Edgar Filing: MERCADOLIBRE INC

10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended March 31, 2010

-OR-


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

For the transition period from to

Commission file number 001-33647

MercadoLibre, Inc.

(Exact name of Registrant as specified in its Charter)


Delaware (State or other jurisdiction of incorporation or organization)		98-0212790 (I.R.S. Employer Identification Number)

Tronador 4890, 8th Floor
Buenos Aires, C1430DNN, Argentina
(Address of registrant’s principal executive offices)

011-54-11-5352-8000
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files. Yes o No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:


Large accelerated filer þ	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

44,126,557 shares of the issuer’s common stock, $0.001 par value, outstanding as of May 3, 2010.

MERCADOLIBRE, INC.
INDEX TO FORM 10-Q


PART I. FINANCIAL INFORMATION			2

Item 1 — Unaudited Condensed Consolidated Financial Statements			2

Condensed Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009			2

Condensed Consolidated Statements of Income for the three-month periods ended March 31, 2010 and 2009			3

Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three-month periods ended March 31, 2010 and 2009			4

Condensed Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2010 and 2009			6

Notes to Condensed Consolidated Financial Statements			7

Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations			28

Item 3 — Qualitative and Quantitative Disclosure About Market Risk			44

Item 4 — Controls and Procedures			47

PART II. OTHER INFORMATION

Item 1 — Legal Proceedings			47

Item 6 — Exhibits			48

Exhibit 10.1
Exhibit 10.2
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I. FINANCIAL INFORMATION

Item 1 — Unaudited Condensed Consolidated Financial Statements

MercadoLibre, Inc.

Condensed Consolidated Balance Sheets

As of March 31, 2010 and December 31, 2009


	March 31,			December 31,
	2010			2009
	(Unaudited)			(Audited)
Assets
Current assets:
Cash and cash equivalents	$	34,634,299		$	49,803,402
Short-term investments		7,077,862			14,580,185
Accounts receivable, net		7,578,659			4,868,377
Funds receivable from customers		3,238,299			3,785,802
Prepaid expenses		471,733			547,138
Deferred tax assets		5,614,306			5,481,182
Other assets		3,279,979			3,068,930


Total current assets		61,895,137			82,135,016
Non-current assets:
Long-term investments		54,864,792			26,627,357
Property and equipment, net		7,263,001			5,948,276
Goodwill and intangible assets, net		63,769,288			64,338,564
Deferred tax assets		4,014,516			2,897,492
Other assets		530,498			667,944


Total non-current assets		130,442,095			100,479,633

Total assets	$	192,337,232		$	182,614,649


Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable and accrued expenses	$	14,321,381		$	11,599,634
Funds payable to customers		32,087,593			31,453,410
Payroll and social security payable		4,405,229			7,428,340
Taxes payable		7,842,042			6,797,516
Loans payable and other financial liabilities		—			3,213,992


Total current liabilities		58,656,245			60,492,892
Non-current liabilities:
Payroll and social security payable		3,339,995			1,355,006
Deferred tax liabilities		5,971,114			5,170,799
Other liabilities		1,123,168			1,402,715


Total non-current liabilities		10,434,277			7,928,520

Total liabilities	$	69,090,522		$	68,421,412


Commitments and contingencies (Note 8)

Shareholders’ equity:
Common stock, $0.001 par value, 110,000,000 shares authorized, 44,126,557 and 44,120,269 shares issued and outstanding at March 31, 2010 and December 31, 2009, respectively	$	44,126		$	44,120
Additional paid-in capital		120,320,530			120,257,998
Retained earnings		27,277,138			17,656,537
Accumulated other comprehensive loss		(24,395,084	)		(23,765,418	)


Total shareholders’ equity		123,246,710			114,193,237


Total liabilities and shareholders’ equity	$	192,337,232		$	182,614,649

The accompanying notes are an integral part of these condensed consolidated financial statements.

MercadoLibre, Inc.

Condensed Consolidated Statements of Income

For the three-month periods ended March 31, 2010 and 2009


	Three Months Ended March 31,
	2010			2009
	(Unaudited)
Net revenues	$	45,937,774		$	32,322,501
Cost of net revenues		(9,893,051	)		(6,633,986	)

Gross profit		36,044,723			25,688,515

Operating expenses:
Product and technology development		(3,224,775	)		(2,633,419	)
Sales and marketing		(11,108,801	)		(10,216,177	)
General and administrative		(6,206,881	)		(6,071,375	)

Total operating expenses		(20,540,457	)		(18,920,971	)

Income from operations		15,504,266			6,767,544


Other income (expenses):
Interest income and other financial gains		794,142			929,663
Interest expense and other financial charges		(2,995,418	)		(2,510,184	)
Foreign currency gains		396,972			1,875,486


Net income before income / asset tax expense		13,699,962			7,062,509



Income / asset tax expense		(4,079,361	)		(1,671,333	)


Net income	$	9,620,601		$	5,391,176


	Three Months Ended March 31,
	2010		2009
Basic EPS
Basic net income per common share	$	0.22	$	0.12

Weighted average shares		44,113,595		44,069,134


Diluted EPS
Diluted net income per common share	$	0.22	$	0.12

Weighted average shares		44,149,700		44,130,866

The accompanying notes are an integral part of these condensed consolidated financial statements.

MercadoLibre, Inc.

Condensed Consolidated Statements of Changes in Shareholders’ Equity

For the three-month periods ended March 31, 2010 and 2009 (unaudited)


													(Accumulated			Accumulated
										Additional			deficit)			other
	Comprehensive			Common stock						paid-in			Retained			comprehensive
	income			Shares			Amount			capital			Earnings			income(loss)			Total
Balance as of December 31, 2008					44,070,367		$	44,071		$	119,807,007		$	(15,552,256	)	$	(10,874,841	)	$	93,423,981


Stock-based compensation — stock options					—			—			436			—			—			436
Stock-based compensation — restricted shares					—			—			16,933			—			—			16,933
Stock -based compensation — long term retention plan (“LTRP”)					3,600			3			80,239			—			—			80,242
Net income	$	5,391,176			—			—			—			5,391,176			—			5,391,176
Currency translation adjustment		(3,382,545	)		—			—			—			—			(3,382,545	)		(3,382,545	)
Realized net gain on investments		(3,643	)		—			—			—			—			(3,643	)		(3,643	)

Comprehensive income	$	2,004,988

Balance as of March 31, 2009					44,073,967		$	44,074		$	119,904,615		$	(10,161,080	)	$	(14,261,029	)	$	95,526,580


Stock options exercised					35,031			35			28,319			—			—			28,354
Stock-based compensation — stock options					—			—			1,316			—			—			1,316
Stock-based compensation — restricted shares					—			—			57,449			—			—			57,449
Stock -based compensation — LTRP					(3,600	)		(3	)		95,214			—			—			95,211
Restricted shares issued					10,655			10			171,089			—			—			171,099
LTRP shares issued					3,600			3			(3	)		—			—			—
Shares issued					616			1			(1	)		—			—			—
Net income	$	27,817,617			—			—			—			27,817,617			—			27,817,617
Currency translation adjustment		(9,532,020	)		—			—			—			—			(9,532,020	)		(9,532,020	)
Unrealized net gains on investments		27,630			—			—			—			—			27,630			27,630
Realized net gains on investments		1			—			—			—			—			1			1

Comprehensive income	$	20,318,216

Balance as of December 31, 2009					44,120,269		$	44,120		$	120,257,998		$	17,656,537		$	(23,765,418	)	$	114,193,237

The accompanying notes are an integral part of these condensed consolidated financial statements.

MercadoLibre, Inc.
Condensed Consolidated Statements of Changes in Shareholders’ Equity
For the three-month periods ended March 31, 2010 and 2009 (unaudited)


											(Accumulated		Accumulated
								Additional			deficit)		other
	Comprehensive			Common stock				paid-in			Retained		comprehensive
	income			Shares		Amount		capital			Earnings		income (loss)			Total
Balance as of December 31, 2009					44,120,269	$	44,120	$	120,257,998		$	17,656,537	$	(23,765,418	)	$	114,193,237


Stock options exercised					2,307		2		1,968			—		—			1,970
Stock-based compensation — stock options					—		—		61			—		—			61
Stock-based compensation — restricted shares					—		—		21,204			—		—			21,204
Stock-based compensation LTRP					—		—		39,303			—		—			39,303
LTRP shares issued					3,981		4		(4	)		—		—			—
Net income	$	9,620,601			—		—		—			9,620,601		—			9,620,601
Currency translation adjustment		(566,885	)		—		—		—			—		(566,885	)		(566,885	)
Unrealized net loss on investments		(35,151	)		—		—		—			—		(35,151	)		(35,151	)
Realized net loss on investments		(27,630	)		—		—		—			—		(27,630	)		(27,630	)

Comprehensive income	$	8,990,935

Balance as of March 31, 2010					44,126,557	$	44,126	$	120,320,530		$	27,277,138	$	(24,395,084	)	$	123,246,710

The accompanying notes are an integral part of these condensed consolidated financial statements.

MercadoLibre, Inc.

Condensed Consolidated Statements of Cash Flows

For the three-month periods ended March 31, 2010 and 2009


	Three Months Ended March 31,
	2010			2009
	(Unaudited)

Cash flows from operations:
Net income	$	9,620,601		$	5,391,176
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		946,873			956,491
Interest expense		—			234,294
Accrued interest		(228,151	)		(3,643	)
Stock-based compensation expense — stock options		61			436
Stock-based compensation expense — restricted shares		21,204			16,933
LTRP accrued compensation		324,607			205,251
Deferred income taxes		(407,531	)		277,015
Changes in assets and liabilities, excluding the effect of acquisitions:
Accounts receivable		(3,020,745	)		(592,602	)
Funds receivable from customers		441,399			(908,809	)
Prepaid expenses		58,009			(393,388	)
Other assets		(92,884	)		(2,465,124	)
Accounts payable and accrued expenses		3,840,657			891,659
Funds payable to customers		418,066			1,322,085
Other liabilities		(467,618	)		(78,893	)

Net cash provided by operating activities		11,454,548			4,852,881

Cash flows from investing activities:
Purchase of investments		(34,354,598	)		(33,656,429	)
Proceeds from sale and maturity of investments		12,723,697			30,861,254
Purchases of intangible assets		(12,865	)		(918,479	)
Purchases of property and equipment		(1,396,672	)		(1,720,008	)

Net cash used in investing activities		(23,040,438	)		(5,433,662	)

Cash flows from financing activities:
Decrease in loans payable		(3,213,878	)		(57,175	)
Stock options exercised		1,970			—
Issuance of common stock		—			3

Net cash used in financing activities		(3,211,908	)		(57,172	)

Effect of exchange rate changes on cash and cash equivalents		(371,305	)		170,150

Net decrease in cash and cash equivalents		(15,169,103	)		(467,803	)
Cash and cash equivalents, beginning of the period		49,803,402			17,474,112

Cash and cash equivalents, end of the period	$	34,634,299		$	17,006,309


Supplemental cash flow information:
Cash paid for interest	$	2,832,119		$	2,041,212
Cash paid for income taxes	$	4,935,701		$	2,284,364

The accompanying notes are an integral part of these condensed consolidated financial statements.

MercadoLibre, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

Nature of Business

MercadoLibre Inc. (the “Company”) is an e-commerce enabler whose mission is to build the necessary online and technology tools to allow practically anyone to trade almost anything, helping to make inefficient markets more efficient in Latin America.

The Company operates in several reporting segments. The MercadoLibre online marketplace segments include Brazil, Argentina, Mexico, Venezuela and other countries (Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Panama, Peru, Portugal and Uruguay). The MercadoPago segment includes the Company’s regional online payments platform consisting of its MercadoPago business available in Brazil, Argentina, Mexico and other countries (Chile, Colombia, and Venezuela).

Traditional offline marketplaces can be inefficient because they (i) are fragmented and regional, (ii) offer a limited variety and breadth of goods, (iii) have high transaction costs, and (iv) provide buyers with less information upon which they can make decisions. The Company makes these inefficient marketplaces more efficient because (i) its community of users can easily and inexpensively communicate and complete transactions, (ii) its marketplace includes a very wide variety and selection of goods, and (iii) it brings buyers and sellers together for much lower fees than traditional intermediaries. The Company attracts buyers by offering selection, value, convenience and entertainment, and sellers by offering access to broad markets, efficient marketing and distribution costs, ability to maximize prices and opportunity to increase sales.

The Company pioneered online commerce in the region by developing a Web-based marketplace in which buyers and sellers are brought together to browse, buy and sell items such as computers, electronics, collectibles, automobiles, clothing and a host of practical and miscellaneous items. The Company’s trading platform is a fully automated, topically arranged, intuitive, and easy-to-use online service that is available 24 hours-a-day, seven days-a-week. The Company’s platform supports a fixed price format in which sellers and buyers trade items at a fixed price established by sellers, and an auction format in which sellers list items for sale and buyers bid on items of interest.

Providing more efficient and effective payment methods from buyers to sellers is essential to creating a faster, easier and safer online commerce experience. Traditional payment methods such as bank deposits and cash on delivery present various obstacles to the online commerce experience, including lengthy processing time, inconvenience and high costs. The Company addressed this opportunity through the introduction in 2004 of MercadoPago, an integrated online payments solution. MercadoPago was designed to facilitate transactions on the MercadoLibre Marketplace by providing an escrow mechanism that enables users to securely, easily and promptly send and receive payments online, and has experienced consistent growth since its launch.

In 2004, the Company introduced an online classifieds platform for motor vehicles, vessels and aircrafts. Buyers usually require a physical inspection of these items or specific types of interactions with the sellers before completing a transaction, and therefore an online classified advertisements service is better suited for purchase and sale of these types of items than the traditional online purchase and sale format. For these items, buyers can search by make, model, year and price, and sellers can list their phone numbers and receive prospective buyers’ e-mail addresses, in order to allow for instant and direct communication between sellers and potential buyers.

