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(a) to the Company
The Company’s sales depend in parts on the effectiveness of its advertising and marketing programs.
The Company’s activities depends on high customer numbers in the physical stores and virtual channels. Consequently, it invests heavily in media exposure, whether digital or printed. Its sales depend on its ability to foresee, identify and interpret customers’ likes and preferences, decide on the advertising message and determine the most appropriate means of communicating with them. If its advertising and marketing activities are not well conceived, planned and executed, sales may be impacted.
Besides that, sales may be adversely affected by the challenges inherent to identifying changes in customers’ behavior and preferences, seasonal dates and the country´s socioeconomic situation.
A reduction in installment sales may adversely affect the Company’s results.
Installment sale is an important component in the Company’s result. In the past, the Brazilian government introduced measures to limit domestic demand, pushing up interest rates and imposing credit restrictions on banks, credit card administrators and retailers. If the Brazilian government once again imposes restrictions on consumer financing, the Company’s results may be adversely affected.
The Company’s sales and inventory levels are subject to seasonal change.
The Company’s sales are traditionally higher in the fourth quarter of each year due to the pre-Christmas and Black Friday upturn in trading. In 2017, 29,0%of the Company’s annual net revenue was generated in the final quarter. In 2016 was 30,4% and in 2015 the percentual was 28.6%.Consequently, the Company is highly dependent on end-of-year sales (e.g. Black Friday and Christmas) and any economic slowdown, interruption in its business or that of its suppliers, or any other circumstances that adversely affect trading in the final three months of each year will have a disproportionate negative impact on its financial situation and operating result. In addition, in order to prepare for the end-of-year season, the Company must acquire and maintain in inventory a substantially higher volume of merchandise than in other periods of the year and hire extra temporary staff for its stores. Any unforeseen reduction in or erroneous estimates of demand for its products during this peak season may force the Company to sell excess inventory for a substantially lower price or even with inappropriate margins, thereby jeopardizing its operating result and financial situation. Such oscillations in its operating result and financial situation may also adversely affect the market value of its shares.
The Company may not succeed in capturing and integrating the synergies arising from acquisitions and associations.
The Company constantly seeks to capture the synergies arising from its acquisitions and associations. However, acquisitions involve risks and challenges, such as those associated with the integration of operations, systems, personnel, products and customer bases between the companies, the generation of expected returns on investments and exposure to the liabilities of the acquired companies. Thus the integration of the acquired businesses, such as the merge of Cnova in 2016, with the Company’s own businesses and the capture of synergies may require more time and resources than initially expected.
According to the Law 12529 of November 30, 2011, amended by Interministerial Ordinance 994 of May 30, 2012 ("New Fair Trading Law"), which deals with the overall economic order, as well as transactions aimed at any type of economic concentration, whether through mergers and acquisitions, the constitution of companies to exercise control over other companies or any form of corporate association which holds a dominant position in the market (defined as a company or group of companies capable of altering, singly or jointly, the conditions of a given market, or that controls 20% or more of said market). In this context, they must first be submitted to the Brazilian Fair Trading Defense System ("SBDC"), comprising the Administrative Council for Economic Defense ("CADE") and the Finance Ministry’s Economic Oversight Department, with the atributions set forth in the New Competition Law, defined above, as a precedent condition for its effects to be effective, the operations of economic concentration in which: (a) either of the economic groups involved (buyer or seller) has recorded annual gross revenue or total business turnover in Brazil of R$750 million or more in the fiscal year prior to that of the transaction; and (b) any other economic group involved has recorded annual gross revenue or total business turnover in Brazil of R$75 million or more in the fiscal year prior to that of the transaction. The SBDC therefore determines if a given transaction will have a negative impact on competitive conditions in the market in which the Company operates, or on the consumers in said market.
Consequently, future acquisitions may not be approved or may be subject to restrictions as a condition for their authorization and approval by CADE, including those that affect the structure of the transaction, result in structural remedies or that require direct or indirect financial disbursements.
Risks related to leasing agreements effective for an indeterminate period.
