Natuzzi S.p.A

Annual Report on Form20-F

20162018

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM20-F

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended: December 31, 20162018

Commission file number:001-11854

NATUZZI S.p.A.

(Exact name of Registrant as specified in its charter)

Republic of Italy

(Jurisdiction of incorporation or organization)

Via Iazzitiello 47, 70029, Santeramo in Colle, Bari, Italy

(Address of principal executive offices)

Mr. Pietro Direnzo

Tel.: +39 080 8820 812;pdirenzo@natuzzi.com; pdirenzo@natuzzi.com; Via Iazzitiello 47, 70029 Santeramo in Colle, Bari, Italy

(Name, telephone,e-mail and/or facsimile number and address of company contact person)

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

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

As of December 31, 20162018 54,853,045 Ordinary Shares

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☐    No  ☒

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes  ☐    No  ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-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  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “emerging growth company” in Rule12b-2 of the Exchange Act.

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.    ☐  Item 17     ☒☐   Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).    Yes  ☐  �� No  ☒

TABLE OF CONTENTS

i

TABLE OF CONTENTS

i

ii

TABLE OF CONTENTS

iii

ii

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

In this annual report on Form20-F (the “Annual Report”), references to “€” or “Euro” are to the Euro and references to “U.S. dollars,” “dollars,” “U.S.$” or “$” are to United States dollars.

Amounts stated in U.S. dollars, unless otherwise indicated, have been translated from the Euro amount by converting the Euro amounts into U.S. dollars at the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York (the “Noon Buying Rate”) for euros on December 31, 20162018 of U.S.$ 1.0552.1.1456. The foreign currency conversions in this Annual Report should not be taken as representations that the foreign currency amounts actually represent the equivalent U.S. dollar amounts or could be converted into U.S. dollars at the rates indicated.

The Consolidatedconsolidated financial statements of the Natuzzi S.p.A. as at December 31, 2018 and 2017, and the consolidated statement of financial position as at January 1, 2017 have been prepared in accordance with International Financial StatementsReporting Standards as issued by the International Accounting Standards Board (“IFRS”), including interpretations issued by the IFRS Interpretations Committee (IFRS IC) applicable to companies reporting under IFRS. The consolidated financial statements as at December 31, 2018 are the Group’s first set of consolidated financial statements prepared in accordance with IFRS and IFRS 1 “First-time Adoption of International Financial Reporting” has been applied.

The annual audited consolidated financial statements contained in this annual report are the Company’s first consolidated financial statements prepared in accordance with IFRS. Historical financial results as of and for the year ended December 31, 2017 have been adjusted based on IFRS, which differs from the results included in Item 18 of this Annual Report areour annual reports on Form 20-F for the year ended December 31, 2017. In addition, no consolidated financial statements and no financial information prepared in conformityaccordance with accounting principles established byIFRS for the Italian Accounting Profession (“Italian GAAP”). These principles varyyear ended December 31, 2016 have been included in certain significant respects from generally accepted accounting principles in the United States (“U.S. GAAP”).this annual report. See Note 31Notes 1 and 43 to the Consolidated Financial Statements included in Item 18 of this Annual Report.

All discussions in this Annual Report are in relation to Italian GAAP,IFRS, unless otherwise indicated.

In this Annual Report, the term “seat” is used as a unit of measurement. A sofa consists of three seats; an armchair consists of one seat.

The terms “Natuzzi,” “Natuzzi Group”, “Company,” “Group,” “we,” “us,” and “our,” unless otherwise indicated or as the context may otherwise require, mean Natuzzi S.p.A. and its consolidated subsidiaries.

None of the websites referred to in this Annual Report, including where a link is provided, nor any of the information contained on such websites is incorporated by reference in thethis Annual ReportReport.

FORWARD-LOOKING INFORMATION

The Company makes forward-looking statements in this Annual Report. Statements that are not historical facts, including statements about the Group’s beliefs and expectations, are forward-looking statements. Words such as “believe,” “expect,” “intend,” “plan” and “anticipate” and similar expressions are intended to identify forward-looking statements but are not exclusive means of identifying such statements. These statements are based on management’s current plans, estimates and projections, and therefore readers should not place undue reliance on them. Forward-looking statements speak only as of the dates they were made, and the Company undertakes no obligation to update or revise any of them, whether as a result of new information, future events or otherwise.

Projections and targets included in this Annual Report are intended to describe our current targets and goals, and not as a prediction of future performance or results. The attainment of such projections and targets is subject to a number of risks and uncertainties described in the paragraph below and elsewhere in this Annual Report. See “Item 3. Key Information—Risk Factors.”

Forward-looking statements involve inherent risks and uncertainties, as well as other factors that may be beyond our control. The Company cautions readers that a number of important factors could cause actual results to differ materially from those contained in any forward-looking statement. Such factors include, but are not limited to: effects on the Group from competition with other furniture producers, material changes in consumer demand or preferences, significant economic developments in the Group’s primary markets, the Group’s execution of its reorganization plans for its manufacturing facilities, significant changes in labor, material and other costs affecting the construction of new plants, significant changes in the costs of principal raw materials, significant exchange rate movements or changes in the Group’s legal and regulatory environment, including developments related to the Italian Government’s investment incentive or similar programs. The Company cautions readers that the foregoing list of important factors is not exhaustive. When relying on forward-looking statements to make decisions with respect to the Company, investors and others should carefully consider the foregoing factors and other uncertainties and events.

PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3. KEY INFORMATION

Selected Financial Data

The following table sets forth selected consolidated financial data for the periods indicated and is qualified by reference to, and should be read in conjunction with, the Consolidated Financial Statements and the notes thereto included in Item 18 of this Annual Report and the information presented under “Operating and Financial Review and Prospects” included in Item 5 of this Annual Report. The statementstatements of operationsprofit or loss and balance sheetstatements of financial position data presented below have been derived from the Consolidated Financial Statements.

As consequence of the application of the new Italian legislation introduced by Legislative Decree no. 139 of August 2015, which endorsed the EU Directive 34/2013, in December 2016, the Italian Accounting Profession (OIC) issued new accounting standards applicable for the annual reporting periods beginning on or after January, 1 2016. Therefore, theThe consolidated financial statements of the CompanyNatuzzi S.p.A. as ofat December 31, 20162018 and 2017, and the consolidated statement of financial position as at January 1, 2017 have been prepared in complianceaccordance with these new accounting standards that led onlyInternational Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”), including interpretations issued by the IFRS Interpretations Committee (IFRS IC) applicable to changes in the classification of some financial statements captions, while there were no changes in Natuzzi’s accounting policies. These changes have been applied using the retrospective method, as if the new classification had always been applied.

companies reporting under IFRS. The changes that have affected the consolidated financial statements as at December 31, 2018 are the Group’s first set of consolidated financial statements prepared in accordance with IFRS and IFRS 1 “First-time Adoption of International Financial Reporting” has been applied.

Being a first-time adopter, the Group restated the 2017 consolidated financial statements for comparative purposes, in order to present the effect of the Companyadoption of the IFRS. Historical financial results as of and for the year ended December 31, 2016 are related2017 have also been adjusted based on IFRS, which differs from the results included in our annual reports on Form 20-F for the year ended December 31, 2017. The Group’s date of transition to the changeIFRS is January 1, 2017 and its first set of consolidated financial statements prepared in accordance with the presentation of other income (expense), net. Under the previous accounting standard the impairment loss of long-lived assetsIFRS is that as at andnon-current investments and the accrual for theone-time termination benefits were classified in year ended December 31, 2018. Note 43 to the caption “other (expense), net” of the consolidated statements of operations. Under the new accounting standard, such costs are classified in the cost of sales, selling expenses and general and administrative expenses based on the function of the cost to be reclassified. For additional details refer to notes 25, 26 and 28includedConsolidated Financial Statements included in Item 18 of this Annual Report.

The following tables summarize, in millionsReport describes the effects of Euro, the impact of such changes ontransition from the Company’s consolidated statements of operations for the years ended December 31, 2016, 2015, 2014, 2013 and 2012.

		2015				Reclassification				2015 revised
Net sales			488.5				—				488.5
Cost of sales			(330.6	)			(3.4	)			(334.0	)
Gross profit			157.9				(3.4	)			154.5
Selling expenses			(133.4	)			—				(133.4	)
General and administrative expenses			(32.1	)			—				(32.1	)
Operating income (loss)			(7.6	)			(3.4	)			(11.0	)
Other income (expense), net			(8.3	)			3.4				(4.9	)
Net Income/(loss) before income taxes			(15.9	)			—				(15.9	)
Income taxes			(0.6	)			—				(0.6	)
Net Income/(loss)			(16.5	)			—				(16.5	)
Non-controlling interest			0.0				—				0.0
Net Income/(loss) attributable to Natuzzi S.p.a. and Subsidiaries			(16.5	)			—				(16.5	)
		2014				Reclassification				2014 revised
Net sales			461.4				—				461.4
Cost of sales			(333.2	)			(1.2	)			(334.4	)
Gross profit			128.2				(1.2	)			127.0
Selling expenses			(128.9	)			(2.2	)			(131.1	)
General and administrative expenses			(36.3	)			—				(36.3	)
Operating income (loss)			(37.0	)			(3.4	)			(40.4	)
Other income (expense), net			(10.5	)			3.4				(7.1	)
Net Income/(loss) before income taxes			(47.5	)			—				(47.5	)
Income taxes			(1.8	)			—				(1.8	)
Net Income/(loss)			(49.3	)			—				(49.3	)
Non-controlling interest			0.0				—				0.0
Net Income/(loss) attributable to Natuzzi S.p.a. and Subsidiaries			(49.3	)			—				(49.3	)
		2013				Reclassification				2013 revised
Net sales			449.1				—				449.1
Cost of sales			(317.3	)			(20.4	)			(337.7	)
Gross profit			131.8				(20.4	)			111.4
Selling expenses			(126.6	)			(2.5	)			(129.1	)
General and administrative expenses			(37.5	)			(6.0	)			(43.5	)
Operating income (loss)			(32.3	)			(28.9	)			(61.2	)
Other income (expense), net			(31.9	)			28.9				(3.0	)
Net Income/(loss) before income taxes			(64.2	)			—				(64.2	)
Income taxes			(4.1	)			—				(4.1	)
Net Income/(loss)			(68.4	)			—				(68.4	)
Non-controlling interest			0.2				—				0.2
Net Income/(loss) attributable to Natuzzi S.p.a. and Subsidiaries			(68.6	)			—				(68.6	)

		2012				Reclassification				2012 revised
Net sales			468.8				—				468.8
Cost of sales			(313.8	)			—				(313.8	)
Gross profit			155.0				—				155.0
Selling expenses			(132.4	)			(1.2	)			(133.6	)
General and administrative expenses			(39.9	)			—				(39.9	)
Operating income (loss)			(17.3	)			(1.2	)			(18.5	)
Other income (expense), net			(4.6	)			1.2				(3.4	)
Net Income/(loss) before income taxes			(21.9	)			—				(21.9	)
Income taxes			(4.1	)			—				(4.1	)
Net Income/(loss)			(26.0	)			—				(26.0	)
Non-controlling interest			0.1				—				0.1
Net Income/(loss) attributable to Natuzzi S.p.a. and Subsidiaries			(26.1	)			—				(26.1	)

Establishedgenerally accepted accounting principles in the Republic of Italy vary(“Italian GAAP”) to the IFRS and presents the related reconciliation schedules.

