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 Period Ended January 3, 2021

 

OR

 

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

 

For the transition period from __________ to __________

 

OR

 

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

 

Date of event requiring this shell company report __________

 

Commission file number 001-39251

 

BETTERWARE DE MÉXICO, S.A.B. DE C.V.

 

(Exact name of Registrant as specified in its charter)

 

Not Applicable

 

(Translation of Registrant’s name into English)

 

MEXICO

 

(Jurisdiction of incorporation or organization)

 

Luis Campos, Board Chairman

+52 (33) 3836-0500

Luis Enrique Williams 549

Colonia Belenes Norte

Zapopan, Jalisco, 45145, México

 

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

 

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

 

Title of each class   Trading Symbol   Name of each exchange in which registered
Ordinary Shares, no par value per share   BWMX   The Nasdaq Stock Market LLC

 

Securities 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: 36,584,968 Ordinary Shares, as of January 3, 2021.

 

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 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 the 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
by the International Accounting Standards Board ☒
  Other ☐

 

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

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS   iii
       
  CERTAIN CONVENTIONS   iii
       
  CURRENCY PRESENTATION   iv
       
  PRESENTATION OF FINANCIAL INFORMATION   iv
       
  PRESENTATION OF INDUSTRY AND MARKET DATA   vii
         
PART I     1
         
  ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS   1
         
  ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE   1
         
  ITEM 3. KEY INFORMATION   1
         
  ITEM 4. COMPANY INFORMATION   15
         
  ITEM 4A. UNRESOLVED SEC STAFF COMMENTS   20
         
  ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS   20
         
  ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES   28
         
  ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS   33
         
  ITEM 8. FINANCIAL INFORMATION   35
         
  ITEM 9. THE OFFER AND LISTING   36
         
  ITEM 10. ADDITIONAL INFORMATION   36
         
  ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES REGARDING MARKET RISK   44
         
  ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES   46
         
PART II CONTROLS AND PROCEDURES   47
         
  ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES   47
         
  ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS   47
         
  ITEM 15. CONTROLS AND PROCEDURES   47
         
  ITEM 16. Reserved   49

 

i

 

 

  ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT   49
         
  ITEM 16B. CODE OF ETHICS   49
         
  ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES   50
         
  ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES   51
         
  ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS   51
         
  ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT   51
         
  ITEM 16G. CORPORATE GOVERNANCE   51
         
  ITEM 16H. MINE SAFETY DISCLOSURE   51
         
PART III     52
         
  ITEM 17. FINANCIAL STATEMENTS   52
         
  ITEM 18. FINANCIAL STATEMENTS   52
         
  ITEM 19. EXHIBITS   52
         
SIGNATURES   53

 

ii

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This annual report contains a number of forward-looking statements, including statements about the financial conditions, results of operations, earnings outlook and prospects and may include statements for the period following the date of this annual report. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. Forward-looking statements are typically identified by words such as “plan,” “believe,” “expect,” “anticipate,” “intend,” “outlook,” “estimate,” “forecast,” “project,” “continue,” “could,” “may,” “might,” “possible,” “potential,” “predict,” “should,” “would” and other similar words and expressions, but the absence of these words does not mean that a statement is not forward-looking.

 

The forward-looking statements are based on the current expectations of the management of Betterware, as applicable, and are inherently subject to uncertainties and changes in circumstance and their potential effects and speak only as of the date of such statement. There can be no assurance that future developments will be those that have been anticipated. These forward-looking statements involve a number of risks, uncertainties or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. Given these uncertainties, you should not rely upon forward looking statements as predictions of future events. These risks and uncertainties include, but are not limited to, those factors described in “Risk Factors,” those discussed and identified in public filings made with the Securities and Exchange Commission (“SEC”) by Betterware and the following:

 

  geopolitical risk and changes in applicable laws or regulations;

 

  the inability to profitably expand into new markets;

 

  the possibility that Betterware may be adversely affected by other economic, business and/ or competitive factors;

 

  financial performance;

 

  operational risk;

 

  litigation and regulatory enforcement risks, including the diversion of management time and attention and the additional costs and demands on Betterware’s resources;

 

  changes in our investment commitments or our ability to meet our obligations thereunder;

 

  natural disaster-related losses which may not be fully insurable;

 

  epidemics, pandemics and other public health crises, particularly the COVID-19 virus;

 

  fluctuations in exchange rates between the Mexican peso and the United States dollar; and

 

  changes in interest rates or foreign exchange rates.

 

Should one or more of these risks or uncertainties materialize or should any of the assumptions made by the management of Betterware prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. Except to the extent required by applicable law or regulation, Betterware undertakes no obligation to update these forward-looking statements to reflect events or circumstances after the date of this annual report or to reflect the occurrence of unanticipated events.

 

CERTAIN CONVENTIONS

 

Betterware de México, S.A.B. de C.V. (formerly Betterware de México, S.A.P.I. de C.V.) was incorporated under the laws of Mexico in 1995. Unless otherwise stated or unless the context otherwise requires, the terms “we,” “us,” “our,” “Company,” the “Group” “Betterware,” “BTW,” “BWM” and “BW” refer to Betterware de México, S.A.B. de C.V. and BLSM Latino América Servicios, S.A. de C.V., a Mexican sociedad anónima de capital variable.

 

iii

 

 

CURRENCY PRESENTATION

 

In this annual report, unless otherwise specified or the context otherwise requires:

 

  “$,” “US$” and “U.S. dollar” each refer to the United States dollar; and

 

  “MX$,” “Ps.” and “peso” each refer to the Mexican peso.

 

Certain numbers and percentages included in this annual report have been subject to rounding adjustments. Accordingly, figures shown for the same category presented in various tables or other sections of this annual report may vary slightly, and figures shown as totals in certain tables may not be the arithmetic aggregation of the figures that precede them.

 

PRESENTATION OF FINANCIAL INFORMATION

 

This annual report contains our Audited Consolidated and Combined Financial Statements as of January 3, 2021 and December 31, 2019 and for the 53 weeks ended January 3, 2021 (referred to as the “2020 period”), the 52 weeks ended December 31, 2019 (referred to as the “2019 period”) and the 52 weeks ended December 31, 2018 (referred to as the “2018 period”) (our “Audited Consolidated and Combined Financial Statements”).

 

Our financial year consists of a 52- or 53-week period ending on the Sunday nearest to, either before or after, December 31. For purposes of this annual report, the term fiscal year is synonymous with financial year and refers to the periods covered by our Audited Consolidated and Combined Financial Statements.

 

We prepare our Audited Consolidated and Combined Financial Statements in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”). We have applied all IFRS issued by the IASB effective at the time of preparing our Audited Consolidated and Combined Financial Statements. Our Audited Consolidated and Combined Financial Statements as of January 3, 2021 and December 31, 2019, and for the 2020 period and the 2019 period, have been audited by Galaz, Yamazaki, Ruiz Urquiza, S.C. member of Deloitte Touche Tohmatsu Limited (“Deloitte”), an independent registered public accounting firm, whose report dated March 25, 2021, is also included in this annual report. Our Audited Combined Financial Statements for the 2018 period, were audited by KPMG Cárdenas Dosal, S.C. a member firm of KPMG International Coperative (“KPMG”), an independent registered public accounting firm, whose report dated September 27, 2019, is also included in this annual report.

 

Prior to BLSM Latino América Servicios, S.A. de C.V., a Mexican sociedad anónima de capital variable (“BLSM”), becoming a subsidiary of Betterware, we prepared combined financial statements because it provided more meaningful information to the reader as Betterware and BLSM were subsidiaries under the common control of Campalier, operating under common management; Considering the foregoing, combined financial statements of these entities were prepared as of December 31, 2019 and 2018. On March 10, 2020, BLSM became a subsidiary of Betterware and thus included in our consolidated financial statements as of such date. As a result, the combined statement of changes in stockholders’ equity for the 2019 and 2018 periods present the net parent investment gross by including contributed capital and retained earnings (rather than net as presented in prior years), as management believes it is a preferable presentation for comparability purposes with the share structure and presentation for the 2020 period. Our Audited Consolidated and Combined Financial Statements are presented in thousands of Mexican Pesos (Ps).

 

Non-IFRS Measures

 

We define “EBITDA” as profit for the year adding back the depreciation of property, plant and equipment and right of use assets, amortization of intangible assets, financing cost, net and total income taxes. Adjusted EBITDA also excludes the effects of gains or losses on sale of fixed assets and adds back other non-recurring expenses. EBITDA and Adjusted EBITDA are not measures required by or presented in accordance with IFRS. The use of EBITDA and Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation from, or as a substitute for analysis of, our results of operations or financial condition as reported under IFRS.

 

Betterware believes that these non-IFRS financial measures are useful to investors because (i) Betterware uses these measures to analyze its financial results internally and believes they represent a measure of operating profitability and (ii) these measures will serve investors to understand and evaluate Betterware’s EBITDA and provide more tools for their analysis as it makes Betterware’s results comparable to industry peers that also prepare these measures.

 

iv

 

 

The Business Combination

 

The Initial Public Offering

 

On October 16, 2018, DD3 Acquisition Corp., a British Virgin Islands company (“DD3”), consummated its initial public offering of 5,000,000 units and on October 23, 2018, the underwriters for DD3’s initial public offering purchased an additional 565,000 units pursuant to the partial exercise of their over-allotment option. The units in DD3’s initial public offering were sold at an offering price of U.S.$10.00 per unit, generating total gross proceeds of U.S.$55,650,000.

 

The Merger

 

On August 2, 2019, DD3 entered into a Combination and Stock Purchase Agreement (as amended, the “Combination and Stock Purchase Agreement”) with Campalier, S.A. de C.V., a Mexican sociedad anónima de capital variable (“Campalier”), Promotora Forteza, S.A. de C.V., a Mexican sociedad anónima de capital variable (“Forteza”), Strevo, S.A. de C.V., a Mexican sociedad anónima de capital variable (“Strevo”, and together with Campalier and Forteza, “Sellers”), Betterware, BLSM, and, solely for the purposes of Article XI therein, DD3 Mex Acquisition Corp, S.A. de C.V., pursuant to which DD3 agreed to merge with and into Betterware (the “Merger”) in a Business Combination that resulted in Betterware surviving the Merger and BLSM becoming a wholly-owned subsidiary of Betterware.

 

As part of the Combination and Stock Purchase Agreement, and prior to the closing of the Merger, DD3 was redomiciled out of the British Virgin Islands and continued as a Mexican corporation pursuant to Section 184 of the Companies Act and Article 2 of the Mexican General Corporations Law.

 

The Company Restructure

 

Following the execution of the Combination and Stock Purchase Agreement, on February 21, 2020, the Company’s shareholders approved, a corporate restructure in the Company (the “Company Restructure”) which implied, among other things (i) the Company’s by-laws amendment in order to issue Series C and Series D non-voting shares, and (ii) a redistribution of the Company’s capital stock as follows: (a) fixed portion of the Company’s capital stock represented by 3,075,946, Series A, ordinary voting shares, and (b) the variable portion of the Company’s capital stock represented by (x) 1,961,993, Series B, ordinary voting shares, (y) 897,261, Series C, ordinary non-voting shares (“Series C Shares”), and (z) 168,734, Series D, ordinary non-voting shares (“Series D Shares”). In addition, Strevo transferred one, Series A, ordinary voting share of Betterware to Campalier (the “Campalier Share”), which remained under certain Share Pledge Agreement, dated July 28, 2017, entered between Strevo, as pledgor, MCRF P, S.A. de C.V. SOFOM, E.N.R. (“CS”), as pledgee, and Betterware.

 

Immediately after the Company’s Restructure and the transfer of the Campalier Share to Campalier, Forteza indirectly owned, through Banco Invex, S.A., Invex Grupo Financiero (“Invex”), as trustee of the irrevocable management and security trust No. 2397 (the “Invex Security Trust”), executed on March 26, 2016, as amended, with CS, as beneficiary, approximately 38.94% of the outstanding common stock of Betterware, and Campalier indirectly owned, through the Invex Security Trust, approximately 61.06% of the outstanding common stock of Betterware.

 

On March 9, 2020, the Invex Security Trust released the Series C Shares and the Series D Shares to Campalier and Forteza, respectively, that were held under the Invex Security Trust.

 

On March 10, 2020, CS, as pledgee, entered into a Termination of the Share Pledge Agreement over the Campalier Share with Campalier, as pledgor, and Betterware. In addition, CS, as beneficiary, Invex, as trustee, and Campalier, as settlor, entered into a Transfer Agreement, where Campalier transferred the Campalier Share to the Invex Security Trust.

 

Upon such transfer to the Invex Security Trust, the Company’s shareholders approved (i) the sale of all or a portion of such Company’s Series C and Series D shares to DD3 Acquisition Corp., S.A. de C.V. (the “DD3 Acquisition”), (ii) the Merger, (iii) the amendment of the Company’s by-laws to become a sociedad anónima promotora de inversion de capital variable, (iv) the increase of the Company’s capital stock by MX$94,311,438.00, through the issuance of 2,211,075 ordinary shares, without nominal value, subscribed by the shareholders of DD3 Acquisition Corp., S.A. de C.V., and (v) the increase of the Company’s capital stock by MX$872,878,500.00 through the issuance of 4,500,000 ordinary treasury shares without nominal value, offered for subscription and payment under the Company’s public offering in the U.S. completed and filed with the SEC under our Registration Statement on Form F-1, which became effective on January 22, 2020.

 

v

 

 

On March 10, 2020, Betterware’s corporate name changed from Betterware de México, S.A. de C.V. to Betterware de México, S.A.P.I. de C.V.

 

The DD3 Acquisition was closed on March 13, 2020, and as a result, all of Betterware shares that were issued and outstanding immediately prior to the closing date were canceled and new shares were issued. The DD3 Acquisition was accounted as a capital reorganization, whereby Betterware issued shares to the DD3 shareholders and obtained US$22,767 (Ps.498,445) in cash through the acquisition of DD3 and, simultaneously settled liabilities and related transaction costs on that date, for net cash earnings of US$7,519 (Ps.181,734) on such date. In addition, Betterware assumed the obligation of the warrants issued by DD3, a liability inherent to the transaction, equivalent to the fair value of Ps.55,810 of the warrants. No other assets or liabilities were transferred as part of the transaction that required adjustment to fair value as a result of the acquisition.

 

On the same date, a total of 2,040,000 of Betterware shares, that were offered for subscription and payment under its public offering on Nasdaq Capital Market (“Nasdaq”), were subscribed and paid for by various investors.

 

On July 14, 2020, Betterware’s corporate name changed from Betterware de México, S.A.P.I. de C.V. to Betterware de México, S.A.B. de C.V. For purposes of this annual report, the Merger, the Company Restructure and all related actions undertaken in connection thereto are referred to as the “Business Combination.”

 

The Business Combination

 

Upon satisfaction of certain conditions and covenants as set forth under the Combination and Stock Purchase Agreement, the Business Combination was consummated and closed on March 13, 2020 (the “Closing”). At Closing, the following actions occurred:

 

  (i) DD3 issued to the Sellers as consideration for the purchase of a portion of the Series C and Series D shares and the BLSM shares outstanding as of December 31, 2019, a debt acknowledgement in an amount equal to $15,000,546.00;

 

  (ii) all of Betterware shares issued and outstanding immediately prior to the Closing were canceled and, Campalier and Forteza received, directly and indirectly (through the Invex Security Trust), 18,438,770 and 11,761,175, respectively, of Betterware’s shares; and

 

  (iii) all of DD3’s ordinary shares issued and outstanding immediately prior to the Closing were canceled and exchanged for Betterware shares on a one-for-one basis.

 

Immediately after the Closing, on the same day, 2,040,000 shares of the Company offered for subscription and payment under the Company’s public offering in the U.S. on the Nasdaq were subscribed and paid for by various investors.

 

As a result of the Business Combination and the additional shares issued in the public offering, Betterware had 34,451,020 issued and outstanding shares, distributed as follows:

 

  (i) 25,669,956 shares, representing 74.5% of the total capital stock, are held by Invex Security Trust, as trustee and for the benefit of CS, as first place beneficiary thereunder;

 

  (ii) 1,764,175 shares, representing 5.1% of the total capital stock, are owned by Forteza;

 

  (iii) 2,765,814 shares, representing 8.0% of the total capital stock, are owned by Campalier;

 

  (iv) 2,211,075 shares, representing 6.4% of the total capital stock, are owned by former DD3 Shareholders as a result of the cancellation of DD3’s ordinary shares and exchange for Betterware shares on a one-for-one basis; and

 

  (v) 2,040,000 shares, representing 5.9% of the total capital stock, are owned by the F-1 Investors.

 

vi

 

 

As part of the Merger, Betterware assumed an obligation that granted existing warrant holders the option to purchase (i) a total of 5,804,125 Betterware shares at a price of US$11.50 per share that would expire on or before March 25, 2025, and (ii) a total of 250,000 units that automatically became an option to issue 250,000 Betterware shares and warrants to buy 250,000 additional Betterware shares. The Company registered the warrants to be traded on OTC Markets, which had an observable fair value. The following events occurred in 2020 as part of the warrants agreement:

 

  (i) During July and August 2020, the Group repurchased 1,573,888 warrants. During August and October, 2020, 895,597 warrants were exchanged for 621,098 shares, of which, 462,130 warrants were settled on a cash basis by exchanging 1 warrant for 1 share at a price of US$11.44 for share, which resulted in receiving cash by an amount of Ps.116,419. The remaining 433,467 warrants were exchanged on a cashless basis by exchanging 1 warrant for 0.37 shares.

 

  (ii) in September 2020, the purchase option of units was exercised by their holders on a cashless basis, which resulted in the issuance of 214,020 Betterware shares.

 

  (iii) Additionally, in October, 2020, and as part of the terms of the warrant agreement, the Company exercised the redemption of the warrants on a cashless basis by exchanging 3,087,022 warrants for 1,142,325 of the Company’s shares. A total of 8,493 public warrants were not exercised by their holders during the redemption period that expired on November 9, 2020, therefore, they were paid by the Company for a price of US$0.01 per warrant.

 

  (iv) In December, 2020, holders exercised a total of 239,125 private warrants on a cashless basis and exchanged for 156,505 of the Company’s shares.

 

  (v) As of the date of this annual report, the warrant holders had redeemed all of the outstanding warrants and purchase option of units and the Company recognized a loss for the increase in the fair value of the warrants of Ps.851,520, which is recognized under the heading “Loss in valuation of warrants” in the consolidated and combined statement of profit or loss.

 

As of the date of this annual report and as consequence of the transactions described before, the total number of outstanding shares of the Company is 36,584,968.

 

PRESENTATION OF INDUSTRY AND MARKET DATA

 

In this annual report, we rely on, and refer to, information regarding our business and the markets in which we operate and compete. The market data and certain economic and industry data and forecasts used in this annual report were obtained from internal surveys, market research, governmental and other publicly available information and independent industry publications. Industry publications, surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but that the accuracy and completeness of such information is not guaranteed. We believe that these industry publications, surveys and forecasts are reliable, but we have not independently verified them and cannot guarantee their accuracy or completeness.

 

Certain market share information and other statements presented herein regarding our position relative to our competitors are not based on published statistical data or information obtained from independent third parties, but reflects our best estimates. We have based these estimates upon information obtained from publicly available information from our competitors in the industry in which we operate.

 

vii

 

 

PART I

 

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 consolidated and combined financial information and other data of the Company should be read in conjunction with, and are qualified by reference to, “Item 5. Operating and Financial Review and Prospects” and our Audited Consolidated and Combined Financial Statements and the notes thereto included elsewhere in this annual report. Our financial information is presented in thousands of Mexican pesos unless otherwise instructed.

 

The selected consolidated and combined statement of financial position data and the selected consolidated and combined statement of income, comprehensive income and cash flow data for the 2020, 2019 and 2018 periods, respectively have been derived from our Audited Consolidated and Combined Financial Statements included elsewhere in this annual report.

 

We prepare our Audited Consolidated and Combined Financial Statements in accordance with IFRS as issued by the IASB. We have applied all IFRS issued by the IASB effective at the time of preparing our Audited Consolidated and Combined Financial Statements.

 

Selected Statement of Financial Position Data as of January 3, 2021, December 31, 2019 and 2018
(In thousands of Mexican pesos “Ps.”)

 

   As of
January 3,
2021
   As of
December 31,
2019
   As of
December 31,
2018
 
Assets            
Current assets:               
Cash and cash equivalents  Ps.649,820    213,697    177,383 
Trade accounts receivable, net   757,806    247,087    198,776 
Inventories   1,274,026    345,554    302,206 
Other current assets(1)   224,918    74,368    51,485 
Total current assets   2,906,570    880,706    729,851 
Property, plant and equipment, net   791,127    207,350    42,972 
Intangible assets, net   319,361    310,965    312,099 
Goodwill   348,441    348,441    348,441 
Other non-current assets(2)   48,261    42,264    24,235 
Total non-current assets   1,507,190    909,020    727,748 
   Ps.4,413,760    1,789,726    1,457,598 

 

 

(1) Includes also prepaid expenses.
(2)

Includes also right of use assets, net, and deferred income tax.

 

1

 

 

Selected Statement of Financial Position Data as of January 3, 2021, December 31, 2019 and 2018
(In thousands of Mexican pesos “Ps.”)

 

   As of
January 3,
2021
   As of
December 31,
2019
   As of
December 31,
2018
 
Liabilities and Stockholders’ equity            
Current Liabilities:               
Borrowings  Ps.105,910    148,070    90,691 
Accounts payable to suppliers   2,078,628    529,348    445,241 
Other current liabilities(1)   682,859    200,940    198,512 
Total current liabilities   2,867,397    878,358    734,444 
Non-current Liabilities:               
Deferred Income tax   56,959    78,501    70,627 
Borrowings   523,967    529,643    562,788 
Other non-current liabilities(2)   43,544    28,742    9,475 
Total non-current liabilities   624,470    636,886    642,890 
Total liabilities   3,491,867    1,515,244    1,377,334 
Stockholders’ equity   921,893    274,482    80,264 
   Ps.4,413,760    1,789,726    1,457,598 

 

 

(1) Includes accrued expenses, provisions, income tax and value added tax payable, employee profit sharing payable, lease liability and derivative financial instruments.
(2)

Includes statutory employee benefits, derivative financial instruments and lease liability.

 

Selected Statement of Profit or Loss Data for the 2020 period, the 2019 period and the 2018 period
(In thousands of Mexican pesos “Ps.”)

 

   January 3,
2021
   December 31,
2019
   December 31,
2018
 
Net revenue  Ps.7,260,408    3,084,662    2,316,716 
Cost of sales   3,290,994    1,280,829    958,469 
Gross profit   3,969,414    1,803,833    1,358,247 
Administrative expenses   664,677    319,133    249,148 
Selling expenses   853,355    551,300    454,016 
Distribution expenses   331,023    121,155    103,336 
Operating income   2,120,359    812,245    551,747 
Financing cost, net(1)   (1,239,230)   (107,411)   (102,301)
Income before income taxes   881,129    704,834    449,446 
Total income taxes   542,768    232,692    150,179 
Net income for the year  Ps.338,361    472,142    299,267 

 

 

(1) Includes interest expense, interest income, unrealized loss/gain in valuation of derivative financial instruments and foreign exchange loss/gain.

 

2

 

 

The following table shows the income and share data used in the calculation of basic and diluted earnings per share for the 2020, 2019 and 2018 periods, respectively:

 

Net income (in thousands of pesos)           
Attributable to shareholders   Ps.338,361    472,142    299,267 
                 

Shares (in thousands of shares)

               
Weighted average of outstanding shares                
Basic    34,083    30,200    30,200 
Diluted    34,383    30,200    30,200 
                 
Basic and diluted earnings per share:                
Basic earnings per share (pesos per share)   Ps.9.93    15.63    9.91 
Diluted earnings per share (pesos per share)    9.84    15.63    9.91 

 

Please see Note 23 of the Audited Consolidated and Combined Financial Statements elsewhere in this annual report for details of the transactions impacting basic and diluted earnings per share for the 2020, 2019 and 2018 periods.

