The number of outstanding shares as of December 31, 20182021, was 22,602,73729,450,551 Class A common shares and 27,658,29027,400,848 Class B common shares.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
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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.
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Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes☒ No☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
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Yes☐ No☐(not required)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,filer”, "accelerated filer,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
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Large Accelerated Filer | ☒ | Accelerated Filer | ◻ | Non-accelerated Filer | ◻ | Emerging growth company | ☐ |
Large Accelerated Filer☐ Accelerated Filer☐ Non-accelerated Filer☒ Emerging growth company☒
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.☐
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report: ☒
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this annual report:
filing:
☐ | U.S. GAAP |
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International Financial Reporting Standards as issued by the International Accounting Standards Board |
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Other |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
☐ Item 17 ☐ Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
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Arco platform limitedARCO PLATFORM LIMITED
TABLE OF CONTENTS
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The full consequences of a credit rating downgrade are inherently uncertain, as they depend upon numerous dynamic, complex, and inter-related factors and assumptions, including market conditions at the time of any downgrade. A prolongation or worsening of the current Brazilian recession and continued political uncertainty, among other factors, could lead to further ratings downgrades. We cannot assure you that the rating agencies will maintain their current ratings or outlooks, and such changes could increase our funding costs and adversely affect our results of operations. Any further downgrade of Brazil’s sovereign credit ratings could heighten investors’ perception of risk and, as a result, cause the trading price of our Class A common shares to decline. 31 Certain Factors Relating to Our Class A Common Shares The Founding Shareholders, our largest group of shareholders, own 100% of our outstanding Class B common shares, which represents As of December 31,
Our Articles of Association contain anti-takeover provisions that may discourage a third-party from acquiring us and adversely affect the rights of holders of our Class A common shares. Our Articles of Association contain certain provisions that could limit the ability of others to acquire our control, including a provision that grants authority to our board of directors to establish and issue from time to time one or more series of preferred shares without action by our shareholders and to determine, with respect to any series of preferred shares, the terms and rights of that series. These provisions could have the effect of depriving our shareholders of the opportunity to sell their shares at a premium over the prevailing market price by discouraging third parties from seeking to obtain our control in a tender offer or similar transactions.
If securities or industry analysts do not publish research, or publish inaccurate or unfavorable research, about our business, the price of our Class A common shares and our trading volume could decline. The trading market for our Class A common shares 32 inaccurate or unfavorable research about our business, the price of our Class A common shares would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our Class A common shares could decrease, which might cause the price of our Class A common shares and trading volume to decline. We do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain our future earnings, if any, for the foreseeable future, to fund the operation of our business and future growth. We do not intend to pay any dividends to holders of our Class A common shares. As a result, capital appreciation in the price of our Class A common shares, if any, will be your only source of gain on an investment in our Class A common shares. Our dual class capital structure means our shares In 2017, FTSE Russell, S&P Dow Jones and MSCI announced changes to their eligibility criteria for inclusion of shares of public companies on certain indices to exclude companies with multiple classes of shares of common stock, such as ours, from being added to such indices. FTSE Russell announced plans to require new constituents of its indices to have at least five percent of their voting rights in the hands of public stockholders, whereas S&P Dow Jones announced that companies with multiple share classes, such as ours, will not be eligible for inclusion in the S&P 500, S&P MidCap 400 and S&P SmallCap 600, which together make up the S&P Composite 1500. MSCI also opened public consultations on their treatment of no-vote and multi-class structures and The dual class structure of our common stock has the effect of concentrating voting control with the Founding Shareholders; this will limit or preclude your ability to influence corporate matters. Each Class A common share entitles its holder to one vote per share, and each Class B common share will entitle its holder to ten votes per share, so long as the total number of the issued and outstanding Class B common shares is at least 10% of the total number of shares outstanding. Due to the ten-to-one voting ratio between our Class B and Class A common shares, the beneficial owners of our Class B common shares In addition, our Articles of Association provide that at any time when there are Class A common shares in issue, additional Class B common shares may only be issued pursuant to (1) a share split, subdivision of shares or similar transaction or where a dividend or other distribution is paid by the issue of shares or rights to acquire shares or following capitalization of profits, (2) a merger, consolidation, or other business combination involving the issuance of Class B common shares as full or partial consideration, or (3) an issuance of Class A common shares, whereby holders of the Class B common shares are entitled to purchase a number of Class B common shares that would allow them to maintain their proportional ownership interests in Arco (following an offer by us to each holder of Class B common shares to issue to such holder, upon the same economic terms and at the same price, such number of Class B common shares as would ensure that such holder may maintain a proportional ownership interest in Arco pursuant to our Articles of Association).
33 Future transfers by holders of Class B common shares will generally result in those shares converting to Class A common shares, subject to limited exceptions, such as certain transfers effected to permitted transferees or for estate planning or charitable purposes. The conversion of Class B common shares to Class A common shares will have the effect, over time, of increasing the relative voting power of those holders of Class B common shares who retain their shares in the long term. In light of the above provisions relating to the issuance of additional Class B common shares, the fact that future transfers by holders of Class B common shares will generally result in those shares converting to Class A common shares, subject to limited exceptions as provided in the Articles of Association; as well as the ten-to-one voting ratio of our Class B common shares and Class A common shares, holders of our Class B common shares will in many situations continue to maintain control of all matters requiring shareholder approval. This concentrated control will limit or preclude your ability to influence corporate matters for the foreseeable future. For a description of our dual class structure, see “Item 10. Additional Information—B. Memorandum and articles of association—Voting Rights.” We are a Cayman Islands exempted company with limited liability. The rights of our shareholders, including with respect to fiduciary duties and corporate opportunities, may be different from the rights of shareholders governed by the laws of U.S. jurisdictions. We are a Cayman Islands exempted company with limited liability. Our corporate affairs are governed by our Articles of Association and by the laws of the Cayman Islands. The rights of shareholders and the responsibilities of members of our board of directors may be different from the rights of shareholders and responsibilities of directors in companies governed by the laws of U.S. jurisdictions. As a foreign private issuer, registrants. As a foreign private issuer, We will follow Cayman Islands laws and regulations that are applicable to Cayman Islands companies. However, Cayman Islands laws and regulations applicable to Cayman Islands companies do not contain any provisions comparable to the U.S. proxy rules, the U.S. rules relating to the filing of reports on Form 10-Q or 8-K or the U.S. rules relating to liability for insiders who profit from trades made in a short period of time, as referred to above.
34 Furthermore, foreign private issuers are required to file their annual report on Form 20-F within 120 days after the end of each fiscal year, while U.S. domestic issuers that are accelerated filers are required to file their annual report on Form 10-K within 75 days after the end of each fiscal year. Foreign private issuers are also exempt from Regulation Fair Disclosure, aimed at preventing issuers from making selective disclosures of material information, although we will be subject to Cayman Islands laws and regulations having substantially the same effect as Regulation Fair Disclosure. As a result of the above, even though we are required to file reports on Form 6-K disclosing the limited information which we have made or are required to make public pursuant to Cayman Islands law, or are required to distribute to shareholders generally, and that is material to us, you may not receive information of the same type or amount that is required to be disclosed to shareholders of a U.S. company.
As a foreign private issuer, we are permitted to, and we will, rely on exemptions from certain Nasdaq corporate governance standards applicable to U.S. issuers, including the requirement that a majority of an issuer’s directors consist of independent directors. This may afford less protection to holders of our Class A common shares. Section 5605 of the Nasdaq equity rules requires listed companies to have, among other things, a majority of their board members be independent, and to have independent director oversight of executive compensation, nomination of directors and corporate governance matters. As a foreign private issuer, however, we are permitted to, and we will, follow home country practice in lieu of the above requirements. See “Item 16G Corporate Governance—Principal Differences between Cayman Islands and U.S. Corporate Law.” We may lose our foreign private issuer status which would then require us to comply with the Exchange Act’s domestic reporting regime and cause us to incur significant legal, accounting and other expenses.
Our shareholders may face difficulties in protecting their interests because we are a Cayman Islands exempted company. Our corporate affairs are governed by our Articles of Association, by the Companies While Cayman Islands law allows a dissenting shareholder to express the shareholder’s view that a court sanctioned reorganization of a Cayman Islands company would not provide fair value for the shareholder’s shares, Cayman Islands statutory law does not specifically provide for shareholder appraisal rights in connection with a Shareholders of Cayman Islands exempted companies (such as us) have no general rights under Cayman Islands law to inspect corporate records and accounts or to obtain copies of lists of shareholders. Our directors have discretion under our Articles of Association to determine whether, 35 obliged to make them available to our shareholders. This may make it more difficult for you to obtain information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.
United States civil liabilities and certain judgments obtained against us by our shareholders may not be enforceable. We are a Cayman Islands exempted company and substantially all Further, it is unclear if original actions predicated on civil liabilities based solely upon U.S. federal securities laws are enforceable in courts outside the United States, including in the Cayman Islands and Brazil. Courts of the Cayman Islands may not, in an original action in the Cayman Islands, recognize or enforce judgments of U.S. courts predicated upon the civil liability provisions of the securities laws of the United States or any state of the United States on the grounds that such provisions are penal in nature. Although there is no statutory enforcement in the Cayman Islands of judgments obtained in the United States, courts of the Cayman Islands will recognize and enforce a foreign judgment of a court of competent jurisdiction if such judgment is final, for a liquidated sum, provided it is not in respect of taxes or a fine or penalty, is not inconsistent with a Cayman Islands’ judgment in respect of the same matters, and was not obtained in a manner which is contrary to the public policy of the Cayman Islands. In addition, a Cayman Islands court may stay proceedings if concurrent proceedings are being brought elsewhere.
Judgments of Brazilian courts to enforce our obligations with respect to our Class A common shares may be payable only in reais. Most of our assets are The Economic Substance Act of the Cayman Islands may affect our operations. The Cayman Islands has recently enacted the International Tax Co-operation (Economic Substance) Act (As Revised), or the Cayman Economic Substance Act. We are required to comply with the Cayman Economic Substance Act. As we are a Cayman Islands company, compliance obligations include filing annual notifications for the Company, which need to state whether we are carrying out any relevant activities and if so, whether we have satisfied economic substance tests to the extent required under the Cayman Economic Substance Act. As it is a new regime, it is anticipated that the Cayman Economic Substance Act will evolve and be subject to further clarification and amendments. We may need to allocate additional resources to keep updated with these developments and may have to make changes to our operations in order to comply with all requirements under the Cayman Economic Substance Act. Failure to satisfy these requirements may subject us to penalties under the Cayman Economic Substance Act. Our Class A common shares may not be a suitable investment for all investors, as investment in our Class A common shares presents risks and the possibility of financial losses. The investment in our Class A common shares is subject to risks. Investors who wish to invest in our Class A common shares are thus subject to asset losses, including loss of the entire value of their investment, as well as other risks, including those related to our Class A common shares, us, the sector in which we operate, our shareholders and the general macroeconomic environment in Brazil, among other risks. 36 Each potential investor in our Class A common shares must therefore determine the suitability of that investment
ITEM 4. INFORMATION ON THE COMPANY A. History and Development of the Company We were founded in 2004. However, our history goes back to 1941, when the grandfather of our CEO and founder, Ari de Sá Cavalcante Neto, acquired a small school in downtown Fortaleza. Over decades, the school grew into a large educational group with several branches providing K-12 education to
Colégio Ari de Sá developed a proprietary educational methodology aimed at improving student academic performance. The methodology is based on instilling discipline and a culture of hard work, stimulating students to develop a study routine and to demonstrate a proactive and considerate attitude toward their learning habits. In 2004, our CEO and founder, Ari de Sá Cavalcante Neto, decided to start an independent company exclusively focused on content and technology for K-12 schools, SAS. The SAS method was created with the aim of offering it as a solution to private schools across Brazil. Our system uses technology as a powerful tool to promote improvements in student performance. This is achieved, in part, by allowing students to prepare for class in advance by using our platform’s video lessons, homework tools and daily class reviews, as well as our practical workbooks with class-specific content, homework and performance reports. The SAS method is based
on the concept of personalized and adaptive learning, aimed at providing tailored education to each student according to his or her individual needs, with concentration on the main areas in need of improvement, which manifests in higher levels of academic achievement. Since 2015, we have been investing in technology and our printed methodology has evolved into an educational platform capable of delivering its curriculum content in both printed and digital format. It has also evolved into a robust omni-channel platform, capable of delivering the entire K-12 curriculum in both printed and digital format, withlecturettes featuring expert, on-screen teachers and tailored assignments and assessments to engage students and ensure subject-area mastery across all grades. 37 With this integrated approach, students can track their progress and performance, teachers have access to real-time data to evaluate students and personalize their teaching, and school administrators have access to their school’s performance both on absolute and comparative terms.
With an asset-light and highly scalable business model that emphasizes operating efficiency and profitability, we were able to grow the number of students served at a On September 25, 2018, the registration On October 29, 2019, we completed a follow-on public offering, consisting of 3,450,656 Class A common shares issued and sold by us, and 4,268,847 Class A common shares sold by certain selling shareholders. The public offering price was US$43.00 per Class A common share. We received net proceeds of US$143.9 million, after deducting US$3.7 million in underwriting discounts and commissions. On November 26, 2019, an additional 661,112 Class A common shares were sold by General Atlantic Arco (Bermuda), L.P. following the exercise by the underwriters of their option to purchase additional shares. On June 4, 2020, we completed a follow-on public offering, by which General Atlantic Arco (Bermuda), L.P. and Alfaco Holding Inc. sold an aggregate amount of 5,563,203 Class A common shares issued by us, at a public offering price of US$47.70 per Class A common share. We did not receive any proceeds from the sale of Class A common shares by the selling shareholders in connection with this offering. 38 On September 8, 2020, we completed a follow-on public offering, consisting of 2,500,000 Class A common shares issued and sold by us. The public offering price was US$44.80 per Class A common share. We received net proceeds of US$109.8 million, after deducting USS$2.2 million in underwriting discounts and commissions. On January 6, 2021, our Board of Directors approved the Repurchase Program to comply with management long-term incentive plan obligations. Pursuant to the Repurchase Program, we may repurchase up to 500,000 of our outstanding Class A common shares in the open market, based on prevailing market prices, or in privately negotiated transactions, over a period beginning on January 6, 2021, continuing until the earlier of the completion of the repurchase or January 6, 2023, depending upon market conditions. On March 31, 2021, our Board of Directors approved the increase of the share repurchase limit of our Repurchase Program to up to 2.5 million of our outstanding Class A common shares in the open market, based on prevailing market prices, or in privately negotiated transactions, continuing until the earlier of the completion of the repurchase or January 6, 2023, depending upon market conditions. As of the date of this annual report, we had purchased an aggregate of 1,818,779 Class A common shares for a total of approximately US$43.2 million under the Repurchase Program. On November 1, 2021, we cancelled 750,000 treasury shares with the approval of our Board of Directors. On December 1, 2021, we issued US$150 million in senior notes convertible into our Class A common shares (US$100 million to Dragoneer, and US$50 million to General Atlantic), bearing interest at 8% per annum in fixed Brazilian reais and maturing on November 15, 2028. Each note will be convertible at the option of the holder into our Class A common shares at the agreed conversion rate, which is equivalent to an initial conversion price of US$29 per share. The conversion price represents an approximately 65% premium to the trailing 30-day volume-weighted share price at the time of signing the investment agreements for the convertible notes. Dragoneer and General Atlantic will beneficially own approximately 5.6% and 2.8%, respectively, of our total shares (on an as converted basis for the convertible senior notes). Following over a decade of growth, and our initial public offering in 2018, we are excited about the future and how technological advances can impact education. We believe that students are increasingly looking for modern, dynamic and client oriented educational platforms and that our tech-enabled approach is positioned to deliver a variety of content and provide a new learning experience that is more effective, personal, engaging, and enjoyable. Acquisitions and Investments Acquisition of Edupass
Acquisition of Eduqo On April 22, 2021, we entered into a purchase agreement for the acquisition of 100% of the equity interest of Eduqo. The transaction closed on July 1, 2021, following CADE’s approval. Eduqo is a learning management system (LMS) platform that connects students and professors, and offers question banks, exams and diagnostics to its clients. The purchase price for the acquisition is structured as follows: (i) R$15,097 million was paid on July 1, 2021, (ii) R$ 6.969 million will be paid on July 1, 2022, and (iii) R$6.504 million will be paid on July 1, 2023. Additionally, on November 16, 2021, Eduqo shareholders and Arco entered into an agreement to amend the earnout structure previously agreed, to a fixed value of R$2.603 million to be paid on July 1, 2023. Investment in Tera On April 9, 2021, we acquired a 23.43% equity interest of Tera for a total amount of R$15 million. The transaction was divided in a capital injection and an acquisition of shares from Tera’s founders and early-stage investors. The company offers tech-related courses such as UX design, full stack development and data analytics, among others, for the B2B and B2C markets. 39 Acquisition of Me Salva!
According to the transaction agreements, 60% of the company’s interest was transferred on the signing date for a total amount of R$27.6 million, and the remaining 40% will be transferred in 2025, in an amount equal to the multiple of the net revenues of Me Salva! Acquisition of COC and Dom Bosco learning systems and PGS and Coleção Mentes do Amanhã supplemental solutions On March 6, 2021, we entered into a definitive agreement with Pearson Education do Brasil Ltda. (“Pearson”) to acquire 100 % interest in P2D, owner of COC and Dom Bosco learning systems, for the total amount of R$920 million, of which (i) 80% was paid on closing, and (ii) the remaining 20% of the purchase price will be paid on the first anniversary of the closing date, as adjusted. The transaction also includes an agreement with Pearson to distribute some supplemental educational solutions for K-12 schools in Brazil. On October 1, 2021, following final approval from CADE for this acquisition, we closed the transaction. The payment terms set forth in the purchase agreement were updated upon closing of the transaction to a total purchase price of R$800.4 million, adjusted for COC’s and Dom Bosco’s cash and working capital positions as of September 30, 2021, paid in a single installment on the transaction closing date. The incorporation of COC and Dom Bosco into Companhia Brasileira de Educação e Sistema de Ensino S.A., our subsidiary incorporating the acquired businesses, is expected to be concluded in the first quarter of 2022. In addition to the acquisition of P2D, CBE entered into a Commercial Cooperation and Distribution Agreement with Pearson pursuant to which CBE would be the sole distributor in Brazil of the PGS bilingual courseware and teaching methodology and the supplemental solution focused on 21st century skills Mentes do Amanhã, with the option to acquire these business lines in the long term. On February 1, 2022, Pearson and CBE entered into an Asset Purchase Agreement and an Intellectual Property License Agreement, pursuant to which CBE acquired the right of such solutions in Brazil for a total amount to be calculated considering 1.5x Net Revenue for 2022, with a base price of R$15.0 million. CBE is licensed to use the PGS trademark until 2026, when a new brand is expected to be launched. Investment in Isaac On January 25, 2021, we entered into a Series B Ordinary Shares Purchase Agreement, among other ancillary and transactional documents, with INCO Limited, or INCO, the controlling entity of OISA Tecnología e Serviços Ltda., or OISA (a company indirectly controlled by David Peixoto dos Santos, Arco’s former CFO), pursuant to which we acquired 8,571,427 series B ordinary shares, equivalent to 30% of the total stock capital of INCO, for R$25 million. INCO Limited provides financial assistance to private schools. In addition, on April 22, 2021, we and other investors entered into a Series A and Series A-1 Preferred Shares Purchase Agreement, pursuant to which we acquired 3,653,788 Series A Preferred Shares of INCO Limited, for R$33.2 million, with the option to acquire an additional 2,935,010 Series A-1 Preferred Shares, which was exercised on September 17, 2021 for an amount of R$52.0 million. As of March 31, 2022, INCO Limited had additional investments rounds in which we did not participate. As of the date of this annual report, we hold 47,375,702 shares of INCO Limited, equivalent to 25.06% of its total capital stock (22.43% on fully diluted basis) representing a total investment of R$110.3 million. 40 Acquisition of Escola da Inteligência On December 2, 2020, we closed the acquisition of Escola da Inteligência, the leading solution in social-emotional learning (SEL) in Brazil, which was approved by CADE, with no restrictions, on the same date. This transaction broadens our supplemental market presence by adding a strong brand to its portfolio. We believe there is a favorable market trend for SEL, pushed forward by the COVID-19 pandemic, and that Escola da Inteligência is well positioned to capture this demand outside and within our school base. The acquisition involves only the private sector business of Escola da Inteligência and under the terms of transaction, we acquired 100% of Escola da Inteligência’s shares, which will be officially transferred in two phases, of which 60% was acquired for R$288 million, with R$200 million paid at closing and the remaining R$88 million in the second quarter of 2021. The amount due for the remaining 40% of Escola da Inteligência’s shares will be calculated considering 6 times the 2023 ACV booking value and will be paid in the second quarter of 2023. The remaining shares will be transferred to us on the day of such payment. For further information, see note 4h to our audited consolidated financial statements. Acquisition of Studos On September 21, 2020, we acquired 100.0% of the outstanding shares and voting rights of Studos, a leading provider of adaptive solutions. For further information, see note 4f to our audited consolidated financial statements. This acquisition is part of our strategy to acquire technology companies that increase the value of our learning systems to partner schools and parents, improve student’s academic performance and enable teachers to thrive. Investment in Bewater Ventures I GA On July 24, 2020, we acquired a 14.48% interest in Bewater Ventures I GA, a fund legally managed by Paraty Capital, through the purchase of 9,670 Class B quotas for R$9.7 million. As a result of the fund's capital call, we currently own 9,713 Class B Shares, equivalent to a 11% interest, representing a total investment of R$9.8 million The fund’s main goal is the minority investment in Grupo A, a company that provides educational solutions for higher education, which happened subsequently to our investment. For further information, see note 11 to our audited consolidated financial statements. Acquisition of Positivo Soluções Didáticas On November 1, 2019, we closed the acquisition of Positivo, one of the largest K-12 content providers to private schools in Brazil, and other companies of the Positivo Group (as defined below), or Positivo Acquisition. Positivo is part of a group founded in 1972 in Curitiba by a group of teachers as a preparatory course focused on admission exams to universities in the state of Paraná, or Positivo Group. The preparatory course reached 2,300 enrolled students in the first year of operation and its success led the group to quickly open new schools for all K-12 grades under the brand Colégio Positivo. In a short period of time, the proprietary content and methodology developed and used by Colégio Positivo schools achieved significant recognition among teachers, parents and students. The high-quality content and its dynamic approach led to the foundation of Positivo in 1979, allowing the Positivo brand to expand far beyond the reach of Colégio Positivo, being adopted by third-party schools in several cities of the state of Paraná and other Brazilian states. With over 40 years of brand legacy, Positivo evolved to become a leading content providing platform that transforms the lives of many students of private schools across all Brazilian states. This is a vibrant ecosystem with several opportunities to effectively address the needs of parents, students, teachers and school owners. Positivo is focused on building long-term relationships with partner schools and this approach is an important factor to its success, proven by the fact that more than 50% of its client base has over ten years of relationship. This carve-out acquisition encompassed only the private school learning systems and did not include the other assets of the Positivo Group, such as the public-school learning system, the printing company, the Universidade Positivo post-secondary education business, and the Colégio Positivo proprietary schools. 41 The agreed purchase price was R$1,684.8 million (equity value), of which (i) 50% was paid in cash on the transaction closing date, and (ii) the remaining 50% will be paid in four installments as follows: (1) 10% per year to be paid in cash in each of 2021 and 2022, and (2) 15% per year to be paid in cash in each of 2023 and 2024, all as adjusted by the CDI rate (Brazilian interest rates). The Positivo Acquisition allowed us to increase our student base twofold, reaching over 1.2 million students in 2019. In addition, it allowed us to accelerate our growth with the same B2B2C business model, with predictable subscription-based revenue, high operating leverage and cash flow conversion while remaining asset-light. By adding complementary assets, Positivo also enables us to broaden our product offerings and expand our footprint. Positivo comprises two different brands with reciprocal business profiles: (i) Sistema de Ensino Positivo, or SPE, an educational solution consisting of content, technology and services provided to private schools serving upper-middle-income students; and (ii) Conquista Solução Educacional, or Conquista, which is focused on private schools serving lower-middle income students. Together, SPE and Conquista enhance our Core Curriculum offering, allowing us to reach a larger base of schools at different price points. In addition, Positivo also owns Positivo English Solution, or PES, an affordably priced second language-offering that enhances our Supplemental Solutions. Positivo has a strong presence in the South and Southeast regions of Brazil, with relatively low geographic overlap with our student base. The acquisition will also allow us to add opportunities through our scale and technology, strengthening our capacity to invest in high quality content and technology and enabling us to enhance our student base experience and academic outcomes through technology improvements and our cross-selling capabilities. Acquisition of EEM On June 4, 2019, we closed the acquisition of EEM, or the EEM Acquisition, an app developer that enhances communication between schools and parents by providing chat-based interactions, location-based identifications, Net Promoter Scores, or NPS, tool to assess parent’s satisfaction and pilot project related to payments. The EEM Acquisition provided us with new capabilities that further increases our value proposition to partner schools, parents and students, and also allowed us to access EEM’s network of schools. The purchase consideration transferred was R$18.3 million. The amount of R$16.1 million was paid on the closing date, the amount of R$0.3 million was paid on June 29, 2019, and the deferred payment in the amount of R$1.9 million, which has been retained for a period of two years as guarantee for the payment of any contingent liabilities, will be released in accordance with the provisions of the agreement. Any remaining balance will be transferred to the former owners of the acquired entity. For further information, see note 17c to our audited consolidated financial statements. Acquisition of NAV In May 2019, we acquired a 13.2% interest in the share capital of NAV, a developer of competence-based learning content present in more than 50 schools and reaching 16,000 students, according to NAV’s website, for the total subscription price of R$4.2 million, hereinafter referred to as the NAV Acquisition. Pursuant to the investment and share purchase agreement, we have agreed to acquire the remaining 86.8% of the outstanding share capital of NAV in three tranches. We acquired: (i) Tranche 1, corresponding to 37.8% of the outstanding share capital of NAV, on October 29, 2019, for the amount of R$21.1 million, and (ii) Tranche 2 and Tranche 3, corresponding to 24% and 25% of the outstanding share capital of NAV, respectively, on February 15, 2021, for the total amount of R$22.6 million. By anticipating the payment of Tranche 3, NAV became our wholly owned subsidiary on February 25, 2021. NAV enhances our Supplemental Solutions offering and the cross-selling capacity of our Core Curriculum offering through a competence-based curriculum to address 21st century skills. The EEM Acquisition and NAV Acquisition provide us with new capabilities that further increases our value proposition to partner schools, parents and students, and also allows us to access each acquisition’s network of schools. Through projects, problem solving and technology, NAV helps students develop transferable skills, such as critical and creative thinking, and communication skills. Acquisition of Geekie In December 2016, we acquired a 6.54% interest in Geekie, an entity that provides technology for adaptive assessment and learning products and engages in the production, development and licensing of software tailored to the specific requirements of 42 education sector customers. On September 20, 2019, we acquired an additional 0.96% interest in the share capital of Geekie through a capital increase of R$1.2 million. On October 14, 2019, we acquired an additional 1.92% interest in the share capital of Geekie through a capital increase of R$2.5 million, increasing our total interest to 10.92%. In addition, on October 25, 2019, we acquired an additional 18.44% interest in the share capital of Geekie from a minority shareholder for the amount of R$21.9 million, increasing our total interest to 29.36%. On November 15, 2019, we acquired an additional 1.17% interest in the share capital of Geekie through a capital increase of R$2.0 million, increasing our total interest to 30.53%. In December 2019, we acquired an additional 7.00% interest in the share capital of Geekie through a capital increase of R$4.3 million and the purchase of minority shareholders for R$5.8 million increasing our total interest to 37.53% as of December 31, 2019. On March 4, 2020, we acquired an additional 10.51% interest in Geekie’s share capital from minority shareholders for R$12.7 increasing our total interest to 48.04%. On July 6, 2020, we acquired an additional 4.62% interest in Geekie’s share capital from minority shareholders for R$5.8 million, increasing our total interest to 52.67%. On September 21, 2020, we acquired an additional 1.76% interest in the share capital of Geekie through a capital increase of R$4,500 increasing its total interest to 54.43%. On November 11, 2020, we acquired an additional 1.64% interest in Geekie’s share capital through a capital increase of R$4,500 increasing our total interest to 56.06%. On January 20, 2021, we acquired an additional 1.36% interest in Geekie’s share capital through a capital increase of R$4,000, increasing our total interest to 57.42%. On November 27, 2020, we entered into a new shareholders’ agreement with the other Geekie’s shareholders, by which we acquired control of Geekie and started to consolidate Geekie in our financial statements as our subsidiary. We expect to acquire the remaining 42.58% interest in Geekie’s share capital in June 2022, for the amount to be calculated considering the ACV of Geekie or Arco for 2022 and the company’s debts, whichever results on the highest amount to be received by the sellers, and the net revenue of Geekie products as of January 2023, which will be payable in June 2022 and January 2023. For further information, see note Acquisition of SAE In June 2016, we acquired a 70% interest in the share capital of SAE. In October 2017, we acquired the remaining 30% in the share capital of SAE. Acquisition of International School In December 2015 The Investment Agreement contains certain contractual arrangements for the 43 Pursuant to the Acquisition of Content Providers In April 2015, we acquired a 99.99% interest in Editora e Livraria Alegre POA Ltda., a content provider to Acquisition of WPensar In April 2015, we acquired a 25% interest in WPensar, a company that develops and licenses school management systems software. Corporate Information Our principal executive offices are located at Rua Augusta 2840, 9th floor, suite 91, Consolação, São The SEC maintains an internet website that contains reports and other information about issuers, like us, that file electronically with the SEC. The address of that website is www.sec.gov. Investors should contact us for any inquiries through the address and telephone number of our principal executive office. Our principal website is www.arcoeducacao.com.br. The information contained in, or accessible through, our website is not incorporated into this annual report.
Our mission is to transform the way students learn by delivering high-quality education at scale through technology to schools and students. We provide a complete pedagogical system with technology-enabled features to deliver educational content to private schools and students in Brazil. Our turnkey curriculum solutions provide educational content in both printed and digital formats delivered through our platform to improve the learning process.
We have an asset-light, 44 Our network in our B2B2C Core Curriculum and Supplemental Content Solutions as of March 31, 2022, consisted of 8,056 partner schools compared to 6,119 schools as of March 31, 2021, 5,414 schools as of March 31, 2020, and 1,464 schools as of March 31, 2019, representing annual growth rates of 31.7%, 13.0% and 269.8%, respectively. We had 2,279,025 expected number of enrolled students, or Number of Enrolled Students, across all Brazilian states as of March 31, 2022, compared to 1,489,707 final number of enrolled students, or Final Number of Enrolled Students of as of September 30, 2021 (or 1,785,576 Number of Enrolled Students as of March 31, 2021), 1,362,141 as of March 31, 2020, and 498,553 as of March 31, 2019, representing annual growth rates of 27.6%, 31.1% and 173.2%, respectively. In years prior to the COVID-19 pandemic, the difference between our Number of Enrolled Students and our Final Number of Enrolled Students was not material. However, during 2020 and 2021 and as result of the impacts of the COVID-19 pandemic, our partner schools experienced atypical dropout rates from March 31 to September 30 ”. Our B2B2C Core Curriculum and Supplemental Content Solutions business model has allowed us to grow and achieve profitability since our founding. Our net revenue totaled R$ ACV Bookings for the Supplemental Solutions (both B2B2C Supplemental Content Solutions and other supplemental solutions) totaled R$323.3 million for the 2022 school year, resulting in a 2% ACV market share of the total addressable market of such segment in Brazil, which includes after-school education, based on Educa Insights’ 2021 assessment of the private K-12 market. In addressing the core solutions market, Arco’s ACV Bookings for the 2022 school year of R$1,236.7 million results in a 24% core solutions market share, which considers the potential market for private K-12 learning systems and textbooks in Brazil, based on Educa Insights’ 2021 assessment of the private K-12 learning systems market. We believe that the quality of our platform, together with the credibility of our client base and the strong reputation of our brand, has driven our significant growth, allowing us to expand our footprint quickly and efficiently In March 2021, Arco started serving students directly through the acquisition of Me Salva!, a B2C test prep player. The online solution offers recorded and live video classes, comprehensive exercises, essay writing tools, assessment tests, 1-on-1 tutoring and personalized study plans. Despite currently representing only a small and immaterial part of our business, this vertical allows Arco to tap a large and underserved market of students from public schools, that lack quality education at affordable prices. We also plan to reinforce our Supplemental portfolio by offering schools a solution on the test prep and tutoring vertical, developed on top of Me Salva!’s know-how and digital offering, allowing them to better prepare their students for the ENEM. Context The 21st century has been characterized by rapid and accelerating technological innovation, with students at the forefront of the adoption of new technologies. We believe that we can deliver a more effective, personal, engaging, and enjoyable learning experience for students by combining We founded our company with the aim of creating 45 training, and commercializing and managing K-12 education. Simultaneously, students acquired educational content through textbooks from various publishers across retail channels. Our platform aims to replace this multitude of third-party educational providers with a streamlined, one-stop solution that delivers high quality education at scale. Our Core Curriculum and Supplemental Solutions enable students, teachers, and school administrators to have access to engaging and easy-to-use resources that propel academic success and meet students’ diverse learning needs. Pairing our printed and digital curriculum with real-time data and teacher-led learning allows us to personalize learning at the individual level, improving both individual student and aggregate school performance. We develop our educational content using a model based on extensive research and performance-based standards. We combine printed and digital content with onlinelecturettes featuring expert, on-screen teachers and tailored assignments and assessments to engage students and help them master their subject areas. With this integrated approach, students can track their progress and performance, teachers can access real-time data to evaluate students and personalize their teaching and school administrators can better manage their school’s performance both on absolute and comparative terms. The increase in internet penetration and the rapid increase in the use of mobile devices and cloud-based services is broadening access to educational content and services and expanding the potential reach of educational institutions. Our platform does not require our partner schools to make any significant capital expenditures or setup investments and is compatible with most mainstream computing platforms (including tablets and mobile phones). Our solutions are designed to be highly interactive and enjoyable, which we believe results in enhanced educational outcomes when compared to traditional models.
Underlying Trends We believe that the strength of our business and Demand for quality education is driving a shift from public to private K-12 education A wide gap in the quality of education 2011. Technological innovation is driving enhancements in private K-12 education
Technology has created opportunities to make learning more affordable, accessible, flexible, personal and effective. Classroom instruction and delivery models are changing and are likely to have a substantial impact on the industry.
46 As a result of the COVID-19 outbreak, which was declared a pandemic by the World Health Organization in March 2020, state and local authorities in Brazil suspended school operations. On-site school activities were postponed, forcing schools to teach classes remotely. Although schools have historically been late adopters of technology and resistant to change, the impacts of the COVID-19 pandemic led them to turn to technology to continue offering their students educational content and pedagogical support. As part of our sales strategy during the COVID-19 outbreak, we have unbundled part of our solutions throughout 2020, allowing approximately 400 schools to use the trial versions of our products and therefore creating a large pipeline of leads for the following commercial cycles. We believe that as we have rapidly evolved our solutions to meet schools needs during the COVID-19 pandemic, we are now uniquely positioned to benefit from the higher willingness from schools to adopt learning systems that offer quality content combined with technological features that will improve the learning experience. Importance of K-12 performance in university admissions processes The best higher education institutions in Brazil are public, with a highly competitive admissions process based largely on challenging standardized admissions exams. According to Expansion of school hours and after-school programs including, but not limited to, English as a Second Language, or ESL, bilingual programs and 21st century skills programs The increased focus on education has led to an increase in the length of the average school day. After-school education,
For many parents, after-school education is considered a lifeline that helps them work without worry and balance their schedules, given (i) that Brazil has one of the highest average working hours per week in the world, and (ii) the increased participation of women in the workforce. In addition, an increase in disposable income has increased demand for private education and after-school programs, and parent expectations for their children’s education are high considering the strong competition to gain admission into top public universities. Accordingly, Obsolescence of traditional content distribution models We believe that traditional content distribution models are becoming obsolete. Traditional educational publishers are almost exclusively focused on physical textbooks, which they sell through retailers rather than directly to schools. These traditional suppliers have limited capability to develop and offer integrated digital solutions to schools, teachers, and students, and typically rely on 47 party authors, illustrators and graphic designers to develop new content. In contrast, because of our robust technology backbone, use of data and strong relationships with teachers and administrators, we can offer a comprehensive solution and content that is continuously updated and improved. Limited and unintegrated product offering Due to the lack of turnkey education solutions, school administrators often rely on a multitude of third-party vendors for K-12 educational content, teacher training, student testing, management, and communication tools. Traditional education providers have struggled to develop mission critical education platforms for several reasons, including the significant costs associated with the development of content and technologies, as well as the lack of extensive in-house technological expertise. In addition, developing a comprehensive and effective methodology is difficult to achieve since it requires many years of proven educational experience and a successful track record. We
Our Market Opportunity According to
We believe that the challenges inherent in the traditional content distribution model, coupled with increasing demand for modern content and integrated value-added services, present a unique market opportunity for our business. By providing an affordable, modern, and efficient platform, we believe that we can continue to disrupt the Brazilian education market and increase our penetration into current and new markets. As for our B2C model, we benefit from the intense competition for higher education admission driving demand for test prep, as the best universities in Brazil are public (and costs are subsidized by the government) and offer a leap in earnings potential for students. As a result, parents and students demonstrate unmet needs and willingness to pay for access to top quality content, individualized learning, and convenience. The K-12 tutoring, and test prep markets are very fragmented and currently mostly offline, while we observe an increasingly preferred for online due to cost, quality and convenience. Additionally, COVID-19 pandemic to further accelerates the habit-change and conversion from offline to online. The Arco Way Quality, a key component for the success in the K-12 market, is always at the center of our decisions and it has been the gear of our virtuous cycle over the years.
48 According to the 2022 university admission data published through the Unified Selection System, 1,513students within our partner school base have been accepted in the first place of their respective majors (an 15% increase when compared to 1,318 students in 2021, considering the same solutions). Considering the number students within our partner school base that were accepted in top 10 positions, the number increases to 7,242 students (a 4% increase when compared to the 6,981 students in 2021, considering the same solutions). The strong results achieved by our partner schools improve our brand equity, help build our reputation and As we grow and add new partner schools, our network becomes a powerful source of leads generation and data. In addition, the increased scale allows us to reinvest in content, quality, and service, contributing to the positive loop.
Our Business Model Our B2B2C model is financially aligned with our partner schools. Our revenues consist of wholesale content fees paid by our partner schools annually on a per-student, per-year basis. On average, partner schools charge students’ parents an incremental markup on top of our wholesale fees, ensuring that their incentives are aligned with ours. Accordingly, we provide a supplemental revenue stream to our partner schools through our B2B2C model, which is a feature that the traditional education model does not employ. Once schools adopt our platform for a particular class year, access to, and payment for, our platform becomes mandatory for all enrolled students in each class year, and such payments are charged as a supplement to tuition. Typically, we revise our contract fees annually, in line with our price-setting policies, which are usually above published inflation indices, to account for improvements in our platform and for changes in our cost and expenses
49 The following chart illustrates our business-to-business-to-consumer (B2B2C) model:
A portion of our historical average 6.0% annual attrition rate is attributable to the early termination or suspension of performance by us, at our option, of contracts with certain partner schools as a result of their failure to timely pay our contract fees.
Our platform on the B2B2C model is difficult to replicate. We have continuously developed our platform since our founding, with the benefit of over 50 years of an evolving educational methodology and a dedicated team of education specialists focused on developing and improving our Core Curriculum and Supplemental Solutions materials. Accordingly, we believe that the depth of our educational content and the technological experience necessary to develop our products makes our platform difficult to replicate. Our B2C model is 100% subscription-based and has attractive unit economics. Our revenues consist of retail content fees paid by students upon subscribing for one of our plans. Despite shorter-term when compared to our B2B2C model, customer acquisition cost is also reduced, leading to profitable unit economics. Our Solutions In the education sector, we believe that quality is fundamental. Our platform on the B2B2C model was developed with the benefit of over 50 years of an evolving educational methodology and robust track record of academic results. Our track record of high-performing educational outcomes motivated us to create a digital, technology-driven product that could deliver high quality education at scale. 50 Additionally, Positivo is the pioneer in the learning system segment in Brazil and has served the K-12 private school market for more than 40 years. The pedagogical methodology developed inside the Colégio Positivo schools was transformed into a comprehensive educational solution that quickly expanded to other schools in Brazil. Over time, Positivo expanded its product offering to address different profiles of schools and increase its addressable market. We provide a complete suite of turnkey curriculum solutions and technology-enabled features to help our students, teachers, partner schools and parents, targeting our students’ educational success.
Our turnkey educational platform solutions comprise core K-12 curricula, as well as supplemental language and 21st century skills programs (such as social and emotional learning - SEL). Benefits Across Our Educational Platform We deliver the following benefits to all the stakeholders engaged in the learning process:
51 Our Products We believe that innovation is an important part of our success. As a technology company in the education sector, we believe that our dynamic and adaptive nature is essential to our continued growth. Our product offerings
Our Core Curriculum comprises
As part of our Core Curriculum, we offer complementary support
52
Our Supplemental Solutions We have a Supplemental Content solutions market share of 2%, calculated by dividing Arco’s Supplementary Solutions ACV Bookings for the 2022 school year by the total addressable market for Supplemental Solutions, which consists of English as a Second Language (ESL) bilingual programs (International School, PES and PGS) and 21st century skills programs (Pleno, Escola da Inteligência, NAV and Mentes), based on Educa Insights’ assessment of the private K-12 market. We started offering Upon the acquisition of Positivo in 2019, our Supplemental Solution also offers the PES, a bilingual program with an approach that promotes integrated learning of content and language, in partnership with Cambridge University Press. The program consists of 2-5 weekly hours of English classes with several tools to develop the skills needed to communicate well. PES also provides teachers’ training and pedagogical support to its partner schools. PES was launched in 2015 and has a strong cross-sell potential within our Core Solution partner schools’ network and to expand to schools that have not yet adopted our solution. In 2019, we started investing in the development of a social-emotional supplemental solution called Pleno, developed to meet schools’ demand for a product that goes beyond the student’s cognitive development. Through the same B2B2C business model and integrated with the K-12 curriculum, Pleno helps students to develop competencies and skills, such as self and social-awareness, design thinking and entrepreneurship.
In December 2020, we concluded the acquisition of Escola da Inteligência, the leading solution in social-emotional learning (SEL) in Brazil, based on a proprietary methodology and great reputation in the K-12 market. In February 2022, we acquired PGS, a K-12 bilingual courseware and teaching methodology, formerly known as Pearson Global School, complementing our ESL offering with a high-quality solution with a differentiated pricing point; and Mentes do Amanhã (“Mentes”), a K-12 supplemental solution focused on 21st century skills (social-emotional learning, financial literacy, and technology). 53 We intend to continue adding supplemental educational modules to our Supplemental Content Solutions portfolio over time, broadening Arco’s supplemental market presence by adding high-quality solutions with pricing complementarity to our current offering. Arco believes in the large potential for English as a Second Language and in the favorable market trend for 21st century skills. An even stronger portfolio better positions Arco to capture this demand outside and within Arco’s school base. The key attributes of our Supplemental Solutions are:
Our Supplemental offering also includes other solutions such as technological and managerial features to partner schools, B2C test prep and education as a benefit. Our tech and managerial features include (i) WPensar (acquired in 2015), a company that develops and licenses school management systems software, (ii) Escola Em Movimento, or EEM (acquired in 2019), an app developer that enhances communication between schools and parents by providing chat-based interactions, location-based identifications, Net Promoter Scores, or NPS, tool to assess parent’s satisfaction and pilot project related to payments, (iii) Studos (acquired in 2020) a leading provider of adaptive solutions, and (iv) Eduqo (acquired in 2011), a learning management system (LMS) platform that connects students and professors, and also offers question banks, exams and diagnostics to its clients. In March 2021, we acquired Me Salva!, a B2C digital test prep solution, allowing Arco to start delivering high quality education to public sector students at affordable prices. Finally, in February 2022, we acquired Pearson Global School, a K-12 bilingual courseware and teaching methodology, and Coleção Mentes, a K-12 supplemental solution focused on 21st century skills (social-emotional learning, financial literacy and technology). In September 2021, we acquired EduPass, a company that offers education as a benefit to corporate clients and aims to prepare the Brazilian workforce to the future of work through education and upskilling. Our Team and Culture We have a strong corporate culture, and we encourage our employees to actively adopt it. We believe in: 54 Technology We believe that the use of technology is fundamental to achieving our goal of placing each student at the center of the educational experience. In our view, technology is a To implement our vision, we’ve redesigned our structure, creating ArcoTech, a centralized tech unit responsible for integrating our user experience¸ maximizing the value of our products and reducing the time spent with repeated demands. The revamp of our technological backbone will allow for an easy plug-and-play structure for specifics products to all Arco brands - respecting their individuality and value proposition. Our application programming interfaces, or APIs, provide a standardized way to provision, manage, engage, and deliver content to students, faculty and administrators. The APIs manage authentication and access for our entire technology stack and is designed to manage and interface with new technologies as they are introduced. All Our products help (i) schools to create and manage their classes more efficiently; (ii) teachers to easily transpose their content into the platform, access thousands of questions, schedule classes and keep up with their student’s development; and (iii) families to be closer to their children’s performance through the usage of easy-to-use communication tools.