Since these are our first audited consolidated financial statements prepared in certain significant respectsaccordance with IFRS, pursuant to the transitional relief granted by the U.S. Securities and Exchange Commission in respect of the first-time adoption of IFRS, we have only provided financial statements and financial information for the financial years ended December 31, 2018, 2017 and January 1, 2017. Financial data as of and for the years ended December 31, 2014, 2015 and 2016 derived from our consolidated financial statements prepared in accordance with the generally accepted accounting principles in the United StatesRepublic of America. Information relating to the natureItaly (“Italian GAAP”) have not been included below, and effect of such differences is presented in Note 31 to theno consolidated financial statements.

The Consolidated Financial Statements, from which the selected consolidatedstatements and no financial data set forth below has been derived, wereinformation prepared in accordance with Italian GAAP, which differIFRS for the year ended December 31, 2016 have been included in certain respects from U.S. GAAP. For a discussion of the principal differences between Italian GAAPthis annual report. See Notes 1 and U.S. GAAP as they relate to the Group’s consolidated net loss and shareholders’ equity, see Note 3143 to the Consolidated Financial Statements included in Item 18 of this Annual Report.

Exchange Rates

The following table sets forth, for each of the periods indicated, the Noon Buying Rate for the Euro expressed in U.S. dollars per Euro.

The effective Noon Buying Rate on April 21, 201719, 2019 was U.S.$ 1.06941.1246 to 1 Euro.

Risk Factors

Investing in the Company’s ADSs involves certain risks. You should carefully consider each of the following risks and all of the information included in this Annual Report.

The Group has a recent history of losses; the Group’s future profitability, financial condition and ability to maintain adequate levels of liquidity depend, to a large extent, on its ability to overcome macroeconomic and operational challenges— TheIn 2018, the Group reported net lossesa profit of €6.1€33.1 million, mainly as a result of a €75.4 million gain following the finalization of the joint venture in 2016, improving significantly fromChina which occurred in July 2018. See Note 10 to the previous years (€16.5 millionConsolidated Financial Statements included in 2015, €49.4 million in 2014, €68.6 million in 2013 and €26.1 million in 2012). TheItem 18 of this Annual Report. During the same year, the Group reported an operating loss equal to €0.4of €25.5 million. In 2017, the Group reported a loss of €30.8 million in 2016, improving fromand an operating loss in each of 2015, 2014, 2013€24.0 million, mainly resulting from both external factors and 2012 (€11.0 million, €40.4 million, €61.2 millionnew operational challenges. See “Item 5. Operating and €18.5 million, respectively).

Despite declining sales,Financial Review and Prospects.” During the 2013-2016 period, the Company also reportedimplemented an intensive restructuring of its operations that led to an improving marginstrend in 2016. Notwithstanding improving margins,its results.

In 2017 and 2018, the Group still perceivesconcentrated its efforts on the expansion of the Group’s retail network of monobrand stores, both directly operated and franchised. This activity required significant upfront costs at both the regional and HQ level. Most of the newly opened mono-brand stores were not fully productive during the first months of their openings in 2017 and 2018 and, therefore, investments in the retail and marketing organization were, at the beginning, not adequately returned by sales. While the Group expects the new directly-operated stores will progressively improve in productivity to absorb suchup-front costs, there is a chance that these investments will not be recouped.

As in previous years, the Group continues to operate in a persistently difficult macroeconomic environment affecting the furniture industry as a whole (particularly evident in some mature markets, such as Europe), including weakness inwhich includes weak economic activity in certain Euro-zone countries.

In response to this difficult macroeconomic environment, in 2014, the Group launched a transformation plan (the “Transformation Plan”), which was aimed at restructuring the Group’s operations, including by reducing our Italian workforce. In 2017 and 2018, the Company faced redundant workforce closing certain Italian facilitiesrelated challenges. See “Item 5. Operating and implementing more efficient production processes in all of our manufacturing plants, including those in Italy that remain in operation. Following the initial phase of the implementation of the Transformation Plan, theFinancial Review and Prospects.” The Group faced othermay continue to be affected by difficult macroeconomic conditions and may face operational challenges at the Italian and Chinese plants that resulted in temporary inefficiencies and additional costs, and which affected the Group’s overall profitability. In 2015, approximately one year after the timing foreseen in the Transformation Plan, the Group reached improvements in efficiency, in particular, in its Italian and Chinese plants. In the same year the Group realized savings in selling general and administrative expenses through a rightsizing plan in the Italian headquarters. The Group continued to see improvements in efficiency in its industrial plants also in 2016. going forward.

In addition, during the last fiveseven years, pursuant to our

obligations under the Italian Reorganization Agreements (as defined in Item 10. Additional Information—Material Contracts” below), the Group incurred aggregate financial obligations in the amount of €24.5€ 42.8 million (€4.51.4 million, €16.9 million, €4.5 million, €4.5 million, €13.5 million, €1.4 million and €0.6 million for years 2018, 2017, 2016, 2015, 2014, 2013 and 2012, respectively) in connection with an incentive program aimed at reducing redundant employees.

Despite these incentive payments, the Group increased its cash and cash equivalents from €52.5 million at the end of year 2015 to €65.0 million at the end of year 2016. Net financial position at the end of year 2016 amounted to €28.9 million, compared to €14.5 million at the 2015year-end. This positive result was due to benefits deriving from the Transformation Plan and improvements in efficiency, trade receivables securitizations and other improvements in net working capital, despite declining sales. Year 2016 was also characterized by an increase in financial credit lines that were initially granted by financial institutions in 2015 on both a short-short and long-term basis. As such,In 2017, for the reasons highlighted above, cash and cash equivalents decreased to €55.0 million from €65.0 million at the end of 2016. Group’s Net Financial Position was equal to €3.3 million at the end of 2017, from €28.9 million in 2016. Group’s Net Financial Position was equal to €6.0 million at the end of 2018, from €3.3 million in 2017. In 2018, cash and cash equivalents were €62.1 million, mainly as a result of the joint venture signed in July 2018. See “Item 5. Operating and Financial Review and Prospects.”

Despite the challenges arising from the restructuring of our Italian operations, management believes that the Group has a sufficient source of liquidity to fund working capital expenditures and other contractual obligations for the next 2412 months. See “Item 5. Operating and Financial Review and Prospects.” The Group has also faced increased labor costs for some of its manufacturing plants operating abroad. See “Item 4. Information on the Company—Manufacturing” for further information.

Our results of operations and ability to maintain adequate levels of liquidity in the future will depend on our ability to overcome these and other challenges. Our failure to achieve profitability in the future could adversely affect the trading price of our shares and our ability to raise additional capital and, accordingly, our ability to grow our business. There can be no assurance that we will succeed in addressing any or all of these risks, and the failure to do so could have a material adverse effect on our business, financial condition and operating results.

The worldwideGroup has redundant workers at its Italian operations. This remains an unresolved issue and the management of such redundant workers may not be successful and therefore, could significantly impact our operations, earnings and liquidity in the foreseeable future — In May 2017, the Italian Supreme Court rejected the Company’s appeal of a lawsuit brought by two former employees of the Company relating to the implementation of the Cassa Integrazione Guadagni Straordinaria (“CIGS”), an Italian temporarylay-off program, ruling in favor of the plaintiffs. As a result of this decision, the Company accrued €9.3 million in the “Provision for legal claims” included in the “Provisions (non current)” caption of the Company’s Statement of financial position. In addition, in October 2016 the Company laid off 176 workers as part of an organization restructuring, 166 of which were thenre-employed in the second half of 2017 as the Bari Labor Court deemed the dismissals to have been carried out improperly. In this regard, in December 2017, the Company reached an agreement with the Italian institutions representing these workers to extend the scope of the Solidarity Agreement (as defined below) in order to reduce the impact of there-employments in 2018.

In December 2018, subject to obtaining any applicable authorizations, the Company, along with the Trade Unions and relevant Italian authorities, agreed to extend the current Solidarity Agreement (reduced-work schedules) for aone-year period ending in December 2019. In addition, parties signed an agreement to allow the Company to benefit from a temporary workforce reduction program, involving up to 491 employees, for a period of 24 months, called CIGS “Cassa Integrazione Guadagni Straordinaria”, in order to support the reorganization process. Furthermore, the parties involved agreed upon setting up an Incentive Plan for staff who would voluntarily terminate their employment relationship in 2019. For further information, please see Note 21 of the Consolidated Financial Statements included in Item 18 of this Annual Report for the amounts accrued by the Company for the probable contingent liability related to legal procedures initiated by several third parties as result of past events.