 

RECONCILIATION OF NON-IFRS MEASURES

 

Non IFRS Financial Measures

 

We define “EBITDA” as profit for the year adding back the depreciation of property, plant and equipment and right of use assets, amortization of intangible assets, financing cost, net and total income taxes. Adjusted EBITDA also excludes the effects of gains or losses on sale of fixed assets and adds back other non-recurring expenses. EBITDA and Adjusted EBITDA are not measures required by, or presented in accordance with IFRS. The use of EBITDA and Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation from, or as a substitute for analysis of, our results of operations or financial condition as reported under IFRS.

 

Betterware believes that these non-IFRS financial measures are useful to investors because (i) Betterware uses these measures to analyze its financial results internally and believes they represent a measure of operating profitability and (ii) these measures will serve investors to understand and evaluate Betterware’s EBITDA and provide more tools for their analysis as it makes Betterware’s results comparable to industry peers that also prepare these measures.

 

Betterware’s EBITDA and Adjusted EBITDA Reconciliation

 

In thousands of Mexican Pesos  January 3,
2021
   December 31,
2019
   December 31,
2018
 
Net Income for the period  Ps.338,361    472,142    299,267 
Add: Total Income Taxes   542,768    232,692    150,179 
Add: Financing Cost, net   1,239,230    107,411    102,301 
Add: Depreciation and Amortization   43,688    38,394    25,960 
EBITDA  Ps.2,164,047    850,639    577,707 
Other Adjustments   -    -    - 
Less: Gain on sale of Fixed Assets(1)   -    -    (11,820)
Add: Non-recurring Expenses(2)   -    -    7,667 
Adjusted EBITDA  Ps.2,164,047   Ps.850,639    573,554 

 

 

(1)Gain on sale of transportation equipment.
(2)Expenses incurred in the year including market penetration analysis, liquidation payment to former employees and licensing implementation of SAS software.

 

3

 

 

B. CAPITALIZATION AND INDEBTEDNESS

 

Not applicable.

 

C. REASONS FOR THE OFFER AND USE OF PROCEEDS

 

Not applicable.

 

D. RISK FACTORS

 

An investment in our ordinary shares carries a significant degree of risk. You should carefully consider the following risk factors, together with all of the other information included in this annual report, before making a decision to invest in our ordinary shares. The risks described below are those which Betterware believes are the material risks that it faces. Some statements in this annual report, including such statements in the following risk factors, constitute forward-looking statements. See the section entitled “Cautionary Note Regarding Forward-Looking Statements.” If any of the following events occur, our business, financial condition and operating results may be materially adversely affected. In that event, the trading price of our securities could decline, and you could lose all or part of your investment.

 

Risks Related to Betterware’s Business

 

If we are unable to retain our existing independent distributors and recruit additional distributors, our results of operations could be negatively affected.

 

We distribute almost all of our products through our independent distributors and it depends on them directly for the sale of our products. BWM experiences high turnover among distributors from year to year since they terminate their services at any time. As a result, it needs to continue to retain existing and recruit additional independent distributors. To increase its revenue, BWM must increase the number and/or the productivity of our distributors. The number and productivity of BWM’s distributors also depends on several additional factors, including:

 

  adverse publicity regarding BWM, our products, our distribution channel or its competitors;

 

  failure to motivate BWM’s distributors with new products;

 

  the public’s perception of BWM’s products;

 

  competition for distributors from other direct selling companies;

 

  the public’s perception of BWM’s distributors and direct selling businesses in general; and

 

  general economic and business conditions.

 

BWM’s operations would be harmed if we fail to generate continued interest and enthusiasm among our distributors or we fail to attract new distributors, or if BWM’s distributors are unable to operate due to internal or external factors.

 

The number of our active distributors, including those at the manager and district director level, may not increase and could decline in the future. BWM’s operating results could be harmed if existing and new business opportunities and products do not generate sufficient interest to retain existing distributors and attract new distributors.

 

The loss of key high-level distributors could negatively impact Betterware’s consultant growth and our revenue.

 

As of January 3, 2021, BWM had approximately 1,230,699 active associates and approximately 59,713 distributors, district managers and district directors. The district directors, together with their extensive networks of downline distributors, account for an important part of our net revenue. As a result, the loss of a high-level consultant or a group of leading distributors in the consultant’s network of downline distributors, whether by their own choice or through disciplinary actions by BWM for violations of our policies and procedures, could negatively impact our consultant growth and our net revenue.

 

4

 

 

A decline in our customers’ purchasing power or consumer confidence or in customers’ financial condition and willingness to spend could materially and adversely affect our business.

 

The sale of home organization products correlates strongly to the level of consumer spending generally, and thus is significantly affected by the general state of the economy and the ability and willingness of consumers to spend on discretionary items. Reduced consumer confidence and spending generally may result in reduced demand for BWM’s products and limitations on our ability to maintain or increase prices. A decline in economic conditions or general consumer spending in any of our major markets could have a material adverse effect on our business, financial condition and results of operations.

 

Failure of new products to gain distributors and market acceptance could harm Betterware’s business.

 

An important component of BWM’s business is our ability to develop new products that create enthusiasm among our customers. If we fail to introduce new products planned for the future, our distributors’ productivity could be harmed. In addition, if any new products fail to gain market acceptance, are restricted by regulatory requirements, or have quality problems, this would harm our results of operations. Factors that could affect our ability to continue to introduce new products include, among others, government regulations, proprietary protections of competitors that may limit our ability to offer comparable products and any failure to anticipate changes in consumer tastes and buying preferences.

 

Betterware’s markets are competitive, and market conditions and the strengths of competitors may harm our business.

 

The market for BWM’s products is competitive. Our results of operations may be harmed by market conditions and competition in the future. Many competitors have much greater name recognition and financial resources than BWM has, which may give them a competitive advantage. For example, BWM’s products compete directly with branded, premium retail products. BWM currently does not has significant patent or other proprietary protection, and competitors may introduce products with the same ingredients that BWM uses in its products.

 

Betterware also competes with other companies for distributors. Some of these competitors have a longer operating history, better name recognition and greater financial resources than we do. Some of our competitors have also adopted and could continue to adopt some of BWM’s business strategies. Consequently, to successfully compete in this market and attract and retain distributors, We must ensure that our business opportunities and compensation plans are financially rewarding. BWM may not be able to continue to successfully compete in this market for distributors, which would ultimately, affect our business operations.

 

If Betterware’s industry, business or our products are subject to adverse publicity, our business may suffer.

 

Betterware is very dependent upon our distributors’ and the general public’s perception of the overall integrity of our business, as well as the safety and quality of our products and similar products distributed by other companies. The number and motivation of our distributors and the acceptance by the general public of our products may be negatively affected by adverse publicity regarding:

 

  the legality of network-marketing systems in general or Betterware’s network-marketing system specifically;

 

  the safety and quality of our products;

 

  regulatory investigations of our products;

 

  the actions of our distributors;

 

  management of our distributors; and

 

  the direct selling industry.

 

5

 

 

Failure of Betterware’s internet and our other technology initiatives to create sustained consultant enthusiasm and incremental cost savings could negatively impact our business.

 

We have been developing and implementing a strategy to use the internet to sign up distributors and take orders for our products. In certain demographic markets it has experienced some success using BWM’s internet strategy to improve our operating efficiency. However, any cost savings from our internet strategy may not prove to be significant, or we may not be successful in adapting and implementing the strategy to other markets in which BWM operates. This could result in our inability to service our distributors in the manner they expect.

 

We are dependent on information and communication technologies, and our systems and infrastructures face certain risks, including cybersecurity risks.

 

We are dependent on information and communication technologies, and our systems and infrastructures face certain risks, including cybersecurity risks.

 

The operation of complex infrastructures and the coordination of the many actors involved in our operation require the use of several highly specialized information systems, including both our own information technology systems and those of third-party service providers, such as systems that monitor our operations or the status of our facilities, communication systems to inform the public, access control systems and closed circuit television security systems, infrastructure monitoring systems and radio and voice communication systems used by our personnel. In addition, our accounting and fixed assets, payroll, budgeting, human resources, supplier and commercial, hiring, payments and billing systems and our websites are key to our functioning. The proper functioning of these systems is critical to our operations and business management. These systems may, from time to time, require modifications or improvements as a result of changes in technology, the growth of our business and the functioning of each of these systems.

 

The risk of cyber-crime continues to augment across all industries and geographies as infiltrating technology is becoming increasingly sophisticated. If we are unable to prevent a significant cyber-attack, such attack could materially disrupt our operations, damage our reputation and lead to regulatory penalties and financial losses. To prevent such disruptions to our operations we have implemented a multi-layer security framework, from strategic corporate policies to operational procedures and controls. To support this framework, we use sophisticated technologies to secure our perimeter, computing equipment, networks, servers, storage and databases.

 

Information technology systems cannot be completely protected against certain events such as natural disasters, fraud, computer viruses, hacking, communication failures, equipment breakdown, software errors and other technical problems. However, our security framework allows us to minimize and manage these risks through the use of enabling technologies such as, but not limited to, firewalls, mail & web filtering, endpoint protection, antivirus and antimalware, access lists, encryption and hardening.

 

In addition, our business operations routine involves gathering personal information about vendors, distributors, customers and employees among others, through the use of information technologies. Breaches of our systems or those of our third-party contractors, or other failures to protect such information, could expose such people’s personal information to unauthorized use. Any such event could give rise to a significant potential liability and reputational harm.

 

During 2020 and 2019, we encountered an increased number of non-material phishing attempts which consisted on fake e-mails requesting minor payments and/or confidential information. As mentioned, none of these attempts were material nor had any major consequences for our operations or our customers. However, we cannot guarantee any future events will not affect our operations or customers.

 

Because of the costs and difficulties inherent in managing cross-border business operations, the Company’s results of operations may be negatively impacted.

 

Managing a business, operations, personnel or assets in another country is challenging and costly. Management may be inexperienced in cross-border business practices and unaware of significant differences in accounting rules, legal regimes and labor practices. Even with a seasoned and experienced management team, the costs and difficulties inherent in managing cross-border business operations, personnel and assets can be significant (and much higher than in a purely domestic business) and may negatively impact the Company’s financial and operational performance.

 

6

 

 

BWM’s distributors are independent contractors and not employees. If regulatory authorities were to determine, however, that our distributors are legally BWM employees, BWM could have significant liability under social benefit laws.

 

BWM’s distributors are self-employed and are not our employees. Periodically, the question of the legal status of our distributors has arisen, usually with regard to possible coverage under social benefit laws that would require BWM to make regular contributions to social benefit funds. We cannot guarantee there will not be a future determination adverse to this criteria, which would substantial and materially adversely affect our business and financial condition.

 

BWM depends on multiple contract manufacturers mostly located in China, and the loss of the services provided by any of our manufacturers could harm our business and results of operations.

 

BWM has outsourced product manufacturing functions to third-party contractors mainly located in China. In 2020, products supplied by Chinese manufacturers accounted for approximately 90% of BWM’s revenues.

 

If these suppliers have unscheduled downtime or are unable to fulfill their obligations under these manufacturing agreements because of political or regulatory restrictions, equipment breakdowns, natural disasters, health diseases or health epidemics, such as the COVID-19 virus, or any other cause, this could adversely affect BWM’s overall operations and financial condition.

 

Also, although BWM provides all of the formulations used to manufacture our products, BWM has limited control over the manufacturing process itself. As a result, any difficulties encountered by the third-party manufacturer that result in product defects, production delays, cost overruns, or the inability to fulfill orders on a timely basis could have a material adverse effect on our business, financial condition and operating results.

 

Goodwill, property, plant and equipment and intangible assets represent a significant portion of Betterware’s statement of financial position and our operating results may suffer from possible impairments.

 

Goodwill, property, plant and equipment and intangible assets in Betterware’s statement of financial position derived from past business combinations carried out by BWM, are further explained in the notes to the consolidated and combined financial statements located elsewhere in this annual report. Goodwill and intangible assets with indefinite useful lives are tested for impairment at least annually. Property, plant and equipment and intangible assets with definite useful lives are tested for impairment whenever there is an indication that these assets may be impaired. In the case of an impairment, we will recognize charges to our operating results based on the impairment assessment processes. In addition, future acquisitions may be made by BWM and a portion of the purchase price of these acquisitions may be allocated to acquired goodwill, property, plant and equipment and intangible assets. An impairment on property, plant and equipment or goodwill of acquired businesses could have a material adverse effect on our financial condition and results of operations.

 

The COVID-19 virus (nCoV), as well as any other public health crises that may arise in the future, is having and will likely continue to have a negative impact on our gross margins and in our results of operation.

 

In late December 2019, a notice of pneumonia of unknown cause originating from Wuhan, Hubei province of China was reported to the World Health Organization. A novel COVID-19 virus (nCoV) was identified, with cases soon confirmed in multiple provinces in China, as well as in several other countries. The Chinese government placed Wuhan and multiple other cities in Hubei province under quarantine, with approximately 60 million people affected. On March 11, 2020, the World Health Organization declared the coronavirus outbreak a pandemic. The ongoing COVID-19 has resulted in several cities be placed under quarantine, increased travel restrictions from and to several countries, such as the U.S., China, Italy, Spain and Mexico which had forced extended shutdowns of certain businesses in certain regions.

 

The COVID-19 pandemic continues to impact worldwide economic activity and pose the risk that we or our employees, contractors, suppliers, customers and other business partners may be prevented from conducting certain business activities for an indefinite period of time, including due to shutdowns that may be requested or mandated by governmental authorities or otherwise elected by companies as a preventive measure. In addition, mandated government authority measures or other measures elected by companies as a preventive measure may lead to our consumers being unable to complete purchases or other activities. Its impact on the global and local economies may also adversely impact consumer discretionary spending.

 

7

 

 

Although our operations were not interrupted as a result of the COVID-19 pandemic, our gross margin was negatively affected by the depreciation of the Mexican peso compared to the US dollar, as we acquire most of our products in US dollars. This affected and will likely continue affecting our results of operations for so long as the COVID-19 pandemic continues to impact global and local economies.

 

Material weaknesses have been identified in Betterware’s internal control over financial reporting, and if we fail to establish and maintain proper and effective internal controls over financial reporting, our results of operations and our ability to operate our business may be harmed.

 

We are in the process of implementing Internal Control—Integrated Framework (2013 Framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and as of January 3, 2021 management has identified material weaknesses associated with the components of COSO. See “Disclosure Controls and Procedures—Control and Procedures.”

 

Betterware’s controlling shareholder may have interests that conflict with your interests.

 

As of January 3, 2021, Campalier owns approximately 51.57% of the outstanding common stock of Betterware. As the controlling shareholder, Campalier may take actions that are not in the best interests of the Company’s other shareholders. These actions may be taken in many cases even if they are opposed by the Company’s other shareholders. In addition, this concentration of ownership may discourage, delay or prevent a change in control which could deprive you of an opportunity to receive a premium for your Ordinary Shares as part of a sale of the Company.

 

Our business and results of operations may be adversely affected by the increased strain on our resources from complying with the reporting, disclosure and other requirements applicable to public companies in the United States promulgated by the U.S. Government, Nasdaq or other relevant regulatory authorities.

 

Compliance with existing, new and changing corporate governance and public disclosure requirements adds uncertainty to our compliance policies and increases our costs of compliance. Changing laws, regulations and standards include those relating to accounting, corporate governance and public disclosure, including the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Sarbanes-Oxley Act of 2002, new SEC regulations and the Nasdaq listing guidelines. These laws, regulations and guidelines may lack specificity and are subject to varying interpretations. Their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. In particular, compliance with Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”) and related regulations regarding required assessment of internal controls over financial reporting and our external auditor’s audit of that assessment, requires the commitment of significant financial and managerial resources. We also expect the regulations to increase our legal and financial compliance costs, making it more difficult to attract and retain qualified officers and members of our board of directors, particularly to serve on our audit committee, and make some activities more difficult, time-consuming and costly.

 

Existing, new and changing corporate governance and public disclosure requirements could result in continuing uncertainty regarding compliance matters and higher costs of compliance as a result of ongoing revisions to such governance standards. Our efforts to comply with evolving laws, regulations and standards have resulted in, and are likely to continue to result in, increased general and administrative expenses. In addition, new laws, regulations and standards regarding corporate governance may make it more difficult for our company to obtain director and officer liability insurance. Further, our board members and senior management could face an increased risk of personal liability in connection with their performance of duties. As a result, we may face difficulties attracting and retaining qualified board members and senior management, which could harm our business. If we fail to comply with new or changed laws or regulations and standards differ, our business and reputation may be harmed.

 

8

 

 

Risks Related to Mexico

 

Currency exchange rate fluctuations, particularly with respect to the US dollar/Mexican peso exchange rate, could lower margins.

 

The value of the Mexican peso has been subject to significant fluctuations with respect to the U.S. dollar in the past and may be subject to significant fluctuations in the future. Historically, BWM has been able to raise their prices generally in line with local inflation, thereby helping to mitigate the effects of devaluations of the Mexican peso. However, BWM may not be able to maintain this pricing policy in the future, or future exchange rate fluctuations may have a material adverse effect on our ability to pay suppliers.

 

Given Betterware’s inability to predict the degree of exchange rate fluctuations, it cannot estimate the effect these fluctuations may have upon future reported results, product pricing or our overall financial condition. Although we attempt to reduce our exposure to short-term exchange rate fluctuations by using foreign currency exchange contracts, it cannot be certain that these contracts or any other hedging activity will effectively reduce exchange rate exposure. In particular, BWM currently employs a hedging strategy comprised of forwards U.S. dollar–Mexican peso derivatives that are designed to protect us against devaluations of the Mexican peso. As of the date of this annual report, the hedging contracts cover 100% of the product needs as of November 2021. In addition, We generally purchase our hedging instruments on a rolling twelve-month basis; instruments protecting it to the same or a similar extent may not be available in the future on reasonable terms. Unprotected declines in the value of the Mexican peso against the U.S. dollar will adversely affect our ability to pay our dollar-denominated expenses, including our supplier obligations.

 

Any adverse changes in BWM’s business operations in Mexico would adversely affect our revenue and profitability.

 

BWM’s revenue is generated in Mexico. Various factors could harm BWM’s business in Mexico. These factors include, among others:

 

  worsening economic conditions, including a prolonged recession in Mexico;

 

  fluctuations in currency exchange rates and inflation;

 

  longer collection cycles;

 

  potential adverse changes in tax laws;

 

  changes in labor conditions;

 

  burdens and costs of compliance with a variety of laws;

 

  political, social and economic instability;

 

  increases in taxation; and

 

  outbreaks of disease and health epidemics, such as the COVID-19 virus.

 

Economic and political developments in Mexico and the United States may adversely affect Mexican economic policy.

 

Economic conditions in Mexico are highly correlated with economic conditions in the United States due to the physical proximity and the high degree of economic activity between the two countries generally, including the trade facilitated by USMCA, the successor agreement to NAFTA. As a result, political developments in the United States, including changes in the administration and governmental policies, can also have an impact on the exchange rate between the U.S. dollar and the Mexican peso, economic conditions in Mexico and the global capital markets.

 

9

 

 

Mexico is an emerging market economy, with attendant risks to BWM’s results of operations and financial condition.

 

The Mexican government has exercised, and continues to exercise, significant influence over the Mexican economy. Accordingly, Mexican governmental actions concerning the economy and state-owned enterprises could have a significant impact on Mexican private sector entities in general, as well as on market conditions, prices and returns on Mexican securities. The national elections held on July 2, 2018 ended six years of rule by the Institutional Revolutionary Party or PRI with the election of President Andres Manuel Lopez Obrador, a member of the Morena Party, and resulted in the increased representation of opposition parties in the Mexican Congress and in mayoral and gubernatorial positions. Multiparty rule is still relatively new in Mexico and could result in economic or political conditions that could materially and adversely affect BWM’s operations. BWM cannot predict the impact that this new political landscape will have on the Mexican economy. Furthermore, BWM’s financial condition, results of operations and prospects and, consequently, the market price for our shares, may be affected by currency fluctuations, inflation, interest rates, regulation, taxation, social instability and other political, social and economic developments in or affecting Mexico.

 

The Mexican economy in the past has suffered balance of payment deficits and shortages in foreign exchange reserves. There are currently no exchange controls in Mexico; however, Mexico has imposed foreign exchange controls in the past. Pursuant to the provisions of the United States-Mexico-Canada Agreement, if Mexico experiences serious balance of payment difficulties or the threat thereof in the future, Mexico would have the right to impose foreign exchange controls on investments made in Mexico, including those made by U.S. and Canadian investors.

 

Securities of companies in emerging market countries tend to be influenced by economic and market conditions in other emerging market countries. Emerging market countries, including Argentina and Venezuela, have recently been experiencing significant economic downturns and market volatility. These events could have adverse effects on the economic conditions and securities markets of other emerging market countries, including Mexico.

 

Political and social events in Mexico could adversely affect our business.

 

Mexico will hold federal and local intermediate elections on June 6, 2021. Due to the fact that the Partido Movimiento Regeneración Nacional (Morena), has majority in both houses of congress, the Party, and therefore the President of Mexico, has substantial power to approve new laws, amend existing ones and freely determine the policies and governmental actions including those related to the country’s economy and therefore affect or impact the operations and financial results of Mexican companies. We cannot predict what the result of the elections will bring regarding the integration of congress and the ruling party’s ability to maintain its current ability to dictate and implement public policies. The uncertainty associated with the result of the election and the result itself may adversely affect our operations and financial condition.

 

Investments in Mexican companies entail substantial risk; the Mexican government has exercised, and continues to exercise, an important influence on the Mexican economy

 

Investments in Mexico carry significant risks, including the risk of expropriation or nationalization laws being enacted or imposing exchange controls, taxes, inflationary, hyperinflationary, exchange rate risk, credit risk, among other governmental or political restrictions. We are incorporated under the laws of Mexico and most of our operations and assets are located in Mexico. As a consequence of the foregoing, our financial situation and operating results could be negatively affected.

 

The Mexican government has exercised, and continues to exercise, a strong influence on the country’s economy. Consequently, Mexican federal government actions and policies related to the economy, state-owned and controlled companies, and financial institutions financed or influenced, could have a significant impact on private sector entities in general, including us, in particular and on market conditions, prices and returns on Mexican securities, including counterparty risk. The Mexican federal government has made major policy and regulatory changes and may do so again in the future. Actions to control inflation and other regulations and policies have involved, among other measures, an increase in interest rates, changes in fiscal policies, price controls, currency devaluations, capital controls and limits on imports. Tax and labor legislation, in particular, in Mexico is subject to continuous change, and we cannot guarantee that the Mexican government will maintain current economic or other policies in force or if any the changes to such laws and policies would have a material adverse effect on us or on our financial performance. The measures adopted by the government could have a significant effect on private sector entities in general, as well as on the market situation and on the price of our shares.

 

10

 

 

Additionally, the Mexican federal government has implemented protectionist policies in the past and could implement certain national policies in the future that could restrict our operations, including restrictions on imports from certain countries.

 

Mexico may experience high levels of inflation in the future, which could affect BWM’s results of operations.

 

During most of the 1980s and during the mid- and late-1990s, Mexico experienced periods of high levels of inflation, although the country has had stable inflation during the last five years. The annual rates of inflation for the last five years as measured by changes in the National Consumer Price Index, as provided by Banco de Mexico, were:

 

2020  3.1%
2019  2.8%
2018  4.8%

 

A substantial increase in the Mexican inflation rate would have the effect of increasing some of BWM’s costs, which could adversely affect our results of operations and financial condition.

 

Mexico has experienced a period of increasing criminal activity, which could affect the Company’s operations.

 

In recent years, Mexico has experienced a period of increasing criminal activity, primarily due to the activities of drug cartels and related criminal organizations. In response, the Mexican Government has implemented various security measures and has strengthened its military and police forces aimed at decreasing incidents of theft and other criminal activity. Despite these efforts, criminal activity continues to exist in Mexico. These activities, their possible escalation and the violence associated with them, in an extreme case, may have a negative impact on the Company’s financial condition and results of operations.

 

The regulatory environment in which Betterware operates is evolving, and our operations may be modified or otherwise harmed by regulatory changes, subjective interpretations of laws or an inability to work effectively with national and local government agencies.

 

Although BWM reviews applicable local laws in developing our plans, our efforts to comply with them may be harmed by an evolving regulatory climate and subjective interpretation of laws by the authorities. Any determination that BWM’s operations or activities are not in compliance with applicable regulations could negatively impact our business and our reputation with regulators in the markets in which we operate.

 

Laws and regulations may restrict Betterware’s direct sales efforts and harm our revenue and profitability.

