Market Overview

Netshoes Limited Announces Second Quarter 2018 Results

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Netshoes (Cayman) Ltd. (NYSE:NETS) ("Netshoes"), Latin America's leading
online retailer of sporting and lifestyle goods, today reported
unaudited consolidated financial results for the three and six-month
period ended June 30, 2018. The results are stated in Brazilian Reais
("R$") and prepared in accordance with International Accounting Standard
34, "Interim Financial Reporting".

Second Quarter 2018 Key Highlights

  • Net sales of R$449.8 million, down 2.5% year-over-year, impacted by
    trucker's strike and warmer winter
  • GMV of R$630.0 million, up 2.0% year-over-year (FX neutral), with
    Marketplace GMV up 72.7% year-over-year, accounting for 11% of total
    GMV (+5 p.p. YoY)
  • Adjusted EBITDA of R$0.2 million, with positive EBITDA margin, 1.1
    percentage points (p.p.) higher year-over-year
  • Net loss of R$38.1 million, with negative 8.5% net margin
  • Total net working capital cycle reduction of 16 days to 46 days over
    1Q-2018, with B2C net working capital reduction of 13 days to 16 days
  • Operating cash flow generation of R$70 million, with cash equivalents
    of R$75 million

Subsequent Events

  • Debt restructuring completed: R$107.7 million deferred with twelve
    months grace period and one-year term extension
  • Agreement to sell Netshoes Mexico to Grupo Sierra Capital

Operating and Financial Metrics Highlights

           
Change % Change %
Operating Data  

2Q-
2017

 

2Q-
2018

  YoY  

YoY FX
Neutral

 

1H-
2017

 

1H-
2018

  YoY  

YoY FX
Neutral

Registered Members (in thousands) 19,972 23,964 20.0%   19,972 23,964 20.0%  
Active Customers (in thousands) 5,946 6,829 14.9% 5,946 6,829 14.9%
Invoiced Orders (in thousands) 2,866 2,925 2.0% 5,362 5,740 7.1%
Orders Placed from Mobile Device % 42.9% 54.1% +11.2p.p. 41.0% 53.3% +12.3p.p.
Average Basket Size (in R$) 209.0 213.4 2.1% 4.2% 205.4 204.7 (0.3)% 1.4%
GMV (in millions) 630.7 630.0 (0.1)% 2.0% 1,161.9 1,188.6 2.3% 4.0%
GMV - B2C (in millions) 599.1 624.2 4.2% 6.4% 1,101.1 1,175.3 6.7% 8.5%
Marketplace GMV (as % of total GMV)   6.4%   11.1%   +4.7p.p.       5.9%   11.3%   +5.4p.p.    
Change % Change %
Financial Data (In R$ Millions)  

2Q-
2017

 

2Q-
2018

  YoY  

YoY FX
Neutral

 

1H-
2017

 

1H-
2018

  YoY  

YoY FX
Neutral

Net Sales 461.3 449.8 (2.5)% (0.4)% 857.6 849.1 (1.0)% 0.7%
Net Sales - Brazil 407.5 400.5 (1.7)% 763.0 760.8 (0.3)%
Net Sales - International 53.8 49.3 (8.3)% 9.5% 94.5 88.3 (6.6)% 8.4%
Gross Margin % 33.1% 30.6% (2.5)p.p. 33.0% 30.4% (2.5)p.p.
Adjusted EBITDA Margin %   (1.0)%   0.0%   +1.1p.p.       (0.1)%   (3.4)%   (3.3)p.p.    
      (1) For a reconciliation of net sales to GMV, see page 10 below.
(2) For a reconciliation of net loss to Adjusted EBITDA Margin, see
page 11 below

Message from the Founder and CEO, Marcio Kumruian:

During 2Q-2018 we made important progress on several fronts of the
business as we continue to pursue a more moderate growth strategy in our
B2C online operation to focus on achieving profitability.

Our B2C online operation grew 6.4% year-over-year on an FX neutral
basis, impacted along with the rest of the retail and fashion industry
in Brazil by the truckers' strike in May and a warmer winter season.
These events not only affected sales, but also margins during the
quarter. In this environment we acted quickly to increase efficiency of
our marketing spend while we benefited from lowered technology
maintenance costs due to the implementation of our new IT platform.
Additionally, we took further steps to rationalize other general and
administrative expenses. A combination of these actions resulted in an
improvement of our operating results during the quarter.

We have a concrete action plan in place aimed at improving our business
economics. We are already seeing initial traction, including a reduction
in the inventory cycle by 17 days as compared to 1Q-2018, contributing
significantly to the R$70 million operating cash generation.
Importantly, we have also restructured of the Company's bank debt,
deferring R$108 million in principal amortization through a twelve-month
grace period and a one-year term extension. These changes are providing
more financial comfort during the time our operations need to respond to
the changes we are implementing in the short-term.

Looking ahead we continue to work hard to strengthen the foundation for
long-term sustainable growth. As part of our deep dive into our
business, we have engaged a top tier external consultancy firm to work
alongside our team to assess our entire product portfolio, the mix shift
from 1P to 3P, and our pricing strategy and inventory management,
optimizing gross margins and further reducing working capital needs.

We are focused on streamlining SG&A expenses and are preparing to
execute a Zero-Base Budget to eliminate inefficiencies. In addition, we
continue to reduce losses from our international operations. During
2Q-2018, we managed to improve the international operation's EBITDA
margin by 8.1 p.p. and 5.8 p.p. during the first half of the year.