Global economic downturn over the past few years has impactedconditions may affect the Group’s business and could continue to significantly impact our operations, sales, earnings and liquidity in the foreseeable future — AlthoughOur sales volumes and revenues may be affected by overall general economic conditions. For example, a significant decline in the first half of 2011 the global economy, continued to show small signsor in consumers’ confidence could have a material adverse effect on our business. Deteriorating general economic conditions may affect disposable incomes and reduce consumer wealth, thus affecting client demand, which may negatively impact our profitability and put downward pressure on our prices and volumes. Many factors, all of recovery followingwhich are generally beyond our control, affect the 2008-2009 global financial crisis, it subsequently lost momentum, with particular reference tolevel of consumer spending in the Euro-zone,home furnishing industry, including the state of the economy as a consequencewhole, stock market performance, interest and exchange rates, inflation, political uncertainty, the availability of consumer credit, tax rates, unemployment levels and other matters that influence consumer confidence. In general, sales of home furnishing goods tend to decline during recessionary periods when the sovereign debt crisis affecting Greece, Portugal, Spain, Italylevel of disposable income tends to be lower or when consumer confidence is low. We distribute our products internationally and Ireland.we may be affected by downturns in general economic conditions or uncertainties regarding future economic prospects that may affect the Countries in which we sell a significant portion of our products. In 2013particular, the majority of our current sales are in the EU and 2014,in the global economy continuedUnited States; if we are unable to grow atexpand in emerging markets, a modest pace, but this growth was curbed by the stagnation of economic activitydownturn in parts of Europe, as well as the slow-down of some emerging economies. In 2015 recovery remained gradual and economic developments were different across regions. In 2016, global growth gradually gained pace but, contrary to expectations of major research institutes,mature economies, such as the Bank of Italy, this has not translated into a solid recovery in world trade.

The recovery of the global economy is subject to a number of factors, most of which remain uncertain. The prospects forEU and the United States, will depend onmay negatively affect our results of operations and financial performance.

More generally, there are many risks to the economic policies enacted by the new administration, which have not yet been formulatedglobal macro-economic outlook in detail: certain prospective fiscal policy measures could have an expansionary effect, which is difficult to quantify at the moment, while restrictions on trade could have a negative impact. The normalization of U.S.2019, including (among other things) monetary policy uncertainty; geopolitical tensions globally; political tensions in Europe; unsolved sovereign debt issues in many southern European countries; threats to globalization by renewed protectionism, including rising trade tensions stemming from between the U.S. and China regarding trade relations and tariffs; the evolutionlack of exchange rates could be accompanied by turbulenceprogress in emerging countries.

However, prospects forBrexit negotiations raising the world economy still remain uncertain, particularly owingrisk of a disruptive exit with potential far-reaching consequences including the imposition of potential trade barriers, custom duties, logistic issues and restrictions to persistent weakness in certain countries within the Euro-zone (general weakness in the job market, ongoing vulnerability in the real-estate sector, a decreasing levelfree movement of savings among families,goods and people; high levels of publicgovernment, corporate and consumer indebtedness in most developedvarious countries political instability, austerity(including high levels of indebtedness in emerging markets) and a potentially significant slowdown in Chinese growth.

In the EU, in particular, despite measures designedtaken by several governments and monetary authorities to reduce public expendituresprovide financial assistance to certain Eurozone countries and consequent decreased consumer spending), uncertainty surroundingto avoid default on sovereign debt obligations, concerns persist regarding the negotiation relatingdebt burden of several countries. These concerns, along with the significant fiscal adjustments carried out in several countries, intended to the United Kingdom’s withdrawal from the European Union following the referendum in June 2016 (theso-called “Brexit”), China’s difficulty in reverting from the downward trend inmanage sovereign credit risk, have led to further pressure on economic growth over the past several years, and the downturn in Russia.

may lead to new periods of recession. Furthermore, a resurgence of the sovereign debt crisis in Europe could diminish the banking industry’s ability to lend to the real economy, thus creating a negative spiral of declining production, higher unemployment and a weakening financial sector.

In addition, uncertainties regarding future trade arrangements and industrial policies in various countries, such as in the United Kingdom following the referendum to leave the European Union and in the United States under the current administration, create additional macroeconomic risk. In the United States, any policy to discourage import into the United States of home furnishings manufactured elsewhere could adversely affect our operations. Any new policies and any steps we may take to address such new policies may have an adverse effect on our business, financial condition and results of operations.

These persistently difficult conditions have resulted in a decline in our sales and earnings over the past few years anduncertain conditions could continue to impactaffect our sales and earnings in the future. Sales of residential furniture are impacted by downturns in the general economy primarily due to decreased discretionary spending by consumers. The general level of consumer spending is affected by a number of factors, including, among others, general

Adverse economic conditions inflation, consumer confidencemay also affect the financial health and the availabilityperformance of consumer credit, allour dealers in a manner that will affect sales of which are generally beyond our control.

The economicproducts or their ability to meet their commitments to us. Economic downturn may also impactsaffect retailers, our primary customers, and may result in the inability of our customers to pay the amounts owed to us. In addition, if our retail customers are unable to sell our products or are unable to access credit, they may experience financial difficulties leading to bankruptcies, liquidations, and other unfavorable events. If any of these events occur, or if unfavorable economic conditions continue to challenge the consumer environment, our future sales, earnings, and liquidity would likely be adversely impacted.

The Group’s ability to generate the significant amount of cash needed to service our debt obligations and comply with our other financial obligations, and our ability to refinance all or a portion of our indebtedness or obtain additional financing depends on multiple factors, many of which may be beyond our control — Our

ability to make scheduled payments due on our existing and anticipated debt obligations and on our other financial obligations, and to refinance and to fund planned capital expenditure and development efforts will depend on our ability to generate cash. See “— The Group has a recent history of losses; the Group’s future profitability, financial condition and ability to maintain adequate levels of liquidity depend to a large extent on its ability to overcome macroeconomic and operational challenges.” We will require generation ofneed to generate sufficient operating cash flow from our operations to service our current and future projected indebtedness. Our ability to obtain cash to service our existing and projected debts is subject to a range of economic, financial, competitive, legislative, regulatory, business and other factors, many of which are beyond our control. We may not be able to generate sufficient cash flow from our operations to satisfy our existing and projected debt and other financial obligations, in which case, we may have to undertake alternative financing plans, sell assets, reduce or delay capital investments, or seek to raise additional capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the financial markets and our financial condition at such time. To the extent we have borrowings under bank overdrafts and short-term borrowings that are payable upon demand or which have short maturities we may be required to repay or refinance such amounts on short notice, which may be difficult to do on acceptable financial terms or at all.

At December 31, 2016,2018, we had €18.2€35.1 million of bank overdraftsoverdraft and short-term borrowings outstanding. In addition, while we had €65.0€62.1 million of cash and cash equivalents at December 31, 2016, 62%2018, 29.4% of this amount was held by our Chinese subsidiaries, most of which cannotcan be paid to us as a dividend without incurring withholding taxes. We cannot assure you that any refinancing or restructuring would be possible, that any assets could be sold, or, if sold, of the timing of the sales or the amount of proceeds that would be realized from those sales. We cannot assure you that additional financing could be obtained on acceptable terms, if at all, or would be permitted under the terms of our various debt instruments then in effect. Our failure to generate sufficient cash flow to satisfy our existing and projected debt obligations, or to refinance our obligations on commercially reasonable terms, would have an adverse effect on our business, financial condition and results of operations.

The Company uses a securitization program to manage liquidity risk. Should such program be terminated, the Company’s ability to manage such risk will be impaired — As a means to manage liquidity risk, in July 2015, the Company entered into anon-recourse securitization agreement (the “Securitization Agreement”) with an affiliate of Banca Intesa (the “Assignee”). Under the Securitization Agreement, the Company assigns certain customer receivables to the Assignee in exchange for short-term credit, thereby providing the Company with an important and stable source of short-term funding. The Company’s ability to continue using this tool to mitigate liquidity risk depends on the assigned receivables meeting certain credit criteria, one such criterion being the continued solvency of the customers owing such receivables. If these criteria are not met, including, for example, because the credit quality of the Company’s customers deteriorates, the Securitization Agreement may be terminated, thereby depriving the Company of an important tool for managing liquidity risk. During 2016, the Company amended the Securitization Agreement to increase the maximum amount of receivables available to be sold (on a revolving andnon-recourse basis) from €35 million to €55 million.

The Group’sGroup’s operations have benefited in 20162018 and in previous years from temporary work force reduction programs that, if not continued, may have an impact on the Group’sGroup’s future performance — Due to the persistently difficult business environment that has negatively affected the Group’s sales performance over the past few years, the Company has in recent years entered into a series of agreements with Italian trade unions and the relevant Italian Ministry pursuant to which government funds have been used to pay a substantial portion of the salaries of redundant workers who are subject to either layoffs (as in the case ofCassa Integrazione Guadagni Straordinaria, or “CIGS,” an Italian temporarylay-off program, the terms of which expired in October 2016)program) or reduced work schedules (as in the case of the Solidarity Agreement, as defined below).

The agreements signed in recent years have represented a crucial phase.been important. Between October 2013 and October 2015, 500 blue collar workers voluntarily terminated their employment with Company, which led to a gradual reduction of redundant structural staff in the manufacturing and innovation processes.staff.

With respect to the improvement of manufacturing levels, onOn March 3, 2015, the Minister of Labour and Social Politics signed new agreements (the “Solidarity Agreement”) in order to reduce the redundant staff by reducing the working hours.hours per day (the “Solidarity Agreement”). Pursuant to the Solidarity Agreement, a higher number of workers, as compared to the Company’s current need, may continue to work at the Company, though with a salary reduction that is less than proportional to the reduction in working hours (as a result of government financial support). The Solidarity Agreement is also aimed at increasing the competitiveness of the Italian production plants. The Group intends to recover competitiveness through product and process innovation, with the aim to recover market share and potentially maintain the current occupational levels. On March 22, 2016, the Solidarity Agreement was extended for aone-year period, expiring on May 1, 2017. On March 27, 2017, the Company and the trade unions involved agreed to extend the Solidarity Agreement until December 2018.

In 2017, the Company had to reintegrate 166 workers by carrying out the reinstatement measures of the Bari Labour Court that canceled the October 2016 dismissals.

AsThe impact of the reintegration of these 166 workers was managed by the Company through the signing of a resultnew Solidarity Agreement, with the Minister of Labor and Social Politics and trade unions, which extends to all employees, including reintegrated workers.

In December 2018, subject to obtaining any applicable authorizations, the Company, along with the Trade Unions and Italian relevant authorities agreed to extend the Solidarity Agreement the incentive plan offered by(reduced-work schedules) in force for aone-year period ending in December 2019. In addition, parties signed an agreement to allow the Company to redundant workers andbenefit from a temporary workforce reduction program, called CIGS, involving up to 491 employees, for a period of 24 months in order to support the creation of a new labor organization, the Company reduced redundant positions to 359 work units at the end of year 2015, without strikes or social conflict.