 

Various government agencies throughout the world regulate direct sales practices. These laws and regulations are generally intended to prevent fraudulent or deceptive schemes, often referred to as “pyramid” schemes, that compensate participants for recruiting additional participants irrespective of product sales and/or which do not involve legitimate products. The laws and regulations in BWM’s current markets often:

 

  impose on it order cancellations, product returns, inventory buy-backs and cooling-off rights for consumers and distributors;

 

  require us or our distributors to register with governmental agencies;

 

  impose on it reporting requirements to regulatory agencies; and/or

 

  require it to ensure that distributors are not being compensated solely based upon the recruitment of new distributors.

 

Complying with these sometimes inconsistent rules and regulations can be difficult and requires the devotion of significant resources on BWM’s part.

 

In addition, Mexico could change its laws or regulations to negatively affect or prohibit completely network or direct sales efforts. Government agencies and courts in Mexico may also use their powers and discretion in interpreting and applying laws in a manner that limits BWM’s ability to operate or otherwise harms our business. If any governmental authority were to bring a regulatory enforcement action against BWM that interrupts BWM’s business, our revenue and earnings would likely suffer.

 

11

 

 

You may have difficulty enforcing your rights against Betterware and our directors and executive officers.

 

Betterware is a company incorporated in Mexico. All our directors and executive officers are non-residents of the U.S. You may be unable to effect service of process within the U.S. on Betterware, its directors and executive officers. In addition, as all of our assets and substantially all of the assets of our directors and executive officers are located outside of the U.S., you may be unable to enforce against BWM and our directors and executive officers judgments obtained in the U.S. courts, including judgments predicated upon civil liability provisions of the U.S. federal securities laws or state securities laws. There is also doubt as to the enforceability, in original actions in Mexican courts, of liabilities including those predicated solely on U.S. federal securities laws and as to the enforceability in Mexican courts of judgments of U.S. courts obtained in actions, including those predicated upon the civil liability provisions of U.S. federal securities laws. There is no bilateral treaty currently in effect between the United States and Mexico that covers the reciprocal enforcement of civil foreign judgments. In the past, Mexican courts have enforced judgments rendered in the United States by virtue of the legal principles of reciprocity and comity, consisting of the review in Mexico of the United States judgment, in order to ascertain, among other matters, whether Mexican legal principles of due process and public policy (orden público) have been complied with, without reviewing the merits of the subject matter of the case.

 

Risks Related to Ownership of our Ordinary Shares

 

As a “foreign private issuer” under the rules and regulations of the SEC, Betterware is permitted to, and is expected to, file less or different information with the SEC than a company incorporated in the United States or otherwise subject to these rules, and is expected to follow certain home country corporate governance practices in lieu of certain Nasdaq requirements applicable to U.S. issuers.

 

Betterware is considered a “foreign private issuer” under the Exchange Act and therefore exempt from certain rules under the Exchange Act, including the proxy rules, which impose certain disclosure and procedural requirements for proxy solicitations for U.S. and other issuers. Moreover, the Company is not required to file periodic reports and financial statements with the SEC as frequently or within the same time frames as U.S. companies with securities registered under the Exchange Act. We currently prepare our financial statements in accordance with IFRS. The Company is not required to file financial statements prepared in accordance with or reconciled to U.S. GAAP so long as our financial statements are prepared in accordance with IFRS. The Company is not required to comply with Regulation FD, which imposes restrictions on the selective disclosure of material information to shareholders. In addition, the Company’s officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions of Section 16 of the Exchange Act and the rules under the Exchange Act with respect to their purchases and sales of Company securities.

 

In addition, as a “foreign private issuer” whose shares are listed on Nasdaq, the Company is permitted to, and is expected to, follow certain home country corporate governance practices in lieu of certain Nasdaq requirements. A foreign private issuer must disclose in its annual reports filed with the SEC each Nasdaq requirement with which it does not comply followed by a description of its applicable home country practice. As a Mexican corporation listed on Nasdaq, the Company is expected to follow our home country practice with respect to the composition of the board of directors and nominations committee and executive sessions. Unlike the requirements of Nasdaq, the corporate governance practices and requirements in Mexico do not require the Company to have a majority of its board of directors to be independent; do not require the Company to establish a nominations committee; and do not require the Company to hold regular executive sessions where only independent directors shall be present. Such home country practices of Mexico may afford less protection to holders of Company shares.

 

The Company could lose its status as a “foreign private issuer” under current SEC rules and regulations if more than 50% of the Company’s outstanding voting securities become directly or indirectly held of record by U.S. holders and one of the following is true: (i) the majority of the Company’s directors or executive officers are U.S. citizens or residents; (ii) more than 50% of the Company’s assets are located in the United States; or (iii) the Company’s business is administered principally in the United States. If the Company loses its status as a foreign private issuer in the future, it will no longer be exempt from the rules described above and, among other things, will be required to file periodic reports and annual and quarterly financial statements as if it were a company incorporated in the United States. If this were to happen, the Company would likely incur substantial costs in fulfilling these additional regulatory requirements and members of the Company’s management would likely have to divert time and resources from other responsibilities to ensuring these additional regulatory requirements are fulfilled.

 

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Betterware qualifies as an emerging growth company within the meaning of the Securities Act, and if it takes advantage of certain exemptions from disclosure requirements available to emerging growth companies, which could make the Company’s securities less attractive to investors and may make it more difficult to compare the Company’s performance to the performance of other public companies.

 

Betterware qualifies as an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act, as modified by the JOBS Act. As such, the Company is eligible for and intends to take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies for as long as it continues to be an emerging growth company, including (i) the exemption from the auditor attestation requirements with respect to internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act, (ii) the exemptions from say-on-pay, say-on-frequency and say-on-golden parachute voting requirements and (iii) reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements. The Company will remain an emerging growth company until the earliest of (i) the last day of the fiscal year in which the market value of our ordinary shares that are held by non-affiliates exceeds $700 million as of June 30 of that fiscal year, (ii) the last day of the fiscal year in which it has total annual gross revenue of $1.07 billion or more during such fiscal year (as indexed for inflation), (iii) the date on which it has issued more than $1 billion in non-convertible debt in the prior three-year period or (iv) the last day of the fiscal year following the fifth anniversary of the date of the first sale of DD3’s ordinary shares in its initial public offering. In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the exemption from complying with new or revised accounting standards provided in Section 7(a)(2)(B) of the Securities Act as long as the Company is an emerging growth company. An emerging growth company can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. DD3 has elected not to opt out of such extended transition period and, therefore, the Company may not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. Investors may find the Company shares less attractive because the Company will rely on these exemptions, which may result in a less active trading market for the Company shares and their price may be more volatile.

 

If securities or industry analysts do not publish or cease publishing research or reports about Betterware, our business, or markets, or if they change their recommendations regarding the Company shares adversely, the price and trading volume of the Company shares could decline.

 

The trading market for the Company shares is influenced by the research and reports that industry or securities analysts may publish about the Company, our business, market or competitors. Securities and industry analysts do not currently, and may never, publish research on the Company. If no securities or industry analysts commence coverage of the Company, the price and trading volume of the Company shares would likely be negatively impacted. If any of the analysts who may cover the Company change their recommendation regarding the Company shares adversely, or provide more favorable relative recommendations about the Company’s competitors, the price of the Company shares would likely decline. If any analyst who may cover the Company were to cease coverage of the Company or fail to regularly publish reports on it, the Company could lose visibility in the financial markets, which in turn could cause our share price or trading volume to decline.

 

There can be no assurance that Betterware will be able to comply with the continued listing standards of Nasdaq.

 

Betterware’s shares are listed on Nasdaq under the symbol “BWMX.” If Nasdaq delists the Company’s securities from trading on its exchange for failure to meet the listing standards, the Company and its shareholders could face significant material adverse consequences including:

 

  a limited availability of market quotations for the Company’s securities;

 

  a determination that the Company shares are “penny stock” which will require brokers trading in the Company shares to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for the Company shares;

 

  a limited amount of analyst coverage; and

 

  a decreased ability to issue additional securities or obtain additional financing in the future.

 

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If Betterware is characterized as a passive foreign investment company, or a PFIC, adverse U.S. federal income tax consequences may result for U.S. holders of Company shares.

 

Based on the projected composition of our income and assets, including goodwill, it is not expected that the Company will be a PFIC for its taxable year that includes the date of the Merger or in the foreseeable future. However, the tests for determining PFIC status are applied annually after the close of the taxable year, and it is difficult to predict accurately future income and assets relevant to this determination. Accordingly, there can be no assurance that the Company will not be considered a PFIC for any taxable year.

 

If the Company is a PFIC for any year during which a U.S. holder holds Company shares, a U.S. holder generally would be subject to additional taxes (including taxation at ordinary income rates and an interest charge) on any gain realized from a sale or other disposition of the Company shares and on any “excess distributions” received from the Company. Certain elections may be available that would result in alternative treatments of the Company shares.

 

We urge U.S. holders to consult their own tax advisors regarding the possible application of the PFIC rules to the ownership of Company shares.

 

An investor may be subject to adverse U.S. federal income tax consequences in the event the IRS were to disagree with the U.S. federal income tax consequences described herein.

 

The Tax Cuts and Jobs Act of 2017, or the TCJA, and was signed into law on December 22, 2017. The TCJA changes many of the U.S. corporate and international tax provisions, and certain of the provisions are unclear. No ruling has been or will be requested from the IRS as to any U.S. federal income tax consequences described herein. The IRS may disagree with the descriptions of U.S. federal income tax consequences contained herein, and its determination may be upheld by a court. Any such determination could subject an investor or the Company to adverse U.S. federal income tax consequences that would be different than those described herein. Accordingly, each prospective investor is urged to consult a tax advisor with respect to the specific tax consequences of the acquisition, ownership and disposition of DD3’s or the Company’s securities, including the applicability and effect of state, local or non-U.S. tax laws, as well as U.S. federal tax laws.

 

The Amended and Restated Charter of Betterware provides for the exclusive jurisdiction of the federal courts in Mexico City, Mexico for substantially all disputes between the Company and its shareholders, which could limit Company shareholders’ ability to obtain a favorable judicial forum for disputes with the Company or its directors, officers, other employees or shareholders.

 

The Amended and Restated Charter of the Company provides for the exclusive jurisdiction of the federal courts located in Mexico City, Mexico for the following civil actions:

 

  any action between the Company and its shareholders; and

 

  any action between two or more shareholders or groups of shareholders of the Company regarding any matters relating to the Company.

 

This exclusive jurisdiction provision may limit a shareholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with the Company or any of its directors, officers, other employees or shareholders, which may discourage lawsuits with respect to such claims, although the Company’s shareholders will not be deemed to have waived the Company’s compliance with U.S. federal securities laws and the rules and regulations thereunder applicable to foreign private issuers. Alternatively, if a court were to find the exclusive jurisdiction provision contained in the Amended and Restated Charter to be inapplicable or unenforceable in an action, the Company may incur additional costs associated with resolving such action in other jurisdictions, which could harm the Company’s business, operating results and financial condition. The exclusive jurisdiction provision would not prevent derivative shareholder actions based on claims arising under U.S. federal securities laws from being raised in a U.S. court and would not prevent a U.S. court from asserting jurisdiction over such claims. However, there is uncertainty whether a U.S. court would enforce the exclusive jurisdiction provision for actions for breach of fiduciary duty and other claims.

 

The anti-takeover protections included in our Bylaws and others provided under Mexican Law may deter potential acquirors

 

Our bylaws provide that, subject to certain exceptions as explained below, prior written approval from the board of directors shall be required for any person, or group of persons to acquire, directly or indirectly, any of our common shares or rights to our common shares, by any means or under any title whether in a single event or in a set of consecutive events, such that its total shares or rights to shares would represent 20% or more of our outstanding shares.

 

These provisions could make it substantially more difficult for a third party to acquire control of us. These provisions in our bylaws may discourage certain types of transactions involving the acquisition of our securities. These provisions could discourage transactions in which our shareholders might otherwise receive a premium for their shares over the then current market price. Holders of our securities who acquire shares in violation of these provisions will not be able to vote, or receive dividends, distributions or other rights in respect of, these securities and would be obligated to pay us a penalty. For a description of these provisions, see “Item 10. Additional Information—Bylaws——Anti-takeover Protections.”

 

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ITEM 4. COMPANY INFORMATION

 

The Company makes its filings in electronic form under the EDGAR filing system of the SEC. Its filings are available through the EDGAR system at www.sec.gov. The Company’s filings are also available to the public through the Internet at the Company’s website at http://ri.betterware.com.mx/.

 

A. HISTORY AND DEVELOPMENT OF THE COMPANY

 

  Founded in 1995, Betterware is a leading direct-to-costumer company in Mexico. The Company is focused on the home organization segment, with a wide product portfolio including home solutions, kitchen and food preservation, technology and mobility, among other categories.

 

  On July 28, 2017, Betterware entered into a merger agreement with Betterware Controladora, S.A. de C.V. (“BWC”) and Strevo Holding, S.A. de C.V. (controlling company of BWC and in turn, subsidiary of Campalier). Betterware was the surviving entity to such merger and the merged companies ceased to exist.

 

  On August 2, 2019, DD3 entered into a Combination and Stock Purchase Agreement with Sellers, Betterware, BLSM, pursuant to which DD3 agreed to merge with and into Betterware in a Business Combination. See “The Business Combination.”

 

  On March 13, 2020, the Merger with DD3 was closed and consummated.

 

  On July 14, 2020, Betterware’s corporate name changed from Betterware de México, S.A.P.I. de C.V. to Betterware de México, S.A.B. de C.V.

 

  On December 14, 2020, Betterware and Forteza, (Betterware’s shareholder), entered into a merger agreement pursuant to which Forteza agreed to merge with and into Betterware, surviving Betterware as the acquiror. On December 16, 2020, the merger was completed. Consequently, shares in Betterware were delivered to Forteza’s shareholders in proportion to their shareholding in Betterware, without implying an increase in Betterware’s share capital or in the total number of outstanding shares of the Company.

 

B. BUSINESS OVERVIEW

 

Company Overview

 

Founded in 1995, Betterware is a leading direct-to-customer company in Mexico. BWM is focused on the home organization segment, with a wide product portfolio including home solutions, kitchen and food preservation, technology and mobility, among other categories.

 

BWM sells its products through nine catalogues published throughout the year (approximately six weeks outstanding each) with an offer of approximately 380 products per catalogue. BWM constantly innovates introducing approximately 300 products every year, representing 10% – 15% of the products in a catalogue. All of the products are Betterware branded with unique characteristics and manufactured by +300 certified producers in Mexico and China, and then delivered to BWM’s warehouses in Guadalajara, Jalisco where they process and pack the products.

 

Betterware sells its products through a unique two-tier sales model that is comprised of more than 1,290,412 Distributors and Associates across Mexico, that serve + 20% Household Penetration in Mexico, and 82% of Distributors place orders every week. The Distributors and Associates are monitored tightly through an in-house developed business intelligence platform that tracks weekly performance and has a detailed mapping system of the country to identify potential areas to penetrate and increase the network.

 

BWM’s business model is tailored to Mexico’s unique geographic, demographic and economic dynamics, where communities are small and scattered across the country, with very low retail penetration and difficult to fulfill last mile logistics, middle-income consumers are emerging, and historic high consumer confidence was present during 2020. Additionally, the business model is resilient to economic downturns given low average sales price to consumers and also because being a Distributor or Associate represents an additional source of income for households. As a result, BWM’s operations are not subject to significant seasonal fluctuations.

 

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Betterware has a zero last mile cost, with its Distributors and Associates delivering the products to the final consumers.

 

Betterware has shown long term sustainable double-digit growth rates in revenue and adjusted EBITDA. For the 2020 period, Betterware had triple-digit growth and has built a platform that management believes can grow domestically in Mexico and in other markets.

 

Industry Overview

 

Direct selling is a retail channel used by top global brands, the market serves all types of goods and services, including healthcare, jewelry, cookware, nutritionals, cosmetics, housewares, energy and insurance, among others. The direct selling channel differs from broader retail in an important way mainly due to the avenue where entrepreneurial-minded individuals can work independently to build a business with low start-up and overhead costs.

 

17 Direct selling representatives work on their own but are affiliated with a company that uses the channel, retaining the freedom to run a business and have other sources of income.

 

An important number of representatives join direct selling companies because they enjoy their products or services and want to purchase them at a discount. Some others decide to market these offerings to friends, family and others and earn discounts from their sales.

 

Competitive Strengths

 

Unique Business Intelligence and Data Analytics Unit

 

Betterware’s in-house business intelligence unit plays a crucial role within the operations and strategy of the company. The unit’s team is comprised of geographers, anthropologists, actuaries, and more, in order to diversify the way of thinking and create the best analyses and business strategies.

 

The main functions of the business intelligence unit are:

 

  1. Clear strategy development

 

  2. Tight Monitoring

 

  3. Product Intelligence

 

Product Development and Innovation Program

 

  The Company offers a product portfolio with great depth in the home organization segment through six different categories; kitchen and food preservation, home solutions, bathroom, laundry & cleaning, tech and mobility and bedroom

 

  Constant product innovation is engaged by Betterware through refreshing its catalogue content and attracting clients’ repeated purchases

 

  The Company has a team focused solely in performing industry analyses and product development and monitoring backed by the data analytics unit’s commercial strategy

 

Distributors and Associates Network & Loyalty and Reward Programs

 

  Betterware has a unique two-tier sales model and one of the most robust networks with more than 59,713 Distributors and 1,230,699 Associates as of January 3, 2021.

 

  The Company’s Distributors and Associates serve around 20% Household Penetration in Mexico and 82% of Distributors place orders every week.

 

  The Company has a remarkable rewards program that attracts, retains, and motivates Distributors and Associates through product discounts, Betterware Points, trips, gifts and more.

 

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Unparalleled Logistics and Supply Chain Platform

 

  All of Betterware’s products are manufactured by more than 300 third party factories certified under the Company’s quality standards.

 

Growth Strategies

 

  The Company’s warehousing practices includes a 80-day service level inventory.

 

  Betterware distributes all products from its distribution center in Guadalajara, Mexico.

 

  Distributors personally deliver orders to each of its associates, thus eliminating last mile costs for the Company

 

Experienced Management & Meritocratic Culture

 

  Betterware’s president has more than 25 years of experience in the direct-to-consumer selling sector across the Americas and a strong track record of delivering value to its shareholders with commitment to excellence

 

  Top management has been with the Company six years on average

 

  The company’s culture is based on the following principles

 

  1. Result driven management:

 

  Incentives based on results

 

  Highly professional operation and no bureaucracy

 

  2. Meritocratic culture:

 

  Culture focused on solutions, delivery, discipline and commitment

 

  3. Closeness to salesforce:

 

  Management are close and visible to Distributors and Associates

 

  Open office spaces for efficient flow of information and data allows fast decision making

 

The company has a clear and executable plan for growth, which includes organic and inorganic initiatives. The main strategies divided by timeline are the following:

 

  Short Term

 

  1. Web marketing/E-commerce

 

  2. Increase Service Capacity

 

  Construction of new headquarters campus

 

  Medium Term

 

  1. New Product Line

 

  2. International Expansion to Latin America

 

  3. Strategic Acquisitions

 

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Offerings

 

The living spaces in our target communities are on a decreasing size trend. Hence it is becoming more and more important to optimize the organization within our living spaces and hectic lifestyles. The Company offers a unique and innovative product portfolio with great depth in the home organization segment focused on providing everyday solutions for modern spaces.

 

  The company offers its products through 8 different categories; including kitchen and food preservation, home solutions, bathroom, laundry and cleaning, tech and mobility and bedroom

 

  Products are sold through catalogues that offer approximately 380 products. Each catalogue has extensive consumer reading behavior analysis to ensure that the content is distributed in the most efficient way and purchase potential is maximized

 

  Constant product innovation introducing approximately 300 new products every year and development is conducted where the focus is on refreshing catalogue content and attracting repeated purchases from clients

 

  The Company employs an efficient pricing strategy focused in maximizing revenue and margins and minimizing inventory losses

 

  The Company has a team focused solely on performing industry analyses and monitoring backed by the data analytics unit commercial market strategy

 

Logistics Infrastructure and Supply Chain

 

Customers

 

  Betterware is 100% committed to provide products to its customers that serve as everyday solutions for modern space organization. Betterware also has the objective of providing products that are accessible to anyone. With these objectives in mind, the Company’s target market is all households in Mexico.

 

  Most of the Company’s end customers are adult men and women with the desire of optimizing their homes organization

 

Sales & Marketing

 

Betterware does not rely on significant traditional advertising expenditures to drive net sales since Distributors and Associates distribute its catalogues directly to customers, thus making the sales catalog design and printing an important selling expense representing 3.4% of net revenue. Some of the main advertising costs incurred by the Company include social media and transit advertising in bus lines and subways that represent 0.2% of net revenue.

 

Betterware establishes and maintains credibility primarily through the quality of their products, their customer service and the attractiveness of their pricing.

 

Research & Development

 

  The Company performs constant product innovation with the objectives of refreshing its catalogue content and attracting clients’ repeated purchases

 

  The Company has a team focused solely on performing industry analyses, product development and monitoring of products

 

  Product development is backed by the data analytics unit’s commercial strategy

 

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C. ORGANIZATIONAL STRUCTURE

 

The following diagram depicts the current organizational structure of Betterware:

 

 

D. PROPERTY, PLANT AND EQUIPMENT

 

Our principal executive offices are located in Guadalajara, Mexico. As of January 3, 2021, we leased premises of approximately 26,318 square meters. We also lease offices in Mexico City, with an aggregate area of approximately 384 square meters. We lease our premises from unrelated third parties. Below is a summary of the terms of each of our current leases. We do not plan to renew most of these leases when they expire as in the first quarter of 2021, we completed the construction of a distribution center in Guadalajara, Mexico. As of January 3, 2021, the total amount of investment capital expenditures related to this construction was Ps.674 million.

 

Leased properties  Term   Area
(square meters)
 
Distribution center – CEDIS  April 30, 2021    12,657 
Warehouse CEREC I  February 28, 2021    6,921 
Warehouse CEREC III  February 28, 2021    4,717 
Warehouse CEREC II  September 30, 2020    2,023 
Mexico City – Casa Better  April 30, 2022    384 
Total       26,702 

 

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ITEM 4A. UNRESOLVED SEC STAFF COMMENTS

 

The Company has no unresolved comments from the staff of the SEC with respect to its periodic reports under the Exchange Act.

 

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

Our discussion and analysis of our results of operations and financial condition are based upon our Audited Consolidated and Combined Financial Statements, which have been prepared in accordance with IFRS. Our operating and financial review and prospects should be read in conjunction with our Audited Consolidated and Combined Financial Statements, the accompanying notes thereto and other financial information appearing elsewhere in this annual report.

 

A. Operating Results

 

Factors Affecting Our Results of Operations

 

A number of factors have a significant impact on our business and results of operations, the most important of which are regulations, fluctuations in exchange rates in the currencies in which we operate, external factors, such as the COVID-19 pandemic, See “—Operating and Financial Review and Prospects—Liquidity and Capital Resources—The COVID-19 Impact,” and our capital investment plans.

 

Distributors and Associates

 

Betterware sells its products through a unique two-tier sales model that is comprised of Distributors and Associates. Distributors are the link between the Company and the Associates. The Company distributes products in a weekly basis to the Distributors domicile, who in turn delivers to each Associate. To cover for the associated payment cycle, the Company provides to Distributors a two-- week credit line for them to make the payment back to the Company.

 

Net Revenue

 

BWM primarily generates its revenue through selling products focused on the home organization segment under the Betterware® brand. Some of the categories through which the Company offers its product line include Kitchen and Food Preservation, Bathroom, Bedroom, Home Solutions, among others. BWM’s products are sold through catalogues and are distributed to the end customer by its network of Distributors and Associates. BWM sells its products to a wide array of customers but focuses on the C and D segments of the socioeconomic pyramid in Mexico.

 

BWM’s revenues are driven by the increase in volume of products sold, the price of its products and by the increase in its network of Distributors and Associates. Factors that impact unit pricing and sales volume include promotional campaigns, marketing campaigns, the Company’s business intelligence unit, increase in variable costs, and macroeconomic factors.

