Company Quick10K Filing
despegar.com
20-F 2019-12-31 Filed 2020-04-10
20-F 2018-12-31 Filed 2019-04-26
20-F 2017-12-31 Filed 2018-04-24

DESP 20F Annual Report

Part I
Item 1. Identity of Directors, Senior Management and Advisers
Item 2. Offer Statistics and Expected Timetable
Item 3. Key Information
Item 4. Information on The Company
Item 4A. Unresolved Staff Comments
Item 5. Operating and Financial Review and Prospects
Item 6. Directors, Senior Management and Employees
Item 7. Major Shareholders and Related Party Transactions
Item 8. Financial Information
Item 9. The Offer and Listing
Item 10. Additional Information
Item 11. Quantitative and Qualitative Disclosures About Market Risk
Item 12. Description of Securities Other Than Equity Securities
Part II
Item 13. Defaults, Dividend Arrearages and Delinquencies
Item 14. Material Modifications To The Rights of Security Holders and Use of Proceeds
Item 15. Controls and Procedures
Item 16. [Reserved]
Item 16A. Audit Committee Financial Expert
Item 16B. Code of Ethics
Item 16C. Principal Accountant Fees and Services
Item 16D. Exemptions From The Listing Standards for Audit Committees
Item 16E. Purchases of Equity Securities By The Issuer and Affiliated Purchasers
Item 16F. Change in Registrant's Certifying Accountant
Item 16G. Corporate Governance
Item 16H. Mine Safety Disclosure
Part III
Item 17. Financial Statements
Item 18. Financial Statements
Item 19. Exhibits
EX-2.1 d908027dex21.htm
EX-4.1 d908027dex41.htm
EX-8.1 d908027dex81.htm
EX-12.1 d908027dex121.htm
EX-12.2 d908027dex122.htm
EX-13.1 d908027dex131.htm
EX-13.2 d908027dex132.htm
EX-23.1 d908027dex231.htm

despegar.com Earnings 2019-12-31

Balance SheetIncome StatementCash Flow

20-F 1 d908027d20f.htm FORM 20-F Form 20-F
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 20-F

 

 

 

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2019

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-38209

 

 

Despegar.com, Corp.

(Exact Name of Registrant as Specified in its charter)

 

 

N/A

(Translation of Registrant’s name into English)

British Virgin Islands

(Jurisdiction of Incorporation or Organization)

Juana Manso 999

Ciudad Autónoma de Buenos Aires, Argentina C1107CBR

Telephone: +54 11 4894-3500

(Address of principal executive offices)

Mariano Scagliarini, General Counsel

Juana Manso 999

Ciudad Autónoma de Buenos Aires, Argentina C1107CBR

Telephone: +54 11 4894-3500

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol

 

Name of each exchange

on which registered

Ordinary Shares, no par value   DESP   The New York Stock Exchange

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

 

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the Annual Report:

 

At December 31, 2019

  

69,648,263 ordinary shares

Indicate by check mark if the registrant is a well-known seasoned issuer , as defined in Rule 405 of the Securities Act.    Yes  ☐    No  ☒

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes  ☐    No  ☒

Note- Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Emerging growth company  

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.  ☒

 

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

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP  ☒           International Financial Reporting Standards as issued         Other   ☐
          by the International Accounting Standards Board        

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.    Item 17  ☐    Item 18  ☐

If this is an Annual Report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

 

 

 


Table of Contents

TABLE OF CONTENTS

 

         Page  

PART I

 

INTRODUCTION

     1  

ITEM 1.

 

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

     3  

ITEM 2.

 

OFFER STATISTICS AND EXPECTED TIMETABLE

     3  

ITEM 3.

 

KEY INFORMATION

     3  

ITEM 4.

 

INFORMATION ON THE COMPANY

     42  

ITEM 4A.

 

UNRESOLVED STAFF COMMENTS

     65  

ITEM 5.

 

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

     65  

ITEM 6.

 

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

     89  

ITEM 7.

 

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

     99  

ITEM 8.

 

FINANCIAL INFORMATION

     104  

ITEM 9.

 

THE OFFER AND LISTING

     105  

ITEM 10.

 

ADDITIONAL INFORMATION

     106  

ITEM 11.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     114  

ITEM 12.

 

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

     115  

PART II

    

ITEM 13.

 

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

     116  

ITEM 14.

 

MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

     116  

ITEM 15.

 

CONTROLS AND PROCEDURES

     116  

ITEM 16.

 

[RESERVED]

     117  

ITEM 16A.

 

AUDIT COMMITTEE FINANCIAL EXPERT

     118  

ITEM 16B.

 

CODE OF ETHICS

     118  

ITEM 16C.

 

PRINCIPAL ACCOUNTANT FEES AND SERVICES

     118  

ITEM 16D.

 

EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

     118  

ITEM 16E.

 

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

     118  

ITEM 16F.

 

CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

     118  

ITEM 16G.

 

CORPORATE GOVERNANCE

     119  

ITEM 16H.

 

MINE SAFETY DISCLOSURE

     120  

PART III

    

ITEM 17.

 

FINANCIAL STATEMENTS

     121  

ITEM 18.

 

FINANCIAL STATEMENTS

     121  

ITEM 19.

 

EXHIBITS

     121  

 

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PART I

INTRODUCTION

Unless the context suggests otherwise, references in this Annual Report to “Despegar,” the “Company,” “we” “us” and “our” are to Despegar.com, Corp., a business company incorporated in the British Virgin Islands (“BVI”), and its consolidated subsidiaries. Unless the context suggests otherwise, references to “Latin America” are to South America, Mexico, Central America and the Caribbean.

We were formed as a business company in BVI on February 10, 2017. On May 3, 2017, the stockholders of our predecessor, Decolar.com, Inc., a Delaware corporation, exchanged their shares of Decolar.com, Inc. for ordinary shares of Despegar.com, Corp. to create a BVI holding company. Following the exchange, our shareholders own shares of Despegar.com, Corp. and Decolar.com, Inc. is a wholly-owned subsidiary of Despegar.com, Corp. The consolidated financial information as of 2016 and 2015, and for the three years ended December 31, 2017, 2016 and 2015 included in this Annual Report, to the extent related to the events and periods prior to May 3, 2017, are the consolidated financial information of Decolar.com, Inc., which is our predecessor for accounting purposes, and other information contained in this Annual Report related to events and periods prior to May 3, 2017 is based on Decolar.com, Inc.

Financial Statements

Our financial information contained in this Annual Report derives from our audited consolidated financial statements as of December 31, 2019 and 2018 and for the fiscal years ended December 31, 2019, 2018 and 2017 included in this Annual Report and from our audited consolidated financial statements as of December 31, 2017, 2016 and 2015 and for the fiscal years ended December 31, 2016 and 2015 not included in this Annual Report. Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and presented in dollars.

Adjusted Segment EBITDA

This Annual Report includes certain references to Adjusted Segment EBITDA for each of our segments (Air; and Packages, Hotels and Other Travel Products). We use Adjusted Segment EBITDA for purposes of making decisions about allocating resources to our segments and to internally evaluate their financial performance because we believe Adjusted Segment EBITDA reflects current core operating performance of each segment and provides an indicator of each segment’s ability to generate cash. Adjusted Segment EBITDA is calculated, with respect to each segment, as our net income / (loss) exclusive of financial income / (expense), income tax, depreciation, amortization, impairment of long-lived assets and stock-based compensation expense. See note 24 to our audited consolidated financial statements for our Adjusted Segment EBITDA and segment information.

Consolidated Adjusted EBITDA

This Annual Report includes certain references to Consolidated Adjusted EBITDA, a non-GAAP financial measure. We define Consolidated Adjusted EBITDA as net income / (loss) exclusive of financial income / (expense), income tax, depreciation, amortization, impairment of long-lived assets and stock-based compensation expense. See “Item 3. Key Information – A. Selected Financial Data – Other Financial and Operating Data” for a reconciliation of Consolidated Adjusted EBITDA to net income / (loss). Consolidated Adjusted EBITDA is not prepared in accordance with U.S. GAAP. Accordingly, you are cautioned not to place undue reliance on this information and should note that Consolidated Adjusted EBITDA, as calculated by us, may differ materially from similarly titled measures reported by other companies, including our competitors.

Market Data

This Annual Report includes industry, market and competitive position data that we have derived from independent consultant reports, publicly available information, industry publications, official government information and other third-party sources, as well as our internal data and estimates. Independent consultant reports, industry publications and other published sources generally indicate that the information contained therein was obtained from sources believed to be reliable. Although we believe that this information is reliable, the information has not been independently verified by us.

 

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Certain Operating Measures

This Annual Report includes certain references to number of transactions and gross bookings, both operating measures. Number of transactions is the total number of travel customer orders completed on our platform during a given period. Gross bookings is the aggregate purchase price of all travel products booked by our travel customers through our platform during a given period. For more information, see “Item 5. Operating and Financial Review and Prospects—A. Operating Results — Key Business Metrics.”

Currency Presentation

In this Annual Report, references to “dollars” and “$” are to the currency of the United States, references to “Brazilian real,” “Brazilian reais” and “R$” are to the currency of Brazil and references to “Argentine pesos” and “AR$” are to the currency of Argentina.

Rounding

Certain figures included in this Annual Report have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be exact arithmetic aggregations or percentages of the figures that precede them.

Trademarks

Our key trademarks are “Despegar.com,” “Decolar.com” and “Decolar.com.br.” Other trademarks or service marks appearing in this Annual Report are the property of their respective holders. Solely for the convenience of the reader, we refer to our brands in this Annual Report without the ® symbol, but these references are not intended to indicate in any way that we will not assert our rights to these brands to the fullest extent permitted by law.

Forward-Looking Statements

This Annual Report includes forward-looking statements, principally under the captions “Item 3. Key Information,” “Item 4. Information on the Company––Business Overview” and “Item 5. Operating and Financial Review and Prospects.” We have based these forward-looking statements largely on our current beliefs, expectations and projections about future events and financial trends affecting our business and our market. Many important factors, in addition to those discussed elsewhere in this Annual Report, could cause our actual results to differ substantially from those anticipated in our forward-looking statements, including:

 

   

the impact that the ongoing Novel Coronavirus 2019 (“COVID-19”) pandemic, and governments’ extraordinary measures to limit the spread of the virus, will ultimately have on the global economy and the travel industry;

 

   

political, social and macroeconomic conditions in Latin America;

 

   

currency exchange rates and inflation;

 

   

current competition and the emergence of new market participants in our industry;

 

   

government regulation;

 

   

our expectations regarding the continued growth of internet usage and e-commerce in Latin America;

 

   

failure to maintain and enhance our brand recognition;

 

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our ability to maintain and expand our supplier relationships;

 

   

our reliance on technology;

 

   

the growth in the usage of mobile devices and our ability to successfully monetize this usage;

 

   

our ability to attract, train and retain executives and other qualified employees;

 

   

our ability to successfully implement our growth strategies; and

 

   

the other factors discussed under the caption “Item 3. Key Information—D. Risk Factors” in this Annual Report.

We operate in a competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Annual Report. The words “believe,” “may,” “should,” “aim,” “estimate,” “continue,” “anticipate,” “intend,” “will,” “expect” and similar words are intended to identify forward-looking statements. Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies, capital expenditures, financing plans, competitive position, industry environment, potential growth opportunities, the effects of future regulation and the effects of competition. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update publicly or to revise any forward-looking statements after we distribute this Annual Report because of new information, future events or other factors. These statements are intended to qualify for the safe harbors from liability provided by Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. In light of the risks and uncertainties described above, the future events and circumstances discussed in this Annual Report might not occur or come into existence and forward-looking statements are thus not guarantees of future performance. In particular, the COVID-19 pandemic, and governments’ extraordinary measures to limit the spread of the virus, are disrupting the global economy and the travel industry, and consequently adversely affecting our business, results of operation and cash flows and, as conditions are recent, uncertain and changing rapidly, it is difficult to predict the full extent of the impact that the pandemic will have. Considering these limitations, you should not make any investment decision in reliance on forward-looking statements contained in this Annual Report.

Additional Information

Our principal website addresses are www.despegar.com and www.decolar.com. The information on our websites should not be deemed to be part of this Annual Report. SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding registrants that make electronic filings with SEC using its EDGAR system.

 

ITEM 1.

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

 

ITEM 2.

OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

 

ITEM 3.

KEY INFORMATION

 

A.

Selected Financial Data

The following selected historical consolidated financial and other operating data should be read together with “Item 5. Operating and Financial Review and Prospects” and our audited consolidated financial statements included elsewhere in this Annual Report.

 

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We derived the selected balance sheet data as of December 31, 2019 and 2018, and selected income statement and cash flow data for the three years ended December 31, 2019, from our audited consolidated financial statements which are included elsewhere in this Annual Report. We derived the selected balance sheet data as of December 31, 2017, 2016 and 2015, and selected income statement and cash flow data for the two years ended December 31, 2016 and 2015, from our audited consolidated financial statements which are not included in this Annual Report. Our consolidated financial statements are prepared and presented in accordance with U.S. GAAP in dollars. Our historical results do not necessarily indicate results expected for any future period.

Selected Income Statement Data

 

     Year Ended December 31,  
     2019     2018     2017     2016     2015  
     (in thousands, except per share data)  

Revenue

          

Air

   $ 201,638     $ 214,804     $ 241,015     $ 205,721     $ 219,817  

Packages, Hotels and Other Travel Products

     323,238       315,810       282,925       205,441       201,894  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     524,876       530,614       523,940       411,162       421,711  

Cost of revenue

     179,565       172,110       142,479       126,675       154,213  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     345,311       358,504       381,461       284,487       267,498  

Operating expenses

          

Selling and marketing

     187,894       174,357       166,288       121,466       170,149  

General and administrative

     92,962       67,240       72,626       64,683       78,181  

Technology and product development

     73,375       71,154       71,308       63,251       73,535  

Impairment of long-lived assets

           363                    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     354,231       313,114       310,222       249,400       321,865  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) / income

     (8,920     45,390       71,239       35,087       (54,367

Financial income

     7,944       7,621       2,389       8,327       10,797  

Financial expense

     (25,159     (26,788     (19,268     (15,079     (23,702

(Loss) / income before income taxes

     (26,135     26,223       54,360       28,335       (67,272

Income tax benefit (expense)

     5,225       (7,069     (11,994     (10,538     (18,004
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) / income

   $ (20,910   $ 19,154     $ 42,366     $ 17,797     $ (85,276
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) / Earnings per share:

          

Basic

     (0.30     0.28       0.69       0.30       (1.49
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     (0.30     0.27       0.69       0.30       (1.49
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding:

          

Basic

     69,465       69,154       61,457       58,518       57,078  

Diluted

     70,615       71,254       61,548       58,609       57,186  

Selected Balance Sheet Data

 

     As of December 31,  
     2019      2018      2017      2016     2015  
     (in thousands)  

Cash and cash equivalents(1)

   $ 309,187      $ 346,480      $ 371,013      $ 75,968     $ 102,116  

Total assets

     801,213        763,947        738,694        353,710       348,215  

Total liabilities

     606,977        516,373        520,736        435,973       431,348  

Total shareholders’ equity/(deficit) attributable to Despegar

     194,236        247,574        217,958        (82,263     (83,133

Common stock

     261,608        255,254        253,535        6       6  

Number of Shares

     69,648        69,235        69,097        58,518       58,518  

 

(1)

Excludes restricted cash. See note 5 of our audited consolidated financial statements.

Other Financial and Operating Data

We regularly review the following key metrics to evaluate our business, measure our performance, identify trends in our business, prepare financial projections and make strategic decisions.

 

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     Year Ended December 31,  
     2019     2018      2017     2016      2015  
     (in thousands)  

Operational

            

Number of transactions

            

By country

            

Brazil

     4,121       4,230        3,713       2,924        3,620  

Argentina

     2,324       2,378        2,264       1,798        1,787  

Other

     4,233       3,785        3,079       2,490        2,298  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

     10,678       10,393        9,056       7,212        7,705  

By segment

            

Air

     6,220       5,945        5,285       4,250        4,385  

Packages, Hotels and Other Travel Products

     4,458       4,448        3,771       2,962        3,320  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

     10,678       10,393        9,056       7,212        7,705  

Gross bookings

   $ 4,734,257     $ 4,715,325      $ 4,454,548     $ 3,260,234      $ 3,596,260  

Financial

            

Adjusted Segment EBITDA

            

Air

   $ 3,346     $ 27,790      $ 58,397     $ 27,940      $ 8,259  

Packages, Hotels and Other Travel Products

   $ 36,546     $ 37,739      $ 31,341     $ 20,643      $ (34,383

Unallocated

   $ (14,330   $ 2,115      $ (384   $ 2      $ (12,943

Consolidated Adjusted EBITDA (unaudited)

   $ 25,562     $ 67,644      $ 89,354     $ 48,585      $ (39,067

Number of Transactions

The number of transactions for a period is an operating measure that represents the total number of travel customer orders completed on our platform in such period. We monitor the total number of transactions, as well as the number of transactions in each of our segments and the number of transactions with travel customers in each of Brazil, Argentina and the other countries in which we operate. The number of transactions is an important metric because it is an indicator of the level of engagement with our travel customers and the scale of our business from period to period but, unlike gross bookings and our financial metrics, the number of transactions is independent of the average selling price of each transaction, which can be significantly influenced by fluctuations in currency exchange rates.

Gross Bookings

Gross bookings is an operating measure that represents the aggregate purchase price of all travel products booked by our travel customers through our platform during a given period. We generate substantially all of our revenue from commissions and other incentive payments paid by our suppliers and service fees paid by our travel customers for transactions through our platform, and, as a result, we monitor gross bookings as an important indicator of our ability to generate revenue.

Adjusted Segment EBITDA

We measure our segment’s performance by our Adjusted Segment EBITDA. We use Adjusted Segment EBITDA for purposes of making decisions about allocating resources to our segments and to internally evaluate their financial performance because we believe Adjusted Segment EBITDA reflects current core operating performance of each segment and provides an indicator of each segment’s ability to generate cash. Adjusted Segment EBITDA is calculated, with respect to each segment, as our net income / (loss) exclusive of financial income / (expense), income tax, depreciation, amortization, impairment of long-lived assets and stock-based compensation expense. See note 24 to our audited consolidated financial statements for our Adjusted Segment EBITDA and segment information.

Consolidated Adjusted EBITDA

We define Consolidated Adjusted EBITDA as net income / (loss) exclusive of financial income / (expense), income tax, depreciation, amortization, impairment of long-lived assets and stock-based compensation expense.

 

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We believe that Consolidated Adjusted EBITDA, a non-GAAP financial measure, provides useful supplemental information to investors about us and our results. Consolidated Adjusted EBITDA is among the measures used by our management team to evaluate our financial and operating performance and make day-to-day financial and operating decisions. In addition, Consolidated Adjusted EBITDA is frequently used by securities analysts, investors and other parties to evaluate companies in the online travel industry. We also believe that Consolidated Adjusted EBITDA is helpful to investors because it provides additional information about trends in our core operating performance prior to considering the impact of capital structure, depreciation, amortization, and taxation on our results.

Consolidated Adjusted EBITDA should not be considered in isolation or as a substitute for other measures of financial performance reported in accordance with U.S. GAAP. Consolidated Adjusted EBITDA has limitations as an analytical tool, including:

 

   

Consolidated Adjusted EBITDA does not reflect changes in, including cash requirements for, our working capital needs or contractual commitments;

 

   

Consolidated Adjusted EBITDA does not reflect our financial expenses, or the cash requirements to service interest or principal payments on our indebtedness, or interest income or other financial income;

 

   

Consolidated Adjusted EBITDA does not reflect our income tax expense or the cash requirements to pay our income taxes;

 

   

although depreciation and amortization are non-cash charges, the assets being depreciated or amortized often will need to be replaced in the future, and Consolidated Adjusted EBITDA does not reflect any cash requirements for these replacements;

 

   

although stock-based compensation is a non-cash charge, Consolidated Adjusted EBITDA does not consider the potentially dilutive impact of stock-based compensation; and

 

   

other companies may calculate Consolidated Adjusted EBITDA differently, limiting its usefulness as a comparative measure.

We compensate for the inherent limitations associated with using Consolidated Adjusted EBITDA through disclosure of these limitations, presentation of our consolidated financial statements in accordance with U.S. GAAP and reconciliation of Consolidated Adjusted EBITDA to the most directly comparable U.S. GAAP measure, net income.

The table below provides a reconciliation of our net (loss) / income to Consolidated Adjusted EBITDA:

 

     Year Ended December 31,  
     2019     2018      2017      2016      2015  
     (in thousands)  

Net (loss) / income

   $ (20,910   $ 19,154      $ 42,366      $ 17,797      $ (85,276

Add (deduct):

             

Financial expense / (income), net

     17,215       19,167        16,879        6,752        12,905  

Income tax (benefit) / expense

     (5,225     7,069        11,994        10,538        18,004  

Depreciation expense

     6,659       4,985        5,075        5,089        5,152  

Impairment of long-lived assets

           363                       

Amortization expense

     16,137       10,140        8,751        7,835        9,287  

Stock-based compensation expense

     11,686       6,766        4,289        574        861  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Consolidated Adjusted EBITDA (unaudited)

   $ 25,562     $ 67,644      $ 89,354      $ 48,585      $ (39,067
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

B.

Capitalization and Indebtedness

Not applicable.

 

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C.

Reasons for the Offer and Use of Proceeds

Not applicable.

 

D.

Risk Factors

You should carefully consider the risks described below, in addition to the other information contained in this Annual Report. We also may face additional risks and uncertainties that are not presently known to us, or that as of the date of this Annual Report we deem immaterial, which may impair our business, financial condition and results of operations. If any of these events occur, the trading price of our ordinary shares could decline. In general, you take more risk when you invest in the securities of issuers with operations in emerging markets such as Latin American countries than when you invest in the securities of issuers in the United States and other developed markets. The information in this Risk Factors section includes forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of numerous factors, including those described in “Forward-Looking Statements.”

Risks Related to Our Business

The ongoing COVID-19 pandemic is disrupting the global economy and the travel industry, and consequently adversely affecting our business, results of operations and cash flows, and it is difficult to predict the full extent of the impact that the pandemic will have on our Company.

The recent outbreak of COVID-19, which has been declared by the World Health Organization to be a “public health emergency of international concern,” has rapidly spread across the globe and is disrupting worldwide economic activity and –in particular– the travel industry. Countries around the world, including across Latin America, have adopted extraordinary measures to limit the spread of COVID-19, including imposing travel restrictions and bans, closing borders, establishing restrictions on public gatherings, instructing residents to practice social distancing, requiring closures of non-essential businesses, issuing stay at home advisories and orders, implementing quarantines and similar actions. Depending on how the spread of the virus continues to evolve, governments may extend these measures for longer periods, or re-implement these measures in the future, in order to avoid relapses even after the virus is contained.

The impact to date of the COVID-19 pandemic on global economic conditions and on the travel industry has been sudden and severe. The pandemic has significantly increased economic uncertainty and is likely to cause a global recession. Moreover, leisure travel across the world has come to a virtually immediate and complete halt during the past weeks. We cannot predict how long the COVID-19 pandemic will continue or how long current or future travel restrictions will remain in place. Furthermore, even if the initial outbreaks of COVID-19 subside and limits on travel are lifted, we cannot predict whether subsequent outbreaks will reoccur, whether governments will implement longer-term measures that continue to affect travel, when the economy and consumer sentiment will recover, whether consumer’s travel behavior will change, or if there will be other ongoing disruptions to the volume and value of transactions in the travel industry. As a result, the negative impact of COVID-19 may continue well beyond the containment of the pandemic.

The COVID-19 pandemic is significantly adversely affecting our business, results of operations and cash flows. Demand for travel began showing early initial signs of weakness by the beginning of March 2020. Within a matter of days, with more news of the potentially extensive spread of the virus to other parts of the world, travel demand began to decline significantly, and then the decline accelerated precipitously as governments implemented measures to limit the spread of the virus. Since mid-March, we began experiencing—and continue to experience—an almost complete stoppage in new travel booking, and a spike in customer cancellations or reschedulings of existing bookings for substantially all near term travel.

On March 20, 2020, we withdrew our guidance for the first quarter of 2020, until there is a better understanding of the duration and depth of significantly reduced travel demand resulting from the COVID-19 pandemic and governments’ extraordinary measures. Because the extent of the COVID-19 pandemic and its impact on travel across the world cannot be predicted at this time, the full extent to which COVID-19 will impact our business, results of operations and cash flows is currently unknown, although the effects could be severe. We have not previously experienced such an unprecedented decline in travel demand, however, we believe that the severity of the impact on our Company will depend, to a large extent, on how long the crisis continues.

 

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As an intermediary in the travel industry, a significant portion of our revenue is affected by the operations of our travel suppliers. We cannot predict the financial and operational impact that the COVID-19 pandemic will ultimately have on companies in the travel industry, nor whether any of our suppliers will significantly reduce or terminate their operations and product offerings. The effects of the pandemic and governments’ measures have forced many travel suppliers to temporarily reduce operations and to seek government support in order to maintain their businesses. The suspension or termination of services by major travel suppliers, in particular airlines, would negatively impact the products we can offer to our travel customers. Additionally, it could also adversely affect our ability to benefit from advance payments that we have made to these suppliers, and could result in complaints or lawsuits against us by travel customers seeking refunds for lost bookings. Although we believe such claims would be without merit, we cannot assure you that our position will prevail in all cases or that such complaints will not affect our business.

We are taking measures to mitigate the potential effects on our Company from the pandemic, by protecting the health and safety of our employees, focusing on travel customer care operations to address the disruption in travel plans, and by reducing our expenses and preserving cash. The ongoing effects of COVID-19 could adversely affect our liquidity, as a result of the loss in revenue and, to a lesser extent, the increase in cancellation payments. We are currently taking additional actions to improve liquidity during this time, which include, among other things, limiting our marketing expenditures as well as non-essential expenditures, reducing a part of our workforce and temporarily reducing the salaries, and negotiating payment terms with suppliers. While we believe these measures are important to strengthen our Company during the crisis, they could have adverse consequences for our business such as increased restructuring costs and labor or other lawsuits, and could affect our future performance. Additionally, we cannot assure you that our business will not require additional funds for operating activities in the future, particularly if the effects of the pandemic persist, nor can we assure that we will have access to future funding on favorable terms or at all.

We are subject to the risks generally associated with doing business in Latin America.

Our business serves the Latin American travel industry and substantially all of our revenue is derived from Latin American countries. Substantially all of our operations are located in Latin America. Moreover, we have significant revenue from Brazil and Argentina as well as other Latin American countries. In 2019, Brazil accounted for 39% of our transactions and Argentina accounted for 22%. In addition, if our acquisition of Best Day Travel Group is consummated, our exposure to Mexico would increase significantly. As a result, we are subject to the risks generally associated with doing business in the region, including:

 

   

political, social and macroeconomic instability;

 

   

cycles of severe economic downturns;

 

   

currency devaluations and fluctuations;

 

   

periods of high inflation;

 

   

availability, quality and level of usage of the internet and e-commerce;

 

   

high levels of credit risk, fraud and lack of secure payment methods;

 

   

uncertainty or changes in governmental regulation, including applicable to travel services operations and internet and e-commerce services;

 

   

uncertainty or changes in tax laws and regulations;

 

   

limited access to financing, both for companies and for consumers;

 

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exchange and capital controls;

 

   

limited infrastructure, including in the travel and technology sectors;

 

   

adverse labor conditions and difficulties in hiring, training and retaining qualified personnel;

 

   

the challenges of doing business across a region with multiple languages, different currencies and regulatory regimes that varies from country to country; and

 

   

the impact of adverse global conditions in the region.

Any of these risks could have a material adverse effect on our business, financial condition and results of operations. For more information, see “—Risks Related to Latin America.”

General declines or disruptions in the travel industry may adversely affect our business and results of operations.

Our business is significantly affected by the trends that occur in the travel industry. As the travel industry is highly sensitive to business and personal discretionary spending levels, it tends to decline during general economic downturns. Trends or events that tend to reduce travel and are likely to reduce our revenue include:

 

   

health-related risks, such as the ongoing COVID-19 pandemic, or future outbreaks of Zika virus, H1N1 influenza, Ebola virus, yellow fever, avian flu, or any other serious contagious diseases;

 

   

terrorist attacks or threats of terrorist attacks or wars;

 

   

fluctuations in currency exchange rates;

 

   

increased prices in the airline ticketing, hotel, or other travel-related sectors;

 

   

significant changes in oil prices;

 

   

travel-related strikes or labor unrest, bankruptcies or liquidations;

 

   

travel-related accidents or the grounding of aircraft due to safety or other concerns;

 

   

political unrest;

 

   

high levels of crime;

 

   

natural disasters or severe weather conditions, including volcanic eruptions, hurricanes, flooding or earthquakes;

 

   

changes in immigration policy; and

 

   

travel restrictions or other security procedures implemented in connection with any major events, particularly those that affect travel by Latin Americans within their respective countries, across the region and outbound from the region to the rest of the world.

We could be severely and adversely affected by declines or disruptions in the travel industry and, in many cases, have little or no control over the occurrence of such events. Such events could result in a decrease in demand for our travel services. Any decrease in demand, depending on the scope and duration, could significantly and adversely affect our business and financial performance over the short and long term.

 

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Our business and results of operations are adversely affected by macroeconomic conditions.

Consumer purchases of discretionary items generally decline during periods of recession and other periods in which disposable income is adversely affected. As a substantial portion of travel expenditure, for both business and leisure, is discretionary, the travel industry tends to experience weak or reduced demand during economic downturns.

General adverse economic conditions, including the possibility of recessionary conditions in Latin America or a worldwide economic slowdown, would adversely impact our business, financial condition and results of operations. Past weakness and uncertainty in the global economy and in Latin America have negatively impacted consumer spending patterns and demand for travel services and may continue to do so in the future. For example, consumer spending patterns and demand for travel services were negatively impacted by the 2008-2009 global financial crisis that arose in the United States, as well as the recession in Brazil of 2015-2016, the Argentine financial crisis of 2001-2002 and recession of 2018 and 2019.

As an intermediary in the travel industry, a significant portion of our revenue is affected by prices charged by our travel suppliers. During periods of poor economic conditions, airlines and hotels tend to reduce rates or offer discounted sales to stimulate demand, thereby reducing our commission-based income. A slowdown in economic conditions may also result in a decrease in transaction volumes and adversely affect our revenue, including our consumer fee-based income. It is difficult to predict the effects of the uncertainty in global economic conditions. If economic conditions decline globally or in Latin America, our business, financial condition and results of operations could be adversely impacted.

Moreover, the ongoing COVID-19 pandemic has significantly increased economic uncertainty and is likely to result in a global recession, which may continue to adversely affect consumer spending and travel demand even after the health concerns of the virus have subsided.

We are exposed to fluctuations in currency exchange rates.

Because we conduct our business outside the United States and receive almost all of our revenue in currencies other than the dollar, but report our results in dollars, we face exposure to adverse movements in currency exchange rates. The currencies of certain countries where we operate, including Brazil and Argentina, have historically experienced significant devaluations. The Brazilian real depreciated 2%, 17% and 4% during 2017, 2018 and 2019, respectively; while the Argentine peso depreciated 18%, 51% and 59% during 2017, 2018 and 2019, respectively. The results of operations in the countries where we operate are exposed to foreign exchange rate fluctuations as the financial results of the applicable subsidiaries are translated from the local currency into dollars upon consolidation. If the dollar weakens against foreign currencies, the translation of these foreign-currency-denominated transactions will typically result in increased revenue and operating expenses, and our revenue and operating expenses will typically decrease if the dollar strengthens. Moreover, if the dollar strengthens against the foreign currencies of countries in which we operate, the purchasing power of our travel customers from those countries could be negatively affected by potentially increased prices in local currencies, and we could experience a reduction in the demand for our travel services.

Additionally, foreign exchange exposure also arises from pre-pay transactions, where we accept upfront payments for bookings in the travel customer’s home currency, but payment to the hotel is not due until after the travel customer checks out, and is paid by us in the hotel’s home currency. We are therefore exposed to foreign exchange risk between the time of the initial reservation and the time when the hotel is paid.

We minimize our foreign currency exposures by managing natural hedges, netting our current assets and current liabilities in similarly denominated foreign currencies, and managing short term loans and investments for hedging purposes. Additionally, from time to time we enter into derivative transactions. However, depending on the size of the exposures and the relative movements of exchange rates, if we choose not to hedge or fail to hedge effectively our exposure, we could experience a material adverse effect on our consolidated financial statements and financial condition.

 

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We incurred operating losses in 2019 and may experience earnings declines or net losses in the future.

We incurred operating losses for the year ended December 31, 2019. We cannot assure you that we can sustain profitability or avoid net losses in the future. Our ability to remain profitable depends on various factors, including our ability to generate additional transaction volume and revenue and control our costs and expenses. We may incur significant losses in the future for a number of reasons, including the other risks described in this Annual Report, and we may further encounter unforeseen expenses, difficulties, complications, delays and other unknown events. If our costs and expenses increase at a more rapid rate than our revenue, we may not be able to sustain profitability and may incur losses.

If we are unable to maintain or increase consumer traffic to our sites and our conversion rates, our business and results of operations would be harmed.

Our ability to generate revenue depends, in part, on our ability to attract consumers to our platform. If we fail to maintain or increase consumer traffic and our conversion rates, our ability to grow our revenue could be negatively affected. We expect that our efforts to maintain or increase traffic are likely to include, among other things, significant increases to our marketing expenditures. We cannot assure you that any increases in our expenses will be successful in generating additional consumer traffic.

There are many factors that could negatively affect user retention, growth, and engagement, including if:

 

   

we fail to offer compelling products;

 

   

users increasingly engage with competing products instead of ours;

 

   

we fail to introduce new and exciting products and services or those we introduce are poorly received;

 

   

our websites or mobile apps fail to operate effectively on the iOS and Android mobile operating systems;

 

   

we do not provide a compelling user experience;

 

   

we are unable to combat spam or other hostile or inappropriate usage on our products, or if our anti-fraud measures are too conservative and we reject too many bona fide transactions;

 

   

there are changes in user sentiment about the quality or usefulness of our existing products;

 

   

there are concerns about the privacy implications, safety, or security of our products;

 

   

our suppliers decide to discontinue the offering of their products through our platform;

 

   

technical or other problems frustrate the user experience, particularly if those problems prevent us from delivering our products in a fast and reliable manner;

 

   

we fail to provide adequate service to our travel customers and travel suppliers;

 

   

we or other companies in our industry are the subject of adverse media reports or other negative publicity; or

 

   

we do not maintain our brand image or our reputation is damaged.