As announced, in early August we entered into an agreement with Grupo
Sierra Capital, a private equity fund that invests in Mexico, Central
America and Caribbean, to sell the entirety of our operations in Mexico.
This divestment is in line with our strategy of focusing on and
expanding those markets with the greatest near to medium term e-commerce
growth potential to increase consolidated profitability and create
long-term value to shareholders.

The changes we have been implementing throughout the organization are
meaningful and we expect them to translate to a more positive result and
performance going forward. We are confident that we are building a
better, more sustainable business. While the environment has been
challenging, we remain convinced that there is significant medium to
long-term upside for Netshoes in our markets. We are grateful for your
continued support.

Overview of Second Quarter 2018 Results

             
Change % Change %
Consolidated P&L (In R$ Millions)  

2Q-
2017

 

2Q-
2018

  YoY  

FX
Neutral

1H-
2017

 

1H-
2018

  YoY  

FX
Neutral

   
GMV ¹ 630.7 630.0 (0.1)% 2.0 % 1,161.9 1,188.6 2.3 % 4.0 %
 
Net Sales - Brazil 407.5 400.5 (1.7)% 763.0 760.8 (0.3)%
Net Sales - International   53.8   49.3   (8.3)%   9.5 % 94.5   88.3   (6.6)%   8.4 %
Net Sales   461.3   449.8   (2.5)%   (0.4)% 857.6   849.1   (1.0)%   0.7 %
Cost of Sales   (308.5)   (312.0)   1.1 %     (575.0)   (590.7)   2.7 %    
Gross Profit   152.8   137.8   (9.8)%     282.6   258.4   (8.6)%    
% Gross Margin 33.1 % 30.6 % -2.5p.p. 33.0 % 30.4 % -2.5p.p.
Operating Expenses (157.5) (137.6) (12.6)% (283.6) (287.1) 1.2 %
% of Sales (34.1)% (30.6)% -3.5p.p. (33.1)% (33.8)% 0.7p.p.
Selling and Marketing Expenses (ex-A&D)² (119.8) (108.5) (9.5)% (220.5) (217.4) (1.4)%
% of Sales (26.0)% (24.1)% -1.9p.p. (25.7)% (25.6)% -0.1p.p.
General and Administrative Expenses (ex-A&D)² (36.6) (28.1) (23.1)% (61.0) (67.7) 11.0 %
% of Sales (7.9)% (6.3)% -1.7p.p. (7.1)% (8.0)% 0.9p.p.
Other Operating Expenses (1.0) (1.0) (5.7)% (2.1) (2.1) (1.6)%
% of Sales   (0.2)%   (0.2)%   -0.0p.p.     (0.2)%   (0.2)%   -0.0p.p.    
ADJUSTED EBITDA   (4.6)   0.2   104.5%     (1.0)   (28.7)   (2717)%    
% of Sales (1.0)% 0.0 % 1.1p.p. (0.1)% (3.4)% -3.3p.p.
Certain Other Net Financial Result (4.3) (5.8) 36.2 % (4.8) (8.1) 69.1 %
% of Sales   (0.9)%   (1.3)%   0.4p.p.     (0.6)%   (1.0)%   0.4p.p.    
EBITDA   (8.9)   (5.6)   37.0 %     (5.8)   (36.9)   (533.7)%    
% of Sales (1.9)% (1.2)% 0.7p.p. (0.7)% (4.3)% -3.7p.p.
Amortization and Depreciation (7.6) (18.1) 139.3 % (15.7) (34.0) 117.1 %
% of Sales (1.6)% (4.0)% 2.4p.p. (1.8)% (4.0)% 2.2p.p.
Net Adjusted Financial Result ³ (18.7) (14.4) (23.0)% (51.4) (27.6) (46.3)%
% of Sales   (4.0)%   (3.2)%   -0.9p.p.     (6.0)%   (3.2)%   -2.7p.p.    
Income/(Loss) Before Income Tax   (35.2)   (38.1)   (8.4)%     (72.9)   (98.4)   35.1 %    
% of Sales (7.6)% (8.5)% -0.9p.p. (8.5)% (11.6)% -3.1p.p.
Current Income Tax   -   -         -   -        
Net Income/(Loss)   (35.2)   (38.1)   (8.4)%     (72.9)   (98.4)   (35.1)%    
% of Sales (7.6)% (8.5)% -0.9p.p. (8.5)% (11.6)% -3.1p.p.
(1) For a reconciliation of net sales to GMV, see page 10 below.
(2) For a reconciliation of EBITDA and Adjusted EBITDA, please see
page 11 below.
(3) For a reconciliation of financial income/expense to Certain
Other Net Financial Result and Net Adjusted Financial Result, see
page 10 below.

Operating Metrics

The Company's business is organized into two segments: (1) Brazil, which
consists of the B2C e-commerce operations of Netshoes (sporting goods)
and Zattini (fashion), and the business-to-business (B2B) operation
mainly comprised of supplements sales; and (2) International, which
includes Argentina and Mexico B2C e-commerce operations.

Registered members increased 20.0% year-over-year to 24.0 million in
2Q-2018, of which 6.8 million, or 28.5%, were active customers (up 14.9%
year-over-year).

The Company continued migration of consumer purchasing habits to mobile
devices, with 54.1% of total orders placed from mobile devices in
2Q-2018, a 11.2 p.p. increase over 2Q-2017.

