP total revenue and income excludes a foreign exchange gain on our IPO primary proceeds in the amount of R$89.8 million in the three months ended March 31, 2018, which relates to the impact of exchange rate variation on the conversion from U.S. dollars into Brazilian reais of the proceeds from our sale of new shares in the IPO. We exclude this foreign exchange variation from our non-GAAP measures primarily because it is unusual income. The foreign exchange gain on our IPO primary proceeds is included within Other financial income. Other financial income in the amount of R$116.4 million is therefore adjusted by excluding the foreign exchange gain on our IPO primary proceeds, resulting in Non-GAAP Other financial income in the amount of R$26.6 million.
(2) Non-GAAP total expenses excludes:
  (a) stock-based compensation expenses in the total amount of R$210.6 million, consisting of expenses for equity awards under our LTIP. We exclude stock-based compensation expenses from our non-GAAP measures primarily because they are non-cash expenses, and the related employer payroll taxes depend on our stock price and the timing and size of exercises and vesting of equity awards, over which management has limited to no control, and as such management does not believe these expenses correlate to the operation of our business. The largest portion of this expense amount was recognized upon the closing of our IPO with the issuance of 1.8 million shares under our LTIP awards that vested on the IPO date. The total of stock-based compensation expenses is allocated between Cost of sales and services and Administrative expenses. Excluding the stock-based compensation expenses, Cost of sales and services in the amount of R$444.8 million is adjusted by R$38.2 million resulting in a Non-GAAP Cost of sales and services of R$406.5 million; and Administrative Expenses in the amount of R$219.0 million is adjusted by R$172.4 million resulting in Non-GAAP Administrative expenses of R$46.7 million.
  (b) tax related to remittance of IPO primary share proceeds (IOF tax) in the amount of R$13.1 million in the three months ended March 31, 2018, which represents the impact of Brazilian IOF tax (currency remittance tax) payable when we remitted the proceeds from our sale of new shares in the IPO from the Cayman Islands to Brazil. We exclude this IOF tax on the remittance of IPO primary share proceeds from our Non-GAAP measures primarily because it is an unusual expense. The IOF tax is fully allocated to Financial expenses. Financial expenses in the amount of R$16.5 million is therefore adjusted by excluding the IOF tax, resulting in Non-GAAP Financial expenses in the amount of R$3.4 million.
(3) Non-GAAP profit before taxes is equal to the sum of the adjustments described in footnotes (1) and (2) above.
(4) Non-GAAP income tax and social contribution consists of income tax at the rate of 34% calculated on the Non-GAAP adjustments described in footnotes (1) and (2) above, other than the foreign exchange gain on IPO primary share proceeds of R$89.8 million, which is not taxable, and the tax benefits related to other Non-GAAP adjustments.
(5) Non-GAAP net income is equal to the sum of the adjustments described in footnotes (1), (2) and (4) above.
(6) Non-GAAP basic earnings per common share and Non-GAAP diluted earnings per common share reflect the adjustments to Non-GAAP net income, which is allocated in full to Owners of the Company.

 

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Total revenue and income

Our Total revenue and income amounted to R$928.0 million in the three months ended March 31, 2018, an increase of 106.9% from R$448.5 million in the three months ended March 31, 2017.

Our non-GAAP Total revenue and income amounted to R$838.2 million in the three months ended March 31, 2018. For a reconciliation of our non-GAAP Total revenue and income to our Total revenue and income, see “—Reconciliation of Non-GAAP Financial Measures.”

Net revenue from transaction activities and other services

Our Gross revenue from transaction activities and other services in the three months ended March 31, 2018 amounted to R$514.1 million, an increase of R$296.8 million, or 136.6%, from R$217.3 million in the three months ended March 31, 2017. This increase was principally due to a continued increase in our active merchant base and TPV.

Our Gross revenue from transaction activities and other services during the three months ended March 31, 2018 increased by a lesser percentage than our TPV, which increased to R$14.4 billion from R$6.0 billion in the three months ended March 31, 2017. This difference in the growth rate was due to the mix of debit and credit card payments processed.