In October 2016, the CIGS layoff program expired. Following the expiration, during 2016, the Company offered an incentive of €11.6 million, in the aggregate, to 220 workers, which was accepted. As a result, these 220 workers participated in a voluntary mobility program. Further, 176 workers did not agree to participate in this program and, as a result, their employment was involuntarily terminated as of October 2016..

reorganization process. For further information, please see “Item 5. Operating and Financial Review andProspects—One-Time Termination Benefits” and Notes 3(n) and 21 of the Consolidated Financial Statements included in Item 18 of this Annual Report. Prospects”.

The Company’s inability to continue reducing redundant structural staff could have an adverse effect on our financial condition, results of operations, and cash flows.

The Group’sGroup’s operations may be adversely impacted by strikes, slowdowns and other labor relations matters—Many of our employees, including many of the laborers at our Italian plants, are unionized and covered by collective bargaining agreements. As a result, we are subject to the risk of strikes, work stoppages or slowdowns and other labor relations matters, particularly in our Italian plants. These collective bargaining agreements also limit the possibility to dynamically react to market conditions or competition without the agreement of Italian trade union representatives. During 2014, 2015 and 2016, we experienced strikes and slowdowns in connection with our Italian reorganization efforts, which resulted in lower productivity levels. Our operations may also be adversely impacted by future strikes or slowdowns, which we anticipate could occur in the future in connection with the announcement of layoffs and the subsequent termination of redundant employees.

Any strikes, threats of strikes, slowdowns or other resistance in connection with our reorganization plan, the negotiation of new labor agreements or otherwise could adversely affect our business as well as impair our ability to implement further measures to reduce structural costs and improve production efficiencies. A lengthy strike that involves a significant portion of our manufacturing facilities could have an adverse effect on our financial condition, results of operations, and cash flows.

We may not execute our Business Plan,Budget, successfully or in a timely manner, which could have a material adverse effect on our results of operations or on our ability to achieve the objectives set forth in our plans— On February 28, 2014, the Natuzzi board of directors approved the 2014-2016 Business Plan, which envisaged actions to boost sales and efficiency measures to save on COGS, in order to regain profitability for the Group. The 2017-2020 Business Plan, the guidelines of which were presented to8, 2019, the Board of Directors adopted a budget for 2019. As set out in February 2016this Budget, we expect a slight return to profitability, by consolidating investments made in the retail business through the expansion of our mono-brand stores (either directly or franchised operated) as well as focusing primarily on a few selected primary customers with reference to our unbranded business, while continuing to implement efficiency recovery actions in manufacturing and subsequently enhanced in July 2016, also incorporates successful execution of these actions.supply chain and a general cost control activity. The profitability of our operations depends on the successful and timely execution of the Business Plan.Budget. The failure to successfully and timely executeachieve these objectives could result in ongoing losses for the Group and a failure to reduce costs and improve sales as contemplated byand, hence, generate losses for the Business Plan.Group.

A failure to offer a wide range of products that appeal to consumers in the markets we target and at different price-points could result in a decrease in our future profitability — The Group’s sales depend on our ability to anticipate and reflect consumer tastes and trends in the products we sell in various markets around the world, as well as our ability to offer our products at various price points that reflect the spending levels of our target consumers.

While we have broadened the offering of our products in terms of styles and price points over the past several years in order to attract a wider base of consumers, our results of operations are highly dependent on our continued ability to properly anticipate and predict these trends. The potential inability of the Group to anticipate consumer tastes and preferences in the various markets in which we operate, and to offer these products at prices that are competitive to consumers, may negatively affect the Group’s ability to generate future earnings.

In addition, with the vast majority of our net salesrevenue deriving from the sale of leather-upholstered furniture, consumers have the choice of purchasing upholstered furniture in a wide variety of styles and materials, and consumer preferences may change. There can be no assurance that the current market for leather-upholstered furniture will grow consistent with our internal projections under the 2017-2020 Business Plan or that it will not decline.

Demand for furniture is cyclical and may fall in the future— Historically, the furniture industry has been cyclical, fluctuating with economic cycles, and sensitive to general economic conditions, housing starts, interest rate levels, credit availability and other factors that affect consumer spending habits. Due to the discretionary nature of most furniture purchases and the fact that they often represent a significant expenditure to the average consumer, such purchases may be deferred during times of economic uncertainty such as those being recently experienced in some of our markets, such as Europe, or the United States some years ago.

The furniture market is highly competitive— The Group operates in a highly competitive industry that includes a large number of manufacturers. No single company has a dominant position in the industry. Competition is generally based on product quality, brand name recognition, price and service.

The Group principally competes in the upholstered furnituresub-segment of the furniture market. In Europe, the upholstered furniture market is highly fragmented. In the United States, the upholstered furniture market includes a number of relatively large companies, some of which are larger and have greater financial resources than the Group. Some of the Group’s competitors offer extensively advertised, well-recognized branded products.

Competition has increased significantly in recent years as foreign producers from countries with lower manufacturing costs have begun to play an important role in the upholstered furniture market. Such manufacturers are often able to offer their products at lower prices, which increases price competition in the industry. In particular, manufacturers in Asia and Eastern Europe have increased competition in the lower-priced segment of the market. As a result of the actions and strength of the Group’s competitors and the inherent fragmentation in some markets in which it competes, the Group is continually subject to the risk of losing market share, which may lower its sales and profits.

Market competition may also force the Group to reduce prices and margins, thereby reducingnegatively affecting its cash flows.

The highly competitive nature of the industry means that we are constantly at risk of losing market share, which would likely result in a loss of future sales and earnings. In addition, due to high levels of competition, it may not be possible for us to raise the prices of our products in response to inflationary pressures or increasing costs, which could result in a decrease in our profit margins.

We have identified a material weakness in our internal control over financial reporting which, if not remediated, could have a material adverse effect on our reputation, business or ADS price —In reviewing the accounting for the significant unusual transaction (“SUT”) we completed in 2018 as part of a joint venture agreement with Kuka Furniture (Ningbo) Co., Ltd. (“Kuka”) (see Note 10 to our consolidated financial statements included in Item 18 of this Annual Report on Form 20-F), our management identified a deficiency in the effectiveness of our internal control over financial reporting. The deficient internal control was intended to properly document and review (i) the appropriate accounting under IFRS of the recognition of revenue from the licensing of Natuzzi’s trademarks to the joint venture Natuzzi Trading Shanghai (IFRS 15, B58) and (ii) the appropriate classification under IFRS of Natuzzi Trading Shanghai as a joint venture of Natuzzi S.p.A.

As described under “Item 15. Controls and Procedures”, an inappropriate accounting policy was identified and corrected before finalization and publication of our unaudited consolidated results as at and for the three months and full year ended December 31, 2018. Nonetheless, our management has concluded that the deficiency constitutes a material weakness in our internal control over financial reporting and, as a result, internal control over financial reporting was not effective as at December 31, 2018.

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

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

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

We have developed a plan to remediate this material weakness and believe, based on our evaluation to date, that this material weakness will be remediated on a timely basis in 2019. Nevertheless, we cannot assure you that this will occur within the contemplated timeframe. If we are unable to remediate the material weakness, our ability to record, process and report financial information accurately, and to prepare financial statements within the time periods specified by the rules and forms of the Securities and Exchange Commission, could be adversely affected. The occurrence of or failure to remediate the material weakness may, in the event of similar significant unusual transactions in the future, have a material adverse effect on our reputation and business and the market price of our ADSs and any other securities we may issue.

Fluctuations in currency exchange rates and interestsinterest rates may adversely affect the Group’s results — The Group conducts a substantial part of its business outside of the Euro-zone and is exposed to market risks stemming from fluctuations in currency and interest rates. AnIn particular, an increase in the value of the Euro relative to other currencies used in the countries in which the Group operates has in the past, and may in the future, reduce the relative value of the revenues from its operations in those countries, and therefore may adversely affect its operating results or financial position, which are reported in Euro. In addition to this risk, the Group is subject to currency exchange rate risk to the extent that its costs are denominated in currencies other than those in which it earns revenues. In 2016, a significant portion2018, 64% of the Group’s net sales (about 66%), but approximately 55%revenue and almost 46% of its costs were denominated in currencies other than the Euro. The Group also holds a substantial portion of its cash and cash equivalents in currencies other than the Euro, including a large amount in Chinese Yuan (CNY or RMB, hereafter) received as compensation for the relocation of its Chinese manufacturing plant in 2011. The Group is therefore exposed to the risk that fluctuations in currency exchange rates may adversely affect its results, as has been the case in recent years. During 2018 through the first part of 2019, the foreign exchange markets have been subject to a high degree of volatility, with the Euro currency strengthening over the major currencies, US dollar in particular, in which the Group sells its products.

In addition, foreign exchange movements might also negatively affect the relative purchasing power of our clients which could also have an adverse effect on our results of operations.

Although we seek to manage our foreign currency risk in order to minimize negative effects from rate fluctuations, including through hedging activities, there can be no assurance that we will be able to do so successfully. Therefore, our business, results of operations and financial condition could be adversely affected by fluctuations in market rates, particularly if these highly volatile market conditions persist.

In the normal course of business, the Group also faces risks that are eithernon-financial ornon-quantifiable. Such risks principally include country risk, credit risk and legal risk. For more information about currency and interest rates risks, see Item 11, “Quantitative and Qualitative Disclosures about Market Risk.”

The Group faces risks associated with its international operations — The Group is exposed to risks that arisearising from its international operations, including changes in governmental regulations, tariffs or taxes and other trade barriers, price, wage and currency exchange controls, political, social, and economic instability in the countries where the Group operates, inflation and exchange rate and interest rate fluctuations. Any of these factors could have a material adverse effect on the Group’s results.

The Group’sGroup’s past results and operations have significantly benefited from government incentive programs, which may not be available in the future — Historically, the Group derived significant benefits from the Italian Government’s investment incentive programs for under-industrialized regions in Southern Italy, including tax benefits, subsidized loans and capital grants. See “Item 4. Information on the Company—Incentive Programs and Tax Benefits.” In recent years, the Italian Parliament replaced these incentive programs with an investment incentive program for all under-industrialized regions in Italy, which is currently being implemented by the Group through grants, research and development benefits. There are no indications at this time that the Italian Government will implement new initiatives to support companies located in under-industrialized regions in Italy. Therefore, there can be no assurance that the Group will continue to be eligible for such grants, benefits or tax credits for its current or future investments in Italy.

In recent years, theThe Group has opened manufacturing operations in China, Brazil and Romania and through 2011,in some cases was granted tax benefits and export incentives by the respective governmental authorities in those countries. There can be no assurance that the Group will benefit from such tax benefits or export incentives in connection with future investments.