In accordance with the leasing Law nº 8.245/91, once the term established in the commercial leasing agreements has come to an end, the Company has the right to renew these agreements for a period of five years or more through legal process should the renewal negotiations fail. If these contracts be signed in less than five years and no agreement is reached during the negotiations, the contract will remain in effect for an indeterminate period. In this case, either party may terminate the lease by notifying the other party 30 days in advance.
On December 31, 2017, around 1,9% (5) of the Company’s leasing agreements are in effect for an indeterminate period . As a result, while a term remains unestablished for those agreements under such condition, the Company runs the risk of being notified to quit said premises within 30 days. Given the operational importance of the stores and distribution centers, the Company may be adversely and abruptly affected if a significant number of leases are terminated in the manner mentioned above.
Risks related to the operating licenses of the Company’s stores and distribution centers.
If operating licenses are not granted or renewed, the Company may be subject to successive fines and, depending on the case, closure of the premises in question. Given that the performance of the current stores and distribution centers is a key factor in the success of the Company’s commercial strategy, the Company may be negatively impacted if these establishments are closed due to the non-granting or non-renewal of such licenses.
The Company may be unable to renew or maintain the leasing agreements of its stores or distribution centers.
Most of the properties where the Company’s stores and distribution centers are objects of leasing contracts. In the majority of cases, the Company has the right of compulsory renewal of the lease when the term expires. In the case of agreements where it does not have this right, there is a risk that they will be terminated or renewed under unfavorable conditions. Given that the strategic location of the Company’s stores and distribution centers is of crucial importance to the development of its commercial strategy, it may be adversely affected if a significant number of leases are not renewed under acceptable conditions or are terminated against its wishes.
In addition, up to the presentation date of thisReference Form, 303of the 1.292leasing contracts in effect were with the CB Group and its member companies. Given the significant number of stores and distribution centers involved, the Company may be adversely affected if these agreements are not renewed. For more details on related party transactions such as the above, see item 16.2 of thisReference Form.
The leasing law also states that rents must be reviewed every three years in order to bring them to market value. Most of the Company’s store leases establish a minimum rent and a portion of rent tied to the revenue of the stores. The Company may be negatively affected if a significant number of these reviews propose an upturn in the minimum rent of the stores or the fixed rent of the distribution centers and if these proposals result in a significant rent increase.
Additionally, on December 31, 2017, approximately 9,7% of the lease agreements entered into by the Company were subject to renewal actions, i.e., the Company is taking legal measures to ensure the continuity of these contracts.
Risks related to the operating licenses of the Company’s stores and distribution centers.
Failure to obtain or renew licenses for operation of stores and / or distribution centers may result in the application of successive fines and, as the case may be, the closure of the respective establishments. Since the performance of the activities in the current stores and distribution centers is considered a relevant factor for the success of the commercial strategy, the Company may be adversely affected in the event of the closure of these establishments due to the non-renewal or non-obtaining of the required operating licenses.
The Company relies on technological resources provided by third parties for the availability and operation of e-commerce more broadly.
The Company‘s success in mobile devices depends in part on the interoperability of mobile applications operated by mobile operating systems that the Company does not control, including Android, iOS and Windows Phone systems. Any change in such systems that impairs the functionality of the Company‘s applications, or guarantees preferential treatment for competing products, may adversely affect the use of the Company‘s applications on mobile devices, which may affect the Company‘s sales and image.
The operation of the Company‘s technological systems are subject to risks of discontinuity.
The Company‘s data center or backup system may not function properly, either because of system failures, viruses, physical or electronic violations, or other unexpected events, which can lead to system outages, slow processing or data loss preventing the Company from providing services on a timely basis or limiting access to the websites operated by the Company, causing partial or total shutdown of the sites, which may negatively and substantially affect its business.
Possible changes to the legislation and regulation of data privacy, as well as the interpretation of this legislation, may generate significant costs for the Company as well as oblige it to change its business practices.
The Company relies on collecting data from its customers in an anonymous way to effectively promote its websites, product offerings and services. Data are used for two conversion strategies: advertising and data negotiation. The use, maintenance and sharing of customer data, as well as digital advertising, are regulated in Brazil through specific legislation and regulations, in part by Law No. 12.965 / 14 (Civil Internet Framework). Legislation and regulations related to privacy, data protection, consumer protection and the digital advertising business are evolving and are potentially subject to interpretation changes. Any changes in the legislation and regulations referred to above, as well as the interpretation thereof, may generate significant costs for the Company as well as oblige it to change its business practices.