Our Deductions from gross revenue from transaction activities and other services, which consist principally of sales taxes, amounted to R$71.2 million in the three months ended March 31, 2018, or 13.8% of our Gross revenue from transaction activities and other services for the quarter. In the three months ended March 31, 2017, Deductions from gross revenue from transaction activities and other services totaled R$26.8 million, or 12.3% of our Gross revenue from transaction activities and other services for the quarter. The increase in these Deductions as a percentage of our Gross revenues from transaction activities and other services is due to the repeal of the law that charges ISS based on the municipality where the POS device is used. Since the repeal of this law is being contested, we are currently judicially depositing the full tax rate regarding sales made within the São Paulo municipality and recognizing a provision for the difference charged by other municipalities.

As a result, our Net revenue from transaction activities and other services in the three months ended March 31, 2018 amounted to R$442.8 million, an increase of R$252.4 million, or 132.6%, from R$190.4 million in the three months ended March 31, 2017.

Net revenue from sales

Our Gross revenue from sales in the three months ended March 31, 2018 amounted to R$129.7 million, a decrease of R$36.5 million, or 22.0%, from R$166.2 million in the three months ended March 31, 2017. This decrease was due to a different hardware sales mix in the three months ended March 31, 2018 when compared to the three months ended March 31, 2017, with the launch of the Minizinha at the end of the first quarter of 2017. In terms of number of terminals sold, we observed an increase in the three months ended March 31, 2018 compared to the three months ended March 31, 2017.

Our Deductions from gross revenue from sales in the three months ended March 31, 2018 amounted to R$35.7 million, or 27.5% of our Gross revenues from sales for the period. In the three months ended March 31, 2017, these Deductions totaled R$47.8 million, or 28.8% of Gross revenues from sales for the period. The small decrease in these Deductions as a percentage of our Gross revenues from sales is due to a change in the mix of Brazilian states in which we sold POS devices, since ICMS is levied by each state at a different rate.

 

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As a result, our Net revenue from sales in the three months ended March 31, 2018 amounted to R$94.0 million, a decrease of R$24.4 million, or 20.6%, from R$118.4 million in the three months ended March 31, 2017.

Financial income

Our Financial income, which represents the volume of the discount fees we withhold from TPV in the early payment of receivables feature that we offer merchants, amounted to R$274.8 million in the three months ended March 31, 2018, an increase of R$136.0 million, or 98.0% from R$138.8 million in the three months ended March 31, 2017. The growth in this activity compared to the three months ended March 31, 2017 was driven by growth in our TPV, partially offset by an increase in the adjustment of note receivables at present value of R$16.8 million in the three months ended March 31, 2018 from R$3.4 million in the three months ended March 31, 2017.

Other financial income

Our Other financial income amounted to R$116.4 million in the three months ended March 31, 2018, an increase of R$115.6 million from R$0.8 million in the three months ended March 31, 2017. This increase was due to the unusual impact of changes in exchange rates on the conversion from U.S. dollars into Brazilian reais of the proceeds from our sale of new shares in our IPO, which impact amounted to R$89.9 million in the three months ended March 31, 2018.

Our non-GAAP Other financial income, which excludes the foreign exchange gain of R$89.8 million, amounted to R$26.6 million in the three months ended March 31, 2018. For a reconciliation of our non-GAAP Other financial income to our Other financial income, see “—Reconciliation of Non-GAAP Financial Measures.”

Expenses

Our total expenses amounted to R$765.0 million in the three months ended March 31, 2018, an increase of R$398.7 million, or 108.8%, from R$366.3 million in the three months ended March 31, 2017. As a percentage of our Total revenue and income, our total expenses in the three months ended March 31, 2018 increased by 0.7 percentage points, to 82.4% in the three months ended March 31, 2018 from 81.7% in the three months ended March 31, 2017.

Our non-GAAP total expenses amounted to R$541.3 million in the three months ended March 31, 2018 due to the exclusion of the LTIP expenses in the amount of R$210.6 million and IOF tax of R$13.1 million. As a percentage of our non-GAAP Total revenue and income, our non-GAAP total expenses in the three months ended March 31, 2018 was 64.6% as we continue to leverage our costs and expenses. For a reconciliation of our non-GAAP Expenses to our Expenses, see “—Reconciliation of Non-GAAP Financial Measures.”

Cost of sales and services

Our Cost of sales and services amounted to R$444.8 million in the three months ended March 31, 2018, an increase of R$201.9 million, or 83.1%, from R$242.9 million in the three months ended March 31, 2017. As a percentage of the total of our Net revenue from transaction activities and other services and our Net revenue from sales, our Cost of sales and services posted an increase of 4.2 percentage points, to 82.8% in the three months ended March 31, 2018 from 78.6% in the three months ended March 31, 2017.