Any decrease to user retention, growth, or engagement could render our products less attractive to consumers and would seriously harm our business.

 

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We operate in a highly competitive and evolving market, and pressure from existing and new companies may adversely affect our business and results of operations.

The travel market in Latin America and worldwide is intensely competitive and rapidly evolving. Factors affecting our competitive success include, among other things, price, availability and breadth of choice of travel services and products, brand recognition, customer service, fees charged to travelers, ease of use, accessibility, consumer payment options and reliability. We currently compete with both established and emerging providers of travel services and products, including regional offline travel agency chains and tour operators, global OTAs with presence in Latin America and smaller, country-specific online and offline travel agencies and tour operators. In addition, our travel customers have the option to book travel directly with airlines, hotels and other travel service providers who are increasingly focused on further refining their online offerings. Large, established internet search engines have also launched applications offering travel itineraries in destinations around the world, and meta-search companies who can aggregate travel search results also compete against us for travel customers. We also face competition from Airbnb and other providers acting in the alternative accommodations space. In addition, we face price competition from new entrants that offer discounted rates and other incentives from time to time, as well as social media channels that market travel products and experiences. Some of our competitors have significantly greater financial and other resources than us. From time to time we may be required to reduce service fees and revenue margins in order to compete effectively and maintain or gain travel customers, brand awareness and supplier relationships.

Further, we may also face increased competition from new entrants in our industry. We cannot assure you that we will be able to successfully compete against existing or new competitors. If we are not able to compete effectively, our business, financial condition and results of operations may be adversely affected.

Some travel suppliers are seeking to decrease their reliance on distribution intermediaries like us by promoting direct distribution channels. Many airlines, hotels, car rental companies and tour operators have call centers and have established their own travel distribution websites and mobile applications. From time to time, travel suppliers offer advantages, such as bonus loyalty awards and lower transaction fees or discounted prices, when their services and products are purchased from supplier-related channels. We also compete with competitors which may offer less content, functionality and marketing reach but at a relatively lower cost to suppliers. If our access to supplier-provided content or features were to be diminished either relative to our competitors or in absolute terms or if we are unable to compete effectively with travel supplier-related channels or other competitors, our business could be materially and adversely affected.

If we are unable to maintain existing, and establish new, arrangements with travel suppliers, our business may be adversely affected.

Our business is dependent on our ability to maintain our relationships and arrangements with existing suppliers, such as airlines, global distribution system (GDS), service providers, hotels, hotel consolidators and destination services companies, car rental companies, bus operators, cruise companies and travel assistance providers, as well as our ability to establish and maintain relationships with new travel suppliers. In addition, the hotel and other lodging products that we offer through our platform for all countries outside Latin America are provided to us substantially all by affiliates of Expedia, and Expedia is the preferred provider to us of hotel and other lodging products in Latin America, pursuant to a lodging outsourcing agreement (the “Expedia Outsourcing Agreement”). In the event the Expedia Outsourcing Agreement is terminated, we may be required to pay a $125.0 million termination fee. For more information on our relationships with Expedia, see “Item 7. Major Shareholders and Related Party Transactions — B. Related Party — Relationship with Expedia.” Adverse changes in key arrangements with our suppliers, including an inability of any key travel supplier to fulfill its payment obligation to us in a timely manner, increasing industry consolidation or our inability to enter into or renew arrangements with these parties on favorable terms, if at all, could reduce the amount, quality, pricing and breadth of the travel services and products that we are able to offer, which could adversely affect our business, financial condition and results of operations. For example, American Airlines discontinued our access to its inventory from July 2013 to March 2016, until a mutually satisfactory settlement was reached and American Airlines resumed supplying us with airline tickets.

 

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In addition, adverse economic developments affecting the travel industry could also adversely impact our ability to maintain our existing relationships and arrangements with one or more of our suppliers. We cannot assure you that our agreements or arrangements with our travel suppliers or travel-related service providers will continue or that our travel suppliers or travel-related service providers will not further reduce commissions, terminate our contracts, make their products or services unavailable to us as part of exclusive arrangements with our competitors or default on or dispute their payment or other obligations towards us, any of which could reduce our revenue and margins or may require us to initiate legal or arbitral proceedings to enforce their contractual payment obligations, which may adversely affect our business, financial condition and results of operations.

We rely on the value of our brands, and any failure to maintain or enhance consumer awareness of our brands could adversely affect our business and results of operations.

We believe continued investment in our brand is critical to retain and expand our business. The travel customers awareness of our brand, which we foster via our online and offline marketing throughout our target markets in Latin America, has become one of the most important drivers of growth in our travel customer base, and we believe that our brands are well recognized in the Latin American travel market. We have invested in developing and promoting our brand since our inception and expect to continue to spend on maintaining the value of our brands to enable us to compete against increased spending by competitors and to allow us to expand into new services or increase our penetration in certain markets where our brands are less well known.

We cannot assure you that we will be able to successfully maintain or enhance consumer awareness of our brands. Even if we are successful in our branding efforts, such efforts may not be cost-effective. Our marketing costs may also increase as a result of inflation in media pricing. If we are unable to maintain or enhance consumer awareness of our brands and generate demand in a cost-effective manner, it would negatively impact our ability to compete in the travel industry and would have a material adverse effect on our business, financial condition and results of operations.

We rely on information technology to operate our business and maintain our competitiveness, and any failure to adapt to technological developments or industry trends could adversely affect our business.

We depend on the use of sophisticated information technology and systems, for search and reservation for airline tickets, hotels, and any of the other products that we offer on our platform, as well as payments, refunds, customer relationship management, communications and administration. As our operations grow in both size and scope, we must continuously improve and upgrade our systems and infrastructure to improve services, features and functionality, while maintaining the reliability and integrity of our systems and infrastructure in a cost-effective manner. Our future success also depends on our ability to upgrade our services and infrastructure ahead of rapidly evolving consumer demands while continuing to improve the performance, features and reliability of our service in response to competitive offerings.

We may not be able to maintain or replace our existing systems or introduce new technologies and systems as quickly as our competitors, in a cost-effective manner or at all. We may also be unable to devote adequate financial resources to develop or acquire new technologies and systems in the future.

We may not be able to use new technologies effectively, or we may fail to adapt our websites, mobile apps, transaction processing systems and network infrastructure to meet consumer requirements or emerging industry standards, comply with government regulation or prevent fraud or security breaches. If we face material delays in introducing new or enhanced solutions, our travel customers may forego the use of our services in favor of those of our competitors. Any of these events could have a material adverse effect on our business, financial condition and results of operations.

Some of our airline suppliers (including our GDS service providers) may reduce or eliminate the commission and other compensation they pay to us for the sale of airline tickets and this could adversely affect our business and results of operations.

In our air business, we generate revenue through commissions and incentive payments from airline suppliers (including our GDS service providers) and service fees charged to our travel customers. Our airline suppliers (including our GDS service providers) may reduce or eliminate the commissions, incentive payments or other compensation they pay to us. To the extent any of our airline suppliers (including our GDS service providers) reduce or eliminate the commissions, incentive payments or other compensation they pay to us, our revenue may be

 

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reduced unless we are able to adequately mitigate such reduction by increasing the service fee we charge to our travel customers or increasing our transaction volume in a sustainable manner. However, any increase in service fees may also result in a loss of potential travel customers. In addition, our arrangement with the airlines that supply airline tickets to us may limit the amount of service fee that we are able to charge our travel customers. Our business would also be negatively impacted if competition or regulation in the Latin American travel industry causes us to have to reduce or eliminate our service fees.

Our business and results of operations could be adversely affected when one or more of our major travel suppliers suffers a deterioration in its financial condition or restructures its operations.

As we are an intermediary in the travel industry, a substantial portion of our revenue is affected by the prices charged by our suppliers, including airlines, GDS service providers, hotels, destination service providers, car rental suppliers, tour operators, supply aggregators (such as other OTAs), cruise operators, bus service providers and travel assistance providers, and the volume of products offered by our suppliers. As a result, if one or more of our major suppliers suffers a deterioration in its financial condition or restructures its operations, it could adversely affect our business, financial condition and results of operations. Accordingly, our business may be negatively affected by adverse changes in the markets in which our suppliers operate.

In particular, as a substantial portion of our revenue depends on our sales of airline flights, we could be adversely affected by changes in the airline industry, including consolidation or bankruptcies and liquidations, and in many cases, we will have no control over such changes. Any consolidation in the airline industry in the future would result in fewer airlines with potentially more bargaining power with respect to the commissions and incentive payments or other fees they pay to intermediaries. Events or weaknesses specific to the airline industry that could negatively affect our business include air fare fluctuations, airport, airspace and landing fee increases, seat capacity constraints, removal of destinations or flight routes, travel-related strikes or labor unrest, imposition of taxes or surcharges by regulatory authorities and fuel price volatility. While decreases in prices for flights and other travel products generally increase demand, such price decreases generally also have a negative effect on the commissions we earn, particularly in our non-flight business, which is more dependent on commissions than our flight business. The overall effect of a price increase or decrease is therefore uncertain.

In the past, major airlines have filed for bankruptcy, exited bankruptcy, or discussed publicly the risk of bankruptcy. In addition, some of these and other airlines have merged, or discussed merging, with other airlines. If one of our major airline suppliers merges or consolidates with, or is acquired by, another company that either does not participate in the GDS systems we use, or that participates in such systems but at substantially lower levels, the surviving company may elect not to make supply available to us or may elect to do so at lower levels than the previous supplier. Similarly, in the event that one of our major airline suppliers voluntarily or involuntarily declares bankruptcy and is subsequently unable to successfully emerge from bankruptcy, and we are unable to replace such supplier, our business would be adversely affected. Further consolidation of one or more of the major airlines could result in further capacity reductions, a reduction in the number of airline tickets available for booking on our website and increased air fares, which may have a negative impact on demand for travel products.

The COVID-19 pandemic and the extraordinary measures adopted by the governments are disrupting the global economy and the travel industry in particular, and the business, results of operations and financial condition of many of our suppliers have been adversely affected, and may be further affected, if the disruption to the economy and the industry continues. We cannot predict the financial and operational impact that the COVID-19 pandemic will ultimately have on companies in the travel industry, nor whether any of our suppliers will significantly reduce or terminate their operations and product offerings. The effects of the pandemic and governments’ measures have forced many travel suppliers to temporarily reduce operations and to seek government support in order to maintain their businesses. The suspension or termination of services by major travel suppliers, in particular airlines, would adversely affect the products we can offer to our travel customers. It also could adversely affect the Company’s ability to benefit from advance payments that we have made to these suppliers, and could result in complaints or lawsuits against us by travel customers seeking refunds for lost bookings. Although we believe such claims would be without merit, we cannot assure you that our position will prevail in all cases or that such complaints will not affect our business.

 

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Governments are approving large stimulus packages to mitigate the effects of the sudden decline in economic activity caused by the pandemic; however, we cannot predict the extent to which these measures will be sufficient to restore or sustain the business and financial condition of companies in the travel industry. Moreover, Latin America-based airlines may have more limited access to government stimulus packages to the extent Latin American governments have less resources to support local economies.

We are subject to payments-related fraud risks.

We are held liable for accepting fraudulent bookings on our platform and other bookings for which payment is successfully disputed by the cardholder, both of which lead to the reversal of payments received by us for such bookings (referred to as a “chargeback”). Our results of operations may be negatively affected by our acceptance of fraudulent bookings made using credit cards, as occurred in 2015, when there was an increase in fraud in the Latin American travel industry, particularly in Brazil. In the fourth quarter of 2015, we experienced an increase in attempted fraudulent transactions in Brazil, resulting in both the first quarter of 2016 and the fourth quarter of 2015 in an increase in fraud expense in the form of chargebacks. We also experienced a decrease in gross bookings in both quarters, as we imposed more restrictive anti-fraud protocol in response to the uptick in fraudulent transactions that resulted in more rejections of legitimate transactions. Our ability to detect and combat fraud, which has become increasingly common and sophisticated, may be negatively impacted by the adoption of new payment methods, the emergence and innovation of new technology platforms, including smartphones, tablets and other mobile devices, and our expansion, including into geographies with a history of elevated fraudulent activity. If we are unable to effectively combat fraud on our platform or if we otherwise experience increased levels of chargebacks, our results of operations could be materially adversely affected.

We have agreements with companies that process travel customers’ credit and debit card transactions for the facilitation of travel customer bookings of travel services from our travel suppliers. These agreements allow these processing companies, under certain conditions, to hold an amount of our cash (referred to as a “holdback”) or require us to otherwise post security equal to a portion of bookings that have been processed by such companies. These processing companies may be entitled to a holdback or suspension of processing services upon the occurrence of specified events, including material adverse changes in our financial condition. Moreover, there can be no assurances that the rates we pay for the processing of travel customer’s credit and debit card transactions will not increase, which could reduce our revenue thereby adversely affecting our business and financial performance.

Moreover, credit card networks, such as Visa and MasterCard, have adopted rules and regulations that apply to all merchants which process and accept credit cards and include the Payment Card Industry Data Security Standards (“PCI DSS”). Under these rules, we are required to adopt and implement internal controls over the use, storage and security of card data. We are currently PCI DSS certified and in compliance with PCI DSS. We assess our compliance with PCI DSS rules on a periodic basis and make necessary improvements to our internal controls as needed. Failure to comply may prevent us from processing or accepting credit cards.

In addition, when onboarding suppliers to our platform, we may fail to identify falsified or stolen supplier credentials, which may result in fraudulent bookings or unauthorized access to personal or confidential information of users of our websites and mobile applications. A fraudulent supplier scheme could also result in negative publicity and damage to our reputation, and could cause users of our websites and mobile applications to lose confidence in the quality of our services. Any of these events would have a negative effect on the value of our brands, which could have an adverse impact on our financial performance.

Any system interruption, security breaches or lack of sufficient redundancy in our information systems may harm our businesses.

We rely on information technology systems, including the internet and third-party hosted services, to support a variety of business processes including booking transactions, and activities and to store sensitive data, including our proprietary business information and that of our suppliers, personally identifiable information and other information of our travel customers and employees and data with respect to invoicing and the collection of payments, accounting and procurement activities. In addition, we rely on our information technology systems to process financial information and results of operations for internal reporting purposes and to comply with financial reporting, legal, and tax requirements. The risk of a cybersecurity-related attack, intrusion, or disruption, including by criminal

 

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organizations, hacktivists, foreign governments, and terrorists, is persistent. We have experienced and may in the future experience system interruptions that make some or all of these systems unavailable or prevent us from efficiently fulfilling orders or providing services to third parties. Interruptions of this nature could include security intrusions and attacks on our systems for fraud or service interruption. Significant interruptions, outages or delays in our internal systems, or systems of third parties that we rely upon—including multiple co-location providers for data centers, cloud computing providers for application hosting, and network access providers—and network access, or deterioration in the performance of such systems, would impair our ability to process transactions, decrease our quality of service that we can offer to our travel customers, damage our reputation and brands, increase our costs and/or cause losses.

Potential security breaches to our systems or the systems of our service providers, whether resulting from internal or external sources, could significantly harm our business. We devote significant resources to network security, monitoring and testing, employee training, and other security measures, but we cannot assure you that these measures will prevent all possible security breaches or attacks. A party, whether internal or external, that is able to circumvent our security systems could misappropriate travel customers’ or employees’ information, proprietary information or other business and financial data or cause significant interruptions in our operations. We may need to expend significant resources to protect against security breaches or to address problems caused by breaches, and reductions in website availability could cause a loss of substantial business volume during the occurrence of any such incident. Because the techniques used to sabotage security change frequently, often are not recognized until launched against a target and may originate from less regulated and remote areas around the world, we may be unable to proactively address these techniques or to implement adequate preventive measures. We have obtained cyber insurance, however we cannot assure you that our insurance will be sufficient to protect against our losses or will cover all potential incidents. Moreover, security breaches could result in negative publicity and damage to our reputation, exposure to risk of loss or litigation and possible liability due to regulatory penalties and sanctions or pursuant to our contractual arrangements with payment card processors for associated expenses and penalties. Security breaches could also cause travel customers and potential users and our suppliers to lose confidence in our security, which would have a negative effect on the value of our brands. Failure to adequately protect against attacks or intrusions, whether for our own systems or those of our suppliers, could expose us to security breaches that could have an adverse impact on our financial performance.

In addition, we cannot assure you that our backup systems or contingency plans will sustain critical aspects of our operations or business processes in all circumstances, many other systems are not fully redundant and our disaster recovery or business continuity planning may not be sufficient. Fire, flood, power loss, telecommunications failure, break-ins, earthquakes, acts of war or terrorism, acts of God, computer viruses, electronic intrusion attempts from both external and internal sources and similar events or disruptions may damage or impact or interrupt computer or communications systems or business processes at any time. Although we have put measures in place to protect certain portions of our facilities and assets, any of these events could cause system interruption, delays and loss of critical data, and could prevent us from providing services to our travel customers and/or third parties for a significant period of time. Remediation may be costly and we may not have adequate insurance to cover such costs. Moreover, the costs of enhancing infrastructure to attain improved stability and redundancy may be time consuming and expensive and may require resources and expertise that are difficult to obtain.

Our ability to attract, train and retain executives and other qualified employees, particularly highly-skilled IT professionals, is critical to our business and future growth.

Our business and future success is substantially dependent on the continued services and performance of our key executives, senior management and skilled personnel, particularly personnel with experience in our industry and our information technology and systems. Any of these individuals may choose to terminate their employment with us at any time and we cannot assure you that we will be able to retain these employees or find adequate replacements, if at all. The specialized skills we require can be difficult, time-consuming and expensive to acquire and/or develop and, as a result, these skills are often in short supply. A lengthy period of time may be required to hire and train replacement personnel when skilled personnel depart our company. Our ability to compete effectively depends on our ability to attract new employees and to retain and motivate our existing employees. We may be required to increase our levels of employee compensation more rapidly than in the past to remain competitive in attracting the quality of employees that our business requires. Competition for these personnel is intense, and we cannot assure you that we will be able to successfully attract, integrate, train, retain, motivate and manage sufficiently qualified personnel. If we do not succeed in attracting well-qualified employees or retaining or motivating existing employees, our business and prospects for growth could be adversely affected.

 

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In addition, we compete for talented individuals not only with other companies in our industry but also with companies in other industries, such as software services, engineering services and financial services companies, among others, and there is a limited pool of individuals who have the skills and training needed to help us grow our company. High attrition rates of qualified personnel could have an adverse effect on our ability to expand our business, as well as cause us to incur greater personnel expenses and training costs.

Moreover, while we sometimes require our senior management to sign non-compete agreements, typically for a period of one year following termination, we cannot assure you that our former employees will not compete with us in the future. In addition, these non-compete agreements may be difficult to enforce in certain Latin-American jurisdictions.

We rely on third-party systems and service providers and any disruption or adverse change in their businesses could have a material adverse effect on our business.

We currently rely on a variety of third-party systems, service providers and software companies, including the GDS and other electronic central reservation systems used by airlines, various channel managing systems and reservation systems used by other suppliers, as well as other technologies used by payment gateway providers. In particular, we rely on third parties for:

 

   

the hosting of our websites;

 

   

certain software underlying our technology platform;

 

   

transportation ticketing agencies to issue transportation tickets and travel assistance products, confirmations and deliveries;

 

   

third-party local tour operators to deliver on-site services to our packaged-tour customers;

 

   

assistance in conducting searches for airfares and process air ticket bookings;

 

   

processing hotel reservations for hotels not connected to our management system;

 

   

processing credit card, debit card and net banking payments;

 

   

providing computer infrastructure critical to our business; and

 

   

providing customer relationship management (CRM) services.

Any interruption or deterioration in performance of these third-party systems and services could have a material adverse effect on our business. Further, the information provided to us by certain of these third-party systems may not always be accurate due to either technical glitches or human error, and we may incur monetary and/or reputational loss as a result.

Our success is also dependent on our ability to maintain our relationships with these third-party systems and service providers. In the event our arrangements with any of these third parties are impaired or terminated, we may not be able to find an adequate alternative source of systems support on a timely basis or on commercially reasonable terms, which could result in significant additional costs or disruptions to our business. Any security breach at one of these companies could also affect our travel customers and harm our business.

 

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We rely on banks or payment processors to collect payments from travel customers and facilitate payments to suppliers, and changes to credit card association fees, rules or practices may adversely affect our business.

We rely on banks or payment processors to process collections and payments, and we pay a fee for this service. In the countries where we operate, the number of processors is limited so there is little or no competition among processors. From time to time, credit card associations may increase the interchange fees that they charge for each transaction using one of their cards.

For certain payment methods, including credit cards, we pay transaction and other fees, which may increase over time and raise our operating costs, lowering profitability. We rely on third parties to provide payment processing services and it could disrupt our business if these companies become unwilling or unable to provide these services to us. If we fail to comply with these third-party servicers’ rules or requirements, or if our data security systems are breached or compromised (similar to the increase in fraud attempts we experienced in the fourth quarter of 2015 in Brazil), we may be liable for chargebacks, credit card issuing banks’ costs, fines and higher transaction fees and we may lose our ability to accept credit card payments from our travel customers, process electronic funds transfers, or facilitate other types of online payments. If any of these situations were to occur, our business and results of operations could be adversely affected.

Our business depends on the availability of credit cards and financing options for consumers.

Our business is highly dependent on the availability of credit cards and financing options for consumers. In 2019, 2018 and 2017, substantially all our net sales were derived from payments effected through credit cards. Moreover, approximately 57%, 57% and 55% of transactions in 2019, 2018 and 2017 were paid by installments through bank financing options, respectively. As a result, the continued growth of our business is also partially dependent on the expansion of credit card penetration in Latin America, which may never reach a percentage similar to more developed countries for reasons that are beyond our control, such as low credit availability for a significant portion of the population in such countries. The provision of credit cards and other consumer financing depends on the product offerings at local and regional banks operating in the countries we serve. In the past, banking systems in Latin America have suffered disruptions and significantly limited availability and increased cost of consumer credit. Banks may also change their product offerings that they provide to consumers, or may change the availability or costs of such products, due to credit, regulations or other reasons beyond our control.

We rely on various banks to provide financing to our travel customers who elect to use an installment plan payment option. Under our agreements with local and regional banks, we offer consumers the possibility of financing their purchases under installment plans established, offered and administered by the credit card holders’ issuing banks. Under these agreements, the banks provide the financing arrangements to the consumers and they assume the risk of any potential payment default or delinquency by consumers. Some of our competitors also offer installment plans and may offer installment plans with more attractive terms. If we are not able to offer a competitive selection of installment plan financing at competitive rates, our business and results of operations could be adversely affected. Moreover, our agreements with local banks allow us to offer installment payment plans without assuming collection risk from the travel customer and receive payment in full (provided we choose not to factor such installment payments). We cannot assure you that local banks will not change their credit practices in the future. If our arrangements with local banks are impaired or terminated, our business and results of operations could be adversely affected.

Furthermore, as secure methods of payment for e-commerce transactions have not been widely adopted in certain emerging markets, consumers and other merchants may have relatively low confidence in the integrity of e-commerce transactions and remote payment mechanisms, which may have a material and adverse effect on our business prospects or limit our growth.

Our business could be negatively affected by changes in search engine algorithms and dynamics or other traffic-generating arrangements.

We utilize internet search engines such as Google, principally through the purchase of travel-related keywords, to generate a significant portion of the traffic to our websites. Search engines frequently update and change the algorithms that determine the placement and display of results of a user’s search. It is possible that any such update

 

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could negatively affect us or may negatively affect us relative to our competitors. We have developed search engine management tools that are designed to bid more efficiently on portfolios of travel-related keywords and we have a search engine management team dedicated to reviewing the return of investment of all biddings. We cannot assure you that these tools will be effective over the long term, as the search engine sector is dynamic and rapidly changing.

In addition, a significant amount of traffic is directed to our websites through participation in pay-per-click and display advertising campaigns on search engines, including Google, and travel metasearch engines, including TripAdvisor and Trivago. A search or metasearch engine could, for competitive or other purposes, adopt emerging technologies, such as voice, or alter its search algorithms or results, any of which could cause us to place lower in search query results, or exclude our website from the search query results. If a major search engine changes its algorithms or results in a manner that negatively affects the search engine ranking, paid or unpaid, of our websites, or if competitive dynamics impact the costs or effectiveness of search engine optimization, search engine marketing or other traffic-generating arrangements in a negative manner, this may have a material and adverse effect on our business and financial performance. In addition, certain metasearch engines have added or may add various forms of direct or assisted booking functionality to their sites. To the extent such functionality is promoted at the expense of traditional paid listings, this may reduce the amount of traffic to our websites or those of our affiliates.

Changes in internet browser functionality could result in a decrease in our overall revenue.

Some of our services and marketing activities rely on cookies, which are placed on individual browsers when users visit websites. We use these cookies to optimize our marketing campaigns, to better understand our users’ preferences and to detect and prevent fraudulent activity. Users can block or delete cookies through their browsers or “adblocking” software or apps. The most common internet browsers allow users to modify their browser settings to prevent cookies from being accepted by their browsers, or are set to block third-party cookies by default. Increased use of methods, software or apps that block cookies, or diminished interest of users resulting from our use of such marketing activities, may adversely affect our business, financial condition and results of operations.

Our business depends on the continued growth of e-commerce and the availability and reliability of the internet in Latin America.

The market for e-commerce is developing in Latin America. Our future revenue depends substantially on Latin American consumers’ widespread acceptance and use of the internet as a way to conduct commerce. The use of and interest in the internet (particularly as a way to conduct commerce) has grown rapidly since our inception and we cannot assure you that this acceptance, interest and use will continue in the regions we target. For us to grow our user base successfully, more consumers in our markets must accept and use new ways of conducting business and exchanging information.

The price of personal computers and/or mobile devices and internet access may limit our potential growth in countries with low levels of internet penetration and/or high levels of poverty. In addition, the infrastructure for the internet may not be able to support continued growth in the number of internet users, their frequency of use or their bandwidth requirements.

The internet could lose its viability in our target markets due to delays in telecommunications technological developments, or due to increased government regulation. If telecommunications services change or are not sufficiently available to support the internet, response times would be slower, which would adversely affect use of the internet and our service in particular. Moreover, lack of investment in mobile infrastructure in Latin America may limit the expansion of our mobile offerings, which is one of our key growth strategies.

Growth of e-commerce transactions in Latin America may be impeded by the lack of secure payment methods.

As secure methods of payment for e-commerce transactions have not been widely adopted in Latin America, both consumers and merchants may have a relatively low confidence level in the integrity of e-commerce transactions. Consumer confidence can be adversely affected by incidents of fraud and security breaches, including generally in the marketplace, which is beyond our control. Moreover, although we are PCI DSS certified, most of our suppliers with which we share information are not. The continued growth of e-commerce in the region will depend on consumers’ confidence in the safety of online payment methods.

 

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Our future success depends on our ability to expand and adapt our operations in a cost-effective and timely manner.

We plan to continue to expand our operations by developing and promoting new and complementary services and increasing our penetration in our markets. Moreover, we seek to expand our travel customer base as income levels and access to internet and banking services, such as credit card issuances, increase in Latin America. We may not succeed at expanding our operations in a cost-effective or timely manner, and our expansion efforts may not have the same or greater overall market acceptance as our current services. Furthermore, any new service that we launch that is not favorably received by consumers could damage our reputation and diminish the value of our brands. To expand our operations we will also need to spend significant amounts on development, operations and other resources, and this may place a strain on our management, financial and operational resources. Similarly, a lack of market acceptance of these services or our inability to generate satisfactory revenue from any expanded services to offset their cost could have a material adverse effect on our business, financial condition and results of operations.

We may not be successful in implementing our growth strategies.

Our growth strategies involve expanding our service and product offerings, enhancing our service platforms and potentially pursuing acquisitions or other strategic opportunities.

Our success in implementing our growth strategies could be affected by:

 

   

our ability to attract travel customers in a cost-effective manner, including in markets where we have lower brand awareness or operational history;

 

   

our ability to improve the competitiveness of our product offerings including by expanding the number of suppliers and negotiating fares and rates with existing and potential suppliers;

 

   

our ability to market and cross-sell our travel services and products to facilitate the expansion of our business;

 

   

our ability to compete effectively with existing and new entrants to the Latin American travel industry;

 

   

our ability to expand and promote our mobile platform and make it user-friendly;

 

   

our ability to build required technology;

 

   

our ability to expand our businesses through strategic acquisitions and successfully integrate such acquisitions;

 

   

the general condition of the global economy (particularly in Latin America) and continued growth in demand for travel services, particularly online;

 

   

the growth of the internet and mobile technology as a medium for commerce in Latin America; and

 

   

changes in the regulatory environments where we operate.

Many of these factors are beyond our control and we cannot assure you that we will succeed in implementing our strategies. Even if we are successful in executing our growth strategies, our different businesses may not grow at the same rate or with a uniform effect on our revenue and profitability.

 

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Acquisitions could present risks and disrupt our ongoing business.

We consider and evaluate acquisitions of, or significant investments in, complementary businesses as part of our business strategy. Acquisitions involve numerous risks, and any acquisition could have a material adverse effect on our business, results of operations and financial condition. In June and July 2019, we completed the acquisition of the Viajes Falabella travel companies in Chile, Argentina, Perú and Colombia (together, “Viajes Falabella”). In January 2020, we entered into an agreement to acquire Best Day Travel Group (“Best Day”), a leading travel agency in Mexico, with business in Argentina, Colombia, Brazil and Uruguay, subject to the occurrence of certain closing and business conditions, which are pending.

We may seek to undertake additional strategic acquisitions in the future. We cannot assure you that we will be successful in identifying opportunities and consummating acquisitions on favorable terms or at all. Depending on the size and timing of an acquisition, we may be required to raise future financing to consummate the acquisition.

Moreover, even if we are able to consummate a transaction, acquisitions may involve significant risks and uncertainties, which risks may include: distraction of management and other employees from our day-to-day operations and the development of new business opportunities; difficulties in integrating the operations of the acquired business and technology with our existing business and technology; greater than expected costs, liabilities, expenses and working capital requirements; challenges retaining travel customers or suppliers of acquired businesses; regulatory restrictions that prevent us from achieving the expected benefits of the acquisition; we may not derive the benefits such as operational or administrative synergies we expect from acquisitions, which may result in us committing capital resources and not receiving the expected returns; difficulties in modifying accounting standards rapidly; challenges in the ability to properly access and maintain an effective internal control environment over an acquired company to comply with public reporting requirements; problems assimilating or retaining employees; and other unidentified issues or contingencies not discovered in our pre-acquisition investigations and evaluations of those strategies and acquisitions.

We cannot assure that we will be able to consummate the acquisition of Best Day under the existing terms, under different terms or at all, and, if we are able to consummate the acquisition, we may not achieve the benefits we expect from the acquisition.

On January 27, 2020, we entered into an agreement to acquire Best Day, subject to the occurrence of certain closing and business conditions, which are pending.

While we anticipate that, subject to closing conditions, the closing of the acquisition may occur on or about May 2020, we can provide no assurance that we will be able to complete the acquisition on our anticipated timeframe, on the agreed terms, or at all. The purchase agreement is subject to a number of closing conditions, including regulatory approvals, in particular approval of the Mexican antitrust authorities, and certain business conditions. If we and/or the sellers do not satisfy these conditions in the manner or in the timeframe contemplated, the proposed acquisition may be delayed, modified or terminated.

We are monitoring, and having discussions with the sellers, regarding the impact of the COVID-19 pandemic and other developments on Best Day. We currently cannot predict how severe an impact the COVID-19 pandemic will have on the business, results of operations and financial condition of Best Day; nor can we predict whether, if the acquisition were consummated, we would be able to realize the intended benefits and synergies from the acquisition. We cannot assure you that we and the sellers will be able to consummate the acquisition of Best Day under the existing terms, under different terms, or at all. Under certain circumstances, we and the sellers may nonetheless be obligated by the terms of the purchase agreement to, or may be otherwise agree to, complete the acquisition.

The consummation of the acquisition would increase our business and operations in Mexico. As a result, our business and results of operations may be more affected by economic, political and social conditions in Mexico, including the country’s economy, fluctuations in the value of the Mexican peso, exchange control policies, inflation, interest rates, regulation, taxation, social instability, weather conditions and natural disasters, drug-related and other serious crime, and other developments in or affecting Mexico over which we have no control. In the past, Mexico has experienced several periods of slow or negative economic growth, high inflation, high interest rates, currency devaluation and other economic and social problems. These problems may worsen or reemerge in the future and could adversely affect our business and results of operations.

 

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

We have experienced significant expansion in recent years and anticipate that further expansion will be required to address potential growth in our travel customer base and market opportunities. This expansion has placed, and is expected to continue to place, significant demands on management and our operational and financial resources.

We must constantly improve our software, technology infrastructure, product offering and human resources to accommodate the increased use of our website. This upgrade process is expensive, and the increasing complexity and enhancement of our website result in higher costs. Failure to upgrade our technology, features, transaction processing systems, security infrastructure, or network infrastructure to accommodate increased traffic or transaction volume or the increased complexity of our website could materially harm our business. Adverse consequences could include unanticipated system disruptions, slower response times, degradation in levels of customer support, impaired quality of users’ experiences with our services and delays in reporting accurate financial information. Furthermore, we may need to enter into relationships with various strategic partners and other third-party service providers necessary to our business. The increased complexity of managing multiple commercial relationships could lead to execution problems that can affect current and future revenue and operating margins.

Our failure to manage growth effectively could have a material adverse effect on our business, results of operations and financial condition.

Internet regulation in the countries where we operate is scarce, and several legal issues related to the internet are uncertain.

Most of the countries where we operate do not have specific laws governing the liability of e-commerce business intermediaries, such as ourselves, for fraud, intellectual property infringement or other illegal activities committed by individual users or third-party infringing content hosted on a provider’s servers. This legal uncertainty allows for different judges or courts to decide very similar claims in different ways and establish contradictory case law.

In addition, we are subject to a variety of laws, decrees and regulations across the countries where we operate that affect e-commerce, electronic or mobile payments, tourism, data collection, data protection, privacy, anti-money laundering, taxation (including VAT or sales tax collection obligations), obligations to provide certain information to certain authorities about transactions which are processed through our platforms or about our users and those regulations applicable to consumer protection and businesses in general. However, it is not clear how existing laws governing issues such as general commercial activities, property ownership, copyrights and other intellectual property issues, taxation (including tax laws that require us to provide certain information about transactions consummated through our platforms or about our users) and personal privacy apply to online businesses. Many of these laws were adopted before the internet was available and, as a result, do not contemplate or address the unique issues of the internet.