MercadoLibre, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)

Nature of Business (Continued)

In November 2005, the Company acquired certain operations of DeRemate.com Inc., a regional competing online marketplace, including all of its operations in Brazil, Colombia, Ecuador, Mexico, Peru, Uruguay and Venezuela and the majority of the shares of the capital stock of its subsidiaries (except for its Argentine and Chilean subsidiaries, which were operated under the control of one of previous stockholders of DeRemate), for an aggregate purchase price of $12.1 million, net of cash and cash equivalents acquired.

During 2006, the online classifieds platform was expanded to include the real estate category. Much in the same way as with motor vehicles, vessels and aircrafts, purchases of real estate, require physical inspection of the property and is therefore a business more suited to a classifieds model. For real estate listings, in addition to posting their contact information, individual owners or real estate agents can also upload pictures and videos of the property for sale and include maps of the property’s location and layout.

During 2006, the Company launched several initiatives to improve its platform and expand its reach. Particularly relevant were the launch of eShops, a new platform tailored to attract lower rotation items and increase the breadth of products offered, the introduction of user generated information guides for buyers that improve the shopping experience, and the expansion of the online classifieds model by adding the services category. In terms of geographic expansion, the Company launched sites in Costa Rica, the Dominican Republic, and Panama.

In August 2007, the Company successfully completed its initial public offering pursuant to which the Company sold 3,000,000 shares of common stock and certain selling shareholders sold 15,488,762 shares of common stock, resulting in net proceeds for the Company of approximately $49,573,239.

During 2007 the Company also launched a new and improved version of its MercadoPago payments platform in Chile and Colombia as well as in Argentina during 2008. The new MercadoPago, in addition to improving the ease of use and efficiency of payments for marketplace purchases, also allows for payments outside of the Company’s marketplaces. Users are able to transfer money to other users with MercadoPago accounts and to incorporate MercadoPago as a means of payments in their independent commerce websites. In this way MercadoPago 3.0 as it has been called is designed to meet the growing demand for Internet based payments systems in Latin America. In addition, in December 2009, the Company started processing off-MercadoLibre transactions with selected sites in Brazil as a Beta test using its new direct payments product, while maintaining the escrow product for on-MercadoLibre transactions. On March 30, 2010, the Company started processing off-MercadoLibre transactions through its new direct payments product to anyone in Brazil.

MercadoLibre, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)

Nature of Business (Continued)

In January 2008, the Company acquired 100% of the issued and outstanding shares of capital stock of Classified Media Group, Inc., or CMG, and its subsidiaries. CMG and its subsidiaries operated an online classifieds platform primarily dedicated to the sale of automobiles at www.tucarro.com in Venezuela, Colombia and Puerto Rico and real estate at www.tuinmueble.com in Venezuela, Colombia, Panama, the United States, Costa Rica and the Canary Islands. The Company paid for the shares of CMG and its subsidiaries $19 million, subject to certain escrows and working capital adjustment clauses.

In September 2008, the Company completed the acquisition of DeRemate.com de Argentina S.A., DeRemate.com Chile S.A., Interactivos y Digitales México S.A. de C.V. and Compañía de Negocios Interactiva de Colombia E.U. for an aggregate purchase price of $37.6 million. The Company also purchased certain URLs, domains, trademarks, databases and intellectual property rights related to those businesses for $ 2.4 million. The total purchase price was subject to certain set off rights and working capital adjustment clauses.

As of March 31, 2010, the Company, through its wholly-owned subsidiaries, operated online commerce platforms directed towards Argentina, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Mexico, Panama, Peru, Portugal, Uruguay and Venezuela, and online payments solutions directed towards Argentina, Brazil, Mexico, Venezuela, Chile and Colombia. In addition, the Company operates a real estate classified platform that covers some areas of Florida, U.S.A.

Summary of Significant Accounting Policies

Basis of presentation

The accompanying condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) and include the accounts of the Company and its wholly-owned subsidiaries. These financial statements are stated in US dollars. All significant intercompany transactions and balances have been eliminated. Certain reclassifications have been made to prior year information to conform to current year presentation.

Substantially all revenues and operating costs are generated in the Company’s foreign operations, amounting to approximately 99.3% and 98.7% of the consolidated totals during the three-month periods ended March 31, 2010 and 2009, respectively. Long-lived assets located in the foreign operations totaled $67,067,371 and $67,523,246 as of March 31, 2010 and December 31, 2009, respectively. Cash and cash equivalents as well as short and long-term investments, totaling $96,576,953 and $91,010,944 at March 31, 2010 and December 31, 2009, respectively, are mainly located in the United States of America.

These unaudited interim financial statements reflect the Company’s consolidated financial position as of March 31, 2010 and December 31, 2009. These statements also show the Company’s consolidated statement of income for the three-months ended March 31, 2010 and 2009, its consolidated statement of shareholders’ equity and its consolidated statement of cash flows for the three months ended March 31, 2010 and 2009. These statements include all normal recurring adjustments that management believes are necessary to fairly state the Company’s financial position, operating results and cash flows.

MercadoLibre, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)

Summary of Significant Accounting Policies (Continued)

Basis of presentation (Continued)

Because all of the disclosures required by generally accepted accounting principles in the United States of America for annual consolidated financial statements are not included herein, these interim financial statements should be read in conjunction with the audited financial statements and the notes thereto for the year ended December 31, 2009, contained in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 26, 2010. The condensed consolidated statements of income, shareholders’ equity and cash flows for the periods presented are not necessarily indicative of results expected for any future period.

Management has evaluated subsequent events through May 7, 2010 which is the date the financial statements were issued.

Foreign Currency Translation

All of the Company’s foreign operations have determined the local currency to be their functional currency, except for Venezuela for the three-month periods ended March 31, 2010, as described below. Accordingly, these foreign subsidiaries translate assets and liabilities from their local currencies to U.S. dollars using year end exchange rates while income and expense accounts are translated at the average rates in effect during the year. The resulting translation adjustment is recorded as part of other comprehensive income (loss), a component of shareholders’ equity (deficit). Gains and losses resulting from transactions denominated in non-functional currencies are recognized in earnings. Net foreign currency transaction losses are included in the consolidated statements of income under the caption “Foreign currency gains” and amounted to $396,972 and $1,875,486 for the three-month periods ended March 31, 2010 and 2009, respectively.

Until September 30, 2009, the Company translated its Venezuelan subsidiaries assets, liabilities, income and expense accounts at the official rate of 2.15 “Bolivares Fuertes” per US dollar.

Starting in the fourth quarter of 2009, as a result of the changes in facts and circumstances that affect the Company’s ability to convert currency for dividends remittances using the official exchange rate in Venezuela, the Venezuelan subsidiaries assets, liabilities, income and expense accounts have been translated using the parallel exchange rate resulting in the recognition in that quarter of a currency translation adjustment of $16,977,276 recorded in other comprehensive income. The average exchange rate used for translating the fourth quarter results was 5.67 “Bolivares Fuertes” per US dollar and the year-end exchange rate used for translating assets and liabilities was 6.05 “Bolivares Fuertes” per US dollar.

MercadoLibre, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)

Summary of Significant Accounting Policies (Continued)

Foreign Currency Translation (Continued)

According to US GAAP, we have transitioned our Venezuelan operations to highly inflationary status as of January 1, 2010 considering the US dollar as the functional currency.

Therefore, no translation effect was accounted for in other comprehensive income during the three-month period ended March 31, 2010 related to our Venezuelan operations.

Highly inflationary status in Venezuela

During May 2009, the International Practices Task Force discussed the highly inflationary status of the Venezuelan economy. Historically, the Task Force has used the Consumer Price Index (CPI) when considering the inflationary status of the Venezuelan economy.

The CPI has existed since 1984. However, the CPI covers only the cities of Caracas and Maracaibo. Commencing on January 1, 2008, the National Consumer Price Index (NCPI) has been developed to cover the entire country of Venezuela. Since inflation data is not available to compute a cumulative three year inflation rate for the entire country solely based on the NCPI, the Company uses a blended rate using the NCPI and CPI to calculate Venezuelan inflation rate.

The cumulative three year inflation rate as of December 31, 2009 was calculated using the CPI information for periods before January 1, 2008 and NCPI information for the periods after January 1, 2008. The blended CPI/NCPI three-year inflation index (23 months of NCPI and 13 months of CPI) as of November 30, 2009 exceeded 100%. According to US GAAP, calendar year-end companies should apply highly inflationary accounting as from January 1, 2010. Therefore, the Company has transitioned its Venezuelan operations to highly inflationary status as of January 1, 2010 considering the US dollar as the functional currency.

Taxes on revenues

The Company’s subsidiaries in Brazil, Argentina, Venezuela and Colombia are subject to certain taxes on revenues which are classified as cost of revenues. Taxes on revenues totaled $3,008,089 and $1,727,401 for the three-month periods ended March 31, 2010 and 2009, respectively.

Income Tax

From fiscal year 2008 to fiscal year 2018, the Company’s Argentine subsidiary is a beneficiary of a software development law. Part of the benefits obtained from being a beneficiary of the aforementioned law is a relief of 60% of total income tax determined in each year, during these 10 years. Aggregate tax benefit totaled $789,686 and $703,206 for the three-month periods ended March 31, 2010 and 2009, respectively. Aggregate per share effect of the Argentine tax holiday amounts to $0.02 and $0.02 for the three-month periods ended March 31, 2010 and 2009, respectively. If the Company had not been granted the Argentine tax holiday, the Company would have pursued an alternative tax planning strategy and, therefore, the impact of not having this particular benefit would not necessarily be the abovementioned dollar and per share effect.

MercadoLibre, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)

Summary of Significant Accounting Policies (Continued)

Income Tax (Continued)

As of March 31, 2010 and December 31, 2009, MercadoLibre, Inc has included in the non-current deferred tax assets line the foreign tax credits related to the dividend distributions received from its subsidiaries for a total amount of $3,646,709 and $2,879,999, respectively. Those foreign tax credits will be used to offset the future domestic income tax payable.

Use of estimates

The preparation of condensed consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are used for, but not limited to accounting for allowance for doubtful accounts, depreciation, amortization, impairment and useful lives of long-lived assets, compensation cost related to cash and share-based compensation and restricted shares, recognition of current and deferred income taxes and contingencies. Actual results could differ from those estimates.

Comprehensive Income

Comprehensive income is comprised of two components, net income and other comprehensive income (loss), and defined as all other changes in equity of the Company that result from transactions other than with shareholders. Other comprehensive income (loss) includes the cumulative translation adjustment relating to the translation of the financial statements of the Company’s foreign subsidiaries and unrealized gains on investments classified as available-for-sale securities. Total comprehensive income for the three-month periods ended March 31, 2010 and 2009 amounted to $8,990,935 and $2,004,988, respectively.

Net income per share

Basic earnings per share for the Company’s common stock is computed by dividing net income available to common shareholders attributable to common stock for the period by the weighted average number of common shares outstanding during the period.

The Company’s restricted shares granted to its outside directors were participating securities. Accordingly, net income available to common stockholders for the three-month period ended March 31, 2010 and 2009, was allocated between unvested restricted shares and common stock under the “two class method” for purposes of computing basic and diluted earnings per share.

MercadoLibre, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)

Net income per share (Continued)

Diluted earnings per share for the Company’s common stock assume the exercise of outstanding stock options and vesting restricted shares, additional shares and shares granted under the 2008 Long Term Retention Plan under the Company’s stock based employee compensation plans.

The following table shows how net income available to common shareholders is allocated using the two-class method, for the three-month periods ended March 31, 2010 and 2009:


	Three Months Ended March 31,
	2010				2009
	Basic		Diluted		Basic		Diluted

Net income	$	9,620,601	$	9,620,601	$	5,391,176	$	5,391,176


Net income available to common shareholders attributable to unvested restricted shares preferred stock		1,821		1,821	$	165	$	165


Net income available to common shareholders attributable to common stock	$	9,618,780	$	9,618,780	$	5,391,011	$	5,391,011

Net income per share of common stock is as follows for the three-month periods ended March 31, 2010 and 2009:


	Three Months Ended March 31,
	2010				2009
	Basic		Diluted		Basic		Diluted

Net income available to common shareholders per common share	$	0.22	$	0.22	$	0.12	$	0.12


Numerator:
Net income available to common shareholders	$	9,618,780	$	9,618,780	$	5,391,011	$	5,391,011


Denominator:
Weighted average of common stock outstanding for Basic earnings per share		44,113,595		44,113,595		44,069,134		44,069,134
Adjustment for stock options		—		16,362		—		49,568
Adjustment for additional Shares		—		7,969		—		12,164
Adjustment for shares granted under LTRP		—		11,774		—		—

Adjusted weighted average of common stock outstanding for Diluted earnings per share		44,113,595		44,149,700		44,069,134		44,130,866

MercadoLibre, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)

Net income per share (Continued)

The calculation of diluted net income per share excludes all anti-dilutive shares. For the three-month periods ended March 31, 2010 and 2009, the numbers of anti-dilutive shares are as follows:


	Three Months Ended March 31,
	2010		2009
Anti-dilutive shares
Restricted shares		—		—
Shares granted under LTRP		—		18,690

		—		18,690

Business Combinations, Goodwill and Intangible Assets

Business Combinations

On September 5, 2008, the Company completed, through one of its subsidiaries, Hammer.com, LLC, the acquisition of all of the issued and outstanding shares of capital stock of DeRemate.com de Argentina S.A., a company organized under the laws of Argentina (“DR Argentina”), DeRemate.com Chile S.A., a company organized under the laws of Chile (“DR Chile”), Interactivos y Digitales México S.A. de C.V., a company organized under the laws of Mexico (“ID Mexico”) and Compañía de Negocios Interactiva de Colombia E.U., a company organized under the laws of Colombia (“CNI Colombia” and together with DR Argentina, DR Chile, and ID Mexico, the “Acquired Entities”). Also, on September 5, 2008, the Company entered into an asset purchase agreement to acquire certain URLs, domain names, trademarks, databases and intellectual property rights that are used or useful in connection with the online platforms of the Acquired Entities. The Acquired Entities operate online trading platforms in Argentina (www.deremate.com.ar), Chile (www.deremate.cl), Mexico (www.dereto.com.mx) and Colombia (www.dereto.com.co).