GMV from the B2C operation grew 6.4% year-over-year on an FX neutral
basis in 2Q-2018 (4.2% on as reported basis), driven by a 4.1%
year-over-year increase in Netshoes Brazil GMV, a 14.2% year-over-year
increase in Zattini's GMV, and an 8.0% year-over-year increase in
Netshoes International GMV.

  • During the quarter, the 11-day truckers' strike (May 2018) severely
    disrupted Brazil's supply and logistical activities, negatively
    impacting B2C GMV year-over-year growth. Based on the reduction in
    demand during the period, the Company estimates the impact of the
    strike was approximately 5.0 p.p.
  • Zattini's fashion collection in Brazil was negatively affected by a
    warm winter season.
  • International GMV growth was mainly driven by an increase of 11.3% in
    Argentina's GMV on a local currency basis which was partially offset
    by Mexico's 1.4% GMV decrease.
  • In 2Q-2018, invoiced orders increased 2.0% year-over-year while
    average basket size increased 4.2% on an FX neutral basis.

GMV for the B2B operation amounted to R$5.9 million in 2Q-2018,
accounting for 0.9% of total consolidated GMV, down 81.4%
year-over-year, impacting the consolidated Company's growth by 4.3 p.p.

As a result, total consolidated GMV in 2Q-2018 was R$630.0 million, a
2.0% increase on an FX neutral basis and in line with 2Q-2017 on an as
reported basis.

Marketplace GMV (Netshoes & Zattini in Brazil) amounted to R$70.2
million and accounted for 11.1% of total consolidated GMV (12.4% of GMV
Brazil), an increase of 72.7% or 4.7 p.p. year-over-year. As of June 30,
2018, the Company's total vendor base was comprised of 900 qualified
third-party B2C vendors, an increase of 395 vendors year-over-year and
an increase of 10.0% over 1Q-2018.

The Company's private label collection brands and licensing products
continue to grow as a proportion of GMV, reflecting increased sales of
the existing portfolio and new licensed products. Sales of products in
these categories in 2Q-2018 represented 11.0% of consolidated GMV (12.3%
of GMV in Brazil) representing a 1.2 p.p. increase year-over-year.

Revenue

Consolidated net sales were R$449.8 million in 2Q-2018, a 2.5% decrease
year-over-year (-0.4% on an FX neutral basis). Consolidated net sales
considering only the B2C operation was down 0.7% (+1.4% on an FX neutral
basis).

  • Net sales for Brazil decreased 1.7% year-over-year to R$400.5 million.
    Considering only the B2C operation, net sales were flat with the same
    period last year mainly due to the above-mentioned effects caused by
    the truckers' strike and the warm winter season.
  • Net sales for the International business in 2Q-2018 was R$49.3
    million, an 8.3% decrease year-over-year on an as reported basis and
    up 9.5% on an FX neutral basis. This reflects the Company's strategy
    to moderate sales in Mexico while focusing on profitability and was
    supported by growth in Argentina.

Gross Profit

Gross profit in 2Q-2018 was R$137.8 million, a 9.8% decrease
year-over-year. Gross margin was 30.6% in 2Q-2018, a 2.5 p.p. decrease
when compared to same period last year. During the quarter, the ongoing
revenue mix shift to marketplace and the other margin enhancing
initiatives positively impacted gross margin in 1.8 p.p., more than
offsetting the negative 1.7 p.p. impact from changes in the e-commerce
taxation regime in Brazil (EC 87, in place since 2016). Other impacts,
however, have negatively affected gross margin such as:

  • Accounts payable Adjustment to Present Value (APV) accounting on cost
    negatively impacted gross margin by 1.4 p.p. This was a direct result
    of the Company's adjustments in procurement activities to reduce
    inventory levels, improving quality and decreasing future short-term
    working capital investments.
  • The B2B operation negatively impacted gross margin by 0.9 p.p. The
    Company increased its efforts to lower the inventory level of
    supplement products by commencing additional sales through Netshoes
    B2C online channel.
  • The warmer than expected winter season impact on Zattini's fashion
    collection in Brazil negatively impacted gross margin by 0.3 p.p.
    according to Company estimates.

Operating Expenses

Operating expenses, net of depreciation and amortization, were R$137.6
million in 2Q-2018, 12.6% lower than 2Q-2017. As a percentage of net
sales, operating expenses were 30.6%, compared to 34.1% in 2Q-2017.

Selling and marketing expenses, net of depreciation and amortization,
decreased 9.5% year-over-year in 2Q-2018 to R$108.5 million,
representing 24.1% of net sales compared to 26.0% of net sales in
2Q-2017. This decrease was mainly attributed to lower expenses in
branding campaigns, driving marketing investments down 0.7 p.p., and
lower chargeback expenses.

General and administrative expenses, net of depreciation and
amortization, were R$28.1 million in 2Q-2018, 23.1% lower in comparison
to 2Q-2017, representing 6.3% of net sales, versus 7.9% of net sales in
2Q-2017. This reduction is mainly related to the rationalization of
administrative expenses and lower IT expenses.

Adjusted EBITDA & Net Loss

Consolidated Adjusted EBITDA was R$0.2 million in 2Q-2018 (0.0% Adj.
EBITDA margin) compared to negative R$4.6 million in 2Q-2017 (-1.0% Adj.
EBITDA margin). In 2Q-2018, the negative impact from B2B operations
amounted to R$4.2 million, compared to a positive contribution of R$1.4
million in 2Q-2017.