Following the best frameworks in digital product development, we offer a buy-and-build solution from the customer The main drivers of our technology strategy are:
What Sets Us Apart We believe that we have the following business strengths that allow us to disrupt the private K-12 education market: 55 Disruptive approach to traditional school model Instead of simply delivering content as a product through textbooks, we provide an education solution through a technology-based platform. We believe that our platform is cutting-edge, modern, dynamic and According to internal studies, we believe that the parents of As of December 31, Strong combination of content development team and technology to develop a best-in-class learning experience As of December 31, Widespread positive customer satisfaction and strong academic outcomes Our customer satisfaction is driven by our ability to meaningfully improve the performance of our partner schools’ enrolled students SISU system (Sistema de Seleção Unificada, or Unified Selection System): Strong brand equity and aligned incentives resulting in high retention rates We prioritize quality by employing a “white glove” service model across our business, with clear financial incentives (in the form of bonuses) to our sales force that drive long-term relationships with our partner schools. Educational performance is one of the main drivers of school growth, and the success of our partner schools is a critical part of our value proposition. Due to the quality of our academic outcomes, we rarely lose clients. In addition, we have historically been highly effective in increasing contract
93% in 2021, 93% in 2020 and 93% in 2019. Attractive financial model with a high level of visibility and predictability We have cash flow visibility given our long-term contracts with partner schools. Initial contract terms generally average three years, with high switching costs resulting in a customer churn of approximately 56 Founder-led and experienced management, innovation-driven culture Our culture flows from our founder and CEO’s family, who have specialized in education for over 50 years. Our founder and CEO, Mr. Ari de Sá Cavalcante Neto, has brought his family’s successful school formula to scale by creating a leading educational platform. We strive to innovate and instill in our professionals a passion for serving all As of December 31, Our Growth Strategies We aim to continue driving rapid, profitable growth and to generate greater shareholder value by implementing the following strategic initiatives: Deepen relationships with our existing customer base We intend to increase student enrollments within our existing partner schools at a minimum marginal cost as we see major opportunities for increased penetration through:
Expand our partner school base
known, our sales efforts will benefit from the referrals generated by current school base. Add new Supplemental Solutions We consistently review potential opportunities to provide additional Continue to innovate and extend our technological leadership Innovation is a cornerstone of our culture. As such, we employ significant efforts and resources to ensure the constant development and improvement of our portfolio of solutions. We have also invested in a select group of education technology startups 57 We intend to increase the functionality of our platform and continue our investment in the development and acquisition of new applications that extend our technological leadership. We also intend to continue to improve and update our print and digital content based on the real-time feedback we receive from our partner schools.
Continue to pursue M&A opportunities We plan to continue We believe that we have developed a strong capability and track record of identifying, negotiating, and integrating acquisitions. Moreover, we have developed a systematic model that enables us to integrate our acquired businesses in a timely and efficient manner. Since 2011, we have successfully acquired or invested in We have already executed several strategic transactions since our Investments.” Marketing and Sales Our platform has evolved into a complex solution. The adoption of our platform by partner schools requires us to first build trust and confidence in our solutions, which can only be achieved by engaging them with our solutions and demonstrating a proven track record of success and quality, while constantly monitoring client satisfaction and feedback. We have a non-traditional sales approach, which is structured around a practice we refer to as “Educational Consulting,” which reflects both our core value of ensuring that education is our first priority, as well as the unique sales dynamics associated with our industry. We have a lead time (which we define as the period from the moment of first contact to the execution of a contract) for the acquisition of new partner schools, and we typically enter The success of our sales process requires uniquely qualified professionals, who must not only have an academic background, but are also
58 data, is continuously undertaking industry research and analysis and receives regular feedback from, and is in regular contact with, our consultants deployed in the field. Additionally, we promote specialized events that are aimed to retain current partner schools. The most relevant event is Positivo’s Course Program that provides teacher’s training, workshops of recent trends in education and lectures from highly specialized and trained pedagogical professionals. In 2021, the Course Program reached 3,975 teachers. In addition, we work in conjunction with a branding agency, which assists us in developing and strengthening our brands, increasing their national awareness, and building our institutional image. Our brand portfolio is structured to reflect our value proposition and leverage our marketing and sales strategy. A study conducted by Expertise as of July 2021 showed that the Positivo brand is the most recognizable among parents, teachers, and school events.
the contract. The loyalty program allows SPE to offer more personalized consulting services from our pedagogical experts, literature materials to complement the school’s curriculum, cooperative media, and other products or services, to increase a contract’s profitability. Our Customer Service and Support We believe that the best way to ensure the loyalty of our customers is to maintain a healthy, long-term relationship with our partner schools. We aim to achieve this through our customer engagement and support service, which supports partner schools in the implementation and integration of our educational solutions into their systems, as well as help them identify and achieve their pedagogical, business and Pedagogical Consulting Our pedagogical consulting department is responsible for the pedagogical supervision and educational development of our partner schools. It aims to ensure that our educational platform is being used efficiently, and to actively assist our partner schools in improving the learning experience of their students and helping them develop the necessary skills inside and outside the classroom. It also leverages a dedicated management team to train and support our partner schools in maximizing their supplemental revenue streams. Our pedagogical consulting team activities with partner schools include:
59 Customer Support Our customer support department provides day-to-day customer and administrative support to our partner schools in connection with our educational platform by e-mail and/or by telephone. Our customer support department interacts with our pedagogical consulting department when necessary to minimize the risk of miscommunication and ensure a unified approach to customer satisfaction. Our Geographic Presence We believe our platform can be adopted by virtually any private ACV Bookings. Our Clients We Our Competition We compete with traditional publishers and textbook providers, other providers of core curriculum solutions, as well as with online education platforms. Factors influencing competition in this industry may include price, overall education experience and track record, industry experience and reputation, content quality, availability of technology, faculty, facilities, location and program offerings, among others.
Most traditional publishers and textbook providers are typically focused exclusively on physical textbooks. They do not produce their own content, do not update their content frequently, and do not have developed digital platforms. Furthermore, we believe that traditional publishers and textbook providers whose strategy it is to develop education solutions similar to ours do not possess the content development expertise, brand awareness, or the track record to sell such solutions directly to schools. Other core curriculum solutions providers offer primarily printed content and a limited amount of digital content. Other online platforms that offer education solutions through digital channels face difficulties to efficiently integrate solutions for schools, parents, students, and teachers. We believe our proprietary content is engaging to students, teachers, and parents, as illustrated by our ability to persuade schools to switch from other products to our products. We seek to differentiate ourselves from our competitors primarily on the basis of our simple, integrated and personalized educational platform. We believe the following factors are critical to success in the private K-12 education in Brazil:
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Table of
Seasonality Our revenues and operating results normally fluctuate ESG, at Arco Arco was born with the mission to transform the way students learn by delivering high quality education at scale. We believe that our mission and the social impact we aim to achieve will only be delivered if we are able to engage our stakeholders and manage properly our Environmental, Social and Governance risks. During 2021, we conducted a ESG’s materiality process in consultation with a specialized ESG firm, which identified the material topics for our company and prioritized them through interviews and a survey with over 200 stakeholders, including employees, investors, sell-side analyst, suppliers and Non-Governmental Organizations supported by the Arco Institute. We also established an ESG Advisory Group constituted by Arco’s CHRO, COO, CFO and legal department, which supported the establishment of material topics, the prioritization according to the business impact, the engagement of the whole team and communication with different areas of the Company. As a result, we have established three ESG pillars: Promote the Impact on Education To guarantee Arco’s continuous evolution, we need to keep delivering and improving the quality of our content and technology, be able to grow in scale and increase the accessibility of our products and services. Our progress in those topics is quantified by our ability to:
In our latest ESG report, we have quantified those aspects through different metrics, such as NPS, retention rates and number of National Exam approvals, among others. Focus on our people Arco is a company built upon the belief that our people is our strength. We are constantly looking for highly talented and diverse people, aligned with our values and engaged on delivering our purpose. We work to maintain a sense of ownership and engagement by investing in the development and continuous evolution of our people, creating a diverse environment in which people belong and can prosper. 61 To measure the success of our people-centric culture, our teams’ perception regarding Arco and its career opportunities, we track:
Strong and sustainable structure This pillar can be divided in two main parts. The first part, relating to our corporate governance and stakeholders’ alignment, is ensured by:
For further information on Corporate Governance, please see Item 16.G of this annual report, as well as the main indicators on our ESG Report. With respect to the second part, regarding the sustainability of our supply chain, we work constantly to reduce our impact in the environment by:
We have also established goals to constantly evolve our ESG practices. For further information, please see our 2021 ESG Report published on our IR website (https://investor.arcoplatform.com/esg/). Legal Proceedings See “Item 8. Financial Information—A. Consolidated statements and other financial information—Legal Proceedings.” Regulatory Overview The Brazilian constitution establishes education as a right of all citizens, the provision of which is a duty of the state and the family. Accordingly, the government is required to provide all Brazilian citizens with access to free primary education that requires 62 compulsory attendance. Private investment in education is permitted so long as entities providing education services comply with the applicable rules and regulations. The Brazilian education system is organized as a cooperation regime among federal, state, and municipal governments. The federal government is required to organize and coordinate the federal education system in order to guarantee equal opportunity and quality of education throughout Law No. 9,394/1996, or
In addition, the federal government, through Law No. 13,005 of June 25, 2014, implemented the National Education Plan Primary and Secondary Education Primary and secondary education in Brazil is equivalent to K-12 education in the United States, and consists of elementary school, junior high and high school, which are regulated by the LDB and the PNE. The LDB regulates a nationwide, common core curriculum, the number of teaching hours, the minimum classroom attendance and grade advancement. States, municipalities, and educational institutions can pass rules and regulations according to specific regional and local requirements, such as differences in curricula and calendar, grade advancement and issuance of academic documentation for primary and secondary education students. The Under the federal constitution and the LDB, access to primary and secondary education is a right of all children from the ages of four to 17. Following amendments to Law No. 11,274 on February 6, 2006, the duration of primary and secondary education was extended from a period of eight years to a period of nine years. Among the purposes of primary education are: (1) development of the capacity to learn, including basic abilities in reading, writing and arithmetic; (2) comprehension of the natural and social environment, the political system, technology, arts and social values; (3) development of the capacity to acquire new knowledge and abilities and 63 the formation of attitudes and values; and (4) strengthening family ties, social cohesion and mutual tolerance. Assessment of primary education is coordinated by the state legislation of each individual state, on a case-by-case basis. Secondary education is designed to fulfill the government’s duty to progressively complete the formation of the citizen, seeking universalization of scope and coverage. Secondary education is conducted for a period of not less than three years and seeks: (1) the consolidation and deepening of the knowledge acquired in primary education; (2) the basic preparation of the person being educated for work and to be able to adapt within the labor market or pursue further education; (3) the improvement of the student as a person, including ethical formation and the development of intellectual autonomy and critical thinking; and (4) the comprehension of the scientific and technological bases of the productive processes, relating theory to practice in each discipline. Assessment of secondary education is conducted on a national scale and coordinated by the MEC. Law No. 13,415/2017 amended the LDB and changed the structure of secondary education, increasing the academic courses load per year and establishing a new curricular structure that comprises a specific BNCC. Following this normative change, Ruling No. 1,210/2018 approved the new National Curriculum Guidelines (Diretrizes Nacionais Curriculares or DCN) for High School, which is known as the “New High School” (Novo Ensino Médio). This new model is expected to be implemented gradually starting in 2022 (with implementation expected to be concluded by 2024) and one of its main innovations is the establishment of training itineraries (itinerários formativos). The structure of training itineraries is established by the DCN for High School, and characterizes them as a set of subjects, projects, workshops, study centers, among other situations, that students will be able to choose according to their areas of interest as well as life and career projects and aspirations. The training itineraries focus on deepening the study of a specific field of knowledge (Mathematics and its Technologies, Languages and its Technologies, Natural Sciences and its Technologies and Applied Human and Social Sciences) or technical and professional training (FTP) chosen by the student and each school must offer at least one itinerary, while each municipality must offer at least two itineraries, in order to ensure options for students. Regulatory Bodies The main regulatory bodies of the Brazilian education system are:
The MEC is Brazil’s highest governmental body for education. It formulates and evaluates Brazilian national education policy, ensuring the quality of education and compliance with education regulations. The INEP is 64 The MEC is assisted by the CNE, which is the entity with regulatory power and deliberative authority to ensure national education improvement. The CNE is comprised of the CEB, which is the federal agency responsible for the regulation of the K-12 education system, and the CES, which is the federal agency responsible for the States and municipalities are responsible for regulating K-12 education. State Secretaries of Education (Secretarias Estaduais de Educação) are assisted by the State Councils of Education (Conselhos Estaduais de Educação) The LDB grants power to states and municipalities to authorize, accredit and supervise primary and secondary education institutions. This is achieved through each governmental entity’s respective Department of Education. Regulations Applicable to the Company’s Activities The Company is not directly regulated by the MEC nor any other regulatory agency. However, our educational platform and related educational materials seek to comply with the LDB and the guidelines established by the BNCC. In addition, our partner schools are K-12 education providers and are directly regulated by the The BNCC is a set of guidelines that provides a curriculum specifying the core skills and knowledge required to be taught as part of primary and secondary education in Brazil and each school has the autonomy to elaborate or adapt their curricula and pedagogical projects according to such guidelines. The BNCC guidelines were established following overall poor student performance levels achieved while the predecessor education guidelines were in effect. Several indicators suggest that the predecessor guidelines were failing in guidelines, as well as with our partner schools’ demands. As provided by the LDB and the BNCC, early childhood education should enable children to live in society, to play, to participate, to explore, to express themselves, and to know themselves. Primary education, in turn, shall offer the following subject matters: (i) Portuguese; (ii) Arts; (iii) Mathematics; (iv) Geography; (v) History; (vi) Religious Studies; (vii) English; (viii) Science and
While following the BNCC is still required of every school in the country, there are opportunities to provide content solutions and after-school solutions to improve and adapt to the new status quo in Brazil’s education market. Syndicates Under Brazilian labor law, all companies and employees are represented by unions, regardless of whether they are unionized. The unions representing the companies and the employees negotiate the terms of collective bargaining agreements on an annual basis or every two years. Employers are required to grant employees all the rights and working conditions set forth in the collective bargaining agreement, regardless of whether the employee is unionized or not. The employees who choose to be unionized are required to contribute to the workers’ syndicate that represents their sector. Teachers and professors may contribute to the Brazilian Teacher’s Union (Sindicato dos Professores) 65 Data Protection Cybersecurity has become a top priority for regulators around the world, and in Brazil it is no different. Having come into effect in September 2020, the Brazilian Data Protection Law (Law No. 13,709/18, Lei Geral de Proteção de Dados), or LGPD, is a comprehensive personal data protection law establishing general principles and obligations that apply across multiple economic sectors and contractual relationships. The LGPD applies to individuals or legal entities, private or government entities, who processes personal data in Brazil or collects personal data in Brazil or, further, when the processing activities have the purpose of offering or supplying goods or services to data subjects located in Brazil. The LGPD establishes detailed rules for processing personal data, which includes the collection, use, transfer and storage of personal data and will affect all economic sectors, including the relationship between clients and suppliers of goods and services, employees and employers and other relationships in which personal data is collected, whether in a digital or physical environment. Pursuant to the LGPD, security breaches that may result in significant risk or damage to personal data must be reported to the National Data Protection Authority (Autoridade Nacional de Proteção de Dados), or ANPD, the data protection regulatory body, within a reasonable time period. The notice to the ANPD must include: (a) a description of the nature of the personal data affected by the breach; (b) the affected data subjects; (c) the technical and security measures adopted; (d) the risks related to the breach; (e) the reasons for any delays in reporting the breach, if applicable; and (f) the measures adopted to revert or mitigate the effects of the damage caused by the breach. Moreover, the ANPD could establish other obligations related to data protection that are not LGPD allows private right to petition, so we are subject to individual claims for violations of LGPD. The penalties and fines for non-compliance with the LGPD include: (1) warnings, with the imposition of a deadline for the adoption of corrective measures; (2) fines, up to a maximum amount of 2% of the company or group turnover in Brazil, limited to R$50.0 million per violation; (3) disclosure of the violation; (4) the restriction of access to or deletion of the personal data to which the violation relates (5) in case of repetition of the violation, temporary suspension of the database or of data processing activities. We started implementing the LGPD requirements in January 2020, adapting our websites, e-commerces and systems and processes to the new legislation and creating new privacy policies and warnings. We are developing our LGPD program taking into account the changes in cultural and consumer attitudes towards the protection of personal data law and to comply with any new regulations, creating more training for our employees and clients to promote conscience and promote conscience and change of data analysis and treatment. In 2021 we mapped and identified the risks involved with our business, as we process data on children and adolescents, in order to monitor and control sensitive points to promote greater safety, law enforcement and risk reduction. This data protection impact report is a report of the controller's documentation that contains the description of the processes of processing personal data that may generate risks to civil liberties and fundamental rights, as well as measures, safeguards and risk mitigation mechanisms. In addition, our Privacy and Cybersecurity Committee is composed of our DPO and other senior leadership members, bringing diverse backgrounds to the establishment of related LGPD and cybersecurity practices and measures, as well as readjustments and quality preservation initiatives. C. Organizational Structure We are a Cayman Islands exempted company incorporated with limited liability on April 12, 2018. Arco became the holding company of Arco Educação S.A. and its operating subsidiaries, including 66 The table below is a list of the Company’s subsidiaries, joint ventures, and associated
For more details about our organizational structure please see “Presentation of Financial and Other Information— On January 1, 2020, Osterreich Investimentos - Participações Societárias S.A., Mendel Investimentos - Participações Societárias S.A., Torino Investimentos - Participações Societárias S.A., Remare Investimentos - Participações Societárias S.A. and Fahe Investimentos - Participações Societárias S.A. merged into Positivo and became extinct. As a result of the merger, all the contracts, rights and obligations of the now-extinct companies were transferred to Positivo.
On January 1st, 2021, Arco Ventures S.A., merged into CBE and, therefore, became extinct. Due to the merger, all contracts, rights, and obligations from Arco Ventures were transferred to CBE.
On October 1, 2021, Nave merged into CBE and was dissolved. Due to the merger, all contracts, rights, and obligations from Nave were transferred to CBE. In order to comply with Brazilian corporate regulation, Arce Participações Ltda. holds one (1) share of
67 D. Property, Plant and Equipment Properties Our corporate headquarters, which houses our sales, marketing, and business operations, In addition to our corporate headquarters and as of December 31, Intellectual Property Most of our services are provided using proprietary software developed by third parties and by our employees. We rely on a combination of industrial property, copyright, and software laws, as well as employee and third-party non-disclosure, confidentiality and other types of contractual arrangements to protect, establish, maintain and enforce our intellectual property rights, including with respect to our proprietary rights related to our products and services. Nevertheless, we may hold restricted rights over certain software developed either by third parties or by our current or former employees and, occasionally, may be subject to lawsuits filed by said third parties or employees to claim ownership over each software. In addition, we license technology from third parties, and do not hold or own licenses regarding certain software employed in the business. However, we have not received any legal notices related to such non-licensed software and are employing measures to obtain pending licenses. As of December 31, 2021, we own 774 trademark registrations in Brazil (573 of which have been granted and 201 of which are under review but that we are entitled to use), 2 in Argentina, 2 in Bolivia, 1 in Chile, 1 in Ecuador, 3 in Paraguay, 2 in Venezuela, and 2 in Uruguay. As of December 31, 2021, we owned 115 registered domain names in Brazil. We also have 150 of pending trademark applications in Brazil, Paraguay and Venezuela (148 in Brazil, 1 in Paraguay and 2 in Venezuela), as of December 31, 2021. We have several registered copyrights, most notably copyrights for text formatting, critical reading, books, drafting, text editing and review, reformulation, book updates, content coordination, illustrations and diagramming. ITEM 4A. UNRESOLVED STAFF COMMENTS Not applicable.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS The following discussion of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and the notes A. Operating Results We provide a complete pedagogical system with technology-enabled features to deliver educational content to private schools in Brazil. We founded our company with the aim We believe the success of our platform, together with the quality of our client base and the popularity of our brand, has driven our significant growth, allowing us to expand our footprint quickly and efficiently We provide a complete suite of turnkey curriculum solutions and technology-enabled features to help our students, teachers, partner schools and parents, targeting our students’ educational success. Our turnkey educational platform solutions As of March 31,
Our Growth
Our revenue growth has been driven by:
69 The strength of our partner school base and our ability to expand sales are demonstrated in the increasing portion of our ACV Bookings from existing clients and upsell in existing clients prior to the COVID-19 pandemic, represented in the chart below. During the 2020 and 2021 school years, our business was impacted by the non-recurring drop-outs of students in partner schools, which we believe will be normalized in the upcoming years.
Revenue Recognition and Seasonality Prior to the adoption of IFRS 15, revenue was recognized when the significant risks and rewards of ownership
We generate substantially all Our partner schools pay us our fees directly and pass that cost on to their enrolled students’ parents, who in turn are charged through a mandatory supplement to school tuition, in lieu of paying for textbooks from several vendors. Most of our partner schools charge parents an incremental markup from which we do not earn any additional revenue on top of our wholesale prices. Pursuant to the terms of our contracts with our partner schools, they are required, by the end of November of each year, to provide us with an estimate of the number of enrolled students that will access our content in the next school year (which typically starts in February of the following year). Since we allow our partner schools to make small adjustments to their estimates to account for late admissions and dropouts, this number may fluctuate slightly until March 31, when it becomes more accurate. 70 We typically deliver our Core Curriculum content four times each year in March, June, August and December and our Supplemental Solutions content twice each year in June and December, typically two to three months prior to the start of each school quarter. This allows our partner schools and their teachers to prepare classes in advance of each school quarter. Because we recognize revenue In addition, we bill partner schools and collect the sales we charge them in the first half of each academic collections year, generally resulting in a higher cash position in the first half of each fiscal year relative to the second half of each fiscal year. Accordingly, we expect quarterly fluctuations in our revenues and operating results to continue. These fluctuations could result in volatility and adversely affect our liquidity and cash flows. As our business grows, these seasonal fluctuations may become more pronounced. As a result, we believe that sequential quarterly comparisons of our financial results may not provide an accurate assessment of our financial position. A significant portion of our expenses is also seasonal. Due to the nature of our business cycle, we require significant working capital, typically in September and/or October of each year, to cover costs related to production and accumulation of inventory, selling and marketing expenses, and delivery of our teaching materials at the end of each fiscal year in preparation for the beginning of each school year. Therefore, such operating expenses are generally incurred in the period between September and December of each year. Key Business Metrics We review the following key metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans and make strategic decisions: Operating Data Enrolled Students The number of enrolled students is the primary operational metric our management We typically have high visibility of the number of students we will serve before the school year starts, typically by the end of November. Since we allow our partner schools to make small adjustments to their estimates to account for late admissions and early dropouts, this number may fluctuate slightly until March 31, when it becomes more accurate. Accordingly, we believe this metric is most accurately reflected as of March 31 of each year. Following March 31 in a calendar year, our partner schools may experience additional admissions and/or dropouts up to September 30 of such year, which is the date on which the number of students for the year becomes final, or Final Number of Students. In years prior to the COVID-19 pandemic, the difference between the Number of Enrolled Students as of March 31 and the Final Number of Students as of September 30 was not material. However, during 2020 and 2021 and as result of the impacts of the COVID-19 pandemic, our partner schools experienced atypical dropout rates from March 31 to September 30, and our number of students decreased from Number of Enrolled Students of 1,362,141 as of March 31, 2020, to Final Number of Enrolled Students of 1,239,937 as of September 30, 2020, and from Number of Enrolled Students of 1,785,576 as of March 31, 2021, to Final Number of Students of 1,489,707 as of September 30, 2021. As of March 31,
71 In our Core Curriculum segment, we had respectively, representing a CAGR of 99%. The following table sets forth the number of enrolled students at our partner schools as of the dates indicated.
ACV Bookings ACV Bookings is an operating metric and represents our We define ACV Bookings as the revenue we would contractually expect to recognize
Following March 31 in a calendar year, our partner schools may experience additional admissions and/or dropouts up to September 30 of such year, explaining the difference between the ACV Bookings and the revenue recognized for such school year. In years prior to the COVID-19 pandemic, the difference between our ACV Bookings and the revenue recognized for the school year was not material, demonstrating the predictability of our business. However, during 2020 and 2021 and as result of the impacts of the COVID-19 pandemic, our partner schools experienced atypical dropout rates from March 31 to September 30, and the difference 72 between our ACV Bookings and the revenue recognized for each school year was -4% and -9%, respectively. Consequentially, the dynamics mentioned above also impacted the number of enrolled students in our partner schools.
As presented in the chart above, the ACV is divided into three main parts:
The following table
73 could be converted at that or any other exchange rate. See “—Exchange Rates” for further information about recent fluctuations in exchange rates.
The following table set forth our Number of Enrolled Students, average ticket per student per year and ACV Bookings for our B2B2C Core Curriculum and Supplemental Content Solutions as of March 31, 2022, 2021, 2020 and 2019.
The following table sets forth the approximate
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For our Core Curriculum Solutions segment, ACV Bookings was R$912.7 million as of March 31, 2021, and recognized Revenue for the 2021 school year was R$841.9 million. The following table sets forth the approximate Number of Enrolled Students, average ticket per student per year and ACV Bookings for our Supplemental Content Solutions for the periods presented.
75 For our Brazilian Macroeconomic Environment We believe that our results of operations and financial performance are and will continue to be affected by the following macroeconomic trends and factors: All
Brazil is the largest economy in Latin America, as measured by gross domestic product, or GDP. The following table shows data for real GDP, inflation and interest rates in Brazil and the U.S. dollar/real exchange rate at the dates and for the periods indicated.
Source: FGV, IBGE, Central Bank and B3.
IPCA rate. Our financial performance is also tied to fluctuations in interest rates, such as the CDI rate, because such fluctuations affect the value of our financial investments. 76 Printer Costs; Raw Materials We outsource the printing and binding of our educational materials. Printer costs are one of our principal costs; printer fees are impacted by changes in the price of paper, one of the principal raw materials required
Recent Accounting Pronouncements
Components of Our Results of Operations The following is a summary of the principal line items comprising our statements of income (loss). Net revenue We generate substantially all Our revenue is driven by the number of enrolled students at each partner school using our solutions and the agreed price per student per year, all in accordance with the terms and conditions set forth in each contract. We recognize our revenue Cost of Sales Cost of sales primarily consists of expenses related to the production and delivery of our content and technology, which are mainly composed of printing costs, employee-related costs, and the purchase of long-term intellectual property assets such as educational content produced by third-party authors, as well as inventory write-off costs. We intend to continue to invest additional resources in our content development and technology platform. The timing of these expenses will affect our cost of sales in the affected periods. Also, we may launch new products that require additional resources and can affect our cost of sales. Expenses We classify our operating expenses as selling expenses, general and administrative expenses, and other expenses. The largest component of our operating expenses is employee and labor-related expenses, which includes salaries and bonuses, employee benefit expenses and contractor costs. We allocate expenses such as information technology infrastructure costs related to our operations and rent and occupancy charges in each expense category based on employee headcount in that category.
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We allocate share-based payment expense to general and administrative expenses. These share-based expenses represent granted Other Net Our other income (expenses), net, line item consists mainly of miscellaneous income and/or expense items. Finance Result Our finance result includes finance income and finance costs. Finance income includes mainly income from cash equivalents and financial investments, discounts. Income Taxes Income taxes 78 Results of Operations Year Ended December 31, 2020 The following table sets forth our consolidated statements of income (loss) for the years ended December 31,
Net Revenue Net revenue for the year ended December 31, 2020. This increase was primarily attributable to:
This increase partially offset by the negative impact of student drop outs in our partner schools in the first three quarters of 2021, which led to a lower than expected revenue recognition for the period. 79 In our Core segment, net revenue for the year ended December 31, 2020. This increase was primarily attributable
COC and Dom Bosco core brands from Pearson. In our Supplemental segment, net revenue for the year ended December 31, 2020. This increase was primarily attributable to organic growth and the Cost of Sales Cost of sales for the year ended December 31, new solutions in our base with lower gross margin. As a percentage of net revenue, our cost of sales 2021, compared to 22.1% for the year ended December 31, 2020. In our Core segment, cost of sales for the year ended December 31, 2020. In our Supplemental segment, cost of sales for the year ended December 31, Gross Profit For the reasons discussed above, gross profit for the year ended December 31, 2021, was R$937.7 million, an increase of R$157.1 million, or 20.1%, from R$780.6 million for the year ended December 31, 2020. In our Core segment, gross profit for the year ended December 31, 2021, was R$707.5 million, an increase of R$57.4 million, or 8.8%, from R$650.2 million for the year ended December 31, 2020. In our Supplemental segment, gross profit for the year ended December 31, 2021, was R$230.2 million, an increase of R$99.8 million or 76.5%, from R$130.4 million for the year ended December 31, 2020. Selling Expenses Selling expenses for the year ended December 31, 2021, were R$496.3 million, an increase of R$124.0 million, or 33.3%, from R$372.3 million for the year ended December 31, 2020. This increase was primarily attributable to:
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General and Administrative Expenses General and administrative expenses for the year ended December 31, 2021, were R$328.6 million, an increase of R$58.1 million, or 21.5%, from R$270.6 million for the year ended December 31, 2020. This increase was primarily attributable to:
Operating Profit For the reasons discussed above, operating profit for the year ended December 31, 2021, was R$129.4 million, a decrease of R$6.1 million, or 4.5%, from R$135.5 million for the year ended December 31, 2020. Finance Result Finance result for the year ended December 31, 2021, was a net finance cost of R$280.9 million, an increase of R$184.1 million, from a net finance cost of R$96.8 million for the year ended December 31, 2020, for the reasons described below. Finance income. Finance income for the year ended December 31, 2021, was R$91.2 million, an increase of R$46.0 million, or 101.8%, from R$45.2 million for the year ended December 31, 2020. This increase was mainly attributable to the interest from financial investments. Finance costs. Finance costs for the year ended December 31, 2021, was R$372.1 million, an increase of R$230.1 million, from R$142.0 million for the year ended December 31, 2020. This increase was primarily attributable to increase of (i) changes in accounts payable to selling shareholders and interest on acquisition of investments as described in note 17 of our consolidated financial statements; (ii) interest on loans and financing; (iii) changes in fair value of derivative instruments; and (iv) foreign exchange loss. Share of Profit (Loss) of Equity-Accounted Investees Share of profit (loss) of equity-accounted investees for the year ended December 31, 2021, was a loss of R$22.2 million, as compared to a profit of R$0.4 million for the year ended December 31, 2020, attributable to the performance of our equity-accounted investees. 81 (Loss) Profit before Income Taxes For the reasons discussed above, for the year ended December 31, 2021, we recorded a loss before income taxes of R$173.7 million compared to a profit of R$39.1 million for the year ended December 31, 2020. Income Taxes – Income (Expense) For the year ended December 31, 2021, we recorded an income tax credit of R$15.6 million compared to an income tax expense of R$22.3 million for the year ended December 31, 2020. The income tax credit in 2021 was mainly attributable to: (i) reduction of current tax due to the incorporation of companies by CBE, which is operating at a loss, resulting in a 0 tax liability and (ii) the recognition of deferred tax credits over fiscal loss. (Loss) Profit for the Year As a result of the foregoing, loss for the year ended December 31, 2021, was R$158.1 million compared to a profit of R$16.8 million for the year ended December 31, 2020. Year Ended December 31, 2020, compared to the Year Ended December 31, 2019 The following table sets forth our consolidated statements of income (loss) for the years ended December 31, 2020, and 2019:
82 Net Revenue Net revenue for the year ended December 31, 2020, was R$1,001.7 million, an increase of R$428.9 million, or 74.9%, from R$572.8 million for the year ended December 31, 2019. This increase was primarily attributable to:
In our Core segment, net revenue for the year ended December 31, 2020, was R$841.1 million, an increase of R$407.8 million, or 94.1%, from R$433.3 million for the year ended December 31, 2019. This increase was primarily attributable to:
In our Supplemental segment, net revenue for the year ended December 31, 2020, was R$160.6 million, an increase of R$21.1 million, or 15.1% from R$139.5 million for the year ended December 31, 2019. This increase was primarily attributable to the acquisition of Positivo on November 1, 2019, adding one ESL solution, PES, and the 86.4% increase in the number of enrolled students at partner schools (excluding Positivo), to the Final Number of Enrolled Students of 207,908(158,247 excluding Positivo supplemental solutions) as of September 30, 2020, from the Number of Enrolled Students of 84,875 as of March 31, 2019, and the addition of new supplemental solutions to our portfolio. Cost of Sales Cost of sales for the year ended December 31, 2020, was R$221.1 million, an increase of R$103.8 million, or 88.5%, from R$117.3 million for the year ended December 31, 2019. This increase was primarily attributable to the overall increase in the production volume of our educational materials, resulting from the positive impact of our organic growth. The increase in cost of sales was higher than our revenue growth due to new solutions in our base with lower gross margin. As a percentage of net revenue, our cost of sales increased to 22.1% for the year ended December 31, 2020, compared to 20.5% for the year ended December 31, 2019. 83 In our Core segment, cost of sales for the year ended December 31, 2020, was R$190.9 million, an increase of R$93.4 million, or 95.8%, from R$97.5 million for the year ended December 31, 2019. As mentioned above, this increase was primarily attributable to the overall increase in the production volume of our educational materials, resulting from the positive impact of our organic growth and mix of solutions. As a percentage of net revenue in our Core segment, cost of sales increased to 22.7% in the year ended December 31, 2020, compared to 22.5% in the year ended December 31, 2019. In our Supplemental segment, cost of sales for the year ended December 31, 2020, was R$30.2 million, an increase of R$10.5 million, or 53.3% from R$19.7 million for the year ended December 31, 2019. This increase was also primarily attributable to the overall increase in the production volume of our educational materials, resulting from the positive impact of our organic 2020, compared to 14.1% in the year ended December 31, 2019. Gross Profit For the reasons discussed above, gross profit for the year ended December 31, 2019. Selling Expenses Selling expenses for the year ended December 31,
General and Administrative Expenses General and administrative expenses for the year ended December 31,
84 Operating Profit For the reasons discussed above, operating profit for the year ended December 31, 2019. Finance Result Finance result for the year ended December 31, Finance income. Finance income for the year ended December 31, investments. Finance costs. Finance costs for the year ended December 31, Share of Equity-Accounted Investees Share of
Profit Income Taxes For the reasons discussed above, for the year ended December 31, 2019. Income For the year ended December 31, 2020, we recorded an income
Profit
Year
As a result of the foregoing, profit for the year ended December 31, Non-GAAP Financial Measures Adjusted EBITDA, Adjusted Net Income and Free Cash Flow
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Reconciliations for Non-GAAP Financial Measures The following tables set forth reconciliations of Adjusted EBITDA and Adjusted Net Income to our profit (loss) for the years ended December 31, 2021, 2020, 2019 and 2018, our most recent directly comparable financial measures calculated and presented in accordance with IFRS, as well as reconciliations between Free Cash Flow and net cash flows from operating activities for the years ended December 31, 2021, 2020, 2019 and 2018, our most recent directly comparable financial measures calculated and presented in accordance with IFRS. For further information on why our management chooses to use these non-GAAP financial measures, and on the limits of using these non-GAAP financial measures, please see “Presentation of Financial and Other Information—Special Note Regarding Non-GAAP Financial Measures.” Reconciliation between Adjusted EBITDA and Profit for the Year
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Reconciliation of Adjusted Net Income from Profit (Loss) for the Year
(4) Refers to changes in fair value of derivative instruments from put option to convert senior notes. For further information, see note 23 to our audited consolidated financial statements.
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Reconciliation of Free Cash Flow from Net Cash Flows from Operating Activities
B. Liquidity and Capital Resources As of December 31, The following discussion of our liquidity and capital resources is based on the financial information derived from the audited consolidated financial statements included elsewhere in this annual report.
Cash Flows
88 Operating Activities
We recorded net cash flows generated from operating activities of R$92.4 million in 2020, compared to net cash flows used in operating activities of R$7.6 million in 2019. In 2020, our net cash flows generated from operating activities were affected by the period. Investing Activities Our Our net cash used in investing activities was R$479.7 million in the year ended December 31, 2020, compared to net cash used in investing activities of R$631.4 million in the year ended December 31, 2019, primarily due to the impact of the Financing Activities Our net cash flows
Our net cash flows generated from financing activities for the year ended December 31,
2019. Indebtedness As of December 31, 2021, our total outstanding indebtedness was R$1,831.3 million. On December 1, 2021, we issued US$150 million in senior notes convertible into our Class A common shares (US$100 million to Dragoneer, and US$50 million to General Atlantic), bearing interest at 8% per annum in fixed Brazilian reais and maturing on November 15, 2028. Each note will be convertible at the option of the holder into our Class A common shares at the agreed conversion rate, which is equivalent to an initial conversion price of US$29 per share. The conversion price represents an approximately 65% premium to the trailing 30-day volume-weighted share price at the time of signing the investment agreements for the convertible notes. Dragoneer and General Atlantic will beneficially own approximately 5.6% and 2.8%, respectively, of our total shares (on an as converted basis for the convertible senior notes). On November 11, 2021, Arco Educação, acting as guarantor, entered into an international loan agreement with Itaú Unibanco Nassau Branch, as lender, and Geekie, as borrower, in the amount of US$11.0 million. The loan accrues interest at a rate equal to 2.452% per annum and is repayable in equal quarterly installments from February 10, 2022, to October 28, 2024. We contracted swap 89 derivatives financial instruments to protect our exposure to the foreign currency risk, which changes the effective interest rate for this loan to 100% of the CDI rate + 1.7% per annum. On August 25, 2021, we issued through our wholly owned subsidiary, Companhia Brasileira de Educação e Sistemas de Ensino S.A., R$900 million in debentures, bearing interest at the CDI rate plus 1.7% per annum and maturing on August 25, 2023. On January 1, 2021, CBE acting as guarantor, entered into a lease agreement with HP Financial Services Arrendamento Mercantil S.A. and Geekie. In addition, on April 1, 2021, Arco Educação, acting as guarantor, entered into a lease agreement with HP Financial Services Arrendamento Mercantil S.A. and Geekie. On July 1, 2020, we entered into a loan agreement with Banco Santander (Brasil) S.A. in the amount of R$100.0 million. The loan accrues interest at a rate equal to 100% of the CDI rate plus 2.7% per annum. The loan was repaid in December 2021. On July 1, 2020, we entered into two loan agreements with Itaú Unibanco S.A. in the amount of R$100.0 million each, both loans maturing in January 2022 (single installment). The loans accrue interest at a rate equal to 100% of the CDI rate plus 2.7% per annum, payable in 17 installments, and were repaid in full on January 3, 2022. As collateral for the payment of the remaining purchase price of Positivo Acquisition, on October 25, 2018, we On November 13, 2018, we have entered into a fiduciary agreement with Banco Safra S.A., as amended on December 3, 2020, to guarantee the payment due under the lease agreements of our São Paulo offices located at Rua Augusta 2840. For further information, see note 13 to our audited consolidated financial statements. Off-balance sheet arrangements As of December 31, 2021, we did not have any off-balance sheet arrangements. Capital Expenditures In the years ended December 31, the 2021 school year of R$32.3 million. We expect to increase our capital expenditures to support the growth in our business and operations. We expect to meet our capital expenditure needs for the foreseeable future from our operating cash flow and our existing cash and cash equivalents. Our future capital requirements will depend on several factors, including our growth rate, the expansion of our research and development efforts, employee headcount, marketing and sales activities, the introduction of new features to our existing products and the continued market acceptance of our products. We are monitoring our cash position and if needed acquisition of funds from financial institutions, private debit or public offerings will be timely analyzed.
90 Additionally, our Board of Directors authorized our management to appoint J.P. Morgan Securities LLC, or JPMS, as our agent under the Repurchase Program to purchase securities on our behalf in the open market. Such purchases benefit from the safe harbor provided by Rule 10b-18, or Rule 10b-18, promulgated by the SEC under the Exchange Act. Accordingly, we shall not take, nor permit any person or entity under our control to take, any action that could jeopardize the availability of Rule 10b-18 for purchases of securities under the Repurchase Program. The actual timing, number and value of shares repurchased under the Repurchase Program will depend on several factors, including constraints specified in the Rule 10b-18, price, general business and market conditions, and alternative investment opportunities. The Repurchase Program does not obligate us to acquire any specific number of shares in any period, and may be expanded, extended, modified or discontinued at any time. As of the date of this annual report, we had purchased an aggregate of 1,818,779 Class A common shares for a total of approximately US$43.2 million under the Repurchase Program. C. Research and Development, Patents and Licenses, Etc. See “Item 4. Information on the Company—D. Property, plant and equipment—Intellectual Property.” D. Trend Information For a discussion of trend information, see “Item 4. Information on the Company—B. Business Overview—Underlying Trends.” E. Critical Accounting Estimates
F. Tabular Disclosure of Contractual Obligations The following is a summary of our contractual obligations as of December 31,
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
We are managed by our board of directors and by our senior management, pursuant to our Articles of Association and the Cayman Islands Companies Act (As Revised) or the Companies Act. Board of Directors As of December 31, 91 his or her removal or vacation of office as a director in accordance with the Articles of Association. Directors appointed by the board of directors hold office until the next annual general meeting. Our directors do not have a retirement age requirement under our Articles of Association. On May 17, 2021, our board of directors appointed Paula Soares de Sá Cavalcante as a member of the board of directors. The appointment of Ms. Cavalcante, a member of Arco’s founding family, is part of a long-term succession plan for Mr. Oto de Sá Cavalcante and reinforces the family’s long-term commitment to our Company. The appointment of Ms. Cavalcante will be formally ratified at our annual meeting scheduled to take place on April 29, 2022. We their services and applicable compensation. The following table presents the names of the current members of our board of directors.