 

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Within our Cost of sales and services line item, our Cost of services, expressed as a percentage of our Net revenue from transaction activities and other services, increased to 74.2% in the three months ended March 31, 2018 from 65.7% in the three months ended March 31, 2017, principally due to R$38.2 million in Share-based long-term incentive plan (LTIP) expenses. Our Cost of sales, expressed as a percentage of our Net revenue from sales, increased to 123.4% in the three months ended March 31, 2018 from 99.5% in the three months ended March 31, 2017, due to the change in our device product mix, with the launch of the Minizinha at the end of the first quarter of 2017.

For the three months ended March 31, 2018, our non-GAAP Cost of sales and services amounted to R$406.5 million, reflecting the exclusion of the LTIP adjustment of R$38.2 million. For a reconciliation of our non-GAAP Cost of sales and services to our Cost of sales and services, see “—Reconciliation of Non-GAAP Financial Measures.”

Selling expenses

Our Selling expenses amounted to R$83.6 million in the three months ended March 31, 2018, an increase of R$12.5 million, or 17.6%, from R$71.1 million in the three months ended March 31, 2017. As a percentage of our Total revenue and income, our Selling expenses decreased by 6.9 percentage points, to 9.0% in the three months ended March 31, 2018 from 15.9% in the three months ended March 31, 2017. This reduction in our Selling expenses as a percentage of our Total revenue and income reflected the increase in leverage of our selling expenses base as our TPV has increased.

Administrative expenses

Our Administrative expenses amounted to R$219.0 million in the three months ended March 31, 2018, an increase of R$186.5 million, or 573.5%, from R$32.5 million in the three months ended March 31, 2017. This increase in the three months ended March 31, 2018 was mainly due to the Share based long-term incentive plan (LTIP) expense related to our IPO, which amounted to R$172.4 million. As a percentage of our Total revenue and income, our Administrative expenses increased by 16.3 percentage points, to 23.6% in the three months ended March 31, 2018 from 7.3% in the three months ended March 31, 2017.

For the three months ended March 31, 2018 our non-GAAP Administrative expenses amounted to R$46.7 million, which excludes the LTIP adjustment of R$172.4 million. Our non-GAAP Administrative expenses represented 5.6% of the total of our non-GAAP Net revenue and income for the three months ended March 31, 2018. For a reconciliation of our non-GAAP Administrative expenses to our Administrative expenses, see “—Reconciliation of Non-GAAP Financial Measures.”

Financial expenses

Our Financial expenses amounted to R$16.5 million in the three months ended March 31, 2018, a decrease of R$2.7 million, or 14.0%, from expenses of R$19.2 million in the three months ended March 31, 2017. Expressed as a percentage of our Financial income, our Financial expenses represented 6.0% in the three months ended March 31, 2018 and 13.8% in the three months ended March 31, 2017.

The interest we paid on early payment of receivables that we obtained from issuing banks decreased by R$14.9 million in the three months ended March 31, 2018, when compared with the three months ended March 31, 2017, due to our use of a portion of the proceeds from our IPO in late January 2018 to fund the early payment of receivables feature that we offer merchants, as well as our repayment of R$2.7 million in borrowings during the three months ended March 31, 2017. These effects were partially offset by a R$13.1 million increase related to the impact of the IOF tax on the remittance of our sale of new shares in the IPO from the Cayman Islands to Brazil. For more information, see “—Financing of our early payment of merchants’ receivables feature.”

 

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Our non-GAAP Financial expenses, which excludes the IOF tax amount of R$13.1 million, amounted to R$3.4 million in the three months ended March 31, 2018. For a reconciliation of our non-GAAP Financial expenses to our Financial expenses, see “—Reconciliation of Non-GAAP Financial Measures.”

Other (expenses) income, net

Our Other expenses, net, recorded R$1.1 million in the three months ended March 31, 2018 and R$0.6 million in the three months ended March 31, 2017. These net amounts principally reflect expenses related to civil litigation proceedings during both periods.

Profit before income taxes

Our Profit before income taxes amounted to R$163.0 million in the three months ended March 31, 2018, an increase of R$80.8 million, or 98.4%, from R$82.2 million in the three months ended March 31, 2017.