 

BWM reports net revenue, which represents its gross revenue less sales discounts, adjustments and allowances, also the Company has a deferred revenue due to undelivered performance obligations related to the promotional points, so the revenue is determined in a five-step model:

 

  Identify the contract with client (verbal or written).

 

  Identify the performance obligations committed in the contract.

 

  Consider the contractual terms and the business model of the Company in order to determine the transaction price. The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer, excluding amounts collected on behalf of third parties. In determining the transaction price, the Company considers the variable considerations.

 

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  Allocate the transaction price to the performance obligations identified in the contract (generally each distinct good or service), to depict the amount of consideration to which an entity expects to be entitled in exchange for transferring the promised goods or services to the customer.

 

  Recognition of revenue when or as it satisfies a performance obligation by transferring a good or service to a customer, either at a point in time (when) or over time (as).

 

Cost of Sales

 

Cost of goods sold consists of the purchase of finished goods, maritime freight costs, land freight costs, customs costs, provisions for defective inventory, among others. The cost of finished goods and maritime and land freight costs represent the majority of BWM total costs of goods sold.

 

Selling Expenses

 

Selling expenses include all costs related to the sale of products, such as printing and design of sales catalog, packing material costs, events, marketing and advertising, a part of promotional points products expenses, among others. Costs related to sales catalog and rewards program products account for most of the weight of total selling expenses.

 

Administrative Expenses

 

Administrative expenses primarily include employee salaries and related expenses of all departments of the company´s operations, such as accounting, planning, customer service, legal, and human resources. Also included are corporate operations, research and development, leases, professional services relating to BWM’s statutory corporate audit and tax advisory fees, legal fees, outsourcing fees relating to information technology, and corporate site and insurance costs.

 

Financing Income/Cost

 

Financing income/costs consists primarily of: (i) interest expense and charges in connection with financings, (ii) income derived from investments of excess cash, (iii) loss/gains from foreign exchange changes, and (iv) loss /gains in valuation of derivative financial instruments (including the fair value effects of the warrants).

 

Income Taxes

 

The Company is subject to a 30% Corporate Income Tax rate provided by the Mexican Income Tax Law.

 

Fluctuations in Exchange Rates in the Currencies in which We Operate

 

Our primary foreign currency exposure gives rise to market risks associated with exchange rate movements of the, Mexican Peso against the U.S. dollar See “—Quantitative and Qualitative Disclosure about Market Risk—Exchange Rate Risk.”

 

Results of Operations — 2020 period compared with the 2019 period

 

All amounts discussed are in thousands of Mexican pesos unless otherwise noted

 

Net Revenue

 

   January 3,
2021
   December 31,
2019
 
Net Revenue  Ps.7,260,408    3,084,662 

 

Net revenue increased by 135.4%, or MX$ 4,175,746, to MX$7,260,408 for the 2020 period compared to MX$3,084,662 for the 2019 period, primarily due to: (i) an increase in volume of units sold, mainly as a consequence of an increase in the distribution network, including distributors and associates (for the 2020 period the Company had a Distributors and Associates network of 1,290,412 and 133.7 million units compared to 437,872 Distributors and Associates network and 42.3 million units for the 2019 period), and (ii) an increase of the average unit price of our products.

 

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Cost of Goods Sold

 

    January 3,
2021
   December 31,
2019
 
Cost of Sales   Ps.3,290,994    1,280,829 

 

Cost of goods sold increased 156.9%, or MX$2,010,165, to MX$3,290,994 for the 2020 period compared to MX$1,280,829 for the 2019 period as a result of increased revenue, resulting in a gross profit of MX$3,969,414 for the 2020 period compared to MX$1,803,833 for the 2019 period. As a percentage of net revenues, cost of goods sold was 45.3% for the 2020 period and 41.5% for the 2019 period. The increase of cost of goods sold as a percentage of net revenues was primarily because of the impact of the increase in air freight costs to meet the surge in demand, and lesser extent due to the depreciation of the Mexican peso compared to the US dollar, (approximately 90% of our purchases are imported from China).

 

Administrative Expenses

 

   January 3,
2021
   December 31,
2019
 
Administrative Expenses  Ps.664,677    319,133 

 

Administrative expenses increased 108.3%, or MX$345,544, to MX$664,677 for the 2020 period compared to MX$319,133 for the 2019 period, primarily due to increases in the number of employees to support operation growth and one-time consulting services fee payments. As a percentage of net revenues, these expenses represented 9.2% and 10.4% for the 2020 and 2019 periods, respectively. Decrease in percentage is due to operating leverage.

 

Administrative expenses by department are as follows:

 

    January 3,
2021
   December 31,
2019
   Var. $   Var. % 
Operations    406,856    164,336    242,520    147.6%
Finance    94,886    51,374    43,512    84.7%
IT    45,355    27,765    17,590    63.4%
Depreciation    43,612    38,394    5,218    13.6%
Quality    25,383    15,909    9,474    59.6%
Marketing    24,936    19,085    5,851    30.7%
Others    23,649    2,270    21,379    941.8%
Total    664,677    319,133    345,544    108.3%

 

Selling Expenses

 

   January 3,
2021
   December 31,
2019
 
Selling Expenses  Ps.853,355    551,300 

 

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Selling expenses increased 54.8%, or MX$302,055, to MX$853,355 for the 2020 period compared to MX$551,300 for the 2019 period, primarily due to an increase in our rewards program and expenses incurred in the volume of sales catalogues printed in order to have enough copies to provide for the increased number of Distributors and Associates. The Company’s selling expenses were 11.8% of net revenue for the 2020 period compared to 17.9% of net revenue for the 2019 period. This decrease was mainly a combination of maintaining the same expenses related to employees during 2020 and 2019 and the increase in sales during 2020. The selling expenses major line items include:

 

   January 3,
2021
   December 31,
2019
   Var. $   Var. % 
Sales Bonuses and Wages   288,658    281,259    7,399    2.6%
Sales Catalogue   247,250    128,687    118,563    92.1%
Rewards Program   172,177    26,311    145,866    554.4%
Events and Conventions   19,237    37,848    (18,611)   (49.2%)
Others   126,033    77,195    48,838    63.3%
Total   853,355    551,300    302,055    54.8%

 

Distribution Expenses

 

   January 3,
2021
   December 31,
2019
 
Distribution Expenses  Ps.331,023    121,155 

 

Distribution expenses increased 173.2%, or MX$209,868 to MX$331,023 for the 2020 period compared to MX$121,155 for the 2019 period. This increase relates to the fact that distribution expenses are driven primarily by sales volume, which increased 135.4% for the 2020 period, compared to the 2019 period.

 

Financing Income/Costs

 

   January 3,
2021
   December 31,
2019
 
Financing Income (Cost)          
Interest Expense(1)  Ps.(80,253)   (85,429)
Interest Income   10,930    7,028 
Unrealized Loss in Valuation of Financial Derivative Instruments(2)   (287,985)   (15,680)
Changes in fair value of warrants(3)   (851,520)   - 
Foreign Exchange Loss, Net(4)   (30,402)   (13,330)
Financing Cost, Net   (1,239,230)   (107,411)

 

 

(1) Interest expenses decreased 6.1% or MX$5,176, to MX$80,253 for the 2020 period compared to MX$85,429 for the 2019 period. Interest expenses decreased as a result of lower outstanding debt balances in 2020, as compared to 2019, due to repayment of principal amounts in certain financing agreements. See—“Indebtedness.”
(2) In connection with the secured line of credit for up to Ps.400,000 contracted with Banamex (see —“Indebtedness—Banamex Term Loans”), and in order to mitigate the risk of future increases in interest rates, the Group entered into a derivatives contract with Banamex, which consists of an interest rate swap. By using this interest rate swap, the Group converts its variable interest rates into fixed rates. In addition, to reduce the risks related to fluctuations in the exchange rate of the US dollar, the Group uses derivative financial instruments such as forwards to mitigate foreign currency exposure resulting from inventory purchases made in US dollars.
(3)

Betterware assumed the obligation associated with outstanding warrants upon the Merger with DD3. Changes in the fair value of the warrant obligation, which increased during the year in direct correlation with the increase in our share price, was recognized in financing income/costs.

(4) Company exposure to currency exchange rate fluctuations and how it mitigates this risk can be found in the section entitled “Risk Factors—Risks Related to Mexico, See—Currency exchange rate fluctuations, particularly with respect to the US dollar/Mexican peso exchange rate, could lower margins.”

 

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Income Tax Expense

 

   January 3,
2021
   December 31,
2019
 
Current  Ps576,834    229,900 
Deferred   (34,066)   2,792 
Total Income Tax Expense   542,768    232,692 

 

Income taxes increased 133.3% or MX$310,076 to MX$542,768 for the 2020 period compared to MX$232,692 for the 2019 period due to higher pre-tax profits. The effective income tax rate increased as a result of an increase in, mainly, the tax effect of inflation and non-deductible expenses.

 

Capital Expenditures

 

Our capital expenditures for the 2020 period, were mainly related to the construction of our new headquarters and distribution center in Guadalajara, Mexico. Our capital expenditures for the 2020 and 2019 periods amounted to MX$617.7 million and MX$182.6 million, respectively.

 

Results of Operations — 2019 period compared with the 2018 period

 

The results of operations comparison between the 2019 and 2018 periods has been omitted from this annual report, but may be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Form 20-F filed with the SEC on May 4, 2020.

 

B. LIQUIDITY AND CAPITAL RESOURCES

 

BWM’s primary source of liquidity is from cash flow generated from operations. BWM has an efficient working capital structure where its seller supplier financing matches the Company requirements to serve their clients and inventory supplemented by lines of credit. Additionally, the Company capex requirements to sustain its growth is levered on the existing platform with minimum increased investment in technology. Due to these low capital requirements and closed working capital cycle, the Company has high cash conversion rate enabling it to annually serve their shareholders through dividends.

 

In order to maintain sufficient liquidity, the Company establishes maintaining a minimum cash and cash equivalent monthly balance to equal approximately Ps.200,000 in order to cover its Selling, General and Administrative expenses. For the 2020 period, cash and cash equivalents of the Company was Ps.649,820, above its minimum internal policy.

 

2020 period compared with the 2019 period

 

Cash Flows from Operating Activities

 

Cash flow provided by operating activities was MX$1,822,256 and MX$605,446 for the 2020 and 2019 periods, respectively. The cash flow from operations increased primarily due to an increase in cash received from sales. Inventory management increased from 88 days during the 2019 period, to 90 during the 2020 period, Days of Payables increased from 135 during the 2019 period to 145 during the 2020 period, and Days of Receivables increased from 20 during the 2019 period to 25 during the 2020 period.

 

Cash Flows from Investing Activities

 

Cash flows (used in) provided by investing activities were MX$(631,401) and MX$(175,597) for the 2020 and 2019 periods, respectively. Cash outflows from investing activities include investment in technological platform, product innovation, equipment, and property. The increase in investing activities was mainly due to the construction of a distribution center in Guadalajara. See “Property, Plants and Equipment.”

 

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Cash Flows from Financing Activities

 

Cash flows used in financing activities were MX$754,732 and MX$393,535 for the 2020 and 2019 periods, respectively. For the 2020 period, the Company made repayments in the amount of MX$692,113 under its long-term financing agreements, of which: (i) MX$521,250 was repaid to Credit Suisse, (ii) MX$168,376 to Banamex, and (iii) MX$2,487 to BBVA. Also, the Company made a repayments in the amount of MX$1,064,999 under its short-term financing agreements, of which: (i) MX$434,999 was paid to Banamex, and (ii) MX$630,000 was paid to HSBC. Additionally, we received an additional disbursement under the existing long-term financing agreements for the total amount of MX$195,000. For the 2020 and 2019 periods, the Company paid dividends in the amounts of MX$830,000 and MX$342,955, respectively. Interests paid for the 2020 period of MX$121,297, a 46.7% increase compared to MX$82,654 paid for the 2019 period; mainly due to prepaid commission paid to MCRF P, S.A. de C.V. SOFOM, E.N.R for Ps.45,000.

 

2019 Period and 2018 Period

 

A cash flow comparison of the 2019 and 2018 periods has been omitted from this annual report but may be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Form 20-F filed with the SEC on May 4, 2020.

 

Indebtedness

 

Banamex Term Loans

 

On December 18, 2018, Betterware, as borrower, and BLSM, as guarantor (fiador), entered into a secured credit facility agreement with Banco Nacional de México, S.A., Integrante de Grupo Financiero Banamex for an aggregate principal amount of MX$400 million. The loan is secured by (i) a first priority mortgage over a 49,756.47 m2 property located in Jalisco, Mexico property of BWM and (ii) a bond (fianza) granted by BLSM.

 

Under this facility, Betterware and BLSM must observe certain restrictive covenants, which require BWM and BLSM (i) continuing to perform the same type of activities and businesses, maintaining their legal existence, (ii) complying with all applicable laws, (ii) having audited its consolidated and combined financial statements by internationally recognized auditors authorized by the financial institution, (iii) paying all applicable taxes, (iv) obtaining all licenses and permits required by government to operate, (v) keeping assets and businesses insured against loss or damage, (vi) not to incur liens on BWM and BLSM’s assets, and (vii) not giving or selling any rights of financial documents.

 

The line of credit agreement with Banamex contains the following financial covenants:

 

a) To maintain a short-term debt coverage ratio not lower than 1.5.

 

b) To maintain a total debt coverage ratio not greater than 3.0.

 

c) To maintain a leverage ratio not greater than 7.0.

 

d) To maintain a minimum cash and cash equivalents balance of MX$40,000.

 

On January 30, 2020, the Group renegotiated the interest rate of the secured line of credit with Banamex, which changed from the TIIE rate plus 317 basis points to the TIIE rate plus 260 basis points. In addition, withdrawals from this line of credit were extended to August 2020, and are payable on a quarterly basis from September 2020 up to December 18, 2025.

 

On March 25, 2020 and April 13, 2020, the Group withdrew Ps.74,000 and Ps.100,000, respectively, from its secured line of credit with Banamex.

 

As of the date of this annual report, the Company is in compliance with all covenants under this facility. In connection with the Merger, Banamex granted the Company the required permission from Banamex to consummate the transaction under the Business Combination

 

25

 

 

Supplemental Banamex Term Loan

 

On July 30, 2020 a total amount of Ps.195,000 was withdrawn from a credit agreement signed on June 3, 2020 with Banamex. This loan bears interest at the TIIE rate plus 295 basis points maturing on December 30, 2025.

 

Under this facility, Betterware and BLSM must observe certain restrictive covenants, which require BWM and BLSM (i) continuing to perform the same type of activities and businesses, maintaining their legal existence, (ii) complying with all applicable laws, (ii) having audited its consolidated and combined financial statements by internationally recognized auditors authorized by the financial institution, (iii) paying all applicable taxes, (iv) obtaining all licenses and permits required by government to operate, (v) keeping assets and businesses insured against loss or damage, (vi) not to incur liens on BWM and BLSM’s assets, and (vii) not giving or selling any rights of financial documents.

 

Banamex Revolving Facility

 

On April 30, 2019, Betterware, as borrower, and BLSM, as guarantor (fiador), entered into a revolving facility agreement with Banco Nacional de México, S.A., a member of Grupo Financiero Banamex for an aggregate principal amount of MX$80 million. As of January 3, 2021, the interest rate amounted to TIIE plus 285 basis points. As of December 31, 2019, the interest rate was TIIE plus 275 basis points. The credit is renewable on yearly basis.

 

Under this facility, Betterware and BLSM must observe certain restrictive covenants, which require BWM and BLSM (i) continuing to perform the same type of activities and businesses, maintaining their legal existence, (ii) complying with all applicable laws, (ii) having audited its consolidated and combined financial statements by internationally recognized auditors authorized by the financial institution, (iii) paying all applicable taxes, (iv) obtaining all licenses and permits required by government to operate, (v) keeping assets and businesses insured against loss or damage, (vi) not incurring liens on BWM and BLSM’s assets, and (vii) not to give or sell any rights of financial documents. Under this facility, Betterware and BLSM shall maintain a short-term debt coverage ratio not lower than 1.0.

 

HSBC

 

On March 10, 2020, Betterware entered into a current account credit agreement with HSBC México, S.A., for an amount of Ps.50,000, with provisions by means of promissory notes specifying payment of principal and interest. BLSM is jointly liable for this credit. On May 4, 2020, an amendment to this agreement was signed, in which the amount of the line of credit was increased to Ps.150,000. The maturity date of this line of credit is March 10, 2022, and it bears interest at the TIIE rate plus 350 basis points. During 2020, the Group utilized Ps.115,000 of which as of January 3, 2021 the entire amount has been repaid.

 

BBVA

 

On September 20, 2020, Betterware entered into a line of credit with BBVA for up to Ps.75,000 bearing interest at 7.5%, payable monthly. The line of credit has racks in the Group’s distribution center pledged as collateral for an amount of Ps.80,901.

 

COVID-19 Virus Impact

 

As a result of the coronavirus (COVID-19) outbreak and its recent global spread to a large number of countries, the World Health Organization classified the viral outbreak as a pandemic on March 11, 2020. See Risk Factors—The COVID-19 virus (nCoV), as well as any other public health crises that may arise in the future, is having and will likely continue to have a negative impact on the retail industry and in our results of operations.”

 

Our operations were not interrupted as a result of the COVID-19 pandemic, as its product lines include hygiene and cleaning solutions, which qualify as an essential activity in Mexico. Our gross margin was negatively affected by the depreciation of the Mexican peso compared to the US dollar, as it acquires most of its products in US dollars. To mitigate this risk, we enter into derivative forward contracts to fix the exchange rate for future purchases in US dollars, which has allowed it to partially reduce the effects of the increase in the exchange rate between the Mexican peso and US dollar due to the COVID-19 pandemic.

 

We have a proven track record of performance and a clear and executable growth plan, which includes expansion in current geographies and categories, as well as the addition of new markets and product extensions, all supported by a strong infrastructure deeply rooted in business intelligence.

 

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The Company maintains sufficient liquidity to comply with its contractual obligations as a result of having financing sources, in addition, the payment conditions of its clients are maintained between 14 and 28 days, while the payment conditions to its suppliers are 120 days.

 

C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.

 

Our research and development efforts consist of constant product innovation with the objectives of refreshing our catalogue content and attracting clients’ repeated purchases and data analytics unit technology in order to improve product development processes. For further details, see “Item 4.B. Information on the Company-Business Overview-Research and Development.”.

 

D. TREND INFORMATION

 

The COVID-19 pandemic had no adverse impacts on our financial performance for the 2020 period. However, our gross margin was negatively affected by promotions aimed at gaining market share and the appreciation of the U.S. dollar compared to the Mexican peso impact on inventory costs as we purchase most of our products in U.S. dollars, which might continue throughout 2021. In order to mitigate this risk, the Company enters into forward contracts to fix the exchange rate for future purchases in U.S. dollars, which has allowed us to partially reduce the exchange rate effects of the COVID-19 pandemic. In addition, management is working on plans to increase the introduction of products with higher profit margins and therefore reduce the negative effects that impact our profit margin. We will continue to monitor the impacts that COVID-19 might have on our financial performance during 2021 and beyond.

 

Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events, that are reasonably likely to have a material adverse effect in our revenues, income, profitability, liquidity or capital resources, or that would cause the reported financial information in this annual report to be not necessarily indicative of future operating results or financial conditions.

 

E. OFF-BALANCE SHEET ARRANGEMENTS.

 

BWM does not engage in any off-balance sheet financing activities, nor does it have any interest in entities referred to as variable interest entities.

 

F. DISCLOSURE OF CONTRACTUAL OBLIGATIONS

 

Our Contractual Obligations

 

Set forth below is a tabular presentation of our contractual obligations as of January 3, 2021, for the next five years, presented by type and nature of contractual obligation. The table details the Company’s remaining contractual maturity for its financial liabilities with agreed repayment periods. The maturity analysis has been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the Company can be required to pay. The table includes both interest and principal cash flows:

 

As of January 3, 2021  
   Less than
1 year
  

Over 1 year and

less than
5 years

   Over
5 years
   Total 
Accounts payable to suppliers   2,078,628    -    -    2,078,628 
Lease liability   8,727    19,243    -    27,970 
Derivative financial instruments   46,667    306,667    -    353,334 
Long-term debt   126,736    503,458    -    630,194 
   Ps.2,260,758    829,368    -    3,090,126 

 

G. SAFE HARBOR

 

See the disclaimer with respect to Cautionary Note Regarding Forward-Looking Statements.

 

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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

A. DIRECTORS AND SENIOR MANAGEMENT

 

Set forth below is information concerning our officers and directors. Our executive officers are appointed by the board of directors to serve in their roles. Each executive officer is appointed for such term as may be prescribed by the board of directors or until a successor has been chosen and qualified or until such officer’s death, resignation or removal. Unless otherwise indicated, the business address of all of our executive officers and directors is Luis Enrique Williams, 549 Colonia Belenes Norte, Zapopan, Jalisco, 45145, México.

 

Name   Age   Position Held
Luis Campos   68   Chairman of the Board
Andres Campos   38   Chief Executive Officer and Board Member
Diana Jones   39   Chief Financial Officer
Luis Lozada   39   Chief Strategy Officer
Santiago Campos   29   Board Member
Jose de Jesus Valdez   68   Independent Board Member
Federico Clariond   47   Independent Board Member
Mauricio Morales   60   Independent Board Member
Joaquin Gandara   50   Independent Board Member
Dr. Martín M. Werner   58   Independent Board Member
Dr. Guillermo Ortiz   72   Independent Board Member
José Alberto Terán   67   Board Member
Reynaldo Vizcarra   55   Secretary

 

Background of Our Officers and Directors

 

Betterware’s board of directors is composed of the following members and a non-member Secretary:

 

  Luis Campos has been in the direct to consumer business for almost 25 years. He has been chairman of Betterware de México since he bought the Company in 2001. Prior to Betterware, Mr. Campos served as Chairman of Tupperware Americas (1994 – 1999), Chairman of Sara Lee — House of Fuller Mexico (1991 – 1993), and Chairman of Hasbro Mexico (1984 – 1990). Mr. Luis Campos is an active member of the “Consejo Nacional de Comunicación”, an active member of the “Consejo Consultivo” of Banamex and he was an active member of the Direct Selling Association, The Latin America Regional Managers’ Club, The Conference Board, and a board member of the Economic Development Commission of Mid Florida, Casa Alianza-Covenant House, The Metro Orlando International Affairs Commission, SunTrust Bank and Casa de Mexico de la Florida Central, Inc. Mr. Campos was selected to serve on Betterware’s board of directors due to his extensive experience in consumer product companies, especially in the direct sales, as well as his relevant top-level experience in American public multinational companies. Luis Campos is the father of Andres and Santiago Campos.

 

  Andres Campos has been CEO of Betterware de México since 2018. Prior to becoming CEO, within the Company, Andres Campos served as Commercial Director (2014 – 2018) and Strategy and New Businesses Director (2012 – 2014). Prior to Betterware, Mr. Campos worked in Banamex Corporate Banking area (2012 – 2014) and in KPMG as an Auditor (2004 – 2005). Andres holds a bachelor’s degree in Business Administration from Instituto Tecnológico y de Estudios Superiores de Monterrey and an MBA from Cornell University. Andres Campos is son of Luis Campos and brother of Santiago Campos.

 

  Diana Jones has served as Betterware CFO since 2020. Mrs. Jones previously performed as Betterware’s Director of Comptroller (2018-2019) and Director of Finance Planning (2019-2020). Prior joining the Company, she worked as Director of External Audit in KPMG Cardenas Dosal, S.C., (2003-2018), including a term at New York City from 2008 to 2010. Mrs. Jones holds a degree in Public Accounting and Finance from the Monterrey Institute of Technology and Higher Education (ITESM), as well as an MBA with specialty in Finance from Tecmilenio University. She is also a Certified Public Accountant on behalf of the Mexican Institute of Public Accountants.

 

  Luis Lozada joined Betterware in January 2021, as Chief Strategy Officer. Prior to joining Betterware, Mr. Lozada was an Associate Partner with Bain & Company, where he worked for almost fifteen years (2006 – 2020) advising senior executives of multi-multinational companies on a variety of management topics. Mr. Lozada’s area of expertise resides in business strategy and performance improvement, with retail and consumer-goods companies Mr. Lozada holds a bachelor’s degree in Chemical Engineering from the Monterrey Institute of Technology and Higher Education (Instituto Tecnologico y de Estudios Superiores de Monterrey – “ITESM”) and an MBA from Cornell University.