A new legislation or regulations applicable to the Company may create obligations not foreseen for the Company, causing it to incur additional costs or have its operations restricted.
Breaches of security in the Company’s computer systems by third parties may result in the unauthorized disclosure of customer information.
The Company relies on its Information Security department to protect the data of customers and partners to ensure the confidentiality of the data and its availability and transmission in a safe manner.Security breaches by third parties using its computer systems and the disclosure or unauthorized use of its customers’ and partners confidential information may expose it to lawsuits due to the misuse of such information and damage its reputation, which may have a substantial negative impact on its image and, consequently, its results.
The Company depends on the transportation and infrastructure system to deliver its products to its stores and its customers.
Products for all the Company’s stores in 20 states and the Federal District are delivered through 14 distribution centers in the states of Bahia, Ceará, Goiás, Mato Grosso do Sul, Minas Gerais, Paraná, Pernambuco, Rio de Janeiro, São Paulo, and Rio Grande do Sul and 12 warehousing facilities in the states of Alagoas, Espírito Santo, Maranhão, Goiás, Mato Grosso, Minas Gerais, Rio Grande do Norte, Sergipe, Tocantins, Paraíba, Piauí and Pernambuco. Brazil’s infrastructure and transportation system are underdeveloped and require government investments in order to operate effectively and meet the Company’s businesses’ needs. Any interruption or significant reduction in the use of transportation infrastructure or its operation in the cities where our distribution centers are located as a result of natural disasters, fire, accidents, strikes, demonstrations, system flaws or any other unexpected causes, may delay or affect the Company’s ability to deliver products to its stores and customers, which may reduce sales and affect its results in a substantially adverse manner.
Losses not covered by the Company’s insurance policies may have a substantial negative materials impact on its business.
Certain types of risk, such as those associated with war, unforeseeable circumstances, force majeure or the interruption of certain activities, are not covered by insurance companies. If any of these uncovered events occur, the Company may suffer a financial reverse in order to recompose and/or renovate the assets jeopardized by said events, which could compromise its revenue and investments. The Company may also be held legally liable for indemnifying third parties as a result of such an event.
Risks of non-realization of tax credits.
On December 31, 2017, the Company recorded in its balance sheet tax credits, mainly due to ICMS and PIS / COFINS. As some credits can not yet be offset immediately, the Company‘s management, based on a feasibility technical study, based on the future expectation of growth and consequent compensation with debits arising from its operations, believes that its further compensation is feasible.
The risks related to the non-offsetting of these credits are mainly related to the non-realization of the future expectation of sales growth due to changes in the country‘s economic scenario and also in the hypothesis of changes in the Brazilian and / or state tax system, the use of these credits.
In the normal course of its operations, the Company discounts receivables with financial institutions in order to obtain working capital for its operating activities. Should the Company be incapable of continuing with this practice, it may not have sufficient liquidity to maintain the level of its operations and honor its financial commitments, due to term or volume mismatches between scheduled and actual receivables payments, which may subject it to financial losses as well as having an adverse impact on its financial and operating results.
Dependence on distribution centers.
The delivery of merchandise is handled by 16 distribution centers and 12 warehousing facilities, where the Company stores its goods and organizes the supply of its stores. Any interruptions to the distribution centers’ normal course of activities, such as system failures, fire, natural disasters, electricity outages, interdictions of any kind, among others, may affect the Company significantly. In addition, the Company may require to review the spraying of its distribution centers according to its business strategies adopted. If it is unable to resize the quantity and / or capacity of its distribution centersin order to fully meet the needs of its stores, its operations may be adversely affected.
The Company may not manage to fully implement its growth strategy, with a consequent adverse impact on its operations.
The Company’s capacity to implement the main growth initiatives comprising its strategy depends on a series of factors, including its capacity to:
• Manage its brand and culture;
• Leverage sales and increase the profitability of its operations;
• Strengthen and expand its offering of financial products and services for its customer base;
• Improve customers’ purchasing experience by providing a multichannel sales framework.