The aggregate purchase price paid by the Company to the Sellers for the shares of capital stock of the Acquired Entities and the related assets was $40,000,000. The Company paid the Sellers $22,000,000 in cash. In addition, on September 5, 2008, the Company issued to the Sellers ten (10) unsecured promissory notes having an aggregate principal amount of $18,000,000, $8,000,000 of which are subject to set-off rights in favor of the Company for working capital adjustments and liabilities relating to the assumption of certain contracts by the Company, $4,000,000 of which are subject to set-off rights in favor of the Company for indemnification obligations of the Sellers and the remaining $6,000,000 are not subject to set-off rights. Each of the promissory notes have a one-year term, bear interest at 3.17875% plus 1.5% for the first four months, 2.0% for the second four months and 2.5% for the third four months and can be prepaid by the Company without penalty. Pursuant to the terms of each promissory note, until the principal amount plus interest is repaid, the Company may not incur indebtedness in excess of $55,000,000 in the aggregate.

MercadoLibre, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)

Business Combinations, Goodwill and Intangible Assets (Continued)

On February 12, 2009, the Company agreed to modify the maturity conditions of the promissory note as follows: (i) $3,000,000 on June 5, 2009 (ii) $9,000,000 on September 5, 2009 (iii) $3,000,000 on December 5, 2009 and (iv) $3,000,000 on March 5, 2010. The promissory notes bear interest at 3.17875% plus 1.5% for the first four months, 2.0% for the second four months and 2.5% for the remaining period up to its maturity. In addition, on that date the Company finished the purchase price allocation period and the Company agreed with the Sellers a working capital adjustment for $480,912 to be paid by the Sellers to the Company.

On June 3, 2009, the Company paid to the Sellers $3,113,203 including principal plus accrued interest.

On August 31, 2009, the Company paid to the Sellers $9,470,222 including principal plus accrued interest.

On December 4, 2009, the Company paid to the Sellers $3,018,893 including principal plus accrued interest, net of certain working capital adjustments.

On March 4, 2010, the Company paid the final amount to the Sellers $3,242,395 including principal plus accrued interest.

As of March 31, 2010, the Company has paid all the promissory notes related to DeRemate acquisition.

Goodwill and Intangible Assets

The composition of goodwill and intangible assets is as follows:


	March 31,			December 31,
	2010			2009
Indefinite lived assets
- Goodwill	$	59,397,093		$	59,822,746
- Trademarks		2,455,593			2,415,874
Amortizable intangible assets
- Licenses and others		2,264,622			2,227,315
- Non-compete agreement		1,191,159			1,218,393
- Customer list		1,572,253			1,593,861


Total intangible assets	$	66,880,720		$	67,278,189
Accumulated amortization		(3,111,432	)		(2,939,625	)


	$	63,769,288		$	64,338,564

MercadoLibre, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)

Business Combinations, Goodwill and Intangible Assets (Continued)

Goodwill

The changes in the carrying amount of goodwill for the three-month period ended March 31, 2010 and the year ended December 31, 2009, are as follows:


	Three Months Ended March 31, 2010
	Marketplaces
	Brazil			Argentina			Chile			Mexico		Venezuela		Colombia		Other Countries		Total			Payments			Consolidated

Balance, beginning of period	$	12,565,062		$	23,175,174		$	6,592,024		$	4,770,560	$	4,846,030	$	5,100,939	$	1,359,287	$	58,409,076		$	1,413,670		$	59,822,746
- Effect of exchange rates changes		(280,791	)		(467,118	)		(218,455	)		241,783		—		305,858		22,114		(396,609	)		(29,044	)		(425,653	)


Balance, end of the period	$	12,284,271		$	22,708,056		$	6,373,569		$	5,012,343	$	4,846,030	$	5,406,797	$	1,381,401	$	58,012,467		$	1,384,626		$	59,397,093


	Year Ended December 31, 2009
	Marketplaces
	Brazil		Argentina			Chile		Mexico		Venezuela			Colombia		Other Countries		Total			Payments			Consolidated

Balance, beginning of year	$	9,361,697	$	25,504,101		$	5,252,283	$	4,517,690	$	13,636,502		$	4,647,681	$	1,220,332	$	64,140,286		$	1,512,488		$	65,652,774
- Effect of exchange rates changes		3,203,365		(2,328,927	)		1,339,741		252,870		(8,790,472	)		453,258		138,955		(5,731,210	)		(98,818	)		(5,830,028	)


Balance, end of the year	$	12,565,062	$	23,175,174		$	6,592,024	$	4,770,560	$	4,846,030		$	5,100,939	$	1,359,287	$	58,409,076		$	1,413,670		$	59,822,746

Amortizable intangible assets

Amortizable intangible assets are comprised of customer lists and user base, trademarks and trade names, non-compete agreements, acquired software licenses and other acquired intangible assets including developed technologies. Aggregate amortization expense for intangible assets totaled $172,861 and $139,401 for the three-month periods ended March 31, 2010 and 2009, respectively.

Expected future intangible asset amortization from acquisitions completed as of March 31, 2010 is as follows:


For year ended 12/31/2010 (remaining nine months)	$	678,309
For year ended 12/31/2011		633,597
For year ended 12/31/2012		554,352
For year ended 12/31/2013		50,344

	$	1,916,602

Segments

Reporting segments are based upon the Company’s internal organizational structure, the manner in which the Company’s operations are managed, the criteria used by management to evaluate the Company’s performance, the availability of separate financial information, and overall materiality considerations.

MercadoLibre, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)

Segments (Continued)

The Marketplace segments include Brazil, Argentina, Venezuela, Mexico and other countries (Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Panama, Peru, Portugal and Uruguay) on line market places commerce platforms. The Payments segment is the Company’s regional payments platform consisting of its MercadoPago business in Brazil, Argentina, Mexico, Chile, Colombia, and Venezuela.

Direct contribution consists of net revenues from external customers less direct costs. Direct costs include specific costs of net revenues, sales and marketing expenses, and general and administrative expenses over which segment managers have direct discretionary control, such as advertising and marketing programs, customer support expenses, allowances for doubtful accounts, headcount compensation, third party fees. All corporate related cost have been excluded from the Company’s direct contribution.

Expenses over which segment managers do not currently have discretionary control, such as certain technology and general and administrative costs, are monitored by management through shared cost centers and are not evaluated in the measurement of segment performance.

The following tables summarize the financial performance of the Company’s reporting segments:


	Three Months Ended March 31, 2010
	Marketplaces
	Brazil			Argentina			Mexico			Venezuela			Other Countries			Total			Payments			Consolidated

Net revenues	$	15,687,444		$	6,722,221		$	4,016,180		$	3,326,932		$	3,242,226		$	32,995,003		$	12,942,771		$	45,937,774
Direct costs		(9,191,969	)		(2,597,562	)		(2,268,972	)		(1,731,675	)		(1,668,738	)		(17,458,916	)		(7,787,264	)		(25,246,180	)


Direct contribution		6,495,475			4,124,659			1,747,208			1,595,257			1,573,488			15,536,087			5,155,507			20,691,594

Operating expenses and indirect costs of net revenues																							(5,187,328	)


Income from operations																							15,504,266


Other income (expenses):
Interest income and other financial gains																							794,142
Interest expense and other financial results																							(2,995,418	)
Foreign currency gain																							396,972


Net income before income / asset tax expense																						$	13,699,962


	Three Months Ended March 31, 2009
	Marketplaces
	Brazil			Argentina			Mexico			Venezuela			Other Countries			Total			Payments			Consolidated

Net revenues	$	9,878,197		$	4,965,877		$	2,868,922		$	6,365,820		$	1,875,105		$	25,953,921		$	6,368,580		$	32,322,501
Direct costs		(6,605,658	)		(2,176,755	)		(1,796,994	)		(3,655,514	)		(1,203,036	)		(15,437,957	)		(4,081,206	)		(19,519,163	)


Direct contribution		3,272,539			2,789,122			1,071,928			2,710,306			672,069			10,515,964			2,287,374			12,803,338

Operating expenses and indirect costs of net revenues																							(6,035,795	)


Income from operations																							6,767,544


Other income (expenses):
Interest income and other financial gains																							929,663
Interest expense and other financial results																							(2,510,184	)
Foreign currency gain																							1,875,486


Net income before income / asset tax expense																						$	7,062,509

MercadoLibre, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)

Segments (Continued)

The following table summarizes the allocation of the long-lived tangible assets based on geography:


	March 31,		December 31,
	2010		2009

US long-lived tangible assets	$	3,950,890	$	2,746,059

Other countries long-lived tangible assets
Argentina		2,125,093		1,978,652
Brazil		838,810		883,712
Mexico		84,757		71,064
Venezuela		191,924		196,846
Other countries		71,527		71,943


	$	3,312,111	$	3,202,217


Total long-lived tangible assets	$	7,263,001	$	5,948,276

The following table summarizes the allocation of the goodwill and intangible assets based on geography:


	March 31,		December 31,
	2010		2009

US intangible assets	$	14,028	$	17,535

Other countries goodwill and intangible assets
Argentina		25,556,474		26,188,435
Brazil		12,308,294		12,597,173
Mexico		5,054,874		4,818,438
Venezuela		6,600,769		6,602,677
Other countries		14,234,849		14,114,306


	$	63,755,260	$	64,321,029


Total goodwill and intangible assets	$	63,769,288	$	64,338,564

MercadoLibre, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)

Segments (Continued)

The following table summarizes the allocation of net revenues based on geography:


	Three Months Ended March 31,
	2010		2009

Brazil		26,351,472	$	15,212,678
Argentina		8,354,246		5,397,607
Mexico		4,469,937		3,174,882
Venezuela		3,475,490		6,639,429
Other countries		3,286,629		1,897,905

Total net revenues	$	45,937,774	$	32,322,501

Fair Value Measurement of Assets and Liabilities

The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2010 and December 31, 2009:


			Quoted Prices in				Quoted Prices in
	Balances as of		active markets for		Balances as of		active markets for
	March 31,		identical Assets		December 31,		identical Assets
Description	2010		(Level 1)		2009		(Level 1)

Assets

Cash and Cash Equivalents:

Money Market Funds	$	6,345,689	$	6,345,689	$	26,298,189	$	26,298,189

Investments:

Asset backed securities		11,519,240		11,519,240		—		—

Sovereign Debt Securities		8,163,046		8,163,046		—		—

Corporate Debt Securities		10,660,020		10,660,020		8,045,048		8,045,048


Total financial Assets	$	36,687,995	$	36,687,995	$	34,343,237	$	34,343,237

The Company’s financial assets are valued using market prices on active markets (level 1). Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. As of March 31, 2010 and December 31, 2009, the Company did not have any assets obtained from readily-available pricing sources for comparable instruments (level 2) or without observable market values that would require a high level of judgment to determine fair value (level 3).

MercadoLibre, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)

Fair Value Measurement of Assets and Liabilities (Continued)

The unrealized net gains on short term investments are reported as a component of accumulated other comprehensive income. The Company does not anticipate any significant realized losses associated with those investments as the Company’s historical cost basis is not significant.

As of March 31, 2010 and December 31, 2009, the Company has financial assets measured at fair value on a recurring basis for $36,687,995 and $34,343,237, respectively.

In addition, as of March 31, 2010, the Company had $23,176,806 of short-term and long-term investments, which consisted of time deposits considered held to maturity investments. As of December 31, 2009, the Company had $25,993,069 of short-term and long-term investments, which consisted of time deposits and corporate debt securities considered held to maturity securities. Those investments are accounted for at amortized cost which, as of March 31, 2010 and December 31, 2009, approximates their fair values.

As of March 31, 2010 and December 31, 2009, the carrying value of the Company’s cash and cash equivalents approximated their fair value which was held primarily in bank deposits. For the three-month periods ended March 31, 2010 and 2009, the Company held no direct investments in auction rate securities, collateralized debt obligations, structured investment vehicles.

As of March 31, 2010 and December 31, 2009, the Company does not have any non-financial assets or liabilities measured at fair value.

Compensation Plan for Outside Directors

The Company compensates its outside directors through the payment of cash fees and, from time to time, through the issuance of equity awards. In both 2009 and 2010, each director was entitled to receive an annual cash retainer of $30,000. Additionally, the Chair of the Company’s Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee and the lead independent director of the Company were entitled to receive additional annual cash retainers of $15,000, $12,000, $5,000 and $10,000, respectively.

On June 10, 2009, the Company issued an aggregate of 2,305 shares of common stock and 8,350 restricted shares of common stock (the “Restricted Shares”) to our outside directors. The Restricted Shares vest in full in June 2010. Restricted Shares awarded to employees and directors are measured at their fair market value using the grant-date price of the Company’s shares. For the three-month periods ended March 31, 2010 and 2009, the Company recognized $21,204 and $34,907, respectively, of compensation expense related to these awards, which are included in operating expenses in the accompanying condensed consolidated statement of income.

For the three-month periods ended March 31, 2010 and 2009, the Company also recognized nil and $16,933, respectively, of compensation expense related to prior awards of restricted shares to the outside directors, which amounts are included in operating expenses in the accompanying condensed consolidated statement of income.

MercadoLibre, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)

Commitments and Contingencies

Litigation and Other Legal Matters

At March 31, 2010, the Company had established reserves for proceeding-related contingencies of $1,023,617 to cover 283 legal actions against the Company where the Company has determined that a loss is probable. As of March 31, 2010 no loss amount has been accrued for over 1,274 legal actions for the aggregate amount up to $4,020,805 because a loss is not considered probable.

At the beginning of 2010, the Brazilian subsidiary of the Company had 295 cases in litigation in ordinary courts, 8 of which (QIX Skateboards Industria e Comercio Ltda., Editora COC Empreendimentos Culturais Ltda., Vintage Denim Ltda., Fallms Distribuiçăo de Fitas Ltda., 100% Nacional Distribuidora de Fitas Ltda., Xuxa Promoções e Produções Artísticas Ltda., Praetorium Instituto de Ensino, Pesquisas e Atividades de Extensăo e Direito Ltda., Botelho Indústria e Distribuição Cinematográfica Ltda. and SERASA S.A) were related to alleged intellectual property infringement.