Failure to protect our intellectual property rights could adversely affect us —We believe that our intellectual property rights are important to our success and market position. We attempt to protect our intellectual property rights through a combination of patent and trademark laws, as well as licensing agreements and third party nondisclosure and assignment agreements or confidentiality and restricted use agreements. We believe that our patents, trademarks and other intellectual property rights are adequately supported by applications for registrations, existing registrations and other legal protections in our principal markets. However, we cannot exclude the possibility that our intellectual property rights may be challenged by others or that agreements designed to protect our intellectual property will not be breached, or that we may be unable to register our patents, trademarks or otherwise adequately protect them in some jurisdictions.

The Company relies on information technology to operate its business, and any disruption to its technology infrastructure could harm the Company’sCompany’s operations — We operate many aspects of our business including financial reporting, and customer relationship management through server andweb-based technologies, and technologies. We store various types of data on such servers or with third-parties who in turn store it on servers and in the “cloud”. Any disruption to the internet or to the Company’s or its service providers’ global technology infrastructure, including malware, insecure coding, “Acts of God,”

attempts to penetrate networks, data theft or loss and human error, could have adverse affectseffects on the Company’s operations. A cyber attack of our systems or networks that impairs our information technology systems could disrupt our business operations and result in loss of service to customers. We have a Business Continuity Plan and cybersecurity test designed to protect and preserve the integrity of our information technology systems and the business continuity. Our ability to keep our business operating effectively depends on the functional and efficient operation of our information, data processing and telecommunications systems, including our design, procurement, manufacturing, inventory, sales and payment process. While we have invested and continue to invest in information technology risk management, cybersecurity and disaster recovery plans, these measures cannot fully insulate the Company from technology disruptions or data theft or loss and the resulting adverse effect on the Company’s operations and financial results.

The price of the Group’s principal raw materials is difficult to predict.predict — In 2016, approximately 89%2018, 83% of the Group’s total upholstered net sales came from leather-upholstered furniture sales. The acquisition of cattle hides representsrepresented approximately 27%18% of 2018 total cost of goods sold. The dynamics of the raw hides market are dependent on the consumption of beef, the levels of worldwide slaughtering, worldwide weather conditions and the level of demand in a number of different sectors, including footwear, automotive, furniture and clothing.

The Group is dependent on qualified personnel —The Group’s ability to maintain its competitive position will depend to some considerable degree upon the personal commitment of its founder, chief executive officer (“CEO”) and chairman of the Company’s board of directors (the “Board of Directors”), Mr. Pasquale Natuzzi, as well as on its ability to continue to attract and maintain highly qualified managerial, manufacturing and sales and marketing personnel. There can be no assurance that the loss of key personnel would not have a material adverse effect on the Group’s results of operations.

Changes in tax laws may affect our results— We are subject to income taxes in Italy and other jurisdictions. Changes in tax laws, regulations, or administrative practices in those jurisdictions, such as the recently-enacted U.S. tax reform legislation commonly referred to as the U.S. Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”) could affect our financial position and results of operations. The 2017 Tax Act has significantly changed the U.S. federal income tax rules applicable to U.S. corporations, including by reducing the maximum statutory corporate income tax rate from 35% to 21% as of January 1, 2018. Accounting for the income tax effects of the 2017 Tax Act requires significant judgments in interpretation of its provisions, which may be affected by additional guidance that may be issued by the U.S. Treasury Department, the IRS, and standards-setting bodies. We have completed our evaluation of the impact of the 2017 Tax Act on our U.S. operations and no material impact has arisen for the 2017 and 2018 financial statements.

Investors may face difficulties in protecting their rights as shareholders or holders of ADSs — The Company is incorporated under the laws of the Republic of Italy. As a result, the rights and obligations of its shareholders and certain rights and obligations of holders of its ADSs (as defined below) are governed by Italian law and the Company’sstatuto (or theBy-laws). These rights and obligations are different from those that apply to U.S. corporations. Furthermore, under Italian law, holders of ADSs have no right to vote the shares underlying their ADSs; however, pursuant to the Deposit Agreement (as defined below), ADS holders do have the right to give instructions to The Bank of New YorkBNY Mellon, National Association (“BNY Mellon”BNY” or the “Depositary”) the ADS depositary, as to how they wish such shares to be voted. For these reasons, the Company’s ADS holders may find it more difficult to protect their interests against actions of the Company’s management, board of directors or shareholders than they would if they were shareholders of a company incorporated in the United States.

One shareholder has a controlling stake of the Company — Mr. Pasquale Natuzzi, who founded the Company and is currently CEO and chairman of the Board of Directors, beneficially owns, as of April 21, 2017,19, 2019, an aggregate amount of 30,967,521ordinary shares of the Company (the “Ordinary Shares”), representing 56.5% of the Ordinary Shares outstanding (61.6% of the Ordinary Shares outstanding if the Ordinary Shares owned by members of Mr. Natuzzi’s immediate family (thefamily—the “Natuzzi Family”) —are aggregated). As a result, Mr. Natuzzi has the ability to exert significant influence over our corporate affairs and to control the Company, including its management and the selection of its board of directors. Since December 16, 2003, Mr. Natuzzi has held his entire beneficial ownership of Natuzzi S.p.A. shares through INVEST 2003 S.r.l., an Italian holding company wholly-owned by Mr. Natuzzi and with its registered office located at Via Gobetti 8, Taranto, Italy.

In addition, under the Deposit Agreement dated as of May 15, 1993, as amended and restated as of December 23, 1996, and as of December 31, 2001 (the “Deposit Agreement”), among the Company, the Depositary, and owners and beneficial owners of American Depositary Receipts (“ADSs”), the Natuzzi Family has a right of first refusal to purchase all the rights, warrants or other instruments which BNY Mellon, as Depositary under the Deposit Agreement, determines may not lawfully or feasibly be made available to owners of ADSs in connection with each rights offering, if any, made to holders of Ordinary Shares.

Because a change of control of the Company would be difficult to achieve without the cooperation of Mr. Natuzzi and the Natuzzi Family, the holders of the Ordinary Shares and the ADSs may be less likely to receive a premium for their shares upon a change of control of the Company.

Purchasers of our Ordinary Shares and ADSs may be exposed to increased transaction costs as a result of the Italian financial transaction tax or the proposed European financial transaction tax— On February 14, 2013, the European Commission adopted a proposal for a directive on the financial transaction tax (hereafter “EU FTT”) to be implemented under the enhanced cooperation procedure by eleven Member States initially (Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovenia, Slovakia and Spain). Following Estonia’s formal withdrawal on March 16, 2016, ten Member States are currently participating in the negotiations on the proposed directive. Member States may join or leave the group of participating Member States at later stages. The proposal will be negotiated by Member States,stages and, subject to an agreement being reached by the participating Member States, a final directive will be enacted. The participating Member States will then implement the directive in local legislation. If the proposed directive is adopted and implemented in local legislation, investors in Ordinary Shares and ADSs may be exposed to increased transaction costs.

The Italian financial transaction tax (the “IFTT”) applies with respect to trades entailing the transfer of (i) shares or equity-like financial instruments issued by companies resident in Italy, such as the Ordinary Shares; and (ii) securities representing the shares and financial instruments under (i) above (including depositary receipts such as the ADSs), regardless of the residence of the issuer. The IFTT may also apply to the transfer of Ordinary Shares and ADSs by a U.S. resident. The IFTT does not apply to companies having an average market capitalization lower than €500 million in the month of November of the year preceding the year in which the trade takes place. In order to benefit from this exemption, companies whose securities are listed on a foreign regulated market, such as the Company, need to be included on a list published annually by the Italian Ministry of Economy and Finance. As of the date of this Annual Report, theThe Company is yetnot included in the list published on December 19, 2018 for transactions to be included on such a list.carried out in 2019. As a result of the IFTT, investors in the Ordinary Shares and ADSs may be exposed to increased transaction costs. See “Taxation—Other Italian Taxes—The Italian Financial Transaction Tax.”

ITEM 4. INFORMATION ON THE COMPANY

Introduction

History and development of the company — Founded in 1959 by Pasquale Natuzzi, Natuzzi S.p.A. designs, manufacturesis Italy’s largest furniture house and sells a broad collection of couches, armchairs, home furniture and home accessories.

The Group is one of the world’s leading companiesmost important global player in the furniture industry with an extensive manufacturing footprint and according to IPSOS (onea global retail network. Natuzzi is the best known lifestyle brand in the global furniture industry (Brand Awareness Monitoring Report—Ipsos 2016). Continuous stylistic research, creativity, innovation, solid craftsmanship and industrialknow-how and integrated management throughout the entire value chain are the mainstays that have made Natuzzi one of the leading market research companies worldwide), the Natuzzi brand was ranked alsofew players with global reach in 2015 as the best-known global brand within the furniture category.

market. Natuzzi began operations in Italy in 1959.S.p.A. has been listed on the New York Stock Exchange since May 13, 1993. Always committed to social responsibility and environmental sustainability, Natuzzi is ISO 9001 and 14001 certified (Quality and Environment), OHSAS 18001 certified (Safety on the Workplace) and FSC® certified (Forest Stewardship Council). The Company first targeted the U.S. market in 1983 and subsequently began entering other European markets. More recently, Natuzzi startedcontinues to focus its attention on Brazil, Russia, India, China and other developing markets. TodayCurrently, the distribution network covers approximately 100 countries on five continents.

The company has established a new brand strategy forportfolio of the Group: one brand “Natuzzi” with two product lines —Group is made of three main brands:Natuzzi Italia, Natuzzi Editions andDivani&Divani by Natuzzi Editions, to serve a wider range of consumers, but always leveraging on the Natuzzi brand name.

. For a detailed description of the brand and its target markets, please see “Strategy—The Brand Portfolio Strategy” and “Products” below.

The Group also offers unbranded products (also through its private label, Softaly) within a dedicated business unit to meet the specific needs of key accounts.

As of March 31, 2017,2019, the Group distributed its products as follows:

The Natuzzi Group presents its products at the world’s leading furniture fairs:Il Salone del Mobile in Milan, Italy,IMM in Cologne, Germany,Furniture Market in High Point, USA,North Carolina, U.S.,100% Design in London, United Kingdom, among others.