Promote our strategy of digital transformation through actions that propose the identification of the needs and experiences of our customers through the adoption of new technologies and models of business in our physical stores, as well as intensify our digital culture internally and externally.The Company cannot ensure that any of these objectives will be successfully or fully achieved. Such a lack of success may adversely impact its business.
The Company may be adversely affected by unfavorable decisions in regard to ongoing legal or administrative procedures.
On December 31, 2017, the Company was involved in a number of civil, tax and labor-related court and administrative processes and there is no guarantee that it will be successful in all of them. The Company only constitutes provisions when its external legal counsel deems that a given case may result in a probable loss, i.e. the likelihood of a loss is greater than that of a successful outcome. These provisions may be insufficient to cover the total costs arising from adverse legal or administrative decisions. If all, or a significant proportion, of the lawsuits and administrative processes result in unfavorable decisions for the Company, its business, financial situation and operating results may suffer a substantial impact.
Finally, in addition to the financial provisions and legal advisory fees, the Company may be required to post judicial guarantees related to such processes, which may affect its financial capacity. For more details, see items 4.3 and 4.6 of this Reference Form.
The fact that the Company’s stores are public places may generate outcomes that are outside the control of store management, possibly leading to material damages and harm to the stores’ image, as well as causing civil liabilities.
Given that the Company’s stores are spaces for public use, they are subject to possible accidents which may be beyond the control of their managers and, consequently, harm consumers and visitors. If such accidents should occur, the store in question may suffer serious damage, either in material terms or to its image. The occurrence of accidents may also subject the Company to the imposition of civil liabilities and/or the obligation to indemnify the victims, including through the payment of damages, which may have a substantial material adverse effect on the Company.
The Company may be unable to satisfactorily align its sales channel.
The Company operates in the home appliance, consumer electronics and furniture retail segment in its physical stores and e-commerce. If it is unable to satisfactorily align the commercial, logistics, communication and marketing aspects of its bricks-and-mortar and on-line operations, or if there is internal competition between the different sales channels, it may be unable to take full advantage of the benefits provided by the integrated multichannel structure, adversely impacting its operating results.
The Company may suffer with obsolescence, breakage and theft of its stock.
The Company uses distribution centers to store the products destined for its stores and online customers. If stocks are supersized, there is a danger that products may become out of date before reaching the stores. In addition, inadequate inventory management may lead to breakages and breakdown, thereby causing inventory losses and compromising sales. Finally, despite the Company’s best efforts and security systems, there is a growing lack of public safety, which increases the risk of theft or robbery and armed robberies in their storages and stores.
Risk associated with credit card fraud, adversely affecting our business and the results of our operations.
The risk for fraudulent credit card transactions is assumed by the Company, since we accept the payment by credit card without the application of the cardholder‘s signature, and we also carry out non-card transactions in our online stores. Currently, we have no insurance against this type of risk. As our sales grow and / or our security system fails to protect information, the risk of significant losses from fraudulent operations also increases. Failure to properly control fraudulent credit card transactions could damage our reputation and our brand, which could adversely affect our business and the results of our operations.
(b) To the Company’s direct and indirect controlling shareholders
The interests of the Company’s controlling shareholders may conflict with the interests of the minority shareholders.
The Company is controlled by CBD (Companhia Brasileira de Distribuição), which is in turn controlled by Casino Group. CBD has the power to elect the majority of the members of the Executive Board, who in turn elect the Board of Directors. The interests of our controlling shareholders, or their eventual successors, may differ from the interests of our other shareholders, which may adversely affect the Company‘s business.
(c) To the Company’s shareholders
The Company may need additional capital in the future to be obtained through an issue of shares or securities convertible into shares, which may dilute existing shareholders’ interests.
The Company may decide to raise funds from the capital market through an issue of shares and/or a public or private placement of share-convertible securities. The raising of additional funds through a public share offering, which may not confer preemptive rights on existing shareholders, may dilute the interests of those shareholders in the Company‘s capital stock ,who do not have preemptive rights or, if they do, do not have sufficient resources to exercise said rights. In addition, the Company may, in the future, alter the existing stock option plan through the issue of new shares for management and other Company employees, which may result in the immediate dilution of the Company‘s shareholders.
Holders of the Company’s shares may not receive any dividends or interest on equity.