During the three-month period ended March 31, 2010, the Brazilian subsidiary of the Company was sued in 33 cases in ordinary courts. In most of these cases the plaintiffs asserted that the Company was responsible for fraud committed against them, or responsible for damages suffered when purchasing an item on the Company’s website, when using MercadoPago, or when the Company invoiced them.

MercadoLibre, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)

Commitments and Contingencies (Continued)

Litigation and Other Legal Matters (Continued)

As of March 31, 2010, 315 legal actions were pending in the Brazilian ordinary courts 8 of which (QIX Skateboards Industria e Comercio Ltda., Editora COC Empreendimentos Culturais Ltda., Vintage Denim Ltda., Fallms Distribuiçăo de Fitas Ltda., 100% Nacional Distribuidora de Fitas Ltda., Xuxa Promoções e Produções Artísticas Ltda., Praetorium Instituto de Ensino, Pesquisas e Atividades de Extensăo e Direito Ltda., and Botelho Indústria e Distribuição Cinematográfica Ltda. and SERASA S.A) were related to alleged intellectual property infringement. In addition, during the three-month period ended on March 31, 2010, the Brazilian subsidiary of the Company received approximately 449 summons of legal actions filed in Brazilian consumer courts, where a lawyer is not required to file or pursue a claim. In most of the cases, the plaintiffs asserted that the Company was responsible for fraud committed against them, or responsible for damages suffered when purchasing an item on the Company’s website, when using MercadoPago, or when the Company invoiced them. As of March 31, 2010, there were more than 1,830 cases still pending in Brazilian courts.

Other third parties have from time to time claimed, and others may claim in the future, that the Company was responsible for fraud committed against them, or that the Company has infringed their intellectual property rights. The underlying laws with respect to the potential liability of online intermediaries like the Company are unclear in the jurisdictions where the Company operates. Management believes that additional lawsuits alleging that the Company has violated copyright or trademark laws will be filed against the Company in the future.

Intellectual property claims, whether meritorious or not, are time consuming and costly to resolve, could require expensive changes in the Company’s methods of doing business, or could require the Company to enter into costly royalty or licensing agreements. The Company may be subject to patent disputes, and be subject to patent infringement claims as the Company’s services expand in scope and complexity. In particular, the Company may face additional patent infringement claims involving various aspects of the Payments businesses.

From time to time, the Company is involved in other disputes or regulatory inquiries that arise in the ordinary course of business. The number and significance of these disputes and inquiries are increasing as the Company’s business expands and the Company grows larger.

Any claims or regulatory actions against the Company, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time, and result in the diversion of significant operational resources.

On June 12, 2007, a state prosecutor of the State of São Paulo, Brazil presented a claim against the Company’s Brazilian subsidiary. The state prosecutor alleges that the Company’s Brazilian subsidiary should be held joint and severally liable for any fraud committed by sellers on the Brazilian version of its website, or responsible for damages suffered by buyers when purchasing an item on the Brazilian version of the MercadoLibre website. The Company was summoned on December 12, 2007 and presented its defense on January 4, 2008. On June 26, 2009, the Judge sentenced in favor of the State of São Paulo Public Prosecutor in all his claims. On June 29, 2009 a recourse to the lower court was presented by the Company. On September 29, 2009 the Company presented an appeal and requested to suspend effects of the sentence issued by the lower court until the appeal is decided. On November 2009, the suspension of the effects of the ruling was granted, however the appeal is still pending.

MercadoLibre, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)

Commitments and Contingencies (Continued)

Litigation after March 31, 2010

After March 31, 2010 and up to the date of issuance of these consolidated financial statements, the Company was sued in 10 cases in ordinary courts (9 of which correspond to the Brazilian subsidiary) and 180 new cases in consumer courts (159 of which correspond to the Brazilian subsidiary). No loss amount has been accrued in connection with these actions because a loss is not considered probable.

Other contingencies

As of March 31, 2010, the Company had reserved $94,927 against some tax contingencies (other than income tax), identified in some of its subsidiaries.

Other Commitments

On June 19, 2008, the Company’s Argentine subsidiary agreed to participate in a real estate trust for the construction of an office building located in the City of Buenos Aires, buying 5,340 square meters divided into 5 floors and 70 parking spaces, where the Company plans to move its headquarters and Argentine operation offices. As of March 31, 2010, the Argentine subsidiary has invested $8,423,542 in the aforementioned trust and is expected to invest an additional $808,752 in the following 2 months. As this investment represents an undivided interest for more than 20% of the total amount of the real estate trust, it is accounted for under the equity method and it is classified as Long-Term Investments in the balance sheet.

Long Term Retention Plan

On August 8, 2008, the Board of Directors approved an employee retention program that will be payable 50% in cash and 50% in shares, in addition to the annual salary and bonus of certain executives. Payments will be made in the first quarter on annual basis according to the following vesting schedule:

•

Year 1 (2008): 17%

•

Year 2 (2009): 22%

•

Year 3 (2010): 27%

•

Year 4 (2011): 34%

In March 2009, the abovementioned 17% related to Year 1 was paid. In April 2010, the Company paid the 22% related to the Year 2.

In addition, the 2008 Long Term Retention Plan (the “2008 LTRP”) has a performance condition which has been achieved at the date of these financial statements and also requires the employee to stay in the Company at the payment date. The compensation cost is recognized in accordance with the graded-vesting attribution method and is accrued up to each payment date.

MercadoLibre, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)

Long Term Retention Plan (Continued)

The total compensation cost of the 2008 LTRP amounts to approximately $1.8 million including cash and shares. The 21,591 shares granted were valued at the grant-date fair market value of $36.8 per share. For the three-month period ended March 31, 2010, the related accrued compensation expense was $91,652 corresponding $34,376 to the share portion of the award credited to Additional Paid-in Capital and $57,276 to the cash portion included in the Balance Sheet as Social security payable.

During the three-month periods ended March 31, 2009, the related accrued compensation expense was $135,820 corresponding $51,356 to the share portion of the award credited to Additional Paid-in Capital and $84,424 to the cash portion included in the Balance Sheet as Social security payable.

The following table summarizes the number of shares for each of the following groups:


	March 31,		December 31,
Number of Shares	2010		2009

Granted		21,591		21,591
Non-vested at the beginning of the period / year		21,591		21,591
Non-vested at the end of the period / year		10,599		15,015
Forfeited		3,411		2,976
Vested and paid to the employees		7,581		3,600
Outstanding		10,599		15,015

The following table details the aggregate intrinsic value and weight-average remaining contractual life of the shares at March 31, 2010:


	March 31, 2010
			Weighted-average
	Aggregate		remaining
	Intrinsic		contractual
	value		life (years)

Shares outstanding		510,997		1.56
Shares paid		191,920		—

The aggregate intrinsic value of the shares paid on March 13, 2009 and March 31, 2010 under the 2008 LTRP amounts to $61,740 and $191,920 respectively, at each date.

On June 10, 2009, the Compensation Committee of the Board of Directors approved the 2009 employee retention program (“the 2009 LTRP”). The award under the 2009 LTRP will be fully payable in cash in addition to the annual salary and bonus of each employee.

MercadoLibre, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)

Long Term Retention Plan (Continued)

The 2009 LTRP will be paid in 8 equal annual quotas (12.5% each) commencing on March 31, 2010. Each quota will be calculated as follows:

•

6.25% of the amount will be calculated in nominal terms (“the nominal basis share”),

•

6.25% will be adjusted by multiplying the nominal amount by the average closing stock price for the last 60 trading days of the year previous to the payment date and divided by the average closing stock price for the last 60 trading days of 2008 which is $13.81 (“the variable share”).

As of June 10, 2009, the grant date, the total compensation cost of the 2009 LTRP amounts to approximately $3.5 million including the nominal and variable basis cost and the average grant-date fair market value was $22.1 per share.

In addition, the 2009 LTRP has performance conditions to be achieved at December 31, 2009 and also requires the employee to stay in the Company at the payment date. The compensation cost related to the nominal basis share is recognized in straight line basis using the equal annual accrual method. The compensation cost related to the variable share is recognized in accordance with the graded-vesting attribution method and is accrued up to each payment date.

On July 15, 2009, the Board of Directors, upon the recommendation of the compensation committee of the Board, adopted the 2009 Long Term Retention Plan (the “2009 LTRP”) in the form as described above.

As of March 31, 2010, the total compensation cost of the 2009 LTRP amounts to approximately $5.5 million and the related accrued compensation expense for the three-month period ended March 31, 2010 was $328,012.

The following table details the aggregate intrinsic value and weight-average remaining contractual life of the shares at March 31, 2010:


	March 31, 2010
			Weighted-average
	Aggregate		remaining
	Intrinsic		contractual
	value		life (years)

Outstanding		3,680,387		4.00

MercadoLibre, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)

10.

Share Repurchase Plan

On November 14, 2008, the Company announced that its board of directors approved a share repurchase plan authorizing the Company to repurchase, from available capital, up to $20 million of the Company’s outstanding common stock from time to time through November 13, 2009. The timing and amount of any share repurchase under the share repurchase plan will be determined by management of the Company based on market conditions and other considerations, and repurchases may be effected in the open market, through derivative, accelerated repurchase and other privately negotiated transactions and through plans designed to comply with Rules 10b-18 or 10b5-1(c) under the Securities Exchange Act of 1934, as amended. The share repurchase plan does not require the Company to acquire any specific number of shares and may be temporarily or permanently suspended or discontinued by the Company at any time. A committee of the board of directors will reevaluate the operation of the plan each fiscal quarter.

In November 2008, the Company has repurchased in the open market 249,700 shares for a total amount of $2,590,734. The repurchased shares were accounted for as treasury stock and subsequently retired.

The Company charged the excess of the cost of the treasury stock over its par value entirely to additional paid-in capital because it has accumulated deficit instead of retained earnings.

The direct costs incurred to acquire treasury stock have been added to the reduction of additional paid in capital.

Additionally, during November and December 2008, the Company sold written put options of its own shares as part of the Share Repurchase Plan, those put options were not exercised at the expiration date and for that reason, during the first quarter of 2009, the Company recognized a gain of $185,000.

The Company accounted for its written put options as derivative instruments and measured them initially and subsequently at fair value. The liabilities associated with these derivative instruments were recorded at fair value in current liabilities in the consolidated balance sheet.

During March 2009, the Company sold written put options of its own shares. The following table summarizes the written put option transactions made in the first quarter of 2009:


	Total

Number of Shares		226,000
Premium		302,997
Average Price		1.34
Commissions and other fees		(6,782	)
Cash received		296,215

MercadoLibre, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)

10.

Share Repurchase Plan (Continued)

As of March 31, 2009, the Company held 2,260 written put option contracts for 100 shares each one which can be exercised by the counterparties up to June 20, 2009. The strike price is $10 for 1,100 written put option contracts and $12.5 for the remaining put options. If all options were exercised, the Company would pay $2,550,000.

As of March 31, 2009 the written put options fair value amounted to $130,100.

As of March 31, 2009, those derivative financial instruments were not accounted for as hedges and, therefore, $172,897 —gain— representing the change in the fair value of these instruments were recorded in the income statement as interest income and other financial gains.

These put options were not exercised at the expiration date and for that reason, during the first half of 2009, the Company recognized a gain of $302,997.

No written put option transactions were made during the three-month period ended March 31, 2010. As of March 31, 2010 there is no written put options transaction outstanding.

Those derivative financial instruments were not accounted for as hedges and, therefore, the change in the fair value of these instruments was recorded in the income statement as interest income and other financial gains.

* * * *


Item 2 —		Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement Regarding Forward-Looking Statements

Certain statements regarding our future performance made in this report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements may relate to such matters as:

	•		our expectations regarding the continued growth of online commerce and Internet usage in Latin America;

	•		our ability to expand our operations and adapt to rapidly changing technologies;

	•		government regulation;

	•		litigation and legal liability;

	•		systems interruptions or failures;

	•		our ability to attract and retain qualified personnel;

	•		consumer trends;

	•		security breaches and illegal uses of our services;

	•		competition;

	•		reliance on third-party service providers;

	•		enforcement of intellectual property rights;

	•		our ability to attract new customers, retain existing customers and increase revenues;

	•		seasonal fluctuations; and

	•		political, social and economic conditions in Latin America in general, and Venezuela and Argentina in particular, including Venezuela’s status as a highly inflationary economy.

These statements are based on currently available information and our current assumptions, expectations and projections about future events. While we believe that our assumptions, expectations and projections are reasonable in view of the currently available information, you are cautioned not to place undue reliance on our forward-looking statements. These statements are not guarantees of future performance. They are subject to future events, risks and uncertainties — many of which are beyond our control — as well as potentially inaccurate assumptions that could cause actual results to differ materially from our expectations and projections. Some of the material risks and uncertainties that could cause actual results to differ materially from our expectations and projections are described in “Item 1A — Risk Factors” in Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 filed with the Securities and Exchange Commission on February 26, 2010. You should read that information in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2 of Part I of this report and our unaudited condensed consolidated financial statements and related notes in Item 1 of Part I of this report. We note such information for investors as permitted by the Private Securities Litigation Reform Act of 1995. There also may be other factors that we cannot anticipate or that are not described in this report, generally because we do not perceive them to be material that could cause results to differ materially from our expectations.

Forward-looking statements speak only as of the date they are made, and we do not undertake to update these forward-looking statements except as may be required by law. You are advised, however, to review any further disclosures we make on related subjects in our periodic filings with the Securities and Exchange Commission.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The discussion and analysis of our financial condition and results of operations has been organized to present the following:

	•		a brief overview of our company;

	•		a discussion of our principal trends and results of operations for the quarters ended March 31, 2010 and 2009;

	•		a review of our financial presentation and accounting policies, including our critical accounting policies;

	•		a discussion of the principal factors that influence our results of operations, financial condition and liquidity;

	•		a discussion of our liquidity and capital resources, capital expenditures and contractual obligations; and

	•		a discussion of the market risks that we face.

Overview

MercadoLibre, Inc. (together with its subsidiaries “us”, “we”, “our” or the “company”) hosts the largest online commerce platform in Latin America focused on enabling e-commerce and its related services. Our services are designed to provide our users with mechanisms to buy, sell, pay for and collect on e-commerce transactions effectively and efficiently. With a population of over 550 million people and a region with one of the fastest-growing Internet penetration rates, we provide buyers and sellers with a robust online commerce environment that fosters the development of a large and growing e-commerce community. We offer a technological and commercial solution that addresses the distinctive cultural and geographic challenges of operating an online commerce platform in Latin America.