On June 7, 2002, the Company changed its name fromIndustrie Natuzzi S.p.A. to Natuzzi S.p.A. Thestatuto (or theBy-laws) of the Company provide that the duration of the Company is until December 31, 2050. The Company, which operates under the trademark “Natuzzi,” is asocietàsocietà per azioni (joint stock company) organized under the laws of the Republic of Italy and was incorporated in 1959 by Mr. Pasquale Natuzzi, who is currently the CEO, chairman of the Board of Directors and controlling shareholder of the Company. Most of the Company’s operations are carried out through various subsidiaries that individually conduct a specialized activity, such as leather processing, foam production and shaping or furniture manufacturing, marketing or administration.manufacturing.

The Company’s principal executive offices are located at Via Iazzitiello 47, 70029 Santeramo in Colle, Italy, which is approximately 25 miles from Bari, in southern Italy. The Company’s telephone number is: +39 080882-0111. The Company’s general sales agent subsidiary in the United States is Natuzzi Americas, Inc. (“Natuzzi Americas”), located at 130 West Commerce Avenue, High Point, North Carolina 27260. Natuzzi Americas telephone number is: +1 336887-8300.

The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is www.sec.gov. The Company’s Internet address is natuzzi.com

Organizational Structure

Natuzzi S.p.A. is the parent company of the Natuzzi Group. As of March 31, 2017,2019, the Company’s principal operating subsidiaries were:

See Note 1 to the Consolidated Financial Statements included in Itemitem 18 of this Annual Report for further information on the Company’s subsidiaries.

Strategy

The Company’s results for the year 2016 should be viewed in light of worldwide economic conditions, which are not in the Company’s control, such as the volatility of the Euro and the reduction in the price of certain raw materials, in particular leather, and transportation costs. These external factors may notre-occur in 2017. To reduce potential inflationary pressure on costs, during the past several months, the Group has purchased raw materials in amount that is beyond its short-term needs in order to benefit from the current favorable prices for the entire 2017.

Although the economy is gradually recovering in some regions, the general worldwide economic environment has not recovered enough to, on its own, lead to an increase in the Company’s sales volumes.

Thegeo-political context, which is currently characterized by conflicts in various parts of the globe, instability within the European Union and the slow-down in the emerging economies, has contributed to increase concern about companies’ and consumers’ future.

Therefore, the Company intends to target geographic regions with high growth potential, such as North America, the United Kingdom and China, through major commercial drives to gain market share from competitors, mainly by leveraging on the new retail format for Natuzzi Italia, on marketing and products.

Over the last several years, the Group has focused its efforts on brand strengthening, expanding its product offering and retail network, and efficiency improvements in both procurement and operations. At the same time, the Group has implemented cost control measures to streamline its headquarter related costs. Negotiations with

Additionally, we launched a new Group organization in July 2016 based on two business models and two Divisions (Natuzzi Division and Softaly Division). Such strategy has stayed consistent throughout 2017 and 2018.

1) The Natuzzi Division — The Natuzzi Division has further developed its strategy as a widely-recognized, global consumer brand whose footprint has existed for the Italian government to maintain the current occupational levels were carried out with success.past 10 years.

In 2016, although we experienced significant savings on operating costs (raw materials2018 the Natuzzi Division executed its plan to evolve into adirect-to-consumer business model, both organizationally and transportation in particular),operationally.

First of all, a new consumer-centric organization has been established to drive the Group decided notentirego-to-market process, from R&D to lower prices in orderdesign, merchandising, brand communication, customer acquisition and customer value, supply chain, after sales service and customer retargeting.

With regard to support sales. In fact, despitecustomer acquisition worldwide, thedirect-to-consumer business model has been accelerated through a decreasing turnover, the Group improved the qualitywide set of its sales, margins and cash flow. Furthermore, with a specific focus on the wholesale distribution, the Group has undertaken a strategy that prioritizes margins rather than volumes: this has led sometimes to a decline in turnover in the North America and Europe regions.

The Company’s recent focus on innovation, expanding its product offering and on points of sale, together with high brand recognition, are expected to support growth in those markets that the Company considers to be the most important.

The Company intends to focus on the following activities in 2017:

—	fine tuning theretail format

The increaseexecution of the above strategy is set to continue and be strengthened during 2019, in sales inorder to further nurture and protect the North America region, in particular with some “key accounts”Brand identity of each brand while strengthening the evolution towards adirect-to-consumer business model.

2) The second division isSoftaly, our private label business, offering leather upholstery to the largest worldwide wholesalers at amedium/low-end of the market. Softaly is the Group’s manufacturing project that devotes its foreign plants to the business and customers at large retailers and department store resellers. This segment of the market is exposed to any other competition offering uniquely a product “value” at specific market’s price positionings, which are typically private labels wholesalers featuring large volumes at slightly lowerclearly affects our margins. In 2016order to get higher efficiencies, economies of scale and recover competitiveness in this division, we will continue to be focused on simplifying the Softaly “industrial project”,re-engineering most of the Softaly models and developing new models according to modular platform bases. Having gone through this process over the past year, we recently presented a new collection during the latest exhibitions in Europe and the U.S. In 2018, the Softaly division grew in line with our expectation both in the Asia PacificAsia-Pacific and EMEA region, whereas the North America region suffered from a decline in sales from one of our most important client in that region. The Group is focusing on implementing actions, both in organization and marketing, to recover business in the North American market, which remains oneregion it kept suffering from a downsizing and decline in sales of our best opportunities for growth: we expect such actions to allow the Group to recover market sharemost important key retailers in the following quarters.

The Company’s plan for growth (mainly North America, the United Kingdom and China);

During 2016,2018, the Group opened27 36 Natuzzi Italia stores,9 15 of which are located in China, 3 in Australia, 3the USA, 4 in the United Kingdom, 2 in each of Spain, France, and Turkey, and 1 in each of Italy, Russia, Ukraine,1 in Brazil, Bosnia and Slovakia. In 2016, the Group also opened a number of Natuzzi Italia galleries. As of March 31, 2017, there were 183Natuzzi Italia stores, of which 30 were directly owned by the Group, and 9 were concessions10 in the United Kingdom.other markets worldwide.

Natuzzi Editions as well as theDivani&Divani by Natuzzi retail chainchains are characterized by a medium positioning in the upholstery business. As of March 31, 2017, we distributed our products throughNatuzzi Editionsgalleries, and 113During 2018, the Group opened 56Natuzzi Editions stores worldwide,(40 of which 84are located in China (with 10Natuzzi Editions stores

were directly operated by the Group), 22 in Brazil, 3 in Serbia, and one each of Taiwan, Thailand, Israel and Paraguay.As of the same date, there were81China) as well as 5Divani&Divani by Natuzzi stores, 77 located in Italy (of which 17 directly operated by the Group) and 4 in Portugal.stores.

Product Diversification and Innovation — The Group believes that it is crucial to display a coordinated product mix through its “Harmony“harmony maker” offering.offer. The “Harmony“harmony maker” offer is conceiveda branded package in accordance with the latest trends in design, materials and colours,colors, and includes high quality sofas, furnishings (including wall units, dining tables and chairs) and accessories, all of which are developed mainlyin-house and presented in harmonious and personalized solutions. The Group has taken a number of steps to broaden its product lines, including the development of new models, such as modular and motion frames, and the introduction of new materials and colours,colors, including exclusive fabrics and microfibers. The Group believes that expanding its “Harmony Maker”“harmony maker” offer will strengthen its relationships with the world’s leading distribution chains, which are interested in offering branded packages. The Group has also investedcontinued investing in the Natuzzi Style Center in Santeramo in Colle, Italy, to serve as a creative hub for the Group’s design activities.

In recent years Natuzzi developed important partnerships with internationally renowned designers, such as Claudio Bellini, Studio Memo, Mauro Lipparini and Jamie Durie, who are able to capture the brand’s spirit in their designs.

Beginning in 2014, The Group also began distributing beds, bed linens and bedroom furnishings to further expand its product offerings.

Manufacturing

Our manufacturing facilities are located in China, Romania, Brazil and Italy.

Our Chinese plant is located in Shanghai, extending over 88,000 square meters, and has been in operation since 2011. As of December 31, 2016,2018, our Chinese plant employed 1,271992 people, of whom 1,188916 were laborers. It manufacturesNatuzzi Editions and private label products for the Americas (apart from Brazil)South America) and for the Asia-Pacific market. In 2016,2018, the Chinese plant produced about 40%32% of the Group’s total consolidated upholstery revenue.

Our Romanian plant is located in Baia Mare, extending over 75,600 square meters, and has been in operation since 2003. As of December 31, 2016,2018, our Romanian plant employed 1,1261,009 people, of whom 1,060946 were laborers. It producesNatuzzi Editions and private label products for Eastern Europe,EMEA. In 2018, the Middle East and Africa (“EMEA”). In 2016 theRomanian plant generatedproduced about 20%16% of the Group’s total consolidated upholstery revenue.

Our Brazilian plant is located in Salvador De Bahia, extending over 28,700 square meters, and has been in operation since 2000. As of December 31, 2016,2018, our Brazilian plant employed 176232 people, of whom 144172 were laborers. It produces

Since the end of 2016, in addition to Natuzzi Revive, Natuzzi Editions and private label products exclusively for the local market. In March 2015, the Group set up a new moving line dedicated to the production ofNatuzziRe-vive, to be sold exclusively to the Brazilian market. In 2016, the plant generated almost 5% of the Group’s total consolidated upholstery revenue. During 2016, a portion of our Latin America-based customers were also served byPrivate Label, the Brazilian plant resultingalso produces theNatuzzi Italia brand for the Brazil and South America market. During 2017, due to the increase in increased production volume at such manufacturing facility. In addition, thevolumes, a fourth and fifth moving line have been set up. The Group previously owned a Brazilian plant located in Pojuca, which it sold in 2015 for a total consideration of approximately €4.0 million.2015. For further information on the sale of the Pojuca plant, see “— Manufacturing—Brazilian Production” below.

Our three Italian plants dedicated to the production of upholstered products and two warehouses are located in Santeramo Jesce, Matera Jesce and Laterza, all of which are located either in or within a 25 kilometer radius of Santeramo in Colle, where the Group’s headquarters are located. Collectively these sites extend over 120,000 square meters. As of December 31, 2016,2018, these sites (together with the Group’s headquarters) employed 1,9571,570 workers, the majority of whom were subject to the layoff program. See “Item 6. Directors, Senior Managers and Employees—Employees.” TheWith the exception of our Brazilian and South American markets, the Italian plants are the exclusive producers ofNatuzzi Italia products for the world market and, beginning in the first quarter of 2014, these plants also began producing theRe-vive performance recliner. In 2016,2018, these plants generated about 35%47% of the Group’s total consolidated upholstery revenue. As a result of the Solidarity Contract a significant portion of theNatuzzi Editions production was transferred from Romania to Italy in order to more evenly distribute production based on the Group’s human resources needs.