The Company’s Bylaws state that shareholders must be paid at least 25% of annual net income, calculated and adjusted in accordance with Brazilian Corporation Law, as dividends or interest on equity. Net income may be capitalized, used to offset losses or retained, also in accordance with Corporation Law; consequently, no resources may be available for dividend or interest on equity payments. In addition, Corporation Law allows the Company to suspend mandatory dividend payments in a given fiscal year if the Board of Directors informs the Annual Shareholders‘ Meeting that their distribution would be incompatible with the Company’s financial situation.
The Brazilian securities market’s volatility and lack of liquidity may substantially limit shareholders’ ability to sell their shares at the price they want and at the time they wish.
Investing in securities traded in emerging markets, such as Brazil, frequently involves higher risks than those traded in other global markets, such investments being considered, in general, to be of a more speculative nature. The Brazilian securities market is also substantially smaller, less liquid and more concentrated, and may be more volatile than the world’s leading markets. Accordingly, shareholders’ capacity to sell their shares at the price they want and at the time they wish may be severely jeopardized, adversely impacting the trading price of the Company’s shares.The sale or the perception of a possible sale of a substantial volume of shares may also impair the trading price of said shares.
(d) To the Company’s subsidiaries and associates
The Company belongs to an economic group together with other operational companies that are party to or may become party to lawsuits in which the Company may be jointly or secondarily liable.
The Company belongs to an economic group together with other operational companies. In the course of their activities, these companies are party to lawsuits where a negative outcome may also affect the Company, jointly or secondarily. These include a diverse range of processes, including those involving social security, labor and environmental issues. If a company in the Company’s economic group loses such a lawsuit and the Company is held jointly or secondarily liable, its operating and financial results may be adversely impacted.
(e) To the Company’s suppliers
The Company cannot guarantee that its suppliers and business partners do not make use of irregular practices.
Given the enormous fragmentation and outsourcing of the productive chain of the Company’s suppliers, and despite exists a Third Party Risk Analysis procedure when hiring a new supplier and / or business partner, the Company cannot control their operations and eventual irregularities that may occur. The Company cannot guarantee that some of its suppliers and business partners do not have problems in regard to labor or sustainability issues, Anti-corruption Law, the inclusion of a fourth party in the productive chain, or inadequate safety conditions, or that they make use of such irregularities to lower the cost of their products.
If this risk materialize, the Company may suffer losses with its image and, as a consequence, loss of attractiveness together with its clients, with a direct impact on the reduction of its net revenue and operating income, , as well as to be affected by fines and or penalty to be applied by competent bodies. Additionally, it may suffer a decrease in the value of the shares issued by it.
In addition, the Company may be jointly and severally liable if its suppliers and / or business partners may demonstrate problems already described in the previous paragraphs, as well as default by their business partners toward marketplace customers.
There is a concentration of supply categories of products for sale, if may be any alteration in this supply chain may adversely affect the Company’s business and activities.
Certain categories of product sold by the Company suffer from a concentration of suppliers. If a given supplier is unable to furnish the products in the volume and frequency with which they are normally acquired by the Company and storage levels are not enough for the supply of the demand, the Company may be unable to maintain the level of sales of the category in question, which may have a substantial impacton its activities and result.
(f) To the Company’s customers:
The Company is exposed to risks related to customer loans and financing.
Together with CBD, the Company maintains a partnership with Itaú Unibanco, through which it established FIC, which offers exclusive private-label and co-branded credit cards, personal loans and consumer financing and insurance in the Pontofrio stores. FIC also raises funds from financial institutions in order to grant credit to the Company’s customers and the risk of the operation is related to the customers default in order to adversely affect FIC‘s results, and consequently the equity method that the Company is entitled to.
In addition, installment sales are widely used in the Casas Bahia stores, especially in the physical stores segment, granting credit through Consumer Direct Credit with Intervention ("CDCI") to its clients to finance purchases. The balance of the CDCI consumer finance portfolio, in December 31, 2017, was R$2.382 milions (R $ 2,138 million as of December 31, 2016 and R $ 1,987 million as of December 31, 2015). The Company is subject to the normal risks associated with this type of financing, including default on the payment of principal and interest.