The following is a brief summary of the business experience of our directors. Unless otherwise indicated, the current business addresses for our directors is Rua Augusta 2840, 9th floor, suite 91, Consolação, São Paulo - SP, Oto Brasil de Sá Cavalcante is the Chairman of our board of directors, a position he has held since February 2018. Mr. Brasil de Sá Cavalcante has over 50 years’ experience in the education industry. In 2001, he founded Colégio Ari de Sá in Fortaleza, and has been the chairman of its board of directors since 2001. In 2013, he founded Faculdade Ari de Sá in Fortaleza, and has been its chief executive officer since 2013. He holds a bachelor’s degree in civil engineering fromUniversidade Federal do Ceará in Fortaleza. Ari de Sá Cavalcante Neto is a member of our board of directors and our Chief Executive Officer, positions he has held since February 2018. He has been a member of the advisory committee at Colégio Ari de Sá since 2007. Mr. de Sá Cavalcante Neto was an associate at Ernst & Young from 1998 to 2000. He was the chief operating officer of Colégio Ari de Sá from 2001 to 2005 and was an associate at McKinsey & Company in 2006. He holds an MBA from the Massachusetts Institute of Technology (MIT). Paula Soares de Sá Cavalcante is a member of our board of directors, a position she has held since May 2021. Ms. Cavalcante previously worked at Deloitte in the auditing and mergers and acquisitions areas for four years. She holds a bachelor’s degree in Business Administration from the University of Fortaleza and a postgraduate degree in Finance from Insper. Beatriz Amary is an independent board member, a position she has held since February 23, 2021. She is a partner focused on emerging markets at Amadeus Capital, a global technology investor. Before that, she was part of the team responsible for launching Actis, a global emerging markets investment fund, in São Paulo, leading investments in the consumer, retail, healthcare and education sectors in Latin America. Ms. Amary was responsible for the investments and held board member positions in CNA, an English Language Training company in Brazil, and Cruzeiro do Sul, an in-class and distance learning post-secondary education provider in Brazil. Prior to that, Ms. Amary worked in M&A at JP Morgan and Johnson & Johnson. Ms. Amary holds a degree from Fundação Getúlio Vargas in Brazil and an MBA from Harvard Business School. 92 Carla Schmitzberger is an independent board member, a position she has held since February 23, 2021. She was a vice-president at Alpargatas, owner of the Havaianas brand of sandals, for nearly 14 years, responsible for the internationalization of the business, the expansion of the brand to new product categories and the establishment of retail operations. Prior to that, Ms. Schmitzberger has worked for eight years at Citibank, holding the positions of Vice-President of Marketing and Products, Vice-President of Marketing and Head of Citibank Credit Cards Brazil. Ms. Schmitzberger also worked for 11 years at P&G and 2 years for Johnson & Johnson. Ms. Schmitzberger is currently an independent board member at Natura &Co and Lojas Marisa. Carla holds a bachelor’s degree in chemical engineering from Cornell University. Edward Ruiz is a member of our board of directors and the chair of our audit committee, positions he has held since July 2019. Mr. Ruiz is an American national with over 50 years of experience in public and private accounting. He has been a Certified Public Accountant in the United States since 1972. Edward retired from Deloitte in 2012, where he was an audit partner and member of Deloitte’s IFRS Specialist Group in Brazil. As Head of the Capital Markets group in Brazil, Edward advised companies on financial and regulatory reporting matters related to initial public offerings and secondary offerings in Brazil, the United States and European Capital Markets. Prior to Deloitte, he held executive positions in internal audit at JP Morgan and PepsiCo Inc. in the United States. He holds a bachelor’s degree in Business Administration from Pace University, New York City and has taken advanced courses related to an Executive MBA at FIA in São Paulo and governance courses at the Harvard Business School. Since his retirement, Mr. Ruiz has gained extensive board-level experience as a member and Audit Committee chair of several publicly traded companies in Brazil. Mr. Ruiz is currently a Board member and Audit Committee chair at Nexa Resources, a mining company listed on the New York Stock Exchange and Toronto Stock Exchange and with mining and smelting operations in Brazil and Peru. Martin Escobari is a member of our board of directors, a position he has held since August 2018. He has been with General Atlantic since 2012, and is a member of its Executive Committee, is the Chair of its Investment Committee, and is the head of its Latin America business. Mr. Escobari serves on the board of directors of Empreendimentos Pague Menos SA, Invekra, S.A.P.I. de C.V. (d/b/a Laboratórios Sanfer, S.A. de C.V.), Grupo Axo, S.A.P.I. de C.V. and XP Investimentos, and has previously served on the boards of Ourofino Saude Animal Participações S.A., Sura Asset Management, Smiles S.A. Aceco TI
Board Diversity Matrix
93
Executive Officers Our executive officers are responsible for the day-to-day management of our business and for implementing the general policies and directives established by our board of directors. We have a strong management team led by Ari de Sá Cavalcante Neto, our Chief Executive Officer, who has broad experience in the education industry. The following table lists our current executive officers:
The following is a brief summary of the business experience of our executive officers. Unless otherwise indicated, the current business addresses for our executive officers is Rua Augusta 2840,
Renata Ferraz de Toledo Machado is our Chief Operating Officer, a position she has held since February 17, 2022. Ms. Machado joined Arco in September 2019 and is currently responsible for Arco’s Operations and Supply Chain area, and is also our People Executive Officer. Prior to joining Arco, Ms. Machado was an Associate Partner at McKinsey & Company, where for 5 years she held a leading role in projects related to digital transformation for the banking segment, projects related to bottom line operational improvements, and projects related to best organizational practices to accelerate the delivery of innovation and new products. Ms. Machado holds a bachelor’s degree in Economics from Universidade de São Paulo (USP), a master’s degree in Economics from Fundação Getúlio Vargas (FGV-EAESP)and Alexandre Nakamaru is our Accounting and Legal Officer, a position he has held since May 6, 2021. Mr. Nakamaru joined Arco in June 2019 as Financial Officer. Mr. Nakamaru has 18 years of experience working at large multinational companies in Brazil (including Monsanto, AmBev and Natura), in audit roles at Deloitte and as the Chief Financial Officer of two private equity owned companies. Mr. Nakamaru holds a bachelor’s degree in business administration from Fundação Armando Alvares Penteado (FAAP) and a post-graduation degree in controllership from Fundação Getúlio Vargas (FGV-EAESP). João Cunha Silva is our Chief 94 Family Relationships Oto Brasil de Sá Cavalcante, our Chairman, is the father of Ari de Sá Cavalcante Neto, our Chief Executive Directors’ and Officers’ Insurance We have contracted civil liability insurance coverage for acts carried out by our directors and executive officers in the course of their duties.
Compensation of Directors and Key Executives Under Cayman Islands law, we are not required to disclose compensation paid to our senior management on an individual basis and we have not otherwise publicly disclosed this information elsewhere. Our executive officers, directors and management receive fixed, variable and Fixed Compensation The fixed component of their compensation is set on market terms and adjusted annually. In general, approximately 32% of our management compensation is composed of a fixed component. Variable Compensation The variable component consists of cash bonuses and awards of shares (or the cash equivalent). Cash bonuses or paid to executive officers and members of our management based on previously agreed targets for the business. The variable compensation represents approximately 68% of our management compensation, 50% of which is connected to our corporate goals. Share-based Compensation Shares (or the cash equivalent) are awarded under our share options long-term incentive program, as discussed below. We believe that our Long-Term Incentive Plan enhances the dedication of our executives towards achieving our goals.
Long-Term Incentive Plan (LTIP) and Share-based Compensation Restricted Shares Grant Plan On April 30, 2019, our board of directors approved our restricted share long-term incentive program, or the “Restricted Shares Grant Plan.” The maximum number of shares that can be issued under the Restricted Shares Grant Plan may not exceed 5% of our share capital at any time. The Restricted Shares Grant Plan is administered by our board of directors and a designated committee (the “Restricted Share Plan Advisory Committee”). Our and our controlled companies’ directors, officers, employees and professionals of any nature may participate in the Restricted Shares Grant Plan, which is composed of two underlying programs: (i) the regular program, pursuant to which we will grant restricted shares to the participant at no cost, subject to certain vesting and/or performance conditions (the “Regular Program”) and (ii) the matching shares program, pursuant to which we will match the number of Class A shares (at no additional cost to the participant) that were acquired by the participant at fair market value (“investment shares”), using the amounts received by the participant as a short term incentive and designated by our board of directors to be used as an investment in investment shares, provided certain vesting conditions are satisfied (the “Matching Program”). 95 Under the matching shares program, participants are required to (i) be employed or providing services to us through each vesting date, as set forth in the applicable award agreement and (ii) hold the investment shares through each vesting date. The vesting period may not exceed five years. In addition, upon each vesting date, a portion of the investment shares will become free of restrictions and the participant will be allowed to freely negotiate such shares. Under the regular shares program, the participant’s right to receive the restricted shares will be subject to the participant remaining continuously bound as our employee, officer, or director, as applicable, through each vesting, which may not exceed five years. If a participant is dismissed by us with cause or voluntarily terminates his or her employment or service relationship with us, the participant will forfeit any right to the unvested shares. If the participant is dismissed by us without cause or by mutual agreement between us and the participant, the participant will be entitled to receive his or her vested shares and a pro rata amount of the granted and unvested shares, by reference to the vesting period in which the termination occurred and based on the number of days the participant was employed by us. In case of the participant’s death or permanent disability, the participant (or his or her heirs) will be entitled to receive all the granted shares, whether or not vested, which will be delivered upon termination of the original vesting period. If our shares cease to be publicly traded or in an event of a change in our control, the vesting period of the granted shares will be accelerated, as applicable. In each such case, each participant may elect to (i) sell his or her granted shares at a price equal to the price at which the shares were sold in connection with the transaction resulting in the Company becoming privately owned or in a change of control, or (ii) remain a shareholder of the Company subject to the approval of the board of directors. Awards of restricted shares and matching shares may be settled in shares or cash, as determined by our board of directors. The restricted shares and matching shares may not be pledged, assigned or transferred to third parties, without the prior approval of our board of directors. Participants in the Restricted Share Grant Plan will be subject to a two-year post-termination of employment or service noncompete and prohibition against soliciting our employees, service providers and customers. The Restricted Shares Grant Plan provides that the Company shall withhold a portion of the restricted shares units to comply with all taxes applicable to the delivery of the restricted shares units to the beneficiary. As of March 31, 2022, we had 118,155 restricted shares units outstanding under the Regular Program and Matching Program. Regular Programs The Restricted Plan Advisory Committee approves the participants of each Regular Program, from time to time. The table below shows the grant date and market value on the grant date of the share units granted by us up to March 31, 2022, under the Regular Programs.
96 *The 12th and 13th Programs are the 1st and 2nd Matching Programs respectively, as described below. All such shares will be available for sale by the beneficiaries annually, over three or four years, on each date of the anniversary of the IPO or March 31, depending on the program. Matching Program On February 26, 2021, our Restricted Shares Plan Advisory Committee approved our first Matching Program (12th Program). On June 1, 2021, our second Matching Program was approved (13th Program). The table below shows the grant date and market value on the grant date of the share units granted by us up to March 31, 2021, under the Matching Programs.
All such shares, including the investment shares acquired by the participants of the Matching Program, will be available for sale by the beneficiaries annually, over four years, on March 31 of each year. LTIP I Certain members of our management participate in our share option long-term incentive program, or the LTIP I. Beneficiaries under the LTIP I are granted rights to buy shares based on certain criteria.
As of December 31, C. Board Practices Committees of the Board of Directors Our board of directors has Audit Committee The audit committee, which consists of The audit committee is governed by a charter that complies with Nasdaq rules. The audit committee is responsible for, among other matters:
97
The audit committee meets as often as it determines is appropriate to carry out its responsibilities, but in any event, meets at least four times per year. Compensation Committee As of December 31, We update the full-time personnel functions into 6 categories as described below:
The table below breaks down our full-time personnel by function as of December 31, 2021.
The table below breaks down our full-time personnel by function as of December 31,
Our employees are represented by labor unions through collective agreements (convenções coletivas) they have with such labor unions. These collective agreements are renegotiated annually. We have not experienced any work stoppages, and we consider our relations with our employees to be good. 99 None of our executive officers have entered into employment agreements directly with the Company.
The shares and any outstanding beneficially owned by our directors and officers and/or entities affiliated with these individuals are disclosed in “Item 7. Major Shareholders and Related Party Transactions—A. Major See “Item 6. Directors, Senior Management and Employees—B. Compensation—Long-Term Incentive Plan (LTIP)” for information on our share option long-term incentive program.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS A. Major Shareholders The following table and accompanying footnotes 2021. The number of common shares beneficially owned by each entity, person, executive officer or director is determined in accordance with the rules of the SEC, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares over which the individual has sole or shared voting power or investment power as well as any shares that the individual has the right to acquire within 60 days through the exercise of any option, warrant or other right. Except as otherwise indicated, and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all common shares held by that person. The percentages of beneficial ownership in the table below are calculated as of December 31, 100 Unless otherwise indicated below, the address for each beneficial owner is c/o Arco, Rua Augusta 2840,
The holders of our Class A common shares and Class B common shares have identical rights, except that our Founding Shareholders as holders of Class B common shares (i) are entitled to 10 votes per share, whereas holders of our Class A common shares are entitled to one vote per share (ii) have certain conversion rights and (iii) are entitled to maintain a proportional ownership interest by purchasing additional Class B common shares in the event that additional Class A common shares are issued. For more information see “Item 10. Additional Information—B. Memorandum and articles of association—Preemptive or Similar Rights” and “Item 10. Additional Information—B. Memorandum and articles of association —Conversion.” Each Class B common share is convertible into one Class A common share.
Educational Agreement—International School Program On August 2, 2016, Educadora ASC Ltda., or Educadora ASC, entered into an agreement with International School, pursuant to which International School agreed to (i) make available to Educadora ASC an educational platform that it developed, and (ii) supply to Educadora ASC the related materials, and Educadora ASC agreed to pay certain fees to International School in connection 101 therewith. Development and Promotion of Educational Materials Agreement On August 29, 2014, Educadora ASC and Livraria ASC Ltda., or Livraria ASC, entities under common control of our controlling shareholder, entered into an agreement withSAS Desenvolvimento e Promoção de Material Didático, or SAS Material Didático, which was merged into CBE on January 2021, pursuant to which (i) SASMaterial Didático agreed to (a) make available to Educadora ASC and Livraria ASC an educational platform that it developed, and (b) supply to Educadora ASC and Livraria ASC the related materials, and (ii) Educadora ASC agreed to promote the educational platform and share its expertise in educational management with SAS Material Didático, and Educadora ASC and Livraria ASC agreed to pay certain fees to SAS Material Didáticoin connection therewith. The agreement is for an initial term of 10 years and will be automatically renewed for an additional 5 years or 10 years respectively, should there be a change of control or initial public offering of
CBE. Loan and Debentures Agreements with Geekie On January 17, 2019, we entered into an agreement (the “Geekie Agreement”) with Geekie, our In addition, and pursuant to the Geekie Agreement, we lent R$4.0 million to Geekie Partners S.A., the former controlling entity of Geekie. The loan is repayable in a single instalment in June 2022, bears interest at 110% of the CDI, and is secured by the shares of Geekie Partners S.A. in Geekie. The transaction totaled R$14.0 million and its purpose was to support Geekie’s working capital needs. On June 1, 2021, we lent R$5.5 million to Geekie, in accordance with the investment agreement executed on November 27, 2020. The loan is payable in a single instalment in June 2022, bears an interest of 110% of the CDI and is secured by the shares of Geekie Partners S.A. in Geekie.
We have entered into several intercompany loan agreements that have not yet matured in order to develop our activities, as described below:
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Investment in Isaac On In addition, on April 22, 2021, we and other investors entered into a Series A and Series A-1 Preferred Shares Purchase Agreement, pursuant to which we acquired 3,653,788 Series A Preferred Shares of INCO Limited, for R$33.2 million, with the
we hold 47,375,702 shares of INCO Limited, equivalent to 25.06% of its total capital stock (22.43% on fully diluted basis) and made a total investment equivalent to R$110.3 million. Sale of Escola de Aplicação São José dos Campos Ltda. On January 2, 2019, we sold the shares we owned in Escola de Aplicação São José dos Campos Ltda. to its minority shareholders. The transaction price of R$ On October 23, 2020, the buyers have anticipated the payment of the installments due in 2022 and the first installment of 2023. On February 26, 2021, the parties executed an amendment to the purchase agreement, which was agreed that the installments to be paid in 2021 will be adjusted by the IPCA. The purchase price was fully paid on August 23, 2021. Indemnification Agreements We have entered into indemnification agreements with each of our directors and executive officers. Pursuant to these agreements, we have agreed to indemnify and hold harmless each director and officer to the full extent permitted by applicable law in the event of any claim made against him or her in any proceeding due to the fact that he or she is or was a director or officer of our company or served at our request as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise. In addition, under the terms of these agreements we have agreed to cover all expenses actually and reasonably incurred by each director and officer in connection with any such proceeding, with certain limited exceptions. The indemnification extends to the beneficiary’s services as a director or officer prior to the date of the indemnification agreement as well as afterward. It continues after the beneficiary ceases to be a director or officer. C. Interests of experts and counsel Not applicable.
103 ITEM 8. FINANCIAL INFORMATION
Financial statements See Dividends and Dividend Policy We have not adopted a dividend policy with respect to future distributions of dividends. The amount of any distributions will depend on many factors such as our results of operations, financial condition, cash requirements, prospects and other factors deemed relevant by our board of directors and, where applicable, our shareholders. We currently intend to retain all available funds and any future earnings, if any, to fund the development and expansion of our business and we do not anticipate paying any cash dividends in the foreseeable future. Subject to the Companies The holders of Class A common shares and Class B common shares shall be entitled to share equally in any dividends that may be declared in respect of Arco’s common shares from time to time. In the event that a dividend is paid in the form of Class A common shares or Class B common shares, or rights to acquire Class A common shares or Class B common shares, (1) the holders of Class A common shares shall receive Class A common shares, or rights to acquire Class A common shares, as the case may be; and (2) the holders of Class B common shares shall receive Class B common shares, or rights to acquire Class B common shares, as the case may be. We have not declared or paid any dividends to our shareholders since our incorporation in the Cayman Islands on April 12, 2018. However, In addition, a dividend payment of R$10.5 million (based on There was no distribution of dividends of CBE in 2019, 2020 and 2021. Certain Cayman Islands and Brazilian Legal Requirements Related to Dividends Under the Companies 104 Additionally, please refer to “Item 3. D. Risk Factors—Certain Factors Relating to Our Business and Industry—We depend on dividend distributions by our subsidiaries, and we may be adversely affected if the performance of our subsidiaries is not positive or if Brazil imposes legal restrictions on dividend distributions by subsidiaries.” Our ability to pay dividends is directly related to positive and distributable net results from our
Brazilian subsidiaries. If, for any legal reasons due to new laws or bilateral agreements between countries, they are unable to pay dividends to Cayman Islands companies, or if a Cayman Islands company becomes incapable of receiving them, we may not be able to make any dividend payments in the future. Legal proceedings We are, and may be from time to time, involved in disputes that arise in the ordinary course of our business. Claims against us can be time-consuming, result in costly litigation, require significant management time and result in the diversion of significant operational resources.
As of December 31, Civil Matters As of December 31,
The proceeding in the State of Ceará
As both the proceedings are still ongoing and
105 educational material. As of
this proceeding. Labor Matters As of December 31, Tax and Social Security Matters As of December 31, Request for Arbitration
This request for arbitration purporting to assert Mr. Cardinot’s rights under the Investment Agreement (for more information regarding the Investment Agreement, see “Item 4.A. History and development of the company—Acquisitions and Investments—Acquisition of International School”) is still ongoing. Mr. Cardinot has asserted that, among others, he is entitled to receive shares of Arco Platform and the purchase price due pursuant to the Investment Agreement is materially higher. On October 10, 2019, we filed our response to the request for arbitration, denying Mr. Cardinot’s claims and affirming that Arco Platform and Arco Educação cannot be parties to the arbitration since they are not parties to the Investment Agreement. On July 6, 2020, Arco Brazil, the Company and CBE filed their statements of defense. On August 10, 2020, Ulisses Cardinot filed his reply to the statements of defense. On September 14, 2020, Arco Brazil, the Company and CBE filed their rejoinders.
The submissions had not caused a material impact on our assessment of the applicable liabilities or on the provisions made by us in the financial statements. We are vigorously defending ourselves on the award phase of the arbitration proceeding. If an unfavorable decision were to occur, it could result in a material adverse impact on our financial position and results of operations in the period in which the decision occurs, or in future periods, and on the price of our Class A common shares. 106 B. Significant changes None. ITEM 9. THE OFFER AND LISTING
On September 28, 2018, we completed our initial public offering. Subsequently, we completed a follow-on offering on: (i) October 24, 2019; (ii) June 4, 2020; and (iii) September 8, 2020. Our common shares have been listed on the Nasdaq Global Select Market since September 26, 2018 under the symbol “ARCE.”
distribution Not applicable. C. Markets For a description of our publicly traded common shares, see “—A. Offering and listing details.” D. Selling shareholders Not applicable. E. Dilution Not applicable.
Not applicable. ITEM 10. ADDITIONAL INFORMATION
Not applicable.
Our shareholders adopted the Amended and Restated Memorandum and Articles of Association included as Exhibit 3.1 to the Amendment No. Share Capital The Memorandum and Articles of Association authorize two classes of common shares: Class A common shares, which are entitled to one vote per share, and Class B common shares, which are entitled to 10 votes per share and to maintain a proportional ownership interest in the event that additional Class A common shares are issued. Any holder of Class B common shares may convert his or her shares at any time into Class A common shares on a share-for-share basis. The rights of the two classes of common shares are otherwise identical, except as described below. The implementation of this dual class structure was required by Oto Brasil de Sá Cavalcante and Ari de Sá Cavalcante Neto, our principal shareholders, as a condition of undertaking 107 As of December 31, Treasury Shares As of December 31, Issuance of Shares Except as expressly provided in Arco’s Articles of Association, Arco’s board of directors has general and unconditional authority to allot, grant options over, offer or otherwise deal with or dispose of any unissued shares in the company’s capital without the approval of our shareholders (whether forming part of the original or any increased share capital), either at a premium or at par, with or without preferred, deferred or other special rights or restrictions, whether in regard to dividend, voting, return of capital or otherwise and to such persons, on such terms and conditions, and at such times as the directors may decide, but so that no share shall be issued at a discount, except in accordance with the provisions of the Companies Arco’s Articles of Association provide that at any time that there are Class A common shares in issue, additional Class B common shares may only be issued pursuant to (1) a share split, subdivision of shares or similar transaction or where a dividend or other distribution is paid by the issue of shares or rights to acquire shares or following capitalization of profits, (2) a merger, consolidation, or other business combination involving the issuance of Class B common shares as full or partial consideration, or (3) an issuance of Class A common shares, whereby holders of the Class B common shares are entitled to purchase a number of Class B common shares that would allow them to maintain their proportional ownership interests in Arco (following an offer by Arco to each holder of Class B common shares to issue to such holder, upon the same economic terms and at the same price, such number of Class B common shares as would ensure such holder may maintain a proportional ownership interest in Arco pursuant to Arco’s Articles of Association). In light of: (a) the above provisions; (b) the fact that future transfers by holders of Class B common shares will generally result in those shares converting to Class A common shares, subject to limited exceptions as provided in the Memorandum and Articles of Association; and (c) the ten-to-one voting ratio between our Class B common shares and Class A common shares, means that holders of our Class B common shares will in many situations continue to maintain control of all matters requiring shareholder approval. This concentration of ownership and voting power will limit or preclude your ability to influence corporate matters for the foreseeable future. For more information see “—Preemptive or Similar Rights.” Arco’s Articles of Association also provide that the issuance of non-voting common shares requires the affirmative vote of a majority of the of then-outstanding Class A common shares.
Fiscal Year Arco’s fiscal year begins on January 1 of each year and ends on December 31 of the same year. Voting Rights The holders of the Class A common shares and Class B common shares have identical rights, except that (i) the holder of Class B common shares is entitled to 10 votes per share, whereas holders of Class A common shares are entitled to one vote per share, (ii) Class B common shares have certain conversion rights and (iii) the holder of Class B common shares is entitled to maintain a proportional ownership interest in the event that additional Class A common shares are issued. For more information see “—Preemptive or Similar Rights” and “—Conversion.” The holders of Class A common shares and Class B common shares vote together as a single class on all matters (including the election of directors) submitted to a vote of shareholders, except as provided below and as otherwise required by law. Arco’s Articles of Association provide as follows regarding the respective rights of holders of Class A common shares and Class B common shares: 108
As set forth in the Articles of Association, the holders of Class A common shares and Class B common shares, respectively, do not have the right to vote separately if the number of authorized shares of such class is increased or decreased. Rather, the number of authorized Class A common shares and Class B common shares may be increased or decreased (but not below the number of shares of such class then outstanding) by the affirmative vote of the holders of a majority of the voting power of the issued and outstanding Class A common shares and Class B common shares, voting together in a general meeting. Preemptive or Similar Rights The Class A common shares and Class B common shares are not entitled to preemptive rights upon transfer and are not subject to conversion (except as described below under “—Conversion”), redemption or sinking fund provisions. The Class B common shares are entitled to maintain a proportional ownership interest in the event that additional Class A common shares are issued. As such, except for certain exceptions, if Arco issues Class A common shares, it must first make an offer to each holder of Class B common shares to issue to such holder, upon the same economic terms and at the same price, such number of Class B common shares as would ensure such holder may maintain a proportional ownership interest in Arco. This right to maintain a proportional ownership interest may be waived by the holders of a majority of the Class B common shares. Conversion The outstanding Class B common shares are convertible at any time as follows: (1) at the option of the holder, a Class B common share may be converted at any time into one Class A common share or (2) upon the election of the holders of a majority of the then outstanding Class B common shares, all outstanding Class B common shares may be converted into a like number of Class A common shares. In addition, each Class B common share will convert automatically into one Class A common share upon any transfer, whether or not for value, except for certain transfers described in the Articles of Association, including transfers to affiliates, transfers to and between the Founding Shareholders, their family members and their respective heirs and successors, trusts solely for the benefit of the shareholder or their affiliates, and partnerships, corporations and other entities exclusively owned by the shareholder or their affiliates and certain transfers to organizations that are exempt from taxation under Section 501(c)(3) of the Internal Revenue Code of 1986, as amended. Furthermore, each Class B common share will convert automatically into one Class A common share and no Class B common shares will be issued thereafter if, at any time, the total number of the issued and outstanding Class B common shares is less than 10% of the total number of shares outstanding.
No class of Arco’s common shares may be subdivided or combined unless the other class of common shares is concurrently subdivided or combined in the same proportion and in the same manner. Equal Status Except as expressly provided in Arco’s Articles of Association, Class A common shares and Class B common shares have the same rights and privileges and rank equally, share ratably and are identical in all respects as to all matters. In the event of any merger, consolidation, scheme, arrangement or other business combination requiring the approval of our shareholders entitled to vote thereon (whether or not Arco is the surviving entity), the holders of Class A common shares shall have the right to receive, or the right to elect to receive, the same form of consideration as the holders of Class B common shares, and the holders of Class A common shares shall 109 have the right to receive, or the right to elect to receive, at least the same amount of consideration on a per share basis as the holders of Class B common shares. In the event of any (1) tender or exchange offer to acquire any Class A common shares or Class B common shares by any third-party pursuant to an agreement to which Arco is a party, or (2) any tender or exchange offer by Arco to acquire any Class A common shares or Class B common shares, the holders of Class A common shares shall have the right to receive, or the right to elect to receive, the same form of consideration as the holders of Class B common shares, and the holders of Class A common shares shall have the right to receive, or the right to elect to receive, at least the same amount of consideration on a per share basis as the holders of Class B common shares. Record Dates For the purpose of determining shareholders entitled to notice of, or to vote at any general meeting of shareholders or any adjournment thereof, or shareholders entitled to receive dividend or other distribution payments, or in order to make a determination of shareholders for any other purpose, Arco’s board of directors may set a record date which shall not exceed forty (40) clear days prior to the date where the determination will be made. General Meetings of Shareholders As a condition of admission to a shareholders’ meeting, a shareholder must be duly registered as a shareholder of Arco at the applicable record date for that meeting and, in order to vote, all calls or installments then payable by such shareholder to Arco in respect of the shares that such shareholder holds must have been paid. Subject to any special rights or restrictions as to voting then attached to any shares, at any general meeting every shareholder who is present in person or by proxy (or, in the case of a shareholder being a corporation, by its duly authorized representative not being himself or herself a shareholder entitled to vote) shall have one vote per Class A common share and 10 votes per Class B common share. As a Cayman Islands exempted company, Arco is not obliged by the Companies Also, Arco may, but is not required to (unless required by the laws of the Cayman Islands), hold The Companies
Subject to regulatory requirements, the annual general meeting and any extraordinary general meetings must be called by not less than ten (10) clear days’ notice prior to the relevant shareholders meeting and convened by a notice discussed below. Alternatively, upon the prior consent of all holders entitled to receive notice, with regards to the annual general meeting, and the holders of 95% in par value of the shares entitled to attend and vote at an extraordinary general meeting, that meeting may be convened by a shorter notice and in a manner deemed appropriate by those holders. Arco will give notice of each general meeting of shareholders by publication on its website and in any other manner that it may be required to follow in order to comply with Cayman Islands law, Nasdaq and SEC requirements. The holders of registered shares may 110 be given notice of a shareholders’ meeting by means of letters sent to the addresses of those shareholders as registered in our shareholders’ register, or, subject to certain statutory requirements, by electronic means. Holders whose shares are registered in the name of DTC or its nominee, which we expect will be the case for all holders of Class A common shares, will not be a shareholder or member of the company and must rely on the procedures of DTC regarding notice of shareholders’ meetings and the exercise of rights of a holder of the Class A common shares. A quorum for a general meeting consists of any one or more persons holding or representing by proxy not less than one-third of the aggregate voting power of all shares in issue and entitled to vote upon the business to be transacted. A resolution put to a vote at a general meeting shall be decided on a poll. An ordinary resolution to be passed by the shareholders at a general meeting requires the affirmative vote of a simple majority of the votes cast by, or on behalf of, the shareholders entitled to vote, present in person or by proxy and voting at the meeting. A special resolution requires the affirmative vote on a poll of no less than two-thirds of the votes cast by the shareholders entitled to vote who are present in person or by proxy at a general meeting. Both ordinary resolutions and special resolutions may also be passed by a unanimous written resolution signed by all the shareholders of our Company, as permitted by the Companies Pursuant to Arco’s Articles of Association, general meetings of shareholders are to be chaired by the chairman of our board of directors or in his absence the vice-chairman of the board of directors. If the chairman or vice-chairman of our board of directors is absent, the directors present at the meeting shall appoint one of them to be chairman of the general meeting. If neither the chairman nor another director is present at the general meeting within 15 minutes after the time appointed for holding the meeting, the shareholders present in person or by proxy and entitled to vote may elect any one of the shareholders to be chairman. The order of business at each meeting shall be determined by the chairman of the meeting, and he or she shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts and things as are necessary or desirable for the proper conduct of the meeting, including, without limitation, the establishment of procedures for the maintenance of order and safety, limitations on the time allotted to questions or comments on the affairs of the Company, restrictions on entry to such meeting after the time prescribed for the commencement thereof, and the opening and closing of the polls. Liquidation Rights If Arco is voluntarily wound up, the liquidator, after taking into account and giving effect to the rights of preferred and secured creditors and to any agreement between Arco and any creditors that the claims of such creditors shall be subordinated or otherwise deferred to the claims of any other creditors and to any contractual rights of set-off or netting of claims between Arco and any person or persons (including without limitation any bilateral or any multi-lateral set-off or netting arrangements between the company and any person or persons) and subject to any agreement between Arco and any person or persons to waive or limit the same, shall apply Arco’s property in satisfaction of its liabilitiespari passu and subject thereto shall, subject to the rights attaching to any share, distribute the property pari passu amongst the shareholders in proportion to the capital paid up at the commencement of the winding up on the shares held by them respectively. Changes to Capital Pursuant to the Articles of Association, Arco may from time to time by ordinary resolution:
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Arco’s shareholders may by special resolution, subject to confirmation by the Grand Court of the Cayman Islands on an application by the Company for an order confirming such reduction, reduce its share capital or any capital redemption reserve in any manner permitted by law. In addition, subject to the provisions of the Companies
Transfer of Shares Subject to any applicable restrictions set forth in the Articles of Association, any shareholder of Arco may transfer all or any of his or her common shares by an instrument of transfer in the usual or common form or in the form prescribed by the Nasdaq or any other form approved by the Company’s board of directors. The Class A common shares are traded on the Nasdaq in book-entry form and may be transferred in accordance with Arco’s Articles of Association and Nasdaq’s rules and regulations. However, Arco’s board of directors may, in its absolute discretion, decline to register any transfer of any common share which is either not fully paid up to a person of whom it does not approve or is issued under any share incentive scheme for employees which contains a transfer restriction that is still applicable to such common share. The board of directors may also decline to register any transfer of any common share unless:
If the directors refuse to register a transfer they are required, within two months after the date on which the instrument of transfer was lodged, to send to the transferee notice of such refusal. 112 Share Repurchase The Companies
Dividend Rights See “Item 8A. Consolidated Statements and Other Financial Information—Dividends and Dividend Policy” for further information regarding dividend rights. Appointment, Disqualification and Removal of Directors Arco is managed by its board of directors. The Articles of Association provide that, unless otherwise determined by a special resolution of shareholders, the board of directors will be composed of four to 11 directors, with the number being determined by a majority of the directors then in office. There are no provisions relating to retirement of directors upon reaching any age limit. The Articles of Association also provide that, while Arco’s shares are admitted to trading on Nasdaq, the board of directors must always comply with the residency and citizenship requirements of the U.S. securities laws applicable to foreign private issuers. The Articles of Association provide that directors shall be elected by an ordinary resolution of our shareholders, which requires the affirmative vote of a simple majority of the votes cast on the resolution by the shareholders entitled to vote who are present, in person or by proxy, at the meeting. Each director shall be appointed and elected for such term as the resolution appointing him or her may determine or until his or her removal or vacation of office in accordance with the Articles of Association. Any vacancies on the board of directors that arise other than upon the removal of a director by resolution passed at a general meeting can be filled by the remaining directors (notwithstanding that they may constitute less than a quorum). Any such appointment shall be as an interim director to fill such vacancy until the next annual general meeting of shareholders. Additions to the existing board (within the limits set pursuant to the Articles of Association) may be made by ordinary resolution of the shareholders.
Grounds for Removing a Director A director may be removed with or without cause by ordinary resolution. The notice of general meeting must contain a statement of the intention to remove the director and must be served on the director not less than ten calendar days before the meeting. The director is entitled to attend the meeting and be heard on the motion for his removal. The office of a director will be vacated automatically if he or she (1) becomes prohibited by law from being a director, (2) becomes bankrupt or makes an arrangement or composition with his creditors, (3) dies or is in the opinion of all his co-directors, incapable by reason of mental disorder of discharging his duties as director, (4) resigns his office by notice to us or (5) has for more than six months been absent without permission of the directors from meetings of the board of directors held during that period, and the remaining directors resolve that his or her office be vacated. Proceedings of the Board of Directors The Articles of Association provide that Arco’s business is to be managed and conducted by the board of directors. The quorum necessary for the board meeting shall be a simple majority of the directors then in office (subject to there being a minimum of two directors present) and business at any meeting shall be decided by a majority of votes. In the case of an equality of votes, the chairman shall have a casting vote. 113 Subject to the provisions of the Articles of Association, the board of directors may regulate its proceedings as they determine is appropriate. Board meetings shall be held at least once every calendar quarter and shall take place either in São Paulo, Brazil or at such other place as the directors may determine. Subject to the provisions of the Articles of Association, to any directions given by ordinary resolution of the shareholders and the listing rules of the Nasdaq, the board of directors may from time to time at its discretion exercise all powers of Arco, including, subject to the Companies
Inspection of Books and Records Holders of Arco shares will have no general right under Cayman Islands law to inspect or obtain copies of the list of shareholders or corporate records of the Company. However, the board of directors may determine from time to time whether and to what extent Arco’s accounting records and books shall be open to inspection by shareholders who are not members of the board of directors. Notwithstanding the above, the Articles of Association provide shareholders with the right to receive annual financial statements. Such right to receive annual financial statements may be satisfied by publishing the same on the company’s website or filing such annual reports as we are required to file with the SEC. Register of Shareholders The Class A common shares are held through DTC, and DTC or Cede & Co., as nominee for DTC, will be recorded in the shareholders’ register as the holder of our Class A common shares. Under Cayman Islands law, Arco must keep a register of shareholders that includes:
Under Cayman Islands law, the register of shareholders of Arco is prima facie evidence of the matters set out therein (i.e., the register of shareholders will raise a presumption of fact on the matters referred to above unless rebutted) and a shareholder registered in the register of shareholders is deemed as a matter of Cayman Islands law to haveprima facie legal title to the shares as set against his or her name in the register of shareholders. Once the register of shareholders has been updated, the shareholders recorded in the register of shareholders should be deemed to have legal title to the shares set against their name.
register of members were made in respect of our ordinary shares, then the validity of such shares may be subject to re-examination by a Cayman Islands court. Exempted Company Arco is an exempted company with limited liability under the Companies 114
“Limited liability” means that the liability of each shareholder is limited to the amount unpaid by the shareholder on the shares of the company (except in exceptional circumstances, such as involving fraud, the establishment of an agency relationship or an illegal or improper purpose or other circumstances in which a court may be prepared to pierce or lift the corporate veil). Arco is subject to reporting and other informational requirements of the Exchange Act, as applicable to foreign private issuers. Except as otherwise disclosed in this annual report, Arco intends to continue to comply with the Nasdaq rules in lieu of following home country practice. Anti-Takeover Provisions in our Articles of Association Some provisions of the Articles of Association may discourage, delay or prevent a change in control of Arco or management that shareholders may consider favorable. In particular, the capital structure of Arco concentrates ownership of voting rights in the hands of the Founding Shareholders. These provisions, which are summarized below, are expected to discourage coercive takeover practices and inadequate takeover bids. These provisions are also designed to encourage persons seeking to acquire control of Arco to first negotiate with the board of directors. However, these provisions could also have the effect of discouraging others from attempting hostile takeovers and, as a consequence, they may also inhibit temporary fluctuations in the market price of the Class A common shares that often result from actual or rumored hostile takeover attempts. These provisions may also have the effect of preventing changes in the management of Arco. It is possible that these provisions could make it more difficult to accomplish transactions that shareholders may otherwise deem to be in their best interests. Two Classes of Common Shares The Class B common shares of Arco are entitled to 10 votes per share, while the Class A common shares are entitled to one vote per share. Since it owns of all of the Class B common shares of Arco, the Founding Shareholders currently have the ability to elect all directors and to determine the outcome of most matters submitted for a vote of shareholders. This concentrated voting control could discourage others from initiating any potential merger, takeover, or other change of control transaction that other shareholders may view as beneficial. So long as the Founding Shareholders have the ability to determine the outcome of most matters submitted to a vote of shareholders, 115 Preferred Shares Arco’s board of directors is given wide powers to issue one or more classes or series of shares with preferred rights. Such preferences may include, for example, dividend rights, conversion rights, redemption privileges, enhanced voting powers and liquidation preferences. Despite the anti-takeover provisions described above, under Cayman Islands law, Arco’s board of directors may only exercise the rights and powers granted to them under the Articles of Association, for what they believe in good faith to be in the best interests of Arco. Protection of Non-Controlling Shareholders The Grand Court of the Cayman Islands may, on the application of shareholders holding not less than one-fifth of the shares of Arco in issue, appoint an inspector to examine the Company’s affairs and report thereon in a manner as the Grand Court shall direct. Subject to the provisions of the Companies
Notwithstanding the U.S. securities laws and regulations that are applicable to Arco, general corporate claims against Arco by its shareholders must, as a general rule, be based on the general laws of contract or tort applicable in the Cayman Islands or their individual rights as shareholders as established by Arco’s Articles of Association. The Cayman Islands courts ordinarily would be expected to follow English case law precedents, which permit a minority shareholder to commence a representative action against Arco, or derivative actions in Arco’s name, to challenge (1) an act which is ultra vires or illegal, (2) an act which constitutes a fraud against the minority and the wrongdoers themselves control Arco, and (3) an irregularity in the passing of a resolution that requires a qualified (or special) majority. Registration Rights and Restricted Shares Although no shareholders of Arco have formal registration rights, they or entities controlled by them or their permitted transferees will be able to sell their shares in the public market from time to time pursuant to an exemption from registration, subject to certain limitations on the timing, amount and method of those sales imposed by regulations promulgated by the SEC. C. Material contracts See “Item 7. Major Shareholders and Related Party D. Exchange controls TheCaymanIslands currently has no exchange control restrictions. E. Taxation The following summary contains a description of certain Cayman Islands and U.S. federal income tax consequences of the acquisition, ownership and disposition of our Class A common shares. It does not purport to be a comprehensive description of all the tax considerations that may be relevant to a decision to purchase the Class A common shares, is not applicable to all categories of investors, some of which may be subject to special rules, anddoesnot address all of the Cayman Islands and U.S. federal income tax considerations applicable to any particular holder. The summary is based upon the tax laws of the Cayman Islands and regulations thereunder and on the tax laws of United States and regulations thereunder as of the date hereof, which are subject to change. 116 Prospective purchasers of our Class A common shares should consult their own tax advisors about the particular Cayman Islands and U.S. federal, state, local and other tax consequences to them of the acquisition, ownership and disposition of our Class A common shares. Cayman Islands Tax Considerations The Cayman Islands laws currently levy no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty or withholding tax applicable to us or to any holder of Class A common shares. There are no other taxes likely to be material to us levied by the government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or after execution brought within the jurisdiction of the Cayman Islands. No stamp duty is payable in the Cayman Islands on transfers of shares of Cayman Islands companies except those which hold interests in land in the Cayman Islands. The Cayman Islands is not party to any double tax treaties which are applicable to any payments made by or to our company. There are no exchange control regulations or currency restrictions in the Cayman Islands. As a Cayman Islands exempted company with limited liability, we have received an undertaking as to tax concessions pursuant to Section 6 of the Tax Concessions Payments of dividends and capital in respect of our Class A common shares will not be subject to taxation in the Cayman Islands and no withholding will be required on the payment of a dividend or capital to any holder of our Class A common shares, nor will gains derived from the disposal of our Class A common shares be subject to Cayman Islands income or corporation tax. There is no income tax treaty or convention currently in effect between the United States and the Cayman Islands.
Material U.S. Federal Income Tax Considerations for U.S. Holders
This summary applies only to U.S. Holders (as defined below) that hold our Class A common shares as capital assets for tax purposes. In addition, it does not describe all of the tax consequences that may be relevant in light of a U.S. Holder’s particular circumstances, including alternative minimum tax consequences, the potential application of the provisions of the Internal Revenue Code of 1986, as amended (the “Code”), known as the Medicare contribution tax, and tax consequences applicable to U.S. Holders subject to special rules, such as:
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If an entity that is classified as a partnership for U.S. federal income tax purposes holds our Class A common shares, the U.S. federal income tax treatment of a partner will generally depend on the status of the partner and the activities of the partnership. Partnerships holding our Class A common shares and partners in such partnerships should consult their tax advisers as to the particular U.S. federal income tax consequences of owning and disposing of the Class A common shares. This discussion is based on the Code, administrative pronouncements, judicial decisions, final, temporary and proposed Treasury regulations, all as of the date hereof, any of which is subject to change or differing interpretations, possibly with retroactive effect. A “U.S. Holder” is a holder who, for U.S. federal income tax purposes, is a beneficial owner of our Class A common shares and is:
U.S. Holders should consult their tax
This discussion assumes that we are not, and will not become, a passive foreign investment company (a “PFIC”), as described below. Taxation of Distributions As discussed under “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Dividends and Dividend Policy”, we do not currently intend to pay dividends. In the event that we do pay dividends, and subject to the discussion below under “—Passive Foreign Investment Company The amount of the dividend will generally be treated as foreign-source dividend income to U.S. Holders and will not be eligible for the dividends-received deduction generally available to U.S. corporations under the Code. Dividends will be included in a U.S. Holder’s income on the date of the U.S. Holder’s receipt of the dividend. Sale or Other Disposition of Common Shares Subject to the discussion below under “—Passive Foreign Investment Company 118 equal the difference between the U.S. Holder’s tax basis in the Class A common shares disposed of and the amount realized on the disposition, in each case as determined in U.S. dollars. This gain or loss will generally be U.S.-source gain or loss for foreign tax credit purposes. The deductibility of capital losses is subject to various limitations. Passive Foreign Investment Company Rules A non-U.S. corporation will be a PFIC for any taxable year in which either (i) 75% or more of its gross income consists of “passive income,” or (ii) 50% or more of the average quarterly value of its assets consist of assets that produce, or are held for the production of, “passive income.” For this purpose, subject to certain exceptions, passive income includes interest, dividends, rents, and gains from transactions in commodities. A non-U.S. corporation will be treated as owning its proportionate share of the assets and earning its proportionate share of the income of any other corporation in which it owns, directly or indirectly, Based on our current operations, income, assets and certain estimates and projections, including as to the relative values of our assets, we believe that we were not a PFIC for U.S. federal income tax purposes for our taxable year ended December 31, Holder for all succeeding years during which the U.S. Holder holds the Class A common shares, even if we ceased to meet the threshold requirements for PFIC status. If we were a PFIC for any taxable year during which a U.S. Holder held our Class A common shares (assuming such U.S. Holder has not made a timely election described below), gain recognized by a U.S. Holder on a sale or other disposition (including certain pledges) of the Class A common shares would be allocated ratably over the U.S. Holder’s holding period for the Class A common shares. The amounts allocated to the taxable year of the sale or other disposition and to any year before we became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or corporations, as appropriate, for that taxable year, and an interest charge would be imposed on the tax on such amount. Further, to the extent that any distribution received by a U.S. Holder on its Class A common shares exceeds 125% of the average of the annual distributions on
available that would result in alternative tax consequences (such as mark-to-market treatment) of owning and disposing the Class A common shares. U.S. Holders should consult their tax advisers to determine whether any of these elections would be available and, if so, what the consequences of the alternative treatments would be in their particular circumstances. In addition, if we were a PFIC or, with respect to a particular U.S. Holder, were treated as a PFIC for the taxable year in which we paid a dividend or for the prior taxable year, the preferential dividend rates discussed above with respect to dividends paid to certain non-corporate U.S. Holders would not apply. If a U.S. Holder owns Class A common shares during any year in which we are a PFIC, the holder generally must file an annual report containing such information as the U.S. Treasury may require on IRS Form 8621 (or any successor form) with respect to us, generally with the holder’s federal income tax return for that year. U.S. Holders should consult their tax Information Reporting and Backup Withholding Payments of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries generally are subject to information reporting, and may be subject to backup withholding, unless (i) the U.S. Holder is a 119 corporation or other exempt recipient or (ii) in the case of backup withholding, the U.S. Holder provides a correct taxpayer identification number and certifies that it is not subject to backup withholding. Backup withholding is not an additional tax. The amount of any backup withholding from a payment to a U.S. Holder will be allowed as a credit against such holder’s U.S. federal income tax liability and may entitle it to a refund, provided that the required information is timely furnished to the IRS. U.S. Holders should consult their tax advisers regarding the application of the U.S. information reporting and backup withholding rules. Information with Respect to Foreign Financial Assets Certain U.S. Holders who are individuals (and, under recent Treasury regulations, certain entities) may be required to report information on their U.S. federal income tax returns relating to an interest in our common shares, subject to certain exceptions (including an exception for common shares held in accounts maintained by certain U.S. financial institutions). U.S. Holders should consult their tax advisers regarding the effect, if any, of this requirement on their ownership and disposition of the common shares. F. Dividends and paying agents Not applicable. G. Statement by experts Not applicable. H. Documents on display We are subject to the informational requirements of the Exchange Act. Accordingly, we are required to file reports and other information with the SEC, including annual reports on Form 20-F and reports on Form 6-K. You may inspect and copy reports and other information filed with the SEC at the Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an
Not applicable. ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risks associated with foreign exchange and interest rates. In accordance with our policies, we seek to manage our exposure to these various market-based risks.