In addition to these three Italian plants, we have two plants elsewhere in Italy: one dedicated to the production of leather and another one dedicated to the production of flexible polyurethane foam, as further described below.

These operations retain many characteristics of hand-crafted production coordinated through a management information system that identifies by number (by means of abar-code system) each component of every piece of furniture and facilitates its automatic transit and traceability through the different production phases up to the warehouse.

In recent years, the Group has been investing in the reorganization of its production processes, following the “Lean Production” approach. We believe that ongoing implementation of these more efficient production processes will allow us to regain competitiveness by reducing costs (both in terms of labor and consumption of materials) and improving the quality of our services (by reducing defects and lead time for production).

The industrialization of the prototyped product lines was further defined in May 2011, and in December 2011 three new production lines were completed in a new dedicated plant in Matera Jesce. We also moved the manufacturing of wooden frames, which was originally carried out in the production site located in Santeramo in Colle, Italy, to the Matera Jesce plant, thus further optimizing both productivity and logistics costs through a direct,in-loco integration of sofa assembly.

During 2012, these new moving lines were gradually introduced in all of the Group’s production facilities. In 2013, the Group integrated the following production phases in the moving-linemoving line production process within our plants:

• direct integration with wood and foam suppliers to serve each plant according to daily needs (“just in time” supplying) with the advantage of reducing the stock level for semi-finished goods; and

•

This upgrade in the industrial process allows us to better control every stage in the moving-linemoving line sequence in terms of quality, since every worker at every stage supervises the quality of the piece he receives from the immediately previous stage as well as the piece he passes forward; should a quality issue arise, it must be resolved immediately before gettingre-introduced into the production chain. Thison-the-spot product quality monitoring started to slightly reduce our defect claims rate and we expect further improvement from this monitoring.

Testing of limited model samples produced with the moving-line process demonstrated a nearly 7% decline in cost of goods sold for certainNatuzzi Editions and private label products and a decline in cost of goods sold of nearly 12% for certainNatuzzi Italia products. Following these tests, management confirmed its decision to transform all the Group’s plants, substituting the old “Isle Production” models, with a roll out of moving-line production processes to all plants. As of December 31, 2016 the following number of moving lines were implemented and completed: 26 moving lines in China; 14 moving lines in Romania; 8 moving lines in Italy; 4 moving lines in Brazil. Each moving line has an estimated production capacity of up to 130 seats per day when utilized for two eight-hour shifts per day.

Beginning in 2014, we have also been designing a software program in cooperation with the University of Lecce that assists in assigning models to the moving line to which they are best-suited and where production would be most efficient. In 2015, we implemented the software in the Romanian plant. A final release was subsequently performed in Matera Jesce and soon after released in China and Brazil.

Consistent with its commitments under the Italian Reorganization Agreements, the Company has reorganized its Italian operations by closing its plant located in Ginosa, effective January 2014. This closure has allowed us to concentrate all upholstered furniture production activities within just three facilities with the aim of reducing logistics costs and industrial costs.

The Company initially also planned to close its warehouse inMatera-La Martella, but, following the decision to execute the covering-cutting phase within all of the Italian plants, thus reducing space available for products assembled, it decided not to close it and to continue utilizing theMatera-La Martella plant as a general warehouse for sofas and accessory furnishings.

Furthermore, the Group also utilizes two facilities for the processing of leather (Natco S.p.A. (“Natco”), located in Udine), and for the production of polyurethane foam (IMPE S.p.A. (“IMPE”), located near Naples).

The Group processes leather hides to be used as upholstery in its Udine plant whose main activities are leather dyeing and finishing. The Udine facility, which had 157145 employees as of December 31, 2016,2018, of whom 131122 were laborers, receives both raw and tanned cattle hides, sends raw cattle hides to subcontractors for tanning, and then dyes and finishes the hides. Hides are tanned, dyed and finished on the basis of orders given by the Group’s central office in accordance with the Group’s “on demand” planning system, as well as on the basis of estimates of future requirements.

The movement of hides through the various stages of processing is monitored through our management information system. See “Item 4. Information on the Company—Manufacturing—Supply-Chain Management.”

The Group produces, directly and by subcontracting, ten grades of leather in approximately 40 finishes and 280 colors. The hides, after being tanned, are split and shaved to obtain uniform thickness and separated into “top grain” and “split.” Top grain leather is primarily used in the manufacture of mostNatuzzi Italia leather products, while split leather is used, in addition to top grain leather, in the manufacture of someNatuzzi Italia products and mostNatuzzi Editions products. The hides are then colored with dyes and treated with fat liquors and resins to soften and smooth the leather, after which they are dried. Finally, the semi-processed hides are treated to improve the appearance and strength of the leather and to provide the desired finish. The Group also purchases finished hides from third parties.

The Group’s facility for the production of polyurethane foam, IMPE, employed 3332 workers as of December 31, 2016,2018, of whom 19 were laborers, and is engaged in the production of flexible polyurethane foam, and also sells foam to third parties because the facility’s production capacity is in excess of the Group’s needs. In 2012, IMPE obtained ISO 14001 certification in accordance with the environmental policy of the Natuzzi Group and also improved safety conditions at the plant. As part of the Group’s efforts to improve its production process, we have substituted some chemical compounds with more ecologically-friendly materials.

As a result of intensive research and development activity, the Company has developed a new family of highly resilient materials. The new polymer matrix is safer than others available in the market because of its improved flame resistance, and it is more environmentally-friendly because it can be disposed of without releasing harmfulby-products and because the raw materials used to make it cause a less harmful environmental impact during handling and storage.

Chinese ProductionProduction:: The original Chinese plant owned by the Group was subject to an expropriation process by local Chinese authorities, since the plant was located on land that was intended for public utilities. Negotiations involving the expropriation process began in 2009 and were concluded in 2011. The agreement setting for the payment of compensation for the expropriated plant was signed with Chinese authorities on January 26, 2011. As compensation for this expropriation, the parties agreed upon a total indemnity of Chinese Yuan (CNY or RMB, hereafter)CNY 420 million, which was equivalent to approximately €46.7 million based on the Yuan-Euro exchange rate as of December 31, 2011. The Company collected the full amount of the indemnity payment from the local Chinese authorities in 2011. During 2013, a second supplementary agreement was signed between the Company and the Shanghai Municipality, by which the Company obtained the reimbursement (€8.7 million) of taxes due and paid on the 2011 relocation compensation.

The Group’s current production plant in Shanghai was made available in January 2011 to compensate for the reduction in production capacity caused by the expropriation. The relocation process began in February 2011 and was completed, as planned, by the end of May 2011, after equipment and machinery were moved to the new plant. The relocation resulted in worker turnover of approximately 20% because of the distance of the new plant to the old one (approximately 35 kilometers). In response, management hired new personnel, fully eliminating the turn-over effect by the end of April 2011.

Brazilian Production:The Group owned two plants in Brazil that, in the past, have been used for the production of upholstery for the Americas region. Due to the overall appreciation of the Brazilian Real against the U.S. dollar since these plants were opened and a consequent decline in competitiveness, the Group decided to temporarily close the Pojuca plant (putting it up for sale in 2010) and reduced the production capacity of the Salvador de Bahia plant to a level that is sufficient to serve only the Brazilian market. In February 2015 the Group entered into a sale purchase agreement to sell the Pojuca plant to a Brazilian company. By the end of 2015, the buyer paid the majority of the agreed sale price. The buyer completed the payment of the remainder of the agreed sale price in January 2016.

In March 2015, the Group set up a new moving line dedicated to production ofRe-vive, to be sold exclusively to the Brazilian market.

In order to minimize the potential future effects of currency fluctuations and reduce supply lead times, our Brazilian subsidiary began to increase its local sourcing in 2014.

After frequent interactions between the Group and top local retailers in the past few years, as well as in light of the high level of fragmentation of the Brazilian market, which consists primarily of small producers with low levels ofknow-how, the Group believes that the Latin American region currently represents a very good opportunity for the development of additional business.

Therefore, the Group intends to continue investing in the Latin American market, with a particular focus on Brazil, by better organizing operating, sales and marketing activities, by developing the current distribution channel ofNatuzzi Editionspoints-of-sale and by improving relations with the most important local key accounts through a dedicated private label production.

Raw Materials — The principal raw materials used in the manufacture of the Group’s products are cattle hides, polyurethane foam, polyester fiber and wood.

The Group purchases hides from slaughterhouses and tanneries located mainly in Italy, Brazil, India, Germany, other countries in South America and Europe. The hides purchased by the Group are divided into several categories, with hides in the

lowest categories being purchased mainly in South America.America and India. The hides in the middle categories are purchased in Europe or South America and hides in the highest-quality categories are purchased in Italy, Germany and the United Kingdom. A significant number of hides in the lowest categories are purchased at the “wet blue” stage — i.e., after tanning — while some hides purchased in the middle and highest categories are unprocessed. The Group has implemented a leather purchasing policy according to which a percentage of leather is purchased at a finished or semi-finished stage. Therefore, theThe Group has had a smaller inventory of “split leather” to sell to third parties. Approximately 80% ofpurchases finished leather hides, which is leather that for either technical or price reasons is not processed by the Group’s hidestanneries, from tanneries mainly located in Italy, Brazil and India. The finished leather suppliers ship their goods directly to the destinations where the Group’s factories are purchased from 10 suppliers, with whom the Group enjoys long-termlocated: Santeramo (Italy), Shanghai (China), Baia Mare (Romania) and stable relationships. Hides are generally purchased from the suppliers pursuant to orders given every one to two months specifying the number of hides, the purchase price and the delivery date.

Salvador Bahia (Brazil). Hides purchased from Europe are delivered directly by the suppliers to the Group’s leather facilities near Udine, while those purchased outside of Italy are delivered to an Italian port and then sent to Udine and inspected by technicians of the Group.