Any mismatch between the cost and maturity of funds raised in the market and the funds made available to customers may adversely and significantly affect the Company’s results.
The Company may be held liable for incidents with consumers related to the delivery and assembly of products acquired by them.
The Company is exposed to certain incidents involving the delivery and assembly of furniture and other products that may lead to the need for indemnification or materially damage the Company’s image,
activities and economic situation. Complaints, as well as legal or administrative processes may be filed against the Company alleging that product delivery and assembly were made unsatisfactory, or due to accidents that may have affected the consumer.
Any risk related to the delivery and assembly of furniture and other products sold by the Company, whether actual or possible, may cause consumers to lose confidence in the safety and effectiveness of the Company’s delivery and assembly service. Consequently, any allegation of this nature against the Company and/or regarding the products delivered to the location designated by the consumer may have a material adverse effect on the Company’s image, activities and economic situation, as well as generating a need to indemnify consumers.
(g) To the retail sector
Fierce competition in the Brazilian retail sector may adversely affect the Company’s market share and net income.
The Company operates in the Brazilian retail home appliance and consumer electronics segment, which is highly competitive, being composed of specialized and/or large-scale multinational and Brazilian chains. Segment mergers and acquisitions may increase this competition and adversely affect the Company’s market share and net income.
The Company also operates in the e-commerce segment, where it competes with several well-established companies that offer a wide range of products. Given that this market’s entry barriers are considerably smaller than those of the traditional retail market, competition is even more intense. If the Company is unable to respond to changes in e-commerce, its share of this market may be jeopardized, with a consequent negative effect on its results.
The retail sector is highly sensitive to economic cycles and any reduction in consumers’ purchasing power.
Historically, the retail sector has experienced periods of economic slowdown, which have reduced consumption. A successful home appliance and consumer electronics operation depends on several factors related to consumption and income, including overall business conditions, interest rates, inflation, the availability of consumer credit, taxation, consumer confidence in future economic conditions, and employment and salary levels. Consequently, any reduction in the overall availability of credit, or a restrictive alteration in the Company’s or credit card companies’ credit policies may adversely affect sales, especially home appliance and consumer electronics sales.
Unfavorable economic conditions in Brazil, or in the world with reflections on Brazil’s economy, may substantially reduce consumption and disposable income, especially in the lower income groups, which have less access to credit than the higher income groups, are subject to more restrictive debt refinancing conditions and are more sensitive to any increase in unemployment. Such conditions may therefore have a substantial negative impact on the Company results.
In addition, given that the Brazilian retail sector is normally regarded as being strongly tied to growth, the success of the Company’s activities depends on an increase in the growth rate of the urban population and its various income levels. Any reduction or slowdown in this growth may have a negative impact on the Company’s sales and operating result.
The non-anticipation and/or inadequate response to changes in consumer habits may negatively affect the Company’s sales.
The Company cannot guarantee that it will always be able to offer its customers the products and services they want.
The Company is subject to eventual changes in consumption habits and in demand for its products and services and must therefore be constantly adapting to their preferences. Consequently, it may not be able to anticipate or adequately respond to changes in consumer habits, with a possible negative impact on sales.
(h) To the regulation of the segments in which the Company operates:
The Company is subject to environmental legislation and regulation.
The Company is subject to federal, state and municipal legislation related to environment preservation and protection. Among other obligations, this legislation establishes environmental licensing requirements and standards for sewage disposal, gas emissions, solid waste management and specially-protected areas.
The Company incurs costs arising from the prevention, control, reduction or elimination of emissions into the atmosphere, soil and water, as well as the disposal and handling of waste in its stores and distribution centers. Any violation of environmental legislation and regulations may expose the Company to administrative and criminal sanctions, in addition to obligations to remedy or indemnify damage caused to the environment and to third parties.
The Company cannot guarantee that said legislation and regulations will not become even more rigid. In this case, it may be required to substantially increase its investments in order to comply with the stricter legislation and regulations. This may reduce the volume of resources available for other investments and may have a significant negative impact on the Company’s results.
Financial institutions in Brazil, including the Company’s associates FIC and Investcred, are subject to regulatory changes by the Central Bank.