We monitor market, credit and operational risks in line with the objectives in capital management, supported by the oversight of our Board of Directors, in decisions related to capital management and to ensure their consistency with our objectives and assessment of risks. Information relating to quantitative and qualitative disclosures about these market risks is described below. Foreign Exchange Risk
120 Liquidity Risk We regularly review the liquidity risk and maintain appropriate reserves, including bank credit facilities with first tier financial institutions. We also continuously monitor projected and actual cash flows and the combination of maturity profiles of the financial assets and liabilities. The main requirements for financial resources used by us arise from the need to make payments for printing educational content, freight expenses, operating expenses, labor and social obligations and other operating disbursements. See “Item 5. F—Tabular disclosure of contractual obligations” for a table summarizing our contractual obligations as of December 31, 2021. Financial Counterparty Risk The financial counterparty risk arises from the possibility that we may incur losses due to the default of our counterparties. We adopt as practice the analysis of the financial and equity situation of our counter parts in order to control this risk. Counterparty credit limits, which take published credit ratings and other factors into account, are set to cover our total aggregate exposure to a single financial institution. Exposures and limits applicable to each financial institution are approved by our treasury within guidelines approved by the board and are reviewed on a regular basis. Interest Rate Risk Interest rate risk represents the chance that the fair value or future cash flows of a financial instrument will fluctuate due to changes in market interest rates. Our exposure to this risk relates primarily to our investments with floating interest rates. We are primarily exposed to fluctuations in CDI interest rates on financial investments. Our exposure to cash, bank deposits and cash equivalents and financial investments indexed to the CDI totaled R$ 2021. For further information on our market risks, see note ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES A. Debt securities Not applicable. B. Warrants and rights Not applicable. C. Other securities Not applicable. D. American depositary shares Not applicable.
121 PART II ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
No matters to report.
No matters to report. ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
Not applicable.
Not applicable.
Not applicable.
Not applicable. E. Use of proceeds On September 25, 2018, the registration On October 21, 2019, a shelf registration statement on Form F-3 (File No 333-234215) was declared effective by the SEC. On October 25, 2019, we filed with the SEC the final prospectus supplement related to our follow-on public offering of our class A common shares. Goldman Sachs & Co. LLC, Morgan Stanley & Co. LLC and Itau BBA USA Securities, Inc. acted as the representatives of the underwriters in this offering. In connection with this offering, we issued and sold 3,450,656 Class A common shares and the selling shareholders offered and sold an additional 4,268,847 Class A common shares to the public at a price of US$43.00 per Class A common shares, for an aggregate price of US$331,938,629. We received net proceeds of US$143.9 million, after deducting USS$3.7 million in underwriting discounts and commissions. On November 26, 2019, an additional 661,112 Class A common shares were sold by General Atlantic Arco (Bermuda), L.P. following the exercise by the underwriters of their option to purchase additional shares. 122 On September 8, 2020, we filed with the SEC the final prospectus supplement (File No 333-234215) related to a public offering of our class A common shares. Goldman Sachs & Co. LLC, Morgan Stanley & Co. LLC and Itau BBA USA Securities, Inc. acted as the representatives of the underwriters in our follow-on. In connection with the follow-on, we issued and sold 2,500,000 Class A common shares to the public at a price of US$44.80 per Class A common shares, for an aggregate price of US$112,000,000. We received net proceeds of US$109.8 million, after deducting USS$2.2 million in underwriting discounts and commissions. ITEM 15. CONTROLS AND PROCEDURES A. Disclosure controls and procedures We have evaluated, with the participation of our chief executive officer and chief financial officer, the effectiveness of our
Management is responsible for establishing and maintaining adequate “internal control over financial reporting,” as such term is defined in Rule 13a-15(f) of the Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatement. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2021. In making its assessment of internal control over financial reporting, management used the criteria described in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission 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 annual or interim consolidated financial statements will not be prevented or detected on a timely basis.
C. Attestation report of The effectiveness of internal control over financial reporting as of December 31, 2021, has been audited by Ernst & Young Auditores Independentes S.S., an independent registered public accounting firm, 123 in this annual report on Form 20-F on page F-2. EY’s audit of internal control over financial reporting of the D. Changes in internal control over financial reporting There ITEM 16. RESERVED ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT The audit committee, which consists of ITEM 16B. On September 11, 2018, our Board of Directors adopted a code of business conduct and ethics (the “Code of Ethics”) applicable to the board of directors and all employees of Arco. On November 21, 2019, our Board of Directors approved an amendment to the Code of Ethics applicable to the board of directors and all employees of Arco. An English translation of the Code of Ethics wasincluded in the 2019 annual report as Exhibit Since its effective date on September 11, 2018, we have not waived compliance with ITEM 16C. Audit and Non-Audit Fees The following table sets forth the fees billed to us by our independent registered public accounting firm during the years ended December 31,
124 ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES Under the listed company audit committee rules of Nasdaq and the SEC, we must comply with Exchange Act Rule 10A-3, which requires that we establish an audit committee composed of members of the Board of Directors that meets specified requirements. The composition of our audit committee complies with the requirements of Nasdaq rules. ITEM 16E. On January 6, 2021, our Board of
Total Number of Maximum Value of Shares Purchased Shares that May as Part of Publicly Yet Be Purchased Total Number of Average Price Paid Announced Plans Under the Plans or Shares Purchased per Share (US$) or Programs(1) Programs January 2021 70,839 33.6778 70,839 429,161 February 2021 205,742 36.2643 205,742 223,419 March 2021 — – – 233,419 April 2021 362,621 27.9866 362,621 1,860,798 May 2021 – – – 1,860,798 June 2021 – – – 1,860,798 July 2021 – – – 1,860,798 August 2021 185,161 23.6687 185,161 1,675,637 September 2021 66,628 22.0991 66,628 1,609,009 October 2021 312,000 18.6670 312,000 1,297,009 November 2021 277,070 17.9247 277,070 1,019,939 December 2021 – – – 1,019,939 January 2022 66,153 20.1357 66,153 953,786 February 2022 232,565 19.5137 232,565 721,221 March 2022 40,000 18.2050 40,000 681,221 Total 1,818,779 23.7738 1,818,779 681,221
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT Not applicable. ITEM 16G. Foreign Private Issuer Status Nasdaq listing rules include certain accommodations in the corporate governance requirements that allow foreign private issuers, such as us, to follow “home country” corporate governance practices in lieu of the otherwise applicable corporate governance 125 standards of Nasdaq. The application of such exceptions requires that we disclose each noncompliance with Nasdaq listing rules that we do not follow and describe the Cayman Islands corporate governance practices we do follow in lieu of the relevant Nasdaq corporate governance standard. As a foreign private issuer, we currently rely, and will continue to rely, on the foreign private issuer exemption with respect to the following rules:
Principal Differences between Cayman Islands and U.S. Corporate Law The Companies Mergers and Similar Arrangements The Companies
Where the
company’s Articles of Association. No shareholder resolution is required for a merger between a parent company (i.e., a company that owns at least 90% of the issued shares of each class in a subsidiary company) and its subsidiary company. The Moreover, Cayman Islands
126 rigorous and take longer to complete than the procedures typically required to consummate a merger in the United States), the arrangement in question is approved by a majority in number of each class of shareholders and creditors with whom the arrangement is to be made, and who must in addition represent three-fourths in value of each such class of shareholders or creditors, as the case may be, that are present and voting either in person or by proxy at a meeting, or meetings
If a scheme of arrangement or takeover offer (as described below) is approved, any dissenting shareholder would have no rights comparable to appraisal rights, which would otherwise ordinarily be available to dissenting shareholders of United States corporations, providing rights to receive payment in cash for the judicially determined value of the shares. Squeeze-out Provisions When a takeover offer is made and accepted by holders of 90.0%
an operating business. Shareholders’ Suits
the Cayman Islands courts have confirmed the availability for such actions. In which:
A shareholder may have a direct right of action against us where the individual rights of that shareholder have been infringed or are about to be infringed. 127 Corporate Governance Cayman Islands law restricts transactions between a company and its directors unless there are provisions in the Articles of Association which provide a mechanism to alleviate possible conflicts of interest. Additionally, Cayman Islands law imposes on directors’ duties of care and skill and fiduciary duties to the companies which they serve. Under Arco’s Articles of Association, a director must disclose the nature and extent of his interest in any contract or arrangement and following such disclosure and subject to any separate requirement under applicable law or the listing rules of the Nasdaq, and unless disqualified by the chairman of the relevant meeting, the interested director may vote in respect of any transaction or arrangement in which he or she is interested. The interested director shall be counted in the quorum at such meeting and the resolution may be passed by a majority of the directors present at the meeting. Subject to the foregoing and our Articles of Association, our directors may exercise all the powers of Arco to vote compensation to themselves or any member of their body in the absence of an independent quorum. Our Articles of Association provide that, in the event a Compensation Committee is established, it shall be made up of such number of independent directors as is required from time to time by the Nasdaq rules (or as otherwise may be required by law). As a foreign private issuer, we are permitted to follow home country practice in lieu of certain Nasdaq corporate governance rules, subject to certain requirements. We currently rely, and will continue to rely, on the foreign private issuer exemption with respect to the following rules:
Borrowing Powers Arco’s directors may exercise all the powers of Arco to borrow money and to mortgage or charge its undertaking, property and assets (present and future) and uncalled capital or any part thereof and to issue debentures, debenture stock, mortgages, bonds and other such securities whether outright or as security for any debt, liability or obligation of Arco or of any Indemnification of Directors and Executive Officers and Limitation of Liability
The Companies
128 Insofar as indemnification for liabilities arising under the Securities Act may be permitted to Arco’s directors, officers or persons controlling the Company under the foregoing provisions, we have been informed that, in the opinion of the SEC, this indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. Directors’ Fiduciary Duties As a matter of Cayman Islands law, a director of a Cayman Islands company is in the position of a fiduciary with respect to the company. Accordingly, directors and officers owe the following fiduciary duties In addition to the above, under Cayman Islands law, directors also owe a duty of care which is not fiduciary in nature. This duty has been defined as a requirement to act as a reasonably diligent person having both the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company and the general knowledge skill and experience which that director has. As set out above, directors have a duty not to put themselves in a position of conflict and this includes a duty not to engage in self-dealing, or to otherwise benefit as a result of their position. However, in some instances what would otherwise be a breach of this duty can be forgiven and/or authorized in advance by the shareholders provided that there is full disclosure by the directors. This can be done by way of permission granted in the memorandum and articles of association or alternatively by shareholder approval at general meetings. A director of a Cayman Islands company also owes to the company duties to exercise independent judgment in carrying out his functions and to exercise reasonable skill, care and diligence, which has both objective and subjective elements. Recent Cayman Islands case law confirmed that directors must exercise the care, skill and diligence that would be exercised by a reasonably diligent person having the general knowledge, skill and experience reasonably to be expected of a person acting as a director. Additionally, a director must exercise the knowledge, skill and experience which he or she actually possesses. A general notice may be given to the board of directors to the effect that (1) the director is a member or officer of a specified company or firm and is to be regarded as interested in any contract or arrangement which may after the date of the notice be made with that company or firm; or (2) he or she is to be regarded as interested in any contract or arrangement which may after the date of the notice to the board of directors be made with a specified person who is connected with him or her, will be deemed sufficient declaration of interest. This notice shall specify the nature of the interest in question. Following the disclosure being made pursuant to Arco’s Articles of Association and subject to any separate requirement under applicable law or the listing rules of the Nasdaq, and unless disqualified by the chairman of the relevant meeting, a director may vote in respect of any transaction or arrangement in which he or she is interested and may be counted in the quorum at the meeting. In comparison, under Delaware corporate law, a director of a Delaware corporation has a fiduciary duty to the corporation and its shareholders. This duty has two components: the duty of care and the duty of loyalty. The duty of care requires that a director act in good faith, with the care that an ordinarily prudent person would exercise under similar circumstances. Under this duty, a director must inform himself or herself of, and disclose to shareholders, all material information reasonably available regarding a significant transaction. The duty of loyalty requires that a director act in a manner he or she reasonably believes to be in the best interests of the corporation. He or she must not use his or her corporate position for personal gain or advantage. This duty prohibits self-dealing by a director and mandates that the best interest of the corporation and its shareholders take precedence over any interest possessed by a director, officer or controlling shareholder and not shared by the shareholders generally. In general, actions of a director are presumed to have been made on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the corporation. However, this presumption may be rebutted by evidence of a breach of one of the fiduciary duties. Should such evidence 129 be presented concerning a transaction by a director, a director must prove the procedural fairness of the transaction, and that the transaction was of fair value to the corporation. Shareholder Proposals Under the Delaware General Corporation Law, a shareholder has the right to put any proposal before the annual meeting of shareholders, provided it complies with the notice provisions in the governing documents. The Delaware General Corporation Law does not provide shareholders an express right to put any proposal before the annual meeting of shareholders, but Delaware corporations generally afford shareholders an opportunity to make proposals and nominations provided that they comply with the notice provisions in the certificate of incorporation or bylaws. A special meeting may be called by the board of directors or any other person authorized to do so in the governing documents, but shareholders may be precluded from calling special meetings.
The Companies Cumulative Voting Under the Delaware General Corporation Law, cumulative voting for elections of directors is not permitted unless the corporation’s certificate of incorporation specifically provides for it. Cumulative voting potentially facilitates the representation of minority shareholders on a board of directors since it permits the minority shareholder to cast all the votes to which the shareholder is entitled on a single director, which increases the shareholder’s voting power with respect to electing such director. As permitted under Cayman Islands law, Arco’s Articles of Association do not provide for cumulative voting. As a result, the shareholders of Arco are not afforded any less protections or rights on this issue than shareholders of a Delaware corporation. Removal of Directors The office of a director shall be vacated automatically if, among other things, he or she (1) becomes prohibited by law from being a director, (2) becomes bankrupt or makes an arrangement or composition with his creditors, (3) dies or is in the opinion of all his co-directors, incapable by reason of mental disorder of discharging his duties as director (4) resigns his office by notice to us or (5) has for more than six months been absent without permission of the directors from meetings of the board of directors held during that period, and the remaining directors resolve that his/her office be vacated. Transaction with Interested Shareholders The Delaware General Corporation Law provides that; unless the corporation has specifically elected not to be governed by this statute, it is prohibited from engaging in certain business combinations with an “interested shareholder” for three years following the date that this person becomes an interested shareholder. An interested shareholder generally is a person or a group who or which owns or owned 15% or more of the target’s outstanding voting shares or who or which is an affiliate or associate of the corporation and owned 15% or more of the corporation’s outstanding voting shares within the past three years. This has the effect of limiting the ability of a potential acquirer to make a two-tiered bid for the target in which all shareholders would not be treated equally. The statute does not apply if, among other things, prior to the date on which the shareholder becomes an interested shareholder, the board of directors approves either the business combination or the transaction which resulted in the person becoming an interested shareholder. This encourages any potential acquirer of a Delaware corporation to negotiate the terms of any acquisition transaction with the target’s board of directors. Cayman Islands law has no comparable statute. As a result, Arco cannot avail itself of the types of protections afforded by the Delaware business combination statute. However, although Cayman Islands law does not regulate transactions between a company and its significant shareholders, it does provide that the board of directors owe duties to ensure that these transactions are entered into 130 bona fide in the best interests of the company and for a proper corporate purpose and, as noted above, a transaction may be subject to challenge if it has the effect of constituting a fraud on the minority shareholders. Dissolution; Winding Up Under the Delaware General Corporation Law, unless the board of directors approves the proposal to dissolve, dissolution must be approved by shareholders holding 100% of the total voting power of the corporation. If the dissolution is initiated by the board of directors, it may be approved by a simple majority of the corporation’s outstanding shares. Delaware law allows a Delaware corporation to include in its certificate of incorporation a supermajority voting requirement in connection with dissolutions initiated by the board. Under Cayman Islands law, a company may be wound up by either an order of the courts of the Cayman Islands or by a special resolution of its members or, if the company resolves by ordinary resolution that it be wound up because it is unable to pay its debts as they fall due. The court has authority to order winding up in a number of specified circumstances including where it is, in the opinion of the court, just and equitable to do so.
Under the Companies Variation of Rights of Shares Under the Delaware General Corporation Law, a corporation may vary the rights of a class of shares with the approval of a majority of the outstanding shares of that class, unless the certificate of incorporation provides otherwise. Under Arco’s Articles of Association, if the share capital is divided into more than one class of shares, the rights attached to any class may only be varied with the written consent of the holders of two-thirds of the shares of that class or the sanction of a special resolution passed at a separate meeting of the holders of the shares of that class. Also, except with respect to share capital (as described above), alterations to Arco’s Articles of Association may only be made by special resolution of shareholders (requiring a two-thirds majority vote). Amendment of Governing Documents Under the Delaware General Corporation Law, a corporation’s certificate of incorporation may be amended only if adopted and declared advisable by the board of directors and approved by a majority of the outstanding shares entitled to vote, and the bylaws may be amended with the approval of a majority of the outstanding shares entitled to vote and may, if so provided in the certificate of incorporation, also be amended by the board of directors. Under Cayman Islands law, Arco’s Articles of Association generally (and save for certain amendments to share capital described in this section) may only be amended by special resolution of shareholders (requiring a two-thirds majority vote). Rights of Non-Resident or Foreign Shareholders There are no limitations imposed by Arco’s Articles of Association on the rights of non-resident or foreign shareholders to hold or exercise voting rights on Arco’s shares. In addition, there are no provisions in the Articles of Association governing the ownership threshold above which shareholder ownership must be disclosed. Handling of Mail Mail addressed to us and received at our registered office will be forwarded unopened to the forwarding address, which will be supplied by us. None of us, our directors, officers, advisors or service providers (including the organization which provides registered office services in the Cayman Islands) will bear any responsibility for any delay howsoever caused in mail reaching the forwarding address. 131 ITEM 16H. Not applicable. ITEM 16I. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS Not applicable.
132 PART III Item 17. Financial Statements We have responded to Item 18 in lieu of this item. ITEM 18. FINANCIAL STATEMENTS Financial Statements are filed as part of this annual report, see pages F-1 to ITEM 19. EXHIBITS The following documents are filed as part of this annual report:
*Filed herewith.
133 SIGNATURES The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
134 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-1 Management’s Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting and for assessing the effectiveness of internal control over financial reporting. Our internal control over financial reporting is a process designed by, or under the supervision of, our chief executive officer and chief financial officer and effected by our board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our consolidated financial statements for external purposes in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatement. 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. Our management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2021, based upon the criteria described in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). 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 annual or interim consolidated financial statements will not be prevented or detected on a timely basis. Based on this assessment and criteria, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2021 to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. Our management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Me Salva! Cursos e Consultorias S.A. (“Me Salva!”), Quadrado Mágico Desenvolvimento e Licenciamento de Software S.A. (“Eduqo”), Desenvoolva – Educação, Treinamento e Consultoria Corporativa Ltda. (“Edupass”) and P2D Educação Ltda. (“P2D”), which are included in the 2021 consolidated financial statements of the Company. Collectively, Me Salva!, Eduqo, Edupass and P2D constituted less than 3% of the Company’s total assets as of December 31, 2021 and less than 5% of the Company’s total revenues for the year ended December 31, 2021. March 31, 2022
F-2 Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Arco Platform Limited Opinion on the Financial Statements We have audited the accompanying consolidated statements of financial position of Arco Platform Limited (the We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 31, 2022 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by Critical Audit Matters
F-3
F-4 Goodwill impairment test
F-5 Accounts payable to selling shareholders
F-6 Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors Arco Platform Limited Opinion on Internal Control over Financial Reporting We have audited As indicated in the accompanying Report of Management on Arco Platform Limited's Internal Control Over Financial Reporting, management's assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Me Salva! Cursos e Consultorias S.A. (“Me Salva!”), Quadrado Mágico Desenvolvimento e Licenciamento de Software S.A. (“Eduqo”), Desenvoolva – Educação, Treinamento e Consultoria Corporativa Ltda. (“Edupass”) and P2D Educação Ltda. (“P2D”), which are included in the reporting of Me Salva!, Eduqo, Edupass and P2D. We Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the Definition and Limitations of Internal Control Over Financial Reporting
F-7 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 Because of its /s/ ERNST & YOUNG Auditores Independentes S.S. Fortaleza, Brazil March 31, 2022
F-8 Arco Platform Limited Consolidated statements of financial position As of December 31, (In thousands of Brazilian reais, unless otherwise stated)
The accompanying notes are part of the consolidated financial statements. F-10 Arco Platform Limited Consolidated statements of income For the years ended December 31, 2021, 2020 and 2019 (In thousands of Brazilian reais, except earnings per share)
The accompanying notes are part of the consolidated financial statements.
F-11 Arco Platform Limited Consolidated statements of changes in equity For the years ended December 31, (In thousands of Brazilian reais,
The accompanying notes are part of the consolidated financial statements. F-12 Arco Platform Limited Consolidated statements of changes in equity For the years ended December 31, 2021, 2020 and 2019 (In thousands of Brazilian reais, unless otherwise stated)
The accompanying notes are part of the consolidated financial statements.
F-13 Arco Platform Limited Consolidated statements of cash flows For the years ended December 31, (In thousands of Brazilian reais, unless otherwise stated)
The accompanying notes are part of the consolidated financial statements.
F-14
Notes to the consolidated financial statements Expressed in thousands of Brazilian reais, unless otherwise stated 1 Corporate information Arco Platform Limited (“Arco” and initial public offering in 2018. Arco Brazil is the holding company of Since 2015, the Company has been investing in technology and its printed methodology has evolved to an educational platform, capable of delivering the entire K-12 curriculum content.
The Company offers a complete pedagogical methodology using technology features to deliver educational content to improve the learning process. The Company’s activities The Company has an asset-light, highly scalable business model that emphasizes operational efficiency and profitability. Arco operates through long-term service contracts with private schools. These contracts generally have terms of validity ranging from one to five years, pursuant to which educational content is provided in printed and digital format to private schools. The revenue is driven by the number of enrolled students at each customer using the solutions and the agreed upon price per student per year, all in accordance with the terms and conditions set forth in each contract. As a result, the Company benefits from high visibility in its net revenue and operating margin, which is calculated by dividing the operating profit by net revenue over a given period. These consolidated financial statements were authorized for issue by the Board of Directors on March 31, 2022. 1.2 Significant events during the year (a)Internal restructurings Change of corporate name of subsidiary On April 19, Corporate restructuring
On July 1, 2021, the Company continued the corporate reorganization through the incorporation of Barra Américas Editora Ltda., Distribuidora de Material Didático Desterro Ltda., and On October 1, 2021, the Company completed the corporate reorganization for the year, through the incorporation of Nave à Vela Ltda. by Companhia Brasileira de Educação e Sistemas de Ensino S.A. These restructurings seek an operational improvement and generation of income tax savings from the tax deductible amortization of acquired goodwill and identified intangibles arising from the purchase of Positivo. F-15 All incorporated companies were under common control of Arco and the incorporated assets and liabilities of the respective companies were recorded at their carrying amounts. There were no tax effects resulting from the incorporation. Cancelation of treasury shares As of (b)Financial transactions Issuance of debentures In August 2021, the Company issued non-convertible debentures through its subsidiary Companhia Brasileira de Educação e Sistemas de Ensino S.A., consisting of 900,000 debentures with a unitary value of R$1.00, in the total amount of R$900,000 (with transaction costs in the amount of R$ 8,550). The purpose of this issue is to pay the amount due on the COC and Dom Bosco acquisition. See Note 15 for further information. Investment from Dragoneer and General Atlantic On November 30, 2021, Arco signed agreements led by affiliates of Dragoneer Investment Group LLC (“Dragoneer”), which have committed to make a US$100 million strategic investment, and General Atlantic Partners (Bermuda) J, L.P. (“General Atlantic”), which has committed to make a US$50 million strategic investment, through the purchase of convertible senior notes, subject to customary closing conditions. The full amount committed was received by the Company on November 30, 2021. See Note 15 for further information. Loan agreement On November 11, 2021, the subsidiary Geekie entered into a loan agreement in the amount of US$ 11,020 thousand with an interest rate of 2.452% p.a. Additionally, Geekie entered into swap contracts with the lender, swapping the original interest rate to CDI + 1.7208%, avoiding any exchange risk. See Note 15 for further information. (c)Acquisition of interests in other entities and business combinations Acquisition of additional shares of Geekie On January 20, 2021, Arco acquired an additional 1.36% interest in Geekie’s share capital through a capital increase of R$4,000, increasing its total interest to 57.42%. Investment in INCO Limited (“INCO”) On January 25, 2021, the Company acquired 8,571,427 series B ordinary shares of INCO, a company that provides financial and administrative services to private schools, equivalent to 30.0% of the total capital stock for R$25,000. On April 27, 2021, the Company invested R$ 33,195 in the entity and an additional R$ 53,523 on September 27, 2021, in new rounds of investments. See Note 11 for further information. F-16 Acquisition of COC and Dom Bosco learning systems On March 6, 2021, the Company announced that it entered into a definitive agreement (the “Purchase Agreement”) with Pearson Education do Brasil Ltda. (“Pearson”) to acquire COC and Dom Bosco, two important K-12 learning systems in Brazil. COC and Dom Bosco have over 50 years of academic track record in Brazil, serving over 800 partner schools and around 210 thousand students in all regions of the country, from pre-K to high school and pre-university. The brands have a strong presence in the Southeast region of Brazil, especially in the state of São Paulo. Arco expects to accelerate the growth of COC and Dom Bosco by updating their content and technology, improving distribution and customer service capabilities, as well as to cross-sell supplemental solutions within the COC and Dom Bosco partner school base. This transaction was approved by the Brazilian Administrative Council for Economic Defense (CADE) in September 2021, and the transaction closing date occurred on October 1, 2021. as described in Note 4. Acquisition of Me Salva! On March 12, 2021, the Company announced that it had acquired 60% of the outstanding shares of Me Salva!, an entity founded in 2011 with an online educational solution to help students improve their ENEM scores and be admitted to the best universities in the country. The online solutions platform offers recorded and live video classes, comprehensive exercises, essay writing tools, assessment tests, 1-on-1 tutoring and personalized study plans. The remaining 40% will be acquired from the non-controlling interests in 2025 based on the enterprise value (as defined in the sale purchase agreement) of Me Salva! as of December 31, 2024. This transaction expands Arco’s supplemental solutions portfolio to test prep and tutoring, with an estimated addressable market of R$5 billion and favorable growth prospects. The deal rationale relies on accelerating Me Salva!’s growth by leveraging Arco’s resources and strengthening Arco’s B2B2C winning factors with new digital capabilities. See Note 4 for further information. Investment in Tera Treinamentos Profissionais Ltda. (“Tera”) On April 9, 2021, Arco acquired a 23.43% interest in Tera for R$15,000 through the purchase of interest from minority shareholders and a capital increase. Tera provides courses and training for professional and management development and additionally provides consulting services in project development, IT and marketing. See Note 11 for further information. Acquisition of Quadrado Mágico Desenvolvimento e Licenciamento de Software S.A. (“ On April 22, 2021, the Company entered into an agreement (the “Purchase Agreement”) to acquire 100% of the outstanding shares of Eduqo, which provides educational services, acting specifically in the Learning Management System (LMS), for R$ 30,000, subject to price adjustments. This transaction was approved by CADE in June 2021, and the transaction closing date occurred on July 1, 2021. See Notes 4 and 17 for further information. Acquisition of Desenvoolva – Educação, Treinamento e Consultoria Corporativa Ltda. (“Edupass”) On September 3, 2021, the Company entered into an agreement (the “Purchase Agreement”) to acquire 100% of the outstanding shares of Edupass, which provides educational services, acting specifically as an “education as a benefit” platform. The Company connects educational institutions with companies and professionals, and currently has more than 75,000 courses linked with corporate education benefits to help employees in their career development. F-17 The transaction was closed for R$ 5,000, with an additional earn out of R$ 11,254 to be paid in 2024. See Notes 4 and 17 for further information. (d) Information related to Covid-19 pandemic In January 2021, the COVID vaccine began to be applied in Brazil. Vaccination started with the priority groups: health workers, the elderly, the disabled and indigenous villagers. Currently the vaccine is available to all the adult population in Brazil and children above the age of 5 years old, and the vaccination campaign has maintained a After the holiday celebrations at the end of 2021, there was an increase in the number of COVID-19 cases in Brazil. During January 2022, state and Currently, the Country presents an optimistic scenario and is believed to be closer to the end of the pandemic, since on average 90% of the Brazilian population over 18 years of age are vaccinated with at least the first dose, and about 70% of this target audience are fully vaccinated according to information from Brazilian health authorities. The initial restrictive measures taken by Brazilian states and local authorities directly impacted the education industry by indefinitely postponing on-site school activities. Nonetheless, education was included in the essential activities list by some states in 2021, allowing private schools to conduct classes applying a hybrid model, with on-site and remote classes. The resumption of Brazilian economic activity is occurring in stages, with restrictions over some activities being gradually lifted, including restrictions for the education sector, in accordance with specific health and safety protocols. In person classes are returning but is occurring differently in each Brazilian state, according to their particular circumstances. Notwithstanding the above, the Company did not suspend its
The measures discussed above, including travel restrictions, were put in place to safeguard the health and safety of the Company’s employees, customers, and suppliers, but have not limited the Company’s ability to maintain its operations. In addition, these alternative working arrangements have not adversely affected financial reporting systems, internal control over financial reporting or disclosure controls and procedures. The Company’s content production continues according to the scheduled curriculum calendar and the With respect to the Company’s distribution and delivery capacity, which relies on third parties, the Company’s main suppliers did not raise any issues related to their ability to fulfill scheduled shipments or indicated the need to incur in any significant additional expenses. As a result, as of
period: F-18
Given the uncertainty around the extent and timing of the future spread of COVID-19, the imposition of additional protective measures, or the relaxation of existing protective measures, it is not possible to accurately predict COVID-19’s general impact on the education industry in Brazil or to reasonably estimate its impact on Arco’s results of operations, cash flows or financial condition, including, but not limited to:
Management will continue to monitor and assess the impact COVID-19 may have on the Company’s business operations, financial performance, financial position, and cash flows. 2 Significant accounting policies 2.1 Basis for preparation of the consolidated financial statements | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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The Company’s consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).
The consolidated financial statements have been prepared on a historical cost basis, except for certain financial assets, derivative financial instruments and contingent consideration from business combinations that have been measured at fair value.
The corporate reorganization described in Note 1, was accounted for as a reorganization of entities under common control whereby Arco was created as a holding company of Arco Brazil and EAS. As a result, the assets and liabilities of Arco Brazil and EAS are carried at historical cost and there was no step-up in basis or goodwill, or other intangible assets recorded as a result of the corporate reorganization.
As a result, the consolidated financial statements prepared by the Company subsequent to the completion of the reorganization are presented “as if” EAS is the predecessor of the Company. Accordingly, these consolidated financial statements reflect: (i) the historical operating results of EAS prior to the reorganization; (ii) the consolidated results of the Company, Arco Brazil and EAS following the reorganization; (iii) the assets and liabilities of EAS at their historical cost; and (iv) the Company’s equity and earnings (loss) per share for all periods presented. The number of Class A and Class B common shares issued by Arco as a result of the reorganization is reflected retroactively to January 1, 2016, for purposes of calculating earnings (loss) per share for all prior periods presented.
Arco is a holding company itand considers the currency of the local environment of the operational companies in Brazil as its functional currency, as this is the environment which drives the dividend income it receives, which is its primary source of revenue.
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Therefore, the functional currency of the Company is the Brazilianreal and the consolidated financial statements are presented in Brazilianreais (“BRL” or “R$”). All amounts are rounded to the nearest thousand,thousands, except when otherwise indicated.
The consolidated financial statements provide comparative information in respect of the previous period.
2.2 Basis of consolidation and investments in associates |
The consolidated financial statements comprise the financial statements of the Company, its subsidiaries and investments in associates as of December 31, 20182021 and 20172020 and for the years ended December 31, 2018, 20172021, 2020 and 2016.2019.
F-19
The table below is a list of the Company’s subsidiaries associates and joint venture:investments:
| Direct and indirect interest | ||||||
| Name | Principal activities | Country | Investment type | 2018 | 2017 | 2016 |
| Arco Educação S.A. | Holding | Brazil | Subsidiary | 100.0% | - | |
| EAS Educação S.A. | Educational content | Brazil | Subsidiary | 100.0% | 100.0% | 100.0% |
| Barra Américas Editora Ltda. | Educational content | Brazil | Subsidiary | 100.0% | 100.0% | 100.0% |
| Distribuidora de Material Didático Desterro Ltda. | Educational content | Brazil | Subsidiary | 100.0% | 100.0% | 100.0% |
| Novagaúcha Editora e Livraria Ltda. | Educational content | Brazil | Subsidiary | 100.0% | 100.0% | 100.0% |
| SAS Sistema de Ensino Ltda. | Educational content | Brazil | Subsidiary | 100.0% | 100.0% | 100.0% |
| SAS Desenvolvimento Educacional Ltda. | Educational content | Brazil | Subsidiary | 100.0% | 100.0% | 100.0% |
| SAS Livrarias Ltda. | Educational content | Brazil | Subsidiary | 100.0% | 100.0% | 100.0% |
| SAE Digital S.A. (*) | Educational content | Brazil | Subsidiary | 100.0% | 100.0% | 70.0% |
| Escola de Aplicação São José dos Campos Ltda. | Educational services | Brazil | Subsidiary | 69.6% | 69.6% | 51.0% |
| International School Serviços de Ensino, Treinamento e Editoração, Franqueadora S.A. (**) | Educational content | Brazil | Subsidiary | 51.5% | 51.5% | 40.0% |
| NS Ventures Participações Ltda. (***) | Educational content | Brazil | Subsidiary | 100.0% | 100.0% | - |
| NS Educação Ltda. | Educational content | Brazil | Subsidiary | 100.0% | 100.0% | - |
| WPensar S.A. | Educational technology | Brazil | Joint venture | 25.0% | 25.0% | 25.0% |
Geekie Desenvolvimento de Softwares S.A.
| Educational technology | Brazil | Associate | 8.05% | 6.5% | 6.5% |
| | | | | | | | | | | | | |
| | Principal | | | | Investment | | Direct and indirect interest |
| ||||
Name |
| activities |
| Country |
| type |
| 2021 |
| 2020 |
| 2019 |
|
Arco Educação S.A. | | Holding | | Brazil | | Subsidiary | | 100.0 | % | 100.0 | % | 100.0 | % |
Arce Participações Ltda. | | Holding | | Brazil | | Subsidiary | | 100.0 | % | — | | — | |
Companhia Brasileira de Educação e Sistemas de Ensino S.A. |
| Educational content |
| Brazil |
| Subsidiary |
| 100.0 | % | 100.0 | % | 100.0 | % |
Barra Américas Editora Ltda (a). |
| Educational content |
| Brazil |
| Subsidiary |
| — | | 100.0 | % | 100.0 | % |
Distribuidora de Material Didático Desterro Ltda. (a) |
| Educational content |
| Brazil |
| Subsidiary |
| — | | 100.0 | % | 100.0 | % |
SAS Sistema de Ensino Ltda. (a) |
| Educational content |
| Brazil |
| Subsidiary |
| — | | 100.0 | % | 100.0 | % |
Arco Ventures S.A. (a) |
| Educational content |
| Brazil |
| Subsidiary |
| — | | 100.0 | % | 100.0 | % |
SAS Livrarias Ltda. (a) |
| Educational content |
| Brazil |
| Subsidiary |
| — | | 100.0 | % | 100.0 | % |
SAE Digital S.A. |
| Educational content |
| Brazil |
| Subsidiary |
| 100.0 | % | 100.0 | % | 100.0 | % |
International School Serviços de Ensino, Treinamento e Editoração, Franqueadora S.A. |
| Educational content |
| Brazil |
| Subsidiary |
| 51.5 | % | 51.5 | % | 51.5 | % |
Nave à Vela Ltda. (a) |
| Educational content |
| Brazil |
| Subsidiary |
| — | | 51.0 | % | 51.0 | % |
EEM Licenciamento de Programas Educacionais Ltda. |
| Educational technology |
| Brazil |
| Subsidiary |
| 100.0 | % | 100.0 | % | 100.0 | % |
NLP Soluções Educacionais Ltda. |
| Educational content |
| Brazil |
| Subsidiary |
| 100.0 | % | 100.0 | % | 100.0 | % |
WPensar S.A. |
| Educational technology |
| Brazil |
| Subsidiary |
| 100.0 | % | 100.0 | % | 25.0 | % |
Geekie Desenvolvimento de Softwares S.A. |
| Educational technology |
| Brazil |
| Subsidiary |
| 57.4 | % | 56.0 | % | 37.5 | % |
Studos Software Ltda. | | Educational content | | Brazil | | Subsidiary | | 100.0 | % | 100.0 | % | — | |
Escola da Inteligência Cursos Educacionais Ltda. | | Educational content | | Brazil | | Subsidiary | | 60.0 | % | 60.0 | % | — | |
Me Salva! Cursos e Consultorias S/A. | | Educational content | | Brazil | | Subsidiary | | 60.0 | % | — | | — | |
Quadrado Mágico Desenvolvimento e Licenciamento de Software S.A. | | Educational content | | Brazil | | Subsidiary | | 100.0 | % | — | | — | |
Desenvoolva – Educação, Treinamento e Consultoria Corporativa Ltda. | | Educational content | | Brazil | | Subsidiary | | 100.0 | % | — | | — | |
P2D Educação Ltda. | | Educational content | | Brazil | | Subsidiary | | 100.0 | % | — | | — | |
Bewater Ventures I GA Fundo de Investimento em Participações Multiestratégia | | Private equity | | Brazil | | Investee | | 11.0 | % | 14.5 | % | — | |
INCO Limited | | Collection services | | Cayman Islands | | Investee | | 26.1 | % | — | | — | |
Tera Treinamentos Profissionais Ltda | | Educational content | | Brazil | | Investee | | 23.4 | % | — | | — | |
(a) | During the |
Consolidation of a subsidiary begins when the Company obtains control over the subsidiary and ceases when the Company loses control of the subsidiary. Control is achieved when the Company is exposed to, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Consolidation of a subsidiary begins when the Company obtains control over the subsidiary and ceases when the Company loses control of the
F-11
subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated financial statements from the date the Company gains control until the date the Company ceases control of the subsidiary.
Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies in line with the Company’s accounting policies. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions, and any unrealized income and expenses arising from intra-group transactions, are eliminated in full on consolidation.
A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Company loses control over a subsidiary, it derecognizes the related assets (including goodwill), liabilities, non-controlling interest and other components of equity, whileand any resulting gain or loss is recognized in profit or loss.
Non-controlling interests in the results and equity of subsidiaries are shown separately in the consolidated statements of income (loss) and comprehensive income (loss), changes in equity and financial position, respectively.
| 2.3 Summary of significant accounting policies |
This note provides a description of the significant accounting policies adopted in the preparation of these consolidated financial statements in addition to other policies that have been disclosed in other notes to these consolidated financial statements. These policies have been consistently applied to all periods presented, unless otherwise stated.
F-20
a) Business combinations and goodwill
Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, which is measured at acquisition date fair value, and the amount of any non-controlling interests in the acquiree. For each business combination, the Company elects whether to measure the non-controlling interests in the acquiree at fair value or at the proportionate share of the acquiree’s identifiable net assets. Acquisition-related costs are expensed as incurred and included in general and administrative expenses.
The Company determines that it has acquired a business when the acquired set of activities and assets include an input and a substantive process that together significantly contribute to the ability to create outputs.
The acquired process is considered substantive if it is critical to the ability to continue producing outputs, and the inputs acquired include an organized workforce with the necessary skills, knowledge, or experience to perform that process or it significantly contributes to the ability to continue producing outputs and is considered unique or scarce or cannot be replaced without significant cost, effort, or delay in the ability to continue producing outputs.
When the Company acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances, and pertinent conditions as of the acquisition date.
Any contingent consideration to be transferred by the acquirer is recognized at fair value at the acquisition date. Contingent consideration classified as an asset or liability that is a financial instrument and within the scope of IFRS 9 Financial Instruments, is measured at fair value with the changes in fair value recognized in the statement of income (loss) in accordance with IFRS 9. Other contingent consideration that is not within the scope of IFRS 9 is measured at fair value at each reporting date with changes in fair value recognized in profit or loss.
F-12
Goodwill is initially measured at cost (being the excess of the aggregate of the consideration transferred and the amount recognized for non-controlling interests and any previous interest held over the net identifiable assets acquired and liabilities assumed). If the fair value of the net assets acquired is in excess of the aggregate consideration transferred, the Company re-assesses whether it has correctly identified all of the assets acquired and all of the liabilities assumed and reviews the procedures used to measure the amounts to be recognized at the acquisition date. If the reassessment still results in an excess of the fair value of net assets acquired over the aggregate consideration transferred, then the gain is recognized in profit or loss.
After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each segment that areis expected to benefit from the combination.
Where goodwill has been allocated to a segment and part of the operation within that segment is disposed of, the goodwill associated with the disposed operation is included in the carrying amount of the operation when determining the gain or loss on disposal. Goodwill disposed in these circumstances is measured based on the relative values of the disposed operation and the portion of the segment unit retained.
The current Brazilian tax law allows the deductibility of the acquisition date goodwill and fair value of net assets acquired when a non-substantive action is takencorporate reorganization occurs after acquisition by the Company (i.e. when the Company merges or spinspins off the businesses acquired) and therefore. Until such action occurs, the tax and accounting basisbases of the net assets acquired are the same as of the acquisition date. In this regard, for the acquired businesses where the Company considers that it will with certainty merge the acquiree with the acquirer or another subsidiarydate and it will be entitled to the deductibility of the amortization or depreciation of the net assets acquired, no deferred income tax was recorded in these financial statements at acquisition date.
effects are recognized.
Certain acquired subsidiaries utilize the presumed profit regime as described in Note 22.b24.a) to calculate income taxes. Under this regime, there is no difference between the carrying amount and related tax basis of assets and liabilities and therefore no deferred income taxes were recorded in these financial statements at acquisition date or any subsequent periods. At this moment, the Company does not foresee a change in the tax regime utilized by these subsidiaries.
F-21
b) Investment in associates and joint venture
An associate is an entity over which the Company has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.
A joint venture is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control.
F-13
The considerations made in determining significant influence or joint control are similar to those necessary to determine control over subsidiaries. The Company’s investments in its associate and joint venture are accounted for using the equity method.
Under the equity method, of accounting, the investment in an associate or a joint venture is initially recognized at cost, net of transaction costs.cost. The carrying amount of the investment is adjusted to recognize changes in the Company’s share of net assets of the associate or joint venture since the acquisition date. Goodwill relating to the associate or joint ventures is included in the carrying amount of the investment and is not tested for impairment separately.