We offer our users two principal services:

	•		The MercadoLibre Marketplace: The MercadoLibre Marketplace, which we sometimes refer to as our Marketplace business, is a fully-automated, topically-arranged and user-friendly online commerce service. This service permits both businesses and individuals to list items and conduct their sales and purchases online in either a fixed-price or auction-based format. Additionally, through online classified listings, our registered users can list and purchase motor vehicles, vessels, aircraft, real estate and services. Users and advertisers are also able to place, display and/or text advertisements on our web pages in order to promote their brands and offerings. Any Internet user can browse through the various products and services that are listed on our web site and register with MercadoLibre to list, bid for and purchase items and services. As a further enhancement to the MercadoLibre Marketplace, in 2009 we launched our MercadoClics program to allow businesses to promote their products and services on the web. MercadoClics offers advertisers a cost efficient and automated platform with which to acquire traffic from us. Advertisers purchase, on a cost per clicks basis, advertising space that appear alongside product search results for specific categories and other pages. These advertising placements are clearly differentiated from product search results and direct traffic both on or off-platform to the advertisers destination of choice.

	•		The MercadoPago online Payments solution: To complement the MercadoLibre Marketplace, we developed MercadoPago, an integrated online Payments solution, which we sometimes refer to as our Payments business. MercadoPago is designed to facilitate transactions both on and off the MercadoLibre Marketplace by providing a mechanism that allows our users to securely, easily and promptly send and receive Payments online.

We operate in six reporting segments, five of which related to our Marketplace business and the remainder which relates to our Payment business. Within our Marketplace business, we separately report our operations in each of Brazil, Argentina, Mexico, Venezuela and other countries (Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Panama, Peru, Portugal and Uruguay). The operations of our Payments business, which is available in each of Brazil, Argentina, Mexico, Chile, Colombia, and Venezuela, are reported in one segment. In addition, we operate a real estate classifieds platform that covers some areas of Florida in the United States, the operations of which are included in our Marketplace segment for Other Countries.

Principal trends in Results of Operations

Growth in net revenue over comparable periods from year to year

Since our inception, we have consistently generated revenue growth from the MercadoLibre Marketplace and from MercadoPago, driven by the growth of our key operational metrics. Our net revenues for the three-month period ended March 31, 2010, as compared to the same period for 2009, increased by 27.1% and 103.2% for the MercadoLibre Marketplace and MercadoPago Payments platform, respectively. We believe that the growth in net revenues should continue in the future. However, despite this positive historical trend, current weak global macro-economic conditions, coupled with devaluations of certain local currencies in Latin America versus the U.S. dollar, particularly in Venezuela and high interest rates, could lead to declining year-to-year net revenues, particularly as measured in U.S. dollars.

Increased diversification of revenues

Revenues from our Payments business have been increasing at a faster rate than our revenues from our Marketplace business, and we anticipate this trend to continue in the long term. For the three-month periods ended March 31, 2010 and 2009, Payments represented 28.2% and 19.7% of net revenues, respectively. However, this trend is sensitive to macroeconomic fluctuations, including interest rate fluctuations for consumer credit. Accordingly, this revenue diversification trend may be interrupted during economic periods where there are higher costs of lending.

Gross profit margins

Our business has generated sustained high gross profit margins over time, defined as total net revenues minus total cost of net revenues, as a percentage of net revenues. Historically, gains in gross profit margins have been mainly attributable to increased economies of scale in customer service, Internet Service Provider (“ISP”) connectivity and site operations, improved economic terms obtained from payment processors as well as increases in interest fees that we charge our MercadoPago buyers.

Our gross profit margin was 78.5% for the three-month period ended March 31, 2010 as compared to 79.5% for the same period in 2009, mainly as a result of faster growth in our Payments business as compared to our Marketplace business. Our Payments business has a lower gross profit margin than our Marketplace business. In the future, gross profit margins could continue to decline if the cost of net revenues as a percentage of net revenues increases as our Payments business grows faster than our Marketplace business, if we cannot sustain the economies of scale that we have achieved, or if we decrease the interest fees charged.

Improving Operating income margins

We have generated and expect to continue generating economies of scale in operating expenses. For the three-month period ended March 31, 2010, our operating income margins, defined as income from operations as a percentage of net revenues, increased from 20.9% in the first quarter of 2009 to 33.8% in the first quarter of 2010 driven by the impact of these economies of scale.

For the three-month period ended March 31, 2010, our operating expense margins, defined as operating expenses as a percentage of net revenues, decreased from 58.5% during the first quarter in 2009 to 44.7% in the first quarter of 2010. We anticipate, however, that as we continue to invest in product development, sales and marketing and human resources in order to promote our services and capture the long term business opportunity offered by the Internet in Latin America, it is increasingly difficult to sustain growth in operating income margins, and at some point in the future we could experience decreasing operating income margins.

Growth in Net Income

We have generated growth in our net income as a consequence of the abovementioned trends. For the three-month period ended March 31, 2010 and 2009, net income was $9.6 million and $5.4 million, respectively, an increase of $4.2 million or 78.5% from the 2009 first quarter. However, as mentioned above, if any of these trends were to revert, our net income growth could be affected, or could even become negative on a year-to-year basis.

Description of line items

Net revenues

We recognize revenues in each of our reporting segments. The MercadoLibre Marketplace segments include Brazil, Argentina, Mexico, Venezuela and other countries (Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Panama, Peru, Portugal and Uruguay). The MercadoPago segment includes our regional Payments platform consisting of our MercadoPago business.

Historically, we have generated revenues from the MercadoLibre Marketplace segments from:

	•		listing fees;

	•		optional feature fees;

	•		final value fees; and

	•		online advertising fees.

During the first quarter of 2009, we modified our pricing structure by replacing our previous listing fees and optional feature fees with consolidated up-front fees which bundle these features. We now offer three types of up-front fees for three different combinations of placement and features. Up-front fees are charged at the time the listing is uploaded onto our platform and are not subject to successful sale of the items listed. Following this fee structure modification, revenues for the MercadoLibre Marketplace segments are now generated by:

	•		up front fees;

	•		final value fees; and

	•		online advertising fees.

The MercadoLibre Marketplace business generated 71.8% and 80.3% of our net revenues for the three-month periods ended March 31, 2010 and 2009, respectively. The following table sets forth the percentage of consolidated net revenues by country from our MercadoLibre Marketplace for the three-month periods ended March 31, 2010 and 2009:


	Three Months Ended
	March 31,
	2010			2009
	(in millions, except percentages)

Percentage of total MercadoLibre
Marketplace net revenues
Brazil		47.5	%		38.1	%
Argentina		20.4	%		19.1	%
México		12.2	%		11.1	%
Venezuela		10.1	%		24.5	%
Other Countries		9.8	%		7.2	%

Total Net Revenues		100.0	%		100.0	%

The following table sets forth the percentage of consolidated net revenues by type of business for the three-month periods ended March 31, 2010 and 2009:


	Three Months Ended
	March 31,
	2010			2009
Net Revenues breakdown by businesses
As a percentage of total net revenues:
Marketplaces		71.8	%		80.3	%
Payments		28.2	%		19.7	%

Revenues generated by our Payments business are attributable to commissions charged to buyers and sellers for the use of MercadoPago. We generate revenues from our MercadoPago Payments segment by charging users a commission and a financial charge when the user elects to pay in installments, which we recognize, in both cases, once the transaction is completed. During the three-month period ended March 31, 2010, commission and installment-related financial charges averaged 5.9% and 4.6%, respectively, of the payment amounts made by the user through MercadoPago.

We have a highly fragmented customer revenue base given the large numbers of sellers and buyers who use our platforms. For the three-month periods ended March 31, 2010 and 2009, no single customer accounted for more than 1.0% of our net revenues in our MercadoLibre Marketplace business or our MercadoPago Payments business. Our MercadoLibre Marketplace is available in thirteen countries (Argentina, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Mexico, Panama, Peru, Portugal, Uruguay and Venezuela), and MercadoPago is available in six countries (Argentina, Brazil, Chile, Colombia, Mexico and Venezuela). The functional currency for each country’s operations is the local currency, except for Venezuela whose functional currency is the US dollar due to Venezuela’s status as a highly inflationary economy. See “Critical accounting policies and estimates — Foreign Currency Translation” included in this report. Therefore, our net revenues are generated in multiple foreign currencies and then translated into U.S. dollars at the average monthly exchange rate.

Our subsidiaries in Brazil, Argentina, Venezuela and Colombia are subject to certain taxes on revenues which are classified as costs of net revenues. These taxes represented 6.5% of net revenues for the three-month period ended March 31, 2010.

Cost of net revenues

Cost of net revenues primarily represents bank and credit card processing charges for transactions and fees paid with credit cards and other payment methods, certain taxes on revenues, compensation for customer support personnel, ISP connectivity charges, depreciation and amortization and hosting and site operation fees.

Product and technology development expenses

Our product and technology development related expenses consist primarily of depreciation and amortization costs related to product and technology development, compensation for our engineering and web-development staff, telecommunications costs and Payments to third-party suppliers who provide technology maintenance services to our company.

Sales and marketing expenses

Our sales and marketing expenses consist primarily of marketing costs for our platforms through online and offline advertising, bad debt charges, the salaries of employees involved in these activities, public relations costs, marketing activities for our users and depreciation and amortization costs.

We carry out the vast majority of our marketing efforts on the Internet. In that context, we enter in agreements with portals, search engines, social networks, ad networks and other sites in order to attract Internet users to the MercadoLibre Marketplace and convert them into confirmed registered users and active traders on our platform. Additionally, we invest a portion of our marketing budget on cable television advertising in order to improve our brand awareness and to complement our online efforts.

We also work intensively on attracting, developing and growing our seller community through our supply efforts. We have dedicated professionals in most of our operations that work with sellers, through trade show participation, seminars and meetings to provide them with important tools and skills to become effective sellers on our platform.

General and administrative expenses

Our general and administrative expenses consist primarily of salaries for management and administrative staff, compensation for outside directors, long term retention plan compensation, expenses for legal, accounting and other professional services, insurance expenses, office space rental expenses, travel and business expenses, as well as depreciation and amortization costs. General and administrative expenses include the costs of the following areas of our company: general management, finance, administration, accounting, legal and human resources.

Other income (expenses)

Other income (expenses) consists of interest expense (interest expense relating to the working capital requirements for our MercadoPago operations are recorded as interest expense and not as cost of net revenues) and other financial charges, interest income derived primarily from our investments and cash equivalents, foreign currency gains or losses, the effect of changes in the fair value of derivative instruments, and other non-operating results.

Income and asset tax

We are subject to federal and state taxes in the United States, as well as foreign taxes in the multiple jurisdictions where we operate. Our tax obligations consist of current and deferred income taxes and asset taxes incurred in these jurisdictions. We account for income taxes following the liability method of accounting. Therefore, our income tax expense consists of taxes currently payable, if any (given that in certain jurisdictions we still have net operating loss carry-forwards), plus the change during the period in our deferred tax assets and liabilities.

Critical accounting policies and estimates

The preparation of our unaudited condensed consolidated financial statements and related notes requires us to make judgments, estimates and assumptions that affect our reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We have based our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our management has discussed the development, selection and disclosure of these estimates with our audit committee and board of directors. Actual results may differ from these estimates under different assumptions or conditions.

An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact our condensed consolidated financial statements. We believe that the following critical accounting policies reflect the more significant estimates and assumptions used in the preparation of our condensed consolidated financial statements. You should read the following descriptions of critical accounting policies, judgments and estimates in conjunction with our unaudited condensed consolidated financial statements, the notes there to and other disclosures included in this report.

Foreign Currency Translation

Historically, all of our foreign operations have used the local currency as their functional currency. Accordingly, these foreign subsidiaries translate assets and liabilities from their local currencies to U.S. dollars using year end exchange rates while income and expense accounts are translated at the average rates in effect during the year. The resulting translation adjustment is recorded as part of other comprehensive income (loss), a component of shareholders’ equity. Gains and losses resulting from transactions denominated in non-functional currencies are recognized in earnings. Net foreign currency exchange losses or gains are included in the consolidated statements of income under the caption “Foreign currency gain / (loss)”.

Until September 30, 2009, our Venezuelan subsidiaries assets, liabilities, income and expenses were translated at the official exchange rate of 2.15 “Bolivares Fuertes” per U.S. dollar.

In the fourth quarter of 2009, we began to use the parallel exchange rate rather than the official exchange rate to translate our Venezuelan financial statements. The following facts and circumstances have been considered in our analysis of the applicable exchange rate:

	•		At the date we changed the translation exchange rate, we did not have a history of having obtained dividends remittances at the official exchange rate (and we do not have at the date of this report),

	•		The industry in which we operate may not influence our ability to access to the official exchange rate,

	•		The CADIVI volume of approvals of the use of the Official Rate was down 50% on a year-to-year basis as of July 2009.

	•		CADIVI has not only delayed approvals but also removed many items from priority lists, further delaying approvals (current priorities appear to be food and medicine) and causing delays in the repatriation of dividends for many companies.

Consequently, in the fourth quarter of 2009, we translated our Venezuelan assets, liabilities, income and expense accounts using the parallel exchange rate.

In accordance with US GAAP, we have classified our Venezuelan operations as highly inflationary as of January 1, 2010 and have accordingly used the US dollar to be the functional currency for purposes of our financial statements. Therefore, no translation effect was accounted for in other comprehensive income during the three-month period ended March 31, 2010 related to our Venezuelan operations.

Impairment of long-lived assets and goodwill

We review long-lived assets for impairments whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future net cash flows expected to be generated by the asset. If such assets are considered to be impaired on this basis, the impairment loss to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.

Goodwill and certain indefinite live trademarks are reviewed at least annually for impairment. Impairment of goodwill and certain trademarks are tested at the reporting unit level (considering each segment of the Company as a reporting unit) by comparing the reporting unit’s carrying amount, including goodwill and certain trademarks, to the fair value of the reporting unit. The fair values of the reporting units are estimated using a combination of the income or discounted cash flows approach and the market approach, which utilizes comparable companies’ data. If the carrying amount of the reporting unit exceeds its fair value, goodwill or indefinite useful life intangible assets are considered impaired and a second step is performed to measure the amount of impairment loss, if any. No impairments were recognized during the reporting periods and management’s assessment of each reporting unit’s fair value materially exceeds its carrying value.

We believe that the accounting estimate related to impairment of long lived assets and goodwill is critical since it is highly susceptible to change from period to period because: (i) it requires management to make assumptions about gross merchandise volume growth, future interest rates, sales and costs; and (ii) the impact that recognizing an impairment would have on the assets reported on our balance sheet as well as on our net income would be material. Management’s assumptions about future sales and future costs require significant judgment.

Provision for doubtful accounts

We are exposed to losses due to uncollectible accounts and credits to sellers. Provisions for these items represent our estimate of future losses based on our historical experience. Historically, our actual losses have been consistent with our charges. However, future changes in trends could have a material impact on our future consolidated statements of income and cash flows.

We believe that the accounting estimate related to provision for doubtful accounts is a critical accounting estimate because it requires management to make assumptions about future collections and credit analysis. Our management’s assumptions about future collections require significant judgment.

Legal contingencies

In connection with certain pending litigation and other claims, we have estimated the range of probable loss and provided for such losses through charges to our condensed consolidated statement of income. These estimates are based on our assessment of the facts and circumstances at each balance sheet date and are subject to change based upon new information and future events.

From time to time, we are involved in disputes that arise in the ordinary course of business. We are currently involved in certain legal proceedings as described in “Legal Proceedings” in Item 1 of Part II of this report and in Note 8 to our condensed consolidated financial statements. We believe that we have meritorious defenses to the claims against us, and we will defend ourselves vigorously. However, even if successful, our defense could be costly and could divert management’s time. If the plaintiffs were to prevail on certain claims, we might be forced to pay damages or modify our business practices. Any of these consequences could materially harm our business and could have a material adverse impact on our financial position, results of operations or cash flows.

Income taxes

We are required to recognize a provision for income taxes based upon taxable income and temporary differences between the book and tax bases of our assets and liabilities for each of the tax jurisdictions in which we operate. This process requires a calculation of taxes payable under currently enacted tax laws in each jurisdiction and an analysis of temporary differences between the book and tax bases of our assets and liabilities, including various accruals, allowances, depreciation and amortization. The tax effect of these temporary differences and the estimated tax benefit from our tax net operating losses are reported as deferred tax assets and liabilities in our condensed consolidated balance sheet. We also assess the likelihood that our net deferred tax assets will be realized from future taxable income. To the extent we believe that it is more likely than not that some portion or all of deferred tax asset will not be realized, we establish a valuation allowance. At March 31, 2010, we had a valuation allowance on certain foreign net operating losses based on our assessment that it is more likely than not that the deferred tax asset will not be realized. To the extent we establish a valuation allowance or change the allowance in a period, we reflect the change with a corresponding increase or decrease in our “Income/asset tax expense” line in our condensed consolidated statement of income.

Results of operations for the three-month period ended March 31, 2010 compared to three-month period ended March 31, 2009.

The selected financial data for the three-month periods ended March 31, 2010 and 2009 have been derived from our unaudited condensed consolidated financial statements included in Item 1 of Part I of this report. These statements include all normal recurring adjustments that management believes are necessary to fairly state our financial position, results of operations and cash flows. Results of operations for the three-month period ended March 31, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010 or for any other period.

Statement of income data


	Three Months Ended March 31,
(In millions)	2010			2009

Net revenues	$	45.9		$	32.3
Cost of net revenues		(9.9	)		(6.6	)

Gross profit		36.0			25.7

Operating expenses:

Product and technology development		(3.2	)		(2.6	)
Sales and marketing		(11.1	)		(10.2	)
General and administrative		(6.2	)		(6.1	)

Total operating expenses		(20.5	)		(18.9	)

Income from operations		15.5			6.8


Other income (expenses):
Interest income and other financial gains		0.8			0.9
Interest expense and other financial charges		(3.0	)		(2.5	)
Foreign currency gain		0.4			1.9

Net income before income / asset tax expense		13.7			7.1


Income / asset tax expense		(4.1	)		(1.7	)

Net income	$	9.6		$	5.4

Other Data


	Three Months Ended March 31,
(In millions)	2010		2009

Number of confirmed registered users at end of the period ¹		44.9		35.7
Number of confirmed new registered users during the period ²		2.3		1.9
Gross merchandise volume ³		731.6		520.9
Number of items sold ⁴		8.3		6.0
Total payment volume ⁵		123.8		53.2
Total payment transactions ⁶		1.1		0.5
Capital expenditures		1.4		2.6
Depreciation and Amortization		0.9		1.0


1-		Measure of the cumulative number of users who have registered on the MercadoLibre Marketplace and confirmed their registration.

2-		Measure of the number of new users who have registered on the MercadoLibre Marketplace and confirmed their registration.

3-		Measure of the total U.S. dollar sum of all transactions completed through the MercadoLibre Marketplace, excluding motor vehicles, vessels, aircraft and real estate.

4-		Measure of the number of items that were sold/purchased through the MercadoLibre Marketplace.

5-		Measure of the total U.S. dollar sum of all transactions paid for using MercadoPago.

6-		Measure of the number of all transactions paid for using MercadoPago.

Net revenues


	Three Months Ended				Change from 2009
	March 31,				to 2010
	2010		2009		in Dollars		in %
	(in millions, except percentages)
							*()**
Net Revenues by Business:
Marketplaces	$	33.0	$	25.9	$	7.1		27.1	%
Payments		12.9		6.4		6.5		103.2	%

Total Net Revenues	$	45.9	$	32.3	$	13.6		42.1	%


(*)		Percentages have been calculated using the whole figures, instead on rounding figures.

Measured in local currencies, net revenues grew 45.0% in the three-month period ended March 31, 2010, compared to the same period a year earlier. The local currency revenue growth was calculated by using the average monthly exchange rates for each month during 2009 and applying them to the corresponding months in 2010, so as to calculate what our financial results would have been had exchange rates remained stable from one year to the next.

Growth in MercadoLibre Marketplace revenues from the first quarter of 2009 to the first quarter of 2010 resulted principally from a 40.4% increase in the gross merchandise volume transacted through our platform from the first quarter of 2009 to the first quarter of 2010. This was partially offset by a decrease in US dollar revenues provided by our Venezuelan subsidiaries as a consequence of the re-measurement of our revenues at the monthly average parallel exchange rate of 6.52 Bolivar Fuerte per US dollar during the first quarter of 2010. During the first quarter of 2009 we translated the “Bolivares Fuertes” to U.S. dollar at the official exchange rate of 2.15 (See “Critical accounting policies and estimates — Foreign currency translation” for more detail). In addition the growth in Marketplace revenues was partially offset by a decrease in our Marketplace take rate, defined as Marketplace revenues as a percentage of gross merchandise volume, from 5.0% for the three-month period ended March 31, 2009 to 4.5% for the three-month period ended March 31, 2010. The decrease in take rate was principally due to a larger growth

in final value fee listings, which have a marginally lower take rate, as compared to up-front fee listings and a larger growth in our smaller country operations that have a lower take rate as compared to our bigger company operations. The growth in MercadoPago revenues for the three-month period ended March 31, 2010 resulted principally from a 132.9% increase in the total Payments volume completed on our MercadoPago Payments platform partially offset by a decrease in our Payments take rate, defined as Payments revenues as a percentage of total Payment volume, from 12.0% in the first quarter of 2009 to 10.5% in the first quarter of 2010 (see “Description of Line items: Net Revenue” section for an explanation of how revenues are recorded for MercadoPago installments). The decrease in our MercadoPago take rate was principally due to a decrease in installment-related financial charges that we charge to users mainly as a consequence of a general decrease in interest rates.

The following table summarizes the changes in net revenues by segment for the three-month periods ended March 31, 2010 and 2009:


	Three Months Ended				Change from 2009
	March 31,				to 2010
	2010		2009		in Dollars			in %
	(in millions, except percentages)
								*()**
Net Revenues by Segment:
Brazil Marketplace	$	15.7	$	9.9	$	5.8			58.8	%
Argentina Marketplace		6.7		4.9		1.8			35.4	%
Mexico Marketplace		4.0		2.9		1.1			40.0	%
Venezuela Marketplace		3.3		6.3		(3.0	)		-47.7	%
Others Marketplace		3.2		1.9		1.3			72.9	%
Payments		13.0		6.4		6.6			103.2	%

Total Net Revenues	$	45.9	$	32.3	$	13.6			42.1	%


(*)		Percentages have been calculated using the whole figures, instead on rounding figures.

On a segment basis, our net revenues for the three-month period ended March 31, 2010 as compared to three-month period ended March 31, 2009, increased across all segments except for the Venezuelan Marketplace which, measured in US dollars, decreased 47.7%. The decrease in net revenues for this Venezuelan segment is attributable to the re-measurement of our revenues at the monthly average parallel exchange rate of 6.52 “Bolivares Fuertes” per U.S. dollar as compared to the first quarter of 2009 where the revenues were translated at the official exchange rate of 2.15 “Bolivares Fuertes” per U.S. dollar. In local currency, our Marketplace revenues in Brazil and Venezuela grew 21.4% and 58.3% in the three-month period ended March 31, 2010 compared to the same period a year earlier.

The following table summarizes the changes in net revenues of both our Marketplace and Payments business on an aggregate basis by geography for the three-month periods ended March 31, 2010 and 2009:


	Three Months Ended				Change from 2009
	March 31,				to 2010
	2010		2009		in Dollars			in %
	(in millions, except percentages)
								*()**
Net Revenues by Geography:
Brazil	$	26.3	$	15.2	$	11.1			73.2	%
Venezuela		3.5		6.6		(3.1	)		-47.7	%
Argentina		8.3		5.4		2.9			54.8	%
México		4.5		3.2		1.3			40.8	%
Other Countries		3.3		1.9		1.4			73.2	%

Total Net Revenues	$	45.9	$	32.3	$	13.6			42.1	%


(*)		Percentages have been calculated using the whole figures, instead on rounding figures.

Based on geography, our net revenues for the three-month period ended March 31, 2010 as compared to the same period ended March 31, 2009, increased across all geographies except for the Venezuelan Marketplace as explained above.

The following table sets forth our total net revenues and the sequential quarterly growth of these net revenues for the periods described below:


	Quarter Ended
	March 31,			June 30,			September 30,			December 31,
	(in millions, except percentages)
	*()**
2010
Net Revenues	$	45.9			n/a			n/a			n/a
Percent change from prior quarter		-6	%		n/a			n/a			n/a

2009
Net Revenues	$	32.3		$	40.9		$	50.6		$	49.0
Percent change from prior quarter		-3	%		27	%		24	%		-3	%

2008
Net Revenues	$	28.8		$	34.5		$	40.3		$	33.4
Percent change from prior quarter		7	%		20	%		17	%		-17	%


(*)		Percentages have been calculated using the whole figures, instead on rounding figures.

Cost of net revenues


	Three Months Ended						Change from 2009
	March 31,						to 2010
	2010			2009			in Dollars		in %
	(in millions, except percentages)
									*()**
Total cost of net revenues	$	9.9		$	6.6		$	3.3		49.1	%

As a percentage of net revenues		21.5	%		20.5	%


(*)		Percentages have been calculated using the whole figures, instead on rounding figures.

The increase in cost of net revenues was primarily attributable to a $1.9 million increase in collection fees mainly in Brazil and Argentina as a result of a faster growth in our Payments business as compared to our Marketplace business. Our Payments business has a higher collection fee cost than our Marketplace business.

In addition, expenditures related to our in-house customer support operations increased by $0.9 million, or 57.1%, in the three-month period ended March 31, 2010 as compared to the three-month period ended March 31, 2009, primarily driven by an increase in compensation costs, recruitment, investments in improved service and initiatives to combat fraud, illegal items and fee evasion. Sales taxes on our net revenues increased by $1.3 million, or 74.1% for the three-month periods ended March 31, 2010, compared to the same periods for 2009 as a consequence of decreases in deductions we can compute with respect to our Brazilian sales taxes.

The increase in cost of net revenues was partially offset by a $0.7 million decrease in other costs mainly related to a charge attributable to the re-measurement of the US dollar denominated expenses of our Venezuelan subsidiaries in the first quarter of 2009. These expenses were re-measured at an average parallel exchange rate of 5.9 “Bolivares Fuertes” per U.S. dollar and translated at the official exchange rate (2.15 “Bolivares Fuertes” per U.S. dollar). We did not have any similar re-measurement charge in the first quarter of 2010 (See “Critical accounting policies and estimates — Foreign currency translation” for more detail).

Product and technology development


	Three Months Ended						Change from 2009
	March 31,						to 2010
	2010			2009			in Dollars		in %
	(in millions, except percentages)
									*()**
Product and technology development	$	3.2		$	2.6		$	0.6		22.5	%

As a percentage of net revenues		7.0	%		8.1	%


(*)		Percentages have been calculated using the whole figures, instead on rounding figures.

The growth in product and technology development expenses was primarily attributable to $0.5 million or a 43.4% increase in compensation costs for the three-month period ended March 31, 2010 over the same period for 2009. These additional compensation expenses were primarily related to the addition of engineers and, to a lesser extent, to increases in salaries, as we continue to invest in top quality talent to develop enhancements and new features across our platforms. We believe product development is one of our key competitive advantages and intend to continue to invest in adding engineers to meet the increasingly sophisticated product expectations of our customer base.

Sales and marketing


	Three Months Ended						Change from 2009
	March 31,						to 2010
	2010			2009			in Dollars		in %
	(in millions, except percentages)
									*()**
Sales and marketing	$	11.1		$	10.2		$	0.9		8.7	%

As a percentage of net revenues		24.2	%		31.6	%


(*)		Percentages have been calculated using the whole figures, instead on rounding figures.

For the three-month period ended March 31, 2010, the increase in sales and marketing expenses was primarily attributable to a $0.9 million increase in bad debt charges when compared to the same period in 2009. Bad debt charges for the three-month period ended March 31, 2010 represented 7.2% of net revenues versus 7.6% for the same period in 2009. In addition, compensation costs for the three-month period ended March 31, 2010 increased by $0.2 million due to increases in salaries to retain talent and $0.5 million related to trust and safety and other marketing expenses.

The increase in sales and marketing expenses for the three-month period ended March 31, 2010 was partially offset by a $0.7 million decrease in our online advertising expenses related to specific deals, as we have optimized investment allocation over the same period ended March 31, 2009. Online advertising represented 9.3% of our net revenues in the three-month period ended March 31, 2010, down from 15.3% for the same period in 2009.

General and administrative


	Three Months Ended						Change from 2009
	March 31,						to 2010
	2010			2009			in Dollars		in %
	(in millions, except percentages)
									*()**
General and administrative	$	6.2		$	6.1		$	0.1		2.2	%

As a percentage of net revenues		13.5	%		18.8	%


(*)		Percentages have been calculated using the whole figures, instead on rounding figures.

For the three-month period ended March 31, 2010, the increase in general and administrative expenses was primarily attributable to a $0.8 million increase in compensation costs related to our long term retention plans, and increases in salaries to retain talent. The increase in general and administrative expenses was partially offset by a $0.6 million decrease in other general and administrative expenses mainly related to a charge related to the re-measurement of the US dollar denominated expenses of our Venezuelan subsidiaries in the first quarter of 2009 were we re-measured at an average parallel exchange rate of 5.9 “Bolivares Fuertes” per U.S. dollar and translated at the official exchange rate (2.15 “Bolivares Fuertes” per U.S. dollar). We did not have any similar translation effect due to the change in functional currency in the first quarter of 2010 (See “Critical accounting policies and estimates — Foreign currency translation” for more detail).

Other income (expenses)


	Three Months Ended						Change from 2009
	March 31,						to 2010
	2010			2009			in Dollars		in %
	(in millions, except percentages)
									*()**
Other (expenses) income	-$	1.8		$	0.3		-$	2.1		-711.7	%

As a percentage of net revenues		-3.9	%		0.9	%


(*)		Percentages have been calculated using the whole figures, instead on rounding figures.

For the three-month period ended March 31, 2010, the increase in other expenses was primarily a result of a $1.5 million decrease in foreign currency gains, from $1.9 million for the quarter ended March 31, 2009 to $0.4 million for the same period in 2010. The decrease in foreign currency gains for the three-month period ended March 31, 2010 was primarily due to: (i) decreases in foreign exchange gains in Venezuela from the first quarter of 2009 to the same period in 2010 attributable to a change in functional currency as of January 1, 2010, (ii) decreases in foreign exchange gains in Argentina from the first quarter of 2009 to the same period in 2010 attributable to the impact of a lesser depreciation of local currency on the cash balances held by the Argentine subsidiaries in U.S. dollars during the three-month period ended March 31, 2010 as compared to the same period of the previous year, and (iii) increases in losses in Mexico due to the impact of a local currency appreciation on the cash balances held by the Mexican subsidiaries in U.S. dollars in the first quarter of 2010. These foreign currency expenses were partially offset by foreign exchange gains in Brazil attributable to the impact of the local currency depreciation on the cash balances held by the Brazilian subsidiaries in U.S. dollars. In addition, other expenses grew due to an increase in interest expense and other financial charges, from $2.5 million for the three-month period ended March 31, 2009 to $3.0 for the same period in 2010. The increase in interest expense resulted mainly from financing incurred by selling all our credit card coupons to fund working capital needs in our Payments operations in Brazil.

In addition, interest income and other financial charges decreased by $0.1 million from $0.9 million in the three-month period ended March 31, 2009 to $0.8 million in the same period of 2010. This decrease is primarily due to $0.4 million of accrued gains related to changes in the fair value of put options in the three-month period ended March 31, 2009 versus no impact in the same period of 2010, partially offset by higher interest income of our investments driven by a greater volume of investments.

Income and asset tax


	Three Months Ended						Change from 2009
	March 31,						to 2010
	2010			2009			in Dollars		in %
									*()**
Income and asset tax		4.1			1.7			2.4		144.1	%

As a percentage of net revenues		8.9	%		5.2	%


(*)		Percentages have been calculated using the whole figures, instead on rounding figures.

During the three-month period ended March 31, 2010 the income and asset tax represented 8.9% of net revenues versus 5.2% for the same period in 2009. The increase in our income and asset tax expense from the three-month period ended March 31, 2009 to the same period in 2010 was primarily a result of increases in income taxes charges in Brazil and Argentina, driven by higher taxable income period over period.

Our blended tax rate is defined as income and asset tax expense as a percentage of income before income and asset tax. Our effective income tax rate is defined as the provision for income taxes as a percentage of pre tax income. The effective income tax rate excludes the effects of the deferred income tax, and of the Mexican tax called “Impuesto Empresarial a Tasa Única” (“IETU”).

The following table summarizes the changes in our blended and effective tax rate for the three-month periods ended March 31, 2010 and 2009:


	Three Months Ended
	March 31,
	2010			2009
	(*)
Blended tax rate		29.8	%		23.7	%
Effective tax rate		41.4	%		18.0	%


(*)		Percentages have been calculated using the whole figures, instead on rounding figures.

Our blended tax rate increase from the three-month period ended March 31, 2009 to the same period in 2010 as a consequence of a decrease in our Argentine deferred tax assets related to provisions for doubtful accounts and due to a $0.6 million increase in “IETU” taxes.

Our effective tax rate increased from the three-month period ended March 31, 2009 to the same period in 2010 as a consequence of the effect of the Venezuelan change in functional currency which was considered for tax purposes a permanent difference. The effective tax rate also increased due to a growth in our Brazilian taxable income where the income tax rate is 34% as compared to other locations where we have a lower tax rate. In addition, we were impacted by a $1.5 million domestic income tax provision related to a Brazilian dividend distribution where we recorded a domestic pre-tax loss.

Liquidity and Capital Resources

Our main cash requirement historically has been working capital to fund our MercadoPago financing operation in Brazil. We also require cash for capital expenditures related to our technology infrastructure, software applications and office space.

Since our inception, we have funded our operations primarily through contributions received from our stockholders during the first two years of operations, from funds raised during our initial public offering, and from cash generated from our operations. We have funded MercadoPago by discounting credit card receivables, with loans backed with credit card receivables, by selling credit cards coupons and through cash advances derived from our MercadoLibre Marketplace business.

At March 31, 2010, our principal source of liquidity was $41.7 million of cash and cash equivalents and short-term investments and $46.4 million of long-term investments (excluding our investment in an Argentine real estate trust) provided by cash generated from operations.

The significant components of our working capital are cash and cash equivalents, short-term investments, accounts receivable, accounts payable and accrued expenses, funds receivable from and payable to MercadoPago users, and short-term debt. As long as we continue managing our Payments business by transferring credit card receivables to financial institutions in return for cash, as we have done since the last quarter of 2008, we expect that our MercadoPago business will generate cash. The cost of discounting these receivables is built in the financing fees of MercadoPago.

In the event we change the way we manage our Payments business, the working capital needs related to this business could be funded, as we did in the past, through a combination of the sale of credit card coupons to financial institutions, loans backed by credit card receivables and cash advances from our Marketplace business.

The following table presents our cash flows from operating activities, investing activities and financing activities for the three-month periods ended March 31, 2010 and 2009:


	Three Months Ended March 31,
	2010			2009
	(in millions)

Net cash provided by (used in):
Operating activities	$	11.5		$	4.9
Investing activities		(23.0	)		(5.4	)
Financing activities		(3.2	)		(0.1	)
Effect of exchange rates on cash and cash equivalents		(0.4	)		0.2

Net decrease in cash and cash equivalents	$	(15.1	)	$	(0.4	)

Net cash provided by operating activities

Cash provided by operating activities consists of net income adjusted for certain non-cash items, and the effect of changes in working capital and other activities.


	Three Months Ended				Change from 2009
	March 31,				to 2010
	2010		2009		in Dollars		in %
	(in millions, except percentages)
							*()**
Net Cash provided by:

Operating activities	$	11.5	$	4.9	$	6.6		136.0	%


(*)		Percentages have been calculated using the whole figures, instead on rounding figures.

The increase of $6.6 million in net cash provided by operating activities during the three-month period ended March 31, 2010 compared to the same period in 2009 was mainly attributable to a $4.2 million increase in net income. Additionally, net cash provided by operating activities was impacted by a $2.9 million increase in changes in account payable and accrued expenses and $2.4 decrease in changes in other assets as a consequence that in the first quarter of 2009 other assets included the Venezuelan foreign currency effect generated by the re-measurement at the parallel exchange rate and the translation at the official exchange rate versus no impact on the first quarter of 2010 (See “Critical accounting policies and estimates — Foreign currency translation” for more detail).

These increases in cash provided by operations were partially offset by a $2.4 million increase in changes in account receivables in the first quarter of 2010 versus the same period of 2009 and increases in non-cash gains such as the deferred income taxes for $0.7 million.

Net cash used in investing activities


	Three Months Ended				Change from 2009
	March 31,				to 2010
	2010		2009		in Dollars		in %
	(in millions, except percentages)
							*()**
Net Cash used in:

Investing activities	-$	23.0	-$	5.4	-$	17.6		324.0	%


(*)		Percentages have been calculated using the whole figures, instead on rounding figures.

Net cash used in investing activities in the first quarter of 2010 resulted mainly from purchases of investments for $34.4 million. Additionally, we used $1.4 million of cash in the three-month period ended March 31, 2010 to make capital expenditures related to technological equipment, software licenses and, to a lesser degree, office equipment. During the three-month period ended March 31, 2010, the increase in cash used in investment activities was partially offset by proceeds from the sale and maturity of $12.8 million of investments as part of our financial strategy.

As of March 31, 2009, net cash used in investing activities resulted primarily from purchases of investments for $33.7 million. Additionally, in the first quarter of 2009, we used $2.6 million of cash for capital expenditures related to technological equipment, software licenses and, to a lesser degree, office equipment. During the three-month period ended March 31, 2009, the increase in cash used in investment activities was partially offset by proceeds from the sale and maturity of $30.9 million of investments as part of our financial strategy.

Net cash used in financing activities


	Three Months Ended				Change from 2009
	March 31,				to 2010
	2010		2009		in Dollars		in %
	(in millions, except percentages)
							*()**
Net Cash used in:

Financing activities	-$	3.2	-$	0.1	-$	3.1		5517.9	%


(*)		Percentages have been calculated using the whole figures, instead on rounding figures.

For the three-month period ended March 31, 2010, our primary use of cash for financing activities was a reduction in short term debt related to a $3.2 million payment of notes outstanding in connection with the DeRemate acquisition. In the event that we decide to pursue strategic acquisitions in the future, we may fund them with available cash, third party debt financing, or by raising equity capital, as market conditions allow.

Debt

In connection with the DeRemate acquisition, on September 5, 2008, we issued to the Seller ten unsecured promissory notes in the aggregate principal amount of $18 million. On June 3, 2009, August 31, 2009, December 4, 2009 and March 4, 2010, the Company paid to the Sellers $3,113,203, $9,470,222, $3,018,893 and $3,242,395, respectively for principal and accrued interest. As of March 31, 2010, we have no debt outstanding related to DeRemate acquisition.

Capital expenditures

Our capital expenditures decreased $1.2 million, to $1.4 million for the three-month period ended March 31, 2010 as compared to $2.6 million for the same period in 2009, mainly due to an investment in software licenses during the first quarter of 2009. Other capital expenditures during the first quarter of 2010 include hardware and software licenses necessary to maintain and update the technology of our platform, computer software developed internally, office equipment and new office space. We anticipate continued investments in capital expenditures in the future as we strive to maintain our position in the Latin American e-commerce market.

In 2008, our Argentine subsidiary invested in a real estate trust. The investment in this trust represents a beneficial ownership interest in 5,340 square meters divided in five floors of an office building and 70 parking spots under construction in the City of Buenos Aires, Argentina, where we expect to relocate our office headquarters upon completion of the building. As of March 31, 2010, the Argentine subsidiary has paid $8.4 million into the trust. For U.S. GAAP purposes the investment was recorded as a long term investment instead of as Property and Equipment. As this investment represents an undivided interest for more than 20% of the total amount of the real estate trust, it is accounted for under the equity method and it is classified as Long-Term Investments in our balance sheet.

We believe that our existing cash and cash equivalents, including the sale of credit card receivables and cash generated from operations will be sufficient to fund our operating activities, property and equipment expenditures and to repay obligations going forward.

Off-balance sheet arrangements

At March 31, 2010, we had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures or capital resources.

Contractual obligations

We have certain fixed contractual obligations and commitments that include future estimated Payments. Changes in our business needs, cancellation provisions and other factors may result in actual Payments differing materially from the estimates. We cannot provide certainty regarding the timing and amount of Payments. Below is a summary of the most significant assumptions used in our determination of amounts presented in the table. Contractual obligations at March 31, 2010 are as follows:


	Payment due by period
			Less than		1 to 3		3 to 5		More than
(in millions)	Total		1 year		years		years		5 years
Operating lease obligations (1)	$	2.6	$	1.6	$	0.8	$	0.2	$	—
Purchase obligations (2)		4.9		4.2		0.7		—		—


Total	$	7.5	$	5.8	$	1.5	$	0.2	$	—


(1)		Includes leases of office space.

(2)		On June 19, 2008, our Argentine subsidiary agreed to participate in a real estate trust, which investment represents a beneficial ownership interest in 5,340 square meters divided in five floors of an office building and 70 parking spots under construction in the City of Buenos Aires, Argentina. We expect to relocate our office headquarters to this newly acquired office space upon completion of the building, which we expect to occur in the fourth quarter of 2010. As of March 31, 2010, the Argentine subsidiary has invested $8.4 million in the aforementioned trust and is expected to invest an additional $0.8 million in the following 2 months. Due to the impact of inflation and/or currency fluctuations, future Payments could differ from our estimates. Certain of our officers and former officers also entered into an investment in a portion of the trust, which investment represents a beneficial ownership interest in a separate floor of the same building. We do not intend to occupy the space to be owned by this group. In addition, on February 22, 2010, our Argentina subsidiary signed a Company car lease contract to buy 12 cars for certain employees of the Company. The lease contract amounts to $0.4 million and matures in January 2013. The total cost of this contract is being deducted from each employee long term retention plan.

We have leases for office space in certain countries in which we operate and leases for Company cars in Argentina. These are our only operating leases. Purchase obligation amounts include an obligation in the real estate trust for our new Argentina office space, minimum purchase commitments for advertising, capital expenditures (technological equipment and software licenses) and other goods and services that were entered into in the ordinary course of business. We have developed estimates to project payment obligations based upon historical trends, when available, and our anticipated future obligations. Given the significance of performance requirements within our advertising and other arrangements, actual Payments could differ significantly from these estimates.


Item 3 —		Qualitative and Quantitative Disclosure About Market Risk

We are exposed to market risks arising from our business operations. These market risks arise mainly from the possibility that changes in interest rates and the U.S. dollar exchange rate with local currencies, particularly the Brazilian reais due to Brazil’s share of our revenues, may affect the value of our financial assets and liabilities.

Foreign currencies

At March 31, 2010, we hold cash and cash equivalents in local currencies in our subsidiaries, and have receivables denominated in local currencies in all of our operations. Our subsidiaries generate revenues and incur most of their expenses in local currency. As a result, our subsidiaries use their local currency as their functional currency, except for our Venezuelan subsidiaries which functional currency is the US dollar due to a highly inflationary accounting. At March 31, 2010, the total cash and cash equivalents denominated in foreign currencies totaled $17.7 million, and accounts receivable and funds receivable from customers in foreign currencies totaled $10.7 million. To manage exchange rate risk, our treasury policy is to transfer most cash and cash equivalents in excess of working capital requirements into dollar-denominated accounts in the United States. At March 31, 2010, our dollar-denominated cash and cash equivalents and short-term investments totaled $24.0 million and our dollar-denominated long-term investments totaled $46.4 million. For the three-month period ended March 31, 2010, we incurred foreign currency gains in the amount of $0.4 million as the cash and investment balances of the subsidiaries held in U.S. dollars appreciated in local current terms. (See “Management Discussion and Analysis of Financial Condition and Results of Operations — Results of operations for the three-month period ended March 31, 2010 compared to three-month period ended March 31, 2009 — Other income (expenses)” for more detail).

In accordance with US GAAP, we have transitioned our Venezuelan operations to highly inflationary status as of January 1, 2010 and are using the US dollar as the functional currency for these operations. In accordance with US GAAP, translation adjustments for prior periods were not removed from equity and the translated amounts for nonmonetary assets at December 31, 2009 become the accounting basis for those assets. Monetary assets and liabilities in “Bolivares Fuertes” were re-measured to the US dollar at the closing parallel exchange rate and the results of the operations in “Bolivares Fuertes” were re-measured to the US Dollars at the average monthly parallel exchange rate.

In addition, if the U.S. dollar weakens against foreign currencies, the translation of these foreign-currency-denominated transactions will result in increased net revenues, operating expenses, and net income while the re-measurement of our net asset position in US Dollars will have a negative impact in our Statement of Income. Similarly, our net revenues, operating expenses and net income will decrease if the U.S. dollar strengthens against foreign currencies, while the re-measurement of our net asset position in US Dollars will have a positive impact in our Statement of Income. During the three-month period ended March 31, 2010, 57.4% of our revenues were denominated in Brazilian reais, 18.2% in Argentine pesos, 9.7% in Mexican pesos, 7.6% in Venezuelan “Bolivares Fuertes” and 7.2% in the currency of other countries.

The following table summarizes the distribution of net revenues based on geography:


	Three Months Ended				Change from 2009
	March 31,				to 2010
	2010		2009		in Dollars			in %
	(in millions, except percentages)
								*()**
Net Revenues by Geography:
Brazil	$	26.3	$	15.2	$	11.1			73.2	%
Venezuela		3.5		6.6		(3.1	)		-47.7	%
Argentina		8.3		5.4		2.9			54.8	%
México		4.5		3.2		1.3			40.8	%
Other Countries		3.3		1.9		1.4			73.2	%

Total Net Revenues	$	45.9	$	32.3	$	13.6			42.1	%


(*)		Percentages have been calculated using the whole figures, instead on rounding figures.

The table below shows the impact on the Company’s Net Revenues, Expenses, Other income and Income tax, Net Income and Shareholders’ Equity for a positive or negative 10% fluctuation on all the foreign currencies to which we are exposed as of March 31, 2010 and for the three-month period ended March 31, 2010:

Foreign Currency Sensitivity Analysis


(In millions)	-10%			Actual			+10%
	(1)						(2)
Net revenues		51.0			45.9			41.8
Expenses		(33.8	)		(30.4	)		(27.7	)

Income from operations		17.2			15.5			14.1

Other income (expenses) and income tax related to P&L items		(6.5	)		(6.3	)		(5.3	)
Foreign Currency impact related to the remeasument of our Net Asset position		(4.6	)		0.4			3.8

Net income		6.1			9.6			12.6


Total Shareholders’ Equity		123.8			123.2			122.8


(1)		Appreciation of the subsidiaries local currency against U.S. Dollar

(2)		Depreciation of the subsidiaries local currency against U.S. Dollar

The table above shows a decrease in our net income when the U.S. dollar weakens against foreign currencies because the re-measurement of our net asset position in US Dollars has a greater impact than the increase in net revenues, operating expenses, and other income (expenses) and income tax lines related to the translation effect. Similarly, the table above shows an increase in our net income when the U.S. dollar strengthens against foreign currencies because the re-measurement of our net asset position in US Dollars has a greater impact than the decrease in net revenues, operating expenses, and other income (expenses) and income tax lines related to the translation effect.

In the past we have entered into transactions to hedge portions of our foreign currency translation exposure but during 2010 have not entered into any such agreement.

Interest

Our earnings and cash flows are also affected by changes in interest rates. These changes can have an impact on our interest expenses derived from selling our MercadoPago receivables. At March 31, 2010, MercadoPago funds receivable from customers totaled approximately $3.2 million. Interest fluctuations could also negatively affect certain of our fixed rate and floating rate investments comprised primarily of time deposits, money market funds, investment grade corporate debt securities, and sovereign debt securities. Investments in both fixed rate and floating rate interest earning products carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than predicted if interest rates fall.

Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes. Due to the short-term nature of the main part of our investments and because all our long-term investments do not exceed a two year period, a 100 basis point movement in market interest rates would not have a material impact on the total fair market value of our portfolio as of March 31, 2010 or interest expenses derived from discounting our MercadoPago receivables.

Our short-term and long-term investments, which are classified on our balance sheet as current assets in the amount of $7.1 million and as non-current assets in the amount of $46.4 million (excluding our investment in an Argentine real state trust), respectively, can be readily converted at any time into cash or into securities with a shorter remaining time to maturity. We determine the appropriate classification of our investments at the time of purchase and re-evaluate such designations as of each balance sheet date. Time deposits are considered held-to-maturity securities. The book value of held-to-maturity securities approximates their respective fair values and consequently there are no significant unrecognized gains or losses.

Equity Price Risk

Our Board of Directors adopted the 2009 long-term retention plan (the “2009 LTRP”) payable as follows:

	•		the eligible employee will receive a fixed cash payment equal to 6.25% of his or her 2009 LTRP bonus once a year for a period of eight years starting in 2010 (the “Annual Fixed Payment”); and

	•		on each date we pay the Annual Fixed Payment to an eligible employee, he or she will also receive a cash payment (the “Variable Payment”) equal to the product of (i) 6.25% of the applicable 2009 LTRP bonus and (ii) the quotient of (a) divided by (b), where (a), the numerator, equals the Applicable Year Stock Price (as defined below) and (b), the denominator, equals the 2008 Stock Price, defined as $13.81, which was the average closing price of the Company’s common stock on the NASDAQ Global Market during the final 60 trading days of 2008. The “Applicable Year Stock Price” shall equal the average closing price of the Company’s common stock on the NASDAQ Global Market during the final 60 trading days of the year preceding the applicable payment date.

The 2009 Variable Payment LTRP liability subjects us to equity price risk. At March 31, 2010, the total contractual obligation fair value of our 2009 Variable Payment LTRP liability amounts to $3,680,387. As of March 31, 2010, the accrued liability related to the 2009 Variable Payment portion of the LTRP included in Social security payable in our condensed consolidated balance sheet amounts to $1,023,708. The following table shows a sensitivity analysis of the risk associated with our total contractual obligation related to the 2009 variable payment if our stock price were to increases or decreases by up to 40%.


	As of March 31, 2010
	MercadoLibre, Inc		2009 variable
(In US dollars)	Equity Price		LTRP liability
Change in equity price in percentage

40%		60.44		5,152,542
30%		56.13		4,784,504
20%		51.81		4,416,465
10%		47.49		4,048,426
Static (*)		43.17		3,680,387
-10%		38.86		3,312,349
-20%		34.54		2,944,310
-30%		30.22		2,576,271
-40%		25.90		2,208,232


(*)		Average closing stock price for the last 60 trading days of the closing date


Item 4 —		Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Evaluation of disclosure controls and procedures

Based on the evaluation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) required by Exchange Act Rules 13a-15(b) or 15d-15(b), our chief executive officer and our chief financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.

Changes in Internal Controls Over Financial Reporting

There were no changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the three-month period ended March 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION


Item 1 —		Legal Proceedings

From time to time, we are involved in disputes that arise in the ordinary course of our business. The number and significance of these disputes is increasing as our business expands and our company grows. Any claims against us, whether meritorious or not, may be time consuming, result in costly litigation, require significant amounts of management time, result in the diversion of significant operational resources and require expensive implementations of changes to our business methods to respond to these claims. See “Item 1A—Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 as filed with the Securities and Exchange Commission on February 26, 2010 for additional discussion of the litigation and regulatory risks facing our company.

As of March 31, 2010, our total reserves for proceeding-related contingencies were approximately $1.0 million for 283 legal actions against us in which we have determined that a loss is probable. We do not reserve for losses we determine to be possible or remote.

As of March 31, 2010, there were 315 lawsuits pending against our Brazilian subsidiary in the Brazilian ordinary courts. In addition, as of March 31, 2010, there were more than 1,830 lawsuits pending against our Brazilian subsidiary in the Brazilian consumer courts, where no lawyer is required to file or pursue a claim. In most of these cases, the plaintiffs asserted that we were responsible for fraud committed against them, or responsible for damages suffered when purchasing an item on our website, when using MercadoPago, or when we invoiced them. We believe we have meritorious defenses to these claims and intend to continue defending them.

We do not believe that any single pending lawsuit or administrative proceeding, if adversely decided, would have a material adverse effect on our financial condition results of operations and cash flows. Set forth below is a description of the legal proceedings that we have determined to be material to our business. We have excluded ordinary routine legal proceedings incidental to our business. In each of these proceedings we also believe we have meritorious defenses, and intend to continue defending these actions. We have established a reserve for these proceedings.

Litigation

On July 25, 2008, Nike International Ltd. or Nike requested a preliminary injunction against our Argentine subsidiary in the First Civil and Commercial Federal Court, Argentina. We were officially notified on August 14, 2008. Nike requested the injunction alleging that this subsidiary was infringing Nike trademarks as a result of sellers listing allegedly counterfeit Nike branded products through the Argentine page of our website. A preliminary injunction was granted on August 11, 2008 to suspend the offer of Nike-branded products until sellers could be properly identified. We appealed the decision on August 22, 2008. On March 23, 2009 the Federal Court of Appeals on Civil and Commercial Matters, lifted the prohibition to allow in the Argentine website any listing related to Nike branded products subject to our requesting certain personal information from users willing to list those items. On May 22, 2009 we were summoned about a lawsuit file by Nike against our Argentine subsidiary in the same venue, for the same reasons argued in the request preliminary injunction. On May 27, 2009 we presented a preliminary objection requesting that Nike deposit as a security bond for costs. The court established that a bond for costs of approximately $3,500 should be deposited by Nike and both parties appealed this amount which was confirmed by the same Federal Court of Appeals. We presented our defense on April 21, 2010. As of the date of this report, we believe the risk of loss of this case is remote.

Other third parties have from time to time claimed, and others may claim in the future, that we have infringed their intellectual property rights. We have been notified of several potential third-party claims for intellectual property infringement through our website. These claims, whether meritorious or not, are time consuming, can be costly to resolve, could cause service upgrade delays, and could require expensive implementations of changes to our business methods to respond to these claims. See “Item 1A Risk factors—Risks related to our business—We could potentially face legal and financial liability for the sale of items that infringe on the intellectual property rights of others and for information disseminated on the MercadoLibre Marketplace”.


Item 6 —		Exhibits


	10.1			Amendment to the Property Lease Agreement entered into on March 31, 2007 between MercadoLibre S.A. and Curtidos San Luis S.A., dated March 31, 2010.*

	10.2			Preliminary Commercial Property Lease Agreement, dated March 01, 2010, between MercadoLivre.com Atividades de Internet Ltda. and STM Sociedade Técnica de Montagens Ltda. *

	31.1			Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

	31.2			Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

	32.1			Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

	32.2			Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**


*		Filed herewith

**		Furnished herewith

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	MERCADOLIBRE, INC. Registrant
Date: May 7, 2010	By:	/s/ Marcos Galperín
		Marcos Galperín
		President and Chief Executive Officer

	By:	/s/ Hernán Kazah
		Hernán Kazah
		Executive Vice President and Chief Financial Officer

MercadoLibre, Inc.

INDEX TO EXHIBITS


	10.1			Amendment to the Property Lease Agreement entered into on March 31, 2007 between MercadoLibre S.A. and Curtidos San Luis S.A., dated March 31, 2010.*

	10.2			Preliminary Commercial Property Lease Agreement, dated March 01, 2010, between MercadoLivre.com Atividades de Internet Ltda. and STM Sociedade Técnica de Montagens Ltda.*

	31.1			Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

	31.2			Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

	32.1			Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

	32.2			Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**


*		Filed herewith

**		Furnished herewith