The regulatory structure of the Brazilian financial system is constantly evolving. The Company’s associates, FIC and Investcred, are subject to Central Bank regulations. Existing laws and regulations may be changed, as may the way in which they are interpreted or executed, or new laws and rules may be adopted.
As the Company fuels its activities through credit sales, any eventual changes in the regulations or an operational intervention by the Central Bank could have a material negative impact on its operations and profitability.
In addition, it may be adversely affected by changes in the regulations, including those related to: (i) minimum capital requirements; (ii) requirements for investments in fixed capital; (iii) credit limits and other credit restrictions; (iv) accounting requirements; and (v) intervention, liquidation and/or special and temporary management systems.
Monetary regulations imposed by the federal government may adversely affect the Company.
In order to provide support for monetary policy, the federal government periodically introduces regulations designed to control inflation by (i) altering reserve requirements on loans and deposits and the regulations governing maximum financing terms; and (ii) imposing limits on the amounts that can be financed, among other measures.
The government essentially uses these controls to regulate the availability of credit and reduce or increase consumption. Sometimes these regulations affect customers’ capacity to obtain credit and may restrict growth of the credit portfolio of the Company and its affiliated FIC and Investcred. Some of these controls are permanent and affect business for lengthy periods.
There is no guarantees that the government will not adopt new regulations in the future that may affect the Company’s liquidity, financing strategy, loan growth or profitability, as well as the solvency of its customers.
The Company may be held liable for damage caused to consumers or third parties by its products, which may adversely affect its results.
Brazilian consumer protection legislation is rigorous and extremely favorable to consumers, given that the onus of proof in any consumer complaint is always on the company, putting it at an immediate disadvantage.
Court procedures can take place through individual suits or class actions, the latter being filed by state or federal authorities through direct or indirect public administrative bodies, notably the Prosecution Office or PROCON, in order to protect consumers’ rights, or by specific consumer protection bodies.
Lawsuits or administrative processes may be filed against the Company claiming that its products have deteriorated, are adulterated, or do not contain sufficient information, among other allegations. In addition, unfavorable decisions in any such suit involving, individually or jointly, substantial amounts may adversely impact the Company’s results and financial situation. In addition, unfavorable court decisions may impact the Company‘s image, thereby affecting its sales and reputation.
Alterations in the accounting practices adopted in Brazil may adversely affect the Company‘s results.
The Comitê de Pronunciamentos Contábeis ("CPC") issues a series of pronouncements, interpretations and guidelines designed to align Brazilian accounting practices with IFRS, and will continue to do so in order to ensure convergence with new IASB pronouncements.
There is no way to guarantee that future accounting changes will not significantly affect the Company’s consolidated financial statements and quarterly information, either retroactively or prospectively, possibly adversely impacting comparisons of future with current financial statements and quarterly information and compliance with financial covenants.
Alterations to Brazilian tax legislation or conflicts regarding its interpretation may adversely affect the Company, increasing the taxes it is obliged to pay.
The Brazilian government has frequently altered tax regimes that may affect the Company and its customers, including as a result of the execution or alteration of tax treaties. These include changes in the prevailing tax rates and/or the creation of new taxes, either temporary or definitive, whose revenue is used for purposes defined by the government.
Some of these changes may result in increases in the Company’s tax burden, which may adversely affect its profitability and the price of its services, as well as limit its capacity to do business in its existing markets, negatively impacting its financial results. The Company cannot guarantee that it will be able to maintain its projected cash flows and profitability following an increase in those taxes applicable to the Company and its operations.
In addition, certain tax laws may be subject to controversial interpretations by the tax authorities, including, but not limited to, the regulations governing corporate restructurings. The Company may be adversely affected by a different interpretation to that used as a basis for its transactions.
Risk of restriction of the sale of regulated products and services
The Company obtains a significant part of its revenue through financial services and products approved and regulated by governament agencies, such services as lender insurance and other types of insurance regulated by SUSEP (Superintendency of Private Insurance). Any change in the regulation in force and/or possible acts or decisions of these governament agencies may limit or negatively affect the sales of these products and services.
(i) Risks related to the countries abroad where the Company operates
Not applicable, given that the Company has no direct operations in other countries.
(j) Risks related to social and environmental issues
The Company is subject to environmental laws and regulations.
See a description of this risk in item "h" above.