The statement of income (loss) reflects the Company’s share of the results of operations of the associate or joint venture. In addition, when there has been a change recognized directly in the equity of the associate or joint venture, the Company recognizes its share of any changes, when applicable, in the statement of changes in equity.
Unrealized gains and losses resulting from transactions between the Company and the associate or joint venture are eliminated to the extent of the interest in the associate or joint venture.
The aggregate of the Company’s share of profit or loss of an associate and a joint venture is shown on the face of the statement of income (loss) outside operating profit and represents profit or loss after tax of the associate or joint venture.
The financial statements of the associate or joint venture are prepared for the same reporting period as the Company. When necessary, adjustments are made to bring the accounting policies in line with those of the Company.
After application of the equity method, the Company determines whether it is necessary to recognize an impairment loss on its investment in its associate or joint venture. At each reporting date, the Company determines whether there is objective evidence that the investment in the associate or joint venture is impaired. If there is such evidence, the Company calculates the amount of impairment as the difference between the recoverable amount of the associate or joint venture and its carrying value, and then recognizes the loss within share of profit (loss) of equity-accounted investees in the statement of income (loss).
c) Current versus non-current classification
The Company presents assets and liabilities in the statement of financial position based on current/non currentnon-current classification. An asset is current when it is:
| Expected to be realized or intended to be sold or consumed in the normal operating cycle; |
| Held primarily for the purpose of trading; |
| Expected to be realized within |
| Cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least |
F-14
All other assets are classified as non-current.
A liability is current when:
| It is expected to be settled in the normal operating cycle; |
F-22
| It is held primarily for the purpose of trading; |
| It is due to be settled within |
| There is no unconditional right to defer the settlement of the liability for at least |
The terms of the liability that could, at the option of the counterparty, result in its settlement by the issue of equity instruments do not affect its classification.
The Company classifies all other liabilities as non-current.
Deferred tax assets and liabilities are classified as non-current assets and liabilities.
d) Fair value measurement
The Company measures certain financial instruments such as, certainfinancial assets, financial investments, derivatives and derivativesfinancial liabilities at fair value at each balance sheet date.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either: (i) in the principal market for the asset or liability; or (ii) in the absence of a principal market, in the most advantageous market for the asset or liability.either.
| ● | in the principal market for the asset or liability; or |
| ● | in the absence of a principal market, in the most advantageous market for the asset or liability. |
The principal or the most advantageous market must be accessible by the Company.
The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest.
A fair value measurement of a non-financial asset takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.
The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.
All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:
| Level 1 — Quoted (unadjusted) market prices in active markets for identical assets or liabilities. |
F-15
| Level 2 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable. |
| Level 3 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable. |
For assets and liabilities that are recognized in the financial statements at fair value on a recurring basis, the Company determines whether transfers have occurred between levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.
At each reporting date, the Company analyzes the movements in the values of assets and liabilities which are required to be remeasured or re-assessed as per the Company’s accounting policies. For this analysis, the Company verifies the major inputs applied in the latest valuation by agreeing the information in the valuation computation to contracts and other relevant documents.
The Company also compares the change in the fair value of each asset and liability with relevant external sources to determine whether the change is reasonable.
F-23
For the purpose of fair value disclosures, the Company has determined classes of assets and liabilities based on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy, as explained above. See Note 26 for further information.
e) Financial instruments – initial recognition and measurement
A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.
i)f) Financial assets
Initial recognition and measurement
Financial assets are classified, at initial recognition, as subsequently measured at amortized cost, fair value through other comprehensive income (OCI), and fair value through profit or loss.
The classification of financial assets at initial recognition depends on the financial asset’s contractual cash flow characteristics and the Company’s business model for managing them. With the exception ofExcept for trade receivables that do not contain a significant financing component or for which the Company has applied the practical expedient, the Company initially measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs. Trade receivables that do not contain a significant financing component or for which the Company has applied the practical expedient are measured at the transaction price determined under IFRS 15.
In order forFor a financial asset to be classified and measured at amortized cost or fair value through OCI,other comprehensive income (OCI), it needs toshould give rise to cash flows that are ‘solely payments of principal and interest (SPPI)’ on the principal amount outstanding. This assessment is referred to as the SPPI test and is performed at an instrument level.
F-16
Table Financial assets with cash flows that are not SPPI are classified and measured at fair value through profit or loss, irrespective of Contentsthe business model.
The Company’s business model for managing financial assets refers to how it manages its financial assets in order to generate cash flows. The business model determines whether cash flows will result from collecting contractual cash flows, selling the financial assets, or both.
Purchases or sales of Financial assets classified and measured at amortized cost are held within a business model with the objective to hold financial assets that require delivery ofin order to collect contractual cash flows while financial assets classified and measured at fair value through OCI are held within a time frame established by regulation or convention inbusiness model with the market place (regular way trades) are recognized on the trade date, i.e., the date that the Company commitsobjective of both holding to purchase or sell the asset.collect contractual cash flows and selling.
Subsequent measurement
For purposes of subsequent measurement, financial assets are classified as: amortized cost or fair value through profit or loss. There isare no financial assets designated as fair value through OCI.
Financial assets at amortized cost
The Company measures financial assets at amortized cost if both of the following conditions are met:
• The financial asset is held within a business model with the objective to hold financial assets in order to collect contractual cash flows, and
• The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.
Financial assets at amortized cost are subsequently measured using the effective interest (EIR) method and are subject to impairment. Gains and losses are recognized in profit or loss when the asset is derecognized, modified or impaired.
The Company’s financial assets at amortized cost include trade receivables and certain financial investments.
Financial assets at fair value through profit or loss
Financial assets at fair value through profit or loss include financial assets held for trading, financial assets designated upon initial recognition at fair value through profit or loss, or financial assets mandatorily required to be measured at fair value. Financial assets are classified as held for trading if they are acquired for the purpose of selling or repurchasing in the near term. Derivatives, including separated embedded derivatives, are also classified as held for trading unless they are designated as effective hedging instruments. Financial assets with cash flows that are not solely payments of principal and interest are classified and measured at fair value through profit or loss, irrespective of the business model.
Financial assets at fair value through profit or loss are carried in the statement of financial position at fair value with net changes in fair value recognized in the statement of profit or loss. This category includes derivative instruments.
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DerecognitionA derivative embedded in a hybrid contract, with a financial liability or non-financial host, is separated from the host and accounted for as a separate derivative if: the economic characteristics and risks are not closely related to the host; a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and the hybrid contract is not measured at fair value through profit or loss. Embedded derivatives are measured at fair value with changes in fair value recognized in profit or loss. Reassessment only occurs if there is either a change in the terms of the contract that significantly modifies the cash flows that would otherwise be required or a reclassification of a financial asset out of the fair value through profit or loss category.
Derecognition
A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is primarily derecognized (i.e., removed from the Company’s consolidated statement of financial position) when:
• The rights to receive cash flows from the asset have expired; or
• The Company has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass-through’ arrangement-and either (a) the Company has transferred substantially all the risks and rewards of the asset, or (b) the Company has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.
| ● | The rights to receive cash flows from the asset have expired; or |
| ● | The Company has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass-through’ arrangement-and either (a) the Company has transferred substantially all the risks and rewards of the asset, or (b) the Company has neither transferred nor retained substantially all the risks and rewards of the asset but has transferred control of the asset. |
When the Company has transferred its rights to receive cash flows from an asset or has entered into a pass throughpass-through arrangement, it evaluates if, and to what extent, it has retained the risks and rewards of ownership. When it has neither transferred nor retained substantially all of the risks and rewards of the asset, nor transferred control of the asset, the Company continues to recognize the transferred asset to the extent of its continuing involvement. In that case, the Company also recognizes an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Company has retained.
Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Company could be required to repay.
Impairment of financial assets
Further disclosures relating to impairment of financial assets are also provided in the following notes:
• Significant accounting estimates and assumptions - Note 3
• Trade receivables - Note 7
| ● | Disclosures for significant assumptions - Note 3 |
| ● | Trade receivables, including contract assets - Note 7 |
The Company recognizes an allowance for expected credit losses (ECLs) for all debt instruments not held at fair value through profit or loss. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Company expects to receive, discounted at an approximation of the original effective interest rate. The expected cash flows will include cash flows from the sale of collateral held or other credit enhancements that are integral to the contractual terms.
For trade receivables, the Company applies a simplified approach in calculating ECLs. Therefore, the Company does not track changes in credit risk, but instead recognizes a loss allowance based on lifetime ECLs at each reporting date. The Company has established a provision matrix that is based on its historical credit loss experience, adjusted for forward-looking factors specific to the debtors and the economic environment.
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The Company considers a financial asset in default when contractual payments are 180360 days past due. IfManagement considers this amount represents more than 5%period of maturity to be adequate considering the Company’s business model and the historical customer’s payment since the contracts are signed annually and during this period the Company can negotiate the payment of the total accounts receivable of a specific client,security reducing the entire balance, including the not overdue portion is included in the ECL.credit risk. However, in certain cases, the Company may also consider a financial asset to be in default when internal or external information indicates that the Company is unlikely to receive the outstanding contractual amounts in full before taking into accountconsidering any credit enhancements held by the Company. A financial asset is written off when there is no reasonable expectation of recovering the contractual cash flows.
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ii)
g) Financial liabilities
Initial recognition and measurement
Financial liabilities are classified, at initial recognition, as financial liabilities at fair value through profit or loss, loans and borrowings, payables, or as derivatives, designated as hedging instruments in an effective hedge, as appropriate.
All financial liabilities are recognized initially at fair value and, in the case of loans and borrowings and payables, net of directly attributable transaction costs.
The Company’s financial liabilities include trade payables, loans and borrowings, financial instruments from acquisition of interests and accounts payable to selling shareholders.
Subsequent measurement
TheFor purposes of subsequent measurement, of financial liabilities depends on their classification, as described below:are classified in two categories:
| ● | Financial liabilities at fair value through profit or loss |
| ● | Financial liabilities at amortized cost (loans and borrowings) |
Financial liabilities at fair value through profit or loss
Financial liabilities at fair value through profit or loss include financial liabilities held for trading and financial liabilities designated upon initial recognition as at fair value through profit or loss.
Financial liabilities are classified as held for trading if they are incurred for the purpose of repurchasing in the near term. This category also includes derivative financial instruments entered into by the Company that are not designated as hedging instruments in hedge relationships as defined by IFRS 9. Separated embedded derivatives are also classified as held for trading unless they are designated as effective hedging instruments.
Gains or losses on liabilities held for trading are recognized in the statement of income (loss).
Financial liabilities designated upon initial recognition at fair value through profit or loss are designated at the initial date of recognition, and only if the criteria in IFRS 9 are satisfied.
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LoansFinancial liabilities at amortized cost (loans and borrowings
borrowings)
After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortized cost using the EIReffective interest rate (EIR) method. Gains and losses are recognized in profit or loss when the liabilities are derecognized as well as through the EIR amortization process.
Amortized cost is calculated by taking into accountconsidering any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortization is included as finance costs in the statement of income (loss).
Derecognition
A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognized in the statement of income (loss).
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iii)
h) Offsetting of financial instruments
Financial assets and financial liabilities are offset and the net amount is reported in the consolidated statement of financial position if there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, to realize the assets and settle the liabilities simultaneously.
f)i) Derivative financial instruments
Initial recognition and subsequent measurement
The Company has derivative financial instruments from call andsuch as put options from acquisitions of subsidiaries, associatesinvestments and joint venture.forward currency swaps to protect its exposure to foreign currency risks. Such derivative financial instruments are initially recognized at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative.
Any gains or losses arising from changes in the fair value of derivatives are recorded directly to finance result.
g)j) Cash and cash equivalents
Cash and cash equivalents in the statement of financial position comprise cash atin banks and on hand and short-term highly liquid financial investments with an original maturity of three months or less, whichthat are readily convertible to a known amount of cash and subject to an insignificant risk of changes in value.
For the purpose of the consolidated statement of cash flows, cash and cash equivalents consist of cash and short-term financial investments, as they are considered an integral part of the Company’s cash management.
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h)k) Inventories
Inventories are measured at the lower of cost andor net realizable value. The costs of inventories are based on the average cost method and include costs incurred on the purchase of inventories, editorial production costs and other costs incurred in bringing them to their current location and condition. Costs of purchased inventory are determined after deducting any discounts and recoverable taxes.
Educational content in progress is considered as inventories in progress and comprises the costs incurred to create unfinishedproduce educational content. This amount is measured based on the allocation of hours incurred by editorial production employees in the preparation of educational content.
The inventory reserve for educational material is calculated based on their expected net realizable value. Inventory reserve corresponds to a reserve for inventory obsolescence and is recorded in cost of sales. It is estimated based on the amount of educational materials from prior collections which are no longer used for sale.sale and educational materials which the Company expects will not be sold based on the actual sales. In determining the inventory reserve, the Company considers management’s current assessment of the marketplace, industry trends and projected product demand as compared to the number of units currently in stock.
i)l) Property and equipment
Property and equipment isare stated at cost, net of accumulated depreciation and accumulated impairment losses, if any.
Subsequent expenditure is capitalized only if it is probable that the future economic benefits associated with the expenditure will flow to the Company.
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Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets, as follows:
| | |
Machinery and equipment | 10% | |
Vehicles | 20% | |
Furniture and fixtures | 10% | |
IT equipment | 20% | |
Facilities | 10% | |
Leasehold improvements | 20% to |
An item of property and equipment and any significant part initially recognized is derecognized upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the statement of income (loss) when the asset is derecognized.
The residual values, useful lives and methods of depreciation of property and equipment are reviewed at each financial year end and adjusted prospectively, if appropriate.
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j)m) Leases
The determination ofCompany assesses at contract inception whether an arrangement is (or contains) a lease is based on the substance of the arrangement at the inception of the lease. The arrangementcontract is, or contains, a leaselease. That is, if fulfilment of the arrangement is dependent oncontract conveys the right to control the use of an identified asset for a specific asset (or assets) and the arrangement conveys a right to use the asset (or assets), even if that asset is (or those assets are) not explicitly specifiedperiod of time in an arrangement.
exchange for consideration.
Company as a lessee
The Company applies a single recognition and measurement approach for all leases, except for short-term leases and leases of low-value assets. The Company recognizes lease liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets.
A lease is classifiedRight-of-use assets
The Company recognizes right-of-use assets at the inceptioncommencement date of the lease (i.e., the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognized, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. Unless the Company is reasonably certain to obtain ownership of the leased asset at the end of the lease term, the recognized right-of-use assets are depreciated on a straight-line basis over the shorter of its estimated useful life and the lease term, as a finance lease or an operating lease. A lease thatfollows:
| | |
Buildings | 1 to 4 years | |
Equipment | 1 to 4 years |
If ownership of the leased asset transfers substantially all the risks and rewards incidental to ownership to the Company at the end of the lease term or the cost reflects the exercise of a purchase option, depreciation is classified ascalculated using the estimated useful life of the asset. Right-of use assets are subject to impairment.
Lease liabilities
At the commencement date of the lease, the Company recognizes lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments (including in-substance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a finance lease.
An operatingrate, and amounts expected to be paid under residual value guarantees. The lease ispayments also include the exercise price of a purchase option reasonably certain to be exercised by the Company and payments of penalties for terminating a lease, other thanif the lease term reflects the Company exercising the option to terminate. The variable lease payments that do not depend on an index or a finance lease. The Company does not have leases classified as a finance lease. Operating lease paymentsrate are recognized as an operating expense in the statementperiod on which the event or condition that triggers the payment occurs.
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In calculating the present value of lease payments, the Company uses the incremental borrowing rate at the lease commencement date if the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the in-substance fixed lease payments or a change in the assessment to purchase the underlying asset.
Short-term leases and leases of low-value assets
The Company applies the short-term lease recognition exemption to its short-term leases of properties (i.e., those leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option). It also applies the lease of low-value assets recognition exemption to leases of office equipment that are considered of low value. Lease payments on short-term leases and leases of low-value assets are recognized as expense on a straight-line basis over the lease term.
k)n) Intangible assets
Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is their fair value at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and accumulated impairment losses. Internally generated intangibles are not capitalized, and the related expenditure is reflected in profit or loss in the period in which the expenditure is incurred.
The Company capitalizes the costs directly related with the development of the educational platforms used to deliver content. These costs are substantially comprised of technology related services and payroll expenses, recorded as internally developed software in the educational platform accounting ledger. Development expenditure is capitalized only if the expenditure can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable, and the Company intends to and has sufficient resources to complete development and to use or sell the asset. Otherwise, it is recognized in the statement of income (loss) as incurred. Subsequent toAfter initial recognition, development expenditure is measured at cost less accumulated amortization and any accumulated impairment losses.
Costs associated with maintaining internally developed software are recognized as an expense as incurred.
The useful lives of intangible assets are assessed as finite.
Intangible assets with finite lives are amortized over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at least at the end of each reporting period. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are considered to modify the amortization period or method, as appropriate, and are treated as changes in accounting estimates. The amortization expense on intangible assets with finite lives is recognized in the statement of income (loss) in the expense category that is consistent with the function of the intangible assets.
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GainsAn intangible asset is derecognized upon disposal (i.e., at the date the recipient obtains control) or losseswhen no future economic benefits are expected from its use or disposal. Any gain or loss arising fromupon derecognition of an intangiblethe asset are measured(calculated as the difference between the net disposal proceeds and the carrying amount of the asset and are recognizedasset) is included in the statement of income (loss) when the asset is derecognized..
l)o) Impairment of non-financial asset
Further disclosures relating to impairment of non-financial assets are also provided in the following notes:
| ● | Disclosures for significant assumptions – Note 3 |
| ● | Property and equipment – Note 12 |
| ● | Intangible assets – Note 14 |
| ● | Goodwill and intangible assets with indefinite lives – Note 14 |
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The Company assesses at each reporting date,annually whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Company estimates the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or CGU’s fair value less costs of disposal and its value in use. The recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. When the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount.
In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs of disposal, recent market transactions are taken into account.considered. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded companies or other available fair value indicators.
The Company bases its impairment calculation on detailed budgets and forecast calculations, which are prepared separately for each of the Company’s CGUs to which the individual assets are allocated. These budgets and forecast calculations generally cover a period of five years. A long-term growth rate is calculated and applied to project future cash flows after the fifth year.
Impairment losses of continuing operations are recognized in the statement of income (loss) in expense categories consistent with the function of the impaired asset.
For assets excluding goodwill, an assessment is made at each reporting date to determine whether there is an indication that previously recognized impairment losses no longer exist or have decreased. If such indication exists, the Company estimates the asset’s or CGU’s recoverable amount. A previously recognized impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognized. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in the statement of income (loss).
Goodwill is tested for impairment annually as at December 31 and when circumstances indicate that the carrying value may be impaired. SegmentAn operating segment is the lowest level within the Company at which the goodwill is monitored for internal management purposes and
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therefore impairment tests of goodwill have been carried out at each operating segment level. Impairment is determined for goodwill by assessing the recoverable amount of each operating segment to which the goodwill relates. When the recoverable amount is less than its carrying amount, an impairment loss is recognized. Impairment losses relating to goodwill cannot be reversed in future periods.
m)p) Provisions
Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. The expense relating to a provision is presented in the statement of income (loss) net of any reimbursement, when applicable.
n)q) Cash dividend
The Company recognizes a liability to pay a dividend when the distribution is authorized, and the distribution is no longer at the discretion of the Company. The distribution is authorized when it is required to pay a dividend of the profit for the year in accordance with the Company’s Articles of Association or is approved by the shareholders. A corresponding amount is recognized directly in equity.
o)r) Labor and social obligations
Labor and social obligations are expensed as the related service is provided. A liability is recognized for the amount expected to be paid if the Company has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.
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p)
s) Share-based compensation
payments
Certain key executives of the Company receive remuneration in the form of share-based compensation, whereby the executives render services as consideration for equity instruments (equity-settled transactions).
Equity-settled transactions
The expenses of equity-settled transactions are determined by the fair value at the date when the grant is made using an appropriate valuation model. That expense is recognized in general and administrative expenses, together with a corresponding increase in equity (share-based compensation reserve), over the period in which the service and, where applicable, the performance conditions are fulfilled (the vesting period). The cumulative expense recognized for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the best estimate of the number of equity instruments that will ultimately vest. The expense or credit in the statement of income (loss) for a period represents the movement in cumulative expense recognized as at the beginning and end of that period.
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Service and non-market performance conditions are not taken into account when determining the grant date fair value of awards, but the likelihood of the conditions being met is assessed as part of the Company’s best estimate of the number of equity instruments that will ultimately vest. Market performance conditions are reflected within the grant date fair value. Any other conditions attached to an award, but without an associated service requirement, are considered to be non-vesting conditions. Non-vesting conditions are reflected in the fair value of an award and lead to an immediate expensing of an award unless there are also service and/or performance conditions.
No expense is recognized for awards that do not ultimately vest because non-market performance and/or service conditions have not been met. Where awards include a market or non-vesting condition, the transactions are treated as vested irrespective of whether the market or non-vesting condition is satisfied, provided that all other performance and/or service conditions are satisfied.
When the terms of an equity-settled award are modified, the minimum expense recognized is the grant date fair value of the unmodified award, provided the original vesting terms of the award are met. An additional expense, measured as at the date of modification, is recognized for any modification that increases the total fair value of the share-based payment transaction, or is otherwise beneficial to the employee. Where an award is cancelled by the entity or by the counterparty, any remaining element of the fair value of the award is expensed immediately through profit or loss.
The dilutive effect of outstanding options is reflected as additional share dilution in the computation of diluted earnings per share.
Cash-settled transactions
q)A liability is recognized for the fair value of cash-settled transactions. The fair value is measured initially and at each reporting date up to and including the settlement date, with changes in fair value recognized in employee benefits expense. The fair value is expensed over the period until the vesting date with recognition of a corresponding liability. The fair value is determined using a Black & Scholes model. The approach used to account for vesting conditions when measuring equity-settled transactions also applies to cash-settled transactions.
t) Revenue recognitionfrom contracts with customers
Revenue from sale of education content
PriorThe Company sells educational content to the adoption of IFRS 15, revenue wasprivate schools, which is delivered through printed and digital formats. Revenue from contracts with customers is recognized when control of the significant risks and rewards of ownership have beengoods or services are transferred to the customer and the collection ofat an amount that reflects the consideration is probable, net of returns and trade discounts, and there is no continuing management involvement with the educational content and the amount of revenue can be measured reliably. Upon the adoption of IFRS 15,to which the Company recognizes revenue when the performance obligation is satisfied,expects to be entitled, i.e., at the moment it delivers the content to private schools in printed and digital format.format when the Company fulfills its performance obligation, and the revenue from these contracts is recognized at a point of time.
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Revenue is driven by the number of students enrolled in each school and is based on a value negotiated with each contract through the conditions contained in the terms of sales. The technology is provided solely in support of the best use of its content. Both printed and digital content are the same.
Printed content
The Company provides printed content capable of delivering the entire K-12 curriculum. The Company also provides digital content, including its features, is provided withand in this case, for the purpose of supporting the printed content, and it includes video lessons, online homework and assessments that are not customized and have no stand-alone value if used separately or outside of the main context. TheIn this context, the digital content and related features are an evolution from a totally printed methodology to a broader approach and will continue to evolve and change in the coming years but are currently still deeply entwined with the printed content.
Digital content
The Company has been investing in technology and has solutions provided only in digital content due to the evolution to an educational platform capable of delivering entire K-12 curriculum content in a digital format and it includes video lessons, online homework and assessments for the purpose of supporting the digital content.
The Company generates substantially all of its revenue from contracts that have an average term of threefrom one to five years, pursuant to which the Company provides educational
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content in printed and digital format to private schools. The Company’s revenue is driven by the number of enrolled students at each customer using the solutions and the agreed price per student per year, all in accordance with the terms and conditions set forth in each contract. Each contract contemplates penalties ranging between 20% to 100% of the remaining total value of the contract in the event of termination. However, the content already delivered to the private schools is not returned to the Company unless the return conditions in the following paragraph are met.
Revenue recognition of digital content only consists in providing the digital content to the class/year to the school that will provide that to the students. The Company recognizes the revenue at a point of time, when the content is available to the students.
Pursuant to the terms of the contracts with the schools, they are required, by the end of November of each year, to provide the Company with an estimate of the number of enrolled students that will access the content in the next school year (which typically starts in February of the following year), allowing the Company to start the delivery of its educational content. Since the contracts with the schools allows product returns or increase in the number of enrolled students up to a certain limit, the Company recognizes revenue for the amount that is expected to be received based on past experience, assuming that the other conditions for revenue recognition are met. A right of return asset (and corresponding adjustment to cost of sales) is also recognized for the right to recover the goods from the customer.
The asset is measured at the former carrying amount of the inventory, less any expected costs to recover the goods and any potential decreases in value. The Company updates the measurement of the asset for any revisions to the expected level of returns and any additional decreases in the value of the returned products.
The Company may enter contracts with another party in addition to our customer. In making the determination as to whether revenue should be recognized on a gross or net basis, the contract with the customer is analyzed to understand which party controls the relevant good or service prior to transferring to the customer. This judgement is informed by facts and circumstances of the contract in determining whether the Company has promised to provide the specified good or service or whether the Company is arranging for the transfer of the specified good or service, including which party is responsible for fulfilment, has discretion to set the price to the customer and is responsible for inventory risk. On certain contracts, where the Company acts as an agent, only commissions and fees receivable for services rendered are recognized as revenue. Any third-party costs incurred on behalf of the principal that are rechargeable under the contractual arrangement are not included in revenue.
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Revenue from services
The Company provides services related to school management for private schools and students, and technological solutions for communicating with students’ parents and a learning platform for students and teachers, which are delivered through monthly software licenses. Revenue from contracts with customers is recognized when the control of services is transferred to the customer for an amount that reflects the consideration to which the Company expects to be entitled for the exchange of services, that is, when it releases the license to use services. software for private schools.
The Company generates subscription revenue from the sale of user licenses, in which customers can use the services of online school management software. The services are sold directly to schools that bundle the subscription with their own services provided to end customers. The Company fulfills its performance obligation, and the revenue from these services is recognized on a straight-line basis during the subscription period.
Subscription revenue is driven by the number of students enrolled in each customer and is based on a value negotiated with each subscriber through the conditions contained in the terms of use.
Interest income
For all financial instruments measured at amortized cost, interest income is recorded using the EIReffective interest rate (EIR) method. The EIR is the rate that exactly discounts the estimated future cash receipts over the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset. Interest income includes also gain from financial investments classified as financial assets at fair value through profit or loss. Interest income is included in finance income in the statement of income (loss).
Cost to obtain a contract
r)The Company incurs costs to obtain each sales contract and recognizes as an asset the incremental costs of obtaining a contract with a customer if the entity expects to recover those costs. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained.
u) Taxes
Current income tax
Current income tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the reporting date.
Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate.
Deferred tax
Deferred tax is provided using the liability method on temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes at the reporting date.
Deferred tax liabilities are recognized for all taxable temporary differences, except:
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| When the deferred tax liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; |
| In respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint venture, when the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. |
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Deferred tax assets are recognized for all deductible temporary differences, the carry forward of unused tax credits and any unused tax losses. Deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilized, except:
| When the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; |
| In respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint venture, deferred tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized. |
The current Brazilian legislation allows the amortization of goodwill in at least 5 years, for tax purposes, in cases of merger, spin-off or incorporation. Thus, it is possible to have a tax benefit from goodwill in the incorporation, since it has been generated in the acquisition of interests from third parties.
The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Unrecognized deferred tax assets are re-assessed at each reporting date and are recognized to the extent that it has become probable that future taxable profits will allow the deferred tax asset to be recovered.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date.
The Company offsets deferred tax assets and deferred tax liabilities if and only if it has a legally enforceable right to set off current tax assets and current tax liabilities and the deferred tax assets and deferred tax liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities which intend either to settle current tax liabilities and assets on a net basis, or to realize the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered.
v) Treasury shares
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the Company’s own equity instruments.
2.4 Changes in accounting policies and disclosures
New and amended standards interpretations and amendments adopted by the Companyinterpretations
The Company applied for the first time IFRS 15Revenue from Contracts with Customersfirst-time certain standards and IFRS 9Financial Instruments without restating comparative information.
Other amendments, and interpretations apply for the first time in 2018, but do not have an impact on the consolidated financial statements.
IFRS 9Financial Instruments
IFRS 9Financial Instrumentsreplaces IAS 39Financial Instruments: Recognition and Measurementwhich became effective for annual periods beginning on or after 1 January 1, 2018, bringing together all three aspects of the accounting for financial instruments project: classification and measurement, impairment and hedge accounting.
2021 (unless otherwise stated). The Company has appliednot early adopted any other standard, interpretation or amendment that has been issued but is not yet effective.
Interest Rate Benchmark Reform – Phase 2: Amendments to IFRS 9, prospectively, with the initial application date of January 1, 2018.
The effect of adopting IFRS 9 is, as follows:
Impact on the statement of financial position as of January 1, 2018:
(a) Classification and measurement
Except for trade receivables, under IFRS 9, the Company initially measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs.
Debt financial instruments are subsequently measured at fair value through profit or loss (FVPL), amortized cost, or fair value through other comprehensive income (FVOCI). The classification is based on two criteria: the Company’s business model for managing the assets; and whether the instruments’ contractual cash flows represent ‘solely payments of principal and interest’ on the principal amount outstanding (the ‘SPPI criterion’).
The new classification and measurement of the Company’s debt financial assets are, as follows:
•Debt instruments at amortized cost for financial assets that are held within a business model with the objective to hold the financial assets in order to collect contractual cash flows that meet the SPPI criterion. This category includes trade receivables.
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Other financial assets are classified and subsequently measured, as follows:
•Financial assets at FVPL comprise derivative instruments which the Company had not irrevocably elected, at initial recognition or transition, to classify at FVOCI. This category would also include debt instruments whose cash flow characteristics fail the SPPI criterion or are not held within a business model whose objective is either to collect contractual cash flows, or to both collect contractual cash flows and sell.
The assessment of the Company’s business models was made as of the date of initial application, January 1, 2018. The assessment of whether contractual cash flows on debt instruments are solely comprised of principal and interest was made based on the facts and circumstances as at the initial recognition of the assets.
The main effects resulting from this reclassification are as follows:
| Financial assets | Fair value through profit and loss (FVPL) | Loans and receivables | Amortized cost | |||||||||
| Balance at December 31, 2017 – IAS 39 * | 49,197 | 142,292 | - | |||||||||
| Reclassify financial investments from loans and receivables to amortized cost | - | (114,363 | ) | 114,363 | ||||||||
| Reclassify financial investments from loans and receivables to FVPL (*) | 27,929 | (27,929 | ) | - | ||||||||
| Balance at January 1, 2018 - IFRS 9 | 77,126 | - | 114,363 | |||||||||
(*) As a result of the implementation of IFRS 9 in 2018, the Company reclassified some financial investments from loans and receivables to FVPL as described on note 24. The fair value of those instruments did not differ from the amortized cost as of January 1, 2018.
The accounting for the Company’s financial liabilities remains largely the same as it was under IAS 39. Similar to the requirements of IAS 39, IFRS 9 requires contingent consideration liabilities to be treated as financial instruments measured at fair value, with the changes in fair value recognized in the statement of income (loss).
(b) Impairment
7, IFRS 4 and IFRS 16
The adoption of IFRS 9 has changedamendments provide temporary reliefs which address the Company’s accounting for impairment losses for financial assets by replacing IAS 39’s incurred loss approachreporting effects when an interbank offered rate (IBOR) is replaced with a forward-looking expected credit loss (ECL) approach. IFRS 9 requiresan alternative nearly risk-free interest rate (RFR). The amendments include the Company to record an allowance for ECLs for all loans and other debt financial assets not held at FVPL.following practical expedients:
ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Company expects to receive. The shortfall is then discounted at an approximation to the asset’s original effective interest rate.
| ● | A practical expedient to require contractual changes, or changes to cash flows that are directly required by the reform, to be treated as changes to a floating interest rate, equivalent to a movement in a market rate of interest; |
| ● | Permit changes required by IBOR reform to be made to hedge designations and hedge documentation without the hedging relationship being discontinued; |
| ● | Provide temporary relief to entities from having to meet the separately identifiable requirement when an RFR instrument is designated as a hedge of a risk component; |
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For trade receivables, the Company has applied the standard’s simplified approach and has calculated ECLs based on lifetime expected credit losses. The Company has established a provision matrix that is based on the Company’s historical credit loss experience, adjusted for forward-looking factors specific to the debtors and the economic environment.
The Company considers a financial asset in default when contractual payment are 180 days past due. However, in certain cases, the Company may also consider a financial asset to be in default when internal or external information indicates that the Company is unlikely to receive the outstanding contractual amounts in full before taking into account any credit enhancements held by the Company.
The adoption of the ECL requirements of IFRS 9 resulted in increases in impairment allowances of the Company’s trade receivables. The increase in allowance resulted in adjustment to retained earnings. The impairment allowances for trade receivables as at January 1, 2018 is as follows:
IFRS 15Revenue from Contracts with Customers
IFRS 15 supersedes IAS 11Construction Contracts, IAS 18Revenue and related interpretations and it applies to all revenue arising from contracts with customers, unless those contracts are in the scope of other standards. The new standard establishes a five-step model to account for revenue arising from contracts with customers. Under IFRS 15, revenue is recognized at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer.
The standard requires entities to exercise judgement, taking into consideration all of the relevant facts and circumstances when applying each step of the model to contracts with their customers. The standard also specifies the accounting for the incremental costs of obtaining a contract and the costs directly related to fulfilling a contract.
The Company has applied IFRS 15 prospectively, with the initial application date of January 1, 2018 and the effects of adopting IFRS 15 are not material.
The Company sells educational content to private schools, which is delivered through printed and digital formats to private schools. The content for both printed and digital formats is the same, and there are no sales of only digital content or features to private schools. The content is delivered to private schools by transferring the printed books (i.e. the full content) together with a specific code that allows access to the platform. The digital content, including its features, is provided with the purpose of supporting the printed content, and it includes video lessons, online homework and assessments that are not customized and have no stand-alone value if used separately or outside of the main context. Use of the digital content is optional to the students, teachers and management of the private schools. The content, in both printed and digital formats, is sold as a bundle, as the formats are not designed or intended to be used independently
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and for this reason are not sold separately. In addition, the Company does not have any obligation to make updates, upgrades, or provide additional content in the platform. In relation to the benefits of the platform, the Company’s performance is satisfied when the educational content is delivered to schools, which only then receive the benefits in an irrevocable way.
(a) Sale of goods
The Company’s contracts with customers for the sale of educational content include one performance obligations. The Company has concluded that revenue from sale of educational content should be recognized at the point in time when control of the asset is transferred to the customer, i.e. on the delivery of the educational content. Therefore, the adoption of IFRS 15 did not have anThese amendments had no impact on the timing of revenue recognition.
(b) Advances received from customers
The Company receives short-term advances from its customers under the normal course of business, recognized upon the practical expedient as liabilities in the statement of financial position. As such, the Company does not adjust the consideration for the effects of a financing component in contracts, where the Company expects at contract inception, that the period between the time the customer pays for the education content and when the Company transfers the educational content to the customer will be one year or less.
(c) Presentation and disclosure requirements
As required for the consolidated financial statements of the Company. The Company intends to use the practical expedients in future periods if they become applicable.
Covid-19-Related Rent Concessions beyond 30 June 2021 Amendments to IFRS 16
On 28 May 2020, the IASB issued Covid-19-Related Rent Concessions - amendment to IFRS 16 Leases The amendments provide relief to lessees from applying IFRS 16 guidance on lease modification accounting for rent concessions arising as a direct consequence of the Covid-19 pandemic. As a practical expedient, a lessee may elect not to assess whether a Covid-19 related rent concession from a lessor is a lease modification. A lessee that makes this election accounts for any change in lease payments resulting from the Covid-19 related rent concession the same way it would account for the change under IFRS 16, if the change were not a lease modification. The amendment was intended to apply until 30 June 2021, but as the impact of the Covid-19 pandemic is continuing, on 31 March 2021, the IASB extended the period of application of the practical expedient to 30 June 2022.The amendment applies to annual reporting periods beginning on or after 1 April 2021.
This amendment had an impact of R$ 273 on the consolidated financial statements of the Company disaggregated revenue recognized from contracts with customers into categories that depict howdue to the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. The Company also disclosed information about the relationship between the disclosure of disaggregated revenue and revenue information disclosed for each reportable segment. Refer to Note 19 for the disclosure on disaggregated revenue.discounts obtained.
New and amended standards and interpretationsStandards issued but not yet adopted
effective
The new and amended standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Company’s consolidated financial statements are disclosed below. The Company intends to adopt these new and amended standards and interpretations, if applicable, when they become effective.
IFRS 16 - Leases
IFRS 16 was issued The Company is assessing the impact that changes in January 2016 and it replaces IAS 17Leases, IFRIC 4Determining whether an Arrangement containsthe standards will have in current practice, but does not expect a Lease, SIC-15Operating Leases-Incentives and SIC-27Evaluating the Substance of Transactions Involving the Legal Form of a Lease. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lesseessignificant or any impact to account for all leases under a single on-balance sheet model similar to the accounting for finance leases under IAS 17. The standard includes two recognition exemptions for lessees – leases
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of ’low-value’ assets (i.e., personal computers) and short-term leases (i.e., leases with a lease term of 12 months or less). At the commencement date of a lease, a lessee will recognize a liability to make lease payments (i.e., the lease liability) and an asset representing the right to use the underlying asset during the lease term (i.e., the right-of-use asset). Lessees will be required to separately recognize the interest expenseoccur on the lease liability and the depreciation expense on the right-of-use asset.
Lessees will also be required to remeasure the lease liability upon the occurrence of certain events (e.g., a change in the lease term, a change in future lease payments resulting from a change in an index or rate used to determine those payments). The lessee will generally recognize the amount of the remeasurement of the lease liability as an adjustment to the right-of-use asset.
IFRS 16 is effective for annual periods beginning on or after January 1, 2019, requires lessees and lessors to make more extensive disclosures than under IAS 17. Early application is permitted, but not before an entity applies IFRS 15. A lessee can choose to apply the standard using either a full retrospective or a modified retrospective approach. The standard’s transition provisions permit certain reliefs.
During 2018, the Company has performed a detailed impact assessment of IFRS 16. In summary the impact of IFRS 16 adoption in 2019 is expected to be, as follows:
Company’s financial statements:
| ● | ||||
| ● | ||||
Due to the adoption of IFRS 16, the Company’s lease expense in the operational result is expected to decrease, while the interest expense and depreciation are expected to increase, regarding this matter. This is due to the change in the accounting for expenses of leases that were classified as operating leases under IAS 17.
The Company intends to apply the modified retrospective transition approach and will not restate comparative amounts for the year prior to first adoption. Right-of-use assets for property leases will be measured on transition as if the new rules had always been applied. All other right-of-use assets will be measured at the amount of the lease liability on adoption (adjusted for any prepaid or accrued lease expenses).
IFRIC 23 - Uncertainty over Income Tax Treatments
On June 7, 2017, the IFRS Interpretations Committee (IFRS IC) issued IFRIC 23, which clarifies how the recognition and measurement requirements of IAS 12 ‘Income taxes’, are applied where there is uncertainty over income tax treatments. IFRIC 23
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applies to all aspects of income tax accounting where there is an uncertainty regarding the treatment of an item, including taxable profit or loss, the tax bases of assets and liabilities, tax losses and credits and tax rates.
Management has assessed the new standard and does not expect any impacts on the Company’s consolidated financial statements.
| ● | Property, Plant and |
| ● | Disclosure of Accounting Policies (Amendments to IAS 1 and IFRS Practice Statement 2) |
| ● | Definition of Accounting Estimates (Amendments to IAS 8) |
| ● | Covid-19-Related Rent Concessions beyond 30 June 2021 (Amendment to IFRS 16) |
| ● | Deferred Tax related to Assets and Liabilities arising from a Single Transaction (Amendments to IAS 12) |
| ● | IFRS 17 Insurance Contracts |
3 Significant accounting judgements, estimates and assumptions
The preparation of the Company’s consolidated financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the accompanying disclosures. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods. Accounting estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Revisions to estimates are recognized prospectively.
Other disclosures relating to the Company’s exposure to risks and uncertainties includes:
| Capital management – Note |
| Financial instruments risk management – Notes 26 and |
| Sensitivity analyses disclosures – Note |
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Estimates and assumptions
The key assumptions about the future and other key sources of estimatedestimation uncertainty as of the reporting date that include a significant risk of a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are described below. The Company based its assumptions and estimates on parameters available when the consolidated financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances that arise and that are beyond the Company’s control. Such changes are reflected in the assumptions where they occur.
Impairment of non-financial assets
Impairment exists when the carrying value of an asset or cash generating unit (“CGU”) or group of CGU exceeds its recoverable amount, defined as the higher of its fair value less costs of disposal and its value in use. The fair value less costs of disposal calculation is based on data available from binding sales transactions, conducted at arm’s length, for similar assets or observable market prices less incremental costs of disposing of the asset. The value in use calculation is based on a discounted cash flow model (“DCF” model). The cash flows are derived from the budget for the next five years and do not include restructuring activities to which the Company has not yet committed or significant future investments that will enhance the performance of the assets of the CGU being tested. The recoverable amount is sensitive to the discount rate used for the DCF model as well as to expected future cash-inflows and the growth rate used for extrapolation purposes. The Company determined that its operating segment is the cash generating unit.
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These estimates are most relevant to goodwill that are recognized by the Company. The key assumptions used to determine the recoverable amount for the different operating segments, including a sensitivity analysis, are disclosed and further explained in Note 13.14.
Inventory reserve
TaxesThe Company recognizes a provision for disposal of inventory considering materials from previous collections not sold and a prospective model to estimate the forecast of obsolescence of products from current collections. The applied model considers the historical data of non-realization of products to obtain the expected loss percentages. Any significant changes between the observed losses compared to the historical loss pattern impact the expected loss percentages estimated by the Company. See Note 8 for further information.
Provision for expected credit losses of trade receivables and contract assets
The Company uses a provision matrix to calculate ECLs for trade receivables and contract assets. The provision rates are based on days past due for customer. The provision matrix is initially based on the Company’s historical observed default rates. The Company calibrates the matrix to adjust the historical credit loss experience with forward-looking information.
The assessment of the correlation between historical observed default rates, forecast economic conditions and ECLs is a significant estimate. The amount of ECLs is sensitive to changes in circumstances and of forecast economic conditions. The Company’s historical credit loss experience and forecast of economic conditions may also not be representative of customer’s actual default in the future. The information about the ECLs on the Company’s trade receivables and contract assets is disclosed in Note 7.
Share-based payment
Estimating fair value for share-based payment transactions requires determination of the most appropriate valuation model, which depends on the terms and conditions of the grant. This estimate also requires determination of the most appropriate inputs to the valuation model including the expected life of the share option or appreciation right, volatility and dividend yield and making assumptions about them. For the measurement of the fair value of equity-settled transactions, the Company uses the Black & Scholes model. The assumptions and models used for estimating fair value for share-based payment transactions are disclosed in Note 18. b).
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Taxes
Deferred tax assets are recognized for deductible temporary differences and unused tax credits from net operating losses carryforward to the extent that it is probable that taxable profit will be available against which the losses can be utilized. Significant management judgement is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and the level of future taxable profits, together with future tax planning strategies.
The Company has R$ 10,427 (2017:12,902 (2020: R$ 4,451)4,380) of unrecognized unused tax loss carryforwards as of December 31, 20182021 related to a subsidiarysubsidiaries that has a history of losses. Such unused tax loss carryforwards do not expire and may not be used to offset taxable income of other subsidiaries of the Company. See Note 22.24 for further information.
Fair value measurement of financial instruments
When the fair values of financial assets and financial liabilities recorded in the statement of financial position cannot be measured based on quoted prices in active markets, their fair value is measured using valuation techniques including the DCF model. The inputs into these models are taken from observable markets where possible, but where this is not feasible, a degree of judgement is required to estimate fair values. Judgements include considerations of inputs such as liquidity risk, credit risk and volatility. Changes in assumptions relating to these factors could affect the reported fair value of financial instruments. See Note 2426 for further disclosures.
Contingent consideration, resulting from business combinations, is valued at fair value as of the acquisition date as part of the business combination. When the contingent consideration meets the definition of a financial liability, it is subsequently remeasured at each reporting date. This determination of fair value is based on discounted cash flows. The key assumptions taken into consideration are the probability of meeting each performance target and the discount factor (see Notes 46 and 2426 for additional information).
