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How to Analyze SPRINGS

Financial Statements - Summary Criteria of Presentation and Consolidation

The consolidated financial statements include the financial statements of the Company and its fully owned subsidiaries Coteminas SA, and Springs Global U.S.

The process of consolidating the balance sheet and income represents the sum of of assets, liabilities, revenues and expenses, according to their respective natures, complemented with the elimination of investments in subsidiaries, profits or losses and unrealized balances and transactions between companies included in the consolidation.

The effect of exchange variation on investments abroad is highlighted in the statement of changes in shareholders‘ equity under “Cumulative translation adjustment”. The accounting practices of the foreign subsidiaries are adjusted to reflect the same accounting practices of the Company. The share of non-controlling shareholders is in shareholders‘ equity and result.

The financial statements of foreign subsidiaries are translated into Brazilian Reais, based on the current rate of the U.S. dollar prevailing at the closing date of exercise for balance sheet accounts and the average monthly income accounts.

The financial statements of subsidiaries are prepared for the same periods as the parent company. The accounting policies adopted are consistent for all consolidated companies.

Sources of Revenues

The Company manages its business by geographic region: Brazil and Argentina. Additionally, the Company has two distinct operating segments: “Wholesale” and “Retail”.

Wholesale: The Company has several plants that supply each other, operating as an integrated industry in spinning, weaving preparation, dyeing, printing, finishing and manufacturing of home textile products. There is no specific operational units for each category of goods sold, and these operations are controlled under the a single segment named “Wholesale”. The finished products of this segment are sold at the sell-in price to various multibrand customers, who in turn will be responsible for selling to a final consumers.

Retail: The retail subsidiary AMMO has a set of specific information and investment decisions regarding pricing, store expansion, among others, that are taken apart and constitute the “Retail” segment. Retail sales are priced at the sell-in price when directed to franchisees or at the sell-out price when made to final consumers by proprietary stores. In the franchise model, the price that the franchisee pays to the Company for its product consists of (i) the basic cost of goods; (ii) royalty fees, to compensate the Company for the provision of services such as training, general consulting and assistance in assembling stores, and (iii) a contribution to the advertising fund.

Sales Categories

The Company, through analysis of sales performance classifies its products according to the categories of sales (or product lines) as bed, table and bath (CAMEBA), utility bedding, and other intermediate products.

Brands and products of the Company are strategically positioned to efficiently serve customers from different socioeconomic profiles at the same time reducing the risk of overlap and competition between them. Thus, the final selling price of the products in the stores is suggested by the Company‘s distribution channels.

Costs and Expenses

Cost of Goods Sold: “COGS” corresponds mainly to the costs of materials, conversion, storage and distribution costs and the depreciation expense of assets dedicated to production and distribution.

COGS is presented separately for “Brazil” and “Argentina”. In the case of the Brazilian market, COGS is presented separately for the business segments “Wholesale” and “Retail”.

Selling expenses: Selling expenses of the Company can be divided into three major groups:

Retail Expenses: cover expenses related to the operation of proprietary stores. In this group are included mainly the “occupation costs” of stores, especially rent, condominium and the Promotion and Marketing Fund (in the case of stores located in shopping malls) as well as salaries and sales commissions.

Wholesale Expenses – comprise various expenses related to particular commercial operation related to the sale to multi-brand customers and of sales of intermediate products, including: logistics expenses, salaries of sales personnel and sales commissions. These expenses are shown separately to reflect specific costs of operations by geographic region (Brazil and Argentina).

General and Administrative Expenses: are particularly related to expenditures related to overhead and the general administration of the Company. Additionally, it includes the expenses associated with the development of products. These expenses are presented separately for the Company‘s Operations, by geographic region – Brazil and abroad, including Springs US‘s expenses.

Financial Results

The financial results of the Company consist of (i) interest expense, including interest payments and debt service charges, (ii) bank charges associated with the use of debit and credit cards in our stores, taxes and discounts granted to customers; (iii) interest income earned on the investment of cash balances, and (iv) gains or losses arising from exchange rate variations on assets and liabilities denominated in foreign currency, as well as in the translation to Brazilian Reais of Financial Statements of our subsidiaries abroad.

Investments and Depreciation

Permanent investments are presented in segregated between Industry and Retail. Expenditures that increase the value or extend the expected lives of production assets are capitalized as a capital expenditure, while expenses associated to maintenance and repairs are charged directly to the income statement when incurred.

In the case of retail, investment refers to expenditures needed for setting-up new stores and expansion and/or renovation of existing stores. Any investments to acquire “rights of use” of commercial stores (ponto commercial) are recorded in assets but are not subject to depreciation.

The Company also routinely invests in systems and information technology. Depreciation is computed by the straight-line method at rates that take into consideration the estimated useful lives of the assets.