Our non-GAAP Profit before income taxes amounted to R$296.9 million in the three months ended March 31, 2018. This increase was due to significant growth in our Total revenue and income, driven by growth in active merchants and TPV. For a reconciliation of our non-GAAP Profit before income taxes to our Profit before income taxes, see “—Reconciliation of Non-GAAP Financial Measures.”

Income tax and social contribution

Income tax and social contribution amounted to expenses of R$14.5 million in the three months ended March 31, 2018, a decrease of R$7.1 million from expenses of R$21.6 million in the three months ended March 31, 2017. This variance principally reflects the tax benefit under the Lei do Bem, which applies to investments made in innovation and technology by PagSeguro Brazil, our Brazilian operating subsidiary.

Our Current income tax and social contribution expense in the three months ended March 31, 2018 amounted to R$20.9 million, an increase of R$1.8 million from R$19.1 million in the three months ended March 31, 2017. This increase is mainly due to growth in our Profit before income taxes, partially offset by the tax benefit under the Lei do Bem and the non-taxable income generated by PagSeguro Digital.

Our Deferred income tax and social contribution in the three months ended March 31, 2018 amounted to a tax benefit of R$6.4 million, an increase of R$8.9 million compared with an expense of R$2.5 million in the three months ended March 31, 2017.

The amount of Deferred income tax and social contribution recorded in the three months ended March 31, 2018 reflected the tax benefit on our significant new capital investments in software and technology during the period, less the depreciation and amortization expenses that we recorded against those assets during the period. This tax benefit was partially offset by the amounts we recorded during the period for provisions for employee corporate results-sharing, share-based long-term incentive plan (LTIP) expenses and tax contingencies.

 

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The amount of Deferred income tax and social contribution recorded in the three months ended March 31, 2017 reflected the tax benefit on our capital investments in software and technology during the period, less the depreciation and amortization expenses that we recorded against those assets during the period. This tax benefit was partially offset by the amounts we recorded during the period for provisions for employee corporate results-sharing.

Our non-GAAP Deferred income tax and social contribution expense for the three months ended March 31, 2018 amounted to R$69.5 million. For a reconciliation of our non-GAAP Deferred income tax and social contribution to our Deferred income tax and social contribution, see “—Reconciliation of Non-GAAP Financial Measures.”

Net income for the period

Our Net income for the period in the three months ended March 31, 2018 amounted to R$148.5 million, an increase of R$87.9 million, or 144.9%, from R$60.6 million in the three months ended March 31, 2017. As a percentage of our Total revenue and income, our Net income for the period increased by 2.5 percentage points, to 16.0% in the three months ended March 31, 2018 compared with 13.5% in the three months ended March 31, 2017. This increase was driven by growth in active merchants and TPV, resulting in greater leverage of our operating expenses.

Our non-GAAP Net income for the three months ended March 31, 2018 amounted to R$212.9 million, reflecting the sum of the non-GAAP adjustments described above. For a reconciliation of our non-GAAP Net income to our Net income, see “—Reconciliation of Non-GAAP Financial Measures.”

Results of Operations in 2017, 2016 and 2015

 

     For the Years Ended December 31,  
     2017     Percent
Change
    2016     Percent
Change
    2015  
     (in millions of reais, with the exception of
percentages and amounts per share)
 

Net revenue from transaction activities and other services

     1,224.3       155.0     480.0       79.0     268.2  

Net revenue from sales

     471.9       81.1     260.6       47.6     176.5  

Financial income

     818.6       108.6     392.4       78.8     219.5  

Other financial income

     8.6       60.7     5.3       (50.3 )%      10.7  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue and income

     2,523.4       121.7     1,138.4       68.7     674.9  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of sales and services

     (1,324.4     112.4     (623.7     63.1     (382.5

Selling expenses

     (245.8     22.9     (199.9     22.9     (162.6

Administrative expenses

     (153.2     81.4     (84.5     38.2     (61.1

Financial expenses

     (104.5     53.1     (68.3     130.0     (29.7

Other (expenses) income, net

     (12.0     80.5     (6.7     (595.2 )%      1.3  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit before Income Taxes

     683.5       340.0     155.4       285.4     40.3  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Current income tax and social contribution

     (215.0     2,793.1     (7.4     187.2     (2.6

Deferred income tax and social contribution

     10.3       (151.0 )%      (20.1     799.9     (2.2

Income Tax and Social Contribution

     (204.7     642.2     (27.6     471.5     (4.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income for the Year

     478.8       274.7     127.8       260.1     35.5