Moreover, due to these areas of legal uncertainty, and the increasing popularity and use of the internet and other online services, it is possible that new laws and regulations will be adopted with respect to the internet or other online services. If laws relating to these issues are enacted, they may have a material adverse effect on our business, results of operations and financial condition.

We are subject to laws relating to the collection, use, storage and transfer of personally identifiable information about our users, especially financial information. Several jurisdictions have regulations in this area, and other jurisdictions are considering imposing additional restrictions or regulations. For example, in August 2018, Brazil approved its first comprehensive data protection law (“Lei Geral de Proteção de Dados Pessoais” or “LGPD”), which will become effective beginning August 2020. If we fail to comply with these laws, which in many cases apply not only to third-party transactions but also to international transfers of information or transfers of information to third parties with which we have commercial relations, we could be subject to significant penalties and negative publicity, which would adversely affect us. As of the date of this Annual Report, we continue working on the implementation of all necessary measures to comply with such data protection law.

 

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Because our services are accessible worldwide, other foreign jurisdictions may claim that we are required to comply with their laws. Laws regulating internet companies outside of the Latin American jurisdictions where we operate may be more restrictive to us than those in Latin America. In order to comply with these laws, we may have to change our business practices or restrict our services. We could be subject to penalties ranging from criminal prosecution, significant fines or outright bans on our services for failure to comply with foreign laws.

We process, store and use personal information, card payment information and other consumer data, which subjects us to risks stemming from possible failure to comply with governmental regulation and other legal obligations.

In our business, we use personal information, card payment information and other consumer data from users of our website and mobile applications. There are numerous laws regarding privacy and the storing, sharing, use, processing, transfer, disclosure and protection of personal information, card payment information and other consumer data, the scope of which are changing, subject to differing interpretations, and may be inconsistent between countries or conflict with other rules. We strive to comply with all applicable laws, policies, legal obligations and industry codes of conduct relating to privacy and data protection. It is possible, however, that these obligations may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or the practices of the company. Any failure or perceived failure by us, or our service providers, to comply with the privacy policies, privacy-related obligations to users or other third parties, or privacy related legal obligations, or any compromise of security that results in the unauthorized release or transfer of personally identifiable information, payment card information or other consumer data, may result in governmental enforcement actions, litigation or public statements against the Company by consumer advocacy groups or others and could cause our travel customers and members to lose trust in our Company, as well as subject us to bank fines, penalties or increased transaction costs, all of which could have an adverse effect on our business.

The regulatory framework for privacy issues is currently in flux and is likely to remain so for the foreseeable future. Practices regarding the collection, use, storage, transmission and security of personal information by companies operating over the internet have recently come under increased public scrutiny. Countries in Latin America are increasingly implementing new privacy regulations, resulting in additional compliance burdens and uncertainty as to how some of these laws will be interpreted.

Application of existing tax laws or regulations are subject to interpretation by taxing authorities.

The application of income and non-income tax laws and regulations to our products and services is subject to interpretation by the applicable taxing authorities across the multiple jurisdictions in which we operate our business. For example, in Brazil we are subject to corporate income tax (IRPJ), social contribution on net profits (CSLL), social contribution on total revenue (PIS and COFINS), withholding taxes, and a municipal tax on services (ISS). In Argentina, we are subject to income tax, value added tax, turnover tax and a new 30% tax (Tax for an Inclusive and Solidarity Argentina (PAIS for its acronym in Spanish)) on purchases made in foreign currencies.

In both countries, we are subject to transfer pricing rules applicable to cross-border operations with related parties or parties in tax havens or subject to privileged fiscal regimes. These taxing authorities may become more aggressive in their interpretation and/or enforcement of such laws and regulations over time, as governments are increasingly focused on ways to increase revenue. This may contribute to an increase in audit activity and harsher stances by tax authorities. As such, additional taxes or other assessments may be in excess of our current tax reserves or may require us to modify our business practices to reduce our exposure to additional taxes going forward, any of which could have a material adverse effect on our business, financial condition and results of operations.

While we believe we currently comply in all material respects with applicable tax laws and regulations in the jurisdictions in which we operate, tax authorities may determine that we owe additional taxes. Moreover, we may have historical tax contingencies across multiple jurisdictions, and while we have made provisions for those contingencies which we considered probable, the amount of total contingencies may exceed our provisions. In addition, in accordance with U.S. GAAP, we record provisions for contingencies based on probable loss or when otherwise required under accounting rules, but we do not record provisions for possible and remote losses.

 

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Significant judgment and estimation is required in determining our tax liabilities. In the ordinary course of our business, there are transactions and calculations, including intercompany transactions and cross-jurisdictional transfer pricing, for which the ultimate tax determination may be uncertain or otherwise subject to interpretation. Tax authorities may disagree with our intercompany charges, including the amount of or basis for such charges, cross-jurisdictional transfer pricing or other matters, and assess additional taxes. Although we believe our tax estimates are reasonable, the final determination of tax audits could be materially different from our historical income tax provisions and accruals, in which case we may be subject to additional tax liabilities, possibly including interest and penalties, which could have a material adverse effect on our cash flows and results of operations. Moreover, we have in the past and may in the future be required in certain jurisdictions to pay any such tax assessments prior to contesting their validity, which payments may be substantial.

Amendment to existing tax laws or regulations or enactment of new unfavorable tax laws or regulations could adversely affect our business and results of operations.

Many of the underlying laws or regulations imposing taxes and other obligations were established before the growth of the internet and e-commerce. If the tax or other laws or regulations were amended, or if new unfavorable laws or regulations were enacted, our tax payments or other obligations could increase, prospectively or retrospectively, which may subject us to interest and penalties, decrease the demand for our products and services if we pass on such costs to our travel customers, result in increased costs to update or expand our technical or administrative infrastructure or effectively limit the scope of our business activities if we decided not to conduct business in particular jurisdictions. As a result, these changes could have an adverse effect on our business, financial condition or results of operations.

Governments could adopt tax laws that increase our tax rate or tax liabilities or affect the carrying value of deferred tax assets or liabilities, including the termination of tax-free incentives or termination of treaties for the avoidance of double taxation. Any changes to tax laws could impact the tax treatment of our earnings and adversely affect our profitability. Our effective tax rate in the future could also be adversely affected by changes to our operating structure, changes in the mix of earnings in countries with differing statutory tax rates, or changes in the valuation of deferred tax assets and liabilities.

In addition, we have benefited from, and continue to benefit from, certain tax exemptions and incentive programs in various jurisdictions in which we have operations. When any of our tax exemptions or incentive programs expire or terminate, or if the applicable government withdraws or reduces the benefits of a tax exemption or incentive that we enjoy, our tax expense may materially increase and this increase may have a material impact on our results of operations. The applicable tax authorities may also disallow deductions claimed by us and assess additional taxable income on us in connection with their review of our tax returns. See “Item 4. Information on the Company — B. Business Overview — Regulation — Regulations Related to Taxation.”

New laws and regulations requiring economic substance in the BVI

On 1 January 2019 the Economic Substance (Companies and Limited Partnerships) Act, 2018 (the “ES Act”) came into force in the British Virgin Islands. The ES Act was enacted in direct response to a scoping paper issued by the European Union’s Code of Conduct Group (Business Taxation) in June 2018. The scoping paper (a) expressed concerns regarding so-called harmful tax competition and the potential “misuse” of offshore entities for profit-shifting; and (b) set out requirements that certain jurisdictions outside the European Union must adopt in order for the jurisdiction to avoid being “blacklisted” by the European Union.

Under the ES Act and related regulations and guidelines, companies incorporated in the BVI that are not tax resident in another jurisdiction and which carry on certain specified activities must establish and maintain ‘economic substance’ in the BVI. As we are tax resident in the United States, we believe these substance requirements should not apply to our Company.

We are subject to anti-corruption and economic sanctions laws and regulations in the jurisdictions in which we operate, including the U.S. Foreign Corrupt Practices Act and regulations administered and enforced by the U.S. Treasury Department’s Office of Foreign Assets Control. Failure to comply with these laws and regulations could negatively impact our business, our results of operations, and our financial condition.

We are subject to a number of anti-corruption and economic sanctions laws and regulations, including the U.S. Foreign Corrupt Practices Act (“FCPA”) and regulations administered and enforced by the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”). Failure to comply with these laws and regulations could negatively impact our business, our results of operations, and our financial condition.

 

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The FCPA and similar anti-bribery laws generally prohibit companies and their intermediaries from making improper payments or improperly providing anything of value to foreign officials, directly or indirectly, for the purpose of obtaining or keeping business and/or other benefits. The FCPA also requires maintenance of adequate record-keeping and internal accounting practices to accurately reflect transactions. Under the FCPA, companies operating in the United States may be held liable for actions taken by their strategic or local partners or representatives. Other jurisdictions in which we operate have adopted similar anti-corruption, anti-bribery and anti-kickback laws to which we are subject.

Economic sanctions and embargo laws and regulations, such as those administered and enforced by OFAC, vary in their application, as they do not all apply to the same covered persons or proscribe the same activities, and such sanctions and embargo laws and regulations may be amended or strengthened over time. Although we believe that we are in compliance with all applicable sanctions and embargo laws and regulations, and intend to maintain such compliance, there can be no assurance that we will be in compliance in the future, particularly as the scope of certain laws may be unclear and may be subject to changing interpretations.

Civil and criminal penalties may be imposed for violations of these laws. We operate in some countries which are viewed as high risk for corruption and/or economic sanctions issues. Despite our ongoing efforts to ensure compliance with the FCPA and similar laws, and economic sanctions laws and regulations, there can be no assurance that our directors, officers, employees, agents, and third-party intermediaries will comply with those laws and our policies, and we may be ultimately held responsible for any such non-compliance. If we or our directors or officers violate such laws or other similar laws governing the conduct of our business (including local laws), we or our directors or officers may be subject to criminal and civil penalties or other remedial measures, which could harm our reputation and have a material adverse impact on our business, financial condition, and results of operations. Any investigation of any actual or alleged violations of such laws could also harm our reputation or have an adverse impact on our business, financial condition, and results of operations.

We are, and may be in the future, involved in various legal proceedings, the outcomes of which could adversely affect our business and results of operations.

We are, and may be in the future, involved in various legal proceedings relating to allegations of our failure to comply with consumer protection, labor, tax or antitrust regulations, that could involve claims or sanctions for substantial amounts of money or for other relief or that might necessitate changes to our business or operations.

Our websites contain information about hotels, flights, popular vacation destinations and other travel-related topics. It is possible that if any information, accessible on our websites, contains errors or false or misleading information, third parties could take action against us for losses incurred in connection with the use of such information. In addition, because consumer protection laws in many of our markets provide for joint liability, travel customers may bring claims against us for a failure or deficiencies in the provision of a travel product or service by one of our suppliers that is outside of our control.

The defense of any of these actions is, and may continue to be, both time-consuming and expensive. We cannot assure you that we will prevail in these legal proceedings or in any future legal proceedings and if such disputes were to result in an unfavorable outcome, it could result in reputational damage and have a material adverse effect on our business, financial condition and results of operations. For a discussion of certain key legal proceedings relating to us, see “Item 4. Information on the Company — Business Overview — Legal Proceedings.”

We may not be able to adequately protect and enforce our intellectual property rights; and we could potentially face claims alleging that our technologies infringe the property rights of others.

Our websites and mobile applications rely on brands, domain names, technology and content. We protect our brands and domain names by relying on trademark and domain name registration in accordance with laws in Latin America. We have also entered into confidentiality and invention assignment agreements with our employees and certain

 

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contractors, as well as confidentiality agreements with certain suppliers and strategic partners, in order to protect our technology and content. We own our technology platform, which is comprised of applications that we develop in-house using primarily open source software. We have not registered our technology, however, because we believe it would be difficult to replicate and that it is adequately protected by the agreements we have in place. Additionally, our technology is constantly evolving and any registration may run the risk of protecting outdated technology. Even with these precautions, it may be possible for another party to copy or otherwise obtain and use our intellectual property without our authorization or to develop similar intellectual property independently. Effective trademark protection may not be available in every jurisdiction in which our services are made available, and policing unauthorized use of our intellectual property is difficult and expensive. Any misappropriation or violation of our rights could have a material adverse effect on our business. Furthermore, we may need to go to court or other tribunals to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. These proceedings might result in substantial costs and diversion of resources and management attention.

We currently license from third parties some of the technologies, trademarks and content incorporated into our websites. As we continue to introduce new services that incorporate new technologies, third parties’ trademarks and content, we may be required to license additional technologies, third parties’ trademarks and content. We cannot be sure that such technologies and content licenses will be available on commercially reasonable terms, if at all.

Third parties may assert that our services, products and technology, including software and processes, violate their intellectual property rights. As competition in our industry increases and the functionality of technology offerings further overlaps, such claims and counterclaims could increase. We cannot assure you that we do not or will not inadvertently infringe on the intellectual property rights of third parties. Any intellectual property claim against us, regardless of its merit, could have an adverse effect on our business, financial condition and results of operations and could be expensive and time consuming to defend. Our failure to prevail in such matters could result in loss of intellectual property rights, judgments awarding substantial damages and injunctive or other equitable relief against us, or require us to delay or cease offering services or reduce features in our services.

Increased labor costs, compliance with labor laws and regulations and failure to maintain good relations with labor unions may adversely affect our results of operations.

We are required to comply with extensive labor regulations in each of the countries in which we have employees, including with respect to wages, social security benefits and termination payments. If we fail to comply with these regulations we may face labor claims and government fines.

In the past, governments from certain countries in which we operate, including Argentina, have adopted laws, regulations and other measures requiring companies in the private sector to increase wages and provide specified benefits to employees. We cannot assure you that these governments will not do so again in the future. On December 13, 2019, the Argentine administration enacted Decree No. 34/2019 that duplicates the amount of the statutory severance payments payable to employees hired before December 13, 2019 and fired between December 13, 2019 and June 13, 2020. Moreover, by Decree No. 14/2020 issued on January 3, 2020, the Argentine government approved mandatory salary increases for private sector employees of AR$3,000 in January 2020, and additional AR$1,000 in February 2020.

In addition, some of our employees in Argentina, Brazil and certain other countries are currently represented by labor unions. We may face pressure from our labor unions or otherwise to increase salaries. In Argentina, for example, employers in both the public and private sectors have historically experienced, and are currently experiencing, significant pressure from unions and their employees to further increase salaries due to the devaluation of the peso and high inflation. According to the data published by the Instituto Nacional de Estadística y Censos (National Statistics Institute or “INDEC”) regarding the evolution of salaries in the private and public sectors in Argentina, salary increases in both sectors have been of approximately 30.4% and 30.3% for 2018, and 44.5% and 42.2% for 2019, respectively.

Due to high levels of inflation and full employment in the tech industry, we expect to continue to raise salaries. If future salary increases in the Argentine peso or the currencies of other countries in which we have employees exceed the pace of the devaluation of those currencies, such salary increases could adversely affect our business, results of operations and financial condition.

 

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Moreover, while we have enjoyed satisfactory relationships with labor unions that represent our employees, labor-related disputes may still arise. Labor disputes that result in strikes or other disruptions could adversely affect our business, financial condition and result of operations.

A failure to comply with current laws, rules and regulations or changes to such laws, rules and regulations and other legal uncertainties may adversely affect our business, results of operations or business growth.

We have been subject, and we will likely be subject in the future, to inquiries from time to time from regulatory bodies concerning compliance with consumer protection, tax, labor, antitrust and travel industry-specific laws and regulations.

Such inquiries have included investigations and legal proceedings relating to the travel industry and, in particular, parity provisions in contracts between hotels and travel companies, including us, as well as allegations of “geopricing” or “geoblocking practices.” See Item 4. “Business—Legal and Regulatory—Legal Proceedings” for more information. Parity provisions are significant to our business model, and their removal or modification may adversely affect our business, financial condition and results of operations. We are unable at this time to predict the timing or outcome of these various investigations and lawsuits, or similar future investigations or lawsuits, and their impact, if any, on our business and results of operations.

The failure of our businesses to comply with these laws and regulations could result in fines and/or proceedings against us by governmental agencies and/or consumers, which if material, could adversely affect our business, financial condition and results of operations. Further, if such laws and regulations are not enforced equally against other competitors in a particular market, our compliance with such laws may put us a competitive disadvantage vis-à-vis competitors which do not comply with such requirements.

Complaints from travel customers or negative publicity about our services can diminish consumer confidence and adversely affect our business.

In the past, government and consumer protection agencies have received a substantial number of complaints about our products, which represent a small percentage of our total transactions but could increase in the future. Many of these claims are related to the behavior of our suppliers. From time to time, we are involved in disputes or regulatory inquiries that arise in the ordinary course of business. The number and significance of these disputes and inquiries have increased as our business has expanded. We have responded to inquiries from regulatory agencies; however, we are likely to receive inquiries in the future, which may lead to actions against us. If during these inquiries we were found to violate any laws or to constitute unfair business practices, we could be subject to civil damages, enforcement actions, fines or penalties. Such actions or fines could require us to restructure our business processes in ways that would harm our business and cause us to incur substantial costs.

Because volume and growth in the number of new travel customers are key drivers of our revenue and profitability, travel customer’s complaints or negative publicity about our customer service could severely diminish consumer confidence and use of our services. Measures we sometimes take to combat risks of fraud and breaches of privacy and security can damage relations with our travel customers. To maintain good customer relations, we need prompt and accurate customer service to resolve irregularities and disputes. Effective customer service requires significant personnel expense and investment in developing programs and technology infrastructure to help customer service representatives carry out their functions. These expenses, if not managed properly, could significantly impact our profitability. Failure to manage or train our customer service representatives properly, could compromise our ability to handle our travel customer’s complaints effectively. If we do not handle travel customer complaints effectively, our reputation and brand may suffer and we may lose our travel customers confidence.

Consumer adoption and use of mobile devices creates new challenges.

Widespread adoption of mobile devices, coupled with the web browsing functionality and development of apps available on these devices, is driving substantial online traffic and commerce to mobile platforms. We have experienced a significant shift of business to mobile platforms and our suppliers are also seeing a rapid shift of traffic to mobile platforms. Many of our competitors and new market entrants are offering mobile apps for travel

 

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products and other functionality, including proprietary last-minute discounts for accommodation reservations. Advertising and distribution opportunities may be more limited on mobile devices given their smaller screen sizes. The average price of travel products purchased in mobile transactions may be less than a typical desktop transaction due to different consumer purchasing patterns. Further, given the device sizes and technical limitations of tablets and smartphones, mobile consumers may not be willing to download multiple apps from multiple companies providing a similar service and instead prefer to use one or a limited number of apps for their mobile travel activity. As a result, the consumer experience with mobile apps as well as brand recognition and loyalty are likely to become increasingly important. Our mobile offerings drive a material and increasing share of our business. We believe that mobile bookings present an opportunity for growth and are necessary to maintain and grow our business as consumers increasingly turn to mobile devices instead of a desktop computer. As a result, it is increasingly important for us to develop and maintain effective mobile apps and websites optimized for mobile devices to provide consumers with an appealing, easy-to-use mobile experience. If we are unable to continue to innovate rapidly and create new, user-friendly and differentiated mobile offerings and advertise and distribute on these platforms efficiently and effectively, or if our mobile offerings are not used by consumers, we could lose considerable market share to existing competitors or new entrants and our business, financial condition and results of operations could be adversely affected.

Moreover, we are dependent on the compatibility of our app with popular mobile operating systems that we do not control, such as Android and iOS, and any changes in such systems that degrade our products’ functionality or give preferential treatment to competitive products could adversely affect the usage of our app on mobile devices. Additionally, in order to deliver high quality mobile products, it is important that our products work well with a range of mobile technologies, systems, networks, and standards that we do not control. We may not be successful in developing relationships with key participants in the mobile industry or in developing products that operate effectively with these technologies, systems, networks, or standards. In the event that it is more difficult for our users to access and use our app on their mobile devices, or if our users choose not to access or use our app on their mobile devices or use mobile products that do not offer access to our app, our user growth and user engagement could be harmed.

We rely on Expedia for substantially all of the hotel and other lodging products that we offer for all countries outside Latin America.

Substantially all hotel and other lodging products that we offer through our platform for all countries outside Latin America are provided to us by affiliates of Expedia pursuant to the Expedia Outsourcing Agreement. In addition, Expedia is the preferred provider to us of hotel and other lodging products in Latin America. For more information on our relationships with Expedia, see “Item 7. Major Shareholders and Related Party Transactions — B. Related Party — Relationship with Expedia.”

If Expedia’s affiliates cease to provide us with their hotel and other lodging products, we may be unable to offer these products to our users for some time and it might be difficult for us to replace this supply in the short term, which would negatively affect our business, financial condition and results of operations.

Pursuant to the Expedia Outsourcing Agreement, Expedia pays monthly marketing fees to us, which are calculated as a percentage of the gross booking value of the bookings that we sourced through Expedia during that month. We are required to maintain a level of bookings through Expedia such that those marketing fees equal at least $5.0 million in a six-month period; otherwise, Expedia may require us to pay a $125.0 million termination fee. Given the uncertainty caused by the ongoing COVID-19 pandemic, we cannot assure you that we will be able to meet this requirement in the future. As a result, we have initiated discussions with Expedia regarding a potential temporary suspension of this requirement under the Expedia Outsourcing Agreement, although, in the event that we are not able to meet this requirement in the future due to the effects of the pandemic, we believe that the termination fee would not apply as a result of the force majeure provision under the contract.

In addition, the agreement was amended and restated on November 14, 2019 in order to, among other things, allow us to source a limited percentage of our hotel bookings outside of Latin America without Expedia and from certain pre-agreed properties. However, if such transactions exceed the agreed percentage threshold during a six-month period, we may be required to pay Expedia compensation; and if our non-Expedia sourced bookings outside of Latin America exceed the agreed percentage of gross bookings outside of Latin America for two consecutive quarters, or a

 

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higher agreed percentage threshold in one quarter, Expedia may elect to become our exclusive provider outside of Latin America once again. If such transactions exceed the agreed percentage of the minimum bookings set forth therein for any three consecutive months or any three months within a six-month period, then Expedia may require us to pay a $125.0 million termination fee. The Expedia Outsourcing Agreement may also be terminated by Expedia, and we may be required to pay the termination payment, if the termination by Expedia is for our material breach of certain terms under the agreement or our Shareholder Agreements. In addition, Expedia may unilaterally terminate the Expedia Outsourcing Agreement in the event of a change of control of our Company. Moreover, if the hotel and other lodging products provided by Expedia were to suffer a deterioration in scale or quality, or if their pricing were not attractive, the products and services that we offer to our users would be adversely affected. The Expedia Outsourcing Agreement may be terminated by us unilaterally beginning from March 6, 2022 upon payment of a $125.0 million termination payment to Expedia. Consequently, if a deterioration in the scale or quality of the products and services provided exclusively to us by affiliates of Expedia were to occur, or if their pricing were not attractive, it could be difficult for us to terminate the Expedia Outsourcing Agreement.

We may experience constraints in our liquidity and may be unable to access capital when necessary or desirable, either of which could adversely affect our financial condition.

Although we believe we have a sufficient level of cash and cash equivalents to cover our working capital needs in the ordinary course of business, we may, from time to time, explore additional financing sources and means to improve our liquidity and lower our cost of capital, which could include equity, equity-linked and debt financing and factoring activities. In addition, from time to time, we review acquisition and investment opportunities to further implement our business strategy and may fund these investments with bank financing, the issuance of debt or equity or a combination thereof.

The availability of financing depends in significant measure on capital markets and liquidity factors over which we exert no control. In light of periodic uncertainty in the capital and credit markets, we can provide no assurance that sufficient financing will be available on desirable or even any terms to improve our liquidity, fund investments, acquisitions or extraordinary actions or that our counterparties in any such financings would honor their contractual commitments, which in turn could negatively affect our business, results of operations and financial condition. In addition, if we raise funding through the issuance of new equity or equity-linked securities, it would dilute the percentage ownership of our then existing shareholders.

The ongoing COVID-19 pandemic could adversely affect our liquidity. We are currently taking additional actions to improve our liquidity during the crisis, which include expense reductions and preserving cash. As conditions are recent, uncertain and changing rapidly, we cannot assure you that our business will not require additional funds for operating activities in the future, particularly if the effects of the pandemic persist, nor we can assure you that we will be able to access new funding on favorable terms or at all.

Our business experiences seasonal fluctuations and quarter-to-quarter comparisons of our results may not be meaningful.

Our business experiences fluctuations, reflecting seasonal variations in demand for travel services. For example, bookings for vacation and leisure travel are generally higher during the fourth quarter, although we have historically recognized more revenue associated with those bookings in the first quarter of each year. As a result, quarter-to-quarter comparisons of our results may not be meaningful. Moreover, seasonal fluctuations in our results of operations could result in declines in our share price that are not related to the overall performance and prospects of our business.

The use of derivative financial instruments may adversely affect our results of operations, particularly in a volatile and uncertain market.

From time to time, we enter into derivative transactions to manage our risks associated with currency exchange rates and interest rates. Significant changes may occur in our portfolio of derivative instruments due to increasing volatility and the fluctuation of the currencies of certain countries where we operate, including Brazil and Argentina, against the dollar and volatility in the relevant interest rates, and we may incur net losses from our derivative financial instruments. The fair value of the derivative instruments fluctuates over time as a result of the effects of

 

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future interest rates and exchange rates. These values must be analyzed in connection with the underlying transactions and as a part of our total average exposure to interest rate and exchange rate fluctuations. It is difficult to predict the magnitude of the risk resulting from derivative instruments because the appreciation is imprecise and variable. We may be adversely affected by our derivative financial positions.

Risks Related to Latin America

Latin American countries are subject to political and social instability.

Political and social developments in Latin America, including government deadlock, instability, civil strife, terrorism, high levels of crime, expropriations and other risks of doing business in Latin America could impact our business, financial condition and results of operations.

For example, in Brazil, as a result of the ongoing Operation Car Wash (Lava Jato investigation), a number of senior politicians have resigned or been arrested and other senior elected officials and public officials are being investigated for allegations of corruption. In 2016 the Brazilian Senate impeached President Rousseff for violations of fiscal responsibility laws, and the then Vice-President Michel Temer assumed office to complete the remainder of the presidential mandate. In July 2017, former President Luiz Inácio Lula da Silva was convicted of corruption and money laundering by a federal court in the State of Paraná in connection with the Operation Car Wash (Lava Jato). After Mr. Temer’s mandate as President ceased in the beginning of 2019, he was arrested in the context of the corruption investigation on a warrant issued by the federal justice, making him the second former president (following Luiz Inácio Lula da Silva) arrested as part of Operation Car Wash (Lava Jato). Jair Bolsonaro was elected as the new President of Brazil in October 2018, and took office in January 2019. His election led to a market recovery and the recovery of the value of local stock and the Brazilian real, however we cannot assure that this confidence in the market will continue. While the potential outcome of these and other investigations is uncertain, they have already had a material adverse effect on the image and reputation of the companies involved, as well as the market’s overall perception of the Brazilian economy. There can be no guarantee that investigations will not lead to greater political and economic instability or whether new allegations against government employees and officials and/or private companies will arise in the future.

In Argentina, in the past decade, the Argentine government nationalized or announced plans to nationalize certain industries and expropriate private sector companies and property. In December 2008, the Argentine government transferred approximately AR$94.4 billion ($29.3 billion) in assets held by the country’s private Administradoras de Fondos de Jubilaciones y Pensiones (pension fund management companies, or “AFJPs”) to the government-run social security agency (“ANSES”). AFJPs were the largest participants in the country’s local capital market. With the nationalization of their assets, the local capital market decreased in size and became substantially concentrated. In addition, the Argentine government became a significant shareholder in many of the country’s public companies, including YPF S.A., the main Argentine oil and gas company, in which the majority of the capital stock was expropriated from the Spanish company Repsol, S.A. in 2012. In October 2019, Argentine presidential, legislative and certain provincial and municipal governments elections were held and Alberto Fernández was elected president. The new administration took office on December 10, 2019. Certain members of the current government coalition, including president Alberto Fernández and vice president Cristina Fernández de Kirchner, were part of administrations which in the past were characterized by high levels of government intervention and policies at times disadvantageous to investors and the private sector. On December 23, 2019, the new Argentine government passed a law granting emergency powers to the executive branch, among other measures. We cannot predict what policies the new Argentine government will implement under these emergency powers, nor their impact in the Argentine economy.

Although political and social conditions in one country may differ significantly from another country, events in any of our key markets could adversely affect our business, financial conditions or results of operations.

Latin American countries have experienced periods of adverse macroeconomic conditions.

Our business is dependent upon economic conditions prevalent in Latin America. Latin American countries have historically experienced economic instability, including uneven periods of economic growth as well as significant downturns. As a consequence of economic conditions in global markets and lower commodity prices and demand for commodities, many of the economies of Latin American countries have recently slowed their rates of growth, and some have entered recessions.

 

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For example, according to the Brazilian Institute for Geography and Statistics (Instituto Brasileiro de Geografia e Estadística, or “IBGE”), Brazil real GDP decreased 3.8% in 2015 and 3.6% in 2016, increased 1% in 2017 and 1.1% in 2018 and, in 2019 it’s been forecast to have increased 0.6%. In addition, the credit rating of the Brazilian federal government was downgraded in 2015 and 2016 by all major credit rating agencies and is no longer investment grade.

The Argentine economy has experienced significant volatility, including multiple periods of low or negative growth and high levels of inflation and currency depreciation. According to restated information released by INDEC, Argentina’s real GDP grew by 2.7% in 2015, decreased by 2.2% in 2016, grew by 2.9% in 2017, and decreased by 2.5% in 2018. For 2019, the INDEC has preliminarily estimated a decrease by 3.1%.

Since our business is dependent on discretionary consumer spending, which is influenced by general economic conditions, any prolonged economic downturn in any of our key markets could have adverse effects on our business, financial condition and results of operations.

Latin American governments have exercised and continue to exercise significant influence over their economies.

Governments in Latin America frequently intervene in the economies of their respective countries and occasionally make significant changes in policy and regulations. Governmental actions have often involved, among other measures, nationalizations and expropriations, price controls, currency devaluations, mandatory increases on wages and employee benefits, capital controls and limits on imports.

Our business, financial condition and results of operations may be adversely affected by changes in government policies or regulations, including such factors as exchange rates and exchange control policies; inflation control policies; price control policies; consumer protection policies; import duties and restrictions; liquidity of domestic capital and lending markets; electricity rationing; tax policies, including tax increases and retroactive tax claims; and other political, diplomatic, social and economic developments in or affecting the countries where we operate.

In the future, the level of intervention by Latin American governments may continue or increase. We cannot assure you that these or other measures will not have a material adverse effect on the economy of each respective country and, consequently, will not adversely affect our business, financial condition and results of operations.

Inflation, and government measures to curb inflation, may adversely affect Latin American economies.

Many of the countries in which we operate have experienced, or are currently experiencing, high rates of inflation. For example, the inflation rate in Brazil, as reflected by the Broad Consumer Price Index (Índice Nacional de Preços ao Consumidor Amplo, or “IPCA”), published by the IBGE, was 10.7% in 2015, 6.3% in 2016, 2.9% in 2017, 3.8% in 2018, and 4.3% in 2019. In the past, Brazil has recorded high inflation rates, which, combined with other measures taken by the Brazilian government to fight inflation and speculation on what measures would be taken, has materially adversely affected the Brazilian economy and contributed to economic uncertainty in Brazil, which increases volatility in the Brazilian capital markets and may materially adversely affect us.

In Argentina, inflation has materially undermined the Argentine economy and the government’s ability to foster conditions that permit stable growth. The Consumer Price Index (Índice de Precios al Consumidor de la Ciudad de Buenos Aires or “IPCBA”) measured by the City of Buenos Aires (national statistical data was not available in Argentina from December 2015 to June 2016) showed an increase of 26.9% in 2015 and 41% in 2016. According to measurements from INDEC of the national consumer price index, inflation for the first nine months of 2015 was 10.7%, for the period from May to December 2016 was 15.8%, and cumulative consumer price inflation (Inflacion Acumulada de Precios al Consumo) for 2017 was 24.8%, for 2018 was 47.6%, and for 2019 was 59.8%. Moreover, INDEC reported that the 2020 monthly consumer price index increased by 2.3% in January compared to December 2019 and 2% in February compared to January 2020.

 

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Inflation in Argentina could increase our costs of operations and impact our financial condition and results of operations. Inflation rates may continue to increase in the future, and the government measures to control inflation, adopted presently or in the future, remain uncertain. Measures taken by the governments of these countries to control inflation have often included maintaining a tight monetary policy with high interest rates, thereby restricting the availability of credit and retarding economic growth. Inflation, measures to combat inflation and public speculation about possible additional actions have contributed materially to economic uncertainty in many of these countries.

Exchange rate fluctuations against the dollar in the countries in which we operate could negatively affect our results of operations.

Local currencies used in the conduct of our business are subject to depreciation and volatility. The currencies of many countries in Latin America have experienced significant volatility in the past, particularly against the dollar.

For example, the Brazilian real has historically experienced frequent, sometimes significant, fluctuations relative to the dollar. The real depreciated 47% in 2015, appreciated 17% in 2016, and depreciated 2%, 17% and 4% in 2017, 2018 and 2019, respectively, based on official exchange rates as reported by the Brazilian Central Bank. A devaluation of the Brazilian real relative to the dollar could create inflationary pressures in Brazil and cause the Brazilian government to, among other measures, increase interest rates. Any depreciation of the Brazilian real may generally restrict access to the international capital markets, and would also reduce the dollar value of our results of operations. Restrictive macroeconomic policies could reduce the stability of the Brazilian economy and harm our results of operations and profitability. In addition, domestic and international reactions to restrictive economic policies could have a negative impact on the Brazilian economy.

Fluctuations in the value of the Argentine peso continue to affect the Argentine economy. In 2015, the Argentine peso lost approximately 52% of its value with respect to the dollar, primarily after the lifting of certain foreign exchange restrictions in the month of December, and following that, during the years 2016, 2017, 2018 and 2019, the Argentine peso depreciated 17%, 18%, 51% and 59%, respectively, with respect to the dollar. As a result of the greater volatility of the Peso, the former government announced several measures to restore market’s confidence and stabilize the value of the Argentine peso. During 2019, with the intention to reduce the amount of Argentine pesos available in the market and reduce the demand for foreign currency, the government established a new regime for a stricter control of the local monetary base, which would initially remain in place until December 2019, and was further complemented by the reinstatement of foreign currency controls on September 2019. The success of any measures taken by the Argentine government to restore market’s confidence and stabilize the value of the Argentine peso is uncertain and the continued depreciation of the Argentine peso could have a significant adverse effect on our financial condition and results of operations.