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In the accounting
4 Business combinations and acquisition of SAE Digital S.A. (“SAE”), contingent consideration with an estimated fair value of R$ 4,200 was recognized as of the acquisition date and settled for the same amount in April 2017. There is no outstanding amount related to contingent consideration of SAE acquisition as of December 31, 2017 and 2018. See Note 4 for additional information about business combinations.
Any contingent consideration is classified as financial instruments from acquisition ofnon-controlling interests (see Note 14).
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Share-based payment
Estimating fair value for share-based payment transactions requires determination of the most appropriate valuation model, which depends on the terms and conditions of the grant. This estimate also requires determination of the most appropriate inputs to the valuation model including the expected life of the share option or appreciation right, volatility and dividend yield and making assumptions about them. For the measurement of the fair value of equity-settled transactions, the Company uses the Black & Scholes model. The assumptions and models used for estimating fair value for share-based payment transactions are disclosed in Note 16b.
The fair value of the identifiable assets and liabilities as of the date of each acquisition was:
| Fair value as of the acquisition date | ||||||||||||||||||||
| 2017 | 2016 | |||||||||||||||||||
| | | | | | | | | ||||||||||||
| | Fair value as of the acquisition date | ||||||||||||||||||
| | 2021 | ||||||||||||||||||
| NS Educação | International School | SAE |
| Me Salva! |
| Eduqo |
| Edupass |
| P2D | ||||||||||
| Assets |
|
|
|
|
|
|
|
| ||||||||||||
| Cash and cash and equivalents | 1 | 689 | 5,000 |
| 10,562 |
| 1,112 |
| 362 |
| 24,136 | |||||||||
| Trade receivables | - | 10,576 | 5,890 |
| 2,010 |
| 300 |
| 23 |
| 17,786 | |||||||||
| Inventories | - | 1,837 | - |
| 80 |
| — |
| — |
| 23,348 | |||||||||
| Taxes recoverable | - | 173 | - | |||||||||||||||||
Recoverable taxes |
| 7 |
| 50 |
| — |
| 1,175 | ||||||||||||
Deferred taxes |
| — |
| — |
| — |
| 3,137 | ||||||||||||
Advance to employees | | — | | — | | — | | 109 | ||||||||||||
| Other assets | - | 470 | - |
| 160 |
| 4 |
| 102 |
| 2,622 | |||||||||
| Property and equipment | - | 323 |
| 145 |
| 74 |
| — |
| 319 | ||||||||||
Right-of-use assets |
| 112 |
| 270 |
| — |
| — | ||||||||||||
| Intangible assets | 9,707 | 29,736 | 21,400 |
| 12,022 |
| 9,097 |
| 3,702 |
| 168,187 | |||||||||
| 9,708 | 43,804 | 32,290 | ||||||||||||||||||
|
| 25,098 |
| 10,907 |
| 4,189 |
| 240,819 | ||||||||||||
| | | | | | | | | ||||||||||||
| Liabilities |
|
|
|
|
|
|
|
| ||||||||||||
| Trade payables | - | (2,327 | ) | - |
| 614 |
| 77 |
| 56 |
| 8,738 | ||||||||
| Labor and social obligations | - | (696 | ) | - |
| 296 |
| 232 |
| 42 |
| 5,205 | ||||||||
| Taxes and contributions payable | - | (119 | ) | - |
| 211 |
| 657 |
| 519 |
| 65 | ||||||||
| Income taxes payable | - | (410 | ) | - | ||||||||||||||||
Leases |
| 112 |
| 270 |
| — |
| — | ||||||||||||
Loans and financing |
| 91 |
| 119 |
| — |
| — | ||||||||||||
Advances from customers | | 322 | | — | | 22 | | 202 | ||||||||||||
| Other liabilities | - | (340 | ) | - |
| 2,263 |
| 4 |
| — |
| 6,113 | ||||||||
| - | (3,892 | ) | - | |||||||||||||||||
| Total identifiable net assets at fair value | 9,708 | 39,912 | 32,290 | |||||||||||||||||
|
| 3,909 |
| 1,359 |
| 639 |
| 20,323 | ||||||||||||
Net identifiable assets acquired at fair value |
| 21,189 |
| 9,548 |
| 3,550 |
| 220,496 | ||||||||||||
| | | | | | | | | ||||||||||||
| Goodwill arising on acquisition | 28,826 | 27,598 | 20,365 |
| 28,326 |
| 22,422 |
| 11,679 |
| 560,075 | |||||||||
| Purchase consideration transferred | 38,534 | 67,510 | 52,655 | |||||||||||||||||
Purchase consideration |
| 49,515 |
| 31,970 |
| 15,229 |
| 780,571 | ||||||||||||
| Cash paid | 29,037 | - | 27,857 |
| 15,779 |
| 15,097 |
| 2,000 |
| 788,985 | |||||||||
| Capital contribution | - | 5,300 | 5,000 |
| 10,000 |
| — |
| — |
| — | |||||||||
| Forward contract of non-controlling interest at acquisition | - | 30,144 | 15,455 | |||||||||||||||||
| Deferred payments | 9,497 | - | 143 | |||||||||||||||||
| Contingent consideration | - | - | 4,200 | |||||||||||||||||
| Fair value of previously held interest in a step acquisition | - | 32,066 | - | |||||||||||||||||
Accounts payables to selling shareholders arising from acquisition (Note 17) | | 22,196 | | 16,076 | | 13,229 | | — | ||||||||||||
Retained payments |
| 1,324 |
| — |
| — |
| — | ||||||||||||
Price adjustment | | 217 | | 797 | | — | | (8,414) | ||||||||||||
| Analysis of cash flows on acquisition: |
|
|
|
|
|
|
|
| ||||||||||||
| Transaction costs of the acquisition (included in cash flows from operating activities) | (498 | ) | (85 | ) | (218 | ) |
| (486) |
| (390) |
| (191) |
| (13,629) | ||||||
| Cash paid and subscribed capital net of cash acquired with the subsidiary (included in cash flows from investing activities) | (29,036 | ) | 689 | (27,857 | ) |
| (15,433) |
| (13,985) |
| (1,638) |
| (764,849) | |||||||
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(a) International School Serviços de Ensino, Treinamento e Editoração, Franqueadora S.A. (“International School”)
| | | | | | | | �� |
|
| 2020 | ||||||
|
| WPensar |
| Studos |
| Geekie |
| EI |
Assets | | | | | | | | |
Cash and cash and equivalents |
| 378 |
| 191 |
| 7,796 |
| 14,492 |
Trade receivables |
| 75 |
| 126 |
| 1,120 |
| 11,129 |
Inventories |
| — |
| — |
| 8,333 |
| 4,419 |
Recoverable taxes |
| 108 |
| — |
| 524 |
| — |
Deferred taxes |
| — |
| — |
| 15,098 |
| — |
Advance to employees |
| — |
| — |
| — |
| 11,484 |
Other assets |
| 1 |
| — |
| 710 |
| 697 |
Property and equipment |
| 172 |
| 39 |
| 2,592 |
| 843 |
Right-of-use assets |
| — |
| — |
| 292 |
| 2,418 |
Intangible assets |
| 6,192 |
| 5,996 |
| 36,328 |
| 238,825 |
|
| 6,926 |
| 6,352 |
| 72,793 |
| 284,307 |
Liabilities |
|
|
|
|
|
|
|
|
Trade payables |
| 47 |
| 18 |
| 823 |
| 1,709 |
Labor and social obligations |
| 385 |
| 79 |
| 21,584 |
| 3,097 |
Taxes and contributions payable |
| 152 |
| 56 |
| 677 |
| — |
Income taxes payable |
| 8 |
| — |
| — |
| — |
Leases |
| — |
| — |
| 292 |
| 2,418 |
Loans and financing |
| — |
| — |
| 8,836 |
| — |
Loans with related parties |
| 1,285 |
| — |
| 10,885 |
| — |
Provision for legal proceedings |
| — |
| — |
| — |
| 599 |
Advances from customers |
| 100 |
| 27 |
| 269 |
| — |
Other liabilities |
| 35 |
| 10 |
| — |
| 166 |
|
| 2,012 |
| 190 |
| 43,366 |
| 7,989 |
Total identifiable net assets at fair value |
| 4,914 |
| 6,162 |
| 29,427 |
| 275,684 |
Goodwill arising on acquisition |
| 18,994 |
| 13,371 |
| 158,552 |
| 219,715 |
Purchase consideration transferred |
| 23,908 |
| 19,533 |
| 187,979 |
| 496,033 |
Cash paid |
| 14,345 |
| 8,298 |
| 4,500 |
| 200,000 |
Forward contract of non-controlling interest at acquisition |
| — |
| — |
| 115,222 |
| 291,413 |
Retained payments |
| 3,586 |
| 11,235 |
| — |
| — |
Price adjustment |
| — |
| — |
| — |
| 4,620 |
Fair value of previously held interest in a step acquisition |
| 5,977 |
| — |
| 68,257 |
| — |
Analysis of cash flows on acquisition: |
|
|
|
|
|
|
|
|
Transaction costs of the acquisition (included in cash flows from operating activities) |
| (115) |
| (275) |
| (762) |
| (6,510) |
Cash paid and subscribed capital net of cash acquired with the subsidiary (included in cash flows from investing activities) |
| (13,967) |
| (8,107) |
| 3,296 |
| (185,508) |
International School represented an opportunity forThe purchase price allocation is subject to change during the Company to enteringperiod of completion of the English as a second language and bilingual teaching market. The acquisition hasdetermination of the purpose to provide additional value-added contentfair value of intangible assets according to the Company’s customers. International School has a proprietary English content solution developed for in-school programs for private schools and a professional staff that is highly qualified to develop the product and provide support to International School’s customers.deadline defined by IFRS.
(a) | Me Salva! Cursos e Consultorias S/A (“Me Salva!”) |
On December 21, 2015,March 10, 2021, the Company acquired 40%control of Me Salva!, by acquiring 60.0% of the outstanding shares on the acquisition date.
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The purchase consideration transferred was R$ 49,515, comprised of:
For acquisition of 60%: (i) R$ 15,779 related to cash consideration paid on the acquisition date; (ii) R$ 10,000 capital contribution paid on the acquisition date; (iii) R$ 1,324 retained for the period of 5 years for any eventual inaccuracies in the fulfillment of the guarantees given in the purchase and sale agreement, which will be released in 5 annual installments; and (iv) R$ 217 determined as an “acquisition price adjustment.
For acquisition of remaining 40%: (i) R$ 22,196, representing the present value of the amount that will be paid in March 2025. Because the price is not fixed, the Company considers the payment as contingent consideration and the financial liability is measured at FVPL and no non-controlling interest has been recognized. The Company did not recognize deferred taxes related to the business combination because the tax basis and the accounting basis, including fair value adjustments, were the same at the date of the business combination.
Goodwill
The goodwill recorded on the acquisition was R$28,326 and it is expected to be deductible for tax purposes after the Company incorporates the acquiree. For the purposes of impairment testing, the goodwill has been allocated to the Supplemental operating segment.
The goodwill is primarily attributable to the expected synergies and other benefits from combining the assets and activities of Me Salva! with those of the Company. The goodwill paid is based on the Business Plan prepared for purposes of the acquisition, and the principal business assumptions used were considered by management as appropriate.
Transaction costs
Transaction costs of R$486 were expensed and are included in general and administrative expenses as of December 31, 2021.
(b)Quadrado Mágico Desenvolvimento e Licenciamento de Software S.A. (“Eduqo”)
On July 1, 2021, the Company acquired control of Eduqo, by acquiring 100% of the outstanding shares on the acquisition date.
Eduqo provides educational services, acting specifically in the Learning Management System (LMS) segment.
The purchase consideration transferred was R$31,970, comprised of: (i) R$15,097 cash consideration paid on the acquisition date; (ii) R$16,076 related to seller financing, representing the present value of fixed price that will be paid in two installments on each anniversary date of the transaction, and (iii) of R$797 determined as an acquisition price adjustment. See Note 17 for further information.
The Company did not recognize deferred taxes related to the business combination because the tax basis and the accounting basis, including fair value adjustments, were the same at the date of the business combination.
Goodwill
The goodwill recorded on the acquisition was R$22,422 and it is expected to be deductible for tax purposes after the Company incorporates the acquiree. For the purposes of impairment testing, the goodwill has been allocated to the Supplemental operating segment.
The goodwill acquired is primarily attributable to the expected synergies and other benefits from combining the assets and activities of Eduqo with those of the Company. The goodwill paid is based on the Business Plan prepared for purposes of the acquisition, and the principal business assumptions used were considered by management as appropriate.
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Transaction costs
Transaction costs of R$390 were expensed and are included in general and administrative expenses as of December 31, 2021.
(c)Desenvoolva – Educação, Treinamento e Consultoria Corporativa Ltda. (“Edupass”)
On September 3, 2021, the Company acquired control of Edupass, by acquiring 100% of the outstanding shares on the acquisition date.
Edupass connects education institutions with companies and professionals, helping employees in their career development.
The purchase consideration was R$ 15,229, comprised of: (i) R$ 2,000 cash consideration paid on the acquisition date; (ii) R$ 1,975 related to seller financing which will be paid in 2 installments on each anniversary of the transaction; and (iii) an additional earn-out of R$ 11,254, representing the present value of the amount that will be paid in 2024. Because the R$ 11,254 is not a fixed price but subject to a formula, the Company considers the payment as contingent consideration and the liability is measured at FVPL.
The Company did not recognize deferred taxes related to the business combination because the tax basis and the accounting basis, including fair value adjustments, were the same at the date of the business combination.
Goodwill
The goodwill recorded on the acquisition was R$ 11,679 and it is expected to be deductible for tax purposes after the Company incorporates the acquiree. For the purposes of impairment testing, the goodwill has been allocated to the Supplemental operating segment.
The goodwill acquired is primarily attributable to the expected synergies and other benefits from combining the assets and activities of Edupass with those of the Company. The goodwill paid is based on the Business Plan prepared for purposes of the acquisition, and the principal business assumptions used were considered by the administration as appropriate.
Transaction costs
Transaction costs of R$ 191 were expensed and are included in general and administrative expenses as of December 31, 2021.
(d)P2D Educação Ltda. (“P2D”)
On March 6, 2021, the Company announced that it entered into a definitive agreement to acquire COC and Dom Bosco, two important K-12 learning systems in Brazil.
On October 1, 2021, Arco concluded the acquisition of 100% of the capital stock of P2D.
The purchase consideration was R$ 780,571, comprised of: (i) R$ 788,985 cash consideration paid on the acquisition date; and (ii) R$ 8,414 of price adjustments calculated after the acquisition, to be paid by Pearson, reducing the acquisition price. The price adjustment is under discussion between both parties and its payment is more likely to occur in the first semester of 2022.
The transaction was subject to customary closing conditions, including antitrust and other regulatory approvals. After the preliminary antitrust approval from Brazil’s Administrative Council for Economic Defense – CADE, which occurred on September 30, 2021, Arco closed the acquisition of P2D on October 1, 2021, becoming a subsidiary of Company.
The Company did not recognize deferred taxes related to the business combination because the tax basis and the accounting basis, including fair value adjustments, were the same at the date of the business combination.
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Goodwill
The goodwill recorded on the acquisition was R$ 560,075 and it is expected to be deductible for tax purposes after the Company incorporates the acquiree. For the purposes of impairment testing, the goodwill has been allocated to the Core operating segment.
The goodwill acquired is primarily attributable to the expected synergies and other benefits from combining the assets and activities of Edupass with those of the Company. The goodwill paid is based on the Business Plan prepared for purposes of the acquisition, and the principal business assumptions used were considered by the administration as appropriate.
Transaction costs
Transaction costs of R$ 13,629 were expensed and are included in general and administrative expenses as of December 31, 2021.
(e)WPensar S.A. (“WPensar”)
WPensar is a company engaged in the development and licensing of software, related to school management systems.
The Company bought, as a first step, a 25.0% stake in the entity in April 2015 for R$ 5,000, of which R$ 4,777 related to the consideration transferred as capital contribution and R$ 223 to the initial recognition of asymmetrical put and call options. Pursuant to the investment and share purchase agreement for the acquisition of WPensar, Arco purchased the remaining 75.0% on September 21, 2020.
The purchase consideration transferred was R$ 23,908, consisting of R$ 14,345 paid at the acquisition date, R$ 3,586 retained until September 30, 2021 as a guarantee for any losses and R$ 5,977 regarding the fair value of the previously held interest. At the date of acquisition, the carrying amount of the investment previously held interest was R$ 2,729, resulting in a gain in step acquisition of R$ 3,248. The amount will be released in a single installment, adjusted by Interbank certificates of deposit (CDI). On the due date, if there are no losses, the amount will be paid to the selling shareholders.
The Company did not recognize any deferred taxes related to the business combination because the tax basis and accounting basis, including fair value adjustments, were the same at the acquisition date.
Goodwill
The goodwill acquired on the acquisition was R$ 18,994 and is expected to be deductible for tax purposes after the Company merges the acquiree. For the purposes of impairment testing, the goodwill has been allocated to the Supplemental operating segment.
The goodwill recognized is primarily attributable to the expected synergies and other benefits from combining the assets and activities of WPensar with those of the Company. The goodwill paid is based on the Business Plan prepared for purposes of the acquisition, and the principal business assumptions used were considered by the administration as appropriate.
Transaction costs
Transaction costs of R$ 115 were expensed and are included in general and administrative expenses on December 31, 2020.
(f)Studos Software Ltda. (“Studos”)
On September 21, 2020, the Company acquired control of Studos, by acquiring 100% of the outstanding ordinary shares and voting sharesinterests.
Studos is a platform that contributes to enrich students’ learning and optimize teachers’ time, in addition to providing simplified management for coordinators.
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The purchase consideration transferred was R$ 19,533. The amount of R$ 12,300.8,298 was paid on the acquisition date and R$ 11,235 has been retained for the period of 2 years and is conditioned to the performance of the entity. The amount will be released in 2 annual installments.
The Company did not recognize deferred taxes related to the business combination because the tax basis and the accounting basis, including fair value adjustments, were the same at the date of the business combination.
Goodwill
The goodwill recorded on the acquisition was R$ 13,371 and it is expected to be deductible for tax purposes after the Company merges the acquiree. For the purposes of impairment testing, the goodwill has been allocated to the Supplemental operating segment.
The goodwill acquired is primarily attributable to the expected synergies and other benefits from combining the assets and activities of Studos with those of the Company. The goodwill paid is based on the Business Plan prepared for purposes of the acquisition, and the principal business assumptions used were considered by the administration as appropriate.
Transaction costs
Transaction costs of R$ 275 were expensed and are included in general and administrative expenses on December 31, 2020.
(g)Geekie Desenvolvimento de Softwares S.A. (“Geekie”)
Geekie Desenvolvimento de Software S.A. is an entity that provides technology for adaptive assessment and learning products and engages in the production, development and licensing of software tailored to the specific requirements of education sector customers.
In December 2016, the Company acquired a 6.54% interest in Geekie, Based on the agreement signed by Geekie’s shareholders, the Company exercised significant influence over the investment, as the Company: (i) had representation on the board of directors; (ii) participated in strategic decision making regarding all relevant matters; (iii) approved all products launched by Geekie; and (iv) provided essential technical information (Geekie’s products are based on the Company’s educational content). At that date, the Company entered into an agreement through which it had a call option, and the sellers had a put to acquireoption over the remaining 60% of the seller’s shares. The price would be calculated using adetermined by the greater of the multiple of 10xthe Company’s EBITDA related tofor 2021 multiplied by Geekie’s EBITDA, including any cash or debt; or 10 times Geekie’s EBITDA for 2021, less net debt. The put option could be exercised between the year ending Decemberperiod beginning on May 1, 2022, through May 31, 2019 and the call2022. Call and put options would be exercised betweenwere recorded at fair value, calculated through the multiple scenarios method – Monte Carlo. Any adjustment to the fair value was recognized as finance income (costs) in the statement of income (loss).
The amount to acquire the 6.54% interest of R$8,000 was paid in January 1, 20202017, of which R$4,000 was a capital contribution and April 30, 2020. The put and callR$4,000 was considered symmetrical but did not givepaid to the control over the remaining shares. selling shareholders.
The Company did not have at that time (i) power over the investee; (ii) exposure, or rights, to variable returns from its involvementagreed with the investee; (iii)selling shareholders that if in June 2018 the abilitycash and cash equivalents of Geekie were lower than a threshold of R$5,000, the Company would have to use its power over the investee to affectsubscribe capital in the amount of R$2,000.
On July 2, 2018, the investor's returns.extraordinary shareholders’ meeting authorized the acquisition of an additional 1.51% interest in the equity of Geekie, increasing the Company’s share from 6.54% to 8.05% through a capital increase of R$2,000. The capital increase was fully paid on July 3, 2018. The additional investment did not change the Company’s influence in Geekie and had the purpose to support Geekie’s working capital needs.
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On September 20, 2019, Arco acquired an additional 0.96% interest in the share capital of Geekie through a capital increase of R$1,218 increasing the Company’s total interest to 9.01%. On October 14, 2019, Arco acquired an additional 1.92% interest in the share capital of Geekie through a capital increase of R$2,500 increasing its total interest to 10.92%. In addition, on October 25, 2019, Arco acquired an additional 18.44% interest in the contract agreement establishedshare capital of Geekie from a minority shareholder for R$21,892 increasing its total interest to 29.36%. On November 15, 2019, Arco acquired an additional 1.17% interest in the share capital of Geekie through a capital increase of R$2,000 increasing its total interest to 30.53%. In December 2019, Arco acquired an additional 7.00% interest in the share capital of Geekie through a capital increase of R$4,282 and the purchase of minority shareholders for R$5,761 increasing its total interest to 37.53% as of December 31, 2019. On March 4, 2020, Arco acquired an additional 10.51% interest in the share capital of Geekie through the purchase of shares from minority shareholders in the amount of R$12.676, increasing its total interest to 48.04%. On July 06, 2020, Arco acquired an additional 4.62% interest in Geekie’s share capital from minority shareholders for R$5,782, increasing its total interest to 52.67%. Notwithstanding this acquisition, at that date, based on the Company would only have control over the remaining 60% shares when the option was exercised. As a consequence,existing shareholders ‘agreement the Company did not consolidatecontrol Geekie. On September 21, 2020, Arco acquired a 1.76% interest in the investmentshare capital of Geekie through a capital increase of R$4,500 increasing its total interest to 54.43%. On November 11, 2020, Arco acquired an additional 1.64% interest in International School and the put and call was accounted asGeekie’s share capital through a forward contracted marked at fair value. Ascapital increase of December 31, 2016, the investment was accounted for as an equity method investment and a goodwill of R$4,200 was recorded as part the investment.
4,500 increasing its total interest to 56.06%.
On January 23, 2017,November 27, 2020, the Company signed a new shareholders’ agreement and based on the new terms defined, on that date the Company acquired an additional 11.48% interestcontrol of Geekie. With the change in International School, through the capitalizationcomposition of advances for future capital increases amounting to R$ 5,300, thatthe Board of Directors the Company paid in cash in 2016. This resulted in the dilution of the other shareholders and increasing its ownership from 40%has power to 51.48% and also obtaining control of International School.decide on Geekie’s operations. The financial statements of International SchoolGeekie were consolidated from the date the Company acquired control and the acquisition was accounted for as a business combination.
On January 23, 2017, upon acquiring control20, 2021, Arco acquired an additional 1.36% interest in Geekie’s share capital through a capital increase of International School, the Company and the former controlling shareholder agreedR$4,000, increasing its total interest to amend the exercise dates of the call and put options originally issued in 2015. 57.42%.
The shareholders agreed that the put and call optionsentered a firm commitment on the 25%42,58% of the remaining interest held by the non-controlling shareholders will be exercisedexercisable until January 2023, because the terms are non-cancelable in the period between January 1, 2020 and April 30, 2020 and the put and call on the remaining 23.52% will be exercised in the period between January 1, 2021 and April 30, 2021.
Additionally, the exercise price was also amended as follows:
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any way.
The terms of the optionsfirm commitment were assessed to determine as to whether or not they expose the Company to the risks and rewards associated with the actual ownership of such shares during the period of the optionfirm commitment contract. Because the terms of the put and call options are symmetrical, the Company concluded that it is virtually certain that either the parent or the non-controlling shareholder will exercise the option because it will be in the economic interests of one of them to do so.
The Company accounted for the call and put optionsfirm commitment under the anticipated-acquisition method, and the non-controlling interest subject to the put or call optionsthat is deemed to have been acquired at the date of acquisition of the control. Accordingly, upon obtaining control, the Company also consolidated the interest currently legally held by the non-controlling shareholder and recognized a financial liability that will be eventually settled when the put or callnon-cancelable firm commitment option is exercised.
The financial liability was recorded at the present value of the estimated amount payable to the non-controlling shareholder upon the exercise of the put or call options andfirm commitment discounted to present value using an estimated interest rate of 21.0%13.15%.
Goodwill
A business combination achieved in stages is accounted for using the acquisition method at the acquisition date. Goodwill is calculated at the date when control is acquired.
In order Any dividends payable to calculate goodwill, the previously heldnon-controlling shareholder will recorded as interest was remeasured to fair value at the acquisition date, and a gain was recognized in the statement of income in other operating income (expense) for an amount of R$ 1,184 at that date. The fair value of the previously held interest then forms one of the components that is used to calculate goodwill, along with consideration and non-controlling interest, less the fair value of identifiable net assets.
expense.
The purchase consideration transferred totaledamounted to R$ 67,510, which breakdown187,979, comprised of: (i) cash consideration in the amount of R$4,500 through capital contribution paid on the same month of acquisition; (ii) R$115,222 regarding a forward contract and (iii) R$68,257 regarding a fair value of previously held interest in a step acquisition.
At the date of acquisition, the carrying amount of the investment previously held interest was R$71,812, resulting in a loss in step acquisition of R$3,555. The exercise price is variable and conditioned to the performance of the entity and is based on multiples of 2022 ACV book value and revenue as follows:described in Note 17.i).
Goodwill
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The table below demonstratesgoodwill recorded on the calculation of goodwill:
Goodwill arising on this acquisition was R$158,552 and it is not expected to be deductible for tax purposes.purposes after the Company merges the acquiree. For the purposepurposes of impairment testing, the goodwill has been allocated to the Core operating segment.
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The goodwill acquired is primarily attributable to the expected synergies and other benefits from combining the assets and activities of Geekie with those of the Company. The goodwill paid is based on the Business Plan prepared for purposes of the acquisition, and the principal business assumptions used were considered by the administration as appropriate.
Transaction costs
Transaction costs of R$762 were expensed and are included in general and administrative expenses on December 31, 2020.
(h)Escola da Inteligência Cursos Educacionais Ltda. (“EI” or “Escola da Inteligência”)
On August 28, 2020, the Company announced that it entered into a definitive agreement to acquire Escola da Inteligência, the leading solution in social-emotional learning (SEL) in Brazil.
This transaction broadens Arco’s supplemental market presence by adding a strong brand to its portfolio. Arco believes there is a favorable market trend for SEL, pushed forward by the COVID-19 pandemic, and that EI is well positioned to capture this demand outside and within Arco’s school base.
The acquisition involves only the private sector business of Escola da Inteligência and under the terms of the transaction, Arco will acquire 100% of EI’s shares for R$496,034, of which R$200,000 was paid at closing, the amount of R$88,000 was paid in the second quarter of 2021, concluding the first stage of acquisition corresponding to 60% of EI’s shares. The remaining 40% of EI’s shares is estimated in R$208,150, subject to adjustments related to multiples of 2023 ACV book value plus cash generation multiplied by 40%. The amount will be paid in the second quarter of 2023.
The amount of R$ 4,620 was determined as an “acquisition price adjustment”, which was calculated based on the difference between net debt less the working capital and was paid to the selling shareholders in April 30, 2021.
The transaction was subject to customary closing conditions, including antitrust and other regulatory approvals. After the preliminary antitrust approval from Brazil’s Administrative Council for Economic Defense – CADE, which occurred on November 13, 2020, Arco closed the acquisition of EI on December 2, 2020, becoming a subsidiary of Company.
Goodwill
The goodwill recorded on the acquisition was R$219,715 and it is expected to be deductible for tax purposes after the Company merges the acquiree. For the purposes of impairment testing, the goodwill has been allocated to the Supplemental operating segment.
The goodwill acquired is primarily attributable to the expected synergies and other benefits from combining the assets and activities of Escola da Inteligência with those of the Company. The goodwill paid is based on the Business Plan prepared for purposes of the acquisition, and the principal business assumptions used were considered by the administration as appropriate.
TransactionsTransaction costs
Transaction costs of R$ 85R$6,510 were expensed and are included in general and administrative expenses for the year endedon December 31, 2017.2020.
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MeasurementTable of fair valueContents
As of the acquisition date, the fair value of trade receivables acquired equals its carrying amount.
| (i) | Measurement of fair value |
The valuation techniques used for measuring the fair value of separatelyseparate identified intangible assets acquired were as follows:
| | | | |
| | | | |
Entity | Asset acquired | Valuation technique | ||
Me Salva! Eduqo Edupass P2D WPensar Studos Escola da Inteligência | | Customer | | Multi-period excess earning method The method considers the present value of net cash flows expected to be generated by customer relationship, by excluding any cash flows related to contributory |
Me Salva! Eduqo Edupass P2D WPensar Studos Escola da Inteligência | ||||
|
From the date of acquisition, International School contributed with R$ 25,382 of net revenue and with R$ 7,465 of profit before income taxes for the year ended December 31, 2017 to the Company. If the combination had taken place at the beginning of the year ended December 31, 2017, net revenue would have been R$ 244,426 and profit before income taxes for the Company would have been R$ 67,024.
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(b) NS Educação Ltda. (“NS Educação”)
On September 28, 2017, the Company acquired control of NS Educação Ltda. (“NS Educação”) by acquiring 100% of its shares. NS Educação is a private company which sells educational content under the trademark “Universitário”. NS Educação is a content provider to middle class private schools in Brazil and represented an opportunity for the Company to achieve a greater scale and improve its margin.
The purchase consideration transferred amounted to R$ 38,534, comprise by a cash consideration in the amount of R$ 29,037, which was paid on the date of acquisition and a deferred payment in the amount of R$ 7,302, which has been retained in an escrow account for the period of 5 years as a guarantee for the payment of any contingent liabilities that may arise. Any remaining balance will be transferred to the former owners of the acquired entity. The amount will be released in annually installments adjusted by the interest from Interbank certificates of deposit (“CDI”).
The equivalent of 5% of the original purchase price was determined as an "acquisition price adjustment", which was calculated based on the difference between the revenue from 2017 less the projected revenue for that year multiplied by 2.50. The purchase price adjustment totaled R$ 2,195.
Goodwill
Goodwill recorded on the acquisition is R$ 28,826 and it is expected to be deductible for tax purposes after the Company merges the acquiree. For the purpose of impairment testing, goodwill has been allocated to the Core operating segment.
Transaction costs
Transaction costs of R$ 498 were expensed and are included in general and administrative expenses for the year ended December 31, 2017.
Measurement of fair value
The valuation techniques used for measuring the fair value of separate identified intangible assets acquired were as follows:
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Non-compete agreement | | With-and-without method The With-and-Without method consists of estimating the fair value of an asset by the difference between the value of this asset in two scenarios: a scenario considering the existence of the asset in question and another, considering its non-existence. |
From the date of acquisition, NS Educação had no revenue due to the implementation process and seasonality, and contributed with a loss before income taxes of R$ 1,050 for the year ended December 31, 2017. If the combination had taken place at the beginning of the year December 31, 2017, net revenue of the Company would have been R$ 258,848 and profit before income taxes for the Company would have been R$ 70,357.
(c) Acquisition of SAE
On June 27, 2016, the Company acquired control of SAE, a private company, through the acquisition of 70% interest, which represented 22,098,606 shares with a nominal value of R$ 1.00 per share. The investment in SAE added a new platform for the Company’s Core segment with a different pedagogical approach and different pricing point. This acquisition enabled the Company to serve a broader range of schools, allowing it to maximize its market reach and penetration. Thus, with the SAE solution, the Company started to offer a basic subscription solution focused on upper middle-income private schools.
Cash consideration
The amount of R$ 33,000 was paid in cash, of which R$ 5,000 was a capital contribution, R$ 27,857 was paid to the selling shareholders on the acquisition date, and R$ 143 in 2018.
Contingent consideration
The Company has agreed to pay to the selling shareholders additional consideration of R$ 210.00 (two hundred and ten reais) per additional student if SAE’s number of students on March 31, 2017 was higher than 70,000. The Company recorded R$ 4,200 as a contingent consideration, representing the fair value of the additional consideration at the date of acquisition, which was fully paid in April 2017.
Forward contract of remaining interest
The Company entered into an agreement to acquire the remaining 30% interest in SAE through symmetrical call and put options. The exercise period begins on June 27, 2019 and has no expiration date. The exercise price is calculated based on the following formula: 30% multiplied by 8x EBITDA of 2018 or the year before the exercise date, less any debts and cash and cash equivalents.
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The terms of the option contracts were assessed to determine whether or not they provide the Company with access to the risks and rewards associated with the actual ownership of the shares during the period of the contracts. In this case, as there is a symmetrical put and call options instrument, the Company considered that it is virtually certain that either party will exercise them because doing so will be in the economic interests of one of them.
The Company opted to account for the put and call options under the anticipated-acquisition method. Thus, the interest subject to the put or call options is deemed to have been acquired at the date of acquisition. Accordingly, the financial liability arising from the put or call option is included in the consideration transferred, eliminating the non-controlling interest of this acquisition.
The financial liability is recorded at the present value of the estimated amount payable to the non-controlling shareholder upon the exercise of the put or call options and discounted to present value using an estimated interest rate of 20.5%.
Transactions costs
Transaction costs of R$ 218 were expensed as incurred and are included in general and administrative expenses for the year ended December 31, 2016.
Goodwill
Goodwill recorded on the acquisition amounted to R$ 20,365 and it is expected to be deductible for tax purposes after the Company merges with SAE. For the purpose of impairment testing, goodwill has been allocated to the Core operating segment.
Fair value measurement
At acquisition date, the fair value of trade receivables acquired equals its carrying amount.
The valuation techniques used for measuring the fair value of separately identified intangible assets acquired were as follows:
Me Salva! Edupass P2D Geekie Escola da Inteligência | | Trademarks | | Relief-from-royalty method The |
Me Salva! Eduqo Edupass WPensar | | Software | | Replacement cost The method considers the amount that an entity would have to pay to replace at the present time, according to its current worth. |
Me Salva! Eduqo P2D | | Educational platform | | Replacement cost The method considers the amount that an entity would have to pay to replace at the present time, according to its current worth. |
Studos Escola da Inteligência | | Educational system | | Relief-from-royalty method The relief-from-royalty method considers the discount estimated royalty payments that are expected to be avoided as a result of the educational platform being owned. |
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Acquisition of additional interest in SAE(j)Revenue and profit contribution
The individual net revenue and net income from the acquisition date through each period end for all business combinations are presented below:
| | | | | | | | |
|
| December 31, 2021 | ||||||
|
| Me Salva! |
| Eduqo |
| Edupass |
| P2D |
Total net revenue |
| 6,929 |
| 2,511 |
| 434 |
| 38,081 |
Net income (loss) before income taxes |
| (4,961) |
| 988 |
| (505) |
| 7,497 |
| | | | | | | | |
| | 2020 | ||||||
|
| WPensar |
| Studos |
| Geekie |
| EI |
Total net revenue |
| 1,126 |
| 282 |
| 18,497 |
| 14,779 |
Net income (loss) before income taxes |
| (89) |
| (249) |
| (11,035) |
| 10,429 |
On October 24, 2017,Total revenue and income (loss) before income taxes for the Company effectively acquiredare presented below assuming the remaining 30% interest inacquisitions had occurred at the voting shares of SAE based on negotiations with the non-controlling shareholder, for which a cash consideration of R$ 19,250 will be paid to the selling shareholders in 10 monthly equal instalments adjusted by the CDI. The difference between the cash consideration paid at this transaction and the fair value amountbeginning of the forward contract atyear:
| | | | |
|
| 2021 |
| 2020 |
Total net revenue |
| 1,271,921 |
| 1,078,831 |
Net income (loss) before income taxes |
| (185,101) |
| 32,208 |
This additional financial information is presented for informational purposes only and does not purport to represent what the momentCompany’s results of payment was recognized as a lossoperations would have been had it completed the acquisition on the date assumed, nor is it necessarily indicative of R$ 3,946the results that may be expected in the statement of income (loss) for the year ended December 31, 2017 in finance costs.future periods.
5 Cash and cash equivalents
| | | | |
|
| 2021 |
| 2020 |
Cash and bank deposits |
| 20,085 |
| 7,536 |
Bank deposits in foreign currency (a) |
| 154 |
| 28,327 |
Cash equivalents (b) |
| 190,904 |
| 388,547 |
|
| 211,143 |
| 424,410 |
| 2018 | 2017 | |||||||
| Cash and bank deposits | 366 | 234 | ||||||
| Cash equivalents and bank deposits in foreign currency (a) | 3,615 | - | ||||||
| Cash equivalents (b) | 8,320 | 600 | ||||||
| 12,301 | 834 | |||||||
| (a) | Short-term deposits |
| (b) | Cash equivalents correspond to financial investments in Bank Certificates of Deposit (“CDB”) |
6 Financial investments
F-47
| | | | |
|
| 2021 |
| 2020 |
Financial investments (a) |
| 1,013,550 |
| 721,935 |
Financial investments in foreign currency |
| — |
| 542 |
Other |
| 506 |
| 517 |
|
| 1,014,056 |
| 722,994 |
Current |
| 973,294 |
| 712,645 |
Non-current |
| 40,762 |
| 10,349 |
| 2018 | 2017 | |||||||
| Financial investments (a) | 810,812 | 46,323 | ||||||
| Multimarket investment fund (b) | - | 36,686 | ||||||
| Other | 347 | 199 | ||||||
| 811,159 | 83,208 | |||||||
| Current | 806,789 | 83,009 | ||||||
| Non-current | 4,370 | 199 |
| |||||
| (a) | Financial investments correspond mainly to investments in |
| | | | |
|
| 2021 |
| 2020 |
From sales of educational content |
| 676,787 |
| 475,507 |
From related parties (Note 10) |
| 3,608 |
| 3,209 |
|
| 680,395 |
| 478,716 |
(-) Allowance for doubtful accounts |
| (87,132) |
| (63,434) |
|
| 593,263 |
| 415,282 |
| 2018 | 2017 | |||||||
| From sales of educational content | 146,114 | 96,025 | ||||||
| From related parties (Note 10) | 3,916 | 3,444 | ||||||
| 150,030 | 99,469 | |||||||
| (-) Allowance for doubtful accounts | (13,419 | ) | (4,533 | ) | ||||
| 136,611 | 94,936 | |||||||
As of December 31, 20182021 and 2017,2020, the aging of trade receivables was as follows:
| 2018 | 2017 | |||||||||||
| | | | | ||||||||
| 2021 |
| 2020 | |||||||||
| Neither past due nor impaired | 127,387 | 83,441 |
| 567,490 |
| 360,737 | ||||||
| | | | | ||||||||
| Past due | 22,643 | 16,028 |
| 112,905 |
| 117,979 | ||||||
| | | | | ||||||||
| 1 to 60 days | 8,931 | 7,143 |
| 15,383 |
| 26,206 | ||||||
| 61 to 90 days | 3,868 | 2,508 |
| 8,403 |
| 9,973 | ||||||
| 91 to 120 days | 1,978 | 1,789 |
| 10,347 |
| 10,528 | ||||||
| 121 to 180 days | 3,173 | 1,280 |
| 16,284 |
| 18,887 | ||||||
| More than 180 days | 4,693 | 3,308 |
| 62,488 |
| 52,385 | ||||||
| 150,030 | 99,469 | |||||||||||
|
| 680,395 |
| 478,716 | ||||||||
F-43
TableThe Company reviews its bad debt provision at least twice a year following a detailed review of Contentsreceivable balances and historical payment profiles, and assessment of forward-looking risk factors. Management believes all the remaining receivable balances are fully recoverable.
The movement in the allowance for doubtful accounts for the years ended December 31, 20182021, 2020 and 2017,2019, was as follows:
| | | | | | |
|
| 2021 |
| 2020 |
| 2019 |
Balance at beginning of the year |
| (63,434) |
| (30,051) |
| (13,419) |
Additions |
| (26,610) |
| (34,684) |
| (17,392) |
Receivables written off during the period as uncollectible |
| 2,912 |
| 1,301 |
| 760 |
Balance at end of year |
| (87,132) |
| (63,434) |
| (30,051) |
8 Inventories
F-48
| | | | |
|
| 2021 |
| 2020 |
Educational content |
| 75,778 |
| 30,167 |
Educational content in progress (a) |
| 71,314 |
| 37,276 |
Consumables and supplies |
| 2,128 |
| 1,198 |
Inventories held by third parties |
| 9,362 |
| 5,435 |
|
| 158,582 |
| 74,076 |
| ||||
| ||||
|
The increase in 2021 balances is mainly related to:
| ● | Increase from inventories of companies acquired in 2021. |
| 2018 | 2017 | |||||||
| Educational content | 8,335 | 8,494 | ||||||
| Educational content in progress (a) | 6,205 | 10,060 | ||||||
| Consumables and supplies | 286 | 33 | ||||||
| Inventories held by third parties | 305 | 233 | ||||||
| 15,131 | 18,820 | |||||||
(a) Costs being incurred to develop educational content. These costs include incurred personnel costs and third parties’ services for editing educational content and related activities (graphic design, editing, proofreading and layout, among others). Educational content is presented net of inventory reserve. The movement in the inventory reserve for the years ended December 31, 2018, 20172021, 2020 and 20162019 was as follows:
| | | | | | |
|
| 2021 |
| 2020 |
| 2019 |
Balance at beginning of the year |
| (7,510) |
| (6,517) |
| (4,403) |
Inventory reserve |
| (26,778) |
| (7,453) |
| (8,476) |
Write-off of inventories against reserve |
| 8,573 |
| 6,460 |
| 6,362 |
Balance at end of year |
| (25,715) |
| (7,510) |
| (6,517) |
9 Recoverable taxes
| | | | |
|
| 2021 |
| 2020 |
Withholding Income Tax (IRRF) on financial investments (a) |
| 3,079 |
| 2,027 |
Recoverable IRPJ and CSLL |
| 11,400 |
| 8,573 |
Recoverable PIS and COFINS |
| 44,097 |
| 7,250 |
Other recoverable taxes |
| 2,451 |
| 2,575 |
|
| 61,027 |
| 20,425 |
Current |
| 38,811 |
| 19,304 |
Non-current |
| 22,216 |
| 1,121 |
F-44
F-49
| 2018 | 2017 | |||||||
| Withholding Income Tax (IRRF) on financial investments | 5,291 | 6,649 | ||||||
| IRPJ and CSLL recoverable | 5,520 | - | ||||||
| PIS and COFINS recoverable | 1,223 | 969 | ||||||
| Other taxes recoverable | 226 | 782 | ||||||
| 12,260 | 8,400 | |||||||
| Current | 11,227 | 5,112 | ||||||
| Non current | 1,033 | 3,288 | ||||||
Withholding income tax (IRRF) will be utilized to offset federal taxes payable.
10 Related parties
The table below summarizes the balances and transactions with related parties:
| | | | |
|
| 2021 |
| 2020 |
Assets |
|
|
|
|
Trade receivables |
|
|
|
|
Livraria ASC Ltda. and Educadora ASC Ltda. (a) |
| 3,546 |
| 3,209 |
OISA Tecnologia e Serviços Ltda. (g) | | 62 | | — |
| | 3,608 | | 3,209 |
Other assets |
| |
| |
Arco Instituto de Educação (b) | | 1,373 | | — |
| | 1,373 | | — |
Loans to related parties |
|
|
|
|
Minority shareholders - Geekie (c) |
| 4,571 |
| 4,361 |
OISA Tecnologia e Serviços Ltda. (d) |
| — |
| 5,018 |
Minority shareholders - EI (e) |
| 6,750 |
| 11,099 |
Former shareholders - Eduqo (f) | | 4 | | — |
Former shareholders - Edupass (f) | | 65 | | — |
|
| 11,390 |
| 20,478 |
Current |
| 4,571 |
| 9,970 |
Non-current |
| 6,819 |
| 10,508 |
| | | | |
Advances from customers |
|
|
|
|
Livraria ASC Ltda. and Educadora ASC Ltda. (a) |
| 9 |
| 150 |
|
| 9 |
| 150 |
| | | | |
Other liabilities |
|
|
|
|
OISA Tecnologia e Serviços Ltda. (g) |
| 258 |
| 469 |
|
| 258 |
| 469 |
| 2018 | 2017 | |||||||||||
| Assets | ||||||||||||
| Trade receivables | ||||||||||||
| Livraria ASC Ltda. and Educadora ASC Ltda. (a) | 3,916 | 3,444 | ||||||||||
| Other assets | ||||||||||||
| WPensar S.A. (b) | 1,226 | 1,034 | ||||||||||
| 5,142 | 4,478 | |||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Net revenue | ||||||||||||
| Livraria ASC Ltda. and Educadora ASC Ltda. (a) | 8,234 | 8,895 | 5,350 | |||||||||
| Expenses | ||||||||||||
| ASC Empreendimentos Ltda. and OSC Empreendimentos Ltda. (c) | (13 | ) | (21 | ) | (21 | ) | ||||||
(a)SAS Desenvolvimento Educacional Ltda. and International School sell educational content to Livraria ASC Ltda. and Educadora ASC Ltda., entities under common control of the Company’s controlling shareholders. The transactions are priced based on contract price at the sales date.
(b) The amounts receivable from joint venture are monetarily indexed to the BrazilianSistema Especial de Liquidação e Custódia(SELIC) interest rate and have due date in July 2020.
(c) SAS Sistema de Ensino Ltda. had leased a facility from ASC Empreendimentos Ltda., which agreement was terminated in June 2018; SAS Livrarias Ltda. had leased a facility from OSC Empreendimentos Ltda., which agreement was also terminated in June 2018; and SAS Desenvolvimento Educacional Ltda. leases a facility from OSC Empreendimentos Ltda., which are entities under common control of the Company’s controlling shareholder.
| | | | | | |
|
| 2021 |
| 2020 |
| 2019 |
Net revenue |
|
|
|
|
|
|
Livraria ASC Ltda. and Educadora ASC Ltda. (a) |
| 8,831 |
| 7,230 |
| 8,805 |
OISA Tecnologia e Serviços Ltda. (g) | | 226 | | 4 | | — |
| | 9,057 | | 7,234 | | 8,805 |
|
|
|
|
|
|
|
Expenses | | | | | | |
ASC Empreendimentos Ltda. and OSC Empreendimentos Ltda. |
| — |
| (1) |
| (8) |
| | | | | | |
Finance income |
|
|
|
|
|
|
WPensar S.A. |
| — |
| 30 |
| 72 |
Minority shareholders - Geekie(c) |
| 210 |
| 453 |
| 813 |
OISA Tecnologia e Serviços Ltda. (d) | | 19 | | 18 | | — |
Minority shareholders - EI (e) | | 336 | | 18 | | — |
|
| 565 |
| 519 |
| 885 |
F-45
| (a) | Companhia Brasileira de Educação e Sistemas de Ensino and International School sell educational content to Livraria ASC Ltda. and Educadora ASC Ltda., entities under common control of the Company’s controlling shareholders. The transactions are priced based on contract price at the sales date. Sales price for these transactions are conducted at arm’s length, at similar observable market prices. |
F-50
| (b) | Arco is a founding member of Instituto Arco de Educação (“Arco Instituto”), a non-profit association whose purpose is to support and encourage education through the generation of knowledge. The Company has amounts receivable from Arco Instituto arising from the reimbursement of expenses paid by Arco. The amounts are not subject to financial charges and the payment term is under negotiation between the parties. |
| (c) | On January 17, 2019, the Company loaned R$ 4,000 to the current minority shareholders of Geekie, through a loan agreement with payment due in June 2022, interest of 110% of the CDI, and with their entire interest in Geekie’s shares as collateral to the transaction. During the year ended December 31, 2021, the Company recognized R$210 of interest income. The transaction was intended to support Geekie’s working capital needs. |
| (d) | On October 23, 2020, the Company loaned R$5,000 to OISA Tecnologia e Serviços Ltda. (“ISAAC”), an affiliate of the Company, at that date, and which a member of its key management personnel was a Director of the Company until October 9, 2020. The entity is developing a project to assist schools in financial and administrative management. The amount was paid in February 2021 and the Company recognized R$19 of interest income. |
| (e) | Amount due from minority shareholders of Escola da Inteligência, with an interest rate of 100% CDI and maturing in May 2023. During the year, the Company recognized R$336 of interest income. |
| (f) | Amount due from former shareholders of Eduqo and Edupass, which the payment is under negotiation between the parties. The amounts are not subject to financial charges. |
| (g) | WPensar provides financial intermediation services to OISA. Amounts collected by WPensar are transferred to OISA net of the value of the service provided. As of December 31, 2021, the amount to be transferred to OISA is R$ 258, the amount of receivables from services is R$62 and during the year the recognized revenue from financial intermediation was R$226. |
Key management personnel compensation
Key management personnel compensation comprised the following:
| 2018 | 2017 | 2016 | ||||||||||||||||
| | | | | | | ||||||||||||
|
| 2021 |
| 2020 |
| 2019 | ||||||||||||
| Short-term employee benefits | 9,436 | 5,321 | 4,087 |
| 60,845 |
| 39,628 |
| 13,732 | |||||||||
| Share-based compensation plan | 59,747 | 1,359 | 2,043 | |||||||||||||||
| 69,183 | 6,680 | 6,130 | ||||||||||||||||
Restricted stock units |
| 51,231 |
| 48,852 |
| 66,429 | ||||||||||||
|
| 112,076 |
| 88,480 |
| 80,161 | ||||||||||||
Compensation of the Company’s key management includes short-term employee benefits comprised by salaries, bonuses, labor and social charges, and other ordinary short-term employee benefits.
Certain executive officers also participate in the Company’s share-based compensation plan (Note 16b)18.b).
11 Investments and interests in other entities
(a) Investments
Bewater Ventures I GA Fundo de Investimento em Participações Multiestratégia (“Bewater”)
WPensarOn July 24, 2020, the Company, through its subsidiary Companhia Brasileira de Educação e Sistemas de Ensino S.A. (“WPensar”CBE”)
In April 2015, acquired 9,670 Class B quotas of Bewater Ventures I GA Fundo de Investimento em Participações Multiestratégia, a fund managed by Paraty Capital. The Company paid R$9,670, corresponding to a total interest of 14.5% in Bewater. On February 2, 2021, Bewater carried out a new round of capital injection, in which the Company acquired a 25%an additional 27 class B quotas, resulting in an 11.1% interest of WPensar, a company engaged in the development and licensing of software, specifically, school management systems. The Company executed a shareholders’ agreement to share control of WPensar with the other shareholders, recognizing this investment as a joint venture. This investment helped the Company to identify new potential businesses, to enhance its overall growth strategy and to create synergies.
This investment is not a business combination since the Company did not acquire control of WPensar.
In addition, the Company has a call option to acquire the remaining 75% interest in WPensar with an exercise period beginning on July 10, 2020 through July 10, 2021. In addition, the other shareholders have a put option to sell their interest of 75% with an exercise period beginning on July 10, 2021 through July 10, 2022.
The exercise price for the put and call options is calculated by the average of the last three months of the EBITDA multiple that Arco’s stock is being traded, less net debt. If the Company exercises the call option, the settlement can be performed up to 50% in shares of EAS.
The call and put options were recorded at their fair value, calculated through the multiple scenarios method – Monte Carlo. Any adjustmentfund due to the fair value is recognized as finance income/costsdilution of its interest. On August 12, 2021, Bewater had a new round of investments, in the statement of income (loss).
F-46
The Company paid an acquisition price of R$ 5,000 for the interest in WPensar, of which R$ 4,777 refers to the consideration transferred as capital contribution and R$ 223 to the initial recognition of the above said asymmetrical put and call options instrument.
Geekie Desenvolvimento de Softwares S.A. (“Geekie”)
In December 2016, the Company acquired a 6.54%an additional 16 class B quotas, resulting in an 11.0% interest in Geekie, an entitythe fund.
F-51
The fund made a minority investment in Group A, a company that provides technologyeducational solutions for adaptive assessmenthigher education. The investment in Bewater is measured at fair value through profit and learning productsloss.
INCO Limited (“INCO”)
On January 25, 2021, the Company entered into a Share Purchase Agreement with INCO Limited, or INCO, the controlling entity of OISA, a company that provides financial and engages inadministrative services to private schools, according to which 8,571,427 series B ordinary shares were acquired, equivalent to 30% of the production, developmenttotal stock capital of INCO, for a total amount of R$25,000. On April 27, 2021, Arco invested R$ 33,195, and licensing of software tailoredan additional R$ 52,035 on September 27, 2021, and now holds an 26.09% interest due to the specific requirementsdilution of education sector customers. its interest.
As of December 31, 2021, the Company had a gain of R$ 14,022 resulting from the dilution of its interest in INCO’s equity. This amount is recognized in Other income (expenses) in profit and loss.
Based on the agreement signed by Geekie’s shareholders,agreement, the Company does not have control of INCO but exercises significant influence over the investment, asentity since it is one member of INCO’s Board of Directors.
Tera Treinamentos Profissionais Ltda (“Tera”)
On April 9, 2021, the Company: (i) has representationCompany entered into a Share Purchase Agreement with Tera Treinamentos Profissionais Ltda, a company that provides professional courses focused on the boarddevelopment of directors; (ii) participates on strategic decision making regarding all relevant matters; (iii) must approve all products launched by Geekie; and (iv) provides essential technical information (Geekie's products are baseddigital skills, according to which 8,234 shares were acquired, equivalent to 23,43% of the total stock capital of Tera, for a total amount of R$15,000. Based on the Company’s educational content).
The agreed amount of R$ 8,000 was paid in January 2017, of which R$ 4,000 was a capital contribution and R$ 4,000 was paid to the selling shareholders.
The Company agreed with the selling shareholders that if in June 2018 the cash and cash equivalents of Geekie are lower than a threshold of R$ 5,000,signed agreement, the Company willdoes not have to subscribe capital incontrol of Tera but exercises significant influence over the amount of R$ 2,000.entity.
On July 2, 2018, the extraordinary shareholders' meeting authorized the acquisition of additional 1.51% interest in the equity of Geekie, increasing the Company's share from 6.54% to 8.05% through a capital increase of R$ 2,000. The capital increase was fully paid on July 3, 2018. The additional investment did not change the Company's influence in Geekie and had the purpose to support its working capital needs.
In addition, the Company has a call option to acquire the remaining 91.95% in Geekie that can be exercised in the period beginning on May 1, 2022, through May 31, 2022. The selling shareholders have a put option to sell their 91.95% interest in Geekie that can be exercised during the same period. The exercise price is determined by the greater of:
If the Company decides to exercise the option to acquire the remaining interest, the settlement may be performed in up to 50% in shares of EAS.
The call and put options were recorded at fair value, calculated through the multiple scenarios method – Monte Carlo. Any adjustment to the fair value is recognized as finance income (costs) in the statement of income (loss).
F-47
(i) Investments and interests in other entities
Reconciliation of carrying amount:
| International School | Geekie | WPensar | Total | |||||||||||||
| As of December 31, 2015 | 27,973 | - | 4,192 | 32,165 | ||||||||||||
| Capital contributions | - | 5,420 | - | 5,420 | ||||||||||||
| Cash paid / payable to selling shareholders | - | 4,000 | - | 4,000 | ||||||||||||
| Advances for future capital increase * | 5,300 | - | - | 5,300 | ||||||||||||
| Share of loss of equity-accounted investees | (474 | ) | - | (637 | ) | (1,111 | ) | |||||||||
| As of December 31, 2016 | 32,799 | 9,420 | 3,555 | 45,774 | ||||||||||||
| Share of profit (loss) of equity-accounted investees | (384 | ) | (100 | ) | 22 | (462 | ) | |||||||||
| Amortization of identified fair value | - | - | (243 | ) | (243 | ) | ||||||||||
| Consolidation on the acquisition of control | (32,415 | ) | - | - | (32,415 | ) | ||||||||||
| As of December 31, 2017 | - | 9,320 | 3,334 | 12,654 | ||||||||||||
| Share of loss of equity-accounted investees | - | (695 | ) | (97 | ) | (792 | ) | |||||||||
| As of December 31, 2018 | - | 8,625 | 3,237 | 11,862 | ||||||||||||
| | | | | | | | | | |
| | 2021 | | 2020 | ||||||
|
| INCO |
| TERA |
| Bewater |
| Total |
| Total |
At beginning of the year |
| 0 |
| 0 |
| 9,654 |
| 9,654 |
| 48,574 |
Capital contributions |
| 110,230 |
| 15,000 |
| 43 |
| 125,273 |
| 14,170 |
Acquisition from a minority shareholder |
| — |
| — |
| — |
| — |
| 18,458 |
Fair value on investment | | — | | — | | 106 | | 106 | | (16) |
Gain of changes in ownership |
| 14,022 |
| — |
| — |
| 14,022 |
| — |
Share of loss of equity-accounted investees |
| (21,831) |
| (351) |
| — |
| (22,182) |
| 409 |
Consolidation on the acquisition of control |
| — |
| — |
| — |
| — |
| (71,941) |
At end of the year |
| 102,421 |
| 14,649 |
| 9,803 |
| 126,873 |
| 9,654 |
| | | | | | | | | | |
Percentage of ownership |
| 26.09 | % | 23.43 | % | 11.03 | % |
|
|
|
* Advances for future capital increase is mandatorily converted into an investment in International School for a fixed amount of cash and a fixed number of shares.
(ii) Selected financial information for associates and joint ventures
| Geekie | WPensar | |||||||
| December 31, 2018 | ||||||||
| Current assets | 5,215 | 1,625 | ||||||
| Non-current assets | 12,174 | 1,414 | ||||||
| Current liabilities | 7,681 | 286 | ||||||
| Non-current liabilities | - | 1,170 | ||||||
| Equity | 9,708 | 1,583 | ||||||
| Net revenue | 11,084 | 3,965 | ||||||
| Costs and expenses (*) | (18,299 | ) | (4,015 | ) | ||||
| Loss for the year | (7,215 | ) | (50 | ) | ||||
| December 31, 2017 | ||||||||
| Current assets | 8,937 | 1,615 | ||||||
| Non-current assets | 11,503 | 1,394 | ||||||
| Current liabilities | 5,276 | 284 | ||||||
| Non-current liabilities | - | 1,091 | ||||||
| Equity | 15,164 | 1,634 | ||||||
| Net revenue | 14,329 | 3,687 | ||||||
| Costs and expenses (*) | (15,865 | ) | (3,598 | ) | ||||
| Profit (loss) for the year | (1,536 | ) | 89 | |||||
| December 31, 2016 | ||||||||
| Net revenue | 15,601 | 2,470 | ||||||
| Costs and expenses (*) | (15,951 | ) | (4,047 | ) | ||||
| Loss for the year | (350 | ) | (1,577 | ) | ||||
F-48
F-52
12 Property and equipment
Reconciliation of carrying amount:
| Machinery and equipment | Vehicles | Furniture and fixtures | IT equipment | Facilities | Leasehold improvements | Others | Total | |||||||||||||||||||||||||
| Cost | ||||||||||||||||||||||||||||||||
| As of December 31, 2015 | 478 | 191 | 764 | 1,440 | 88 | 2,745 | - | 5,706 | ||||||||||||||||||||||||
| Additions | 97 | - | 258 | 525 | 46 | 665 | - | 1,591 | ||||||||||||||||||||||||
| Disposals | - | - | (2 | ) | - | - | (6 | ) | - | (8 | ) | |||||||||||||||||||||
| As of December 31, 2016 | 575 | 191 | 1,020 | 1,965 | 134 | 3,404 | - | 7,289 | ||||||||||||||||||||||||
| Additions | 219 | - | 583 | 1,021 | 121 | 983 | 2,387 | 5,314 | ||||||||||||||||||||||||
| Business combinations | 49 | - | 155 | 61 | 58 | - | - | 323 | ||||||||||||||||||||||||
| As of December 31, 2017 | 843 | 191 | 1,758 | 3,047 | 313 | 4,387 | 2,387 | 12,926 | ||||||||||||||||||||||||
| Additions | 87 | - | 589 | 2,096 | 12 | 258 | 3,812 | 6,854 | ||||||||||||||||||||||||
| Disposals | (34 | ) | - | (51 | ) | (63 | ) | - | (7 | ) | - | (155 | ) | |||||||||||||||||||
| As of December 31, 2018 | 896 | 191 | 2,296 | 5,080 | 325 | 4,638 | 6,199 | 19,625 | ||||||||||||||||||||||||
| Depreciation | ||||||||||||||||||||||||||||||||
| As of December 31, 2015 | (50 | ) | (50 | ) | (99 | ) | (458 | ) | (26 | ) | (119 | ) | - | (802 | ) | |||||||||||||||||
| Depreciation charge for the year | (53 | ) | (37 | ) | (86 | ) | (305 | ) | (11 | ) | (296 | ) | - | (788 | ) | |||||||||||||||||
| As of December 31, 2016 | (103 | ) | (87 | ) | (185 | ) | (763 | ) | (37 | ) | (415 | ) | - | (1,590 | ) | |||||||||||||||||
| Depreciation charge for the year | (67 | ) | (33 | ) | (139 | ) | (424 | ) | (28 | ) | (375 | ) | (1,191 | ) | (2,257 | ) | ||||||||||||||||
| As of December 31, 2017 | (170 | ) | (120 | ) | (324 | ) | (1,187 | ) | (65 | ) | (790 | ) | (1,191 | ) | (3,847 | ) | ||||||||||||||||
| Depreciation charge for the year | (84 | ) | (24 | ) | (203 | ) | (740 | ) | (35 | ) | (484 | ) | (878 | ) | (2,448 | ) | ||||||||||||||||
| Disposals | - | - | - | 17 | - | - | - | 17 | ||||||||||||||||||||||||
| As of December 31, 2018 | (254 | ) | (144 | ) | (527 | ) | (1,910 | ) | (100 | ) | (1,274 | ) | (2,069 | ) | (6,278 | ) | ||||||||||||||||
| Net book value | ||||||||||||||||||||||||||||||||
| As of December 31, 2017 | 673 | 71 | 1,434 | 1,860 | 248 | 3,597 | 1,196 | 9,079 | ||||||||||||||||||||||||
| As of December 31, 2018 | 642 | 47 | 1,769 | 3,170 | 225 | 3,364 | 4,130 | 13,347 | ||||||||||||||||||||||||
| | | | | | | | | | | | | | | | |
|
| Machinery |
| |
| Furniture |
| |
| |
| |
| |
| |
| | and | | | | and | | IT | | | | Leasehold | | | | |
|
| equipment |
| Vehicles |
| fixtures |
| equipment |
| Facilities |
| improvements |
| Others |
| Total |
Cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019 |
| 1,257 |
| 121 |
| 2,353 |
| 7,272 |
| 80 |
| 10,034 |
| 7,234 |
| 28,351 |
Additions |
| 146 |
| — |
| 1,365 |
| 4,612 |
| 38 |
| 4,239 |
| 422 |
| 10,822 |
Disposals |
| (37) |
| — |
| (114) |
| (1,289) |
| — |
| — |
| (934) |
| (2,374) |
Business combination |
| 625 |
| 186 |
| 325 |
| 2,300 |
| 5 |
| 205 |
| — |
| 3,646 |
As of December 31, 2020 |
| 1,991 |
| 307 |
| 3,929 |
| 12,895 |
| 123 |
| 14,478 |
| 6,722 |
| 40,445 |
Additions |
| 453 |
| — |
| 759 |
| 56,290 |
| 112 |
| 1,381 |
| 1,083 |
| 60,078 |
Disposals |
| (67) |
| — |
| (222) |
| (432) |
| — |
| — |
| (415) |
| (1,136) |
Business combination |
| 10 |
| — |
| 65 |
| 413 |
| — |
| 50 |
| — |
| 538 |
As of December 31, 2021 |
| 2,387 |
| 307 |
| 4,531 |
| 69,166 |
| 235 |
| 15,909 |
| 7,390 |
| 99,925 |
| | | | | | | | | | | | | | | | |
Depreciation |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
As of December 31, 2019 |
| (221) |
| (100) |
| (379) |
| (1,395) |
| (26) |
| (2,225) |
| (2,677) |
| (7,023) |
Depreciation charge for the period |
| (136) |
| (26) |
| (327) |
| (2,279) |
| (9) |
| (2,391) |
| (2,284) |
| (7,452) |
Depreciation of disposals |
| 104 |
| — |
| — |
| 13 |
| — |
| — |
| — |
| 117 |
As of December 31, 2020 |
| (253) |
| (126) |
| (706) |
| (3,661) |
| (35) |
| (4,616) |
| (4,961) |
| (14,358) |
Depreciation charge for the period |
| (391) |
| (72) |
| (478) |
| (4,529) |
| (16) |
| (4,419) |
| (2,021) |
| (11,926) |
Depreciation of disposals |
| 32 |
| — |
| 26 |
| 185 |
| 1 |
| — |
| — |
| 244 |
As of December 31, 2021 |
| (612) |
| (198) |
| (1,158) |
| (8,005) |
| (50) |
| (9,035) |
| (6,982) |
| (26,040) |
| | | | | | | | | | | | | | | | |
Net book value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019 | | 1,036 |
| 21 |
| 1,974 |
| 5,877 |
| 54 |
| 7,809 |
| 4,557 |
| 21,328 |
As of December 31, 2020 |
| 1,738 |
| 181 |
| 3,223 |
| 9,234 |
| 88 |
| 9,862 |
| 1,761 |
| 26,087 |
As of December 31, 2021 |
| 1,775 |
| 109 |
| 3,373 |
| 61,161 |
| 185 |
| 6,874 |
| 408 |
| 73,885 |
The increase in the year ended December 31, 2021, is mainly due to purchase of IT equipment for subsidiary Geekie.
The Company assesses at each reporting date, whether there is an indication that a property and equipment asset may be impaired. If any indication exists, the Company estimates the asset’s recoverable amount. There were no indications of impairment of property and equipment as of and for the years ended December 31, 2018, 20172021, 2020 and 2016.2019.
F-4913 Leases
The balance sheet shows the following amounts relating to leases:
| | | | |
|
| 2021 |
| 2020 |
Right-of-use assets |
|
|
|
|
Properties |
| 35,221 |
| 29,938 |
Machinery and equipment |
| 739 |
| 84 |
|
| 35,960 |
| 30,022 |
| | | | |
|
| 2021 |
| 2020 |
Lease liabilities |
|
|
|
|
Current |
| 20,122 |
| 12,742 |
Non-current |
| 22,996 |
| 22,478 |
|
| 43,118 |
| 35,220 |
F-53
Set out below, are the carrying amounts of the Company’s right-of-use assets and lease liabilities and the movements during the period:
| Goodwill | Rights on contracts | Customer relationships | Educational system | Copyrights
| Software license | Trademarks | Educational platform | Non compete agreement | In Progress | Total | ||||||||||||||||||||||||||||||||||
| Cost | ||||||||||||||||||||||||||||||||||||||||||||
| As of December 31, 2015 | 12,845 | 15,263 | 10,329 | 1,300 | 205 | 195 | 5,604 | 774 | - | - | 46,515 | |||||||||||||||||||||||||||||||||
| Acquisitions | - | - | - | 245 | 2,978 | 417 | 104 | 1,819 | - | - | 5,563 | |||||||||||||||||||||||||||||||||
| Business combination | 20,365 | - | 4,300 | 12,000 | - | - | 5,100 | - | - | - | 41,765 | |||||||||||||||||||||||||||||||||
| As of December 31, 2016 | 33,210 | 15,263 | 14,629 | 13,545 | 3,183 | 612 | 10,808 | 2,593 | - | - | 93,843 | |||||||||||||||||||||||||||||||||
| Acquisitions | - | - | 2,016 | - | 1,925 | 603 | - | 1,503 | - | - | 6,047 | |||||||||||||||||||||||||||||||||
| Disposals | - | - | - | (245 | ) | (160 | ) | - | (105 | ) | (154 | ) | - | - | (664 | ) | ||||||||||||||||||||||||||||
| Business combinations | 56,424 | - | 6,400 | 23,356 | - | 178 | 8,412 | - | 1,097 | - | 95,867 | |||||||||||||||||||||||||||||||||
| As of December 31, 2017 | 89,634 | 15,263 | 23,045 | 36,656 | 4,948 | 1,393 | 19,115 | 3,942 | 1,097 | - | 195,093 | |||||||||||||||||||||||||||||||||
| Acquisitions | - | - | - | - | 7,744 | 1,415 | 62 | 17,969 | - | 2,213 | 29,403 | |||||||||||||||||||||||||||||||||
| As of December 31, 2018 | 89,634 | 15,263 | 23,045 | 36,656 | 12,692 | 2,808 | 19,177 | 21,911 | 1,097 | 2,213 | 224,496 | |||||||||||||||||||||||||||||||||
| Amortization | ||||||||||||||||||||||||||||||||||||||||||||
| As of December 31, 2015 | - | (809 | ) | (797 | ) | (239 | ) | (55 | ) | (33 | ) | (647 | ) | (30 | ) | - | - | (2,610 | ) | |||||||||||||||||||||||||
| Amortization | - | (917 | ) | (2,202 | ) | (677 | ) | (254 | ) | (73 | ) | (627 | ) | (219 | ) | - | - | (4,969 | ) | |||||||||||||||||||||||||
| As of December 31, 2016 | - | (1,726 | ) | (2,999 | ) | (916 | ) | (309 | ) | (106 | ) | (1,274 | ) | (249 | ) | - | - | (7,579 | ) | |||||||||||||||||||||||||
| Amortization | - | (1,041 | ) | (1,925 | ) | (5,211 | ) | (1,012 | ) | (167 | ) | (1,396 | ) | (1,224 | ) | (55 | ) | - | (12,031 | ) | ||||||||||||||||||||||||
| As of December 31, 2017 | - | (2,767 | ) | (4,924 | ) | (6,127 | ) | (1,321 | ) | (273 | ) | (2,670 | ) | (1,473 | ) | (55 | ) | - | (19,610 | ) | ||||||||||||||||||||||||
| Amortization | - | (1,182 | ) | (2,636 | ) | (6,589 | ) | (2,618 | ) | (375 | ) | (1,140 | ) | (2,387 | ) | (219 | ) | - | (17,146 | ) | ||||||||||||||||||||||||
| As of December 31, 2018 | - | (3,949 | ) | (7,560 | ) | (12,716 | ) | (3,939 | ) | (648 | ) | (3,810 | ) | (3,860 | ) | (274 | ) | - | (36,756 | ) | ||||||||||||||||||||||||
| Net book value | ||||||||||||||||||||||||||||||||||||||||||||
| As of December 31, 2017 | 89,634 | 12,496 | 18,121 | 30,529 | 3,627 | 1,120 | 16,445 | 2,469 | 1,042 | - | 175,483 | |||||||||||||||||||||||||||||||||
| As of December 31, 2018 | 89,634 | 11,314 | 15,485 | 23,940 | 8,753 | 2,160 | 15,367 | 18,051 | 823 | 2,213 | 187,740 | |||||||||||||||||||||||||||||||||
| | | | |
| | Right-of-use | | |
| | assets – | | Lease |
|
| Properties |
| Liabilities |
As at January 1, 2020 |
| 21,631 | | 25,857 |
Additions |
| 12,391 | | 12,391 |
Disposal | | (253) | | (244) |
Lease modification (a) |
| 2,080 | | 2,080 |
Depreciation expense |
| (8,537) | | — |
Business combination |
| 2,710 | | 2,710 |
Interest expense |
| — | | 3,036 |
Payments of lease liabilities |
| — | | (8,160) |
Discounts on leases | | — | | (350) |
Interest paid |
| — | | (2,100) |
As at December 31, 2020 | | 30,022 |
| 35,220 |
Additions | | 22,146 | | 22,146 |
Disposal | | (334) | | (329) |
Lease modification (a) | | 200 | | 200 |
Depreciation expense | | (16,456) | | — |
Business combination | | 382 | | 382 |
Interest expense | | — | | 4,795 |
Payments of lease liabilities | | — | | (15,729) |
Discounts on leases | | — | | (273) |
Interest paid | | — | | (3,294) |
As at December 31, 2021 |
| 35,960 |
| 43,118 |
| | | | |
Average annual depreciation rate 2020 | | 27.5 | % | |
Average annual depreciation rate 2021 |
| 29.4 | % |
|
F-50(a) Refers to price adjustments that occur annually as defined in the lease agreements.
The Company entered into fiduciary agreements with Banco Safra S.A. in the amount of R$10,903 to guarantee payment due in the lease agreements of the São Paulo office. This financial agreement bears interest at the rate of 1.95% per annum. The lease payments are adjusted annually by the General Market Price Index (IGP-M).
The Company recognized rent expense from short-term leases and low-value assets of R$2,673 for the year ended December 31, 2021 (2020: R$2,329)
14 Intangible assets and goodwill
F-54
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Software | | | | | | | | | | |
| | | | Rights on | | Customer | | Educational | | | | license and | | | | Educational | | Non-compete | | | | |
|
| Goodwill |
| contracts |
| relationships |
| system |
| Copyrights |
| development |
| Trademarks |
| platform |
| agreement |
| In Progress |
| Total |
| | | | | | | | | | | | | | | | | | | | | | |
Cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019 |
| 916,767 |
| 15,263 |
| 206,971 |
| 251,223 |
| 21,069 |
| 18,412 |
| 355,298 | | 87,987 |
| 8,303 |
| 9,606 |
| 1,890,899 |
Acquisitions |
| — |
| — |
| — |
| — |
| 8,131 |
| 22,127 |
| 3 |
| 51,262 |
| 431 |
| 14,873 |
| 96,827 |
Disposals |
| — |
| — |
| — |
| — |
| (3) |
| (94) |
| — |
| (4,607) |
| — |
| — |
| (4,704) |
Acquisitions through business combinations |
| 477,584 | | — | | 115,172 | | 29,775 | | 14 | | 5,103 | | 121,053 | | 13,102 | | 3,122 | | — | | 764,925 |
Transfer |
| — |
| — |
| — |
| — |
| 249 |
| (231) |
| — |
| 22,604 |
| — |
| (22,622) |
| — |
As of December 31, 2020 |
| 1,394,351 |
| 15,263 |
| 322,143 |
| 280,998 |
| 29,460 |
| 45,317 |
| 476,354 | | 170,348 |
| 11,856 |
| 1,857 |
| 2,747,947 |
Acquisitions (a) |
| — |
| — |
| — |
| — |
| 7,914 |
| 43,569 |
| 101 |
| 75,516 |
| 985 |
| 23,233 |
| 151,318 |
Disposals |
| — |
| — |
| — |
| — |
| — |
| (9) |
| — |
| (252) |
| — |
| — |
| (261) |
Acquisitions through business combinations | | 622,502 | | — | | 26,197 | | 45,138 | | 179 | | 10,023 | | 66,250 | | 39,771 | | 5,450 | | — | | 815,510 |
Finalization of price allocation (b) | | (66,952) | | — | | — | | — | | — | | — | | — | | — | | — | | — | | (66,952) |
Transfer |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 23,018 |
| — |
| (23,018) |
| — |
As of December 31, 2021 |
| 1,949,901 |
| 15,263 |
| 348,340 |
| 326,136 |
| 37,553 |
| 98,900 |
| 542,705 | | 308,401 |
| 18,291 |
| 2,072 |
| 3,647,562 |
| | | | | | | | | | | | | | | | | | | | | | |
Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019 |
| — |
| (5,291) |
| (14,010) |
| (22,234) |
| (11,682) |
| (2,955) |
| (8,241) |
| (13,773) |
| (810) |
| — |
| (78,996) |
Amortization |
| — |
| (1,527) |
| (24,227) |
| (26,941) |
| (6,421) |
| (6,789) |
| (19,074) |
| (35,072) |
| (1,947) |
| — |
| (121,998) |
Amortization of disposals |
| — |
| — |
| — |
| — |
| — |
| 3 |
| — |
| 2,681 |
| — |
| — |
| 2,684 |
As of December 31, 2020 |
| — |
| (6,818) |
| (38,237) |
| (49,175) |
| (18,103) |
| (9,741) |
| (27,315) |
| (46,164) |
| (2,757) |
| — |
| (198,310) |
Amortization |
| — |
| (1,735) |
| (35,368) |
| (33,682) |
| (8,031) |
| (16,561) |
| (26,559) |
| (66,970) |
| (3,236) |
| — |
| (192,142) |
Amortization of disposals |
| — |
| — |
| — |
| — |
| — |
| 11 |
| — |
| 239 |
| — |
| — |
| 250 |
As of December 31, 2021 |
| — |
| (8,553) |
| (73,605) |
| (82,857) |
| (26,134) |
| (26,291) |
| (53,874) |
| (112,895) |
| (5,993) |
| — |
| (390,202) |
| | | | | | | | | | | | | | | | | | | | | | |
Net book value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019 | | 916,767 |
| 9,972 |
| 192,961 |
| 228,989 |
| 9,387 |
| 15,457 |
| 347,057 |
| 74,214 |
| 7,493 |
| 9,606 |
| 1,811,903 |
As of December 31, 2020 |
| 1,394,351 |
| 8,445 |
| 283,906 |
| 231,823 |
| 11,357 |
| 35,576 |
| 449,039 |
| 124,184 |
| 9,099 |
| 1,857 |
| 2,549,637 |
As of December 31, 2021 |
| 1,949,901 |
| 6,710 |
| 274,735 |
| 243,279 |
| 11,419 |
| 72,609 |
| 488,831 |
| 195,506 |
| 12,298 |
| 2,072 |
| 3,257,360 |
(a) | The acquisitions of the period are mainly due to the development of educational content from the 2021 school year, development of technology platforms for the supply of digital content, as well as licenses and software development for new projects. |
(b) | Refers to the Geekie and EI purchase price allocation adjustment made upon completion of the calculation of the fair value of intangible assets in accordance with the period defined by IFRS 3. During the measurement period, the Company obtained new information about facts and circumstances that existed at the acquisition date, mainly related to the change in the projections used to define the purchase price allocation and recognized an adjustment in goodwill and accounts payable to selling shareholders to reflect the new information obtained. |
(a) Goodwill
The carrying amount of goodwill by operating segment was:
| 2018 | 2017 | |||||||||||
| | | | | ||||||||
|
| 2021 |
| 2020 | ||||||||
| Core | 62,036 | 62,036 |
| 1,474,166 |
| 918,091 | ||||||
| Supplemental | 27,598 | 27,598 |
| 475,735 |
| 476,260 | ||||||
| 89,634 | 89,634 | |||||||||||
|
| 1,949,901 |
| 1,394,351 | ||||||||
Impairment test for goodwill
The Company performed its annual impairment test on December 31, 2018, 2017 and 2016. The Company tests at least annually the recoverability of the carrying amount of each operating segment. The process of estimating these values involves the use of assumptions, judgments and estimates of future cash flows that represent the Company'sCompany’s best estimate.
F-55
Goodwill is monitored by management at the level of cash generating unit, which is the same of the two operating segments. The Core and Supplemental operating segments had an important cash flow improvement as they have increased their number of students and achieved greater scale that positively impact the gross margin.
The Company’s management estimates future gross margin based on past performance and its expectations of market developments. The discount rates used are pre-tax and reflect the specific risks associated with the segment being tested.
The value-in-use calculation is based on cash flow projections and financial budgets approved by management for a period of five years. Cash flows beyond the five-year period were extrapolated using an estimated growth rate. The growth rate does not exceed the average long-term rate for the industry. The fair valuevalue-in-use of the Core operating segment calculated for 20182021 was R$ 721,2713,695,227 (R$ 308,7672,372,829 in 2017)2020), and the carrying amount was R$ 265,607.2,849,081. The fair valuevalue-in-use of the Supplemental operating segment for 20182021 was R$ 195,0231,758,097 (R$ 98,5171,349,754 in 2017)2020), and the carrying amount was R$ 37,032.
853,142.
The fair valuevalue-in-use calculations were based on the discounted cash flow model and are based on the following assumptions for those segments:
| | | | | | | | | | | | | |
| | | | | | Growth rate | | | | |
| ||
| | Budget period | | beyond budget | | | | | | ||||
|
| growth rate |
| period |
| Discount rate |
| ||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
|
Core | | 13.8 | % | 9.2 | % | 3.3 | % | 3.2 | % | 11.7 | % | 11.1 | % |
Supplemental |
| 16.4 | % | 17.3 | % | 3.3 | % | 3.2 | % | 12.9 | % | 12.4 | % |
| Budget period | Growth rate beyond budget period | Discount rate | |||||||
| Gross margin | Growth rate | ||||||||
| 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | ||
| Core | 78.8% | 55.8% | 21.1% | 20.5% | 4.0% | 7.0% | 15.7% | 14.8% | |
| Supplemental | 87.4% | 82.9% | 33.0% | 62.7% | 4.0% | 4.0% | 17.6% | 19.4% | |
Significant estimate: impact of possible changes in key assumptions
A decrease of 1,000 basis points in management estimated gross margin used in the value-in-use calculation for the Core operating segment as of December 31, 2018 (68.8% instead of 78.8%)2021 to 79.2%, would have not resulted in the recognition of an impairment
F-51
of goodwill. Also, the Company performed the same sensitivity analysis for the Supplemental operating segment, a decrease to 85.9% and concluded it would have not resulted in the recognition of an impairment of goodwill.
In addition, an increase of 1,000 basis pointsto 11.1% in management’s estimated discount rate applied to the cash flow projections of the Core operating segment for the year ended December 31, 2018 (25.7% instead of 15.7%),2021, would have not resulted in the recognition of an impairment of goodwill.
Also, the Company performed the same sensitivity analysis for the Supplemental operating segment (27.6%(12.4% instead of 17.6%12.9%) and concluded it would have not resulted in the recognition of an impairment of goodwill.
There was no0 goodwill impairment for the years ended December 31, 2018, 20172021, 2020 and 2016.
2019.
(b) Other intangible assets
Intangible assets, other than goodwill, are valued separately for each acquisition and are amortized during eachover their respective useful life.lives. The useful lives and methods of amortization of other intangibles are reviewed at each financial year end and adjusted prospectively, if appropriate.
The estimated useful lives of intangible assets for the years ended December 31, 2018, 2017 and 20162021, are as follows:
| | |
| Years | |
Rights on contracts | 10 | |
Customer relationships | 5 to 16 | |
Educational system | 3 to 10 | |
Copyrights | 3 | |
Software license | 2 to | |
Trademarks | 10 to 20 | |
Educational platform | 3 to 10 | |
Non-compete agreement | 2 to | |
| 5 |
F-56
For the years ended December 31, 2018, 20172021, 2020 and 20162019 there were no indicativesindicators that the Company’s intangible assets with definite lives might be impaired.
15 Loans and financing
| | | | | | | | |
|
| Interest rate |
| Maturity |
| December 31, 2021 |
| December 31, 2020 |
Bank loan | | 100% CDI + 2.7% pa | | December/2021 | | — | | 100,395 |
Bank loan | | 100% CDI + 2.7% pa | | January/2022 | | 201,990 | | 200,788 |
Bank loan | | 8.1% pa | | March/2022 | | 310 | | 1,500 |
Bank loan | | 8.2% pa | | May/2022 | | — | | 8,373 |
Debentures (a) | | 100% CDI + 1.7% pa | | August/2023 | | 919,703 | | — |
Bank loan (b) | | 3.7% pa | | October/2023 | | 62 | | — |
Bank loan (c) | | 3.8% pa | | October/2023 | | 90 | | — |
Bank loan | | 3.8% pa | | November/2023 | | 49 | | 63 |
Bank loan (d) | | USD + 2.4% pa | | October/2024 | | 61,649 | | — |
Convertible notes (e) | | 8.0% pa | | November/2028 | | 647,474 | | — |
| | | | | | 1,831,327 | | 311,119 |
Current | | | | | | 228,448 | | 107,706 |
Non-current | | | | | | 1,602,879 | | 203,413 |
| (a) | This amount is related to issuance of debentures in August 2021 to pay the amount due on the COC and Dom Bosco acquisition and will be settled in a single installment on August 25, 2023. The debentures bear interest of 100% CDI + 1.7% per annum, which will accrue and will also be payable on August 25, 2023. The debentures are guaranteed by Arco Educação S.A. |
| (b) | Loan acquired by Me Salva!, the Company’s subsidiary, for working capital. The amount is being paid monthly until October 2023 and bears interest at the rate of 3.7% per annum. |
| (c) | Loan acquired by Eduqo, the Company’s subsidiary, for working capital. The amount is being paid monthly until October 2023 and bear interest at the rate of 3.8% per annum. |
| (d) | On November 11, 2021, the subsidiary Geekie entered into a loan agreement in the amount of US$11,020 thousand, equivalent to R$ 60,000, with an interest rate of 2.452% per annum. Since the operation was contracted in U.S. dollars, the Company holds swap derivatives to protect its exposure to foreign currency risk, which changes the effective interest rate for this loan to 100% CDI + 1.7% per annum. The loan payments will be paid quarterly in 12 installments, until October 28, 2024. |
| (e) | On November 30, 2021, the Company issued convertible senior notes in the amount of US$150,000 with a value per share of $1.00, equivalent to R$ 825,285. These notes mature in 7 years, on November 15, 2028, and bear interest at 8% per year fixed in Brazilian reais. While the interests are payable quarterly, the principal amount will be paid in a single installment at the mature date, both in cash in United States dollars equivalents to the amount in Brazilian reais at the payment date. |
F-52Each note can be converted at any time during the term of the contract, at the option of the holders, into Arco’s Class A common shares at the agreed conversion rate, which is equivalent to an initial price of US$ 29 per share. Dragoneer and General Atlantic will beneficially own approximately 5.6% and 2.8%, respectively, of the total shares of Arco (on an as-converted basis for the convertible senior notes). See Note 16 for further information.
The holders also have the right to require the Company to repurchase for cash, on any date on or after November 15, 2026, all or portion of the holders’ notes, at a repurchase price that is equal to 100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interests.
F-57
The Company determined that the convertible senior notes have an embedded put option to repurchase the convertible notes for cash. It is an embedded derivative that is not closely related to the contract host debt instrument, because the risks inherent in the derivative (equity risk) and the host are dissimilar. Therefore, the conversion option will be treated separately and classified as a derivative liability, see Note 16 for further information.
The host foreign currency debt will be measured subsequently at amortized cost, using the effective interest rate of 3.61% per annum, and thus is subject to foreign exchange changes.
The initial transaction costs that are directly attributable to the issuance of the convertible notes were measured at fair value together with the financial liability on initial measurement. The transaction cost totaled R$ 13,032, including legal counsels and advisors.
All financing arranged by Company is not subject to any financial covenants for the year ended December 31, 2021.
Set out below the movements during the year:
| | | | |
|
| 2021 |
| 2020 |
Balance at beginning of the year |
| 311,119 |
| 98,561 |
Additions |
| 1,599,880 |
| 502,063 |
Loan cost |
| (21,582) |
| (3,629) |
Business combination |
| 210 |
| 8,836 |
Interest expense |
| 57,245 |
| 19,862 |
Interest paid | | (20,275) | | (13,423) |
Payment of loans and financing |
| (109,815) |
| (301,151) |
Exchange rate variation | | 14,545 | | — |
Balance at end of year |
| 1,831,327 |
| 311,119 |
16Derivative financial assets and liabilities
The breakdown of contingent consideration assets and liabilities and related derivative instruments from business combinations and acquisition of investments in associates and joint venturesfinancial derivatives is as follows:
| 2018 | 2017 | |||||||
| Assets | ||||||||
| Derivative financial instruments | ||||||||
| Investment in Geekie (Note 11) | 23,346 | 8,906 | ||||||
| Investment in WPensar (Note 11) | 3,284 | 3,605 | ||||||
| 26,630 | 12,511 | |||||||
| Current | - | - | ||||||
| Non current | 26,630 | 12,511 | ||||||
| Liabilities | 2018 | 2017 | ||||||
| Derivative financial instruments | ||||||||
| Investment in Geekie (Note 11) | (22,037 | ) | (10,028 | ) | ||||
| Investment in WPensar (Note 11) | (3,006 | ) | (1,720 | ) | ||||
| Deferred revenue in Escola de Aplicação São José dos Campos | (54 | ) | (105 | ) | ||||
| (25,097 | ) | (11,853 | ) | |||||
| Contingent considerations and forward contract | ||||||||
| Investment in Geekie – contingent consideration (Note 11) | - | (1,784 | ) | |||||
| - | (1,784 | ) | ||||||
| (25,097 | ) | (13,637 | ) | |||||
| Current | (51 | ) | (1,784 | ) | ||||
| Non current | (25,046 | ) | (11,853 | ) | ||||
| | |
| 2021 | |
Assets | | |
Financial derivatives | | |
Swap Geekie (a) |
| 861 |
| 861 | |
Current | 301 | |
Non-current | 560 |
| | |
| 2021 | |
Liabilities | | |
Financial derivative | ||
Put option (b) | 223,561 | |
| 223,561 | |
Current | — | |
Non-current | 223,561 |
| (a) | On November 11, 2021, subsidiary Geekie entered into swap contracts to protect a foreign currency loan, with maturities between February 2022 to October 2024, which the active end receives, on average, dollar plus 2.452% per annum and in the liability position it pays, on average, CDI plus 1.7% per annum with fair value receivable of R$861. |
F-58
| (b) | Dragoneer and General Atlantic have a put option to convert their investment in the Company’s senior notes into Class A shares of the Company. The fair value of the put option is calculated using the Black & Scholes method as of December 31, 2021. |
The Company recognized an initial put option of US$32,995 separated from the fair value of the total compound financial instrument issued, comprising the senior notes and the put option. Any adjustment to the fair value is recognized as finance income/costs in the statement of income (loss). See Note 15 for further information.