  • Adjusted EBITDA for the Brazilian operation in 2Q-2018 was R$8.0
    million (2.0% Adj. EBITDA margin), which includes a R$4.2 million
    negative impact from the B2B operation. This compares to positive
    R$9.8 million Adj. EBITDA (2.4% Adj. EBITDA margin) in 2Q-2017, which
    was positively impacted by R$1.4 million from the B2B operation.
  • Adjusted EBITDA loss for the International operations in 2Q-2018 was
    R$6.4 million (-12.9% Adj. EBITDA margin), compared to a R$11.3
    million loss in 2Q-2017 (-21.0% Adj. EBITDA margin).

Consolidated net loss was R$38.1 million in 2Q-2018 (-8.5% net margin),
compared to net loss of R$35.2 million (-7.6% net margin) in 2Q-2017.
Despite the better EBITDA and higher efficiency in financial results, in
2Q-2018 depreciation and amortization expenses increased by R$10.5
million year-over-year mainly due to the accelerated depreciation of the
Company's former e-commerce front-end system following the
implementation of the new proprietary system in February 2018.

Balance Sheet and Cash Flow

In 2Q-2018, the Company generated R$69.6 million in net cash flow from
operating activities versus a use of cash of R$28.3 million in 2Q-2017.
The R$97.9 million year-over-year improvement was mainly a result of a
R$46.4 million inventory reduction, R$39.0 million of recoverable taxes
and judicial deposits, and a R$22.6 million higher contribution from
factoring arrangements. Factoring arrangements contributed to a cash
generation of R$61.0 million in 2Q-2018 compared to R$38.5 million in
2Q-2017.

Cash used in investing activities amounted to R$20.4 million in 2Q-2018
and was mainly related to the development of the Company's information
technology infrastructure and regular maintenance capex of the Company's
distribution centers. In 2Q-2017, cash used in investing activities
amounted to R$24.2 million.

Cash used in financing activities amounted to R$35.4 million in 2Q-2018
and was mainly related to principal amortization and interest payments
on financial debt, while in 2Q-2017, the Company generated R$380.7
million in cash related to proceeds from its IPO, net from the period's
financial expenses and debt amortization.

Due to the above, change in cash and cash equivalents was R$14.6 million
in 2Q-2018 compared to R$335.4 million in 2Q-2017. Cash and cash
equivalent as of June 30, 2018 were R$75.3 million, compared to R$419.9
million as of June 30, 2017.

       
Cash Flow Statement (In R$ Millions)   2Q-2017  

2Q-2018

 

1H-2017

  1H-2018
 
Net loss (35.2) (38.1) (72.9) (98.4)
Depreciation and amortization 7.6 18.1 15.7 34.0
Interest expense, net 27.3 16.0 61.9 32.4
Others 2.5 5.5 (1.8) 19.1
Adjusted Net Loss 2.3 1.5 2.9 (13.0)
 
Trade accounts receivable 18.0 7.4 84.9 4.8
Inventories (1.9) 44.5 (40.8) 27.0
Trade accounts payable / Reverse Factoring (2.8) (8.9) (51.2) (188.7)
Changes in Working Capital 13.3 43.0 (7.1) (157.0)
 
Restricted Cash (0.2) 0.5 3.1 (2.2)
Recoverable taxes (19.1) 10.2 (34.7) 7.8
Judicial deposits (12.8) (3.0) (23.6) (6.0)
Accrued expenses 6.5 11.7 (31.4) (15.2)
Others (18.3) 5.7 (16.0) (5.3)
Total Changes in Assets and Liabilities   (43.9)   25.1   (102.5)   (21.0)
Net Cash Provided by (Used In) Operating Activities   (28.3)   69.6   (106.8)   (190.9)
 
Capex (14.1) (24.1) (27.3) (51.5)
Interest received on installment sales (9.8) 0.2 0.2 1.1
Restricted cash   (0.2)   3.5   0.6   1.3
Net Cash Provided by (Used in) Investing Activities   (24.2)   (20.4)   (26.4)   (49.1)
 
Proceeds / Payment of debt (26.9) (20.3) 71.0 (48.2)
Payments of interest (16.9) (15.1) (61.0) (32.7)
Proceeds from issuance of common stock   424.5   0.0   424.5   0.0
Net Cash Provided by (Used in) Financing Activities   380.7   (35.4)   434.5   (80.9)
 
Effect of exchange rate changes on cash and cash equivalents 7.1 0.8 7.3 0.2
                 
Change in Cash and Cash Equivalents   335.4   14.6   308.6   (320.7)
 
Cash and cash equivalents, beginning of period 84.6 60.7 111.3 396.0
Cash and cash equivalents, end of period 419.9 75.3 419.9 75.3
 

In 2Q-2018, the Company's net working capital cycle was 46 days, 16 days
lower than 1Q-2018 and in line with 2Q-2017. The B2C business net
working capital cycle decreased 13 days from 1Q-2018 to 16 days.

Trade accounts receivable cycle decreased by 3 days year-over-year to 17
days in 2Q-2018 mainly due to lower volume of outstanding receivables
from the B2B operation. Trade accounts receivable cycle from the B2C
operation was 13 days, in line with same period last year.

Inventory cycle increased 3 days when compared to 2Q-2017 mainly
impacted by the corrective actions taken during the second half of 2017
in the B2B business. The inventory cycle from the B2C operation was 104
days in 2Q-2018, 10 days lower when compared to 114 days in 2Q-2017 and
11 days lower than 1Q-2018.

Trade accounts payable cycle was 101 days, in line with 2Q-2017, and 2
days lower than 1Q-2018.

       
In Days  

2Q-
2017

 

4Q-
2017

 

1Q-
2018

 

2Q-
2018

Trade Accounts Receivable 20 18 18 17
Inventories 127 144 147 130
Trade Accounts Payable / Reverse Factoring   101   156   103   101
Cash Conversion Cycle 46 7 62 46
 

In 2Q-2018 the net debt position was R$128.4 million, a R$29.3 million
reduction from 1Q-2018. When compared to the net cash of R$94.3 million
in 2Q-2017, net debt increased R$222.7 million.

In the year-over-year comparison, total debt was reduced from R$365.1
million in 2Q-2017 to R$239.1 million in 2Q-2018 as a result of (i) the
regular debt amortization schedule and (ii) the accelerated amortization
of R$65.1 million in 3Q-2017, partially offset by the R$26.7 million
FINEP new credit line.

       
DEBT (In R$ Millions)  

2Q-
2017

 

4Q-
2017

 

1Q-
2018

 

2Q-
2018

Working Capital 260.9 175.0 157.1 147.9
Short-term 76.0 68.3 66.1 72.7
Long-term 185.0 106.7 91.0 75.2
Debenture 103.2 84.2 74.9 65.5
Short-term 38.1 37.7 37.7 37.6
Long-term 65.1 46.5 37.2 27.9
Other 1.0 26.7 25.9 25.7
Short-term 0.9 0.5 0.3 0.1
Long-term 0.1 26.2 25.5 25.6
                 
TOTAL DEBT (R$)   365.1   286.0   257.8   239.1
Short-term (%) 31% 37% 40% 46%
Long-term (%) 69% 63% 60% 54%
(-) Total Cash (459.4) (430.4) (100.1) (110.7)
Cash and cash equivalents (419.9) (396.0) (60.7) (75.3)
Restricted cash   (39.5)   (34.4)   (39.5)   (35.4)
NET DEBT (R$)   (94.3)   (144.4)   157.7   128.4
 

Subsequent Events:

Debt Restructuring

The Company successfully completed the renegotiation of its working
capital and debenture credit lines, increasing the original maturity of
the contracts by one year to 2021 and establishing a 12 months grace
period on principal amortization. This renegotiation eliminates R$107.7
million in debt amortization during the next year, with no changes to
the costs of both credit lines.

Divestment of Netshoes Mexico Operation

In early August the Company's subsidiaries (NS2.COM INTERNET S.A. and
NS5 PARTICIPAÇÕES LTDA.) have signed an agreement with Grupo Sierra
Capital, a private equity fund that invests in Mexico, Central America
and Caribbean, to sell the entirety of its operations in Mexico.

This transaction is expected to close in the third quarter of 2018 and
is subject to customary (a) closing conditions, and (b) purchase price
adjustment mechanisms.

Share Option Pool

On August 7, 2018, the board of directors approved the increase of the
size of the Company's share option pool from 956,470 to 1,296,470 of its
common shares, which represents 4.0% of the Company's total equity on a
fully diluted basis.

2Q-2018 Earnings Conference Call

A conference call with live webcast will be held tomorrow, August 10,
2018 at 8:30 am (Eastern Time).

Investors and other interested participants can access the call by
dialing 1-877-883-0383 in the U.S. and 1-412-902-6506 internationally.
The entry number for the conference line is 8137264. An archived webcast
will be available on our IR website. For more information visit: http://investor.netshoes.com.

About Netshoes

Founded in 2000, Netshoes is the leading sports and lifestyle online
retailer in Latin America and one of the largest online retailers in the
region, with operations in Brazil, Argentina, and Mexico. Through the
websites Netshoes, Zattini and Shoestock, as well as through
partner-branded store sites the Company manages, it offers customers a
wide selection of products and services for sports, fashion and beauty.

Core to the Company's success has been a relentless focus on delivering
a superior customer experience. As one of the first companies in Latin
America to provide online retail offerings, Netshoes benefits from its
early mover advantage, which has allowed the Company to capture
significant market share and achieve a leadership position in a large
and expanding addressable market. For more information, visit: http://investor.netshoes.com

Forward-Looking Statements

This press release, prepared by Netshoes (Cayman) Limited (the
"Company"), contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1993, as amended, and Section 21E
of the Securities Exchange of 1934, as amended. Statements contained
herein that are not clearly historical in nature, including statements
about the Company's strategies and business plans, are forward-looking,
and the words "anticipate," "believe," "continues," "expect,"
"estimate," "intend," "strategy," "project" and similar expressions and
future or conditional verbs such as "will," "would," "should," "could,"
"might," "can," "may," or similar expressions are generally intended to
identify forward-looking statements. The Company may also make
forward-looking statements in its periodic reports filed with the U.S.
Securities and Exchange Commission (the "SEC"), in press releases and
other written materials and in oral statements made by its officers and
directors. These forward-looking statements speak only as of the date
they are made and are based on the Company's current plans and
expectations and are subject to a number of known and unknown
uncertainties and risks, many of which are beyond the Company's control.
A number of factors could cause actual results to differ materially from
those contained in any forward-looking statement, including but not
limited to the following: Company's goals and strategies; Company's
future business development; Company's ability to maintain sufficient
working capital, the continued growth of e-Commerce in Latin America,
the Company's ability to predict and react to changes in consumer demand
or shopping patterns, Company's ability to retain or increase engagement
of consumers, Company's ability to maintain or grow its net sales or
business, general economic and political conditions in the countries
where it operates. Further information regarding these and other risks
is included in the Company's filings with the SEC. As a consequence,
current plans, anticipated actions and future financial position and
results of operations may differ significantly from those expressed in
any forward-looking statements in this announcement. You are cautioned
not to unduly rely on such forward-looking statements when evaluating
the information presented as there is no guarantee that expected events,
trends or results will actually occur. We undertake no obligation to
update any forward-looking statements, whether as a result of new
information or future events or for any other reason.