 

28

 

  Santiago Campos has served as Director of Innovation and Communication at Betterware since 2018. Prior to joining Betterware, Santiago Campos served as Commercial Director at EPI Desarrollos, a Real Estate Development company, coordinating efforts between marketing, sales, finance and also taking care of administration, he was involved in achieving successful projects in a span of 2.5 years where 100% sales were accomplished before finishing construction. Santiago holds a bachelor’s degree in public accounting and finance from Instituto Tecnológico y de Estudios Superiores de Monterrey. Mr. Campos was selected to serve on Betterware’s board of directors due to his natural instinct in product innovation and household needs in BWM market target group. Santiago Campos is son of Luis Campos and brother of Andres Campos.

 

  Jose de Jesus Valdez serves as CEO of Alpek since 1988. Mr. Valdez joined Alpek in 1976 and has held several senior management positions such as CEO of Petrocel, Indelpro and Polioles. He was also president of the “Asociación Nacional de la Industria Química” (ANIQ), of the “Comisión Energética de la Confederación de Cámaras Industriales de los Estados Unidos Mexicanos” (CONCAMIN) and of the “Cámara de la Industria de Transformación de Nuevo León” (CANAINTRA). Mr. Valdez is a mechanical engineer and has an MBA from Tecnológico de Monterrey (ITESM) and a master’s degree in industrial engineering from Stanford University. Mr. Valdez was selected to serve on the Company’s board of directors due to his vast experience in Mexican, US and Latin American business and market economy.

 

  Federico Clariond has served as CEO of Valores Aldabra, a single-family office with investments in financial services, aluminum, packaging and consumer goods companies, since 2011, and as CEO of Buro Inmobiliario Nacional, a Real Estate investment vehicle with holdings in the hospitality, industrial, office, and commercial spaces throughout Mexico, since 2015. Prior to Valores Aldabra and Buro Inmobiliario Nacional, from 2007 to 2011, Mr. Clariond served as CEO of Stabilit Mexico, a manufacturer of fiber glass reinforced plastics with operations in Mexico, the United States and Europe, and from 2004 to 2007, as Commercial VP of IMSA Acero. Additionally, he is board member of several companies ranging from the financial services, aluminum, packaging and consumer goods industries. Mr. Clariond is a mechanical engineer and has an MBA from Stanford University. Mr. Clariond was selected to serve on Betterware’s board of directors due to his vast business experience in Mexico’s private investment matters.

 

  Mauricio Morales is a founding partner at MG Capital. Before his 21-year tenure at the firm, he worked at different financial institutions in Mexico, specializing in wealth management, with a focus on exchange-traded instruments. Mauricio hold a B.S. in Mechanical Engineering, from the Instituto Tecnológico y de Estudios Superiores de Monterrey. Mauricio participates as a board member at one private firm, and one private charity group. Mr. Morales was selected to serve on Betterware’s board of directors due to his vast experience in Mexico and USA capital markets.

 

  Joaquin Gandara serves as CEO of Stone Financial Awareness since 2017. Prior to Stone Financial Awareness, he worked at Scotiabank for 24 years where he held several positions in different departments such as Credit, Consumer Banking, Branch Operations and Corporate Banking. Mr. Gandara was selected to serve on the Company’s board of directors due to his extensive knowledge in the financial and banking field.

 

  Dr. Martín M. Werner, who has served as DD3’s Chief Executive Officer and Chairman of the Board since inception, is a founding partner of DD3 Capital. Prior to founding DD3 Capital in 2016, Dr. Werner worked at Goldman Sachs for 16 years (2000 – 2016) becoming a Managing Director in 2000 and a Partner in 2006. He was co-head of the Investment Banking Division for Latin America and the country head of the Mexico office. Dr. Werner continues to serve as the Chairman of the board of directors of Red de Carreteras de Occidente (RCO), which is one of Mexico’s largest private concessionaires and operates more than 760 kilometers of toll roads and is owned by Goldman Sachs Infrastructure Partners. Prior to his time with Goldman Sachs, Dr. Werner served in the Mexican Treasury Department as the General Director of Public Credit from 1995 to 1997, and as Deputy Minister from 1997 to 1999. Among his numerous activities, he was in charge of restructuring Mexico’s Public debt after the financial crisis of 1994 and 1995. Dr. Werner is the second largest investor of Banca Mifel, a leading mid-market Mexican bank with $3.3 billion in assets and a credit portfolio of $2.0 billion; he is also member of the Board of Directors of Grupo Comercial Chedraui, a leading supermarket chain in Mexico and the United States; the Board of Directors of Grupo Aeroportuario Centro Norte, one of Mexico’s largest airport operators; and he is a member of Yale University’s School of Management Advisory Board. Dr. Werner holds a bachelor degree in economics from Instituto Tecnológico Autónomo de Mexico (ITAM) and a Ph.D. in economics from Yale University.

 

  Dr. Guillermo Ortiz has served as Chairman of BTG Pactual Latin America ex-Brazil, a leading Brazilian financial services company with operations throughout Latin America, the U.S. and Europe, since 2015. Prior to joining BTG, from 2010 to 2015, he was Chairman of the Board of Grupo Financiero Banorte-Ixe, the largest independent Mexican financial institution. Dr. Ortiz also served two consecutive six-year terms as Governor of Mexico’s Central Bank from 1998 to 2009. From 1994 to 1997, Dr. Ortiz served as Secretary of Finance and Public Credit in the Mexican Federal Government where he guided Mexico through the “Tequila” crisis and contributed to the stabilization of the Mexican economy, helping return the nation to growth in 1996. He has served on the Board of Directors of the International Monetary Fund, the World Bank and the Interamerican Development Bank. Dr. Ortiz is Chairman of the Pe Jacobsson Foundation, a member of Group of Thirty, Board of Directors of the Center for Financial Stability, Board of Directors of the Globalization and Monetary Policy Institute, Board of Directors in the Federal Reserve Bank of Dallas and Board of Directors of the China’s International Finance Forum. He is also an Officer of Zurich Insurance Group Ltd. and a Member of the Board of Directors of Wetherford International, a leading company in the oil and equipment industry, as well as of a number of Mexican companies, including Aeropuertos del Sureste, one of Mexico’s largest airport operators, Mexichem, a global leading petrochemical group, and Vitro, a leading glass manufacturer company in Mexico. Dr. Ortiz is also a member of the Quality of Life Advisory board of the Government of Mexico City. Dr. Ortiz holds a bachelor’s degree in economics from Universidad Nacional Autónoma de México (UNAM), a master’s degree and a Ph.D. in economics from Stanford University. Dr. Ortiz was selected to serve on our board of directors due to his significant government service and finance experience.

 

29

 

 

  José Alberto Terán Vázquez was born in Mexico City in 1953. He studied administration at the Instituto Tecnológico Autónomo de México, he worked 2 years at the bancking sectory and in 1978 he joined to Terán Publicity; The dvertising agency was founded in 1947 by his father; In 1988 he was named as CEO of Terán Publicity. In 1995, Terán Publicity become part of OMNICOM group, thus joining the TBWA network and the agency was again named as TERAN / TBWA. Some of its clients are leading local and global brands operating in Mexico, such as Apple, Bachoco, BBVA, Domino’s, El Palacio de Hierro, GNP Seguros, Tequila Herradura, Jack Daniel’s, Kleen Bebe, Nissan, FUD, Yoplait and Volaris. José Alberto has been an active leader in the Mexican advertising industry and has served as President of the Mexican Association of Advertising Agencies (AMAP) in 1995, 200 and 2017. He has also been Vice President of the National Advertising Council. In 2000 he founded the EFFIE awards in Mexico, which are sponsored by the American Marketing Association and served as its president for 7 years.

 

  Reynaldo Vizcarra (non-member Secretary) is a member of Baker & McKenzie’s Corporate and Transactional Practice Group. He is a professor at the University Anáhuac del Norte where he teaches foreign investment as part of the master of laws program, and an instructor at Universidad Panamericana’s Baker McKenzie Seminar. He joined Baker & McKenzie’s Mexico City office in 1986, handling foreign investments, banking and finance matters and international agreements. He also worked in the Chicago office’s Latin America Practice Group, advising on investments and acquisitions in Latin America (1996 – 1997). In 2000, Mr. Vizcarra co-founded Baker & McKenzie’s Guadalajara office, where he led the Banking & Finance Practice Group. In August 2005, he transferred to Baker McKenzie’s Cancun office as a founding member and director mainly handling tourism and real estate projects. In 2009, he transferred back to the Mexico City office, where he was local managing partner for four years and thereafter became National Managing Partner of the Firm in Mexico until August 2018.

 

B. COMPENSATION

 

For the 2020 period, we paid our top management for services in all capacities an aggregate compensation of approximately MX$31,917,000 and a variable aggregate compensation for bonuses of approximately MX$5,796,000. The amounts payable under the performance bonus depend on the results achieved and include certain qualitative and/or quantitative objectives that can be operative and financial. Hence, the total executive compensation for the 2020 period was MX$37,713,000.

 

On July 30, 2020, Betterware’s Board of Directors awarded certain officers and directors a long-term share-based incentive plan (the “Incentive Plan”). The purpose of the Incentive Plan is to provide eligible officers and directors with the opportunity to receive share-based incentives to encourage them to contribute significantly to the growth of the Group and to align the economic interests of those individuals with those of the shareholders. The Incentive Plan is aligned with the shareholders’ interest in terms of the management capacity to obtain operating results that potentially benefit the share price; if the established results are achieved, it will cause a gradual delivery of shares over a period of 4 to 5 years (see Note 22 of the Audited Consolidated and Combined Financial Statements elsewhere in this annual report).

 

C. BOARD PRACTICES

 

Board Committees

 

The Company’s Audit and Corporate Practices Committee has the following specifications:

 

Composition

 

  The Audit and Corporate Practices Committee of the Company consists of three members appointed by the board itself, in accordance with the provisions of Nasdaq, the Company’s bylaws and other legal provisions, in the understanding, however, that the chairman of the Audit and Corporate Practices Committee will be elected by the General Assembly of Shareholders of the Company.

 

  The members of the Audit and Corporate Practices Committee are independent as under Nasdaq requirements.

 

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  The Audit and Corporate Practices Committee may create one or more sub-committees, to receive support in the performance of its functions. The Audit and Corporate Practices Committee is empowered to designate and remove the members of said sub-committees and to determine their powers.

 

  As of the date of this annual report, the members of the Audit and Corporate Practices Committee are:

 

  i. Joaquin Gandara Ruiz Esparza — Chairman — Mr. Gandara serves as CEO of Stone Financial Awareness since 2017. Prior to Stone Financial Awareness, he worked at Scotiabank for 24 years where he held several positions in different departments such as Credit, Consumer Banking, Branch Operations and Corporate Banking.

 

  ii. America Taracido serves as Managing Partner at Consultores en Alta Direccion y Gestión de Empresas, S.C. and, she joined Desarrolladora de Ciudad as CFO. Mrs. Taracido served in various positions in countries such as Peru, the United States and Mexico and worked in important positions in companies such as “Ernst & Young México, Avon Cosmetics, Finanzas & CFO at Smurfit Kappa Group México”, and others. She is an active member of the Council of Americas and was a president of “Instituto Mexicano de Ejecutivos de Finanzas”. Mrs. Taracido holds a master degree in Administration in “Tecnológico Autonómo de México (ITAM)”. Since April 2020 she is part of the Audit Committee for Betterware Mexico.

 

  iv. Federico Clariond has served as CEO of Valores Aldabra, since 2011, and as CEO of Buro Inmobiliario Nacional. Prior to Valores Aldabra and Buro Inmobiliario Nacional, from 2007 to 2011, Mr. Clariond served as CEO of Stabilit Mexico, a manufacturer of fiber glass reinforced plastics with operations in Mexico, the United States and Europe, and from 2004 to 2007, as Commercial VP of IMSA Acero. Additionally, he is board member of several companies. Mr. Clariond is a mechanical engineer and has an MBA from Stanford University. Mr. Clariond was selected to serve on Betterware’s board of directors due to his vast business experience in Mexico’s private investment matters.

 

Sessions Frequency

 

  The Audit and Corporate Practices Committee and its sub-committees meet with the necessary frequency for the performance of their duties, at the request of any of its members, the Board of Directors or its Executive President or the General Assembly of Shareholders; in the understanding that it must meet at least 4 (four) times during a calendar year.

 

  The sessions of the Audit and Corporate Practices Committee and its sub-committees may be held by telephone or videoconference, with the understanding that the Secretary of the respective session must take the corresponding minutes, which must in any case be signed by the Executive President and the respective Secretary, and collect the signatures of the members who participated in the session.

 

Functions

 

  Regarding Corporate Practices, the Audit and Corporate Practices Committee will have the functions referred to in the Securities Market Law, especially the provisions of section I (first) of its Article 42 (forty-two), and other applicable legal provisions, as well as those determined by the General Assembly of Shareholders. They will also perform all those functions of which they must render a report in accordance with the provisions of the Securities Market Law. In an enunciative way, but not limited to, it will have the following functions:

 

  Provide opinions regarding transactions between related parties to the General Assembly of Shareholders and the Board of Directors.

 

  Develop, recommend and review corporate governance guidelines and guidelines of the Company and its subsidiary.

 

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  Recommend modifications to the bylaws of the Company and its subsidiary.

 

  Analyze and review all legislative, regulatory and corporate governance developments that may affect the operations of the Company, and make recommendations in this regard to the Board of Directors.

 

  Prepare and propose the different manuals necessary for the corporate governance of the Company or for compliance with the applicable provisions.

 

  Define the compensation and performance evaluation policies of the senior executives of the Company.

 

  Use the best compensation practices to align the interests of the Shareholders and the senior executives of the Company, being able to hire any independent expert necessary for the development of this function.

 

  Ensure access to market data and best corporate practices through external consultants specialized in the field.

 

  Develop a plan for the succession of senior executives of the Company.

 

  In matters of Audit, the Audit and Corporate Practices Committee will have the functions referred to in the Securities Market Law especially the provisions of section II of its Article 42 (forty-two), and other applicable legal provisions, as well as those determined by the General Assembly of Shareholders. They will also perform all those functions of which they must render a report in accordance with the provisions of the Securities Market Law. In an enunciative way, but not limited to, it will have the following functions:

 

  Determine the need and viability of the fiscal and financial structures of the Company.

 

  Comment on the financial and fiscal structure of the international expansion of the Company.

 

  Comment on the financial reports, accounting policies, control and information technology systems of the Company.

 

  Evaluate and recommend the external auditor of the Company.

 

  Ensure the independence and efficiency of the internal and external audits of the Company.

 

  Evaluate the transactions between related parties of the Company, as well as identify possible conflicts of interest derived from them.

 

  Analyze the financial structure of the Company, in the short, medium and long term, including any financing and refinancing transactions.

 

  Review and comment on the management of the Company’s treasury, risk and exposure to fluctuations in exchange rates and hedging instruments of the Company, whatever their nature or denomination.

 

  Evaluate the processes and selection of insurance brokers, as well as the coverage and premiums of the Company’s insurance policies.

 

D. EMPLOYEES

 

The following table provides information regarding the number of our employees for the 2020, 2019 and 2018 periods, respectively:

 

   Number of Employees 
   January 3,
2021
   December 31,
2019
  

December 31,
2018

 
Operations   962    296    283 
Sales and marketing   148    263    289 
Finance, administration, human resources, IT   184    115    108 
Total   1,294    674    680 

 

E. SHARE OWNERSHIP

 

Not applicable.

 

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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

 

A. MAJOR SHAREHOLDERS

 

The following table sets forth information with respect to the beneficial ownership of our shares as of the filing date of this annual report:

 

  each shareholder, or group of affiliated shareholders, who we know beneficially owns more than 5% of our outstanding shares;

 

  each of our directors and executive officers individually; and

 

  all directors and executive officers as a group.

 

As of the filing date of this annual report, we had 36,584,968 issued and outstanding ordinary shares. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes any shares over which a person exercises sole or shared voting and/or investment power. Shares subject to options and warrants currently exercisable or exercisable within 60 days are deemed outstanding for computing the percentage ownership of the person holding the options but are not deemed outstanding for computing the percentage ownership of any other person. Except as otherwise indicated, we believe the beneficial owners of the shares listed below, based on information furnished by them, have sole voting and investment power with respect to the number of shares listed opposite their names. The address for Campalier is Luis Enrique Williams 549, Colonia Belenes Norte, Zapopan, Jalisco, 45145, Mexico.

 

   Ordinary shares Beneficially
Owned as of the filing date of
this annual report
 
   Ordinary Shares 
   Number   % 
Five Percent or More Holders          
Campalier, S.A. de C.V   18,866,160    51.57%
Cede & Co.   17,672,376    48.31%
Our executive officers and directors:          
Luis Campos        
Andres Campos        
Diana Jones        
Luis Lozada        
Santiago Campos        
Jose de Jesus Valdez        
Federico Clariond        
Mauricio Morales        
Joaquin Gandara        
Dr. Martín M. Werner        
Dr. Guillermo Ortiz        
José Alberto Terán        
Reynaldo Vizcarra        
All directors and executive officers as a group (thirteen individuals)        

 

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B. RELATED PARTY TRANSACTIONS

 

Registration Rights Agreement

 

In connection with the Business Combination, the Company, DD3 and the Holders entered into the Registration Rights Agreement on March 11, 2020. Pursuant to the terms of the Registration Rights Agreement, the Company is obligated to file a shelf registration statement to register the resale of certain Company securities held by the Holders. The Registration Rights Agreement also provides the Holders with demand, “piggy-back” and Form F-3 registration rights, subject to certain minimum requirements and customary conditions.

 

Lock-Up Agreements

 

In connection with the Business Combination, (i) the Company, DD3 and certain security holders of the Company (the “Members”) entered into the Member Lock-Up Agreement, dated as of March 11, 2020, and (ii) the Company, DD3 and certain members of the Company’s management team (“Management”), entered into the Management Lock-Up Agreement, dated as of March 11, 2020, pursuant to which the Members and Management agreed not to transfer any of the Company’s shares held by them for a period of six or twelve months, as applicable, after the closing of the Business Combination, subject to certain limited exceptions.

 

Merger Agreements

 

In connection with the Business Combination, the Company and DD3 entered into the Merger Agreement, dated as of March 10, 2020 (the “Merger Agreement”). Pursuant to the terms of the Merger Agreement, DD3 merged with and into the Company with the Company surviving the Merger, the separate corporate existence of DD3 ceased and BLSM became a wholly-owned subsidiary of the Company. At Closing, pursuant to the Merger Agreement, (i) all of the Betterware shares issued and outstanding immediately prior to the Closing were canceled, and Campalier and Forteza received, directly and indirectly (through the Invex Security Trust), 18,438,770 and 11,761,175, respectively, of Betterware’s shares and (ii) all of DD3’s ordinary shares issued and outstanding immediately prior to the Closing were canceled and exchanged for Betterware shares on a one-for-one basis. See “The Business Combination.”

 

In connection with the Business Combination and as a result of the merger transaction thereunder, which closed on March 13, 2020, all of Betterware shares issued and outstanding immediately prior to the closing date were canceled and new shares were issued. As a result of the Business Combination and the subscription and payment of 2,040,000 Betterware shares on Nasdaq, Betterware’s original shareholders held 87.7% of the total outstanding shares, DD3 shareholders held a 6.4% stake, and investors under the Nasdaq listing held a 5.9% stake. After the closing date, Betterware had 34,451,020 issued and outstanding shares. See “The Business Combination.”

 

On December 14, 2020, Betterware and Forteza (Betterware’s shareholder), entered into a merger agreement pursuant to which Forteza agreed to merge with and into Betterware, surviving Betterware as the acquiror. On December 16, 2020, the merger was completed. Consequently, shares in Betterware were delivered to Forteza’s shareholders in proportion to their shareholding in Betterware, without implying an increase in Betterware’s share capital or in the total number of outstanding shares of the Company. The net effects of the merger resulted in an increase in equity of Ps.4,724.

 

Warrant Amendment

 

In connection with the Business Combination, the Company, DD3 and Continental Stock Transfer & Trust Company (“Continental”) entered into the Assignment, Assumption and Amendment Agreement, dated as of March 13, 2020 (the “Warrant Amendment”), pursuant to which DD3 assigned to the Company, and the Company assumed, all of DD3’s right, title and interest in and to the Warrant Agreement, dated as of October 11, 2018, by and between DD3 and Continental (as amended pursuant to the Warrant Amendment, the “Warrant Agreement”), and the parties thereto agreed to certain amendments to reflect the fact that DD3’s warrants that were outstanding immediately prior to the Closing are, as a result of the Merger, exercisable for Betterware shares.

 

As part of the Merger, Betterware assumed an obligation that granted existing warrant holders the option to purchase (i) a total of 5,804,125 Betterware shares at a price of US$11.50 per share that will expire on or before March 25, 2025, and (ii) a total of 250,000 units that automatically became an option to issue 250,000 Betterware shares and warrants to buy 250,000 additional Betterware shares. The Company registered the warrants to be traded on OTC Markets, which had an observable fair value.

 

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During July and August 2020, the Group repurchased 1,573,888 warrants. During August and October, 2020, 895,597 warrants were exchanged for 621,098 shares, of which, 462,130 warrants were settled on a cash basis by exchanging 1 warrant for 1 share at a price of US$11.44 for share, which resulted in receiving cash by an amount of Ps.116,419. The remaining 433,467 warrants were exchanged on a cashless basis by exchanging 1 warrant for 0.37 shares.

 

In September 2020, the purchase option of units was exercised by their holders on a cashless basis, which resulted in the issuance of 214,020 Betterware shares.

 

Additionally, in October, 2020, and as part of the terms of the warrant agreement, the Company exercised the redemption of the warrants on a cashless basis by exchanging 3,087,022 warrants for 1,142,325 of the Company’s shares. A total of 8,493 public warrants were not exercised by their holders during the redemption period that expired on November 9, 2020, therefore, they were paid by the Company for a price of US$0.01 per warrant.

 

Finally, on December 23, 2020, 239,125 private warrants were exercised on a cashless basis by their holders and exchanged for 156,505 of the Company’s shares.

 

As of the date of this annual report, the warrant holders had redeemed all of the outstanding warrants and purchase option of units and the Company recognized a loss for the increase in the fair value of the warrants of Ps.851,520, which is recognized under the heading “Changes in fair value of warrants” in the consolidated and combined statement of profit or loss.

 

C. INTERESTS OF EXPERTS AND COUNSEL

 

Not applicable.

 

ITEM 8. FINANCIAL INFORMATION

 

A. CONSOLIDATED AND COMBINED STATEMENTS AND OTHER FINANCIAL INFORMATION

 

The Company’s Audited Consolidated and Combined Financial Statements are included in Item 18.

 

Legal Proceedings

 

Betterware is a party to various legal actions in the normal course of its business. The Company is not involved in or threatened by proceedings for which the Company believes it is not adequately insured or indemnified or which, if determined adversely, would have a material adverse effect on its consolidated and combined financial position, results of operations and cash flows.

 

Additional taxes payable could arise in transactions with related parties if the tax authority, during a review, believes that prices and amounts used by the Company are not similar to those used with or between independent parties in comparable transactions.

 

In accordance with the current tax legislation, the authorities have the power to review up to five fiscal years prior to the last income tax return filed.

 

On August 12, 2014, the International Inspection Administration “4” (AFI), under the Central Administration of International Control, attached to the General Administration of Large Taxpayers of the Tax Administration Service (“SAT”), requested that Betterware provide, with respect to 2010 year, information regarding income tax, which was provided at the time. On February 20, 2017, the final agreement was signed with the Taxpayer Advocacy Office (“PRODECON”) regarding this SAT review. On March 2, 2017, the SAT notified Betteware about certain issues on which an agreement was not reached. As a result, Betterware filed a lawsuit for annulment before the SAT’s resolution, which is still in progress’. Based on the evaluation of the Group’s Management, tax liabilities are not expected to arise as a result of this matter. As of January 3, 2021, the maximum exposure of the contingent liability on this matter was estimated to amount Ps.20,086.

 

Dividend Distribution Policy

 

The Company’s board of directors will consider whether or not to institute a dividend policy. As of the date of this annual report, we have not implemented a dividend policy.