We are subject to foreign currency exchange controls in certain countries in which we operate.

Certain Latin American economies have experienced shortages in foreign currency reserves and their respective governments have adopted restrictions on the ability to transfer funds out of the country and convert local currencies into dollars.

For example, Brazilian law provides that whenever there is a serious imbalance in Brazil’s balance of payments or reason to foresee a serious imbalance, the Brazilian government may impose temporary restrictions on the remittance to foreign investors of the proceeds of their investments in Brazil.

In the case of Argentina, in 2001 and 2002 imposed exchange controls and transfer restrictions substantially limiting the ability of companies to make payments abroad. During 2019, the Argentine government established a new regime for a stricter control of the local monetary base, which was meant to initially remain in place until December 2019, in an attempt to reduce the amount of Argentine pesos available in the market and reduce the demand for foreign currency. Complementing these measures, on September 2019, foreign currency controls were reinstated in Argentina. For further information on this topic, see Item 10. “Additional Information – Exchange Controls”.

 

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Under current Argentine law, we are restricted from accessing the official foreign exchange market to make dividend payments to us from our Argentine subsidiaries without prior approval from the Argentine Central Bank. In addition, Argentina recently enforced some measures that control and restrict the capacity of individuals and companies to exchange Argentine pesos for foreign currencies, conditioned to prior approval from the Argentine Central Bank, which could eventually restrict the ability to exchange Argentine pesos for other currencies, such as dollars. Restrictions currently apply to dollar purchases via bank account and in cash. In addition, on December 2019, the Argentine government also implemented a new tax PAIS, with a rate of 30% on transactions involving –among others– the acquisition by Argentine residents of foreign currency; foreign services through credit and debit cards; services to be provided abroad, contracted through Argentine travel and tourism agencies –wholesale or retailers–; and international passenger transport services (by land, air, aquatic and road).

We cannot assure you that foreign exchange controls in Brazil, Argentina or any other country where we operate, may not reemerge or worsen in the future to prevent capital flight, counter a significant depreciation of the Brazilian real, Argentine peso or other currency, or address other unforeseen circumstances. Additional controls could have a negative effect on the ability of our operating entities in the affected country to access the international credit or capital markets.

Any shortages or restrictions on the transfer of funds from abroad may impede our ability to convert these currencies into dollars and to transfer funds, including for the payment of dividends or debt. Moreover, such restrictions limit our ability to use funds for operating purposes in other countries. Consequently, if we are prohibited from transferring funds out of the countries in which we operate, our business, financial condition and results of operations could be adversely affected. For a discussion of certain foreign exchange regulations applicable to us, see “Item 10. Additional Information — Exchange Controls.”

Those kinds of exchange controls could have a material adverse impact on our operations, business, financial condition and results of operations. It is uncertain whether the Brazilian and/or Argentine governments will or will not increase such controls or restraints which could affect the ability to make payments to foreign creditors or suppliers, and dividend payments to shareholders.

Developments in other markets may affect Latin America.

The market value of companies like us may be, to varying degrees, affected by economic and market conditions in other global markets. Various Latin American economies have been adversely impacted by the political and economic events that occurred in several emerging economies in recent times, including Mexico in 1994, the collapse of several Asian economies between 1997 and 1998, the economic crisis in Russia in 1998, the Brazilian devaluations in January of 1999 and 2002 and the Argentine crisis of 2001 and 2002. In addition, Latin American economies have been adversely affected by events in developed countries, such as the 2008 and 2009 global financial crisis that arose in the United States, and the current COVID-19 pandemic in 2020.

As of the date of this Annual Report, recent global developments have occurred in the world which could impact the economies of the Latin American countries in which we operate and consequently have an adverse effect on our business, financial condition and results of operations, such as any new restrictions on travel, immigration or trade.

Developments of a similar magnitude to the international markets in the future can be expected to adversely affect the economies of Latin American countries and, therefore, us.

Risks Related to our Ordinary Shares

An active or liquid trading market for our ordinary shares may not be maintained.

An active, liquid trading market for our ordinary shares may not be maintained in the long term. Loss of liquidity could increase the price volatility of our ordinary shares. Moreover, we cannot assure you that investors will be able to sell ordinary shares should they decide to do so.

 

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The price of our ordinary shares may fluctuate significantly and your investment may decline in value.

The price of our ordinary shares may fluctuate significantly in response to factors, many of which are beyond our control, including those described above under “—Risks Related to our Business” and “—Risks Related to Latin America.” The stock markets in general, and the shares of emerging market and technology companies in particular, have experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the companies involved. We cannot assure you that any trading price or valuation will be sustained. These factors may materially and adversely affect the market price of our ordinary shares, which may limit or prevent investors from readily selling our ordinary shares and may otherwise affect liquidity, regardless of our operating performance. Market fluctuations, as well as general political and economic conditions in the markets in which we operate, such as recession or currency exchange rate fluctuations, may also adversely affect the market price of our ordinary shares. Following periods of volatility in the market price of a company’s securities, that company may often be subject to securities class-action litigation. This kind of litigation may result in substantial costs and a diversion of management’s attention and resources, which would have a material adverse effect on our business, financial condition and results of operation.

The sale or availability for sale of substantial amounts of our ordinary shares could adversely affect their market price.

Sales of substantial amounts of our ordinary shares in the public market, or the perception that such sales could occur, could adversely affect the market price of our ordinary shares, even if there is no relationship between such sales and the performance of our business.

A portion of our ordinary shares are currently held by affiliates, which means they may not be sold unless the sale is registered under the Securities Act, other than if an exemption from registration is available. Certain of our shareholders have demand and/or other piggyback registration rights which may enable them to sell some or all of their ordinary shares in a public offering in the United States registered under the Securities Act. For more information, see “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions.”

The strategic interests of our significant shareholders may, from time to time, differ from, and conflict with, our interests and the interests of our other shareholders.

As of March 31 2020, Expedia held 13.77% and funds affiliated with Tiger Global held 13.29% of our outstanding ordinary shares. If Expedia or other investors acquire or continue to own and control, directly or indirectly, a significant portion of our voting share capital, even if their respective interests represent less than a majority of our total voting share capital, such shareholders may be able to exert influence over decisions at both the shareholder and board level of our Company. For more information, see “Item 7. Major Shareholders and Related Party Transactions.”

The strategic interests of our significant shareholders may differ from, and conflict with, our interests and the interests of our other shareholders in material respects. In addition, our memorandum and articles of association provides that Expedia and any of our directors affiliated with Expedia do not have any duty to refrain from engaging, directly or indirectly, in the same business activities or similar business activities or lines of business in which we operate.

Expedia also competes in the global travel industry, and also acts as a supplier to us and certain of our competitors. For a further description of our relationship with Expedia, see “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions,” “—Risks Related to our Business—We rely exclusively on Expedia for the hotel and other lodging products that we offer for all countries outside Latin America,” and “Item 16G. Corporate Governance—Differences in Corporate Law—Conflict of Interest.”

We cannot assure you that the actions of Expedia and other significant shareholders, will not conflict with our interests or the interests of our other shareholders.

 

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We have not determined any specific use for our net proceeds from our initial public offering and we may use the proceeds in ways with which you may not agree.

The principal purposes of our initial public offering in September 2017 was to increase our financial flexibility and create a public market for our ordinary shares. As of the date of this Annual Report, we have not allocated our net proceeds from our initial public offering to any particular purpose, other than for the acquisition of Viajes Falabella and the contemplated acquisition of Best Day. Rather, our management has considerable discretion in the application of the net proceeds that we received. Our net proceeds may be used for corporate purposes that do not improve our profitability or increase our share price. In addition, net proceeds we received from our initial public offering may be placed in investments that do not produce income or that lose value.

Investors should not unduly rely on market information included in this Annual Report.

Facts, statistics, forecasts and other information included in this Annual Report relating to the Latin America travel and e-commerce markets are derived from various sources, including independent consultant reports, publicly available information, industry publications, official government information and other third-party sources, as well as internal data and estimates. Although we believe that this information is reliable, the information has not been independently verified by us. Additionally, we cannot assure you that the market data included in this Annual Report is compiled or stated on the same basis as may be the case in the United States or elsewhere, particularly as the publication of certain market data for the Latin American region may be relatively newer than in the United States or elsewhere.

In addition, certain data related to the Latin American travel market and the Latin American online travel market includes the purchase of hotel and other travel products by inbound travelers traveling to Latin America, as well as corporate travel. Our travel customer base, however, is primarily comprised of consumers from Latin America traveling for leisure domestically within their own country of origin, to other countries in the Latin American region, and outside of Latin America. Market data related solely to the travel trends of Latin American consumers is limited. As a result, certain market data included in this Annual Report is being provided to investors to give a general sense of the trends of our industry but such market data does not capture the trends of only our targeted customers.

Accordingly, investors should not place undue reliance on the market information included in this Annual Report.

We are a foreign private issuer under U.S. securities regulations and, as a result, we are not subject to U.S. proxy rules and we are subject to Exchange Act reporting obligations that, to some extent, are more lenient and less frequent than those of a U.S. issuer.

We report under the Exchange Act as a non-U.S. company and a “foreign private issuer,” as such term is defined under U.S. securities regulations. Because we qualify as a foreign private issuer, we are exempt from certain provisions of the Exchange Act that are applicable to U.S. public companies, including (1) the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act; (2) the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and (3) the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q containing unaudited financial and other specified information, or current reports on Form 8-K upon the occurrence of specified events. In addition, we are not required to file our Annual Report on Form 20-F until 120 days after the end of each fiscal year, while U.S. domestic issuers that are accelerated filers are required to file their Annual Report on Form 10-K within 75 days after the end of each fiscal year. Foreign private issuers are also exempt from Regulation Fair Disclosure, aimed at preventing issuers from making selective disclosures of material information. As a result of the above, even though we are required to furnish reports on Form 6-K disclosing whatever information we have made or are required to make public pursuant to BVI law or distribute to our shareholders and that is material to our Company, you may not have the same protections afforded to shareholders of companies that are not foreign private issuers.

 

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We are exempt from certain corporate governance requirements of the New York Stock Exchange.

We are exempt from certain corporate governance requirements of the New York Stock Exchange, by virtue of being a foreign private issuer. The standards applicable to us are considerably different than the standards applied to U.S. domestic issuers. For instance, we are not required to:

 

   

have a majority of our board of directors be independent;

 

   

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

 

   

have regularly scheduled executive sessions with only non-management directors;

 

   

have an executive session of solely independent directors each year; or

 

   

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

For more information, see “Item 6. Directors, Senior Management and Employees — A. Directors and Senior Management.” We have relied on and intend to continue to rely on some of these exemptions. As a result, you may not be provided with the benefits and protections of certain corporate governance requirements of the New York Stock Exchange.

We are an “emerging growth company” and the reduced disclosure and attestation requirements applicable to emerging growth companies could make our ordinary shares less attractive to investors.

We are an “emerging growth company” (an “EGC”), as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”), and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not EGCs, including not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act for up to five fiscal years after our initial public offering in September 2017. Section 404(b) of the Sarbanes-Oxley Act would otherwise require our independent registered public accounting firm to attest to and report on the effectiveness our internal control structure and procedures for financial reporting.

In addition, Section 107 of the JOBS Act also provides that an EGC may take advantage of the extended transition period provided in Section 13(a) of the Exchange Act for complying with new or revised accounting standards. In other words, an EGC may delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected not to take advantage of the benefits of this extended transition period and, therefore, are subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. This election is irrevocable.

We will cease to be an EGC upon the earliest of: (1) the last day of the fiscal year during which we have revenue of $1.07 billion or more, (2) the last day of the fiscal year following the fifth anniversary of our initial public offering in September 2017, (3) the date on which we have issued more than $1 billion in non-convertible debt during the previous three-year period, or (4) when we become a “large accelerated filer,” as defined in Rule 12b-2 under the Exchange Act.

The requirements of being a public company may strain our resources and distract our management.

As a public company, we are subject to the reporting requirements of the Exchange Act and requirements of the Sarbanes-Oxley Act applicable to a foreign private issuer and EGC. These requirements may place a strain on our systems and resources. The Exchange Act requires that we file annual and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal controls over financial reporting. To maintain and improve the effectiveness of our disclosure and internal controls and procedures, we need to commit significant resources, potentially hire additional staff and provide additional management oversight. We have implemented additional procedures and processes for the purpose of addressing the standards and requirements applicable to public companies. In addition, sustaining our

 

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growth also will require us to commit additional management, operational and financial resources to identify new professionals to join our Company and to maintain appropriate operational and financial systems to adequately support expansion. These activities may divert management’s attention from other business concerns, which could have a material adverse effect on our business, financial condition and results of operations.

We may lose our foreign private issuer status in the future, which could result in significant additional costs and expenses.

We are a “foreign private issuer,” as such term is defined under the Securities Act, and, therefore, we are not required to comply with all the periodic disclosure and current reporting requirements of the Exchange Act and related rules and regulations. Under the Securities Act, the determination of foreign private issuer status is made annually on the last business day of an issuer’s most recently completed second fiscal quarter and, accordingly, the next determination will be made with respect to us on June 30, 2020.

In the future, we would lose our foreign private issuer status if a majority of our shareholders, directors or management are U.S. citizens or residents and we fail to meet additional requirements necessary to avoid loss of foreign private issuer status. Although we have elected to comply with certain U.S. regulatory provisions, our loss of foreign private issuer status would make such provisions mandatory. If we are not a foreign private issuer, we will be required to file periodic reports and registration statements on U.S. domestic issuer forms with the SEC, which are more detailed and extensive than the forms available to a foreign private issuer. For example, the Annual Report on Form 10-K requires domestic issuers to disclose executive compensation information on an individual basis with specific disclosure regarding the domestic compensation philosophy, objectives, annual total compensation (base salary, bonus and equity compensation) and potential payments in connection with change in control, retirement, death or disability, while the Annual Report on Form 20-F permits foreign private issuers to disclose compensation information on an aggregate basis. We will also have to mandatorily comply with U.S. federal proxy requirements, and our executive officers, directors and principal shareholders will become subject to the short-swing profit disclosure and recovery provisions of Section 16 of the Exchange Act. We may also be required to modify certain of our policies to comply with good governance practices associated with U.S. domestic issuers. In addition, we may lose our ability to rely upon exemptions from certain corporate governance requirements on U.S. stock exchanges that are available to foreign private issuers. Such transition and modifications will involve additional costs and may divert our management’s attention from other business concerns, which could have a material adverse effect on our business, financial condition and results of operations.

Any failure to maintain an effective system of internal controls may result in material misstatements of our consolidated financial statements or cause us to fail to meet our reporting obligations or fail to prevent fraud; and in that case, our shareholders could lose confidence in our financial reporting, which would harm our business and could negatively impact the price of our ordinary shares.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, we are required to furnish a report by our senior management on our internal control over financial reporting. However, while we remain an EGC we are not required to include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. To prepare for eventual compliance with Section 404, once we no longer qualify as an EGC, we are engaged in a process to document and validate through testing that our internal controls are functioning as documented and implementing a continuous reporting and improvement process for internal controls over financial reporting, which is both costly and challenging. In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants, adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate. Despite our efforts, there is a risk that we will not be able to conclude, within the prescribed timeframe or at all, that our internal control over financial reporting is effective as required by Section 404. If we identify one or more material weaknesses, it could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.

Effective internal controls are necessary for us to provide reliable and accurate financial reports on a timely basis and prevent fraud. If we fail to maintain an effective system of internal controls, we might not be able to report our financial results accurately or on a timely basis or prevent fraud; and in that case, our shareholders could lose confidence in our financial reporting or we could be sanctioned by the SEC, which would harm our business and

 

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could negatively impact the price of our ordinary shares. While we believe that we have sufficient personnel and review procedures to allow us to maintain an effective system of internal controls, we cannot provide assurance that we will not experience potential material weaknesses in our internal control. Even if we conclude that our internal control over financial reporting provides reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. GAAP, because of its inherent limitations, internal control over financial reporting may not prevent or detect fraud or misstatements. Failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our results of operations or cause us to fail to meet our future reporting obligations.

Future issuances of our ordinary or other classes of shares may cause a dilution in your shareholding.

We may raise additional funding to meet our working capital, capital expenditure requirements for our planned long-term capital needs, or to fund future acquisitions. If such funding is raised through issuance of new equity or equity-linked securities, it may cause a dilution in the percentage ownership of our then existing shareholders.

From time to time we may grant equity-based compensation to our management and employees, which may dilute the value of your ordinary shares.

From time to time, we may grant options or other equity-based compensation to our management and employees. As of the date of this Annual Report, we have reserved 5,461,777 ordinary shares for issuance under our 2016 Stock Incentive Plan, of which 315,425 shares remain available for future grants under the 2016 Plan as of March 31, 2020. For more information about our equity-based compensation, see “Item 6. Directors, Senior Management and Employees — B. Compensation.” If our board of directors approves the issuance of new equity incentive plans (or the issuance of additional shares under the existing equity incentive plans), the interests of other shareholders may be diluted.

If securities or industry research analysts do not publish or cease publishing research or reports about our business or if they issue unfavorable commentary or downgrade our ordinary shares, our stock price and trading volume could decline.

The trading market for our ordinary shares will rely in part on the research and reports that securities and industry research analysts publish about us, our industry and our business. We do not have any control over these analysts. Our stock price and trading volumes could decline if one or more securities or industry analysts downgrade our ordinary shares, issue unfavorable commentary about us, our industry or our business, cease to cover us or fail to regularly publish reports about us, our industry or our business.

Investors may have difficulty enforcing judgments against us, our directors and management.

We are incorporated under the laws of the BVI and many of our directors and officers reside outside the United States. Moreover, many of these persons do not have significant assets in the United States. As a result, it may be difficult or impossible to effect service of process within the United States upon these persons, or to recover against us or them on judgments of U.S. courts, including judgments predicated upon the civil liability provisions of the U.S. federal securities laws.

Furthermore, our memorandum and articles of association include an exclusive jurisdiction clause pursuant to which, to the fullest extent permitted by applicable law, (i) other than claims specified in clause (ii) below and except as may otherwise be expressly agreed between the Company and a shareholder or between two or more shareholders in relation to the Company, we and all our shareholders agree that the BVI courts shall have exclusive jurisdiction to hear and determine all disputes of any kind regarding us and shareholders’ respective investments in us, irrevocably submit to the jurisdiction of the BVI courts, irrevocably waive any objection to the BVI courts being nominated as the forum to hear and determine any such dispute, and undertake and agree not to claim any such court is not a convenient or appropriate forum; and (ii) the federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act, in each case unless our board of directors consents in writing to the selection of an alternative forum.

 

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An award of punitive damages under a U.S. court judgment based upon U.S. federal securities laws is likely to be construed by BVI courts to be penal in nature and therefore unenforceable in the BVI. Further, no claim may be brought in the BVI against us or our directors and officers in the first instance for violation of U.S. federal securities laws because these laws have no extraterritorial application under BVI law and do not have force of law in the BVI. However, a BVI court may impose civil liability, including the possibility of monetary damages, on us or our directors and officers if the facts alleged in a complaint constitute or give rise to a cause of action under BVI law. Moreover, it is unlikely that a court in the BVI would award damages on the same basis as a foreign court if an action were brought in the BVI or that a BVI court would enforce foreign judgments if it viewed the judgment as inconsistent with BVI practice or public policy.

The courts of the BVI would not automatically enforce judgments of U.S. courts obtained in actions against us or our directors and officers, or some of the experts named herein, predicated upon the civil liability provisions of the U.S. federal securities laws, or entertain actions brought in the BVI against us or such persons predicated solely upon U.S. federal securities laws. Further, there is no treaty in effect between the United States and the BVI providing for the enforcement of judgments of U.S. courts in civil and commercial matters, and there are grounds upon which BVI courts may decline to enforce the judgments of U.S. courts. Some remedies available under the laws of U.S. jurisdictions, including remedies available under the U.S. federal securities laws, may not be allowed in the BVI courts if contrary to public policy in the BVI. Because judgments of U.S. courts are not automatically enforceable in the BVI, it may be difficult for you to recover against us or our directors and officers based upon such judgments.

Certain types of class or derivative actions generally available under U.S. law may not be available as a result of the fact that we are incorporated in the BVI and the exclusive jurisdiction clause included in our memorandum and articles of association. As a result, the rights of shareholders may be limited.

Shareholders of BVI companies may not have standing to initiate a shareholder derivative action in a court of the United States. Furthermore, our memorandum and articles of association include an exclusive jurisdiction clause which, to the fullest extent permitted by applicable law, will act as a bar to any such action in a court of the United States. In any event, the circumstances in which any such action may be brought, if at all, and the procedures and defenses that may be available in respect to any such action, may result in the rights of shareholders of a BVI company being more limited than those of shareholders of a company organized in the United States. Accordingly, shareholders may have fewer alternatives available to them if they believe that corporate wrongdoing has occurred. The BVI courts are also unlikely to recognize or enforce against us judgments of courts in the United States based on certain liability provisions of U.S. securities law or to impose liabilities against us, in original actions brought in the BVI, based on certain liability provisions of U.S. securities laws that are penal in nature.

You may have more difficulty protecting your interests than you would as a shareholder of a U.S. corporation.

Our corporate affairs are governed by the provisions of our memorandum and articles of association, as amended and restated from time to time, and by the provisions of applicable BVI law. The rights of shareholders and the fiduciary responsibilities of our directors and officers under BVI law are not as clearly established as they would be under statutes or judicial precedents in some jurisdictions in the United States, and some states (such as Delaware) have more fully developed and judicially interpreted bodies of corporate law.

These rights and responsibilities are to a large extent governed by the BVI Business Companies Act, 2004 as amended from time to time (the “BVI Act”) and the common law of the BVI. The common law of the BVI is derived in part from judicial precedent in the BVI as well as from English common law, which has persuasive, but not binding, authority on a court in the BVI. In addition, BVI law does not make a distinction between public and private companies and some of the protections and safeguards (such as statutory pre-emption rights, save to the extent expressly provided for in the memorandum and articles of association) that investors may expect to find in relation to a public company are not provided for under BVI law.

There may be less publicly available information about us than is regularly published by or about U.S. issuers. Also, the BVI regulations governing the securities of BVI companies may not be as extensive as those in effect in the United States, and the BVI law and regulations regarding corporate governance matters may not be as protective of minority shareholders as state corporation laws in the United States. Therefore, you may have more difficulty protecting your interests in connection with actions taken by our directors and officers or our principal shareholders than you would as a shareholder of a corporation incorporated in the United States.

 

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The laws of BVI provide limited protections for minority shareholders, so minority shareholders will not have the same options as to recourse in comparison to the United States if the shareholders are dissatisfied with the conduct of our affairs.

Under the laws of the BVI there is limited statutory protection of minority shareholders other than the provisions of the BVI Act dealing with shareholder remedies. The principal protections under BVI statutory law are derivative actions, actions brought by one or more shareholders for relief from unfair prejudice, oppression and unfair discrimination and/or to enforce the BVI Act or the memorandum and articles of association. Shareholders are entitled to have the affairs of the company conducted in accordance with the BVI Act and the memorandum and articles of association, and are entitled to payment of the fair value of their respective shares upon dissenting from certain enumerated corporate transactions. For more information, see “Item 10. Additional Information — Memorandum and Articles of Association” and “Item 16G. Corporate Governance — Differences in Corporate Law” below.

There are common law rights for the protection of shareholders that may be invoked, largely dependent on English company law, since the common law of the BVI is limited. Under the general rule pursuant to English company law known as the rule in Foss v. Harbottle, a court will generally refuse to interfere with the management of a company at the insistence of a minority of its shareholders who express dissatisfaction with the conduct of the company’s affairs by the majority or the board of directors. However, every shareholder is entitled to seek to have the affairs of the company conducted properly according to law and the constitutional documents of the company. As such, if those who control the company have persistently disregarded the requirements of company law or the provisions of the company’s memorandum and articles of association, then the courts may grant relief. Generally, the areas in which the courts will intervene are the following: (i) a company is acting or proposing to act illegally or beyond the scope of its authority; (ii) the act complained of, although not beyond the scope of the authority, could only be effected if duly authorized by more than the number of votes which have actually been obtained; (iii) the individual rights of the plaintiff shareholder have been infringed or are about to be infringed; or (iv) those who control the company are perpetrating a “fraud on the minority.”

These rights may be more limited than the rights afforded to minority shareholders under the laws of states in the United States.

We have no current plans to pay any cash dividends on our ordinary shares.

We currently intend to retain our future earnings, if any, to fund the development and growth of our business. As a result, capital appreciation, if any, of our ordinary shares are likely to be your sole source of gain for the foreseeable future. Consequently, in the foreseeable future, you will likely only experience a gain from your investment in our ordinary shares if the trading price of our ordinary shares increases.

Anti-takeover provisions in our Shareholder Agreements and memorandum and articles of association might discourage, delay or prevent acquisition or other change of control attempts for us that you and/or other of our shareholders might consider favorable.

Certain provisions of our Shareholder Agreements and memorandum and articles of association may discourage, delay or prevent a change in control of our Company or management that shareholders may consider favorable, including but not limited to the following provisions:

Pursuant to our Shareholder Agreements:

 

   

Until September 19, 2020, we may not directly or indirectly issue or transfer any of our securities to certain specified entities that conduct business in the travel industry, and certain of our existing shareholders and their affiliates are also precluded from directly or indirectly transferring any of our securities to such entities, subject to limited exceptions.

 

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Expedia has agreed not to acquire more than 35% of the voting or economic power of our outstanding shares prior to September 19, 2020 except by means of a tender offer that, if consummated, would result in Expedia being the beneficial owner of more than 75% of the voting or economic power of our outstanding shares entitled to vote in the election of the board of directors.

Pursuant to our memorandum and articles of association:

 

   

Our board of directors may without prior notice to shareholders, or obtaining any shareholder approval, amend our memorandum and articles of association to authorize and subsequently issue an unlimited number of preferred shares in one or more classes and series and designate the issue prices, rights, preferences, privileges, restrictions and terms of such preferred shares.

 

   

Our board of directors is currently made up of six directors divided into three classes, with each class having a three year term. Class I’s, Class II’s and Class III’s terms will expire at the Company’s annual meetings in 2021, 2022 and 2020, respectively. The only circumstance in which shareholders can elect new directors is at an annual meeting and in respect of those board seats whose term is expiring at the annual meeting. Elections will take place by plurality voting. Shareholders do not have the power to increase or reduce the size of the board or fill a vacancy on the board, which matters are the exclusive authority of our board of directors.

 

   

Our shareholders may only remove directors for cause and only by resolution approved by shareholders holding not less than two-thirds of the voting rights at a meeting of shareholders called for the stated purpose of removing the director.

 

   

There are a number of restrictions, conditions and other requirements (including advance notice period requirements) that apply to our shareholders’ ability to (i) request special meetings of our shareholders; (ii) nominate persons for election as directors at annual meetings of our shareholders; and (iii) propose other items of business or other matters for consideration at any annual or special meetings of our shareholders.

 

   

All resolutions of the shareholders must be adopted at a meeting of our shareholders convened in accordance with our memorandum and articles of association. Shareholders are prohibited from adopting resolutions by written consent.

 

   

There are restrictions on amending our memorandum and articles of association. Certain provisions of our memorandum and articles of association (including many of the provisions described above) may only be amended with the approval of both our shareholders and our board of directors. Provisions that may be amended by the shareholders without board approval require the affirmative vote of holders of two-thirds of the shares entitled to vote on the resolution.

For more information on our Shareholder Agreements, see “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions.” For more information on our memorandum and articles of association, see “Item 10. Additional Information—Memorandum and Articles of Association” and “Item 16G. Corporate Governance—Differences in Corporate Law.”

These provisions and other provisions under BVI law could discourage, delay or prevent potential takeover attempts and other transactions involving a change in control of our Company, including actions that our shareholders may deem advantageous. As such, these provisions may reduce the price that investors might be willing to pay for our ordinary shares in the future and negatively affect the trading price of our ordinary shares.

 

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ITEM 4.

INFORMATION ON THE COMPANY

 

A.

History and Development of the Company

Despegar.com, Corp. was formed as a business company incorporated in the BVI on February 10, 2017. On May 3, 2017, the stockholders of our predecessor, Decolar.com, Inc., a Delaware corporation, exchanged their shares for ordinary shares of Despegar.com, Corp. to create a BVI holding company. Following the exchange, our shareholders own shares of Despegar.com, Corp., and Decolar.com, Inc. is a wholly-owned subsidiary of Despegar.com, Corp.

We are known by our two brands, Despegar, our global brand, and Decolar, our Brazilian brand.

Our principal executive office is located at Juana Manso 999, Ciudad Autónoma de Buenos Aires, Argentina C1107CBR, and our telephone number is: +54 11 4894 3500. Our agent for service of process in the United States is Cogency Global Inc., located at 10 E. 40th Street, 10th Floor, New York, New York 10016.

Our History and Development

Our business has grown substantially in revenue, products and geographic scope since launching in 1999. The following table shows the timeline of key milestones:

 

1999   

•  Launched site in Argentina.

2000   

•  Launched sites in Brazil, Chile, Colombia, Mexico and Uruguay.

2001   

•  Launched sites in the United States and Venezuela.

2007   

•  Launched site in Perú.

2009   

•  Expanded our offering to include hotels.

  

•  Launched sites in Bolivia, Costa Rica, Dominican Republic, Ecuador, Guatemala, Nicaragua, Panama, Paraguay and Puerto Rico.

2010   

•  Launched sites in El Salvador and Honduras, reaching our 20th market.

  

•  Cumulative one million travel customers served.

2012   

•  Launched our mobile apps on Android and iOS.

  

•  Expanded offering to include packages, rental cars and cruise products.

2013   

•  Reached one million downloads of our mobile app.

  

•  Expanded our offering to include destination services.

  

•  Expanded hotel offering to include vacation rentals.

2014   

•  Cumulative 10 million travel customers served.

  

•  Our mobile app is included in the iTunes Store’s “Best of 2014”.

  

•  Launched travel affiliates program.

  

•  Expanded our offering to include travel insurance.

2015   

•  Reached 10 million downloads of our mobile app.

 

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•  Completed migration from call center sales to fully online model.

  

•  Deepened strategic partnership with Expedia, including its equity investment in our Company.

2016   

•  Awarded “E-commerce Leader in the Tourism Industry in LATAM” by the Latin American E-Commerce Institute.

  

•  Expanded our offering to include our bus product.

  

•  Expanded our destination services offering to include our local concierge product.

2017   

•  Initial public offering and listing on the New York Stock Exchange.

2018   

•  Launched sales call centers in Perú, Ecuador, Mexico, Chile, Colombia, Argentina and Brazil.

 

•  Developed tour operation business.

2019   

•  Completed rebranding our core business, including logos, website and images in order to update our outward facing content.

 

•  Acquired Viajes Falabella in Chile, Argentina, Perú and Colombia.

 

•  Entered into an API connectivity agreement with CTrip International Travel (Hong Kong) Ltd., for the integration of Despegar direct lodging offering in Latin America with Ctrip’s platform.

 

•  Entered into a ten-year exclusive agreement with Industrial and Commercial Bank of China Limited, to launch a co-branded credit card in Argentina in partnership with Mastercard.

2020   

•  Announced agreement to acquire Best Day, a leading travel agency in Mexico, subject to the occurrence of certain closing and business conditions.

 

•  Launched a co-branded credit card in Brazil jointly with Banco Santander.

 

•  Entered into a ten-year commercial partnership agreement with Tarjeta Naranja, the leading branded proprietary credit card issuer in Argentina and a subsidiary of Grupo Financiero Galicia.

Capital Expenditures

See “Item 5. Operating and Financial Review and Prospects—C. Research and Development, Patents and Licenses.”

 

B.

Business Overview

Overview

We are the leading online travel company in Latin America, known by our two brands, Despegar, our global brand, and Decolar, our Brazilian brand. We have a comprehensive product offering, including airline tickets, packages, hotels and other travel-related products, which enables consumers to find, compare, plan and purchase travel products easily through our marketplace. We provide our network of travel suppliers a technology platform for managing the distribution of their travel products and access to our travel customers. We believe that our focus on the underpenetrated Latin American online travel market, our knowledge of the consumer and supplier landscape in the region and our ability to manage the business successfully through economic cycles will allow us to continue our industry leadership. In 2019, 2018 and 2017, we had approximately 5.2 million, 5.3 million and 4.6 million travel customers, generating $524.9 million, $530.6 million and $523.9 million in revenue, respectively. Our gross bookings were $4.7 billion, $4.7 billion and $4.4 billion during 2019, 2018 and 2017, respectively.

 

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Latin America online travel bookings are expected to continue growing in the coming years, once the effects of the COVID-19 pandemic have subsided. Factors driving the growth in online travel bookings include the increase of internet penetration, further adoption of smartphones, tablets and other mobile devices and a growing middle class with greater access to banking services and credit products, together enabling a larger segment of the growing population to transact online or on mobile devices.

The Latin American travel industry is characterized by significant fragmentation in suppliers across airlines, hotels and other travel products. This fragmentation is compounded by regional complexities, including differences in language, local customs, travel preferences, currencies and regulatory regimes across the more than 40 countries in the region. These factors create challenges for suppliers to reach customers directly and, consequently, create a significant market opportunity for us.

We believe we have the broadest travel portfolio among OTAs in Latin America, with inventory from global suppliers, including over 270 airlines and over 690,000 hotels, as well as approximately 1,260 car rental agencies and approximately 200 destination services suppliers with more than 7,500 activities. Our business benefits from network effects: our large travel customer base helps us to attract additional travel suppliers and, in turn, a larger network of travel suppliers helps us to attract new travel customers by enhancing our product offering. Additionally, as we continue to grow our marketplace, we are increasingly able to offer more competitive pricing and product availability to our travel customers as well as enhance the effectiveness of our marketing strategy.

We launched our award-winning mobile travel app in 2012 and it is an increasingly important part of our business, as it allows consumers to access and browse our real-time inventory, compare prices and transact through their mobile devices quickly. As of December 31, 2019, our apps have more than 60 million cumulative downloads from the iOS App Store and Google Play, 21.6 million of which were downloaded in the last two years, and we believe they are the most downloaded OTA apps in Latin America. During 2019 and 2018, mobile accounted for approximately 60% and 61%, respectively, of all of our user visits, and approximately 39% and 34%, respectively, of our transactions were purchased on our mobile platform, complementing our desktop website traffic. As internet, smartphone and other mobile device penetration continue to increase, we believe that our strength in mobile will continue to be a strategic advantage.

Through mobile and online marketing, brand promotion and cross-marketing, we have created strong brand recognition among Latin America travelers, which we view as one of our key competitive advantages. To date, we have invested more than $1.5 billion in marketing and branding initiatives promoting our brand, which we believe, combined with the quality of the service we have delivered over the years, has made us a trusted brand with our travel customers. In 2019 and 2018, 64% and 61% of our travel customers had completed previous purchases on our platform, respectively.

Travel Market Opportunity in Latin America

Latin America is one of the largest and most diverse regions in the world. Comprised of over 40 countries with a total population of over 600 million, the region encompasses multiple languages, currencies and regulatory regimes. The travel market serving Latin American consumers presents a significant opportunity for us due to its large market size, highly fragmented base of travel suppliers and rapid growth in the adoption of technology-based solutions for consumers and travel suppliers. In addition, long-term favorable macroeconomic trends in the region have contributed to the expansion of the middle class and increased consumption in the region.

Since the middle of March 2020 and as of the date of this Annual Report, the travel market in Latin America –as in other parts of the world– has been severely impacted as a consequence of the ongoing COVID-19 pandemic and governments’ measures to limit the spread of the virus. Governments around the world, including in Latin America, have imposed travel restrictions and bans, closed borders, established restrictions on public gatherings, instructed residents to practice social distancing, required closure of non-essential businesses, issued stay at home advisories and orders, implemented quarantines and similar actions, which has resulted in a virtually immediate and complete halt in leisure travel during the past weeks. While it is impossible to predict at this moment how the travel industry, globally and in Latin America, will ultimately be impacted, we believe that the Latin American travel industry will continue to grow, and the following trends will largely continue in the longer term, once the effects of COVID-19 pandemic have subsided.

 

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Overview of Suppliers in the Latin American Travel Industry

The Latin American travel industry is characterized by significant supplier fragmentation across airlines, hotels and other travel products. Regional complexities, including differences in language, local customs, travel preferences, currencies and regulatory regimes across the more than 40 countries in the region create challenges for travel suppliers to reach travel customers directly, at scale and across the region. Further driving this fragmentation is the growing number of smaller airlines, including low-cost airlines that have been commencing operation in recent years. Today, travel agencies are the leading distribution channel in the region for airlines, due to their ability to provide greater selection and scale across the region.

We believe that due to a lack of scale or unified brand, other travel services in Latin America tend to be even more fragmented, operating in specific cities or countries.

Trends Driving Online Travel and Our Growth

An expanding and evolving travel market, coupled with greater internet, smartphone and other mobile device penetration, is expected to drive robust growth in online travel bookings in Latin America. As consumers shift to researching and booking travel online, travel suppliers have adapted their offerings and deepened their relationships with online marketing and booking channels, such as OTAs, to generate revenue. OTAs provide travel suppliers with scale and distribution into new and existing markets and 24/7 customer service and localization services, including language and payment capabilities.

Factors driving the growth in online travel include:

 

   

Increasing internet penetration. While internet penetration in Latin America has increased, we believe it has substantial room for growth. As internet penetration increases, Latin American consumers are increasingly using the internet to research and purchase products, including travel.

 

   

Increasing adoption of mobile devices, including smartphones. The use of mobile devices in Latin America is expected to continue to grow. With the proliferation of smartphones and tablets, mobile has become a prominent tool for travelers to search, discover and purchase travel services.

 

   

Superior user experience. Online travel booking channels, which include websites and mobile apps, empower travelers to search products and user-generated reviews and easily compare real-time availability and pricing options from multiple travel providers simultaneously, which we believe leads to higher user engagement and customer conversion.

 

   

Growth in banked consumers and proliferation of credit products. With the continued development of the Latin American economy, a larger portion of the population has opened bank accounts, enabling access to new forms of payments including credit cards and other financial products. With the increased number of consumers with bank and credit card accounts, more people have the ability to make purchases online. Access to bank accounts and credit cards also gives consumers access to additional financing options from banks, such as payment by installments.

As the leading OTA in Latin America, we believe we are well positioned to succeed as consumers’ destination of choice for fast, easily searchable and more transparent travel research and shopping. As our market share grows, we are increasingly able to capture significant amounts of customer data including travel history and preferences and serve personalized recommendations to drive higher customer conversion. Additionally, we are able to provide better pricing through scale and by bundling multiple travel products together in a single offer.

 

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Our Competitive Strengths

We are the leading OTA in Latin America, offering our travel customers a broad and diversified selection of travel products at attractive prices. Our leadership position is a result of our following core strengths:

Industry Leader in Latin America

With our launch in 1999, we have benefited from an early mover advantage in Latin America, which has allowed us to achieve significant scale and brand awareness. In 2019 and 2018, we had approximately 5.2 million and 5.3 million travel customers, respectively, primarily in Latin America, generating $524.9 million and $530.6 million in revenue and approximately $4.7 billion in gross bookings, in both 2019 and 2018.

We have established relationships with a large network of travel suppliers in Latin America and we have become the leading online air ticketing provider in Latin America, having sold approximately 20.4% and 20.4% of all airline tickets purchased through GDS in the region during 2019 and 2018, respectively, according to Amadeus. Additionally, we believe we provide our travel customers with the largest travel portfolio among Latin American OTAs, with access to over 270 global airlines and over 690,000 hotels globally as well as approximately 1,260 car rental agencies and approximately 200 destination services suppliers with more than 7,500 activities. Additionally, we have accumulated approximately 17.6 million user-generated reviews in total as of December 31, 2019, of which 2.3 million and 2.2 million were submitted in 2019 and 2018, respectively, which we believe drive user engagement. Our platform is also of increasing importance to airlines based outside of Latin America, which generally have a limited local presence in the region, and which account for over 68% of the outbound international travel booked on our platform. Such international travel is more attractive because of its price point and higher commission structure.

Our technology platform allows us to offer our travel customers the ability to create custom packages of two or more products, such as a combination of airfare and a hotel booking for a particular trip, allowing us to offer our travel customers lower combined prices that may not be available for individual products. We are also able to better cross-sell multiple travel products and provide travel customers with a comprehensive solution for their travel needs.

We benefit from network effects: our large travel customer base helps us to attract additional travel suppliers and, in turn, a larger network of travel suppliers helps us to attract new travel customers by enhancing our product offering. Furthermore, by growing our user base and aggregating different products from our supplier base, we are able to offer attractive pricing and availability of travel products to our travel customers as well as enhance the effectiveness of our marketing strategy.

Strong Brand Recognition and Awareness

Despegar, our global brand, and Decolar, our Brazilian brand, have leading brand awareness in online travel in key markets, including Brazil and Argentina. According to search engine trend data that is based on the relative number of searches of brand related keywords on Google during 2019, we had an approximate 28% share (as compared with what we believe to be the next five largest competitors in the market) in Latin America.

Local Market Expertise and Leadership

We have a strong track record in Latin America, with a point of sale in 19 markets, representing 98% of the region’s population, and with a leading OTA presence in key markets such as Brazil, Argentina, Mexico, Chile, and Colombia. In our two largest markets, Brazil and Argentina, we have operated for 20 and 21 years, respectively. Our knowledge of local consumers, and their buying patterns and travel preferences, as well as our ability to offer financing through our relationships with financial institutions, have enabled us to serve our travel customers more effectively than global competitors from outside the region. Furthermore, our extensive supplier relationships allow us to offer a greater scale and breadth of offerings than smaller, local competitors. We understand the objectives of, and challenges faced by, Latin American travel suppliers and we are well-positioned to address those challenges by helping the travel suppliers grow their businesses, all to the benefit of travel customers who receive more choice at attractive pricing.

As the leading Latin American OTA, we have developed long-standing relationships with a wide range of local banks to offer installment payment plans to their credit card holders as an alternative purchase option. We believe that local banks look to partner with us because of our scale, access to our online audience and high transaction volume. We believe this differentiates us from other local and global travel agencies as those agencies either do not offer installment plans or offer installment plans from a more limited selection of financing providers or in a more

 

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limited selection of countries. We believe our portfolio of installment plans is a meaningful driver of traffic to our platform as well as conversion. Approximately 57% of our transactions in both 2018 and 2019 were paid by installment. Our agreements with local banks allow us to offer installment plans without assuming collection risk from the travel customer.

Leading Mobile Offering

Mobile is an increasingly important part of our business, as consumers are quickly able to access and browse our real-time travel offerings, compare prices and make purchases through their mobile devices. We launched our leading mobile travel apps in 2012. As of December 31, 2019, our mobile apps have more than 60.1 million cumulative downloads from the iOS App Store and Google Play ( 21.6 million of which were downloaded in the last two years). In addition, our iOS App Store and Google Play apps were rated 3.5 and 3.9 stars as of December 31, 2019. During 2019 and 2018, mobile, which includes both mobile web and our mobile apps, accounted for approximately 60% and 61%, respectively, of all of our user visits, and approximately 39% and 34%, respectively, of our transactions. In addition, transactions via mobile increased by approximately 17.6% from 2018 compared to 2019. We continue to provide innovative features and functionality to consumers through our mobile apps, including push notifications, dynamic updates, inventory alerts and personalized promotions as well as in-app customer service. Our travel customers using mobile devices have historically made more repeat transactions than travel customers using desktop computers. Additionally, our mobile presence allows in-destination marketing, which facilitates cross-selling of additional travel products, such as rental cars and destination services to travel customers, after they have arrived at their destination.

Many of our travel customers use their mobile device to search for travel products but complete their transactions on their desktop. However, as mobile purchasing becomes increasingly prevalent in the region, we believe our award-winning mobile platform, coupled with the widespread adoption of our apps, positions us well for an increasingly mobile future.

Powerful Data and Analytics Platform

Our large web and mobile audience and transaction volume generate a significant amount of data that allows us to better understand our travel customers and provide personalized travel offerings and also helps us to drive our sales, marketing and operational strategy. To offer the most effective content and products for each travel customer, we extensively analyze the data we collect to identify and highlight the most valuable products and destinations in each travel customer interaction. By gathering and analyzing data in real-time, we are quickly able to assess and react to changes in travel customer behavior, market pricing and other market dynamics. Currently, the majority of visitors to our platform see a personalized landing page based on such factors as user account information, past search and purchasing history and geolocation. We believe that this personalization of the user experience increases engagement and likelihood of purchase.

Effective Marketing Capabilities

We have invested significant resources in our marketing team, which we believe is a significant driver of our business. Through our vertically-integrated, in-house marketing team, we are able to control all aspects of our budget, marketing campaigns and market analytics, without the need for agencies or external consultants. Our marketing team’s local knowledge and expertise in our key markets have allowed us to develop direct relationships with a broad range of local and regional media providers and purchase media directly, avoiding more costly intermediaries. We have invested in our own creative, production and media execution teams, who are quickly able to adapt our marketing strategy, while also leveraging our extensive data and analytics capabilities for more precise audience targeting. Furthermore, we have developed our own software platform for managing our search optimization capabilities, allowing us to tailor messages effectively for specific target markets and travel customers.

 

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Proven and Experienced Team

Our management team has significant experience in the travel sector and across a variety of industries in Latin America. Members of our management team have worked at organizations such as LATAM Airlines, McKinsey, Morgan Stanley, PwC and Thales, among others. In addition to our management team, we have an extensive technology team including more than 1,000 developers and technology professionals. By fostering a distinctive, collaborative and high-performance working culture, we attract software developers with world-class talent and offer an engaging working environment for ongoing career development. We believe we are perceived as a top talent recruiter for IT professionals in Latin America, allowing us to attract the highest quality professionals and specialists dedicated to the enhancement of our platform.

Our Travel Customers

We had approximately 5.2 million and 5.3 million travel customers for 2019 and 2018, respectively, primarily in Latin America. Our travel customers are primarily from Latin America traveling domestically within their own country of origin, to other countries in the Latin American region, and outside of Latin America. Most of our travel customers are traveling for leisure, although we do have some independent business travelers as well.

Our Products

We offer a wide range of travel and travel-related products catering to the needs of Latin Americans traveling domestically within their own country of origin, to other countries in the Latin American region and outside of Latin America. We provide these travelers with the comprehensive tools and information, in multiple languages, that they need to research, plan, book and purchase travel products efficiently. That information includes approximately 6.8 million user-generated reviews over the last three years ended December 31, 2019, of which 2.3 million and 2.2 million were submitted in 2019 and 2018, respectively. We organize our business into two segments: (1) Air, which consists of the sale of airline tickets, and (2) Packages, Hotels and Other Travel Products, which consists of travel packages (which can include airline tickets and hotel rooms), as well as stand-alone sales of hotel rooms (including vacation rentals), car rentals, bus tickets, cruise tickets, travel insurance and destination services. We offer our products online through our website and mobile applications, and use data and analytics to personalize the travel customer experience on our platform, based on geolocation, past search and purchasing history and social network interactions, which we believe increases engagement and likelihood of purchase.

Air

Through our Air segment, we offer airline tickets, primarily targeted at leisure travelers in Latin America, including travel domestically, to other countries in the region and outside of Latin America. Our Air segment includes airline tickets purchased on a stand-alone basis but excludes airline tickets that are packaged with other non-airline flight products. Our travel customers booked approximately 6.2 million, 5.9 million and 5.3 million transactions in our Air segment using our platform in 2019, 2018 and 2017, respectively.

We provide our travel customers with access to over 270 full service and low-cost airlines. We obtain inventory from these airlines either through a GDS or, primarily in the case of low-cost airlines, via direct connections to the airlines’ booking systems. We believe our platform provides comprehensive information to our travel customers in a time efficient and transparent manner. Travel customers are quickly and easily able to evaluate a broad range of fares and airline combinations, and may search for flights based on their preferred travel dates, destinations, number of passengers, number of stops and class of travel, or they may use our more advanced search tool and include additional search parameters. Travel customers can also filter and sort the results of their search easily according to their preferences.

Packages, Hotels and Other Travel Products

The total number of transactions in our Packages, Hotels and Other Travel Products segment was 4.4 million, 4.5 million and 3.8 million in 2019, 2018 and 2017, respectively.

Packages

We offer travelers the opportunity to create custom packages by combining two or more travel products, such as airline tickets and hotel, airline tickets and car rental or hotel and car rental, and booking them in a single transaction. Combining multiple products into a package with a single quoted price allows us to offer travel customers lower prices than are available for individual products and helps us to cross-sell multiple products in a single transaction.

 

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Hotels

Through our platform, travel customers can search, compare and book reservations at more than 690,000 hotels globally through our direct network and third-party inventory. In addition, since 2013 our hotels offering includes vacation rentals.

Travel customers may search for hotels based on their destination and preferred dates for check-in and checkout, and may filter and sort our search results easily by selecting star ratings, specific hotel chains and location.

Travel customers can also indicate amenity preferences such as business services, internet access, fitness centers, swimming pools and more. Travel customers can also view hotel pictures and read hotel reviews from other travel customers on our platform. Our platform features approximately 6.8 million user-generated reviews over the last three years ended December 31, 2019, of which 2.3 million and 2.2 million were generated in 2019 and 2018, respectively.

As of December 31, 2019, approximately 31,000 of our hotel suppliers in Latin America were directly connected to our booking system. Through these direct connections, our hotel suppliers allocate rooms to us either by managing their room inventory directly on an extranet supported by us, or on an extranet supported by one of our more than 48 third-party channel managers.

In 2019 and 2018, 8.4% and 9.2%, respectively, of our gross bookings were attributable to supply provided to us by affiliates of Expedia. Expedia, the beneficial owner of 13.77% of our ordinary shares outstanding as of December 31, 2019, holds certain rights in its capacity as a shareholder. For more information on our relationships with Expedia, see “Item 7. Major Shareholders and Related Party Transactions —B. Related Party — Relationship with Expedia” for more information.

We typically do not assume inventory risk as we do not pre-purchase hotel room inventory from our hotel suppliers. Hotel suppliers are paid by one of two methods: “pre-pay” and “pay-at-destination.” Under the pre-pay model, our travel customer pays us at the time of booking and we pay our hotel suppliers after the travel customer checks out. Under the pay-at-destination model, the travel customer pays the hotel directly at checkout and we either receive our commission later from the hotel suppliers or from the travel customer, at the time of booking.

Other Travel Products

We also offer other travel products on our platform. We provide our travel customers access to approximately 1,260 car rental agencies, more than 180 bus carriers, six cruise carriers, approximately 200 destination services, suppliers with more than 7,500 activities, and one travel insurance supplier. While we offer both pre-pay and pay-at-destination options for car rentals, the other travel products that we offer must be prepaid.

Destination Services: We offer in-destination services as an opportunity for us to offer attractions, tickets, tours and activities and local concierge services to package with other products and as a way to encourage in-destination transactions. The wide array of options offered is intended to suit varying budgets and preferences of potential travel customers.

Car Rentals: Currently, we offer car rentals worldwide, with a focus in Latin America and the United States.

Cruise Tickets: Currently, cruise tickets are available to travel customers in Argentina, Brazil, Chile, Colombia and Mexico. We currently have relationships with six cruise carriers.

 

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Travel Insurance: We offer travel insurance through a third-party provider in Latin America, Assist Card, with whom we entered into an exclusivity agreement in 2017. Travel customers can choose from a range of coverage options depending on their particular needs, such as medical insurance and lost or damaged baggage. Typically, this product is requested in conjunction with a flight and hotel booking. Prior to confirming and proceeding with the reservation of and payment for a flight or hotel booking or a package booking, our travel customers are offered the opportunity to purchase travel insurance.

Bus Tickets: Currently, bus tickets are available only in Brazil and Argentina, and we intend to expand our coverage further to major cities in Latin America. We currently have relationships with three suppliers that give us access to more than 180 bus carriers.

In addition, we sell digital advertising on our platform, which represented 3% of our revenue in 2019.

Payment Options

Credit cards are the primary means of payment for products on our platform. We allow for the use of more than one credit card in a single transaction, permitting travel customers with lower credit limits to make larger purchases. We also offer other payment alternatives including debit cards as well as several localized payment options available in the markets in which we operate.

In addition, we agreed with a wide range of local and regional banks that allow us to offer to our travel customers, the possibility to purchase our travel products under installment purchase plans established, offered and administered by such banks; which we believe differentiates us from other global travel agencies which either do not offer installment plans or offer them from a more limited selection of financing providers or in a more limited selection of countries. Local banks look to partner with us because of our scale, access to our online audience and high transaction volume. Credit card travel customers may choose from a range of installment plan offerings and terms from different financial institutions with which the travel customer holds or obtains a credit card. Many of these installment plan offerings are interest-free to the travel customer. Installment plans allow travel customers to make larger purchases than they may otherwise be able to make in a single payment.

Our agreements with local and regional banks allow us to offer travel customers installment payment plans without assuming collection risk from the travel customers and receive payment in full (provided we choose not to factor such installment payments). We do not provide any type of financing by ourselves. Each of our partner local and/or regional bank establishes, offers and administers any financing plan to travelers. When travel customers make purchases using installment plans, the facilitating bank bears the full risk that the travel customer will actually make the required installment payments.

Regardless of any financing or installment agreement offered by the banks, for transactions in certain territories, we generally receive full payment of our commissions and service fees within less than one month after the travel customer completes the booking in our platforms, in an amount that reflects its cash-selling price. We typically receive payment before travel occurs. In other territories, such as in Brazil, we generally receive payment from the financing bank only after each scheduled payment is due from the travel customer, regardless of the fact that the travel customer actually makes the scheduled payments; so in those cases we generally receive payment before or while the travel occurs. In some cases, we elect to factor or discount installment receivables, allowing us to receive the payment of the purchase price earlier. For the years ended December 31, 2019 and 2018, more than 57% of our transactions were completed using an installment plan offered by a financial institution.

In Brazil, we work with a provider to enable clients to finance purchases without credit cards, in up to twelve installments, with an interest rate of 1.85% per month. The provider bears the risk of payment and fraud. We first made this payment option available in 2018 for refundable hotels sold through our sales call center.

 

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Marketing and Affiliates

Marketing

We execute a multi-channel marketing strategy. Through this effort, we have created a long-standing brand that is associated with superior travel products, high quality services and competitive prices in Latin America. We have an experienced in-house marketing team dedicated to delivering efficient allocation of time and resources across media channels, without relying on outside agencies or consultants. During 2019, our marketing strategy allowed us to increase our total travel customers by 4% and our travel customers from mobile devices by 2%. Key elements of our marketing strategy include:

In-house Teams. We have teams dedicated to: audiovisual content generation across online and offline channels; negotiation with media and agencies to control budget; performance trends and market analysis through strong data analytics; and targeted campaign monitoring.

Buy Direct. Through our direct relationships with key media suppliers throughout Latin America, we believe we are able to secure highly competitive rates across the region, without unnecessary interaction with intermediaries.

“Always On” Strategy. We have 24/7 continuity of marketing campaigns through a combination of online, television, radio, print and other channels tailored for every country and market. We run campaigns to drive maximum awareness, and we use a multi-channel approach in our top markets.

Cross-Device Insights and Custom Attribution Model and Bidding Tools. We measure marketing success across all media channels and devices by reconstructing the user’s marketing path across devices and applying our custom attribution model that feeds our optimization strategy. We have also developed proprietary tools to optimize our investment in search engine marketing (“SEM”) campaigns for Google Adwords by tracking sources of traffic and attributing a percentage of conversions to each event in a user’s marketing path.

Focus on Efficient Use of Media. We continuously analyze the minimum frequency needed on each media channel to deliver targeted marketing messages, events and promotions to travel customers based on the specific demographics of each market.

Promotions and Sales. We focus aggressively on promotions including discounts, holiday campaigns and financing options. Our technology-driven marketing allows us to dynamically optimize promotions on a daily basis. For example, we partnered with Mercado Libre, Latin America´s largest online marketplace, for the SiWeek promotion, which was a one-week offering of very attractive discounts by Mercado Libre and us. This was an opportunity to increase sales as the promotion appealed to the impulse traveler.

Affiliates

We have relationships with a network of over 9,800 affiliates, including travel agents, airlines, websites and other third parties such as online and offline retailers, in seven countries across Latin America. Our agreements with these affiliates allows them to access our product inventory directly through our platform or through our application program interface (“API”). We believe our affiliate program is attractive because we provide access to a range of travel products that our affiliates otherwise may not be able to access cost-effectively or at all. Our affiliates earn commissions from us depending on country and type of products sold. Furthermore, our affiliate program allows us to expand our footprint in Latin America and distribution network in a cost-effective manner.

Sales Call Centers

In 2018, we launched call center operations through third parties in Perú, Ecuador, Mexico, Colombia, Chile, Argentina and Brazil. Through these call centers we sell all our products, with the exception of buses, cruise lines and vacation rentals. We included our sales call number on the homepage of each website. This complements our online platform, helping us to gain new travel customers and interact with those who might not be digitally enabled. Our travel customers are quickly embracing this option, as gross bookings from our sales call centers increased over 18% on average quarterly, totaling $228.1 million in 2019.

 

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Acquisition of Viajes Falabella

On June 7, 2019, we completed the acquisition of Viajes Falabella in Argentina, Peru and Chile, and on July 31, 2019 we completed the acquisition of Viajes Falabella in Colombia, for a total consideration of $23 million. Of this total consideration, we have paid $11.5 million, and the remaining $11.5 million will be paid in two installments in June 2020 and June 2021. Concurrent with the acquisition, the Company entered into a 10-year commercial agreement with Grupo Falabella which provides for several marketing and promotional activities, and other activities to promote future business, including the license for the “Viajes Falabella” brand name, for which we paid $2 million in June 2019 and $2 million will be paid in two installments in June 2020 and June 2021. The license for the ‘Viajes Falabella’ brand name is for an initial period of four years and is renewable for one year periods thereafter at the option of the Company, for a pre-agreed price, provided that the Company meets a service standard set forth under the contract.

The acquisition of Viajes Falabella provides travel customers of both companies with access to an enhanced travel and tourism product and service offerings, wherever and however they want to book travel (mobile, online, apps, call center and store-within-store locations). This includes air, hotel and insurance travel packages, as well as significant non-air travel offerings. In addition, travel customers are able to access exclusive discounts, earn double CMR Points Falabella’s loyalty program, both at Viajes Falabella and Despegar, as well as an expanded product offering in exchange for CMR Points at Viajes Falabella. Following the acquisition of Viajes Falabella, as of December 31, 2019 we operated 86 travel agencies in Chile, Argentina, Perú and Colombia.

Acquisition of Best Day

On January 27, 2020, we entered an agreement to acquire Best Day, a leading travel agency in Mexico, with business in Argentina, Colombia, Brazil and Uruguay, subject to the occurrence of certain closing and business conditions, which are pending. The total consideration for the acquisition is approximately $136 million, subject to closing purchase price adjustments and plus or minus a variable purchase price component of up to approximately 10% of the total consideration. According to the purchase agreement, approximately 65% of the purchase price is payable upon closing, with the remainder of the consideration to be paid on or about the second and third anniversaries of the closing date.

Best Day operates a cross-platform business model with a product mix that includes significant revenue from non-air travel. In addition to its business-to-consumer business operated through its online platform, call centers and more than 200 kiosks, the company offers a variety of destination services, including ground transportation, tours and activities across Mexico. Best Day also provides online wholesale travel products to agencies worldwide, as well as white label services for major travel vendors, including partnerships with certain Mexican airlines. We believe the acquisition of Best Day would enhance our strategies to focus on Mexico and on travel packages.

We cannot assure you that we and the sellers will be able to consummate the acquisition of Best Day under the existing terms, under different terms, or at all. For more information, see “Item 3. Key Information — D. Risk Factors—Risks Related to Our Business— We cannot assure that we will be able to consummate the acquisition of Best Day under the existing terms, under different terms or at all, and, if we are able to consummate the acquisition, we may not achieve the benefits we expect from the acquisition”.

Customer Service

Customer experience is a key focus for our business and we believe this is reflected in our strong brand recognition and loyalty throughout Latin America. We emphasize providing personalized support throughout the customer purchase cycle, including automated web-based support and support from live customer service representatives.

In addition to our customer service centers in Brazil and Colombia, we rely on outsourced services to provide 24/7 support to our customers for issues that cannot be resolved through our platform. Our customer service facilities in Brazil are dedicated to our Portuguese-speaking travel customers, while our customer service facilities in Colombia serve Spanish-speaking travel customers. Many of our customer service staff at these facilities speak English in addition to Portuguese and/or Spanish. We also have a team of customer service staff dedicated specifically to addressing urgent customer needs, primarily those of customers that are in-destination.

To control expenditures related to customer support, we also outsource certain functions to international call center service providers. These outsourced customer service providers support our internal call center operations and improve our ability to support travel customers around the world.

 

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We also have implemented comprehensive performance measures to monitor our calls to ensure that our travel customers receive quality service. In addition, as a part of our customer experience we maintain a database containing travel customer transactions and user preferences for each travel customer who has booked services through us in order to provide customized support and offerings in the future. We believe that the design of our existing systems can scale to meet further increases in call volume.

In addition, during 2018 we implemented a service button on our mobile app which enables travel customers to reach our Company no matter where they are via VOIP (Voice over Internet Protocol) or WI-FI, at no cost.

As a result of our efforts we managed to increase our net promoter score (“NPS”) 110 basis points, up to 67.4% during 2019.

Technology and Data

We use our technology platform to improve the travel customer experience and optimize the efficiency of our business operations. We have successfully built an innovative technology culture that we believe is unique in Latin America and enables us to attract and retain some of the best talent in the region. We employ more than 1,000 dedicated technology professionals. We actively recruit and train these highly-skilled technology professionals and many of our current technology managers started in our training program.

We own our technology platform, which is comprised of applications that we develop in-house using primarily open source software. Our technology team has adopted a continuous improvement, high-frequency testing approach to our business, aimed at improving both traffic and conversion rates, while maintaining reliability.

Our platform is engineered to provide a personalized and secure experience to our travel customers. We invest heavily in understanding our travel customers’ behavior and intentions through a combination of detailed behavioral data collection and machine learning algorithms. Our machine learning algorithms also help us detect fraud attempts. We collect, maintain and analyze behavioral data from all the devices our travel customers are using to interact with our platform. The insights derived from the analysis of this data form the basis of our enhanced conversion strategies. We use email, social media marketing and retargeting campaigns to remind travel customers of their searches.

We believe our technology can scale to accommodate significantly higher volumes of site traffic, customers, bookings and the overall growth in our business. We routinely test and expand the capacity of our servers so we are prepared to provide our travel customers with uninterrupted access to our sites during periods with high levels of user traffic, such as when we are offering promotions. Our information technology platform employs a horizontal architecture, which allows us to increase our processing capacity by adding more hardware in parallel with our existing servers. With this structure, we can grow our platform to accommodate the growth of our business with minimal disruption to the operation of our customer-facing platform and without having to replace our existing equipment.

Our system has been designed around an open architecture with a focus on robust reliability to reduce downtime in the event of outages or catastrophic occurrences. Our platform provides 24/7 availability, except during twice-monthly planned maintenance periods. Our system hardware, which we own, is hosted by a third-party data center in Miami, Florida, which also provides redundant communications lines and emergency power backup.

We believe our technology infrastructure is an important asset due to its robustness, cost-effectiveness and scalability. We continuously evaluate, research and develop new services, platforms infrastructure, and software to improve and solidify our technological systems further and provide a reliable, personalized, fast and secure experience to our travel customers.

For more information, see “—Intellectual Property” and “Item 3. Key Information — D. Risk Factors—Risks Related to Our Business—We may not be able to adequately protect and enforce our intellectual property rights; and we could potentially face claims alleging that our technologies infringe the property rights of others.”

 

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Security, Privacy and Anti-Fraud

We are committed to operating a secure online business. We use various security methods in an effort to protect the integrity of our networks and the confidential data collected and stored on our servers. For example, we use firewalls to protect access to our networks and to the servers and databases on which we store confidential data; we restrict access to our network by virtual private network (“VPN”) with two-factor authentication and conduct periodic audits of data access and modifications of our network; and we use password-protected encryption technology to protect our communication channels and sensitive travel customer data. In addition, we have developed and use internal policies and procedures to protect the personal information of our travel customers, and we comply with the Payment Card Industry Data Security Standard (“PCI DSS”). To enforce our security framework we have a dedicated cybersecurity team that conducts penetration testing and application security analysis, develops policies and standards, and ensures compliance with those policies and standards.

We believe that issues relating to privacy and the use of personally identifiable information are becoming increasingly important as the internet and its commercial use continue to grow. We have adopted what we believe is a detailed privacy policy that complies with local legal requirements in each of the Latin American countries in which we operate and outlines the information that we collect concerning our users and how we use it. Users must acknowledge and expressly agree to this policy when registering with our platform, signing up for our newsletters, or making a purchase.

Although we send marketing communications to our users periodically, we use our best efforts to ensure that we respect users’ communication preferences. For example, when users register with us, they can opt out of receiving marketing e-mails from us. Users can modify their communication preferences at any time in the “My Account” section of our sites.

We use information about our users for internal purposes in order to improve marketing and promotional efforts and in order to improve our content, product offerings and site layout. We may also disclose information about our users in response to legal requirements. All information is stored on our servers located in Miami, Florida.

Moreover, we are committed to detecting and deterring possible instances of fraudulent transactions before they are completed. The key components of our fraud-prevention strategy include: (1) a dedicated and specialized fraud prevention team that works closely with our IT staff; (2) engagement with key actors in the online travel industry, such as banks and airlines, which strengthens our early-detection capabilities, thereby reducing the exposure period to potential fraud events; and (3) machine learning systems that analyze multiple factors, including intelligence gathered from our industry relationships, to help us adapt better to changing market conditions and detect and address fraudulent transactions. Our in-house team works with third-party vendors, allowing us to leverage best practices and scale quickly.

Competition

We operate in a highly competitive and evolving market. Travelers have a range of options, both online and offline, to research, find, compare, plan and book air, packages, hotels and other travel products.

Our competitors include:

 

   

global OTAs with presence in Latin America, such as Booking.com and Expedia and travel metasearch sites;

 

   

search websites and apps, such as Google and its travel businesses, and e-commerce and group buying websites and apps;

 

   

alternative accommodation and vacation rental businesses, such as Airbnb;

 

   

local offline travel agency chains and tour operators, such as CVC Brasil Operadora e Agência de Viagens; and

 

   

smaller online travel agencies lacking a pan-regional presence.

 

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In addition, our travel customers have the option to book travel directly with travel suppliers, including airlines, hotels and other travel service providers via online and offline channels. See “Item 3. Key Information — D. Risk Factors—Risks Related to Our Business—We operate in a highly competitive and evolving market, and pressure from existing and new companies may adversely affect our business and results of operations” for more information.

We believe that the primary competitive factors in the travel industry, in particular as consumers increasingly research, plan and book travel online, are, among other things, brand recognition, price, availability and breadth of choice of travel services and products, customer service, ease of use, fees charged to travelers, accessibility and reliability. We believe our brands, scale, operational and technological capabilities, including our local knowledge and marketing expertise, provide us with a sustainable competitive advantage.

Intellectual Property

We regard our intellectual property as critical to our future success and rely on a combination of trademark laws and contractual restrictions to establish and protect our proprietary rights in our products. Our intellectual property includes trademarks and domain names associated with the names “Despegar.com” and “Decolar.com.” To protect our platform and technology, we have entered into confidentiality and invention assignment agreements with our employees and certain contractors and suppliers. We own our technology platform, which is comprised of applications that we develop in-house using primarily open source software. We have not registered our technology, however, because we believe it would be difficult to replicate and that it is adequately protected by the agreements we have in place. Additionally, our technology is constantly evolving and any registration may run the risk of protecting outdated technology. We cannot assure you that all our intellectual property is fully protected and enforceable vis-à-vis third parties under all applicable laws in Latin America. For more information, see “Item 3. Key Information — D. Risk Factors—Risks Related to our Business—We may not be able to adequately protect and enforce our intellectual property rights; and we could potentially face claims alleging that our technologies infringe the property rights of others.”

Seasonality

See “Item 5. Operating and Financial Review and Prospects — Operating Results.”

Regulation

Regulations Related to the Travel Industry

The laws and regulations applicable to the travel industry affect us and our travel suppliers in the jurisdictions in which we operate, the jurisdictions in which our travel customers reside and the jurisdictions of their destinations. We are also required to be accredited by the International Air Transport Association (“IATA”) in order to promote and sell tickets for airlines connected to IATA.

Brazil

In addition to the standard licenses and permits required for all companies to operate in the travel industry in Brazil, we are subject to a specific registration of tourism providers with the Ministry of Tourism (“CADASTUR”). In Brazil, there are four main norms that govern the activities related to tourism, as well as the enrollment of services providers in the tourism industry: (i) Law No. 11,771/2008, which regulates the National Tourism Policy and defines the responsibilities of the federal government in planning, developing and stimulating the tourism sector; (ii) Decree No. 7,381/2010, which regulates Law No. 11,771/2008; (iii) Ordinance No. 130/2011 from the Ministry of Tourism, which establishes the CADASTUR, the CADASTUR’s consulting committee and regulates other measures; and (iv) Law No. 12,974/2014, which regulates the activities of tourism agencies.

 

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Argentina

As a travel agency in Argentina, Despegar.com.ar must be registered with the Registry of Travel Agents (Registro de Agentes de Viajes) created by Section 5 of Decree No. 2,182/72. The local regulation on commercial tourism activities is comprised of: (i) Law 25,997 and its applicable regulation which governs the development and promotion of tourism in Argentina; (ii) Law 18,829 which defines the regulations applicable to travel agents; (iii) the resolutions issued by the Secretariat of Tourism; and (iv) Law 24,240 as amended, which sets forth the provisions for the protection of consumers.

Regulations that apply to the E-Commerce Industry

We are also subject to a variety of laws, decrees and regulations that affect companies conducting business on the internet in the countries where we operate related to e-commerce, electronic or mobile payments; data collection; data protection; privacy; information requirements for internet providers; taxation (including value added taxes (“VAT”) or sales tax collection obligations); obligations to provide information to certain authorities; and other legislation which also applies to other companies conducting business in general. It is not clear how existing laws in Latin America governing issues such as general commercial activities, property ownership, copyrights and other intellectual property issues, taxation, consumer protection, digital signatures and personal privacy, apply to online businesses. Some of these laws were adopted before the internet was available and, as a result, do not contemplate or address the unique issues of the internet. Due to these areas of legal uncertainty, and the increasing popularity and use of the internet and other online services in our markets, it is possible that new laws and regulations will be adopted with respect to the internet or other online services. These regulations could cover a wide variety of issues, including e-commerce; internet service providers’ responsibility for third-party content hosted in their servers; user privacy; electronic or mobile payments; pricing, content and quality of products and services; taxation (including VAT or sales tax collection obligations, obligation to provide certain information about transactions that occurred through our platform, or about our users); advertising; intellectual property rights; consumer protection and information security. See “Item 3. Key Information — D. Risk Factors—Risks Related to our Business—We process, store and use personal information, card payment information and other consumer data, which subjects us to risks stemming from possible failure to comply with governmental regulation and other legal obligations” and “Item 3. Key Information — D. Risk Factors—Risks Related to our Business—Internet regulation in the countries where we operate is scarce, and several legal issues related to the internet are uncertain” for more information.

Brazil

Resolution (Circular) issued by the Central Bank of Brazil No. 3,682 regulates the payment arrangement (arranjos de pagamento) services in Brazil (“Payment Arrangement Services Rule”). On July 27, 2017 and March 26, 2018, the Central Bank of Brazil revoked and amended certain provisions and included new provisions to the Payment Arrangement Services Rule, which introduced a definition of sub accrediting entities (subrecendiador) and determined that all participants of the payment arrangements should be subject to a centralized settlement system not later than September 28, 2018.

Pursuant to Payment Arrangement Services Rule, among other provisions, sub-accrediting entity is defined as a party of the payment arrangement that accredits a recipient to accept a payment instrument issued by a payment institution or a financial institution that is a party to the same payment arrangement, but that does not participate in the settlement process of transactions as creditor in relation to the issuer. The definition of sub-accrediting entity provided by the Payment Arrangement Services Rule is not precise enough to confirm that our Brazilian subsidiary would be subject to it. After carrying out several discussions with the Central Bank of Brazil, financial institutions and other participants involved in the payments arrangements, our Brazilian brand Decolar demonstrated to the Central Bank of Brazil that: (i) Resolution 3,682 does not apply to its business; (ii) Decolar should not be deemed a subaccrediting institution; and (iii) it should not be obliged to integrate its activities into the payment arrangement Services, nor be subject to the payment arrangement rules issued by the Central Bank of Brazil, which on September 2018 issued a list of the entities and companies which should not be subject to Resolution 3,682 as well as their classification. Decolar has been classified as a non-subaccreditor, this is a simple business establishment, and not as a marketplace entity as provided in the Resolution.

 

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Regulations Related to Consumer and Data Protection

We are subject to consumer and data protection laws in every country where we have a website.

Brazil

There are several laws in Brazil dealing with privacy and data protection, including: (i) the Brazilian Federal Constitution, which provides for the protection of individuals’ fundamental and inviolable rights of intimacy/privacy, private life and image; (ii) the Brazilian Civil Code (Law No. 10,406/2002), which reaffirms the Federal Constitution’s provision of fundamental rights, and provides for the right to act against violators in order to cease the violation and seek compensation for suffered damage; (iii) the Consumer Protection and Defense Code (Law No. 8,078/1990), which provides for consumer-related databases, data collection and penalties related therewith; (iv) the Brazilian Internet Act (Law No. 12,965/2014), which establishes principles, guarantees, rights and obligations related to the use of the internet in Brazil; and (v) the Brazilian Internet Act Regulation (Decree No. 8,771/2016), which sets forth security standards to be complied with by internet connection and application providers (online platform operators) when storing personal data.

Brazilian consumer protection authorities and courts take the view that the express consent of the consumer must be obtained before the collection, treatment, sharing and transmission of personal data. With regard to data collection, the Brazilian Internet Act provides that personal data collection, use, storage, sharing, transmission and treatment must be authorized previously and expressly by the individual, consistent with the general privacy principle set forth by the Federal Constitution and Consumer Defense Code. For the purposes of the Brazilian Internet Act and its regulation, personal data is deemed any data related to an identified or identifiable individual, including identifying numbers, location data or electronic identifiers, when related to an individual.

In addition, Law No. 9,507/1997 regulates privacy requirements and the habeas data process, by which individual citizens can ask a court to issue an order to protect, correct or remove their personal data, and recognizes consumers’ rights to access, correct and update their personal information stored in governmental or public databases. For the purposes of this law, a public database is composed by information that either: (i) is and/or may be transmitted to third parties; or (ii) is not exclusively used by the governmental agency or legal entity generating or managing the information.

As an internet-based retailer, we are also subject to several laws and regulations designed to protect consumer rights—most importantly the Consumer Protection and Defense Code, which regulates commercial practices, product and service liability, strict liability of the supplier of products or services, reversal of the burden of proof to the benefit of consumers, joint and several liability of all companies within the supply chain, abuse of rights in contractual clauses, and advertising and information on products and services offered to the public. The Consumer Protection and Defense Code establishes the legal framework for the protection of consumers, setting out certain basic rights, including the right to clear and accurate information about products and services offered in the consumer market, with correct specification of characteristics, structure, quality and price and the risks they pose. In addition, Executive Decree No. 7.962/13 applies with regards to retaining of service in an online environment. This legislation describes, among others, the rules on disclosure of information, consumer service, payment protection and other procedures for the rendering of online services.

Brazilian General Data Protection Law No. 13.709/2018

The Brazilian General Data Protection Law (Law No. 13.709/2018 – “LGPD”) was approved in August 2018 and it will be effective as of August, 2020. The grace period was proposed in order to provide public and private institutions with a period for them to adapt to the LGPD. The LGPD is applicable to any individual or legal entity governed by public or private law treating personal data (i) in the Brazilian territory; or (ii) for the purposes of offering or supplying goods or services or treating information of data subjects located in Brazil; or (iii) if personal data has been collected in the Brazilian territory.

According to the LGPD, personal data can only be processed (i) upon data subject consent; (ii) in compliance with statutory or regulatory obligations; (iii) by public administration; (iv) for development of studies by research

 

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entities; (v) by contractual and preliminary contractual relationship; (vi) through lawsuits; (vii) for the protection of life and health; (viii) to legitimate interest of the controller; or (ix) for credit protection. The treatment of sensitive personal data (e.g., regarding ethnical or racial origin, religion, political opinion or affiliation, health information, sexual orientation) is subject to a higher scrutiny. The LGPD also provides liability obligations if damages are produced while processing personal data in violation of the provisions of the LGPD.

According to the LGPD, the eight situations in which the international transfer of data is allowed are: (i) when the data subject has provided specific and highlighted consent for such transfer; (ii) when countries or international organizations provide the appropriate level of protection of Personal Data established by Brazilian law; (iii) when controller provides and demonstrates safeguards of compliance with the principles, rights of the data subject and data protection regime established in the law, in the form of specific contractual clauses for a given transfer, among others; (iv) when the transfer is required for international legal cooperation between public bodies of intelligence; (v) when the transfer is required for life protection of the data subject or any third party; (vi) when the national authority authorizes such transfer; (vii) when the transfer results in a commitment undertaken under an international cooperation agreement; or (viii) when the transfer is required for enforcement of a public policy.

Provisional Measure No. 869/2018 of December 27, 2018 (MP 869/2018) created the National Data Protection Authority (“ANPD”), with powers –among others– to ensure the protection of personal data, construe the provisions of the LGPD, and supervise, monitor and apply sanctions in relation to the compliance of LGPD regulation. In order to gain definitive effectiveness, MP 869/2018 must be converted into law.

Argentina

In Argentina, we are subject to e-commerce laws such as Resolution No. 104/05 adopted by the Ministry of Economy and the Argentine Consumer Protection Agency, which establishes certain information requirements for internet providers, and Law No. 25,326, as amended, and its corresponding regulations, which mandate the registration of databases with the Data Protection Agency and regulate, among other things, the type of information that can be collected, and how such information can be used.

Moreover, Law No. 24,240, as amended (the “Consumer Protection Law”), sets forth certain rules and principles designed to protect consumers. The Consumer Protection Law was amended on March 12, 2008 by Law No. 26,361 in several respects, including: (i) an increase in the size of the overall group of persons deemed to be consumers, or recipients of the protections of the Consumer Protection Law; (ii) an increase in the maximum penalties applicable to providers that breach the law to AR$5 million, as discussed below, and the granting of power to the administrative authority to require the payment of direct damages by any provider; (iii) requirements that providers pay punitive damages to consumers (which may not exceed AR$5 million); and (iv) regulations regarding the possibility for consumer associations to initiate class actions on behalf of consumer groups. The Argentine Secretary of Commerce, which is part of the Argentine Ministry of Economy, is the national enforcement authority of the Consumer Protection Law, while the Autonomous City of Buenos Aires and the provinces act as local enforcement authorities.

Regulations Related to Taxation

Brazil

In Brazil, between 2011 and 2015, our Brazilian subsidiary was exempt from collection of withholding income tax (“WHT”) on remittances to cover travel expenses of Brazilian individuals abroad, within the parameters established by applicable law. From January 1, 2016 to March 1, 2016, the applicable WHT for payments, credits, delivery, use by or remittance of these amounts to foreign persons was 25%. In February 2016, our Brazilian subsidiary filed a writ of mandamus (a judicial complaint) against the federal tax authority claiming that WHT should not be applicable due to a provision of “non-imposition” contained in the Income Tax Regulations. In March 2016, the court granted our Brazilian subsidiary a preliminary injunction on the writ of mandamus, which allowed our Brazilian subsidiary to make remittances free of WHT while the preliminary injunction was in place. In December 2016, the court published a decision on the merits of the case, against our Brazilian subsidiary (which terminated the effects of the preliminary injunction). Also in December 2016, our Brazilian subsidiary filed a motion for clarification, in an attempt to request the court to issue an opinion on the possible application of tax treaties to allow our Brazilian subsidiary to not collect WHT on the basis of their provisions.

 

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Since March 2, 2016, the former WHT exemption was converted into a WHT imposition of 6% on remittances to cover travel expenses of Brazilian individuals abroad, within the parameters established by applicable law. This reduced WHT rate was effective until December 31, 2019. During 2018, while the motion for clarification was still pending, our Brazilian subsidiary deposited (via judicial deposits) the withheld amounts before the court in order to guarantee that (i) if the company is not successful in the plea before the court, the applicable WHT will be converted into income of the federal revenue, without the imposition of any fines or interest and (ii) if the company is successful in its plea, the amount corresponding to the WHT will be returned to our Brazilian subsidiary with monetary adjustments. The new Income Tax Regulation RIR/18 came into effect on November 23, 2018, repealing former Decree No. 3,000/1999. Under the new RIR/18, non-incidence of income tax withholdings on remittances abroad was reconsidered. On January 2020, our Brazilian subsidiary submitted a partial withdrawal from the writ of mandamus (judicial complaint), and abandoned the discussion in court, for the upcoming periods.

On November 26, 2019 a new Medida Provisoria 907 came into effect. According to the new regulation, new withholding tax rates were established for remittances to cover travel expenses of Brazilian individuals abroad, with progressively increased rates starting with 7.9% in 2020, 9.8% in 2021, 11.7% in 2022, 13.7% in 2023 and 15.5% in 2024.

Argentina

IT District Parque Patricios

Since 2013 we have been the beneficiary of a partial tax exemption, applicable until January 30, 2029, under Buenos Aires Municipal Law No. 2,972, which includes, among others, the turnover tax reduction. This benefit implies the reduction, from the turnover tax, of any revenue directly connected to services performed through software applied to e-commerce that are performed within the designated IT district located in Parque Patricios in the city of Buenos Aires, only when: (i) said entity/person is registered under the Information and Communications Technologies Registry; and (ii) the entity/person keeps or increases the number of employees hired at the time of registration.

Software Law Benefits & Knowledge-based-Economy Promotional Regime

On August 18, 2017, the Argentine National Ministry of Production issued Disposition 82-E/2017, accepting the registration of our Argentine subsidiary in the National Registry of Software Producers, created by Decree 1315/13. As a result of this registration and pursuant to Argentine National Law No. 25,922, as amended, and its corresponding regulations (the “Software Promotion Law”), our Argentine subsidiary has been granted several tax benefits through December 31, 2019. These benefits include (i) a fixed national tax rate, (ii) a fiscal bond equivalent to 70% of the value of 75.14% of the Company’s social security tax contribution payments under Laws 19,032, 24,013 and 24,241, which can be used as a tax credit to offset national taxes; provided that not more than 13.83% of this tax credit may be used by the company to cancel Argentine corporate income tax; (iii) exemption from value-added tax withholding regimes; and (iv) a 60% reduction in the total amount of corporate income tax as applied to income from the activities of creation, design, development, production, implementation or adjustment (upgrade) of developed software systems and their associated documents.

On June 10, 2019, the Argentine government enacted Law No. 27,506 (knowledge-based economy promotional regime), which established a regime that provides certain tax benefits for companies that meet specific criteria, such as companies that derive at least 70% of their revenues from certain specified activities. Law No. 27,506 allows companies currently benefiting from the software development law, to apply for tax benefits under Law No. 27,506, which will be effective from January 1, 2020 to December 31, 2029. Eligible companies are entitled to (i) a 15% corporate income tax rate (instead of the otherwise applicable 30% corporate income tax rate), (ii) a freeze on the taxpayer’s overall federal tax burden, (iii) a reduction in employer social security contributions and (iv) a tax credit in the amount of 1.6 times the amount payable as social security contributions. The tax credit may be used to offset federal taxes, such as value-added tax and income tax.

 

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The above mentioned regime, however, was suspended on January 20, 2020 through a new resolution issued by Argentina’s Ministry of Productive Development until new rules for the application of the knowledge-based economy promotional regime are issued. We will analyze whether we will be eligible to benefit from the law and its related tax benefits once the new regulations are issued.

Income Tax Reform

On December 27, 2017, the Argentine Congress approved a comprehensive income tax reform effective since January 1, 2018. Among the key features, the bill: (i) reduces the 35% income tax rate to 30% for 2018 and 2019, and to 25% as from 2020; (ii) imposes a dividend withholding tax paid by an Argentine entity of 7% for 2018 and 2019, increasing to 13% as from 2020; and (iii) repeals the “equalization tax” (i.e., 35% withholding applicable to dividends distributed in excess of the accumulated taxable income) for income accrued from January 1, 2018.

On December 23, 2019, the Argentine Congress enacted a law which maintains the corporate income tax rate of 30% for two more years, instead of reducing the rate to 25% as established under the previous law. The law also maintains the dividend withholding tax rate of 7% for two more years, instead of applying the 13% rate as previously established.

Tax on Export of Services

In September 2018, the Argentine government issued the Decree 793/2018 which established a temporary withholding on exports of services of 12% with a maximum limit of AR$ 4 per each dollar of the export invoice amount. This withholding on exports of services was applicable for exports of years 2019 and 2020. On December 2019, Decree No. 99/2019 reduced the percentage from 12% to 5% without limit of Argentine pesos per dollar, to become effective since January 1, 2020 until December 31, 2021.

New Tax for an Inclusive and Solidarity Argentina (PAIS)

Effective as of December 23, 2019, a new tax (Tax for an Inclusive and Solidarity Argentina (PAIS)) was created in Argentina. The new 30% tax applies on the purchases by Argentinean residents of foreign services through credit and debit cards; services to be provided outside Argentina, contracted through Argentine travel and tourism agencies –wholesale or retailers–; and the acquisition of international passenger transport services (by land, air, aquatic and road).

Uruguay and Others

We operate as a free trade zone user of the Zonamerica Free Trade Zone in Montevideo, Uruguay (the “Free Trade Zone”), under Law No. 15,921 and its corresponding regulations. No domestic Uruguayan tax whatsoever applies in the Free Trade Zone, except for social security contributions for any Uruguayan employees. No social security contributions are required for non-Uruguayan employees, so long as they do not exceed 25% of the personnel working in the facility located in the Free Trade Zone. In addition, the inflow of goods and services to the Free Trade Zone, as well as their outflow abroad, are tax exempt. The movement of goods and services into a Free Trade Zone from a non-Free Trade Zone Uruguayan territory is treated as an export and therefore also exempt from VAT and the Specific Internal Tax (Impuesto Específico Interno or “IEI”). On the other hand, if goods are introduced into a non-Free Trade Zone Uruguayan territory from a Free Trade Zone, the corresponding import tax will apply. Exporting services from a Free Trade Zone to a non-Free Trade Zone Uruguayan territory is generally prohibited. However, in 2016, our Uruguay subsidiary located in the Free Trade Zone was authorized by the Ministry of Economy in Uruguay to have limited operations with a related party located in Uruguay. By law, the Uruguayan state is liable for damages if the tax exemptions, benefits and rights of users of Free Zones granted pursuant to the law are not fulfilled during the term of their contracts.

We operate as a free trade zone user in Bogotá, Colombia under Decree 2147. Based on the regime, we receive certain tax benefits, consisting primarily of a reduced income tax rate.

 

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Regulations Related to Foreign Currency and Exchange Rates

There are also laws and regulations that address foreign currency and exchange rates in many of the countries in which we operate. In certain countries where we operate, we need governmental authorization to pay invoices to a foreign supplier or send money abroad due to foreign exchange restrictions. See “Item 3. Key Information — D. Risk Factors—Risks Related to Latin America—We are subject to significant foreign currency exchange controls in certain countries in which we operate.”

Other Recent Argentine Regulations

Productive Financing Law. The Argentine Congress passed Law No. 27,440 on May 9, 2018, which amends the existing Argentine Capital Markets Law, the Mutual Funds Law No. 24,083 and the Argentine Negotiable Obligations Law No. 23,576, among other complementary and relevant legislation, in an effort to update the applicable legal framework and fostering the development of the Argentine capital markets. Law No. 27,440 seeks to increase the base of investors and companies which take part in the capital markets, promoting productive financing for all players in the market but with special focus on micro-, small- and medium-sized companies, creating a regimen which promotes and eases financing to such companies. Furthermore, the Law No. 27,440 amends certain tax provisions, derivatives regulations and certain financial inclusion program.

Corporate Criminal Liability Law. On November 8, 2017, the Argentine Congress passed the Corporate Criminal Liability Law as Law No. 27,401, which implements certain international standards to penalize criminal offenses against public administration and cross-border bribery committed by, companies’ shareholders, attorneys-in-fact, directors, managers, employees, or representatives, among others. The Corporate Criminal Liability Act entered into effect on March 1, 2018.

Welfare Reform Law. On December 18, 2017, the Argentine Congress passed the Welfare Reform Law as Law No. 27,426 which seeks to comprehensively reform of the Argentine welfare system, including modifications to the basic formula for the periodic adjustment of retirement earnings, pensions and social plans. The Welfare Reform Law also modified the Labor Law No. 24.241 by establishing that employers may request employees who have reached 70 years of age to initiate retirement proceedings.

Tax Reform. On December 27, 2017, the Argentine Congress approved a Tax Reform as Law No. 27,430, which is intended to eliminate certain of the existing complexities and inefficiencies of the Argentine tax regime, reduce tax evasion, increase the coverage of income tax as applied to individuals and encourage investment while sustaining its medium- and long-term efforts aimed at restoring fiscal balance. The reforms will gradually come into effect within a five-year term from 2018 until 2022, as part of a larger program to increase the competitiveness of the Argentine economy as well as employment and diminish poverty on a sustainable basis.

Fiscal Consensus Laws. On December 21, 2017, the Argentine Congress passed the Fiscal Consensus Law No. 27,429. This law was based on an agreement signed on November 16, 2017 between the Argentine government and representatives from 23 out of Argentina’s 24 provinces, with the goal of implementing measures that favor sustained growth in economic activity, productivity and employment. On December 4, 2018, the Argentine Congress passed a new Fiscal Consensus Law, as Law No. 27,469, which modifies some aspects of the previous Law, such as the suspension of the prohibition on increasing the tax rate of the personal assets tax and it also suspends, for a period of one year, the commitment of the provinces to reduce the stamp tax rates. Additionally, on January 29, 2020 by means of Law No. 27,542, the Argentine Congress approved the agreement reached between the federal government and provincial governments on December 17, 2019, amending the tax consensus in order to suspend reductions on certain provincial taxes until December 31, 2020.

Decree No. 27/2018 (Decreto de Necesidad y Urgencia) on Debureaucratization and Simplification: On January 2018, the Executive Branch issued necessity and urgency Decree No. 27/2018 on Debureaucratization and Simplification. With this measure, the Argentine government seeks to reduce the amount of processes companies must complete to be able to operate in the country, seeking to be more efficient and accelerate processing. On May 30, 2018, the Argentine Congress passed the Law 27,444, Law 27,445 and Law 27, 446 in replacement of the Decree No. 27/2018. Although such Laws maintain most of the basic modifications introduced by the Decree, certain measures were left aside of the laws’ content and therefore, repealed.

 

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Legal Proceedings

From time to time, we are involved in disputes and legal and administrative proceedings that arise in the ordinary course of our business. We are currently engaged in several legal proceedings, including consumer protection, tax, labor and other proceedings. Any claims against us, regardless of whether meritorious, can be time-consuming, result in costly litigation, require significant management time and result in the diversion of significant operational resources.

We have established provisions for such disputes and proceedings in an aggregate amount of $6.4 million as of December 31, 2019. We record a provision in our balance sheet for losses arising from litigation based on an evaluation of the likelihood of loss by our external and internal legal counsel, the progress of related proceedings, the history of losses in similar cases and the individual analysis of each contingency. We record provisions for contingencies based on probable loss or when so required under accounting rules. We do not reserve provisions for possible and remote losses.

We are currently not a party to any legal, arbitration or administrative proceedings that, in the opinion of our management, is likely to have a material and adverse effect on our business, financial condition and results of operations, other than as set forth below.

Brazil

On June 25, 2014, the National Association of Citizenship and Consumer Defense (“ANADEC”) filed a public civil action against our Brazilian subsidiary to (i) dispute the validity of cancellation clauses which establish a penalty in a percentage higher than 20% of the price paid by the consumer; and (ii) request the return of the amounts paid by all consumers above this percentage. We successfully defended this claim in the trial court and the ANADEC appealed the decision. On May 10, 2018, in the context of another civil class action filed by the Public Attorney’s Office of São Paulo against ANADEC, an Appeal Court decided to dissolve ANADEC.

Between May and July 2016, Booking.com filed several complaints against us before various public offices: Public Prosecution Office of the State of Rio Grande do Sul, Public Prosecution Office of the State of São Paulo, Consumer Defense Office of the State of Rio de Janeiro, Consumer Defense Office of the State of São Paulo (“PROCON”), Consumer Defense Office of the Department of Justice, Consumer Defense Committee of the Legislative Assembly of the State of Rio de Janeiro and the Public Prosecution Office of the State of Rio de Janeiro. Booking.com alleged that (i) we offered higher prices to Brazilian consumers than those offered to foreign consumers for the same accommodation during the same period of time (“geopricing”) and (ii) we made accommodations unavailable for Brazilian consumers whereas foreign consumers were allowed to book the same accommodations (“geoblocking”). Based on these allegations, Booking.com requested that the public prosecution offices order us to pay penalties and/or to initiate public civil actions against us in order to prevent the alleged practices. We presented our administrative defenses to all claims. Such complaints resulted in investigation proceedings with the respective authorities.

In June 2018 the Consumer Defense Office of the Department of Justice issued a decision against Decolar and condemned it to pay a fine in the amount of R$7.5 million, on the grounds of alleged geopricing and geoblocking practices and obligated Decolar to cease such practices. We appealed such decision. The proceeding filed before PROCON originally closed in favor of Decolar; however, on January 23, 2020, the same Office issued a new resolution imposing a fine against Decolar in the amount of R$1.2 million. As of the date of this Annual Report, Decolar already filed its defense, which evidences the inconsistencies in PROCON’S resolution, especially considering the former favorable decision. We are currently waiting for PROCON’s the decision.

In January 2018, the Public Prosecutor’s Office of the State of Rio de Janeiro filed a public civil action against us in the Rio de Janeiro court. This complaint also refers to the alleged geopricing and geoblocking practices in detriment to Brazilian consumers and seeks the cessation of the practice and payment of damages. We filed our defense on

 

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March 20, 2018 and provided evidence that we weren’t engaging in those alleged practices, however the Rio de Janeiro Public Attorney Office requested to the court the suspension of the injunction granted to Decolar, not to seal (classify) Decolar’s defense, and make public available Decolar’s defense documentation. Decolar appealed and the court kept its defense sealed and private; however the court decided to start the phase of “expert examination”, which has not started yet.

Although we believe our Brazilian subsidiary has meritorious defenses to this lawsuit and administrative proceedings, we cannot assure you what the ultimate outcome of this matter will be. The final resolution of these claims, which could take several years, is not likely to have a material effect on our financial position or results of operations.

Argentina

On June 28, 2017, the Sindicato Empleados de Comercio de Capital Federal (Union for Employees of the Commercial Sector in the City of Buenos Aires, or “SECCF”) filed a lawsuit against our Argentine subsidiary, Despegar.com.ar, in which SECCF demanded the application of its collective labor agreement to all of the employees of the subsidiary. According to SECCF’s claim, Despegar.com.ar should have withheld and transferred to SECCF an amount equal to 2% of the gross monthly salaries of all of its employees for the period from October 2011 through October 2016. As a result, SECCF seeks payment of approximately AR$18 million. On April 19, 2018 SECCF filed a new claim, similar to the previous one, but against La Inc S.A.—an Argentine subsidiary company that had already been merged with Despegar.com.ar several months before. In this new claim, SECCF sought an amount equal to the 0.5% of the gross monthly salaries of La Inc’s employees for certain periods (July and August, 2012; September, 2013; and March, 2015 to the present).

We filed both responses in a timely manner, rejecting all the claims, with similar defenses. On May, 2019 we reached a settlement with SECCF in both proceedings, in which we accepted to execute a new labor collective agreement with the union, including certain employees, and the union agreed to withdraw these claims. The new collective agreement comes into effect beginning as of April 2020.

As in Brazil, Booking.com filed two claims in Argentina accusing our Argentinian subsidiary of carrying out certain illegal practices (geopricing and geoblocking) by favoring foreign consumers versus local consumers. The claims were filed before the National Consumer Protection Office (August 2019), and the National Unfair Competition Office (November 2019). In the first claim, Despegar filed its response rejecting plaintiff’s allegation and introducing a counterclaim, asserting that it was Booking.com and not Despegar who carried out misleading practices against consumers. We also accused Booking of lacking the compulsory license granted by the Tourism Ministry to sell tourism products in Argentina. On December 23, 2019 the National Consumer Protection Office rejected the claim filed by Booking and ordered an investigation against it, to be carried out before the National Ministry of Tourism; however, the decision may still be appealed by Booking. In the second claim (filed before the National Unfair Competition Office in November 2019) we filed our response rejecting plaintiff’s allegation on the same basis used on the case before the Consumer Protection Office. The Unfair Competition Office is in the process of collecting evidence. We believe that the final resolution of this claim is not likely to have a material effect on our financial position or results of operations.

 

C.

Organizational Structure

Despegar.com, Corp. is a holding company organized in the British Virgin Islands, which owns, directly or indirectly, all of our operating subsidiaries. The diagram below depicts the organizational structure of our key subsidiaries:

 

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LOGO

 

D.

Property, Plants and Equipment

The following table shows the location of our significant leased offices and customer service centers, and the term of the leases under which they operate.

 

City, Country

  

Facility

  

Address

   Approximate
Square
Meters
   Agreement
Expiration
Date
 
Buenos Aires Argentina    Argentina operation and regional functions    Avenida Corrientes 746    2,030      02/28/2023  
Buenos Aires, Argentina    Argentina operation and regional functions    Juana Manso 999, 2 Floor    4,422      08/31/2021  
Buenos Aires, Argentina    Argentina operation and regional functions    Juana Manso 1069, 5 Floor    1,203      05/21/2022  
La Plata, Buenos Aires Argentina    Argentina operation    Camino Centenario esq. 511, La Plata    2,600      08/31/2022  
Bogotá, Colombia    Colombia operation and customer service center   

Interior 101, Manzana 15,

Carretera 106 Nbr. 15A-25,

Free Trade Zone

   1,754      02/23/2021  

 

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Montevideo, Uruguay    International Hotels, Packages and Other Travel Products operations and Shared service center   

Ruta 8 Km. 17,500, local 318,

edificio 300, Zonamerica

   2,092    09/14/2020
Sao Paulo, Barueri, Brazil    Brazil operation    Alameda Grajuá 219    5,600    08/16/2023

We also own two properties: (i) an approximately 2,077 square meter facility at Jujuy 2013 in the Parque Patricios tech district of Buenos Aires, Argentina, which houses part of our Argentina operations including IT support, and (ii) an approximately 223 square meter facility on Avenida Francisco de Miranda in Caracas, Venezuela, which houses our Venezuela operations.

 

ITEM 4A.

UNRESOLVED STAFF COMMENTS

None.

 

ITEM 5.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

A.

Operating Results

Overview

We are the leading online travel company in Latin America, known by our two brands, Despegar, our global brand, and Decolar, our Brazilian brand. We have a comprehensive product offering, including airline tickets, packages, hotels and other travel-related products, which enables consumers to find, compare, plan and purchase travel products easily through our marketplace. We provide our network of travel suppliers a technology platform for managing the distribution of their travel products and access to our travel customers.

During 2019, 2018 and 2017, we had approximately 5.2 million, 5.3 million and 4.6 million travel customers, respectively. For the years ended December 31, 2019, 2018 and 2017, our gross bookings were $4.7 billion, $4.7 billion and $4.4 billion, respectively.

We organize our business into two segments: (1) Air, which consists of the sale of airline tickets, and (2) Packages, Hotels and Other Travel Products, which consists of travel packages (which can include airline tickets and hotel rooms), as well as stand-alone sales of hotel rooms (including vacation rentals), car rentals, bus tickets, cruise tickets, travel insurance and destination services. In 2019, 38% and 62% of our total revenue derived from our Air and our Packages, Hotels and Other Travel Products segments, respectively. In 2018, 40% and 60% of our total revenue derived from our Air and our Packages, Hotels and Other Travel Products segments, respectively, while in 2017, 46% and 54% of our total revenue derived from our Air and our Packages, Hotels and Other Travel Products segments, respectively.

We primarily generate revenue as a result of our facilitation services to our travel suppliers and travel customers.

Our primary sources of revenue are:

 

   

commissions earned from facilitation services to travel suppliers, including facilitating reservations of flight tickets, hotel accommodations, car rentals, vacation packages and other travel-related products and services;

 

   

service fees charged to travel customers for facilitation services including the handling and processing selected travel products, the facilitation of payment processing, and limited post-booking services related to handling minor inquiries or minor administrative changes;

 

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override commissions or incentives from travel suppliers and GDS providers if certain performance conditions are met; and

 

   

advertising revenues from the sale of advertising placements on our websites.

We operate under two business models: the Pre-Pay/Merchant Business Model and the Pay-at-Destination/Agency Business Model. Under the Pre-Pay/Merchant Business Model, we generally receive the entire amount of the travel product sold up front at the time of booking, which comprises (i) the value of the travel product set and offered by the travel supplier, of which we retain the commission agreed with the travel supplier, and (ii) the service fee amount we charged to travel customers for the facilitation services. Under the Pay-at-Destination/Agency Business Model, except for the amount corresponding to service fees charged by the travel supplier which is paid upfront, travel customers pay the travel supplier directly at destination. Commissions from travel suppliers are paid directly to us by travel suppliers, generally after they use the travel service.

For the years ended December 31, 2019, 2018 and 2017, we generated:

 

   

revenue of $524.9 million, $530.6 million and $523.9 million, respectively;

 

   

operating (loss) / income of $(8.9) million, $45.4 million and $71.2 million, respectively;

 

   

net (loss) / income of $(20.9) million, $19.2 million and $42.4 million, respectively; and

 

   

Consolidated Adjusted EBITDA of $25.6 million, $67.6 million and $89.4 million, respectively.

In May 2017, the stockholders of our predecessor, Decolar.com, Inc., a Delaware corporation, exchanged their shares for ordinary shares of Despegar.com, Corp., a business company incorporated in the British Virgin Islands to create a BVI holding company. Following the exchange, our shareholders own shares of Despegar.com, Corp. and Decolar.com, Inc. is a subsidiary of Despegar.com, Corp. The consolidated financial information as of December 31, 2016 and 2015, and for the three years ended December 31, 2017, 2016 and 2015, to the extent related to the events and periods prior to May 3, 2017, are the consolidated financial information of Decolar.com, Inc., which is our predecessor for accounting purposes.

Novel Coronavirus 2019 (COVID-19)

The ongoing COVID-19 pandemic is disrupting the global economy and the travel industry, and consequently adversely affecting our business, results of operations and cash flows. As conditions are recent, uncertain and changing rapidly, it is difficult to predict the full extent of the impact that the pandemic will have on our Company.

The recent outbreak of COVID-19, which has been declared by the World Health Organization to be a “public health emergency of international concern,” has rapidly spread across the globe and is impacting worldwide economic activity and –in particular– the travel industry. Countries around the world, including in Latin America, have adopted extraordinary measures to stem the spread of COVID-19, including imposing travel restrictions and bans, closing borders, establishing restrictions on public gatherings, instructing residents to practice social distancing, requiring closures of non-essential businesses, issuing stay at home advisories and orders, implementing quarantines and similar actions. Depending on how the spread of the virus evolves, governments may extend these measures for longer periods.

The impact to date of the COVID-19 pandemic on global economic conditions and on the travel industry has been sudden and severe. The pandemic has significantly increased economic uncertainty and is likely to cause a global recession. Moreover, leisure travel across the world has come to a virtually immediate and complete halt during the past weeks. We cannot predict how long the COVID-19 pandemic will continue or how long current or future travel restrictions will remain in place.

Demand for travel began showing early initial signs of weakness by the beginning of March 2020. Within a matter of days, with more news of the potentially extensive spreading of the virus to other parts of the world, travel demand

 

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began to decline significantly, and then the decline accelerated precipitously as governments implemented measures to limit the spread of the virus. Since mid-March, we began experiencing—and continue to experience—an almost complete stoppage in new travel booking, and a spike in customer cancellations or reschedulings of existing bookings for substantially all near term travel. During the second half of the month of March of this year, our gross bookings have declined by over 95% as compared to the comparable period of last year. We estimate that revenues for the month of March 2020 amounts to approximately $2.2 million, a decline of 93% as compared to the previous month, and revenues for the first quarter of 2020 amounts to approximately $78.2 million, a decline of 41% as compared to the same quarter of the previous year. See note 26 to our consolidated financial statements. In addition, we have incurred additional customer service costs in connection with servicing travelers affected by the outbreak, which also has a negative impact on our results of operations. We are also evaluating impairments on goodwill and investments, and we may recognize allowances in relation to advance payments to travel suppliers. Consequently, despite strong results during the months of January and February, we expect that our net income, Adjusted EBITDA and cash flows from operating activities will be adversely affected during the first quarter of 2020.

On March 20, 2020, we withdrew our guidance for the first quarter of 2020, until there is a better understanding of the duration and depth of significantly reduced travel demand resulting from the COVID-19 pandemic and governments’ extraordinary measures. Because the extent of the COVID-19 pandemic and its impact on travel across the world cannot be predicted at this time, the full extent to which COVID-19 will impact our business, results of operations and cash flows is currently unknown. Although we have not previously experienced such an unprecedented decline in travel demand, we believe that the severity of the impact on our Company will depend, to a large extent, on how long the crisis continues. Based on current conditions and the foreseeable scope and extension of the governments’ measures, we expect a more significant impact to our financial performance for the second quarter of 2020, primarily because we expect the crisis to continue for at least significant part of the second quarter. We do not expect our financial performance to improve until travel consumers are able and willing to resume travel plans and travel suppliers are able and willing to resume their operations and product offerings, which will depend to a large degree, on health concerns from the pandemic subsiding and on the recovery of economic conditions.

We are taking significant measures to mitigate the impact of the crisis on our Company. Among other measures, we are prioritizing the health and safety of our employees, which have been working remotely since the middle of March, even before mandatory quarantines were imposed. We are also focusing on our customer service efforts to address the increased need of our travel customers, in particular with changes to their travel plans and arrangements. For that purpose, the Company has (i) reallocated employees to customer support care, doubling the number of representatives handling inbound calls; (ii) improved the automation capabilities of digital channels to assist clients; and (iii) provided customers with flexible conditions to reschedule their travel plans and, in some cases, cancelling their existing travel bookings.

Additionally, we are taking steps to significantly reduce non-critical expenditures and readjusting structural costs to deliver savings and preserve cash, including (i) temporarily reducing salaries of the senior and middle management; (ii) suspending bonuses to all employees; (iii) reducing part of our workforce and implementing a hiring freeze and limiting inflation salary increases; (iv) reducing working hours and implementing unpaid leave in certain locations; (v) accelerating the capture of synergies from the acquisitions of Viajes Falabella; (vi) renegotiating supplier payment terms and conditions; (vii) reviewing all contracts and commitments; and (viii) deferring non-critical capital expenditures. In addition, the Company has also reduced its marketing investments. We expect these measures to significantly reduce our expenses during 2020.

Key Trends and Factors Affecting Our Business

We believe that our results of operations and financial performance will be driven primarily by the following long-term trends:

 

   

Growth in and Retention of our Customer Base: A key driver of our revenue will be the number of customer transactions and the growth in our customer base. We have grown our travel customer base from 2.7 million travel customers booking travel with us in 2012 to 5.2 million in 2019. One important driver of growth in our travel customer base is consumer awareness of our brand which we foster via our online and offline marketing throughout our target markets in Latin America. We also benefit from network effects, in that a larger customer base helps us to attract additional travel suppliers and, in

 

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turn, a larger network of travel suppliers helps us to attract new travel customers as well as drive retention and repeat purchases. We focus on maintaining strong customer satisfaction to build long-term customer relationships. In 2019 and 2018, approximately 64% and 61%, respectively, of our travel customers had completed previous purchases on our platform.

 

   

Cross-Selling: Our financial results are also driven by our ability to cross-sell and increase the number of products that we are able to sell in connection with each trip, which allows us to increase our revenue from each transaction without incurring the costs of acquiring additional travel customers.

 

   

Changes in Product Mix and New Product Offerings: In addition to the total volume of transactions, our operating results also vary depending on product mix. In particular, packages and hotels tend to have higher margins than air travel. In addition, we continually seek to expand our product offerings, whether by adding new product categories, such as our introduction of our bus, local concierge and vacation rentals products, which may have higher or lower margins than our overall business, or by the ongoing expansion of our travel supplier base.

 

   

Packages as a driver of business growth: A key strategy of our business for the coming years, is to increase our proprietary activities, in both forms allotments and tour operations, which allow as to generate higher margins, but is associated with inventory risk. We believe we have the capability to appropriately manage this inventory.

 

   

Shift to Mobile Transactions: As smart phone penetration in Latin America continues to increase, Latin American consumers have begun to make greater use of mobile devices to transact online. Mobile is an increasingly important part of our business, as consumers are quickly able to access and browse our real-time travel offerings, compare prices and make purchases through their mobile devices. During 2019 and 2018, mobile accounted for approximately 60% and 61%, respectively, of all of our user visits, and approximately 39% and 34%, respectively, of our transactions were completed on our mobile platform, complementing our desktop website traffic. In addition, the number of transactions via mobile and other platforms increased by approximately 17.6% in 2019 compared to 2018. During 2019, we increased our travel customers in mobile devices by approximately 14%. Our strategic focus on mobile enables us to remain connected to travel customers and provides the opportunity for travel customers to access our platform after they have arrived at their destination to purchase additional products, such as rental cars, destination services and travel insurance, or make last-minute hotel or air travel bookings.

 

   

Selling and Marketing Expenditures: Our number of transactions and gross bookings, and consequently our revenue and results of operations, are impacted by the level of our selling and marketing expenditures. We monitor our selling and marketing expenditures and their impact on our revenue in many cases virtually in real-time, as a significant amount of our selling and marketing expenditures relate to online advertising for which we can obtain real-time click-through data. As a result, we are able to adjust our selling and marketing expenditures to respond rapidly to changing market conditions. During 2019, our selling and marketing expenditures increased 8% compared to 2018.

Key Business Metrics

We regularly review the following key metrics to evaluate our business, measure our performance, identify trends in our business, prepare financial projections and make strategic decisions.

 

     Year Ended December 31,  
     2019      2018      % Change     2018      2017      % Change  
     (in thousands)     (in thousands)  

Operational

                

Number of transactions

                

By country

                

Brazil

     4,121        4,230        (3     4,230        3,713        14  

 

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     Year Ended December 31,  
     2019     2018      % Change     2018      2017     % Change  
     (in thousands)     (in thousands)  

Argentina

     2,324       2,378        (2     2,378        2,264       5  

Other

     4,233       3,785        12       3,785        3,079       23  
  

 

 

   

 

 

      

 

 

    

 

 

   

Total

     10,678       10,393        3       10,393        9,056       15  

By segment

              

Air

     6,220       5,945        5       5,945        5,285       12  

Packages, Hotels and Other Travel

                 18  

Products

     4,458       4,448        NM       4,448        3,771    
  

 

 

   

 

 

      

 

 

    

 

 

   

Total

     10,678       10,393        3       10,393        9,056       15  

Gross bookings

   $ 4,734,257     $ 4,715,325        NM     $ 4,715,325      $ 4,454,548       6  

Financial

              

Consolidated adjusted EBITDA (unaudited)

   $ 25,562     $ 67,644        (62   $ 67,644      $ 89,354       (24

Adjusted Segment EBITDA

              

Air

     3,346       27,790        (88     27,790        58,397       (52

Packages, Hotels and Other Travel

              

Products

     36,546       37,739        NM       37,739        31,341       20  

Unallocated

     (14,330     2,115        NM       2,115        (384     NM  

 

Note: “NM” denotes not meaningful.

Number of Transactions

The number of transactions for a period is an operating measure that represents the total number of travel customer orders completed on our platform in such period. We monitor the total number of transactions, as well as the number of transactions in each of our segments and the number of transactions with travel customers in each of the countries where we operate. The number of transactions is an important metric because it is an indicator of the level of engagement with our travel customers and the scale of our business from period to period but, unlike gross bookings and our financial metrics, the number of transactions is independent of the average selling price of each transaction, which can be significantly influenced by fluctuations in currency exchange rates.

Gross Bookings

Gross bookings is an operating measure that represents the aggregate purchase price of all travel products booked by our travel customers through our platform during a given period. We generate substantially all of our revenue from commissions and other incentive payments paid by our travel suppliers and service fees paid by our travel customers for transactions through our platform, and, as a result, we monitor gross bookings as an important indicator of our ability to generate revenue.

Adjusted Segment EBITDA

We measure our segment’s performance by our Adjusted Segment EBITDA. We use Adjusted Segment EBITDA for purposes of making decisions about allocating resources to our segments and to internally evaluate their financial performance because we believe Adjusted Segment EBITDA reflects current core operating performance of each segment and provides an indicator of each segment’s ability to generate cash. Adjusted Segment EBITDA is calculated, with respect to each segment, as our net income / (loss) exclusive of financial income / (expense), income tax, depreciation, amortization, impairment of long-lived assets and stock-based compensation expense. See note 24 to our audited consolidated financial statements for our Adjusted Segment EBITDA information and segment information.

Consolidated Adjusted EBITDA

We define Consolidated Adjusted EBITDA as net income / (loss) exclusive of financial income / (expense), income tax, depreciation, amortization, impairment of long-lived assets and stock-based compensation expense.

 

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We believe that Consolidated Adjusted EBITDA, a non-GAAP financial measure, provides useful supplemental information to investors about us and our results. Consolidated Adjusted EBITDA is among the measures used by our management team to evaluate our financial and operating performance and make day-to-day financial and operating decisions. In addition, Consolidated Adjusted EBITDA is frequently used by securities analysts, investors and other parties to evaluate companies in the online travel industry. We also believe that Consolidated Adjusted EBITDA is helpful to investors because it provides additional information about trends in our core operating performance prior to considering the impact of capital structure, depreciation, amortization, and taxation on our results.

Consolidated Adjusted EBITDA should not be considered in isolation or as a substitute for other measures of financial performance reported in accordance with U.S. GAAP. Consolidated Adjusted EBITDA has limitations as an analytical tool, including:

 

   

Consolidated Adjusted EBITDA does not reflect changes in, including cash requirements for, our working capital needs or contractual commitments;

 

   

Consolidated Adjusted EBITDA does not reflect our financial expenses, or the cash requirements to service interest or principal payments on our indebtedness, or interest income or other financial income;

 

   

Consolidated Adjusted EBITDA does not reflect our income tax expense or the cash requirements to pay our income taxes;

 

   

although depreciation and amortization are non-cash charges, the assets being depreciated or amortized often will need to be replaced in the future, and Consolidated Adjusted EBITDA does not reflect any cash requirements for these replacements;

 

   

although stock-based compensation is a non-cash charge, Consolidated Adjusted EBITDA does not consider the potentially dilutive impact of stock-based compensation; and

 

   

other companies may calculate Consolidated Adjusted EBITDA differently, limiting its usefulness as a comparative measure.

We compensate for the inherent limitations associated with using Consolidated Adjusted EBITDA through disclosure of these limitations, presentation of our consolidated financial statements in accordance with U.S. GAAP and reconciliation of Consolidated Adjusted EBITDA to the most directly comparable U.S. GAAP measure, net income.

The table below provides a reconciliation of our net (loss) / income to Consolidated Adjusted EBITDA:

 

     Year Ended December 31,  
     2019     2018      2017  
     (in thousands)  

Net (loss) / income

   $ (20,910   $ 19,154      $ 42,366  

Add (deduct):

       

Financial expense/ (income), net

     17,215       19,167        16,879  

Income tax (benefit) / expense

     (5,225     7,069        11,994  

Depreciation expense

     6,659       4,985        5,075  

Impairment of long-lived assets

     —         363        —    

Amortization expense

     16,137       10,140        8,751  

Stock-based compensation expense

     11,686       6,766        4,289  
  

 

 

   

 

 

    

 

 

 

Consolidated Adjusted EBITDA (unaudited)

   $ 25,562     $ 67,644      $ 89,354  
  

 

 

   

 

 

    

 

 

 

 

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Components of Results of Operations

Revenue

Our revenue is primarily generated from the commissions we charge for the facilitation services we provide to travel suppliers and travel customers, to book reservations of flight tickets, hotel accommodations, car rentals, vacation packages and other travel-related products and services, which include (i) the handling and processing of selected travel products, (ii) the facilitation of payment processing, and (iii) limited post-booking services related to handling minor inquiries or minor administrative changes. To a lesser extent, we also derive our revenue from override commissions or incentives from travel suppliers and GDS providers (if certain performance conditions are met), and the sale of advertisement spaces in our website.

The structure of our fees and commissions varies significantly by product. Travel supplier incentives take several forms, including upfront commissions, back-end commissions and other bonuses based on satisfying volume targets for certain travel suppliers, as well as certain payments from our GDS suppliers and other travel suppliers. Service fees from our travel customers may vary based on a number of factors, including the type of product, destination and point of sale and promotional activities.

We operate under two business models: the Pre-Pay/Merchant Business Model and the Pay-at-Destination/Agency Business Model. Under the Pre-Pay/Merchant Business Model, we generally receive the entire amount of the travel product sold upfront at the time of booking, which comprises (i) the value of the travel product set and offered by the travel supplier, from which we retain the commission agreed with the travel supplier, plus (ii) the service fee we charge to travel customers for the facilitation services. Under the Pay-at-Destination/Agency Business Model –except for the service fees which are charged upfront–, travel customers pay the travel supplier directly at destination. Commissions from travel suppliers are paid directly to us by travel suppliers, generally after the travel customer uses the travel service. Under both business models, we recognize revenue upon the transfer of control of the promised facilitation services to travel customers and travel suppliers, in an amount that reflects the consideration we expect to be entitled to, in exchange for those facilitation services. We have determined that our customers (travelers and travel suppliers) obtain control of the promised facilitation services at the time the corresponding booking is completed. See Note 3 to our audited consolidated financial statements.

Payments received for cancellable or refundable transactions (pursuant to the terms and conditions of the travel products set by travel suppliers), are considered as “variable”, and we record a provision for cancellations against such revenue, based on past objective historical experience.

Under both business models, we have determined that net presentation (the amount billed to the traveler minus the amount paid to the travel supplier) is appropriate for the majority of our revenue transactions because the travel supplier is primarily responsible for providing the underlying travel services. We do not control the service or travel product provided by the travel supplier to the traveler, and we do not bear inventory risk. Taxes assessed by a government authority, if any, are excluded from the measurement of transaction prices that are imposed on the travel related services or collected from travel customers (which are therefore excluded from revenue). We occasionally present our revenue on a gross basis for some bookings where we pre-purchase flight seats. These transactions have been limited to date.

We seek to develop and maintain long-term relationships with travel suppliers, GDSs and other intermediaries. Our travel supplier management personnel work directly with travel suppliers to optimize access to their travel products for visitors to our platform, including through promotional activity, and maximize our revenue. In most cases, we enter into non-exclusive contracts with our travel suppliers, although in the case of some travel suppliers we may have informal arrangements without written contracts. Typically, supplier payment terms are negotiated on a regular basis. We have a contract with Expedia and its affiliates to offer through our platform hotel and other lodging products for all countries outside of Latin America. The contract establishes agreed payment terms. In each of the years 2019, 2018 and 2017, 8.4%, 9.2% and 9.1% of our gross bookings, respectively, were attributable to supply provided by affiliates of Expedia. For more information about our relationships with Expedia, see “Item 7. Major Shareholders and Related Party Transactions —B. Related Party — Relationship with Expedia” and note 17 of our audited consolidated financial statements. Given the fragmentation in travel suppliers in our markets, the frequency of negotiations of payment terms and competitive conditions, we have experienced what we consider to be limited volatility related to our arrangements with travel suppliers; however, we cannot assure you that we will not experience more volatility in the future.

 

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Cost of Revenue

Cost of revenue consists of (1) credit card processing fees, (2) fees that we pay to banks relating to the travel customer financing installment plans that we offer, (3) the costs of operating our fulfillment center, customer service and risk management, (4) costs borne by us as a result of credit card chargebacks, including those related to fraud, (5) claims against us under consumer protection laws, (6) certain transaction-based taxes, other than income taxes (which are included under income tax expense) and sales taxes (which are deducted from our revenue) (7) a portion of overhead expenses distributed based on the percentage of our employees attributable to cost of revenue, and (8) depreciation of property, plant and equipment related to our operation.

Selling and Marketing

Selling and marketing expense is comprised of direct costs, including online marketing such as search engine and social media marketing, and offline marketing, such as television and print advertising. It also includes expenses of our selling and marketing personnel, and related overhead usually distributed based on the percentage of our employees attributable to selling and marketing (for example, rent, facilities, depreciation etc.) Selling and marketing expense also includes commissions paid to certain third-party affiliates for sales that they generate through our systems. Reductions on a per transaction basis are expected to continue as the economy scales. However, the impact on operating contribution will vary with the level of activity and average selling prices.

General and Administrative

General and administrative expense consists primarily of personnel expenses for management, including both senior management and local managers, and employees involved in general corporate functions, including finance, accounting, tax, legal, human resources and commercial analysts, our stock-based compensation expenses for grants to members of our management team and professional and consulting fees. General and administrative expense also includes a portion of the overhead distributed based on the percentage of our employees attributable to general and administrative (for example, rent, facilities and depreciation). General and administrative expense also includes bad debt expense that we recognize relating to the risk that we are unable to collect receivables from certain travel suppliers.

Technology and Product Development

Technology and product development expense includes the costs of developing our platform, as well as information technology costs to support our infrastructure, back-office operations and overall monitoring and security of our networks. This expense is principally comprised of personnel, and depreciation and amortization of technology assets, including hardware, and purchased and internally-developed software. Technology and product development expense also includes a portion of the overhead expense for our facilities, based on the percentage of our employees attributable to technology and product development. During 2019, 2018 and 2017, we capitalized $22.9 million, $13.5 million and $12.9 million, respectively, for internal-use software and website development costs.

We classify our supplier relationships as a component of the products that we offer to our travel customers and, accordingly, our costs of acquiring and maintaining supplier relationships, including the costs of our personnel engaged in supplier relationships, are included as a component of technology and product development expense.

Financial Income / (Expense)

Our functional currency and the functional currency of certain of our subsidiaries, including our U.S., Uruguay, Ecuador, Venezuela and Argentina (beginning July 1, 2018) subsidiaries, is the U.S. dollar. The functional currency of our other subsidiaries is their respective local currency. Gains and losses resulting from transactions by each subsidiary in non-functional currency are included in financial income / (expense). Financial income / (expense) also includes gains and losses on certain derivative financial instruments that we use from time to time, to manage our exposure to foreign exchange volatility.

 

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In addition, our assets and liabilities are translated from local currencies into dollars at the end of each period. However, any gains and losses resulting from such translations are reflected in our consolidated statement of comprehensive income / (loss) and are not reflected in our consolidated statements of operations. See also “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Foreign Exchange Risk.”

Our travel customers typically finance their purchases by using installment plans offered by third-party financial institutions. Our agreements with local and regional banks allow us to offer travel customers the possibility of installment payment plans without assuming collection risk from the travel customers and receive payment in full (provided we choose not to factor such installment payments). We do not provide any type of financing by ourselves. Our partnering local and regional banks establish, offer and administer any financing plan to travelers. When travel customers make purchases using installment plans, the facilitating bank bears the full risk that the travel customer will actually make the required installment payments.

Regardless of any financing or installment agreement offered by the banks, for transactions in certain territories, we generally receive full payment of our commissions and service fees within less than one month after the travel customer completes the booking in our platforms, in an amount that reflects its cash-selling price. We typically receive payment before travel occurs. In other territories, such as in Brazil, we generally receive payment from the financing bank only after each scheduled payment is due from the travel customer regardless of the fact that the travel customer actually makes the scheduled payments. We generally receive payment before or when the travel occurs. In some cases, we elect to factor or discount installment receivables, allowing us to receive the payment of the purchase price more quickly.

For the years ended December 31, 2019 and 2018, more than 57% of our transactions were completed using an installment plan offered by a financial institution.

We maintain revolving credit facilities in certain jurisdictions, and the associated interest expense is also included in financial income / (expense). As of December 31, 2019, we had outstanding borrowings of $19.2 million under these facilities.

Income Tax Expense

As a Delaware corporation, our predecessor and subsidiary Decolar.com, Inc. is subject to taxation in the United States. In May 2017, the stockholders of Decolar.com, Inc. exchanged their shares for newly issued shares of Despegar.com, Corp. Although Despegar.com, Corp. is organized in the BVI, as a result of the exchange, under the “anti-inversion” rules of Section 7874 of the U.S. Internal Revenue Code, Despegar.com, Corp. is treated for U.S. federal tax purposes as a U.S. corporation and, accordingly, Despegar.com, Corp. is subject to U.S. federal income tax on its worldwide income, at a maximum rate which was reduced from 35% to 21% effective January 2018.

We are subject to foreign taxes in the multiple jurisdictions where we operate. In Brazil and Argentina, the income tax statutory rates are 34% and 30%, respectively. In certain jurisdictions, we have outstanding net operating losses from prior periods.

Results of Operations

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

 

     Year Ended December 31,  
     2019      2018  
     (in thousands)  
            % of Revenue             % of Revenue      % Change  

Revenue

              

Air

   $ 201,638        38.4      $ 214,804        40.5        (6.1

Packages, Hotels and Other Travel Products

     323,238        61.6        315,810        59.5        2.4  
  

 

 

       

 

 

       

Total revenue

     524,876        100.0        530,614        100.0        (1.1

Cost of revenue

     179,565        34.2        172,110        32.4        4.3  
  

 

 

       

 

 

       

Gross profit

     345,311        65.8        358,504        67.6        (3.7

Operating expenses

              

Selling and marketing

     187,894        35.8        174,357        32.9        7.8  

 

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     Year Ended December 31,  
     2019     2018  
     (in thousands)  

General and administrative

     92,962       17.7       67,240       12.7       38.3  

Technology and product development

     73,375       14.0       71,154       13.4       3.1  

Impairment of long-lived assets

     —         —         363       0.1       NM  
  

 

 

     

 

 

     

Total operating expenses

     354,231       67.5       313,114       59.0       13.1  
  

 

 

     

 

 

     

Operating (loss) / income

     (8,920     (1.7     45,390       8.6       NM  

Financial income

     7,944       1.5       7,621       1.4       4.2  
  

 

 

     

 

 

     

Financial expense

     (25,159     (4.8     (26,788     (5.0     (6.1
  

 

 

     

 

 

     

Net (loss) / income before income taxes

     (26,135     (5.0     26,223       4.9       NM  

Income tax benefit / (expense)

     5,225       1.0       (7,069     (1.3     NM  
  

 

 

     

 

 

     

Net (loss) / income

   $ (20,910     (4.0   $ 19,154       3.6       NM  
  

 

 

     

 

 

     

 

Note: “NM” denotes not meaningful.

Revenue

Revenue decreased from $530.6 million in 2018 to $524.9 million in 2019, primarily a result of:

 

   

a decrease of $18.4 million in commission and service fees, especially in hotels products, due to a decrease in demand caused principally by the challenging macroeconomics conditions in Argentina, Brazil and Chile during 2019, which included currency devaluations of 59%, 4% and 8%, respectively, and, to a lesser extent, due to a reduction in travel customer fees and discounts in packages transactions to support market share growth;

 

   

a decrease of $10.0 million in incentives received from airlines and hotel, as a result of lower demand, especially during the first half of 2019 due to the Argentine peso devaluation and the suspension of operations of a Brazilian low cost airline; and

 

   

an increase in deferred revenues of $1.6 million generated from the launch in August 2019 of our loyalty program in Brazil.

The decrease was partially offset by:

 

   

the consolidation of Viajes Falabella business since the dates of acquisition in June and July of 2019, which generated an increase of $20.5 million in revenue; and

 

   

an increase of $3.4 million in breakage revenue of car rentals and destination services suppliers.

The following is a discussion of our revenue broken down by our two business segments: Air; and Packages, Hotels and Other Travel Products.

Air Segment. The revenue in our Air segment decreased by 6%, to $201.6 million in 2019 from $214.8 million in 2018, primarily due to:

 

   

the decrease of $11.6 million in commission and service fees, mainly due to lower pricing offered by airlines which affected our commission, causing a decrease of 10% in average revenue per transactions; and

 

   

the decrease of $5.9 million in incentives received from airlines, as a result of less volume bonus due to lower travel demand.

The decrease was partially offset by $4.8 million of revenues from the consolidation of Viajes Falabella since the dates of the acquisition.

Packages, Hotels and Other Travel Products Segment. The revenue in our Packages, Hotels and Other Travel Products segment increased by 2%, to $323.2 million in 2019 from $315.8 million in 2018. The increase was primarily generated due to:

 

   

$15.7 million of revenues from the consolidation of Viajes Falabella since the dates of acquisition; and

 

   

an increase of $3.4 million in breakage revenue from car rentals and destination services suppliers.

 

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This increase was partially offset by:

 

   

a decrease of $8.4 million in commission and service fees, due to lower prices, especially in hotels transactions, and discounts in packages transactions; and

 

   

a decrease of $4.1 million in incentives received from suppliers, as a result of less volume bonus due to lower travel demand.

The following presents a breakdown of our revenue by: commissions, incentives and fees; advertising; commissions for the release of aged payables; and deferred revenue.

 

     Year Ended December 31,  
     2019     2018  
     (in thousands)  

Commissions, incentives and fees(1)

   $ 495,867     $ 504,287  

Advertising(1)

     15,063       15,170  

Breakage revenue

     9,871       6,476  

Sales as principal

     5,694       4,681  

Deferred revenue

     (1,619     —    
  

 

 

   

 

 

 

Total revenue

   $ 524,876     $ 530,614  
  

 

 

   

 

 

 

 

(1)

Net of sales tax.

The following table presents a breakdown of our revenue for commissions, incentives and fees by: pre-pay model; pay-at-destination model; and other.

 

     Year Ended December 31,  
     2019      2018  
     (in thousands)  

Pre-pay model

   $ 407,258      $ 415,812  

Pay-at-destination model

     13,130        20,143  

Other(1)

     75,479        68,332  
  

 

 

    

 

 

 

Total commissions, incentives and fees revenue

   $ 495,867      $ 504,287  
  

 

 

    

 

 

 

 

(1)

Primarily includes incentives from our travel suppliers, primarily airlines and GDSs.

Our revenue from our pre-pay model decreased by 2% in 2019 mainly due to lower prices and currency devaluation in Argentina, Brazil and Chile; partially offset by our increased promotional activity to take advantage of higher demand for sales in installments.

Our revenue from our pay-at-destination model decreased by 35% in 2019, mainly due to a decrease in the revenue per transaction caused by the currency devaluation in Argentina, Brazil and Chile, a decrease in the number of transactions, and a shift from international to domestic transactions, which frequently involve pre-pay transactions.

Other revenue increased by 10% in 2019, mainly due to an increase in revenue from GDSs and an increase of international transactions, especially during December 2019 when Argentine travel customers purchased tickets and booked hotels in advance, before the implementation of the new tax PAIS, which led to an increase of incentives.

Cost of Revenue

Cost of revenue increased 4% from $172.1 million in 2018 to $179.6 million in 2019. The increase was primarily a result of:

 

   

an increase of $3.6 million in the cost of installments in Argentina, as a consequence of the application of higher interest rates applied due to the challenges of the country’s macroeconomic conditions, combined with the increase of purchases in installments by Argentine travel customers;

 

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an increase of $4.2 million due to the consolidation of Viajes Falabella from the dates of acquisition; and

 

   

an increase of $2.3 million in expenses generated for the rescheduling of passengers that were affected by the suspension of operations of a Brazilian low cost airline.

This was partially offset by the decrease of $3.2 million in operations costs, due to the implementation of cost reduction efforts beginning in October 2019.

As a percentage of revenue, cost of revenue represented 32.4% in 2018 and 34.2% in 2019.

Gross Profit

Gross profit decreased 4% from $358.5 million in 2018 to $345.3 million in 2019, mainly due to:

 

   

lower commissions and service fees which were affected by macroeconomic conditions and currency depreciation;

 

   

lower incentives as a consequence of the lower travel demand, which prevented us from achieving our incentive targets; and

 

   

the losses generated from travel customer claims in Brazil due to the suspension of operations of a Brazilian low cost airline.

As a percentage of revenue, gross profit represented 67.6% in 2018 and 65.8% in 2019.

Selling and Marketing

Selling and marketing expense increased from $174.4 million in 2018 to $187.9 million in 2019, an increase of 8%. The increase was mainly a result of our continued investments to build brand awareness and to increase market share, partially offset by the effects of currency depreciation on costs, lower marketing expenditures, and the implementation of some efficiencies in our marketing strategy.

In addition, during 2019 we began consolidating Viajes Falabella since the dates of acquisition, which resulted in a $9.1 million increase in expenses, and launched the new Despegar brand (new logo and corporate image), which required an investment of $8.6 million in communications and advertising campaigns. This was partially offset by a reduction of $4.2 million in expenses from the implementation of efficiencies in our marketing strategy.

As a percentage of revenue, selling and marketing expense increased from 32.9% in 2018 to 35.8% in 2019.

General and Administrative

General and administrative expense increased 38% from $67.2 million in 2018 to $93.0 million in 2019. The increase was due to:

 

   

an increase of $7.3 million relating to the new tax for export of services implemented in Argentina in 2019;

 

   

an increase of $6.6 million relating to the consolidation of Viajes Falabella since the dates of acquisition;

 

   

an increase of $4.9 million in stock based compensations expense, due to new grants during 2019;

 

   

an increase of $2.5 million in allowances related to receivables from a Brazilian low cost airline which stopped operations at the beginning of 2019;

 

   

an increase of $1.7 million in legal fees related to the actions that we are pursuing to recover the remaining exposure with the Brazilian low cost airline; and

 

   

an increase of $1.7 million in severance expenses related to a restructuring process that began in October 2019.

As a percentage of revenue, general and administrative expense increased represented 12.7% in 2018 and 17.7% in 2019.

Technology and Product Development

Technology and product development expense increased from $71.2 million in 2018 to $73.4 million in 2019, an increase of 3%. The increase was mainly a result of:

 

   

higher amortization expenses of $4.7 million related to the increase in internally developed software;

 

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an increase of $3.4 million from the consolidation of the Viajes Falabella since the dates of acquisition; and

 

   

an increase of $0.9 million in severance expenses related to a restructuring process that began in October 2019.

This was partially offset by $7.7 million in salary expenses which were accounted for as an intangible asset since were invested in the development and improvement of our technological platform.

As a percentage of revenue, technology and product development expense represented 13.4% in 2018 and 14.0% in 2019.

Operating Income

In 2019, we had operating expense of $8.9 million, compared to operating income of $45.4 million in 2018, or a decrease in operating results of $54.3 million. As a percentage of revenue, our operating results represented 8.6% in 2018 and (1.7) % in 2019. The following table presents a breakdown of our operating income by our two business segments.

 

     Year Ended December 31,  
     2019     2018  
     (in thousands)  

Air

   $ (4,370   $ 23,160  

Packages, Hotels and Other Travel Products

     28,830       33,157  

Unallocated corporate expenses

     (33,380     (10,927
  

 

 

   

 

 

 

Total operating (loss) / income

   $ (8,920   $ 45,390  
  

 

 

   

 

 

 

Unallocated corporate expenses increased because the expenses of Viajes Falabella, consolidated since the dates of acquisition were allocated to Unallocated corporate expenses, rather than Air or Packages, Hotels and Other Travel Products.

Air Segment. Our operating income from our Air segment decreased from $23.2 million in 2018 to $(4.4) million, primarily due to a decrease in Air revenue caused by lower demand and currency devaluation in key markets, a decline in prices which affected our commission as well as the allocation of revenues derived from booked flights in packages to the “Packages, Hotels and other Travel Products” segment. As a percentage of revenue, the operating (loss) / income from our Air segment represented 11% in 2018 and (2)% in 2019.

Packages, Hotels and Other Travel Products Segment. Our operating income from our Packages, Hotels and Other Travel Products segment decreased from $33.2 million in 2018 to $28.8 million in 2019, primarily due to lower prices and discounts in packages. As a percentage of revenue, the operating income from our Packages, Hotels and Other Travel Products segment represented 11% in 2018 and 9% in 2019.

Financial Income / (Expense)

Financial expense decreased by 10%, from $19.2 million in 2018 to $17.2 million in 2019. The decrease was primarily a result of an increase of $5.5 million in interest income due to short-term cash investments and foreign exchange income generated by non-deliverable forward contracts, partially offset by an increase of $3.2 million in factoring expense in Brazil as a result of the increase in the number of transactions and gross bookings and consequent increase of credit card receivables, and by the consolidation of a loss of $0.7 million from Viajes Falabella since the dates of acquisition.

Income Tax Expense

We are subject to taxes in the multiple jurisdictions where we operate. Our tax obligations include current and deferred income taxes and withholding taxes incurred in these jurisdictions. Income tax expense decreased from an expense of $7.1 million in 2018 to a benefit of $5.2 million in 2019. Our effective tax rate in 2019 was 20%, compared to 27% in 2018. The lower effective rate in 2019 was due primarily to the decrease in non-taxable income and valuation allowance.

 

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Year Ended December 31, 2018 Compared to Year Ended December 31, 2017

 

     Year Ended December 31,  
     2018     2017  
     (in thousands)  
           % of
Revenue
          % of
Revenue
    %
Change
 

Revenue

          

Air

   $ 214,804       40.5     $ 241,015       46.0       (10.9

Packages, Hotels and Other Travel Products

     315,810       59.5       282,925       54.0       11.6  
  

 

 

     

 

 

     

Total revenue

     530,614       100.0       523,940       100.0       1.3  

Cost of revenue

     172,110       32.4       142,479       27.2       20.8  
  

 

 

     

 

 

     

Gross profit

     358,504       67.6       381,461       72.8       (6.0

Operating expenses

          

Selling and marketing

     174,357       32.9       166,288       31.7       4.9  

General and administrative

     67,240       12.7       72,626       13.9       (7.4

Technology and product development

     71,154       13.4       71,308       13.6       (0.2

Impairment of long-lived assets

     363       0.1       NM       —         NM  
  

 

 

     

 

 

     

Total operating expenses

     313,114       59.0       310,222       59.2       0.9  
  

 

 

     

 

 

     

Operating income / (loss)

     45,390       8.6       71,239       13.6       (36.3

Financial income

     7,621       1.4       2,389       0.5       219.0  
  

 

 

     

 

 

     

Financial expense

     (26,788     (5.0     (19,268     (3.7     39.0  
  

 

 

     

 

 

     

Net income / (loss) before income taxes

     26,223       4.9       54,360       10.4       (51.8

Income tax benefit / (expense)

     (7,069     1.3       (11,994     2.3       (41.1
  

 

 

     

 

 

     

Net income

   $ 19,154       3.6     $ 42,366       8.1       (54.8
  

 

 

     

 

 

     

 

Note: “NM” denotes not meaningful.

Revenue

Revenue increased from $523.9 million in 2017 to $530.6 million in 2018. The increase in revenue was primarily a result of 15% increase in the number of transactions from 9.1 million in 2017 to 10.4 million in 2018, and a 6% increase in gross bookings from $4,455 million in 2017 to $4,715 million in 2018.

The increase in revenues is primarily due to:

 

   

an increase of $ 6.2 million in other incentive, mainly from hotels and car rentals, partially offset by a decrease of $5.2 million in back end incentives due to the decrease in international flights;

 

   

an increase of $ 4.7 million generated from the launch of our proprietary activities (tour operations and allotments);

 

   

an increase of $10.8 million resulting from the change in revenue recognition from the adoption of the new standard ASC 606, as described below; and

 

   

an increase of $0.8 million and $ 0.3 million in media revenue and breakage revenue, respectively.

This was partially offset by:

 

   

A decrease in travel customer fee and upfronts of $10.9 million generated by the challenging macroeconomic conditions in Argentina and currency depreciation, and by the shift from international to domestic travel across key markets, especially Brazil.

As of January 1, 2018, we changed the revenue recognition of our Packages, Hotels and Other Travel Products, reimbursable, and paid-at-destination bookings, from check-out to booking in the context of the new revenue recognition standard ASC 606. We elected to adopt the new standard using the modified retrospective approach for all contracts reflecting the aggregate effect of modifications prior to the date of adoption. Results for reporting periods beginning after January 1, 2018 are presented under the new guidance, while prior period amounts were not adjusted and continue to be reported under the accounting standards in effect for those periods.

The following is a discussion of our revenue broken down by our two business segments: Air; and Packages, Hotels and Other Travel Products.

 

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Air Segment. The revenue in our Air segment decreased by 11%, to $214.8 million in 2018 from $241.0 million in 2017, primarily due to a decrease of 21% in the average revenue per transaction for the segment, resulting primarily from a decrease in our rate of commissions, incentives and fees for an amount of $26.2 million, due to a commercial strategy to increase sales opportunities and a change in the mix-shift from international to domestic travel across key markets.

Packages, Hotels and Other Travel Products Segment. The revenue in our Packages, Hotels and Other Travel Products segment increased by 12%, to $315.8 million in 2018 from $282.9 million in 2017, primarily due to:

 

   

an increase of 12% in the number of transactions in this segment;

 

   

an increase of $13.9 million in commission and customer fees;

 

   

an increase of $1.4 million in incentives, all related to our strategy to increase market share in packages and the investment in marketing to increase packages growth; and

 

   

the launch of our proprietary activities (tour operations and allotments), which generated an increase of $4.7 million.

This was partially offset by a decrease of 5% in the revenue per transaction, resulting primarily from a greater product mix of domestic travel due to currency depreciation, accompanied by the slower macroeconomic environment and price discounts.

Additionally, as mentioned in the previous paragraph, we changed the revenue recognition of the Packages, Hotels and Other Travel Products reimbursable and paid-at-destination bookings, from check-out to booking.

The following presents a breakdown of our revenue by: commissions, incentives and fees; advertising; commissions for the release of aged payables; and deferred revenue.

 

     Year Ended December 31,  
     2018      2017  
     (in thousands)  

Commissions, incentives and fees(1)

   $ 504,287      $ 514,126  

Advertising(1)

     15,170        14,277  

Commissions for release of aged payables

     6,476        6,147  

Sales as Principal

     4,681        —    

Deferred revenue

     —          (10,610
  

 

 

    

 

 

 

Total revenue

   $ 530,614      $ 523,940  
  

 

 

    

 

 

 

 

(1)

Net of sales tax.

The following table presents a breakdown of our revenue for commissions, incentives and fees by: pre-pay model; pay-at-destination model; and other.

 

     Year Ended December 31,  
     2018      2017  
     (in thousands)  

Pre-pay model

   $ 415,812      $ 412,679  

Pay-at-destination model

     20,143        23,710  

Other(1)

     68,332        77,737  
  

 

 

    

 

 

 

Total revenue

   $ 504,287      $ 514,126  
  

 

 

    

 

 

 

 

(1)

Primarily includes incentives from our travel suppliers, primarily airlines and GDSs.

Our revenue from our pre-pay model increased by 1% in 2018 mainly due to our increased promotional activity to take advantage of higher demand for sales in installments. Our revenue from our pay-at-destination model decreased by 15% in 2018, mainly due to a decrease in the revenue per transaction, due to mix-shift from international to

 

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domestic destinations. Other revenue decreased by 12% in 2018, due to a decrease in revenue from GDSs and other incentives caused by the decreased in international transactions, which generates higher incentives than domestic transactions.

Cost of Revenue

Cost of revenue increased from $142.5 million in 2017 to $172.1 million in 2018, an increase of 21%. This increase was primarily due to:

 

   

$ 12.7 million or 49% increase in the commissions to banks to offer travelers the possibility of purchasing travel-related products under installment plans related to the increase in (i) the number of transactions and (ii) an average increase in commissions percentage of 1% from the third party banks which provide the installment plans;

 

   

$9.0 million or 21% increase in credit card processing fees due to the higher volume of transaction in 2018 versus 2017 where we act as merchant;

 

   

$4.7 million or 11% increase in salaries and employees benefits due to higher salaries and benefits and the incorporation of new employees and an increase in the call center expenses due to the launch of new sales channels due to the hiring of outsourced call centers in several countries where we operate.

The increase was partially offset by:

 

   

$ 1.5 million or 9% decrease in the fraud expense due to our implementation of more effective anti-fraud protocol at the beginning of 2016;

 

   

$ 1.8 million or 23% decrease in taxes due to the benefit granted by the Argentine government under the Software Promotion Law during 2018, as mentioned in Item 4.B – Regulations Related to Taxation.

As a percentage of revenue, cost of revenue increased from 27.2% in 2017 to 32.4% in 2018.

Gross Profit

Gross profit decreased from $381.5 million in 2017 to $358.5 million in 2018, or a decrease of 6%, mainly due to the initiatives to accelerate market share growth, cost related to the recent launch of the proprietary business, including tour operation activities and allotments, along with investments to support improving travel customer satisfaction levels. As a percentage of revenue, gross profit decreased from 72.8% in 2017 to 67.6% in 2018.

Selling and Marketing

Selling and marketing expense increased from $166.3 million in 2017 to $174.4 million in 2018, an increase of 5%. The increase of $8.1 million was a result of our continued investments to build brand awareness and to increase market share, partially offset by the regional currency depreciation on costs, lower level marketing investments and improving efficiencies. As a percentage of revenue, selling and marketing expense increased from 31.7% in 2017 to 32.9% in 2018.

General and Administrative

General and administrative expense decreased from $72.6 million in 2017 to $67.2 million in 2018, or a decrease of 7%. The decrease of $2.3 million was a benefit from the local currency depreciation, mainly in Argentina and a decrease in employee benefits of $8.0 million due to a higher bonuses paid in 2017 for the accomplishment of certain metrics. This was partially offset by $2.5 million of higher stock-based compensation expense, as well as an increase of $3.0 million related to general expenses. As a percentage of revenue, general and administrative expense declined from 13.9% in 2017 to 12.7% in 2018.

 

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Technology and Product Development

Technology and product development expense decreased from $71.3 million in 2017 to $71.2 million in 2018. The decrease was a result of higher personnel costs of $1.6 million, almost completely offset by $1.8 million salary expenses which were accounted for as intangible asset since were invested in the development and improvement of our technological platform.

As a percentage of revenue, our technology and product development expense decreased from 13.6% in 2017 to 13.4% in 2018.

Operating Income

In 2018, we had operating income of $45.4 million as compared to operating income of $71.2 million in 2017, or a decrease in operating income of $25.8 million. As a percentage of revenue, our operating income decreased from 13.6% in 2017 to 8.6% in 2018.

The following table presents a breakdown of our operating income by our two business segments.

 

     Year Ended
December 31,
 
     2018     2017  
     (in thousands)  

Air

   $ 23,160     $ 56,532  

Packages, Hotels and Other Travel Products

     33,157       28,785  

Unallocated corporate expenses

     (10,927     (14,078
  

 

 

   

 

 

 

Total operating income

   $ 45,390     $ 71,239  
  

 

 

   

 

 

 

Corporate expense allocation is based on the expenses planned in the annual budget, and variances to the budget are also recorded in unallocated corporate expenses. Unallocated corporate expenses in 2017 were more than expected as compared to the annual budget which is used as the basis of allocation. Expenses were more than budgeted due to an increase in stock compensation expense, consulting expenses, management bonus accrual and management personnel expense as compared to the annual budget.

Air Segment. Our operating income from our Air segment decreased from $56.5 million in 2017 to $23.2 million, primarily due to a decrease in Air revenue caused by the change in the mix-shift from international to domestic travels and currency devaluation in key markets. As a percentage of revenue from our Air segment, our operating income from our Air segment decreased from 23.5% in 2017 to 10.8% in 2018.

Packages, Hotels and Other Travel Products Segment. Our operating income from our Packages, Hotels and Other Travel Products segment increased from $28.8 million in 2017 to $33.2 million in 2018, primarily due to an increase in revenue from this segment. As a percentage of revenue, the operating income from our Packages, Hotels and Other Travel Products segment increased from 10.2% in 2017 to 10.5% in 2018.

Financial Income / (Expense)

Financial expense increased by 14%, from $16.9 million in 2017 to $19.2 million in 2018. The increase of $2.3 million was primarily a result of increased factoring activity in Brazil related to the increase in number of transactions and gross bookings, an increase on warranty charges due to the replacement of cash collaterals during the year, partially offset by the increase in interest income due to short-term cash investments.

Income Tax Expense

We are subject to taxes in the multiple jurisdictions where we operate. Our tax obligations included current and deferred income taxes and withholding taxes incurred in these jurisdictions. Income tax expense decreased from $12.0 million in 2017 to $7.1 million in 2018, Our effective tax rate in 2018 was 27%, compared to 22% in 2017. The higher effective rate in 2018 was due primarily to the decrease in non-taxable income. Moreover, a lower rate in 2017 was mainly caused by the recognition of deferred tax assets and by a reversal of a tax contingency due to the expiration of the statute of limitations.

 

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Seasonality

We generally experience seasonal fluctuations in our financial results. Latin American travelers, particularly leisure travelers who are our primary travel customers, tend to travel most frequently at the end of the fourth quarter and during the first quarter of each year. Leisure travel is more common in Latin America at that time because those quarters include the summer months in the southern hemisphere, along with many school holidays and the Christmas holiday season.

Quarterly Information

The following table sets forth our unaudited quarterly results and certain key business metrics for each fiscal quarter in the years ended December 31, 2019 and 2018. The unaudited quarterly results set forth below have been prepared on a basis consistent with our audited consolidated financial statements, and we believe they include all normal recurring adjustments necessary for a fair statement of the financial information presented below. The following table should be read in conjunction with our audited consolidated financial statements included elsewhere in this Annual Report.

 

    March 31,
2018
    June 30,
2018
    September 30,
2018
    December 31,
2018
    March 31,
2019
    June 30,
2019
    September 30,
2019
    December 31,
2019
 
    (in thousands)  

Revenue

    148,593       128,259       121,247       132,515       133,114       114,087       132,048       145,627  

Cost of revenue

    (43,646     (42,088     (36,673     (49,703     (45,245     (40,342     (42,591     (51,387
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    104,947       86,171       84,574       82,812       87,869       73,745       89,457       94,240  

Operating expenses

               

Selling and marketing

    (46,410     (43,450     (41,572     (42,925     (40,933     (50,701     (46,656     (49,604

General and administrative

    (15,888     (16,986     (17,130     (17,599     (20,638     (21,254     (25,090     (25,980

Technology and product development

    (19,225     (18,732     (16,821     (16,376     (18,713     (18,077     (17,922     (18,663
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating

expenses

    (81,523     (79,168     (75,523     (76,900     (80,284     (90,032     (89,668     (94,247
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income /

(loss)

    23,424       7,003       9,051       5,912       7,585       (16,287     (211     (7

Net financial income / (expense)

    (2,831     (5,292     (11,026     (18     (5,220     (1,663     (3,627     (6,705
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income / (loss) before income taxes

    20,593       1,711       (1,975     5,894       2,365       (17,950     (3,838     (6,712

Income tax (expense) / benefit

    (4,235     (471     501       (2,864     (479     1,483       154       4,067  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income / (loss)

  $ 16,358     $ 1,240     $ (1,474   $ 3,030     $ 1,886     $ (16,467   $ (3,684   $ (2,645

Key Business Metrics:

               

Operational

               

Number of transactions

    2,514       2,607       2,596       2,676       2,652       2,448       2,723       2,855  

Gross bookings

  $ 1,231,497     $ 1,184,355     $ 1,092,287     $ 1,207,186     $ 1,157,512     $ 1,118,134     $ 1,177,728     $ 1,280,883  

Financial

               

Consolidated Adjusted EBITDA (unaudited)

  $ 27,284     $ 11,972     $ 14,520     $ 13,868     $ 15,182     $ (7,323   $ 9,410     $ 8,293  

Net income / (loss)

  $ 16,358     $ 1,240     $ (1,474   $ 3,030     $ 1,886     $ (16,467   $ (3,684   $ (2,645

Add (deduct):

               

Financial Income

    (1,534     (1,438     (2,035     (2,614     (1,836     (2,381     (2,502     (1,225

Financial Expense

    4,365       6,730       13,061       2,632       7,056       4,044       6,129       7,930  

Income tax expense / (benefit)

    4,235       471       (501     2,864       479       (1,483     (154     (4,067

Depreciation expense

    859       1,475       1,338       1,313       845       2,683       2,036       1,095  

Impairment of long-lived assets

    —         —         —         363       —         —         —         —    

Amortization expense

    2,018       2,228       2,738       3,156       3,753       3,089       4,195       5,100  

Stock-based compensation expense

    983       1,266       1,393       3,124       2,999       3,192       3,390       2,105  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated Adjusted EBITDA (unaudited)

  $ 27,284     $ 11,972     $ 14,520     $ 13,868     $ 15,182     $ (7,323   $ 9,410     $ 8,293  

 

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Critical Accounting Policies and Use of Estimates

Critical accounting policies and estimates are those that we believe are important in the preparation of our consolidated financial statements because they require that we use judgment and estimates in applying those policies. We prepare our consolidated financial statements and accompanying notes in accordance with U.S. GAAP.

Preparation of the consolidated financial statements included elsewhere in this Annual Report requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements as well as revenue and expenses during the periods reported. We base our estimates on historical experience, where applicable, and other assumptions that we believe are reasonable under the circumstances. Actual results may differ from our estimates under different assumptions or conditions.

An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements. We believe that the following critical accounting policies reflect the more significant estimates and assumptions used in the preparation of our consolidated financial statements. You should read the following descriptions of critical accounting policies, judgments and estimates in conjunction with our audited consolidated financial statements and the notes thereto included elsewhere in this Annual Report.

There are certain critical estimates that we believe require significant judgment in the preparation of our consolidated financial statements. We consider an accounting estimate to be critical if:

 

   

it requires us to make an assumption because information was not available at the time or it included matters that were highly uncertain at the time we were making the estimate; and

 

   

changes in the estimate or different estimates that we could have selected may have had a material impact on our financial condition or results of operations.

For more information on each of these policies, see note 3 —Summary of Significant Accounting Policies, in the notes to our audited consolidated financial statements included elsewhere in this Annual Report. We discuss information about the nature and rationale for our critical accounting estimates below.

Recoverability of Goodwill and Indefinite and Definite-Lived Intangible Assets

Goodwill. We assess goodwill for impairment annually as of December 31, or more frequently if events and circumstances indicate impairment may have occurred. In the evaluation of goodwill for impairment, we typically first perform a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than the carrying amount. If so, we perform a quantitative assessment and compare the fair value of the reporting unit to the carrying value. If the carrying value of a reporting unit exceeds its fair value, the goodwill of that reporting unit is potentially impaired and we proceed to step two of the impairment analysis. In step two of the analysis, we will record an impairment loss equal to the excess of the carrying value of the reporting unit’s goodwill over its implied fair value should such a circumstance arise. Periodically, we may choose to forgo the initial qualitative assessment and perform quantitative analysis to assist in our annual evaluation.

We generally base our measurement of fair value of reporting units on an analysis of the present value of future discounted cash flows. The discounted cash flows model indicates the fair value of the reporting units based on the present value of the cash flows that we expect the reporting units to generate in the future. Our significant estimates in the discounted cash flows model include: our weighted average cost of capital, long-term rate of growth and profitability of our business and working capital effects.

 

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We believe the weighted use of discounted cash flows is the best method for determining the fair value of our reporting units because these are the most common valuation methodology used within the travel and internet industries.

Indefinite-Lived Intangible Assets. We base our measurement of fair value of indefinite-lived intangible assets, which primarily consist of brands and domains, using the relief-from-royalty method. This method assumes that the brands and domains have value to the extent that their owner is relieved of the obligation to pay royalties for the benefits received from them. This method requires us to estimate the future revenue for the related brands, the appropriate royalty rate and the weighted average cost of capital.

Definite-Lived Intangible Assets. We review the carrying value of long-lived assets or asset groups to be used in operations whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Factors that would necessitate an impairment assessment include a significant adverse change in the extent or manner in which an asset is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset, or a significant decline in the observable market value of an asset, among others. If such facts indicate a potential impairment, we would assess the recoverability of an asset group by determining if the carrying value of the asset group exceeds the sum of the projected undiscounted cash flows expected to result from the use and eventual disposition of the assets over the remaining economic life of the primary asset in the asset group. If the recoverability test indicates that the carrying value of the asset group is not recoverable, we will estimate the fair value of the asset group using appropriate valuation methodologies, which would typically include an estimate of discounted cash flows. Any impairment would be measured as the difference between the asset groups carrying amount and its estimated fair value.

The use of different estimates or assumptions in determining the fair value of our goodwill, indefinite-lived and definite-lived intangible assets may result in different values for these assets, which could result in an impairment or, in the period in which an impairment is recognized, could result in a materially different impairment charge.

Income Taxes

We record income taxes under the liability method. Deferred tax assets and liabilities reflect our estimation of the future tax consequences of temporary differences between the carrying amounts of assets and liabilities for book and tax purposes. We determine deferred income taxes based on the differences in accounting methods and timing between financial statement and income tax reporting. Accordingly, we determine the deferred tax asset or liability for each temporary difference based on the enacted tax rates expected to be in effect when we realize the underlying items of income and expense. We consider many factors when assessing the likelihood of future realization of our deferred tax assets, including our recent earnings experience by jurisdiction, expectations of future taxable income, and the carryforward periods available to us for tax reporting purposes, as well as other relevant factors. We may establish a valuation allowance to reduce deferred tax assets to the amount we believe is more likely than not to be realized. Due to inherent complexities arising from the nature of our businesses, future changes in income tax law, tax sharing agreements or variances between our actual and anticipated operating results, we make certain judgments and estimates. Therefore, actual income taxes could materially vary from these estimates.

Other Long-Term Liabilities

Various Legal and Tax Contingencies. We record liabilities to address potential exposures related to business and tax positions we have taken that have been or could be challenged by taxing authorities. In addition, we record liabilities associated with legal proceedings and lawsuits. These liabilities are recorded when the likelihood of payment is probable and the amounts can be reasonably estimated. The determination for required liabilities is based upon analysis of each individual tax issue, or legal proceeding, taking into consideration the likelihood of adverse judgments and the range of possible loss. In addition, our analysis may be based on discussions with outside legal counsel. The ultimate resolution of these potential tax exposures and legal proceedings may be greater or less than the liabilities recorded.

 

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Stock-Based Compensation

Our primary form of employee stock-based compensation is stock option awards. We measure the value of stock option awards on the date of grant at fair value using the appropriate valuation techniques, including the Black-Scholes and Monte Carlo option-pricing models. We amortize the fair value over the remaining term on a straight-line basis. We account for forfeitures as they occur. The pricing models require various highly judgmental assumptions including volatility and expected option term. If any of the assumptions used in the models change significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period.

Recently Issued and Not Yet Adopted Accounting Pronouncements under U.S. GAAP

For information on recently issued accounting pronouncements under U.S. GAAP, see note 3 to our audited consolidated financial statements.

 

B.

Liquidity and Capital Resources

As of December 31, 2019, we had unrestricted cash and cash equivalents of $309.2 million. Additionally, as of December 31, 2019, we had restricted cash of $4.5 million, which primarily consisted of amounts held in restricted accounts to secure our obligations to various suppliers. For the year ended December 31, 2019, we generated $44.2 million of cash flows from operations, as further discussed below. We also maintain revolving credit facilities in certain jurisdictions to cover short-term working capital requirements. As of December 31, 2019, we had outstanding borrowings of $19.2 million.

Based on preliminary management estimates, as of March 31, 2020, we had unrestricted cash and cash equivalents of $221.7 million. On the same basis, as of March 31, 2020, our travel suppliers payable plus our related party payables and our accounts payable and accrued expenses, minus our accounts receivable net of allowances and our related party receivables amounted to aggregate payables of $42.5 million, compared to aggregate payables of $120.1 million as of December 31, 2019. In addition, we are working on the implementation of different strategies to assist our travel customers with refunds and reschedulings, including through the issuance of vouchers to be used by our travel customers during 2020 or in some cases early 2021. If a travel customer does not accept the voucher, according to our standard commercial terms and conditions, the corresponding refund is typically payable within 120 days from the date the refund is requested.

Our business cash cycle provides a positive source of working capital for our operations. Our pre-pay model allows us to collect cash amounts from transactions with our travel customers well before we are required to make payments to our travel suppliers, which allows us to use the cash for other business purposes in the interim and reduces our need to use external sources of financing. Under our pre-pay model, we receive cash payments through credit card companies used by travel customers at or near the time of booking, and we are required to make payments related to the booking to the relevant travel suppliers generally two to three months afterwards, typically after the travel customer uses the reservation and the travel supplier invoices us.

As of December 31, 2019, we had deferred merchant bookings of $141 million and our working capital (calculated as current assets minus current liabilities, except short-term debt and contingent liabilities), was $201.1 million. During 2019, our pre-pay model represented 78% of our revenues compared to 2% represented by our pay-at-destination model. If our pre-pay model declines relative to our pay-at-destination model or our overall business, or if there are changes to the pre-pay model (such as changes in booking patterns, or travel customer or travel supplier payment terms), our overall working capital benefits could be reduced. In such event, we could be required to obtain additional working capital financing, including using factoring, which would increase our financial expense. In addition, in the event of a significantly contracting market or a prolonged market disruption, or a prolonged disruption to our platform (as has been the case since mid-March with the COVID-19 pandemic) we could face liquidity constraints if we have used cash received from travel customers in our business and are not able to obtain cash through our operations or from financing to make subsequent payments to travel suppliers. In addition, a significant change in currency values could affect our payment obligations to travel suppliers, although we believe that our hedging policies mitigate our exposure to currency fluctuations.

 

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Since the middle of March 2020, we have been taking actions to improve our liquidity and mitigate the potential effects on our Company by significantly reducing non-critical expenditures and readjusting structural costs to deliver savings and preserve cash, including (i) temporarily reducing salaries of the senior and middle management; (ii) suspending bonuses to all employees; (iii) implementing a hiring freeze and limiting inflation salary increases; (iv) reducing working hours and implementing unpaid leave in certain locations; (v) accelerating the capture of synergies from the acquisitions of Viajes Falabella; (vi) renegotiating supplier payment terms and conditions; (vii) reviewing all contracts and commitments; and (viii) deferring non-critical capital expenditures. In addition, we have also reduced our marketing investments. We expect these measure to significantly reduce our expenses during 2020. We are also evaluating additional potential financing sources to preserve cash during this period of disruption in our industry, which could include equity, equity-linked and debt financing.

We believe that our existing cash and cash equivalents together with expected cash flows generated from operating activities, will be sufficient to meet our currently-anticipated cash needs for the next twelve months. As conditions are recent, uncertain and changing rapidly, we cannot assure you that our business will not require additional funds for operating activities in the future, nor whether the conditions of the global economy and financial markets will allow for us to access to those financing options, particularly if the effects of the pandemic persist significantly longer.

In addition, from time to time, once the crisis subsides, we may evaluate new acquisitions and other strategic opportunities. If we elect to pursue any such investments, we may fund them with internally generated funds, part of the proceeds from our initial public offering, bank financing, the issuance of debt or equity or a combination thereof.

Cash Flows

Cash Flows for the Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

The following table sets forth certain consolidated cash flow information for the years ended December 31, 2019 and 2018.

 

     Year Ended December 31,  
     2019      2018  
     (in thousands)  

Net cash flows provided by / (used in) operating activities

   $ 44,238      $ (17,620

Net cash flows used in investing activities

     (30,784      (26,579

Net cash flows used in financing activities

     (53,180      (1,257

Effect of exchange rate changes on cash and cash equivalents

     1,181        (13,132
  

 

 

    

 

 

 

Net (decrease) in cash and cash equivalents

     (38,545      (58,588
  

 

 

    

 

 

 

Net Cash Flows provided by (Used in) Operating Activities

Operating activities provided net cash of $ 44.2 million in 2019, while in 2018 operating activities used net cash of $17.6 million. The increase in generation of cash resulted mainly from:

 

   

a reduction in pre-paid flight seats and cash advanced payments to travel suppliers;

 

   

a reduction in accounts receivables; and

 

   

slower growth in the Company’s payables from travel supplier and related parties, as a consequence of the annual sales decrease.

Net Cash Flows (Used in) / Provided by Investing Activities

Investing activities used net cash of $30.8 million in 2019 and $26.6 million in 2018. The increase was mainly due to an increase in capital expenditures for software developed internally, and partially offset by a decrease in capital expenditures for improvements in our offices.

 

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Net Cash Flows (Used in) / Provided by Financing Activities

Financing activities used net cash of $53.2 million in 2019 and used net cash of $1.3 million in 2018. The net cash flows used in financing activities in 2019 were primarily a result of the share buyback program in which we spent $42.2 million. The net cash flows used in financing activities in 2018 were primarily a result of the share buyback program in which we spent $26.0 million, offset by the increase in our borrowings under our revolving credit facilities for $24.6 million.

Currency Exchange Rates

The translation effect of converting cash held in local currencies to dollars increased our cash and cash equivalents by $1.2 million in 2019, and reduced our cash and cash equivalents by $13.1 million in 2018.

Cash Flows for the Year Ended December 31, 2018 Compared to Year Ended December 31, 2017

The following table sets forth certain consolidated cash flow information for the years ended December 31, 2018 and 2017.

 

     Year Ended December 31,  
     2018      2017  
     (in thousands)  

Net cash flows (used in) / provided by operating activities

   $ (17,620    $ 61,226  

Net cash flows used in investing activities

     (26,579      (21,675

Net cash flows (used in) / provided by financing activities

     (1,257      254,114  

Effect of exchange rate changes on cash and cash equivalents

     (13,132      (2,053
  

 

 

    

 

 

 

Net (decrease) / increase in cash and cash equivalents

     (58,588      291,612  
  

 

 

    

 

 

 

Net Cash Flows (Used in) / Provided by Operating Activities

Operating activities used net cash of $17.6 million in 2018 and provided net cash of $61.2 million in 2017. The increase in usage of cash resulted mainly from an increase in pre-paid flight seats and cash advances to travel suppliers, lower net income and slower growth in the company’s travel supplier payables and related party payables resulting from lower year-over-year sales, partially offset by the collection of GDS incentives received in advance.

Net Cash Flows (Used in) Investing Activities

Investing activities used net cash of $21.7 million in 2017 and $26.6 million in 2018. The increase was mainly due to an increase in capital expenditures for improvements in our offices in Argentina and Brazil.

Net Cash Flows (Used in) / Provided by Financing Activities

Financing activities provided net cash of $254.1 million in 2017 and used net cash of $1.3 million in 2018. The net cash flows provided by financing activities in 2017 were primarily a result of the completion of our initial public offering in September 2017. The net cash flows used in financing activities in 2018 were primarily a result of increased borrowings under our revolving credit facilities of $ 24.6 million, offset by the share buyback program in which we spent $26.0 million.

Currency Exchange Rates

The translation effect of converting cash held in local currencies to dollars reduced our cash and cash equivalents by $13.1 million and $2.1 million in 2018 and 2017, respectively.

 

C.

Research and Development, Patents and Licenses

Our technology and product development activities are primarily focused on the development of software, which we view as an important element of the investments we make in our technology and our business. Our primary software

 

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development activities have been focused on providing an effective and engaging platform for our travel customers and on collecting and using data to better customize the user experience, pricing and marketing efforts for our travel customers. In 2019, 2018 and 2017, we spent $73.4 million, $71.2 million and $71.3 million, respectively, on software development and other technology and product development activities.

 

D.

Trend Information

In addition to the information set forth in this section, additional information about the trends affecting our business can be found in “—A. Key Trends and Factors Affecting Our Business.” You should also read our discussion of the risks and uncertainties that affect our business in “Item 3. Key Information— D. Risk Factors.”

The ongoing COVID-19 pandemic is disrupting the global economy and the travel industry. Countries around the world, including across Latin America, have adopted extraordinary measures to limit the spread of COVID-19, including imposing travel restrictions and bans, closing borders, establishing restrictions on public gatherings, instructing residents to practice social distancing, requiring closures of non-essential businesses, issuing stay at home advisories and orders, implementing quarantines and similar actions. Depending on how the spread of the virus continues to evolve, governments may extend these measures for longer periods, as well as re-implement these measures in the future, in order to avoid relapses even after the virus is contained. The negative impact of COVID-19 may continue well beyond the containment of the pandemic. Moreover, the COVID-19 pandemic has significantly increased economic uncertainty and is likely to cause a global recession.

Macroeconomic and Political Environment Conditions in the Countries in which We Operate

Our travel customers are primarily located in Latin America, particularly in Brazil and Argentina, and to a lesser extent, in Mexico and other countries in the region. Our results of operations and financial condition are significantly influenced by political and economic developments in the countries in which our travel customers reside and, to a lesser extent, in the countries to which our travel customers may travel, and the effect that these factors may have on the availability of credit, employment rates, disposable income, average wages and demand for travel in those countries. In the mid- to long-term, we believe that macroeconomic changes in the region will generally benefit us due to an expanding middle class, increasing disposable income, reduced unemployment and lower interest rates, among other factors.

Currency Exchange Rates

We report our financial results in dollars, but most of our revenue and expenses are denominated in local currencies. Any changes in the exchange rates of any such currencies against the dollar will affect our reported financial results as translated into dollars. Furthermore, many of our travel customers travel internationally and any changes in the exchange rate between their home currency and the currency of their destination may influence their travel purchases.

Inflation

Historically, certain countries in Latin America, such as Argentina, have experienced high rates of inflation. Changes in inflation rates can affect our pricing as well as our expenses, including employee salaries, and the inflation rates in the countries where we generate revenue in any period may be higher or lower than the inflation rates in the countries where we incur expenses. In addition, higher inflation may lead our travel customers to make more purchases using installments or other financing options, which may result in an increase in the costs associated with offering such financing options to our travel customers. Below is a summary of certain macroeconomic data for Brazil and Argentina, our two largest markets, for 2019, 2018, 2017, 2016 and 2015:

 

     2019     2018     Brazil
2017
    2016     2015  

Real GDP growth (decline)(1)

     0.6     1.1     1.0     (3.6 )%      (3.8 )% 

Population (in millions)(1)

     211.0       208.5       208       207       205  

Inflation(1)

     3.74     3.8     2.9     6.3     10.7

Exchange rate(2)

     4.03       3.87       3.31       3.26       3.90  

 

(1)

Source: Instituto Brasileiro de Geografia e Estatistica (IBGE), measured in local currency.

(2)

Source: Banco Central do Brasil. Data as of December 31 of each year.

 

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     2019     2018     Argentina
2017
    2016     2015  

Real GDP growth (decline)(1)

     (3.1 )%      (2.5 )%      2.9     (2.2 )%      2.7

Population (in millions)(1)

     44.93       44.49       44.04       43.59       43.13  

Inflation(1)

     53.8     47.6     25     41     27

Exchange rate