This press release may also contain estimates and other information
concerning our industry that are based on industry publications, surveys
and forecasts. This information involves a number of assumptions and
limitations, and have not independently verified the accuracy or
completeness of the information.

Non-IFRS Financial Measures

The Company presents non-IFRS measures when it believes that the
additional information is useful and meaningful to investors. Non-IFRS
financial measures do not have any standardized meaning and are
therefore unlikely to be comparable to similar measures presented by
other companies. The presentation of non-IFRS financial measures is not
intended to be a substitute for, and should not be considered in
isolation from, the financial measures reported in accordance with
International Financial Reporting Standards ("IFRS"), as issued by the
International Accounting Standards Board.

This press release includes unaudited non-IFRS financial measures,
including GMV, Adjusted Selling and Marketing Expenses, Adjusted General
and Administrative Expenses, Net Adjusted Financial Result, Certain
Other Net Financial Result, Adjusted Operating Expenses, EBITDA, EBITDA
Margin, EBITDA Brazil and EBITDA International.

(1): "GMV" is defined as the sum of net sales, returns, GMV from
marketplace and net sales taxes, less marketplace and NCard activation
commission fees;

(2) "Net Adjusted Financial Result" is defined as the sum of financial
income and financial expenses less "Certain Other Net Financial Result";

(3) "Certain Other Net Financial Result" is defined as the sum of
foreign exchange gains/losses, derivative financial instruments
gains/losses, bank charges and other financial income/expenses;

(4) "Adjusted EBITDA" is defined as net income/loss, less net financial
result, less income tax, less depreciation and amortization expenses;

(5) "Adjusted EBITDA Brazil" or "EBITDA Brazil" is defined as Adjusted
EBITDA or EBITDA for our operation in Brazil;

(6) "Adjusted EBITDA International" or "EBITDA International" is defined
as Adjusted EBITDA or EBITDA for our operations in Argentina and Mexico;

(7) "EBITDA" is defined as Adjusted EBITDA plus Certain Other Net
Financial Result;

(8) "Adjusted EBITDA Margin" or "EBITDA Margin" is defined as Adjusted
EBITDA or EBITDA divided by net sales for the relevant period, expressed
as a percentage.

The following table shows the reconciliation for GMV, as described above:

       
GMV - Reconciliation (In R$ Millions)  

2Q-
2017

 

2Q-
2018

 

1H-
2017

 

1H-
2018

 
Net sales 461.3 449.8 857.6 849.1
Add (subtract):
Sales taxes, net 84.1 89.5 154.1 169.1
Returns 53.6 35.4 95.8 64.1
Marketplace commission fees (8.7) (14.3) (13.6) (27.1)
NCard activation commission fees   (0.4)   (0.6)   (0.7)   (1.1)
Sub-Total:   590.0   559.8   1,093.2   1,054.0
 
GMV from marketplace 40.7 70.2 68.7 134.6
                 
GMV   630.7   630.0   1,161.9   1,188.6
 

The following table shows the reconciliation for Net Adjusted Financial
Result and Certain Other Net Financial Result as described above:

       
Net Financial Result Reconciliation (In R$ Millions)  

2Q-
2017

 

2Q-
2018

 

1H-
2017

 

1H-
2018

 
Financial Income 10.2 2.9 15.2 7.5
Financial Expenses   (33.1)   (23.1)   (71.4)   (43.2)
Net Financial Result   (23.0)   (20.2)   (56.2)   (35.7)
Subtract Certain Other Net Financial Result:
Certain Other Financial Income:
Foreign exchange gain (0.3) (0.5) (0.7) (1.0)
Derivative financial instruments gain (0.0) 0.0 (0.8) 0.0
Other Financial Income (0.0) (0.1) (0.0) (0.2)
Certain Other Financial Expenses:
Foreign exchange loss 1.8 4.6 1.8 5.0
Derivative financial instruments loss 0.0 0.0 0.0 0.0
Bank charges 2.5 1.1 4.0 2.3
Other Financial Expenses   0.3   0.8   0.5   2.1
Net Adjusted Financial Result   (18.7)   (14.4)   (51.4)   (27.6)
 

1) Net Financial Result: consists of Interest
income/expenses, Imputed interest on installment sales, Imputed interest
on credit purchases, Debt issuance costs, Foreign exchange gains/loss,
Derivative financial instruments gains/loss, Bank charges and Other
financial income/expenses.

The following table shows the reconciliation for EBITDA, EBITDA Margin,
Adjusted EBITDA and Adjusted EBITDA margin as described above:

       
Consolidated EBITDA Reconciliation (In R$ Millions)  

2Q-
2017

 

2Q-
2018

 

1H-
2017

 

1H-
2018

 
Net loss (35.2) (38.1) (72.9) (98.4)
Add (subtract):
(-) Income tax expense 0.0 0.0 0.0 0.0
(-) Net Financial Result 23.0 20.2 56.2 35.7
(-) Depreciation and Amortization   7.6   18.1   15.7   34.0
Adjusted EBITDA   (4.6)   0.2   (1.0)   (28.7)
(+) Certain Other Net Financial Result   (4.3)   (5.8)   (4.8)   (8.1)
EBITDA   (8.9)   (5.6)   (5.8)   (36.9)
Net Sales   461.3   449.8   857.6   849.1
Adjusted EBITDA Margin %   (1.0)%   0.0 %   (0.1)%   (3.4)%
EBITDA Margin %   (1.9)%   (1.2)%   (0.7)%   (4.3)%
 

(1) Consolidated EBITDA includes Corporate/Holding expenses not included
in EBITDA Brazil and EBITDA International.

       
EBITDA Brazil Reconciliation (In R$ Millions)  

2Q-
2017

 

2Q-
2018

 

1H-
2017

 

1H-
2018

 
Net loss (16.1) (18.3) (39.6) (58.8)
Add (subtract):
(-) Income tax expense 0.0 0.0 0.0 (0.0)
(-) Net Financial Result 19.5 16.3 49.7 29.5
(-) Depreciation and Amortization   6.4   10.0   13.7   19.0
Adjusted EBITDA   9.8   8.0   23.8   (10.3)
(+) Certain Other Net Financial Result   (3.8)   (4.5)   (4.9)   (6.4)
EBITDA   6.0   3.5   19.0   (16.7)
Net Sales   407.5   400.5   763.0   760.8
Adjusted EBITDA Margin %   2.4 %   2.0 %   3.1 %   (1.3)%
EBITDA Margin %   1.5 %   0.9 %   2.5 %   (2.2)%
 
       
EBITDA International Reconciliation (In R$ Millions)  

2Q-
2017

 

2Q-
2018

 

1H-
2017

 

1H-
2018

 
Net loss (14.6) (10.5) (25.6) (20.1)
Add (subtract):
(-) Income tax expense 0.0 0.0 0.0 0.0
(-) Net Financial Result 3.0 4.0 5.2 6.3
(-) Depreciation and Amortization   0.3   0.2   0.5   0.4
Adjusted EBITDA   (11.3)   (6.4)   (19.9)   (13.5)
(+) Certain Other Net Financial Result   (0.5)   (1.4)   (0.7)   (1.7)
EBITDA   (11.8)   (7.7)   (20.6)   (15.2)
Net Sales   53.8   49.3   94.5   88.3
Adjusted EBITDA Margin %   (21.0)%   (12.9)%   (21.0)%   (15.2)%
EBITDA Margin %   (21.9)%   (15.6)%   (21.8)%   (17.2)%
 

Certain Definitions:

Registered members

The sum of all people that have completed the registration form in all
the Company's websites.

Active customers

Customers who made purchases online with the Company during the
preceding twelve months as of the relevant dates.

Repeat customers

The sum of orders placed by customers who have previously purchased from
the Company as of the relevant dates.

Invoiced orders

The total number of orders invoiced to active customers during the
relevant period (online and offline sales)

Orders placed from mobile devices

The sum of total orders placed by active customers through the Company's
mobile site and applications as a percentage of total orders placed by
active customers for the relevant period.

Average basket size

The sum of invoiced order value in connection with a product sale
(online and offline), including shipping fees and taxes, divided by the
number of total invoiced orders for the relevant period. Excludes B2B
and NCard operations.

Gross merchandise volume ("GMV")

The sum of net sales, returns, GMV from marketplace and net sales taxes.
Excludes marketplace and NCard activation commission fees.

Net Working Capital Cycle

The sum of the balances of (a) Trade accounts receivable and (b)
Inventories, less (c) the balance of Trade accounts payable, plus the
balance of (d) Reverse factoring.

Partner-branded stores

All partner-branded online stores that the Company manages.

Foreign Exchange Neutral ("FX Neutral")

Growth rate shown on constant local currency basis, in order to
demonstrate what the results would have been had exchange rates in
Mexico and Argentina remained constant during the period comparison.

   

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Financial Position

As of December 31, 2017 and June 30, 2018

(Reais and Dollars in thousands)

 

 

December 31, June 30,
Assets 2017 2018   2018
Current assets: BRL BRL USD
Cash and cash equivalents 395,962 75,281 19,524
Restricted cash 19,397 21,636 5,611
Trade accounts receivables, net 113,168 102,699 26,635
Inventories, net 456,632 415,891 107,861
Recoverable taxes 80,047 69,894 18,127
Other current assets   48,352 50,078 12,988
Total current assets   1,113,558 735,479 190,746
 
Non-current assets:
Restricted cash 15,048 13,752 3,567
Judicial deposits 106,914 112,932 29,289
Recoverable taxes 70,765 70,721 18,341
Other assets 1,950 1,950 506
Due from related parties 12 9 2
Property and equipment, net 73,039 81,344 21,097
Intangible assets, net   115,839 125,392 32,520
Total non-current assets   383,567 406,100 105,322
 
Total assets   1,497,125 1,141,579 296,068
 
   

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Financial Position

As of December 31, 2017 and June 30, 2018

(Reais and Dollars in thousands)

 
December 31, June 30,
Liabilities and Shareholders' Equity 2017 2018   2018
Current liabilities: BRL BRL USD
Trade accounts payable 365,835 230,567 59,797
Reverse factoring 148,928 91,671 23,775
Current portion of long-term debt 106,577 110,428 28,639
Taxes and contributions payable 19,875 19,325 5,012
Deferred revenue 3,732 4,016 1,042
Accrued expenses 120,366 103,199 26,765
Other current liabilities   31,017 30,215 7,838
Total current liabilities   796,330 589,421 152,868
 
Non-current liabilities:
Long-term debt, net of current portion 179,394 128,692 33,376
Provision for labor, civil and tax risks 12,523 14,769 3,830
Deferred revenue 25,502 24,101 6,251
Other non-current liabilities   27 40 10
Total non-current liabilities   217,446 167,602 43,467
Total liabilities   1,013,776 757,023 196,335
 
Shareholders' equity:
Share capital 244 244 63
Additional-paid in capital 1,345,507 1,348,201 349,655
Treasury shares (1,533) (1,533) (398)
Accumulated other comprehensive loss (13,664) (14,954) (3,878)
Accumulated losses   (847,125) (947,195) (245,655)
Equity attributable to owners of the parent   483,429 384,763 99,787
Equity attributable to non-controlling interests   (80) (207) (54)
Total shareholders' equity   483,349 384,556 99,733
 
Total liabilities and shareholders' equity   1,497,125 1,141,579 296,068
 
   

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Profit or Loss

For the six and three months ended June 30, 2017 and 2018

(Reais and Dollars in thousands, except loss per share)

 
For the six months ended June 30, For the three months ended June 30,
2017   2018   2018 2017   2018   2018
BRL BRL USD BRL BRL USD
Net Sales 857,559 849,090 220,211 461,331 449,797 116,655
Cost of sales   (574,954) (590,712) (153,201) (308,492) (312,009) (80,919)
Gross Profit   282,605 258,378 67,010 152,839 137,788 35,736
 
Operating expenses:
Selling and marketing expenses (222,526) (220,845) (57,277) (121,000) (110,247) (28,593)
General and administrative expenses (74,647) (98,204) (25,469) (43,020) (44,485) (11,536)
Other operating expenses, net   (2,116) (2,082) (541) (1,024) (965) (249)
Total operating expenses   (299,289) (321,131) (83,287) (165,044) (155,697) (40,378)
Operating loss   (16,684) (62,753) (16,277) (12,205) (17,909) (4,642)
 
Financial income 15,195 7,519 1,951 10,166 2,935 761
Financial expenses   (71,383)   (43,213) (11,207) (33,116) (23,136) (6,000)
Loss before income tax   (72,872)   (98,447) (25,533) (35,155) (38,110) (9,881)
 
Income tax expense   (2) 0 0 (2) 0 0
Net Loss   (72,874) (98,447) (25,533) (35,157) (38,110) (9,881)
 
Net loss attributable to:
Owners of the Parent (72,499) (98,216) (25,473) (34,991) (37,997) (9,855)
Non-controlling interests (375) (231) (60) (166) (113) (29)
 
Loss per share attributable to owners of the Parent
Basic and diluted   (3.09) (3.16) (0.82) (1.49) (1.22) (0.32)
 
 

NETSHOES (CAYMAN) LIMITED AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows

For the six months ended June 30, 2017 and 2018

(Reais and Dollars in thousands)

 
Six months ended June 30,
2017   2018   2018
BRL BRL USD
Cash flows from operating activities:
Net loss (72,874) (98,447) (25,533)
Adjustments to reconcile net loss to net cash used in operating
activities:
Allowance for doubtful accounts 6,262 3,852 999
Depreciation and amortization 15,663 34,009 8,820
Loss on disposal of property and equipment, and intangible assets 170 307 80
Share-based payment (13,469) 2,145 556
Deferred taxes 2 0
Provision for contingent liabilities 4,595 4,067 1,055
Interest expense, net 61,892 32,393 8,401
Provision for inventory losses 464 8,710 2,259
Other 179 3 1
Changes in operating assets and liabilities:
(Increase) decrease in:
Restricted cash 3,089 (2,240) (581)
Trade accounts receivable 84,879 4,799 1,245
Inventories (40,822) 26,966 6,994
Recoverable taxes (34,696) 7,804 2,024
Judicial deposits (23,615) (6,018) (1,561)
Other assets (11,832) (1,562) (405)
Increase (decrease) in:
Derivative financial instruments (186) 0 0
Trade accounts payable (52,674) (131,475) (34,098)
Reverse factoring 1,489 (57,258) (14,850)
Taxes and contributions payable 212 416 108
Deferred revenue (1,449) (1,117) (290)
Accrued expenses (31,354) (15,167) (3,934)
Share-based payment (2,141) (431) (112)
Other liabilities   (568) (2,652) (688)
Net cash provided by (used in) operating activities   (106,784) (190,896) (49,510)
Cash flows from investing activities:
Purchase of property and equipment (4,487) (14,313) (3,712)
Purchase of intangible assets (22,770) (37,163) (9,638)
Interest received on installment sales 197 1,121 291
Restricted cash   631 1,296 336
Net cash provided by (used in) investing activities   (26,429) (49,059) (12,723)
Cash flows from financing activities:
Proceeds from debt 123,936 18,654 4,838
Payments of debt (52,973) (66,886) (17,347)
Payments of interest (60,960) (32,696) (8,480)
Proceeds from issuance of common shares   424,533 0 0
Net cash provided by (used in) financing activities   434,536 (80,928) (20,989)
Effect of exchange rate changes on cash and cash equivalents   7,322 202 52
Change in cash and cash equivalents   308,645 (320,681) (83,170)
Cash and cash equivalents, beginning of period 111,304 395,962 102,694
Cash and cash equivalents, end of period 419,949 75,281 19,524
 

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