 

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B. SIGNIFICANT CHANGES

 

As a result of the outbreak of the COVID-19 pandemic and its recent global expansion to a large number of countries, sanitary measures have been taken in Mexico to limit the spread of this virus, which include among others, social isolation and the closure of educational centers (schools and universities), commercial establishments and non-essential businesses. Our operations were not interrupted as a result of the COVID-19 pandemic due to our product lines include hygiene and cleaning solutions, which qualify as an essential activity in Mexico.

 

There have been no significant changes since the approval date of the financial statements included elsewhere in this annual report. Please see Note 29 of the Consolidated and Combined Financial Statements elsewhere in this annual report for details of events after the reporting period.

 

ITEM 9. THE OFFER AND LISTING

 

A. OFFER AND LISTING DETAILS

 

Our ordinary shares are listed on Nasdaq under the symbol “BWMX.”

 

B. DISTRIBUTION PLAN

 

Not applicable.

 

C. MARKETS

 

Our ordinary shares began trading on Nasdaq under the symbol “BWMX,” in connection with our initial public offering, on March 13, 2020.

 

D. SELLING SHAREHOLDERS

 

Not applicable.

 

E. DILUTION

 

Not applicable.

 

F. EXPENSES OF THE ISSUE

 

Not applicable.

 

ITEM 10. ADDITIONAL INFORMATION

 

A. SHARE CAPITAL

 

Not applicable.

 

B. MEMORANDUM AND ARTICLES OF ASSOCIATION

 

The following is a summary of some of the terms of our ordinary shares, based on our articles of association in place. The following summary is not complete and is subject to, and is qualified in its entirety by reference to, the provisions of our articles of association, and applicable Mexican law, including Mexican corporate law.

 

General

 

Betterware is a company incorporated under the General Corporations Law. As Betterware is a Mexican corporation, the rights of holders of Betterware’s shares will be governed directly by Mexican law and the Amended and Restated Charter.

 

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Shareholder Meetings

 

  Held at the corporate domicile of the company or, in the case of unanimous resolutions, the place where the shareholders are met.

 

  Notice:

 

  A copy of the notice of any shareholders’ meeting shall be published not fewer than fifteen (15) calendar days prior to the date of the proposed meeting in the electronic system of the Corporations Publications of the Mexican Ministry of Economy.

 

Shareholders’ Voting Rights

 

  Any person authorized to vote may be represented at a meeting by a proxy who may speak and vote on behalf of the member.

 

  Depending on the matter that requires shareholders’ approval, the by-laws and Mexican law provide a fixed quorum.

 

  The annual ordinary shareholders’ meeting must have a quorum of at least 50% plus one of the outstanding shares of the company’s capital stock and all resolutions shall be approved with the affirmative vote of at least the majority of the present shares. In the event of a second or subsequent call, the general ordinary stockholders’ meeting may be validly held regardless of the number of shares represented, and its resolutions shall be valid when adopted by majority vote of the shares represented at the meeting.

 

  The extraordinary shareholders’ meetings must have a quorum of at least 75% of the outstanding shares of the company’s capital stock and all resolutions must be approved with the affirmative vote of at least 50% of the outstanding voting shares of the company. In the event of a second or subsequent call, extraordinary general stockholders’ meetings may be validly held if 50% of the outstanding voting shares of the company is represented, and their resolutions will be valid if adopted by the favorable vote of shares representing at least 50% of the outstanding voting shares of the company.

 

  Notwithstanding the provisions of the preceding paragraph, the favorable vote of shares with or without voting rights representing (i) 75% (seventy-five percent) of the Company’s outstanding capital stock shall be required to amend the Company’s by-laws and (ii) 95% (ninety-five percent) of the capital stock of the Company to resolve and request from the National Banking and Securities Commission the cancellation of the registration of the shares of the Company in the National Securities Registry, under the terms provided in the Securities Market Law and other applicable provisions.

 

  For special meetings, the rules provided for general extraordinary meetings shall apply considering only the shares of the applicable series or class.

 

  The annual ordinary shareholders’ meeting shall:

 

  approve the chief executive officer and board of directors’ annual reports; the appointment of the members of the board of directors and statutory examiners; and if applicable, the members of the board or statutory examiners’ fees.

 

  discuss, approve or modify the reports of the chairman of the corporate practices and audit committees, if necessary;

 

  discuss and approve on the re-appointment, revocation and/or appointment, if any, of one third of the proprietary members and respective alternates of the board of directors that the annual general ordinary meeting resolves to re-appoint, revoke and/or appoint;

 

  evaluate the independence of independent directors;

 

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  appoint the chairmen of the corporate practices and audit committees;

 

 

decide on the use of the company’s profit, if any;

 

  if applicable, determine the maximum amount of resources that may be used for the acquisition of its own shares;

 

  approve the execution of transactions whether simultaneously or subsequently by the company or the legal entities it controls within the same fiscal year that may be considered as one and the same transaction that the company when they represent 20% or more of the consolidated assets of the company, based on figures corresponding to the close of the immediately preceding quarter, regardless of the way in which they are applied. Stockholders holding shares with limited or restricted voting rights may vote at such meetings; and

 

  any other matter that shall be convened with by the general ordinary meeting in accordance with applicable law or that is not specifically reserved for an extraordinary meeting.

 

  An extraordinary shareholders’ meeting shall approve:

 

  extension of the company’s term;

 

  anticipated dissolution of the company;

 

  any increase or decrease in the capital stock of the company;

 

  any amendment in the company’s corporate purpose;

 

  any change in the company’s nationality;

 

  the company’s change in any other type of entity or company;

 

  any merger;

 

  issuance of shares different than ordinary shares and bonds;

 

  redemption of shares; and

 

  any amendment to the company’s by-laws.

 

Directors

 

  The board of directors shall have a minimum of 9 and a maximum of 21 members.

 

  Any shareholder, or group of shareholders, that have 10% or more of the capital stock of the Company has the right to appoint one member of the board of directors.

 

  The members of the board shall hold office for one year or until the shareholders that have appointed them revoke such appointment. The directors may be reelected as many times as deemed convenient and shall continue in office until their successors have been appointed and taken office.

 

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Fiduciary Duties

 

  Members of the board owe fiduciary duties in accordance with the Securities Market Law and in the applicable provisions of the stock exchange in which the shares are listed as follows:

 

  The members of the board of directors must act in accordance with the duty of loyalty provided under Mexican law and in the applicable provisions of the stock exchange in which the shares are listed. The directors and the secretary, in the event they have a conflict of interest, must abstain from participating in the relevant matter and from being present in the deliberation and voting of said matter, without it affecting the quorum required for the installation of the board.

 

  The members of the board of directors must act in accordance with the duty of care. For such purposes, they shall have the right to request, at any time and in accordance with the terms they deem appropriate, information from the company’s officers and the legal entities controlled by the company.

 

  The breach of any director to his duty of care shall make him jointly and severally liable with other directors who have breached their duty of care or are responsible, for the damages and losses caused to the company, which shall be limited to direct damages and losses, but not punitive or consequential, caused to the company and to the events in which such director acted fraudulently, in bad faith, with gross negligence or unlawfully.

 

Shareholders’ Derivative Actions

 

  The liability resulting from the breach of the duty of care or the duty of loyalty shall be exclusively in favor of the company or of the legal entity controlled by it or over which it has a significant influence and may be exercised by the company or by the stockholders who, individually or jointly, hold ordinary shares or shares with limited voting rights, restricted or without voting rights, representing 5% or more of the corporate capital in accordance with the provisions of Article 16 of the Securities Market Law.

 

  The members of the board of directors shall not incur in liability for damages caused to the company or to the legal entities it controls, when a director acts in good faith.

 

Indemnification of Directors and Officers

 

  The company shall indemnify and hold harmless the members and the secretary of the board of directors, any of the members of the company’s committees, and the relevant officers of the company, in connection with any liability arising from the performance of their duties, including any indemnification for any damage or injury, the necessary amounts to reach any settlement, and any fees and expenses incurred by such persons in connection with the above. Such indemnity shall not apply if any of such persons incurred or committed fraudulent acts, unlawful acts or omissions, or acted in bad faith.

 

Inspection of Books and Records

 

  Members of the general public, on payment of a nominal fee, can obtain copies of the public records of the company available at the Public Registry of Commerce, which will include an extract of the company’s articles of incorporation with the initial capital stock and any increase in its fixed portion, the initial stockholders and members of the Board, as well as any merger, dissolution or liquidation provision.

 

  Any person that is registered as a stockholder in the company’s stockholder registry book can inspect, with prior written notice to the company, any of the company’s books or records.

 

Anti-takeover Protections

 

The Board of Directors needs to approve, with at least 66% of its Members present in a duly conveyed meeting and with at least 66% of its Members favorable vote, any change in Control of the Betterware or the transfer of the 20% or more of Betterware’s shares. Such change of Control or transfer must be notified to Betterware and Betterware’s shareholders.

 

The Board of Directors must approve the transfer within the following 90 calendar days after having all documentation the Board deems necessary for its consideration and approval.

 

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In the event the Board of Directors authorizes the transaction, in addition to the Board approval, prior to the closing of the transaction, the person asking for the Board’s approval shall make a tender offer for 100% of the outstanding capital stock of the Company, at a price payable in cash not less than the highest of the following:

 

  the book value per share, in accordance with the latest quarterly financial statements approved by the Board of Directors and presented to the National Banking and Securities Commission or to the applicable securities exchange; or

 

  the highest closing price per share with respect to transactions in the securities exchange where the shares are placed, published in any of the 365 days prior to the date of the application filed or the authorization granted by the Board of Directors; or

 

  the highest price paid with respect to the purchase of any shares, during the 365 days immediately before sending of the request or the authorization granted by the Board of Directors.

 

In each of these cases (items (i) to (iii) above), a premium equal to or greater than 15% shall be paid in respect of the price per share payable in connection with the requested transaction, it the understanding that the Board of Directors may modify, upwards or downwards, the amount of such premium, taking into account the opinion of a reputable investment bank.

 

The public tender offer must be completed within 90 days of the date of the Board of Directors’ authorization, on the understanding that such term may be extended for an additional period of 60 days if the applicable governmental authorizations continues to be pending on the date of expiration of the initial term referred to above.

 

In the event that the Board of Directors receives on or before closing, an offer from a third party, requesting to make the acquisition of at least the same number of shares, on better terms for the stockholders or holders of shares of Betterware, the Board of Directors shall have the capacity to consider and, if applicable, authorize such second request, revoking the authorization previously granted.

 

If the transaction is not (i) an acquisition representing the 20% of the capital stock of Betterware, or (ii) a change of Control, it shall be registered in Betterware’s Shares Registry Book once authorized by the Board of Directors.

 

In the event the Board of Directors rejects the transaction, the Secretary of the Board shall summon, within a period of 10 calendar days following such rejection (or within 20 calendar days prior to the termination of the term for the Board of Directors to decide on such request), to a General Ordinary Stockholders’ Meeting at which the shareholders may, by the simple majority of the votes of the outstanding shares, ratify the decision of the Board of Directors or revoke such decision. In such case, the shareholders’ resolution shall be deemed as final and shall replace any prior rejection by the Board of Directors.

 

Control” means in respect of any person, through a person or group of persons, (i) the power to impose, directly or indirectly, by any means, resolutions or decisions, or to veto or prevent such resolutions or decisions from being taken, in any sense, at General Shareholders Meetings, or to appoint or remove the majority of the directors, administrators, managers or their equivalents of said person; (ii) maintain the ownership of any class of shares or rights related thereto which permit, directly or indirectly, the exercise of voting rights in respect of more than 50% of the shares, of whatever nature, with voting rights of such person, and/or (iii) the power to direct, determine, influence, veto or impede, directly or indirectly, the policies and/or decisions of the Board of Directors or of the management, strategy, activities, operations or principal policies of such person, whether through ownership of shares, by contract or agreement, written or oral, or by any other means, regardless of whether such control is apparent or implied.

 

A copy of the Articles of Association, as amended, is furnished under Item 19. “Exhibits”.

 

C. MATERIAL CONTRACTS

 

With the exception of the material agreements described in “Item 7.B Related Party Transactions-Agreements with Major Shareholders” and those executed in connection with the Business Combination, explained elsewhere in this annual report, all contracts concluded by the Company during the two years preceding the date of this annual report were entered into in the ordinary course of business.

 

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D. EXCHANGE CONTROLS

 

None.

 

E. TAXATION

 

Material U.S. Federal Income Tax Considerations

 

The following is a summary of the material U.S. federal income tax consequences to U.S. Holders (as defined below) of the ownership and disposition of our ordinary shares. This summary is based upon U.S. federal income tax laws (including the U.S. Internal Revenue Code of 1986, as amended (the “Code”) final, temporary and proposed Treasury regulations, rulings, judicial decisions and administrative pronouncements), all as of the date hereof and such authorities may be repealed, revoked or modified, possibly with retroactive effect, so as to result in United States federal income tax consequences different from those discussed below.

 

As used herein, the term U.S. Holder means a beneficial owner of one or more of our ordinary shares:

 

  that is for U.S. federal income tax purposes one of the following:

 

  an individual citizen or resident of the United States,

 

  a corporation created or organized in or under the laws of the United States or any political subdivision thereof, or

 

  an estate the income of which is subject to U.S. federal income taxation regardless of its source; or

 

  trust if (1) a court within the United States can exercise primary supervision over it, and one or more United States persons have the authority to control all substantial decisions of the trust, or (2) the trust has a valid election in effect under applicable U.S. Treasury regulations to be treated as a United States person;

 

  who holds the ordinary shares as capital assets for U.S. federal income tax purposes;

 

  who owns, directly, indirectly or by attribution, less than 10% of the share capital or voting shares of the Company; and

 

  whose holding is not effectively connected with a business carried on through a permanent establishment in Mexico.

 

The discussion does not cover all aspects of U.S. federal income taxation that may be relevant to, or the actual tax effect that any of the matters described herein will have on, the acquisition, ownership or disposition of our ordinary shares by particular investors (including consequences under the alternative minimum tax or net investment income tax), and does not address state, local, non-U.S. or other tax laws.

 

This summary also does not address all of the tax considerations that may apply to holders that are subject to special tax rules, such as U.S. expatriates or former long-term residents of the United States, insurance companies, individual retirement accounts and other tax-deferred accounts, tax-exempt organizations, certain financial institutions, dealers and certain traders in securities, persons holding ordinary shares as part of a straddle, hedging, conversion or other integrated transaction, controlled foreign corporations or passive foreign investment companies, persons who are required to accelerate the recognition of any item of gross income with respect to the shares of the Company as a result of such income being recognized on an applicable financial statement; persons who acquired their ordinary shares pursuant to the exercise of employee shares options or otherwise as compensation, entities or arrangements classified as partnerships for U.S. federal income tax purposes or persons whose functional currency is not the U.S. dollar. Such holders may be subject to U.S. federal income tax consequences different from those set forth below.

 

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If an entity or arrangement treated as a partnership for U.S. federal income tax purposes holds ordinary shares, the tax treatment of a partner generally will depend upon the status of the partner and the activities of the partnership. An entity or arrangement treated as a partnership for U.S. federal income tax purposes, or partner in a partnership, is urged to consult its own tax advisor regarding the specific tax consequences of owning and disposing of the ordinary shares.

 

Except as otherwise noted, this summary assumes that the Company is not a passive foreign investment company (a “PFIC”) for U.S. federal income tax purposes, which the Company believes to be the case. The Company’s possible status as a PFIC must be determined annually and therefore may be subject to change. If the Company were to be a PFIC in any year, materially adverse consequences could result for U.S. Holders.

 

Potential investors in our ordinary shares should consult their own tax advisors concerning the specific U.S. federal, state and local tax consequences of the ownership and disposition of our ordinary shares in light of their particular situations as well as any consequences arising under the laws of any other taxing jurisdiction.

 

Taxation of distributions

 

Distributions received by a U.S. Holder on ordinary shares, including the amount of any Mexican taxes withheld, generally will constitute foreign source dividend income to the extent paid out of the Company’s current or accumulated earnings and profits (as determined for U.S. federal income tax purposes). Distributions in excess of current and accumulated earnings and profits will be treated as a non-taxable return of capital to the extent of the U.S. Holder’s basis in the ordinary shares and thereafter as capital gain. Because the Company does not maintain calculations of its earnings and profits under U.S. federal income tax principles, it is expected that such distributions (including any Mexican taxes withheld) will be reported to U.S. Holders as dividends. U.S. Holders should consult their own tax advisers with respect to the appropriate U.S. federal income tax treatment of any distribution received from the Company. A non-corporate recipient of dividend income will generally be subject to tax on dividend income from a “qualified foreign corporation” at a reduced capital gains rate rather than the marginal tax rates generally applicable to ordinary income provided that the holding period requirement is met. A non-U.S. corporation (other than a corporation that is classified as a PFIC (defined below) for the taxable year in which the dividend is paid or the preceding taxable year) generally will be considered to be a qualified foreign corporation with respect to any dividend it pays on stock which is readily tradable on an established securities market in the United States. The ordinary shares are listed on Nasdaq, and should qualify as readily tradable on an established securities market in the United States so long as they are so listed. Therefore, the Company believes that it will be a qualified foreign corporation for purposes of the reduced tax rate, although no assurance can be given that it will continue to be treated as a qualified foreign corporation in the future. Non-corporate U.S. Holders should consult their own tax advisors to determine whether they are subject to any special rules that limit their ability to be taxed at this favorable rate.

 

Dividends received on ordinary shares will be treated, for United States foreign tax credit purposes, as foreign source income. A U.S. Holder may be eligible, subject to a number of complex limitations, to claim a foreign tax credit in respect of any non-United States withholding taxes imposed on dividends received on ordinary shares. Instead of claiming a credit, a U.S. Holder may elect to deduct foreign taxes (including any Mexican taxes) in computing its taxable income, subject to generally applicable limitations. An election to deduct foreign taxes (instead of claiming foreign tax credits) applies to all taxes paid or accrued in the taxable year to foreign countries and possessions of the United States. The limitations on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. The rules governing foreign tax credits are complex. Therefore, U.S. Holders should consult their own tax advisors regarding the availability of foreign tax credits in their particular circumstances.

 

Taxation upon sale or other disposition of ordinary shares

 

A U.S. Holder generally will recognize U.S. source capital gain or loss on the sale or other disposition of ordinary shares, which will be long-term capital gain or loss if the U.S. Holder has held such ordinary shares for more than one year. The amount of the U.S. Holder’s gain or loss will be equal to the difference between such U.S. Holder’s tax basis in the ordinary shares sold or otherwise disposed of and the amount realized on the sale or other disposition.

 

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Passive foreign investment company rules

 

The Company believes that it was not a PFIC for its 2018 taxable year and does not expect to be a PFIC for its 2019 taxable year or in the foreseeable future. A non-U.S. corporation will be a PFIC in any taxable year in which, after taking into account the income and assets of the corporation and certain subsidiaries pursuant to applicable “look-through rules,” either (i) at least 75% of its gross income is “passive income” or (ii) at least 50% of the average value of its assets is attributable to assets which produce passive income or are held for the production of passive income. However, because PFIC status depends upon the composition of the Company’s income and assets and the market value of its assets (including, among others, less than 25% owned equity investments) from time to time, there can be no assurance that the Company will not be considered a PFIC for any taxable year.

 

If the Company were a PFIC for any taxable year during which a U.S. Holder held ordinary shares, gain recognized by a U.S. Holder on a sale or other disposition of an ordinary shares would be allocated ratably over the U.S. Holder’s holding period for the ordinary shares. The amounts allocated to the taxable year of the sale or other disposition and to any year before the Company became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or corporations, as appropriate, and an interest charge at the rates generally applicable to underpayments of tax payable in those years would be imposed on the resulting tax liability. The same treatment would apply to any distribution in respect of ordinary shares to the extent such distribution exceeds 125% of the average of the annual distributions on ordinary shares received by the U.S. Holder during the preceding three years or the U.S. Holder’s holding period, whichever is shorter. Certain elections may be available that would result in alternative treatments (such as mark-to-market treatment) of the ordinary shares.

 

In addition, if the Company were treated as a PFIC in a taxable year in which it pays a dividend or in the prior taxable year, the reduced rate discussed above with respect to dividends paid to certain non-corporate U.S. Holders would not apply.

 

A U.S. Holder who owns, or is treated as owning, PFIC stock during any taxable year in which the Company is a PFIC would generally be required to file IRS Form 8621 annually. Prospective purchasers should consult their tax advisors regarding the requirement to file IRS Form 8621 and the potential application of the PFIC regime.

 

Information reporting and backup withholding

 

Under U.S. federal income tax law and the Treasury regulations, certain categories of U.S. Holders must file information returns with respect to their investment in, or involvement in, a foreign corporation. For example, U.S. Holders that hold certain specified foreign financial assets in excess of $50,000 are subject to U.S. return disclosure obligations (and related penalties). The definition of specified foreign financial assets includes not only financial accounts maintained in foreign financial institutions, but also, unless held in accounts maintained by a financial institution, any stock or security issued by a non-U.S. person, any financial instrument or contract held for investment that has an issuer or counterparty other than a U.S. person and any interest in a foreign entity. U. S. Holders may be subject to these reporting requirements unless their ordinary shares are held in an account at a domestic financial institution. Penalties for failure to file certain of these information returns are substantial.

 

Payments of dividends and sales proceeds with respect to ordinary shares by a U.S. paying agent or other U.S. intermediary will be reported to the IRS and to the U.S. Holder as may be required under applicable regulations. Backup withholding may apply to these payments if the U.S. Holder fails to provide a correct taxpayer identification number or certification that it is not subject to backup withholding. Certain U.S. Holders are not subject to backup withholding. The amount of any backup withholding from a payment to a U.S. Holder will be allowed as a credit against the U.S. Holder’s U.S. federal income tax liability and may entitle such U.S. Holder to a refund, provided that the required information is timely furnished to the Internal Revenue Service. U.S. Holders should consult their tax advisors about these rules and any other reporting obligations that may apply to the ownership or disposition of ordinary shares, including requirements related to the holding of certain foreign financial assets.

 

43

 

 

F. DIVIDENDS AND PAYING AGENTS.

 

Not applicable.

 

G. STATEMENT BY EXPERTS

 

Not applicable.

 

H. DOCUMENTS ON DISPLAY

 

The Company makes its filings in electronic form under the EDGAR filing system of the SEC. Its filings are available through the EDGAR system at www.sec.gov. The Company’s filings are also available to the public through the Internet at the Company’s website at http://ri.betterware.com.mx/. Such filings and other information on its website are not incorporated by reference in this annual report. Interested parties may request a copy of this filing, and any other report, at no cost, by writing to the Company at the following email address: ir@better.com.mx.

 

I. SUBSIDIARY INFORMATION

 

Not applicable.

 

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES REGARDING MARKET RISK

 

We are exposed to market risks arising from our normal business activities, which mainly consists of exchange rate risk and interest rate risk. These market risks principally involve the possibility that fluctuations in exchange rates and interest rates will adversely affect the value of our financial assets and liabilities, or future cash flows and earnings. Market risk is the potential loss arising from adverse changes in market rates and prices.

 

The Group’s activities expose it primarily to the financial risks of changes in exchange rates and interest rates (see below). The Group enters into a variety of derivative financial instruments to manage its exposure to interest rate and foreign currency risk, including:

 

In order to reduce the risks related to fluctuations in the exchange rate of foreign currency, the Group uses derivative financial instruments such as forwards to adjust exposures resulting from foreign exchange currency.

 

Additionally, the Group occasionally uses interest rate swaps to adjust its exposure to the variability of the interest rates or to reduce their financing costs. The Group’s practices vary from time to time depending on judgments about the level of risk, expectations of change in the movements of interest rates and the costs of using derivatives.

 

Exchange Rate Risk

 

We undertake transactions denominated in foreign currencies, mainly U.S. dollars; consequently, exposures to exchange rate fluctuations arise from movements of the Mexican peso against the U.S. dollar. Exchange rate exposures are managed within approved policy parameters utilizing forward foreign exchange contracts.