Management believes that the Group is able to purchase leather hides from its suppliers at reasonable prices as a result of the volume of its orders, and that alternative sources of supply of hides in any category could be found quickly at an acceptable cost if the supply of hides in such category from one or several of the Group’s current suppliers ceased to be available or waswere no longer available on acceptable terms. The supply of raw cattle hides is principally dependent upon the consumption of beef, rather than on the demand for leather.

During 2016,2018, the prices for hides decreased by about 16%7% compared to 2015. Due2017. According to historical trends, in 2018 the price of raw hides reached the lowest level in the last ten years, even lower than the previous record low in 2009. The current situation is quite uncertain, and due to the volatile nature of the hides market, there can be no assurance that current prices will remain stable or that price trends will not rise in the future. See “Item 3. Key Information—Risk Factors—The price of the Group’s principal raw materials is difficult to predict.”

The Group also purchases fabrics and microfibers for use in coverings. Both kinds of coverings are divided into several price categories. Most fabrics are purchased in Italy from about a dozen suppliers which provide the product at the finished stage. Microfibers are purchased in Italy, South Korea and China through suppliers who provide them at the finished stage.suppliers. Fabrics and microfibers are generally purchased from suppliers pursuant to orders given every week specifying the quantity (in linear meters) and the delivery date.

Fabrics and microfibers for theNatuzzi Italia products that are purchased from Italian suppliers are delivered directly by the suppliers to the Group’s facility in Laterza, while those that are purchased outside of Italy are delivered to an Italian port and then sent to the Laterza facility.

Fabrics and microfibers for theNatuzzi Editions/Leather Editions and private label products are delivered directly by the suppliers to Chinese, Romanian and Brazilian ports and then sent to the Group’s Shanghai, Bahia Mare and Salvador de Bahia facilities.

The Group continuously searches for alternative supply sources in order to obtain the best product at the best price.

Price performance of fabrics is quite different from that of microfibers, depending on the different range of the products’ quality.

Because fabrics are purchased predominantly in Italy and are composed of natural fibers, their prices are influenced by the cost of labor and the quality of the product.

The price of microfibers, in contrast, is mainly influenced by the international availability of high-quality products and raw materials at low costs, especially from Asian markets.

The Group obtains the chemicals required for the production of polyurethane foam from major chemical companies located in Europe (including Germany, Italy and the United Kingdom) and the polyester fiber filling for its polyester fiber-filled cushions from several suppliers located mainly in Indonesia, China, Taiwan and India. The chemical components of polyurethane foam are petroleum-based commodities, and the prices for such components are therefore subject to, among other things, fluctuations in the price of crude oil,oil. The chemical components prices increased significantly in 2018 compared with 2017 and strongly affected the prices of which have dropped further thanpolyurethane foam. During the previous year.last month of 2018, this trend stopped and a decreasing trend began and continued into early 2019. Within our Romanian industrial plant, we have a woodworking facility that provides wooden frames.

The Group also offers a collection of home furnishing accessories (tables, lamps, rugs, home accessories and wall units in different materials). Most of the suppliers are located in Italy and other European countries, while some hand-made products (such

(such as rugs) are made in India and China. The new collections of beds, bedroom furniture and bed linens are produced by Italian companies that are external to the Group. Before any items are introduced into our collection, they are tested in accordance with European and world safety standards. In the design phase particular attention is paid to the choice of innovative technological solutions that add value to the product and ensure long lasting quality. We believe that the Group’s product packaging adheres to a higher standard than the average product packaging marketed by its competitors; we prioritize our high standard of packaging in an effort to ensure better customer service.

Supply-Chain Management

Procurement Policies and Operations Integration — In order to improve customer service and reduce industrial costs, in 2009 the Group established a policy for handling suppliers and supply logistics. All of thesub-departments working in the Logistics Department were reorganized to maximize efficiency throughout the supply-chain. The Logistics Department coordinates periodic meetings among all of its working groups in order to identify areas of concern that arise in the supply-chain, and to identify solutions that will be acceptable to all groups. The Logistics Department is responsible for monitoring the proposed solutions in order to ensure their effectiveness. Additionally, in order to improve access to supply-chain information throughout the Group, the Logistics Department utilizes a portal that allows it and other departments (such as Customer Service and Sales) to monitor the movement of goods through the supply-chain. The Company continues to invest in this area so as to continuously improve supply-chain tools and processes.

Production Planning (Order Management, Warehouse Management, Production, Procurement) — The Group’s commitment to reorganizing procurement logistics has ledis aimed to:

1) the development of a logistics-production model to customize the level of service to customers;

2) a stableoptimize the level of the size of the Group’s inventory of raw materials and/or components, particularly those pertaining to coverings. This positive impact was made possible by both the development of software that allows more detailed production programming and broader access by suppliers themselves, and a more general reorganization of supplier relationships. Suppliers are now able to provide assembly lines at Italian plants with requested components within four hours. At the same time, acomponents. A procedure was implemented for the continuous monitoring of global finished products inventories in order to determine whichin-stock goods are currently not being sold as part of our existing collections (as a result of beingphased-out) and enable the different commercial branches to promote specific sales campaigns of these goods;

3) the planning and partial completion of the industrial reorganization of the local production center; and

4) the implementation of the SAP system since January 2009, throughout the organization.system.

The Group also plans procurements of raw materials and components:

i)“On demand” for those materials and components (which the Group identifies by code numbers) that require a shorter lead time for order completion than the standard production planning cycle for customers’ orders. This system allows the Group to handle a higher number of product combinations (in terms of models, versions and coverings) for customers all over the world, while maintaining a high level of service and minimizing inventory size. Procuring raw materials and components “on demand” eliminates the risk that these materials and components would become obsolete during the production process; and

ii)“Upon forecast” for those materials and components requiring a long lead time for order completion. The Group utilizes a forecast methodology that balances the Group’s desire to maintain low inventory levels against the Sales Department’s needs for flexibility in filling orders, all the while maintaining high customer satisfaction levels.orders. This methodology was developed together with the Group’s Information Systems Department, in order to create an intranet portal, called Advanced Planning and Optimization (“APO”). APO was launched in March 2011 for sales coming from the North American and Asian-Pacific markets, under the supervision of a forecast manager and, beginning in June 2011, was implemented worldwide. This tool currently supports corporate logistics, operations managers and sales managers in our efforts to better forecast the future demand for the Group’s products and to improve communication between the Sales Department and the Logistics Department, therefore reducing inventory levels and improving the availability of raw materials.

Since 2012, a new methodology concerning furnishing management has been introduced. A more efficient cooperation with suppliers enabled the Group to handle furnishings components without storing them in our warehouses, resulting in improved service and reducing inventory levels.

Lead times can be longer than those mentioned above when a high number of unexpected orders are received. Delivery times vary depending on the place of discharge (transport lead times vary widely depending on the distance between the final destination and the production plant).

All planning activities (finished goods load optimization, customer order acknowledgement, production and suppliers’ planning) are synchronized in orderaimed to guarantee that during the production process, the correct materials are located in the right place at the right time, thereby achieving a maximum level of service while minimizing handling and transportation costs.

Load Optimization and Transportation — The Group delivers goods to customers by common carriers. Those goods destined for the Americas and other markets outside Europe are transported by sea in40-foot high cube containers, while those produced for the European market are generally delivered by truck and, in some cases, by railway. In 2016,2018, the Group shipped 7,6716,439 containers overseas and approximately 4,8024,451 full load mega-trailer trucks to European destinations.

With the aim of decreasing costs and safeguarding product quality, the Group uses software developed through a research partnership with the University of Bari and the University of Copenhagen that permits us to manage load optimization.

As far as the load composition by truck is concerned, the Group uses software designed to minimize total transport costs by taking into account volume, route and optimization of carriers for customer orders in defined areas. To maintain service levels, we use a supplier vendor rating that measures the performance of carriers and distributors providing direct service over land.

The Group relies principally on several shipping and trucking companies operating under “time-volume” service contracts to deliver its products to customers and to transport raw materials to the Group’s plants and processed materials from one plant to another. In general, the Group prices its products to cover itsdoor-to-door shipping costs, including all customs duties and insurance premiums. Some of the Group’s overseas suppliers are responsible for delivering raw materials to the port of departure; therefore, transportation costs for these materials are generally under the Group’s control.

Products

Products are mainly designed in the Company’s Style Center, but the Group also collaborates with acclaimed international designers for the conception and prototyping of certain products in order to enhance brand visibility, especially with respect to theNatuzzi Italia product line.

New models are the result of a constant information flow from the market, in which preferences are analyzed, interpreted and turned into a brief for designers in terms of style, function and price point. Designers draw the sketches of new products in accordance with the guidelines they are provided and, through collaboration with the prototype department, approximately 70 new sofa models are generally introduced each year. The diversity of customer tastes and

preferences as well as the Group’s inclination to offer new solutions results in the development of products that are increasingly personalized. More than 100 highly-qualified employees conduct the Group’s research and development efforts from its headquarters in Santeramo in Colle, Italy.

The Group’s wide range of products includes a comprehensive collection of sofas and armchairs with particular styles, coverings and functions, with more than two million combinations.

The Group operates in accordance with strict quality standards and has earned the ISO 9001 certification for quality and the ISO 14001 certification for its low environmental impact. The ISO 14001 certification also applies to the Company’s tannery subsidiary, Natco, located near Udine, Italy. The Group’s plants in Laterza and the Santeramo in Colle headquarters have also received an ISO 9001 certification for their roles in design and production.

Innovation

Since the end of 2013, the Company has been implementing a new production model based on the Lean Production principles.

The sofa production model, under which sofas were traditionally assembled in a department-based factory (or “Isle Production” model), was subject to rigorous review with a view toward implementing moving line-based manufacturing processes, which would lead to improvements in efficiency, quality and lead time. The moving line production model improves job area ergonomics by splitting products into lighter pieces at individual phases and also coordinates workers by ensuring that they work at a similar pace. The finished product tends to be of higher quality and produced more quickly. Tests and development of the moving-linemoving line production model at all stages of the production process still continue and are coordinated with our products design.

In the field of process and product innovation, the Group implemented since 2013 the Modular Industrial Platform System, aimed at reducing manufacturing costs. Industrial platforms represent an industrial base common to many models that can be technically and aesthetically modified in order to meet customers’ requests. The utilization of

such platforms grants substantial benefits in terms of product simplification (easy assembly), management (fewer codes to be managed), quality (fewer production failures), and production costs (economies of scale), leading to an increase in competitiveness.

Beginning in 2015, the Company implemented the following new programs and measures related to the product development process and product design and engineering systems: