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Business Combinations, Goodwill and Intangible Assets | 6 Months Ended
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Jun. 30, 2014
Text Block [Abstract] |
Business Combinations, Goodwill and Intangible Assets |
4. | Business combinations, goodwill and intangible assets
Business combinations Acquisition of online classifieds advertisement companies in Chile and Mexico On April 8, 2014, through its subsidiaries Meli Inversiones SpA and Meli Participaciones, S.L., the Company acquired 100% of the issued and outstanding shares of capital stock of the companies VMK S.A., Inmobiliaria Web Chile S. de R.L. de C.V. and Inmuebles Online S.A., companies that operate online classified advertisements platforms dedicated to the sale of real estate in Chile through Portal Inmobiliario brand and in Mexico through Guia de Inmuebles brand. The aggregate purchase price for the acquisition of the 100% of the acquired business was $38,078,590, measured at its fair value, amount that included: (i) the total cash payment of $32,147,755 at closing day; (ii) an escrow of $1,000,000 held in an escrow agent, according to the stock purchase agreement; (iii) the contingent additional cash considerations and escrows up to $4,621,084 in case the companies achieve certain revenue performance targets during 2014 and 2015, measured at fair value; and, (iv) an additional price adjustment escrow. In addition, the Company incurred in certain direct costs of the business combination which were expensed as incurred. The Company’s condensed consolidated statement of income includes the results of operations of the acquired business as from April 8, 2014. The net revenues and net income of the acquiree included in the Company’s interim condensed consolidated statement of income since the acquisition amounted to $3,361,850 and $895,414, respectively. The following table summarizes the preliminary purchase price allocation for the acquisition:
|  | Chile |  |  | Mexico |  |  | Total |
Cash and cash equivalents |  | $ | 546,736 |  |  | $ | 474,214 |  |  | $ | 1,020,950 |
Other net tangible assets / (liabilities) |  |  | 2,306,226 |  |  |  | (2,727,285 | ) |  |  | (421,059 | )
Trademarks |  |  | 5,422,000 |  |  |  | 2,155,000 |  |  |  | 7,577,000 |
Customer Lists |  |  | 10,104,059 |  |  |  | 321,809 |  |  |  | 10,425,868 |
Software |  |  | 446,625 |  |  |  | — |  |  |  | 446,625 |
Non solicitation agreement |  |  | 587,000 |  |  |  | — |  |  |  | 587,000 |
Deferred tax assets and liabilities |  |  | (245,484 | ) |  |  | 748,325 |  |  |  | 502,841 |
Goodwill |  |  | 12,384,798 |  |  |  | 5,554,567 |  |  |  | 17,939,365 |
Purchase Price |  | $ | 31,551,960 |  |  | $ | 6,526,630 |  |  | $ | 38,078,590 |
The purchase price was allocated based on the provisional measurement of the fair value of assets acquired and liabilities assumed considering the information available as of the date of these unaudited interim condensed consolidated financial statements. The valuation of identifiable intangible assets acquired reflects management’s estimates based on the use of established valuation methods. Such assets consist of trademarks, customer lists, software and non-solicitation agreements for a total amount of $19,036,493. Management of the Company estimates that trademarks have an indefinite lifetime and the intangible assets associated with customer list will be amortized over a ten year period. The non-solicitation agreement intangible asset will be amortized over a four year period and the software in three years. The Company recognized goodwill for this acquisition based on management expectation that the acquired business will improve the Company’s business. Tax goodwill related to the proportion acquired by Meli Inversiones SpA (Chile) is deductible for tax purposes. The results of operations for periods prior to the acquisition for each acquisition, both individually and in the aggregate, were not material to the interim condensed consolidated statements of income of the Company and, accordingly, supplemental pro-forma information has not been presented. Acquisition of Software Development Company in Argentina On March 22, 2013, the Company completed, through its subsidiaries Meli Participaciones S.L. (ETVE) and MercadoLibre S.R.L. (MercadoLibre Argentina) (together referred to as the “Buyer”), the acquisition of the 100% of equity interest in a software development company located and organized under the laws of the Province of Cordoba, Argentina. The objective of the acquisition was to enhance the capabilities of the Company in terms of software development. The aggregate purchase price for the acquisition of the 100% of the acquired business was $3,454,497 (settled in Argentine pesos 17,652,480). On such same date, the Buyer paid and agreed to pay the purchase price as follows: i) $2,191,781 in cash; ii) set an escrow amounting to $489,237 for a 24-months period, aiming to cover unexpected liabilities and negative working capital; iii) set an escrow amounting to $547,945 for a 36-months period, aiming to continue the employment relationship of certain key employees; and iv) on June 24, 2013 the Company paid the remaining $225,534 net of certain negative working capital adjustments. In addition, the Company incurred in certain direct costs of the business combination which were expensed as incurred. The above mentioned escrow for the continuing employment relationship of $547,945 is expensed over the 36-months period or a lesser period of time if certain other conditions determined in the Selling and Purchase Agreement (SPA) occur. The escrow will be released at the end of such period, together with the accrued interest. The Company’s interim condensed consolidated statement of income includes the results of operations of the acquired business as from March 22, 2013. The net revenues and net loss of the acquiree included in the Company’s consolidated statement of income as of December 31, 2013 since the acquisition amounted to $524,965 and $7,562, respectively. The following table summarizes the definitive purchase price allocation for the acquisition:
Net assets acquired |  | $ | 237,891 |
Goodwill |  |  | 2,668,661 |
Purchase price |  |  | 2,906,552 |
Escrow for employment relationship |  |  | 547,945 |
Aggregate price paid |  | $ | 3,454,497 |
Supplemental pro-forma information required by U.S. GAAP, is impracticable after making every reasonable effort to do so, however, amounts involved are deemed to be immaterial. Arising goodwill has been allocated proportionally to each of the segments identified by the Company’s management, considering the synergies expected from this acquisition and it is expected that the acquiree will contribute to the earnings generation process of such segments. The Company recognized goodwill for this acquisition based on management expectation that the acquired businesses will expand and improve the Company’s business. Goodwill is not deductible for tax purposes. Goodwill and intangible assets The composition of goodwill and intangible assets is as follows:
|  | June 30, |  |  | December 31, |
|  | 2014 |  |  | 2013 |
Goodwill |  | $ | 70,267,846 |  |  | $ | 55,101,218 |
Intangible assets with indefinite lives |  |  |  |  |  |  |  |
- Trademarks |  |  | 12,902,239 |  |  |  | 5,238,090 |
Amortizable intangible assets |  |  |  |  |  |  |  |
- Licenses and others |  |  | 3,797,312 |  |  |  | 3,430,003 |
- Non-compete / solicitation agreement |  |  | 1,565,441 |  |  |  | 1,025,605 |
- Customer list |  |  | 11,827,644 |  |  |  | 1,568,190 |
Total intangible assets |  | $ | 30,092,636 |  |  | $ | 11,261,888 |
Accumulated amortization |  |  | (4,409,535 | ) |  |  | (4,670,303 | )
Total intangible assets, net |  | $ | 25,683,101 |  |  | $ | 6,591,585 |
Goodwill The changes in the carrying amount of goodwill for the six-month period ended June 30, 2014 and the year ended December 31, 2013 are as follows:
|  | Period ended June 30, 2014 |
|  | Brazil |  |  | Argentina |  |  | Chile |  |  | Mexico |  |  | Venezuela |  |  | Colombia |  |  | Other Countries |  |  | Total |
Balance, beginning of the period |  | $ | 10,366,018 |  |  | $ | 14,676,145 |  |  | $ | 6,520,194 |  |  | $ | 11,376,140 |  |  | $ | 5,251,667 |  |  | $ | 5,506,062 |  |  | $ | 1,404,992 |  |  | $ | 55,101,218 |
- Business acquisition |  |  | — |  |  |  | — |  |  |  | 12,384,798 |  |  |  | 5,554,567 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 17,939,365 |
- Effect of exchange rates change |  |  | 390,572 |  |  |  | (2,989,282 | ) |  |  | (341,628 | ) |  |  | 74,173 |  |  |  | — |  |  |  | 120,498 |  |  |  | (27,070 | ) |  |  | (2,772,737 | )
Balance, end of the period |  | $ | 10,756,590 |  |  | $ | 11,686,863 |  |  | $ | 18,563,364 |  |  | $ | 17,004,880 |  |  | $ | 5,251,667 |  |  | $ | 5,626,560 |  |  | $ | 1,377,922 |  |  | $ | 70,267,846 |
|  | Year ended December 31, 2013 |
|  | Brazil |  |  | Argentina |  |  | Chile |  |  | Mexico |  |  | Venezuela |  |  | Colombia |  |  | Other Countries |  |  | Total |
Balance, beginning of year |  | $ | 10,706,281 |  |  | $ | 18,889,094 |  |  | $ | 7,115,211 |  |  | $ | 11,404,780 |  |  | $ | 4,846,030 |  |  | $ | 5,897,136 |  |  | $ | 1,507,531 |  |  | $ | 60,366,063 |
- Business Acquisition |  |  | 1,307,644 |  |  |  | 659,159 |  |  |  | — |  |  |  | 186,806 |  |  |  | 405,637 |  |  |  | 69,385 |  |  |  | 40,030 |  |  |  | 2,668,661 |
- Effect of exchange rates change |  |  | (1,647,907 | ) |  |  | (4,872,108 | ) |  |  | (595,017 | ) |  |  | (215,446 | ) |  |  | — |  |  |  | (460,459 | ) |  |  | (142,569 | ) |  |  | (7,933,506 | )
Balance, end of the year |  | $ | 10,366,018 |  |  | $ | 14,676,145 |  |  | $ | 6,520,194 |  |  | $ | 11,376,140 |  |  | $ | 5,251,667 |  |  | $ | 5,506,062 |  |  | $ | 1,404,992 |  |  | $ | 55,101,218 |
Intangible assets with definite useful life Intangible assets with definite useful life are comprised of customer lists and user base, non-compete and solicitation agreements, acquired software licenses and other acquired intangible assets including developed technologies. Aggregate amortization expense for intangible assets totaled $189,351 and $216,587 for the three-month periods ended June 30, 2014 and 2013, respectively, while for the six-month periods ended at such dates amounted to $348,092 and $437,446, respectively. The estimated aggregate amortization expense for each of the five succeeding fiscal years, as of June 30, 2014 is as follows:
For year ended 12/31/2014 |  | $ | 1,008,652 |
For year ended 12/31/2015 |  |  | 1,929,000 |
For year ended 12/31/2016 |  |  | 1,707,070 |
For year ended 12/31/2017 |  |  | 1,309,813 |
For year ended 12/31/2018 |  |  | 1,112,388 |
Thereafter |  |  | 5,713,939 |
|  | $ | 12,780,862 |

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