 

The carrying amounts of U.S. dollars denominated financial assets and financial liabilities as of January 3, 2021 is as follows:

 

   January 3,
2021
 
Financial assets  US$ 29,559 
Financial liabilities    (49,570)
Net position  US$ (20,011)
Closing exchange rate of the year    19.9352 

 

44

 

 

Exchange rate sensitivity analysis

 

The Group is mainly exposed to variations in the Mexican Peso / the U.S. Dollar exchange rate. For sensitivity analysis purposes, the Group has determined a 10% increase and decrease in Ps. currency units against the U.S. dollar (“relevant currency”). A 10% is the sensitivity rate used when reporting foreign currency risk internally to key management personnel and represents management’s assessment of the reasonably possible change in foreign exchange rates. The sensitivity analysis includes only outstanding foreign currency denominated financial assets/liabilities and adjusts their translation at the year-end for a 10% change in foreign currency rates. Given that the foreign exchange currency net position results in a liability, a positive number below indicates an increase in profit where currency units strengthen 10% against the relevant currency. For a 10% weakening of currency units against the relevant currency, there would be a comparable impact on the net income, and the balances below would be negative.

 

   January 3,
2021
 
Impact on net income  US$ 39,982 

 

Foreign exchange forward contracts

 

To reduce the risks related to fluctuations in the exchange rate of the US dollar, the Group uses derivative financial instruments such as forwards to mitigate foreign currency exposure resulting from inventory purchases made in US dollars from suppliers in China.

 

See Note 18 to our Audited Consolidated and Combined Financial Statements for details on foreign currency forward contracts outstanding at the end of the reporting period. Foreign currency forward contract liabilities are disclosed in the line item ‘Derivative financial instruments’ within the consolidated and combined statement of financial position.

 

Interest Rate Risk

 

Our interest rate risk arises from our financial borrowings. Borrowings issued at variable rates expose us to fair value interest rate risk and increases in interest expense when market interest rates increase, while the borrowings issued at a fixed rate expose us to fair value interest rate risk. We analyze our interest rate exposure on a dynamic basis, maintaining, pursuant to our general policy, an appropriate balance between fixed and variable rate borrowings, and by the use of interest rate swap contracts. Hedging activities are evaluated regularly to align with interest rate views and defined risk appetite; ensuring the most cost-effective hedging strategies are applied. We believe that a variation in the interest rates would not affect our results of operation significantly.

 

As of January 3, 2021, we had no foreign currency-denominated borrowings.

 

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ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

 

A. DEBT SECURITIES

 

Not applicable.

 

B. WARRANTS AND RIGHTS

 

On November 9, 2020, the Company redeemed all of its outstanding public warrants to purchase shares of the Company’s ordinary shares, no par value per share, that were issued under the Warrant Agreement, dated as of October 11, 2018 (as amended from time to time), by and between the Company (as successor of DD3 Acquisition Corp.) and Continental, as warrant agent, for a redemption price of USD$0.01 per Public Warrant. See “Related-Party Transactions–Warrants Amendment.” Also, on December 23, 2020, 239,125 private warrants were exercised on a cashless basis by their holders and exchanged for 156,505 of the Company’s shares. As of the date of this annual report, the Company or the warrant holders had redeemed all of the outstanding warrants and purchase option of units and the Company recognized a loss for the increase in the fair value of the warrants of Ps.851,520, which is recognized under the heading “Loss in valuation of warrants” in the consolidated and combined statement of profit or loss.

 

C. OTHER SECURITIES

 

Not applicable.

 

D. AMERICAN DEPOSITARY SHARES

 

Not applicable.

 

46

 

 

PART II

 

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

 

None.

 

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

 

Not applicable.

 

ITEM 15. CONTROLS AND PROCEDURES

 

A. DISCLOSURE CONTROLS AND PROCEDURES

 

The Company’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO) are responsible for implementing disclosure controls and procedures to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Such information is necessary for our officers who certify the Company’s financial reports and for other members of senior management and the CEO and CFO as appropriate to allow timely decisions regarding required disclosure. Because of these inherent limitations, our disclosure controls and procedures may not prevent or detect misstatements. Additionally, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

The CEO and CFO oversee and review all materials for which there is a disclosure requirement, together with all data required to support the documents mentioned above. These executives meet at regular intervals in order to review all data. Our CEO and CFO conducted an evaluation of the effectiveness of our disclosure controls and procedures (pursuant to Rule 13a-15(e) under the Exchange Act) as of January 3, 2021. Based on that evaluation, our CEO and CFO have concluded that the Company’s disclosure controls and procedures were not effective as of January 3, 2021 due to the existence of material weaknesses in our internal controls over financial reporting.

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that a reasonable possibility exists that a material misstatement of our annual or interim financial statements would not be prevented or detected on a timely basis.

 

We are in the process of implementing Internal Control—Integrated Framework (2013 Framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The material weaknesses are mainly related with the lack of documentation required to evidence the existence and effectiveness of the associated controls that we are in the process of implementing as follows: (i) we have not completed the design and implementation of an effective risk assessment to identify and communicate appropriate objectives and fraud, and identifying and assessing changes in the business that could affect our system of internal controls, (ii) we did not design and implement effective control activities to adequately select and develop control activities and objectives for information and related technologies (COBIT), (iii) inadequate segregation of duties over system changes management process, lack of analysis of useful lives of assets, lack of management review regarding the identification of significant non-recurring or unusual transactions. Additionally, during our assessment of internal control over financial reporting, we identified deficiencies, and based on their nature, management considers that these deficiencies individually represent significant deficiencies. We determined that the combination of these significant deficiencies represents a material weakness due to their nature and potential magnitude. We have implemented and plan to implement a number of measures to address the material weaknesses that had been identified in connection with our assessment of internal control over financial reporting as of January 3, 2021. We have initiated compensating controls in the near term and are enhancing and revising the design of existing controls and procedures; we have hired additional qualified financial and accounting staff with working experience of IFRS and SEC reporting requirements. We have also established clear roles and responsibilities for accounting and financial reporting staff to address accounting and financial reporting issues. We also intend to hire additional resources to strengthen the financial reporting function and set up a financial and system control framework. The material weaknesses will not be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

 

47

 

 

While we believe the steps taken to date and those planned for implementation will improve the effectiveness of our internal control over financial reporting, we have not completed all remediation efforts. Accordingly, as we continue to monitor the effectiveness of our internal control over financial reporting in the areas affected by the material weaknesses described above, we have and will continue to perform additional procedures prescribed by management, including the use of manual mitigating control procedures and employing any additional tools and resources deemed necessary to ensure that our consolidated financial statements are fairly stated in all material respects.

 

Notwithstanding the material weaknesses in our internal control over financial reporting, we have concluded that the Consolidated and Combined Financial Statements included in this annual report on Form 20-F present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with IFRS. Additionally, the material weaknesses did not result in any restatements of our Consolidated and Combined Financial Statements or disclosures for any prior period.

 

Please see Exhibits 12.1 and 12.2 for the certifications required by this Item.

 

B. MANAGEMENT’S ANNUAL ASSESSMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

 

Betterware’s management is responsible for establishing and maintaining adequate internal control over financial reporting for Betterware as defined in Exchange Act Rule 13a-15(f) and 15d-15(f). Our internal control over financial reporting was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board. Internal control over financial reporting includes those policies and procedures that:

 

pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of Betterware;

 

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with IFRS and that receipts and expenditures of Betterware are being made only in accordance with authorizations of Management and directors of Betterware; and

 

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of Betterware’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Management conducted an evaluation of the effectiveness of Betterware’s internal control over financial reporting based on the framework in Internal Control – Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO 2013”). Based on its evaluation, Management concluded that Betterware’s internal control over financial reporting was not effective as of January 3, 2021.

 

Guadalajara, Mexico

April 19, 2021

 

 

/s/   /s/  
Andrés Campos, CEO   Diana Jones, CFO  

 

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C. ATTESTATION REPORT OF THE REGISTERED PUBLIC ACCOUNTING FIRM

 

This annual report does not include an attestation report of our registered public accounting firm because we qualify as an “emerging growth company” as defined under the JOBS Act. As long as we qualify as an “emerging growth company,” our independent registered accounting firm is not required to issue an attestation report on our internal control over financial reporting.

 

D. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

 

During 2020, we implemented certain changes in our internal control over financial reporting to begin to address our material weaknesses, which include:

 

  Implemented an Independent Internal Audit Department and designed an effective monitoring program to assess and communicate deficiencies to management and our board of directors enabling them to take remedial actions as deemed necessary.

 

 

Documented standards of conduct and ethical values, the parameters enabling our board of directors to carry out its governance oversight responsibilities; the organizational structure and assignment of authority and responsibility; the process for attracting, developing, and retaining competent individuals; and the rigor regarding reviews of performance measures, incentives, and rewards to drive accountability for performance;

 

 

Documented process and controls, by which transactions are initiated, authorized, recorded, processed, corrected as necessary, transferred to the general ledger and reported in our consolidated financial statements; and

 

  Documented controls related to internal and external communications, including objectives and responsibilities to support the proper functioning of our internal control; a review process of financial and internal control information with our board of directors was documented and implemented.

 

ITEM 16. Reserved

 

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

 

See “Directors, Senior Management and Employees—Board Practices—Board Committees—Audit Committee.” Our Board of Directors has determined that Joaquin Gandara Ruiz Esparza qualifies as an “audit committee financial expert” under applicable SEC rules.

 

ITEM 16B. CODE OF ETHICS

 

We have a Code of Ethics that applies to all directors, officers and employees of Betterware, including our Chief Executive Officer, Chief Financial Officer, principal accounting officer, controller and persons performing similar functions. Our Code of Ethics is included as an exhibit to this annual report on Form 20-F.

 

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ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

Fees Paid to the Company’s Principal Accountant

 

The following table sets forth the fees for the 2020 and 2019 periods, respectively:

 

   For the Year Ended 
   January 3,
2021
   December 31,
2019
 
   (in thousands of MX$) 
Audit fees   8,975    6,246 
Audit related fees   3,811    1,826 
Other fees   1,642    459 
Total   14,428    8,531 

 

Audit Fees

 

Audit fees were paid for professional services rendered by the auditors for the audit of the Consolidated and Combined Financial Statements of the Company and the statutory financial statements of the Company and its subsidiary.

 

Audit-Related Fees

 

Audit-related fees are typically services that are reasonably related to the performance of the audit or review of the Consolidated and Combined Financial Statements and are not reported under the audit fee item above. This item includes fees for attestation services on financial information of the Company included in the Company’s registration statements on Form F-1 and Form F-4 as well as its listing process in the Bolsa Institucional de Valores (“BIVA”, Mexican Stock Exchange).

 

Other Fees

 

Other fees were paid for transfer pricing services and social security compliance.

 

Audit Committee’s Pre-approval Policies and Procedures

 

The Company’s audit committee is responsible for, among other things, the oversight of the Company’s independent auditors. The audit committee has adopted a policy of pre-approval of audit and permissible non-audit services provided by its independent auditors in its charter.

 

Under the policy, the audit committee makes its recommendations through the Board of Directors to the shareholders’ meeting concerning the continuing appointment or termination of the Company’s independent auditors. On a yearly basis, the audit committee reviews together with management and the independent auditor, the audit plan, audit related services and other non-audit services and approves the related fees. Any changes to the approved fees must be reviewed and approved by the audit committee. In addition, the audit committee delegated to its Chairman the authority to consider and approve, on behalf of the Audit Committee, additional non-audit services that were not recognized at the time of engagement, which must be reported to the other members of the audit committee at its next meeting. No services outside the scope of the audit committee’s approval can be undertaken by the independent auditor.

 

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ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

 

Not applicable.

 

ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

 

None.

 

ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT.

 

On December 23, 2019, we approved the appointment of Galaz, Yamazaki, Ruiz Urquiza, S.C. member of Deloitte Touche Tohmatsu Limited, as our independent registered public accountant.  

 

ITEM 16G. CORPORATE GOVERNANCE

 

As a Mexican company listed on the Nasdaq, we are subject to the Nasdaq corporate governance listing standards. However, Nasdaq rules permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate governance practices in Mexico, which is our home country, may differ significantly from the Nasdaq corporate governance listing standards. Currently, we rely on home country practice. As a result, our shareholders could be subject to less protection than they would otherwise enjoy under the Nasdaq corporate governance listing standards applicable to U.S. domestic issuers. See “Risk Factors-As a “foreign private issuer” under the rules and regulations of the SEC, Betterware is permitted to, and is expected to, file less or different information with the SEC than a company incorporated in the United States or otherwise subject to these rules, and is expected to follow certain home country corporate governance practices in lieu of certain Nasdaq requirements applicable to U.S. issuers.”

 

ITEM 16H. MINE SAFETY DISCLOSURE

 

Not applicable.

 

51

 

 

PART III

 

ITEM 17. FINANCIAL STATEMENTS

 

The Company has responded to Item 18 in lieu of responding to this item.

 

ITEM 18. FINANCIAL STATEMENTS

 

(a) Financial Statements

 

Betterware de México, S.A.B. de C.V. (formerly Betterware de México, S.A.P.I. de C.V.)

 

Audited Consolidated and Combined Financial Statements

 

Report of Independent Registered Public Accounting Firm   F-2
     
Report of Independent Registered Public Accounting Firm   F-4
     
Consolidated and Combined Statements of Financial Position as of January 3, 2021 and December 31, 2019   F-5
     
Consolidated and Combined Statements of Profit or Loss and Other Comprehensive Income for the 53-week period ended January 3, 2021, the 52-week period ended December 31, 2019 and the year ended December 31, 2018   F-7
     
Consolidated and Combined Statements of Changes in Stockholders’ Equity for the 53-week period ended January 3, 2021, the 52-week period ended December 31, 2019 and the year ended December 31, 2018   F-8
     
Consolidated and Combined Statements of Cash Flows for the 53-week period ended January 3, 2021, the 52-week period ended December 31, 2019 and the year ended December 31, 2018   F-9
     
Notes to the Audited Consolidated and Combined Financial Statements   F-11

 

ITEM 19. EXHIBITS

 

(b) List of Exhibits

 

The following exhibits are filed or incorporated by reference as part of this annual report:

 

Exhibit Number   Description
1.1   Articles of Association of Betterware de México, S.A.B. de C.V.
2.1   Description of Securities
8.1   List of Subsidiaries.
11.1   English Translation of the Company’s Code of Ethics.
12.1   Certification of Andres Campos, Chief Executive Officer of Betterware de México, S.A.B. de C.V., pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
12.2   Certification of Diana Jones, Chief Financial Officer of Betterware de México, S.A.B. de C.V., pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
13.1   Certification of Andres Campos, Chief Executive Officer of Betterware de México, S.A.B. de C.V., pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
13.2   Certification of Diana Jones, Chief Financial Officer of Betterware de México, S.A.B. de C.V., pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
101.INS   XBRL Instance Document
101.SCH   XBRL Taxonomy Extension Schema
101.CAL   XBRL Taxonomy Calculation Linkbase
101.DEF   XBRL Definition Linkbase Document
101.LAB   XBRL Taxonomy Label Linkbase
101.PRE   XBRL Definition Linkbase Document

 

52

 

 

SIGNATURES

 

The registrant hereby certifies that it meets all of the requirements for filing Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

 

  Betterware de México, S.A.B. de C.V.
   
  By: /s/ Luis Campos
  Name: Luis Campos
  Title: Board Chairman
Dated: April 19, 2021  

 

53

 

 

 

 

 

 

 

 

 

Betterware de México, S.A.B. de C.V. (formerly Betterware de México, S.A.P.I. de C.V., subsidiary of Campalier, S.A. de C.V.) and subsidiary

 

Consolidated and combined financial statements as of January 3, 2021 and December 31, 2019 and for the 53 weeks ended January 3, 2021, the 52 weeks ended December 31, 2019 and the year ended December 31, 2018 (equivalent to 52 weeks), and Report of Independent Registered Accounting Firm dated March 25, 2021

 

 

 

 

 

 

 

 

 

 

 

 

Betterware de México, S.A.B. de C.V. and subsidiary

 

Consolidated and combined financial statements as of January 3, 2021 and December 31, 2019 and for the 53 weeks ended January 3, 2021, the 52 weeks ended December 31, 2019 and the year ended December 31, 2018 (equivalent to 52 weeks) and Report of Independent Registered Accounting Firm

 

Table of Contents

 

  Page
   
Report of Independent Registered Accounting Firm F-2
   
Consolidated and combined statements of financial position F-4
   
Consolidated and combined statements of profit or loss and other comprehensive income F-6
   
Consolidated and combined statements of changes in stockholders’ equity F-7
   
Consolidated and combined statements of cash flows F-8
   
Notes to the consolidated and combined financial statements F-10

 

F-1

 

 

Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors of Betterware de México, S.A.B. de C.V. and subsidiary

 

Opinion on the Consolidated and Combined Financial Statements

 

We have audited the accompanying consolidated and combined statements of financial position of Betterware de México, S.A.B. de C.V. and subsidiary (collectively, the “Group”) as of January 3, 2021 and December 31, 2019, the related consolidated and combined statements of profit and loss and other comprehensive income, changes in stockholders’ equity, and of cash flows, for the 53- and 52- periods then ended, respectively, and the related notes (collectively referred to as the “consolidated and combined financial statements”). In our opinion, the consolidated and combined financial statements present fairly, in all material respects, the financial position of the Group as of January 3, 2021 and December 31, 2019 and the results of its operations and its cash flows for the 53-week and 52-week periods then ended, respectively, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.

 

The combined financial statements of the Group for the year ended December 31, 2018, before (i) the change in the presentation to the combined statement of changes in stockholders’ equity for the year ended December 31, 2018 (presenting the net parent investment gross by including contributed capital and retained earnings separately, rather than net as presented in prior years), and before (ii) the adjustments to retrospectively apply the issuance of shares discussed in Note 23 to the consolidated and combined financial statements, were audited by other auditors whose report, dated September 27, 2019, expressed an unqualified opinion on those statements. We have also audited the adjustments to the 2018 combined financial statements to retrospectively apply the (i) the change in the presentation to the combined statement of changes in stockholders’ equity, and (ii) the issuance of shares in 2020 as part of the reorganization on the presentation of earnings per share as discussed in Note 21 and 23 to the financial statements. Our procedures related to these matters included, (i) comparing the amounts in the footnote disclosures for 2018 to the amounts presented in the statement of changes in stockholders’ equity, and (ii) (1) comparing the amounts shown in the earnings per share disclosures for 2018 to the Group’s underlying accounting analysis, (2) comparing the previously reported shares outstanding and statement of profit and loss amounts per the Group’s accounting analysis to the previously issued consolidated and combined financial statements, and (3) recalculating the additional shares to give effect to the stock issuance and testing the mathematical accuracy of the underlying analysis. In our opinion, such retrospective adjustments are appropriate and have been properly applied. However, we were not engaged to audit, review, or apply any procedures to the 2018 combined financial statements of the Group other than with respect to the retrospective adjustments, and accordingly, we do not express an opinion or any other form of assurance on the 2018 consolidated and combined financial statements taken as a whole.

 

Basis of preparation

 

As discussed in Note 2.a to the consolidated and combined financial statements, the Group’s financial year is a 52- or 53- week period ending on the Sunday nearest to December 31. The financial year of 2020 consisted of 53 weeks and ended on January 3, 2021, and the financial years of 2019 and 2018 consisted of 52 weeks and ended on December 31, 2019 and 2018, respectively. In addition, the financial statements for the financial years of 2019 and 2018 have been presented on a combined basis because both entities were under common control as of such dates.

 

Basis for Opinion

 

These consolidated and combined financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on the Group’s consolidated and combined financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Group in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Group is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control over financial reporting. Accordingly, we express no such opinion.

 

F-2

 

 

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated and combined financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated and combined financial statements. We believe that our audit provides a reasonable basis for our opinion.

 

Emphasis of a Matter

 

We draw attention to Note 1.a of the consolidated and combined financial statements, which describes the effects of the outbreak of coronavirus disease (“COVID-19”) as of January 3, 2021 and for 53 weeks then ended.

 

Galaz, Yamazaki, Ruiz Urquiza, S.C.

Member of Deloitte Touche Tohmatsu Limited

 

/s/

C.P.C. José Gerardo Castillo Morales

Guadalajara, Jalisco, Mexico

March 25, 2021

 

We have served as the Company’s auditor since 2019.

 

F-3

 

 

Report of Independent Registered Public Accounting Firm

 

To the Stockholders and Board of Directors

Betterware de México, S.A.B. de C.V. (formerly Betterware de México, S.A. de C.V., and Betterware de México, S.A.P.I. de C.V.):

 

Opinion on the Combined Financial Statements

 

We have audited, before the effects of the adjustments to retrospectively change the presentation of the combined statement of changes in stockholders’ equity for the year ended December 31, 2018 described in Note 2, and before the effects of the adjustments to retrospectively apply the issuance of shares described in Note 23, the combined statements of profit or loss and other comprehensive income, net parent investment, and cash flows of Betterware de México, S.A.B. de C.V. (formerly Betterware de México, S.A. de C.V., and Betterware de México, S.A.P.I. de C.V.) and BLSM Latino América Servicios, S.A. de C.V. (collectively, the Group) for the year ended December 31, 2018, and the related notes (collectively, the combined financial statements). The 2018 combined financial statements before the effects of the adjustments described in Note 2 and Note 23 are not presented herein. In our opinion, the combined financial statements, before the effects of the adjustments to retrospectively change the presentation of the combined statement of changes in stockholders’ equity fo the year ended December 31, 2018 described in Note 2, and before the effects of the adjustments to retrospectively apply the issuance of shares described in Note 23, present fairly, in all material respects, the results of operations of the Group and its cash flows for the year ended December 31, 2018, in conformity with International Financial Reporting Standards as issued by the International Accounting Standard Board.

 

We were not engaged to audit, review, or apply any procedures to (i) the adjustments to retrospectively change the presentation of the combined statement of changes in stockholders’ equity for the year ended December 31, 2018 described in Note 2, and (ii) the adjustments to retrospectively apply the issuance of shares described in Note 23, and accordingly, we do not express an opinion or any other form of assurance about whether such adjustments are appropriate and have been properly applied. Those adjustments were audited by other auditors.

 

Basis of Preparation

 

As discussed in Note 2a to the combined financial statements, the financial statements have been presented on a combined basis because both entities are under common control.

 

Basis for Opinion

 

These combined financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on these combined financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Group in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the combined financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the combined financial statements. Our audit also included evaluating the accounting standards used and significant estimates made by management, as well as evaluating the overall presentation of the combined financial statements. We believe that our audit provides a reasonable basis for our opinion.

 

We served as the Group’s auditor from 2002 to 2019.

 

/s/ KPMG Cárdenas Dosal, S.C.

Guadalajara, México.

September 27, 2019.

 

 

F-4

 

 

 

Betterware de México, S.A.B. de C.V. and subsidiary

Consolidated and combined statements of financial position

As of January 3, 2021 and December 31, 2019

(In Thousands of Mexican pesos)

 

Assets  Note  As of
January 3,
2021
   As of
December 31,
2019
 
            
Current assets:             
Cash and cash equivalents  5  $649,820   $213,697 
Trade accounts receivable, net  6,20   757,806    247,087 
Accounts receivable from related parties  24   -    610 
Inventories  7   1,274,026    345,554 
Prepaid expenses  8   94,501    53,184 
Other assets  9   130,417    20,574 
Total current assets      2,906,570    880,706 
              
Non-current assets:             
Property, plant and equipment, net  10   791,127    207,350 
Right of use assets, net  13   24,882    23,811 
Deferred income tax  16   17,605    5,082 
Intangible assets, net  12   319,361    310,965 
Goodwill  11   348,441    348,441 
Other assets  9   5,774    13,371 
Total non-current assets      1,507,190    909,020 
              
Total assets     $4,413,760   $1,789,726 

 

(Continued)

 

F-5

 

 

Betterware de México, S.A.B. de C.V. and subsidiary

Consolidated and combined statements of financial position

As of January 3, 2021 and December 31, 2019

(In Thousands of Mexican pesos)

 

Liabilities and stockholders’ equity  Note  As of
January 3,
2021
   As of
December 31,
2019
 
              
Current liabilities:             
Borrowings  15  $105,910   $148,070 
Accounts payable to suppliers  14   2,078,628    529,348 
Accrued expenses      109,767    54,456 
Provisions  17   151,008    46,689 
Income tax payable  16   85,221    34,709 
Value added tax payable      26,703    30,299 
Employee profit sharing payable      7,354    5,006 
Lease liability  13   7,691    14,226 
Derivative financial instruments  18   295,115    15,555 
              
Total current liabilities     $2,867,397   $878,358 
              
Non-current liabilities:             
Statutory employee benefits  19  $1,678   $1,630 
Derivative financial instruments  18   25,179    16,754 
Deferred income tax  16   56,959    78,501 
Lease liability  13   16,687    10,358 
Borrowings  15   523,967    529,643 
              
Total non-current liabilities      624,470    636,886 
              
Total liabilities      3,491,867    1,515,244 
              
Stockholder’s equity  21          
Common stock      281,722    55,985 
Share premium account      909,428    - 
Retained earnings (deficit)      (268,539)   218,376 
Other comprehensive income      (718)   121 
              
Total stockholders’ equity      921,893    274,482 
              
Contingencies  28          
              
Total liabilities and stockholders’ equity     $4,413,760   $1,789,726 

 

(Concluded)

 

See accompanying notes to consolidated and combined financial statements.

 

F-6

 

 

Betterware de México, S.A.B. de C.V. and subsidiary

Consolidated and combined statements of profit or loss and other comprehensive income

For the 53-week period ended January 3, 2021 (“2020”), the 52-week period ended December 31, 2019 (“2019”) and the year ended December 31, 2018 (“2018”, equivalent to 52 weeks)

(Thousands of Mexican pesos, except per share amounts)

 

   Note  2020   2019   2018 
                   
Net revenue  25  $7,260,408   $3,084,662   $2,316,716 
                   
Cost of sales  7   3,290,994    1,280,829    958,469 
                   
Gross profit      3,969,414    1,803,833    1,358,247 
                   
Administrative expenses  25   664,677    319,133    249,148 
Selling expenses  25   853,355    551,300    454,016 
Distribution expenses  25   331,023    121,155    103,336 
       1,849,055    991,588    806,500 
                   
Operating income      2,120,359    812,245    551,747 
                   
Financing income (cost):                  
Interest expense      (80,253)   (85,429)   (86,343)
Interest income      10,930    7,028    6,707 
Unrealized loss in valuation of derivative financial instruments  18   (287,985)   (15,680)   (16,629)
Changes in fair value of warrants      (851,520)   -    - 
Foreign exchange loss, net      (30,402)   (13,330)   (6,036)
       (1,239,230)   (107,411)   (102,301)
                   
Income before income taxes      881,129    704,834    449,446 
                   
Income taxes:                  
Current  16   576,834    229,900    158,545 
Deferred  16   (34,066)   2,792    (8,366)
       542,768    232,692    150,179 
                   
Net income for the year      338,361    472,142    299,267 
                   
Other comprehensive income items:                  
Remeasurement of defined benefit obligation, net of taxes  19   (839)   76    165 
                   
Total comprehensive income for the year     $337,522   $472,218   $299,432 
                   
Basic earnings per common share (pesos)  23  $9.93   $15.63   $9.91 
                   
Diluted earnings per common share (pesos)  23  $9.84   $15.63   $9.91 

 

See accompanying notes to consolidated and combined financial statements.

 

F-7

 

 

Betterware de México, S.A.B. de C.V. and subsidiary

Consolidated and combined statements of changes in stockholders’ equity

For the 53-week period ended January 3, 2021 (“2020”), the 52-week period ended December 31, 2019 (“2019”) and the year ended December 31, 2018 (“2018”, equivalent to 52 weeks)

(Thousands of Mexican pesos)

 

   Note  Common
stock
   Share
premium
account
   Retained
earnings
(deficit)
   Other
comprehensive
income
   Total
stockholders’
equity
 
Balance as of January 1, 2018      153,851    -    25,046    (120)   178,777 
Capital decrease  21   (97,866)   -    -    -    (97,866)
Dividends paid  21   -    -    (300,079)   -    (300,079)
Total comprehensive income for the year      -    -    299,267    165    299,432 
Balance as of December 31, 2018      55,985    -    24,234    45    80,264 
Dividends paid  21   -    -    (278,000)   -    (278,000)
Total comprehensive income for the year      -    -    472,142    76    472,218 
Balance as of December 31, 2019      55,985    -    218,376    121    274,482 
Capital increase  21   225,737    909,428    -    -    1,135,165 
Effects of merger with related party  21   -    -    4,724    -    4,724 
Dividends paid  21   -    -    (830,000)   -    (830,000)
Total comprehensive income for the year      -    -    338,361    (839)   337,522 
Balance as of January 3, 2021      281,722    909,428    (268,539)   (718)   921,893 

 

See accompanying notes to consolidated and combined financial statements.

 

F-8

 

 

Betterware de México, S.A.B. de C.V. and subsidiary

Consolidated and combined statements of cash flows

For the 53-week period ended January 3, 2021 (“2020”), the 52-week period ended December 31, 2019 (“2019”) and the year ended December 31, 2018 (“2018”, equivalent to 52 weeks)

(Thousands of Mexican pesos)

 

   2020   2019   2018 
                
Operating activities:               
Net income for the year  $338,361   $472,142   $299,267 
Adjustments for:               
Income tax expense   542,768    232,692    150,179 
Depreciation and amortization of non-current assets and right of use assets   43,688    38,394    25,962 
Interest expense recognized in profit or loss   80,253    85,429    86,343 
Interest income recognized in profit or loss   (10,930)   (7,028)   (6,707)
Loss (gain) on disposal of non-current assets   9,216    -    (11,970)
Share-based payment expense   32,910    -    - 
Changes in fair value of warrants   851,520    -    - 
Unrealized loss in valuation of derivative financial instruments   287,985    15,680    16,629 
    2,175,771    837,309    559,703 
(Decrease) increase in:               
Trade accounts receivable   (510,719)   (48,311)   (50,843)
Trade accounts receivable from related parties   610    (610)   22 
Inventory   (928,472)   (43,348)   (160,312)
Prepaid expenses and other assets   (95,532)   (40,263)   (31,329)
Accounts payable to suppliers and accrued expenses   1,604,591    101,857    238,927 
Provisions   104,319    7,703    (3,496)
Value-added tax payable   (3,596)   12,675    (2,909)
Statutory employee profit sharing   2,348    2,290    1,470 
Employee benefits   (743)   351    308 
Income taxes paid   (526,321)   (224,207)   (213,327)
Net cash provided by operating activities   1,822,256    605,446    338,214 
                
Investing activities:               
Payments of fixed and intangible assets   (617,686)   (182,625)   (21,268)
Proceeds from disposal of fixed assets   18,270    -    28,110 
Interest received   10,930    7,028    6,707 
Restricted cash   (42,915)   -    - 
Net cash (used in) provided by investing activities   (631,401)   (175,597)   13,549 

 

(Continued)

 

F-9

 

 

Betterware de México, S.A.B. de C.V. and subsidiary

Consolidated and combined statements of cash flows

For the 53-week period ended January 3, 2021 (“2020”), the 52-week period ended December 31, 2019 (“2019”) and the year ended December 31, 2018 (“2018”, equivalent to 52 weeks)

(Thousands of Mexican pesos)

 

   2020   2019   2018 
                
Financing activities:               
Proceeds from borrowings  $1,712,207   $104,500   $50,000 
Repayment of borrowings   (1,757,112)   (83,041)   (35,085)
Interest paid on borrowings   (121,297)   (82,654)   (85,159)
Restricted cash   -    22,940    (2,001)
Lease payments   (8,825)   (12,325)   - 
Cash  received for issuance of shares   250,295    -    - 
Dividends paid   (830,000)   (342,955)   (235,124)
Payments made to shareholders   -    -    (97,866)
Net cash used in financing activities   (754,732)   (395,535)   (405,235)
                
Increase (decrease) in cash and cash equivalents   436,123    36,314    (53,472)
Cash and cash equivalents at the beginning of year   213,697    177,383    230,855 
Cash and cash equivalents at the end of year  $649,820    213,697    177,383 

 

See accompanying notes to consolidated and combined financial statements.

 

F-10

 

 

Betterware de México, S.A.B. de C.V. and subsidiary

Notes to consolidated and combined financial statements

As of January 3, 2021 and December 31, 2019 and for the 53 weeks ended January 3, 2021, the 52 weeks ended December 31, 2019 and the year ended December 31, 2018 ((“2018”, equivalent to 52 weeks)

(Thousands of Mexican pesos, except the number of shares and earnings per share expressed in Mexican pesos)

 

1. Nature of business and significant events
   
  Betterware de México, S.A.B. de C.V. (formerly Betterware de México, S.A.P.I. de C.V.) (“Betterware”) is a direct-to-consumer selling company, focused on the home organization sector, whose product portfolio includes home organization products, kitchen utensils and appliances, food containers, and other categories of products (“home organization products”). Betterware purchases these home organization products and sells them in 9 (nine) catalogs published throughout the year. Betterware’s controlling shareholder is Campalier, S.A. de C.V. (“Campalier”).
   
  BLSM Latino America Servicios, S.A. de C.V., (“BLSM”), which as of March 10, 2020 became a wholly-owned subsidiary of Betterware, provides administrative, technical, and operational services to Betterware (formerly a related party of Betterware).
   
  Betterware and BLSM (hereinafter jointly referred to as the “Group” or the “Company”) are entities incorporated in Mexico that carry out their operations in Mexico. The Group’s address, registered as its office and primary place of business, is Luis Enrique Williams 549, Parque Industrial Belenes Norte, Zapopan, Jalisco, Mexico, and Zip Code 45150.
   
  Significant events and transactions –
   
  2020

 

  a) As a result of the coronavirus (COVID-19) outbreak and its recent global spread to a large number of countries, the World Health Organization classified the viral outbreak as a pandemic on March 11, 2020. Public health measures have been taken in Mexico to limit the spread of this virus, including but not limited to, social isolation and the closure of educational centers (schools and universities), commercial establishments and non-essential businesses. There is great deal of uncertainty around how this virus will evolve in Mexico, the time it will take for precautionary and / or containment measures to take effect, and the result it will have on the national economy.
     
    The Group’s operations were not interrupted as a result of the COVID-19 pandemic, as its product lines include hygiene and cleaning solutions, which qualify as an essential activity in Mexico. The Group’s gross margin was negatively affected by the depreciation of the Mexican peso compared to the US dollar, as it acquires most of its products in US dollars. To mitigate this risk, the Company enters into forwards contracts to fix the exchange rate for future purchases in US dollars, which has allowed it to partially reduce the effects of the exchange rate due to the COVID-19 pandemic.
     
    The Group has a proven track record of performance and a clear and executable growth plan, which includes expansion in current geographies and categories, as well as the addition of new markets and product extensions, all supported by a strong infrastructure deeply rooted in business intelligence.
     
    The Company maintains sufficient liquidity to comply with its contractual obligations as a result of having financing sources, in addition, the payment conditions of its clients are maintained between 14 and 28 days, while the payment conditions to its suppliers are 120 days.

 

F-11

 

 

  b) On March 10, 2020, Betterware’s legal name changed from Betterware de México, S.A. de C.V. to Betterware de México, S.A.P.I. de C.V. On August 5, 2019, Betterware and DD3 Acquisition Corp. (“DD3”, a publicly listed entity in the US and whose shares traded on the Nasdaq Capital Market (“Nasdaq”)), announced they had entered into a business combination agreement. As part of this transaction, DD3 would merge into Betterware through an exchange of shares with their respective shareholders and Betterware would survive as the acquiror. BLSM would become a wholly-owned subsidiary of Betterware. The transaction closed on March 13, 2020, and as a result, all Betterware shares that were issued and outstanding immediately prior to the closing date were canceled and new shares were issued. This transaction was accounted as a capital reorganization, whereby Betterware issued shares to the DD3 shareholders and obtained US$ 22,767 (Ps. 498,445) in cash through the acquisition of DD3 and, simultaneously settled liabilities and related transaction costs on that date, for net cash earnings of US$ 7,519 (Ps. 181,734) on such date. In addition, Betterware assumed the obligation of the warrants issued by DD3 (see description below), a liability inherent to the transaction, equivalent to the fair value of Ps. 55,810 of the warrants. No other assets or liabilities were transferred as part of the transaction that required adjustment to fair value as a result of the acquisition. On the same date, 2,040,000 Betterware shares, that were offered for subscription and payment under its initial public offering on Nasdaq, were subscribed and paid for by different investors. As of the closing date, BLSM is a fully-owned subsidiary of Betterware. The acquisition by Betterware of BLSM was considered a common control transaction and accounted for as a pooling of interests, whereby the historical values of BLSM’s assets and liabilities where the same before and after. As a result of the transaction, Betterware’s original shareholders held 87.7% of the total outstanding shares; DD3 shareholders obtained a 6.4% stake, and investors under the Nasdaq listing, a 5.9% shake. After the closing date, Betterware had 34,451,020 issued and outstanding shares.
     
  c) On March 10, 2020 and as a result of the aforementioned transaction, the warrants that DD3 had issued were automatically converted into warrants for the purchase of a total of 5,804,125 Betterware shares. Such warrants were exercised in accordance with the terms of the warrant agreement governing those securities, which also considered the option to purchase 250,000 units that automatically became an option to to issue 250,000 Betterware shares and warrants to buy 250,000 additional Betterware shares. This purchase option of units resulted in the issuance of 214,020 Betterware shares, which were excercised on a cashless basis. Warrants could be exercised starting on April 12, 2020 and expired on November 9, 2020 (see Note 1.f). The exercise price of the warrants was US$ 11.50 per share, adjusted by dividends paid that exceeded US$ 0.50 per share within a year, resulting in an exercise price of US$ 11.44.
     
    As warrants and securities purchase options (and underlying securities) were exercised in the 53-week period ended January 3, 2021, additional Betterware shares were issued, resulting in a dilution for Betterware shareholders and increasing the number of Betterware shares eligible for resale in the public market (see Note 23).
     
  d) On July 30, 2020, Betterware awarded a long-term share-based incentive plan with certain officers and directors (“Incentive Plan”). The purpose of the Incentive Plan is to provide eligible officers and directors with the opportunity to receive share-based incentives to encourage them to contribute significantly to the growth of the Group and to align the economic interests of those individuals with those of the shareholders. The delivery of certain shares to the executives and directors was agreed and approved by the Board of Directors. The Incentive Plan is aligned with the shareholders’ interest in terms of the management capacity to obtain operating results that potentially benefit the share price; if the established results are achieved, it will cause a gradual delivery of shares over a period of 4 to 5 years (see Note 22).
     
  e) On July 14, 2020, Betterware’s legal name changed from Betterware de México, S.A.P.I. de C.V. to Betterware de México, S.A.B. de C.V.
     
  f) On August 28, 2020, the Company filed a Registration Statement on Form F-1 with the SEC in order to (i) register the warrants that were protected under the Registration Rights Agreement, and (ii) modify the Registration Declaration on Form F-4 that had been filed with the SEC on January 22, 2020. In the terms established in the Registration Declaration, it was effective on September 11, 2020. The registration of Form F-1 triggered the investors rights to exercise their warrants on a cash basis.

 

F-12

 

 

  g) On October 8, 2020, the Company announced that, based on the agreements reached at the Ordinary General Shareholders’ meeting held on October 2, 2020, it would carry out the redemption of all outstanding warrants for the purchase of shares of the Group. As a result of the redemption, a “cashless” exercise of the warrants was considered for an exercise price of US$ 11.44 per share, expiring on November 9, 2020, with which the warrant holders would receive 0.37 shares of the Company for each warrant that was redeemed.
     
  h) On December 14, 2020, Betterware and Promotora Forteza, S.A. de C.V. (“Forteza”, and one of Betterware’s shareholder), entered into a merger agreement pursuant to which Forteza agreed to merge with and into Betterware, surviving Betterware as the acquiror. On December 16, 2020, the merger was completed. Consequently, considering that Forteza was a Betterware shareholder, the number of Betterware shares were delivered to Forteza’s shareholders in proportion to their shareholding in Betterware, without implying an increase in Betterware’s share capital or in the total number of outstanding shares of the Company. The net effects of the merger was an increase in equity of Ps. 4,724.

 

  2019  

 

  i) During August 2019, the Group started building a distribution center which will be completed in the first quarter of 2021. As of January 3, 2021 and December 31, 2019, payments related to this construction amounted to Ps. 508,958 and Ps. 165,000, respectively. The total investment amounted Ps. 673,958.

 

2.Significant accounting policies

 

  a. Basis of preparation

 

    The consolidated and combined financial statements include the financial statements of Betterware and BLSM (the “consolidated and combined financial statements”). Prior to the merger transaction disclosed in Note 1.b, Betterware and BLSM were subsidiaries under the common control of Campalier, operating under common management; therefore, combined financial statements of these entities were prepared as of December 31, 2019 and 2018. On March 10, 2020, BLSM became a subsidiary of Betterware resulting in the preparation of its consolidated financial statements as of such date. As a result, the combined statement of changes in stockholders’ equity for the 52-week period ended December 31, 2019 and the year ended December 31, 2018 (equivalent to 52 weeks) present the net parent investment gross by including contributed capital and retained earnings (rather than net as presented in prior years), as management believes it is a preferable presentation for comparability purposes with the share structure and presentation as of and for the 53-week period ended January 3, 2021.
     
    Betterware’s financial year is a 52- or 53-week period ending on the Sunday nearest to December 31. The financial year of 2020 consisted of 53 weeks and ended on January 3, 2021. The comparative financial year of 2019 and of 2018 consisted of 52 weeks. The financial information as of January 3, 2021 and for the 53-week period ended on such date is also herein referred to the 2020 period (the “2020 period” or the “period of 2020”). The financial information as of December 31, 2019 and for the 52-week period ended on such date is also herein referred to the 2019 period (the “2019 period” or the “period of 2019”). The financial information for the year ended December 31, 2018 (equivalent to a 52-week period) is also herein referred to the 2018 period (the “2018 period” or the “period of 2018”).
     
    Transactions among the Betterware and BLSM and the balances and unrealized gains or losses arising from intra-group transactions have been eliminated in the preparation of the consolidated and combined financial statements.

 

F-13

 

 

  b. Basis of accounting

 

    The consolidated and combined financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).

 

  c. Basis of measurement

 

    The consolidated and combined financial statements have been prepared on the historical cost basis except for certain financial instruments measured at fair value.
     
    Functional and presentation currency
     
    These consolidated and combined financial statements are presented in Mexican pesos (“Ps.”), which is the Group’s functional currency. All financial information presented in Mexican pesos has been rounded to the nearest thousand (except where otherwise specified). When referring to U.S. dollars (“US$”), means thousands of United States dollars.
     
    Consolidated and combined statement of profit or loss and other comprehensive income
     
    The Group opted to present a single consolidated and combined statement of profit or loss and comprehensive income, combining and consolidating the presentation of profit and loss, including an operating profit line item, and comprehensive income in the same statement. Due to the commercial activities of the Group, costs and expenses presented in the consolidated and combined statements of profit or loss and other comprehensive income were classified according to their function. Accordingly, cost of sales and operating expenses were presented separately.

 

  d. Cash and cash equivalents and restricted cash

 

    Cash and cash equivalents consist mainly of bank deposits and short-term investments in securities, highly liquid and easily convertible into cash in a period no longer than three months. Cash is stated at nominal value and cash equivalents are valued at fair value. Any cash or cash equivalent that cannot be disposed of in less than three months is classified as restricted cash.
     
    As of January 3, 2021, restricted cash by $42,915 was classified within other current assets (see note 5). This restricted cash was in guarantee for some forwards to be excersiced between May and October 2021.

 

  e. Financial instruments

 

    Financial assets and financial liabilities are recognized in the Group’s consolidated and combined statement of financial position when the Group becomes a party to the contractual provisions of the instrument.
     
    Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognized immediately in profit or loss.

 

  f. Financial assets

 

    All recognized financial assets are measured subsequently in their entirety at either amortized cost or fair value, depending on the classification of the financial assets.

 

F-14

 

 

Classification of financial assets

 

Debt instruments that meet the following conditions are measured subsequently at amortized cost:

 

the financial asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows; and
   
the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest (“SPPI”) on the principal amount outstanding.

 

Debt instruments that meet the following conditions are measured subsequently at fair value through other comprehensive income (FVTOCI):

 

the financial asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling the financial assets; and
   
the contractual terms of the financial asset give rise on specified dates to cash flows that are SPPI on the principal amount outstanding.

 

By default, all other financial assets are measured subsequently at fair value through profit or loss (FVTPL).

 

Despite the foregoing, the Group may make the following irrevocable election/designation at initial recognition of a financial asset:

 

the Group may irrevocably elect to present subsequent changes in fair value of an equity investment in other comprehensive income if certain criteria are met; and
   
the Group may irrevocably designate a debt investment that meets the amortized cost or FVTOCI criteria as measured at FVTPL if doing so eliminates or significantly reduces an accounting mismatch.

 

    Amortized cost and effective interest method
     
    The effective interest method is a method of calculating the amortized cost of a debt instrument and of allocating interest income over the relevant period.
     
    The amortized cost of a financial asset is the amount at which the financial asset is measured at initial recognition minus the principal repayments, plus the cumulative amortization using the effective interest method of any difference between that initial amount and the maturity amount, adjusted for any loss allowance. The gross carrying amount of a financial asset is the amortized cost of a financial asset before adjusting for any loss allowance.
     
    Foreign exchange gains and losses
     
    The carrying amount of financial assets that are denominated in a foreign currency is determined in that foreign currency and translated at the spot rate at the end of each reporting period. Specifically, for financial assets measured at amortized cost that are not part of a designated hedging relationship, exchange differences are recognized in profit or loss.
     
    Impairment of financial assets
     
    The Group always recognizes lifetime expected credit losses (“ECL”) for trade receivables. The expected credit losses on these financial assets are estimated using the simplified approach by using a provision matrix, estimated based on historical credit loss experience based on the past due status of the debtors, adjusted as appropriate to reflect current conditions and estimates of future economic conditions.

 

F-15

 

 

    For all other financial instruments, the Group recognizes lifetime ECL when there has been a significant increase in credit risk since initial recognition. However, if the credit risk on the financial instrument has not increased significantly since initial recognition, the Group measures the loss allowance for that financial instrument at an amount equal to 12-month ECL.
     
    Lifetime ECL represents the expected credit losses that will result from all possible default events over the expected life of a financial instrument. In contrast, 12-month ECL represents the portion of lifetime ECL that is expected to result from default events on a financial instrument that are possible within 12 months after the reporting date.
     
    Write-off policy
     
    The Group writes off a financial asset when there is information indicating that the debtor is in severe financial difficulty and there is no realistic prospect of recovery, e.g., when the debtor has been placed under liquidation or has entered into bankruptcy proceedings, or in the case of trade receivables, when the amounts are over one year past due, whichever occurs sooner. Financial assets written off may still be subject to enforcement activities under the Group’s recovery procedures, taking into account legal advice where appropriate. Any recoveries made are recognized in profit or loss.

 

  g. Financial liabilities

 

    All financial liabilities are measured subsequently at amortized cost using the effective interest method or at FVTPL.
     
    Financial liabilities at FVTPL are measured at fair value, with any gains or losses arising on changes in fair value recognized in profit or loss to the extent that they are not part of a designated hedging relationship.
     
    Financial liabilities and equity
     
    Classification as debt or equity
     
    Debt and equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangements and the definitions of a financial liability and an equity instrument.
     
    Financial liabilities measured subsequently at amortized cost
     
    Financial liabilities that are not (i) contingent consideration of an acquirer in a business condensation combination and consolidation, (ii) held-for-trading, or (iii) designated as at FVTPL, are measured subsequently at amortized cost using the effective interest method.
     
    The effective interest method is a method of calculating the amortized cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial liability, or (where appropriate) a shorter period, to the amortized cost of a financial liability.

 

F-16

 

 

Foreign exchange gains and losses

 

For financial liabilities that are denominated in a foreign currency and are measured at amortized cost at the end of each reporting period, the foreign exchange gains and losses are determined based on the amortized cost of the instruments. These foreign exchange gains and losses are recognized in the ‘Foreign exchange (loss) gain, net’ line item in the consolidated and combined Statements of Profit or Loss and Other Comprehensive Income for financial liabilities that are not part of a designated hedging relationship.

 

The fair value of financial liabilities denominated in a foreign currency is determined in that foreign currency and translated at the spot rate at the end of the reporting period. For financial liabilities that are measured as at FVTPL, the foreign exchange component forms part of the fair value gains or losses and is recognized in