17 Accounts payable to selling shareholders
The breakdown of the liabilities regarding balances of accounts payable from business combination and investments in associates is as follows:
| 2018 | 2017 | |||||||||||
| | | | | ||||||||
|
| 2021 |
| 2020 | ||||||||
| Accounts payable to selling shareholders |
|
|
|
| ||||||||
| Acquisition of SAE Digital S.A. (a) | - | (11,693 | ) | |||||||||
| Acquisition of International School | (174,410 | ) | (36,630 | ) |
| 379,501 |
| 354,950 | ||||
| Acquisition of NS Educação Ltda. | (6,971 | ) | (9,680 | ) |
| 6,126 |
| 5,724 | ||||
| (181,381 | ) | (58,003 | ) | |||||||||
Acquisition of Escola em Movimento (c) |
| — |
| 1,024 | ||||||||
Acquisition of Nave à Vela (d) |
| — |
| 21,941 | ||||||||
Acquisition of Positivo (e) |
| 754,451 |
| 903,428 | ||||||||
Acquisition of WPensar (f) | | — | | 3,605 | ||||||||
Acquisition of Studos (g) | | 5,472 | | 11,349 | ||||||||
Acquisition of EI (h) | | 234,493 | | 363,502 | ||||||||
Acquisition of Geekie (i) | | 224,759 | | 120,992 | ||||||||
Acquisition of Me Salva! (j) | | 21,880 | | — | ||||||||
Acquisition of Eduqo (k) | | 18,145 | | — | ||||||||
Acquisition of Edupass (l) | | 23,959 | | — | ||||||||
|
| 1,668,786 |
| 1,786,515 | ||||||||
| Current | (830 | ) | (14,936 | ) |
| 799,553 |
| 656,014 | ||||
| Non-current | (180,551 | ) | (43,067 | ) |
| 869,233 |
| 1,130,501 | ||||
| (a) | The amount payable is subject to an arbitration process and will be paid when the arbitration mentioned in Note 28 is completed. The amount payable is based on realized EBITDA for the 2019 and 2020 school years. During the year ended December 31, 2021 the Company recognized R$ 23,373 of interest. Based on the realized EBITDA for the 2019 and 2020 school years, the accounts payable increased by R$ 4,683 of adjustment during the year ended December 31, 2021. |
| (b) | This amount was retained for any contingent liabilities that may arise, which will be released in annual installments until December 31, 2022. The amount is being adjusted based on the Interbank certificates of deposit (CDI) interest rate. |
| (c) | The balance of December 31, 2020, was retained for any contingent liabilities that might arise. The amount was adjusted based on the Brazilian basic interest rate (SELIC).) and settled in 2021. |
| (d) | The balance at December 31, 2020 is related to the 2 tranches for the acquisition of the remaining 49% interest in Nave payable until February 2022. The Company paid the second tranche in February 2021 and on the same date, as agreed between the Company and the minority shareholders, the parties decided to accelerate the last payment. Therefore, on December 31, 2021, the Company has a 100% interest in Nave. During the year ended December 31, 2021, the Company recognized R$705 of interest. |
| (e) | The amount represents the remaining of the acquisition price and will be paid annually in November over 4 years (10% payable 2022 and 30% payable in 2023 and 2024). The payment is secured by a guarantee letter through a chattel mortgage of 20% of CBE shares and 100% of SAE shares. The outstanding amount is updated by CDI. During the year ended December 31, 2021, the Company recognized R$33,969 of interest. |
F-59
| (f) | The amount represents 20% of the acquisition price and was retained for any eventual inaccuracies in the fulfillment of the guarantees given in the purchase and sale agreement. The amount was updated considering 100% of the Interbank certificates of deposit (CDI) calculated from the date of acquisition until the payment date, which occurred on December 31, 2021. |
| (g) | The obligation is recognized at present value of the acquisition price using an estimated interest rate of 8,2% for the last installment due in September 2022. |
| (h) | This amount is related to the acquisition of the remaining 40% interest in EI and will be paid in May 2023 subject to price adjustments. This amount is recorded at the present value using an estimated interest rate of 13.4% (13.1% in 2020). |
On May 14, 2021, the Company concluded the first stage of the Escola da Inteligência acquisition with the payment of R$ 88,000, which added to the R$200,000 paid in December 2020, relates to the 60% of interest in the acquired business.
The last installment is payable on May 31, 2023, for 6 times EI’s ACV book value for 2023 plus cash generation and multiplied for 40%.
During the year ended December 31, 2021, the Company recognized R$31,215 of interest and the accounts payable decreased by R$3,473.
| (i) |
Geekie One: 8 times Geekie’s ACV book value for 2022 less net debt, multiplied by the remaining interest of sellers; or 0.65 times the multiple of the Company’s ACV book value for 2022, multiplied by Geekie’s ACV for 2022, less net debt, multiplied by the remaining interest of sellers. The amount is due on June 1, 2022.
Geekie Others: 8 times Geekie’s revenue for 2022 multiplied by the remaining interest of sellers; or 0.65 times the multiple of the Company’s ACV book value for 2022, multiplied by Geekie’s revenue for 2022, multiplied by the remaining interest of sellers. The amount is due on January 6, 2023.
During the year ended December 31, 2021, the Company recognized R$27,023 of interest and the accounts payable increased by R$80,744, mainly due to increase in expected ACV book value of Geekie One product for 2022, net of the variation of the net debt.
| (j) | The liability is composed of the present value of the balance payable for the remaining 40% interest in Me Salva!, plus the retained amount defined in the contract. The balance is recognized at present value, using a discount rate of 13.7%. The payment of the retained portion is in the amount of R$ 1,324 and will be made in 5 equal annual installments, commencing in June 2022. The payment of the second stage will be made in 2025 and the acquisition price of 40% is calculated based on the estimated 2024 revenue multiplied by 3, less net debt. During |
| (k) | The liability is composed of |
F-53
F-60
| (l) | The liability is composed of the present value of the balance payable for the outstanding installments for settlement of the 100% participation acquired from Edupass, plus the earn out amount defined in the contract. The balance is recognized at present value, using a discount rate of 15.3%. The payment of the outstanding installments is in the amount of R$ |
18 Labor and social obligations
| | | | |
|
| 2021 |
| 2020 |
Bonuses (a) |
| 30,789 |
| 31,046 |
Payroll and social charges |
| 96,343 |
| 53,462 |
Payroll accruals |
| 24,225 |
| 25,582 |
Other labor |
| 6,905 |
| 11,549 |
|
| 158,262 |
| 121,639 |
Current |
| 157,601 |
| 85,069 |
Non-current |
| 661 |
| 36,570 |
(a) Variable remuneration (bonuses)
The Company recorded bonuses related to variable remuneration of employees and management in cost of sales, selling and administrative expenses in the amount of R$ 4,224,24,184, R$ 85018,989 and R$ 61814,519 for the years ended December 31, 2018, 2017,2021, 2020, and 2016,2019, respectively.
(b) Share-based compensation plan
Geekie Plan
ArcoGeekie has its own stock option plan that is granted to employees elected by Management and duly approved by the Board.
Members of the Company’s management participated in the EASThe first stock option plan was approved on December 19, 2017, with share-based compensation plan (EAS plan). As a result of Arco’s IPO,features to be settled in cash and not in equity. On November 27, 2020, the EAS plan migrated to Arco. The Company recognized the new equity instruments granted as replacement equity instruments for the cancelled equity instruments. As a consequence, the Company accounted for the grant of replacement equity instruments as modification of the original granted instruments. The incremental fair value granted is the difference betweenentity reassessed the fair value of the replaced equity instrumentsvested shares in the closing period and updated the liability against share-based compensation plan expenses, reducing the net assets acquired of the Geekie’s opening balance.
On December 1, 2020, after Geekie’s acquisition by Arco, the Company approved, new conditions for granting stock options in the total amount of 31,763 shares. The stock options are exercisable from the date of approval of the new grant agreement, with the vesting period on that date being considered fulfilled.
The new stock options plan is classified as cash settled since all Geekie’s employees have signed a mandatory contract to sell all the options to Arco at exercise date at the same price to be paid to non-controlling selling shareholders and liability is measured at fair value of the granted equity instruments, as of the date the replaced equity instruments were granted.
There were no share options forfeited, exercised and expired under the EAS plan. The Company has accounted for the migration of the plan as all remaining unvested options became vested due to the IPO and, therefore, as of December 31, 2018, all 1,091,039 options under the Arco plan are vested at the end of each reporting period until its effective settlement.
The exercise price of 11.13 (2017: 848,642 and 2016: 565,762 options under the EAS plan). The share-based compensation reserve was also affected by fair value adjustments at migration and the total impact on the consolidated statement of income (loss) was R$ 59,747.
The following table list the inputs to the model used for the Arco plan:
F-54
All options granted became vestedto all beneficiaries is R$ 82.91 as result of the IPO. As consequence, the full impact of the actual plan has been recordeddetermined in the consolidated statementgrant agreements. The beneficiary has the maximum period for exercising the options is up to March 31, 2022, under penalty of income (loss) and in the share-based compensation reserve in equity.
International School plan
International School has its own share options plan, approved by its shareholders on August 4, 2017. International School granted 294,735 share options on its own shares in 2017 to selected key executives. The share options plan was designed to attract and retain key executives.
forfeiture.
The fair value of the shareplan is calculated using the same valuation method as the accounts payable to selling shareholders for the acquisition of the remaining interest. This payable amount was reclassified to current liabilities in 2021, since its due to 2022.
Although the valuation used in both calculations is the same, Arco recorded accounts payable to selling shareholders, and Geekie recorded stock options was estimated atfor employees who remained in the company after the acquisition without the possibility of liquidation in equity as labor and social obligations.
F-61
Restricted stock units
In 2019, the Company implemented a new share-based payment program called restricted stock units (“RSU”) of the holding company Arco Platform Limited for employees of the Company’s subsidiaries and members of the Board of Directors, which will be available for sale by the beneficiaries annually, on their anniversary dates, except for the members of the Board, whose shares are restricted for sale for one year after vesting.
The participant’s right to effectively receive ownership of the restricted shares will be conditioned on the participant’s continuance and performance as an employee, director, or director of any company in the business group from the grant date usinguntil vesting. If a participant leaves the Black & Scholes pricing model, taking into accountgroup or does not achieve the termsproposed performance goal, the participant will be entitled to receive his or her vested shares and conditions ona pro rata amount of the granted and unvested shares, by reference to the vesting period in which the share options were granted.
termination occurred and based on the number of days the participant was employed by us. The share options vesttotal amount will be calculated based on January 1, 2020the proposed goal multiplied by a rate between 80% and can be exercised from January 1, 2020 through April 30, 2020. The exercise price of120%. After the share options is R$1.37vesting period, the restricted shares have the same rights and is adjusted by the Brazilian General Price Index-Market (“IGP-M”) inflation rate. The Company accounts for the International School Planprivileges as an equity-settled plan.
any shareholder.
The following table illustratesreflects the number and movements of share options during 2017:
outstanding shares from the grant date until December 31, 2021:
| | | ||
| | Number of | ||
| | restricted | ||
| stock units | |||
Outstanding at December 31, | 161,231 | |||
Granted (a) | 251,555 | |||
Vested (b) | | (177,331) | ||
Restricted stocks units transferred | (92,561) | |||
Effectively forfeited | (710) | |||
Outstanding at December 31, 2021 | 142,184 |
(a) | These shares granted are adjusted accordingly to a performance program, which can increase or reduce the number of shares that will be transferred after the vesting period. |
(b) | Refers to the total number of shares whose vesting period was fulfilled as defined in the contract (anniversary date), but not yet transferred to the beneficiaries on December 31, 2021. Restricted Shares will be transferred to the participant only after the vesting period has been completed or in the event of contractual termination. |
There were no share options granted, forfeited, exercised and expired inThe total compensation expense for the year ended December 31, 2018.
The compensation expense recognized for the International School Plan in the statement of income (loss) for the years ended December 31, 20182021, including taxes and 2017social charges, was R$ 55051,231, (R$33,160 of principal and R$ 531, respectively.18,071 of taxes and contributions) net of estimated forfeitures. These awards are classified as equity settled.
F-62
The following table details the assumptions used to determine the fair value of these equity instruments was measured on the share options under the International School share option plans:grant date as follows:
| | | | | | | | | | | | | | | | |
| | Final | | | | | | | | | | | | | | Unit |
| | vesting | | | | Total shares | | Total shares | | Total shares | | Total shares | | Average fair value at | | value |
Grant date (a) |
| date |
| Vesting period (% per year) |
| granted |
| cancelled |
| vested (b) |
| outstanding |
| grant date |
| average |
30/04/2019 | | 28/09/2021 | | 3 years (33.33%) | | 542,760 | | (76,277) | | (466,483) | | — | | 68,800 | | 126.76 |
30/06/2019 |
| 30/06/2020 | | 1 year (100%) | | 1,543 | | — | | (1,543) | | — |
| 319 |
| 206.66 |
30/06/2019 |
| 30/06/2020 | | 1 year (100%) | | 1,543 | | — | | (1,543) | | — |
| 274 |
| 177.71 |
15/10/2019 |
| 28/09/2021 | | 3 years (33.33%) | | 37,929 | | (7,683) | | (30,245) | | — |
| 7,593 |
| 200.18 |
23/01/2020 | | 28/09/2022 | | 3 years (33.33%) | | 13,000 | | — | | (9,783) | | 3,910 | | 2,788 | | 214.48 |
02/03/2020 | | 28/09/2022 | | 3 years (33.33%) | | 36,673 | | (1,442) | | (26,774) | | 10,279 | | 8,762 | | 238.93 |
04/03/2020 | | 28/09/2021 | | 3 years (33.33%) | | 13,164 | | — | | (13,164) | | — | | 3,346 | | 254.21 |
03/09/2020 | | 28/09/2022 | | 3 years (33.33%) | | 3,600 | | (1,687) | | (1,913) | | — | | 883 | | 245.18 |
19/11/2020 | | 30/06/2022 | | 1 year (100%) | | 3,562 | | (984) | | (2,030) | | 1,781 | | 772 | | 216.63 |
19/11/2020 | | 30/06/2021 | | 1 year (100%) | | 3,086 | | — | | (3,086) | | — | | 669 | | 216.63 |
10/02/2021 | | 31/03/2023 | | 3 years (33.33%) | | 8,400 | | — | | (5,126) | | 5,275 | | 1,723 | | 205.11 |
10/02/2021 | | 31/03/2024 | | 4 years (20%, 20%, 30%, 30%) | | 50,200 | | (1,145) | | (17,360) | | 35,738 | | 10,296 | | 205.11 |
23/02/2021 | | 30/06/2022 | | 1 year (100%) | | 1,838 | | — | | (1,162) | | 1,838 | | 366 | | 198.87 |
26/02/2021 | | 31/03/2024 | | 4 years (20%, 20%, 30%, 30%) | | 9,366 | | — | | (3,069) | | 5,728 | | 1,841 | | 196.58 |
15/04/2021 | | 30/06/2022 | | 1 year (100%) | | 1,836 | | — | | (1,082) | | 1,836 | | 291 | | 158.28 |
01/06/2021 | | 31/03/2024 | | 4 years (20%, 20%, 30%, 30%) | | 475 | | (74) | | (140) | | 276 | | 70 | | 148.28 |
24/06/2021 | | 31/12/2021 | | 1 year (100%) | | 89,808 | | (548) | | (89,530) | | — | | 14,837 | | 165.21 |
30/09/2021 | | 31/03/2024 | | 4 years (20%, 20%, 30%, 30%) | | 5,000 | | — | | (1,246) | | 3,522 | | 590 | | 118.02 |
30/09/2021 | | 28/09/2023 | | 3 years (33.33%) | | 3,000 | | — | | (1,251) | | 1,761 | | 354 | | 118.02 |
30/09/2021 | | 31/03/2024 | | 4 years (20%, 20%, 30%, 30%) | | 4,000 | | — | | (997) | | 2,817 | | 472 | | 118.02 |
30/09/2021 | | 31/03/2025 | | 4 years (20%, 20%, 30%, 30%) | | 75,000 | | — | | (6,796) | | 66,031 | | 8,852 | | 118.02 |
30/09/2021 | | 31/12/2021 | | 1 year (100%) | | 3,107 | | — | | (3,031) | | — | | 367 | | 118.02 |
30/09/2021 |
| 30/06/2022 | | 1 year (100%) | | 1,543 | | — | | (520) | | 1,392 | | 182 |
| 118.02 |
30/09/2021 | | 30/09/2021 | | 1 year (100%) | | 167 | | — | | (167) | | — | | 20 | | 118.02 |
Total | | | | | | 910,600 | | (89,840) | | (688,041) | | 142,184 | | 134,467 | | |
| The grant date is the date on which the entity and the counterparty (including employee) entered into a share-based payment agreement, that is, when the entity and the counterparty have a shared understanding of |
| (b) | |
|
F-55Matching program
Class A shares (at no additional cost to the participant) that were acquired by the participant at fair market value (“investment shares”), using the amounts received by the participant as a short term incentive and designated by the Company’s board of directors to be used as an investment in investment shares, provided certain vesting conditions are satisfied.
a. Share capitalUnder the matching shares program, participants are required to (i) be employed or providing services to the Company through each vesting date, as set forth in the applicable award agreement and (ii) hold the investment shares through each vesting date. The vesting period may not exceed five years. In addition, upon each vesting date, a portion of the investment shares will become free of restrictions and the participant will be allowed to freely sell such shares.
All Class A shares, including the investment shares acquired by the participants of the Matching Program, vest over four years, on March 31 of each year.
As of December 31, 2018,2021, the Company transferred 9,841 investment shares under the Matching Program with an average price of R$ 192.2.
F-63
19 Equity
a. Share capital
As of December 31, 2021, Arco’s share capital is represented by 50,261,02756,851,399 common shares of par value of US$ 0.00005 each, comprised by 27,658,290of 27,400,848 Class B common shares and 22,602,73729,450,551 Class A common shares.
| | |
December 31, 2020 shares outstanding | 57,587,563 | |
Restricted Stock Units Transferred (Note 18.b) | 17,878 | |
Restricted Stock Unit withheld (a) | (4,042) | |
Cancellation of shares repurchased | (750,000) | |
December 31, 2021 shares outstanding | 56,851,399 |
| (a) | A portion of the shares was withheld to pay income taxes of the beneficiaries. |
The Class B common shares are entitled to 10 votes per share and the Class A common shares, which are publicly traded, are entitled to one1 vote per share. The Class B common shares are convertible into an equivalent number of Class A common shares and generally convert into Class A common shares upon transfer subject to limited exceptions.
The dual class structure will exist as long as the total number of issued and outstanding Class B common shares is at least 10% of the total number of shares outstanding.
b. Treasury shares
b. Capital reserveRepurchase program
Capital reserve includes additional paid in capital amounts relatedOn January 6, 2021, the Company’s Board of Directors approved a share repurchase program, or the Repurchase Program, to comply with management long-term incentive plan obligations. Pursuant to the difference betweenRepurchase Program, the subscription price that shareholders paid for theCompany may repurchase up to 500,000 of our outstanding Class A common shares and their nominal value.in the open market, based on prevailing market prices, or in privately negotiated transactions, over a period beginning on January 6, 2021, continuing until the earlier of the completion of the repurchase or January 6, 2023, depending upon market conditions.
On March 31, 2021, the Company approved to increase the share repurchase limit of its existing share repurchase program established on January 6, 2021. Pursuant to the increased repurchase limit, Arco may repurchase up to 2,500,000 million of its outstanding Class A common shares in the open market, based on prevailing market prices, or in privately negotiated transactions, over a period beginning on March 31, 2021, continuing until the earlier of the completion of the repurchase or January 6, 2023, depending upon market conditions.
c. DividendsThe following table reflects the movements of treasury shares repurchased until December 31, 2021:
| | |
| Number of | |
| | restricted |
| stock units | |
As at December 31, 2020 | 0 | |
Repurchase |
| 1,480,061 |
Transferred – RSU’s program | (124,745) | |
Cancelled | (750,000) | |
As at December 31, 2021 | 605,316 |
As determined by the Brazilian Corporate Law, EAS is required to pay a minimum dividend amounting to 25% of the profit of the year. Any amount in excess to 25% must be maintained in equity and after approval by the shareholders, the dividends can be considered formally declared.
The table below provides the calculations of dividends for the years ended December 31, 2017 and 2016.
| 2017 | 2016 | |||||||
| Profit for the year attributable to equity holders of the parent | 44,255 | 75,129 | ||||||
| (-) Legal reserve - 5% | (2,213 | ) | (3,756 | ) | ||||
| Calculation basis for dividend distribution | 42,042 | 71,373 | ||||||
| Minimum mandatory dividend - 25% | (10,511 | ) | (17,843 | ) | ||||
| Additional dividends proposed | - | (57,210 | ) | |||||
| Total | (10,511 | ) | (75,053 | ) | ||||
On September 25, 2017, the extraordinary general shareholders’ meeting declared and approved the distribution of dividends for the year ended December 31, 2016 of R$ 75,053, which R$ 57,210 represented additional dividends and were registered in earnings reserve.
For the year ended December 31, 2017,2021, the Company recorded minimum mandatory dividendshas a total of R$ 10,511.605,316 of treasury Class A common shares with an average price of US$ 22.4.
F-56
F-64
On June 29, 2018, the shareholders’ meeting of Arco Brazil approved a dividend distribution of R$ 85,000 which was paid on July 4, 2018.20 Earnings (loss) per share (EPS)
Basic
Basic EPS is calculated by dividing profit (loss) attributable to the equity holders of the parent by the weighted average number of Class A and Class B common shares outstanding during the period.
Diluted
Diluted EPS is calculated by dividing profit (loss) attributable to the equity holders of the parent by the weighted average number of Class A and Class B common shares outstanding during the period plus the weighted average number of common shares that would be issued on conversion of all potential common shares with dilutive effects.
The following table reflects the profit (loss) attributable to equity holders of the parent and the share data used in the basic and diluted EPS computations:
| 2018 | 2017 | |||||||||||||||||||||||||||||||||||||||||
| Class A | Class B | Total | Class A | Class B | Total | |||||||||||||||||||||||||||||||||||||
| Profit (loss) attributable to equity holders of the parent | (37,047 | ) | (45,333 | ) | (82,380 | ) | 19,902 | 24,353 | 44,255 | |||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||
| | 2021 | | 2020 | | 2019 | ||||||||||||||||||||||||||||||||||||
|
| Class A |
| Class B |
| Total |
| Class A |
| Class B |
| Total |
| Class A |
| Class B |
| Total | ||||||||||||||||||||||||
(Loss) profit attributable to equity holders of the parent |
| (70,929) |
| (87,154) | | (158,083) |
| 8,534 |
| 8,246 |
| 16,780 |
| (4,379) |
| (5,052) |
| (9,431) | ||||||||||||||||||||||||
| Weighted average number of common shares outstanding (thousand) | 22,603 | 27,658 | 22,603 | 27,658 |
| 22,300 |
| 27,401 |
| 49,701 |
| 28,357 |
| 27,401 |
| 55,758 |
| 23,938 |
| 27,614 |
| 51,552 | ||||||||||||||||||||
| Effects of dilution from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
| Share-based compensation plan (thousands) | - | - | 931 | - |
| 142 |
| — |
| |
| 161 |
| — |
| |
| 337 |
| — |
| | ||||||||||||||||||||
| Basic earnings (loss) per share - R$ | (1.64 | ) | (1.64 | ) | 0.88 | 0.88 | ||||||||||||||||||||||||||||||||||||
| Diluted earnings (loss) per share - R$ | (1.64 | ) | (1.64 | ) | 0.85 | 0.85 | ||||||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||
Basic (loss) earnings per share - R$ |
| (3.18) |
| (3.18) |
|
|
| 0.30 |
| 0.30 |
|
|
| (0.18) |
| (0.18) |
|
| ||||||||||||||||||||||||
Diluted (loss) earnings per share - R$ |
| (3.18) |
| (3.18) |
|
|
| 0.30 |
| 0.30 |
|
|
| (0.18) |
| (0.18) |
|
| ||||||||||||||||||||||||
| 2016 | ||||||||||||
| Class A | Class B | Total | ||||||||||
| Profit attributable to equity holders of the parent | 33,786 | 41,343 | 75,129 | |||||||||
| Weighted average number of common shares outstanding (thousand) | 22,603 | 27,658 | ||||||||||
| Effects of dilution from: | ||||||||||||
| Share-based compensation plan (thousands) | 931 | - | ||||||||||
| Basic earnings per share - R$ | 1.49 | 1.49 | ||||||||||
| Diluted earnings per share - R$ | 1.44 | 1.45 | ||||||||||
The number of Class A and Class B common shares outstanding was retrospectively adjusted due to the issuance of new shares as a result of the IPO and the corporate reorganization, described in Note 1.
F-57
Diluted profit (loss) per share is calculated by the weighted average number of outstanding shares, in order to assume the conversion of all potential dilutive shares. Diluted earnings per share is calculated considering the instruments that may have a potential dilutive effect in the future, such as share-based payment instruments, using the treasury shares method when the effect is dilutive. However, due to the loss reported for the year ended December 31, 2018, these instruments issued have antidilutive effect and, therefore, were not considered in the computation of diluted loss per share.
21 Revenue
The Company’s net revenue is as follows:
| 2018 | 2017 | 2016 | ||||||||||||||||
| | | | | | | ||||||||||||
|
| 2021 |
| 2020 |
| 2019 | ||||||||||||
| Educational content | 407,599 | 277,596 | 186,838 |
| 1,218,687 |
| 998,373 |
| 570,292 | |||||||||
| Other | 4,102 | 2,385 | 201 |
| 17,237 |
| 4,534 |
| 2,820 | |||||||||
| Deductions | ||||||||||||||||||
Deductions: |
|
|
|
|
|
| ||||||||||||
| Taxes | (264 | ) | (154 | ) | (6 | ) |
| (3,850) |
| (1,197) |
| (275) | ||||||
| Returns and discounts | (30,456 | ) | (35,445 | ) | (27,763 | ) | ||||||||||||
| Net revenue | 380,981 | 244,382 | 159,270 |
| 1,232,074 |
| 1,001,710 |
| 572,837 | |||||||||
| 2018 | 2017 | |||||||||||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||
| | 2021 | | 2020 | | 2019 | ||||||||||||||||||||||||||||||||||||
| Segments | Core | Supplemental | Total | Core | Supplemental | Total |
| Core |
| Supplemental |
| Total |
| Core |
| Supplemental |
| Total |
| Core |
| Supplemental |
| Total | ||||||||||||||||||
| Type of goods or service |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
| Educational content | 299,203 | 77,940 | 377,143 | 216,661 | 25,425 | 242,086 |
| 931,187 |
| 283,650 |
| 1,214,837 |
| 839,383 |
| 157,793 |
| 997,176 |
| 433,326 |
| 136,853 |
| 570,179 | ||||||||||||||||||
| Other | 3,828 | 10 | 3,838 | 2,296 | - | 2,296 |
| 4,812 |
| 12,425 |
| 17,237 |
| 1,762 |
| 2,772 |
| 4,534 |
| 46 |
| 2,612 |
| 2,658 | ||||||||||||||||||
| Total net revenue from contracts with customers | 303,031 | 77,950 | 380,981 | 218,957 | 25,425 | 244,382 |
| 935,999 |
| 296,075 |
| 1,232,074 |
| 841,145 |
| 160,565 |
| 1,001,710 |
| 433,372 |
| 139,465 |
| 572,837 | ||||||||||||||||||
| Timing of revenue recognition | ||||||||||||||||||||||||||||||||||||||||||
| Transferred at a point in time | 303,031 | 77,950 | 380,981 | 218,957 | 25,425 | 244,382 | ||||||||||||||||||||||||||||||||||||
| Total net revenue from contracts with customers | 303,031 | 77,950 | 380,981 | 218,957 | 25,425 | 244,382 | ||||||||||||||||||||||||||||||||||||
| 2016 | ||||||||||||
Segments | Core | Supplemental | Total | |||||||||
| Type of goods or service | ||||||||||||
| Educational content | 159,075 | - | 159,075 | |||||||||
| Other | 195 | - | 195 | |||||||||
| Total net revenue from contracts with customers | 159,270 | - | 159,270 | |||||||||
| Timing of revenue recognition | ||||||||||||
| Transferred at a point in time | 159,270 | - | 159,270 | |||||||||
| Total net revenue from contracts with customers | 159,270 | - | 159,270 | |||||||||
F-58
F-65
The Company’s revenues from contracts with customers are all in Brazil.
The Company recognized impairment losses on trade receivables arising from contracts with customers, included under selling expenses in the statement of income (loss) of R$ 9,588,26,610, R$ 5,22734,684 and R$ 5,61317,392 for the years ended December 31, 2018, 20172021, 2020 and 2016,2019, respectively.
RevenuesRevenue Indirect tax benefits
TheAccording to Brazilian tax laws, the Company is not subjectedsubject to the paymenttaxation, with a zero tax rate, of the social integration program tax (Programa de Integração Social, or PIS) and the social contribution on revenues tax (Contribuição para o Financiamento da Seguridade Social, or COFINS) on the sale of books. The sale of printed and digital books is also exempt from the Brazilian municipal taxes and from the Brazilian value added tax (Imposto sobre Operações relativas à Circulação de Mercadorias e sobre Prestações de Serviços de Transporte Interestadual e Intermunicipal e de Comunicação, or ICMS).
F-5922 Expenses by nature
| | | | | | |
|
| 2021 |
| 2020 |
| 2019 |
Educational content material |
| (118,812) |
| (122,401) |
| (61,953) |
Operations personnel |
| (39,358) |
| (24,731) |
| (12,500) |
Inventory reserves |
| (26,778) |
| (7,453) |
| (8,476) |
Freight |
| (24,831) |
| (16,452) |
| (14,569) |
Depreciation and amortization |
| (55,873) |
| (35,007) |
| (15,311) |
Other |
| (28,755) |
| (15,086) |
| (4,449) |
Cost of sales |
| (294,407) |
| (221,130) |
| (117,258) |
| | | | | | |
Sales personnel |
| (210,055) |
| (167,300) |
| (87,352) |
Depreciation and amortization |
| (99,459) |
| (77,343) |
| (23,573) |
Sales & marketing |
| (46,795) |
| (24,104) |
| (31,208) |
Customer support |
| (89,200) |
| (53,893) |
| (30,755) |
Allowance for doubtful accounts |
| (26,610) |
| (34,684) |
| (17,392) |
Real estate rentals |
| (820) |
| (965) |
| (1,728) |
Other |
| (23,359) |
| (13,980) |
| (7,772) |
Selling expenses |
| (496,298) |
| (372,269) |
| (199,780) |
| | | | | | |
Corporate personnel |
| (96,626) |
| (74,437) |
| (53,443) |
Third party services |
| (78,530) |
| (80,254) |
| (43,415) |
Real estate rents |
| (1,802) |
| (1,623) |
| (2,613) |
Travel expenses |
| (1,541) |
| (2,233) |
| (3,439) |
Tax expenses |
| (7,324) |
| (7,341) |
| (2,331) |
Software licenses |
| (7,411) |
| (5,909) |
| (1,487) |
Share-based compensation plan |
| (88,198) |
| (69,846) |
| (66,978) |
Depreciation and amortization |
| (39,553) |
| (15,105) |
| (9,430) |
Other |
| (7,658) |
| (13,810) |
| (8,302) |
General and administrative expenses |
| (328,643) |
| (270,558) |
| (191,438) |
| | | | | | |
Total |
| (1,119,348) |
| (863,957) |
| (508,476) |
The increase in expenses for the year ended December 31, 2021, compared to the previous year, is mainly due to inclusion of the companies as mentioned in Note 4.
In addition, during the year ended December 31, 2021, the companies acquired last year contributed with R$ 39,172 (2020: R$ 8,004) of cost of sales and with R$ 114,343 (2020: R$ 27,135) of expenses. In the same period, the companies acquired in 2021 contributed with R$ 20,945 of cost of sales and with R$ 22,258 of expenses.
F-66
23 Finance result
| | | | | | |
|
| 2021 |
| 2020 |
| 2019 |
Income from financial investments |
| 43,845 |
| 2,263 |
| 18,443 |
Changes in fair value of financial investments (a) |
| 13 |
| 17,111 |
| 28,886 |
Changes in fair value of financial derivatives (b) |
| 1,699 |
| 16,147 |
| 18,599 |
Foreign exchange gains |
| 20,551 |
| 1,930 |
| 1,745 |
Changes in accounts payable to selling shareholders (Note 17) | | 18,357 | | — | | — |
Interest income |
| 4,656 |
| 4,721 |
| 1,042 |
Other |
| 2,091 |
| 3,039 |
| 3,332 |
Finance income |
| 91,212 |
| 45,211 |
| 72,047 |
| | | | | | |
Changes in fair value of financial derivatives (b) |
| (38,990) |
| (15,585) |
| (18,126) |
Changes in accounts payable to selling shareholders (Note 17) |
| (106,177) |
| (20,330) |
| (89,403) |
Interest in acquisition of investments (c) |
| (121,611) |
| (68,379) |
| (42,206) |
Bank fees |
| (8,647) |
| (4,937) |
| (2,990) |
Foreign exchange loss |
| (22,323) |
| (1,742) |
| (2,300) |
Interest in lease liabilities |
| (4,795) |
| (3,036) |
| (1,489) |
Interest on loans and financing | | (57,245) | | (19,862) | | (1,002) |
Other |
| (12,298) |
| (8,142) |
| (13,339) |
Finance costs |
| (372,086) |
| (142,013) |
| (170,855) |
Finance result |
| (280,874) |
| (96,802) |
| (98,808) |
| (a) |
| 2018 | 2017 | 2016 | ||||||||||
| Content providing | 41,551 | 34,452 | 22,224 | |||||||||
| Operations personnel | 11,477 | 10,979 | 9,176 | |||||||||
| Inventory reserves | 7,252 | 4,481 | 4,533 | |||||||||
| Freight | 7,687 | 4,087 | 2,656 | |||||||||
| Depreciation and amortization | 5,869 | 3,161 | 464 | |||||||||
| Other | 6,909 | 1,357 | 2,271 | |||||||||
| Cost of sales | 80,745 | 58,517 | 41,324 | |||||||||
| Sales personnel | 49,041 | 26,721 | 16,598 | |||||||||
| Depreciation and amortization | 11,939 | 9,799 | 4,505 | |||||||||
| Sales & marketing | 17,931 | 9,319 | 6,078 | |||||||||
| Customer support | 17,274 | 8,173 | 4,054 | |||||||||
| Allowance for doubtful accounts | 9,588 | 5,227 | 5,613 | |||||||||
| Real estate rentals | 1,923 | 1,751 | 993 | |||||||||
| Other | 5,574 | 4,324 | 2,476 | |||||||||
| Selling expenses | 113,270 | 65,314 | 40,317 | |||||||||
| Corporate personnel | 39,382 | 24,633 | 14,700 | |||||||||
| Third party services | 14,269 | 7,814 | 5,160 | |||||||||
| Real estate rents | 3,429 | 1,625 | 1,327 | |||||||||
| Travel expenses | 2,891 | 2,034 | 615 | |||||||||
| Tax expenses | 2,858 | 1,716 | 1,256 | |||||||||
| Software licenses | 1,098 | 1,128 | 285 | |||||||||
| Royalties | - | - | 473 | |||||||||
| Fines | - | - | 2,390 | |||||||||
| Share-based compensation plan | 60,297 | 1,890 | 2,043 | |||||||||
| Depreciation and amortization | 1,786 | 1,328 | 788 | |||||||||
| Other | 3,744 | 6,763 | 3,613 | |||||||||
| General and administrative expenses | 129,754 | 48,931 | 32,650 | |||||||||
| Total | 323,769 | 172,762 | 114,291 | |||||||||
F-60
| (b) |
| 2018 | 2017 | 2016 | ||||||||||
| Income from financial investments | 11,633 | 11,415 | 14,800 | |||||||||
| Changes in fair value of financial investments | 4,322 | - | - | |||||||||
| Changes in fair value of derivative instruments (a) | 19,839 | 258 | 32,233 | |||||||||
| Foreign exchange gains (d) | 138 | - | - | |||||||||
| Other | 686 | 858 | 134 | |||||||||
| Finance income | 36,618 | 12,531 | 47,167 | |||||||||
| Changes in fair value of derivative instruments (a) | (19,180 | ) | (6,915 | ) | (203 | ) | ||||||
| Changes in fair value of contingent consideration (a) | - | - | (348 | ) | ||||||||
| Changes in accounts payable to selling shareholders (b) | (130,378 | ) | - | - | ||||||||
| Interest expenses (c) | (9,781 | ) | (11,179 | ) | (90 | ) | ||||||
| Financial discounts granted | (1,911 | ) | (1,266 | ) | (449 | ) | ||||||
| Bank fees | (1,390 | ) | (310 | ) | (163 | ) | ||||||
| Foreign exchange loss (d) | (34,573 | ) | - | - | ||||||||
| Other | (1,582 | ) | (719 | ) | (550 | ) | ||||||
| Finance costs | (198,795 | ) | (20,389 | ) | (1,803 | ) | ||||||
| Finance result | (162,177 | ) | (7,858 | ) | 45,364 | |||||||
| (c) | Refer |
F-67
24 Income taxes
| (a) |
| | | | | | | |
|
| 2021 |
| 2020 |
| 2019 |
|
(Loss) profit before income taxes |
| (173,657) |
| 39,102 |
| (42,534) |
|
Combined statutory income taxes rate - % (a) |
| 34 | % | 34 | % | 34 | % |
Expected income tax benefit (expense) at statutory rates |
| 59,043 |
| (13,295) |
| 14,462 |
|
Reconciliation adjustments: |
|
|
|
|
|
|
|
Share of profit (loss) of equity-accounted investees (b) |
| (7,542) |
| 139 |
| (612) |
|
Effect of presumed profit of subsidiaries (c) |
| 3,266 |
| 9,552 |
| 18,593 |
|
Permanent differences (d) |
| (22,648) |
| (7,427) |
| (1,714) |
|
Stock option (e) | | (12,569) | | (6,986) | | — | |
Other additions (exclusions), net |
| (3,976) |
| (4,305) |
| 2,374 |
|
|
| 15,574 |
| (22,322) |
| 33,103 |
|
| | | | | | | |
Current |
| (65,609) |
| (87,379) |
| (46,850) |
|
Deferred |
| 81,183 |
| 65,057 |
| 79,953 |
|
Income taxes benefit (expense) |
| 15,574 |
| (22,322) |
| 33,103 |
|
| | | | | | | |
Effective rate |
| 9.0 | % | 57.1 | % | 77.8 | % |
| (a) |
| (b) |
(a) Reconciliation of income taxes expense
| 2018 | 2017 | 2016 | ||||||||||
| Profit (loss) before income taxes | (100,901 | ) | 66,356 | 92,838 | ||||||||
| Combined statutory income taxes rate - % | 34 | % | 34 | % | 34 | % | ||||||
| 34,306 | (22,561 | ) | (31,565 | ) | ||||||||
| Income taxes at statutory rates | ||||||||||||
| Reconciliation adjustments: | ||||||||||||
| Share of loss of equity-accounted investees (a) | (269 | ) | (240 | ) | (378 | ) | ||||||
| Effect of presumed profit of subsidiaries (b) | 11,080 | 907 | 13,523 | |||||||||
| Permanent differences (c) | (26,097 | ) | - | - | ||||||||
| Other additions (exclusions), net | (1,035 | ) | (822 | ) | (23 | ) | ||||||
| Income taxes benefit (expense) | 17,985 | (22,716 | ) | (18,443 | ) | |||||||
| Effective rate | (17.8 | )% | 34.2 | % | 19.9 | % | ||||||
| Refers to the effect of 34% on the share of profit (loss) of investees for the year. |
| (c) | Brazilian tax law establishes that companies that generate gross revenues of up to R$78,000 in the prior fiscal year may calculate income taxes as a percentage of gross revenue, using the presumed profit income tax regime. The Company’s subsidiaries adopted this tax regime and the effect of the presumed profit of subsidiaries represents the difference between the taxation based on this method and the amount that would be due based on the statutory rate applied to the taxable profit of the subsidiaries. |
F-61
profit income tax regime. The Company’s subsidiaries adopted this tax regime and the effect of the presumed profit of subsidiaries represents the difference between the taxation based on this method and the amount that would be due based on the statutory rate applied to the taxable profit of the subsidiaries.
| (d) |
| (e) | Related to the effect of 34% of Geekie’s share-based compensation plan |
F-68
(b) Deferred income taxes
The changes in the deferred tax assets and liabilities are as follows:
| 2015 | Profit or loss | 2016 | Profit or loss | 2017 | Change in accounting practice | As of January 1, 2018 | Profit or loss | Equity | 2018 | |||||||||||||||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | ||||||||||||||||||||||||||||||||||||||||
|
| |
| |
| |
| |
| |
| |
| | ||||||||||||||||||||||||||||||||||||||||
| | | | Profit | | Business | | | | Profit | | Business | | | ||||||||||||||||||||||||||||||||||||||||
|
| 2019 |
| or loss |
| combination |
| 2020 |
| or loss |
| combination |
| 2021 | ||||||||||||||||||||||||||||||||||||||||
| Deferred tax assets |
|
|
|
|
|
|
|
| |
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||
| Tax losses carryforward | - | 3,613 | 3,613 | (6 | ) | 3,607 | - | 3,607 | 757 | - | 4,364 |
| 16,283 |
| 48,481 |
| — |
| 64,764 | | 39,565 |
| — |
| 104,329 | |||||||||||||||||||||||||||||
| Temporary differences |
|
|
|
|
|
|
|
| | |
|
|
|
| ||||||||||||||||||||||||||||||||||||||||
| Financial instruments from acquisition of interests | 722 | 269 | 991 | 6,888 | 7,879 | - | 7,879 | 51,287 | - | 59,166 |
| 106,729 |
| 10,664 |
| — |
| 117,393 | | 57,198 |
| — |
| 174,591 | ||||||||||||||||||||||||||||||
| Other temporary differences | 1,354 | 779 | 2,133 | 1,501 | 3,634 | 1,450 | 5,084 | 1,501 | - | 6,585 |
| 29,325 |
| 2,392 |
| 15,098 |
| 46,815 | | 14,917 |
| 3,137 |
| 64,869 | ||||||||||||||||||||||||||||||
| Share base compensation | 1,061 | 695 | 1,756 | 461 | 2,217 | - | 2,217 | (2,217 | ) | - | - |
| 7,960 |
| (1,487) |
| — |
| 6,473 | | 3,904 |
| — |
| 10,377 | |||||||||||||||||||||||||||||
| Tax benefit from tax deductible goodwill (a) | - | - | - | - | - | - | - | - | 46,314 | 46,314 | ||||||||||||||||||||||||||||||||||||||||||||
Tax benefit from tax deductible goodwill |
| 14,888 |
| (3,341) |
| — |
| 11,547 | | (3,515) |
| — |
| 8,032 | ||||||||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | - | 117 | 117 | 1,088 | 1,205 | - | 1,205 | 77 | - | 1,282 |
| 6,673 |
| 10,148 |
| — |
| 16,821 | | 5,340 |
| — |
| 22,161 | ||||||||||||||||||||||||||||||
| Total deferred tax assets | 3,137 | 5,473 | 8,610 | 9,932 | 18,542 | 1,450 | 19,992 | 51,405 | 46,314 | 117,711 |
| 181,858 |
| 66,857 |
| 15,098 |
| 263,813 | | 117,409 |
| 3,137 |
| 384,359 | ||||||||||||||||||||||||||||||
| Deferred tax liabilities |
|
|
|
|
|
|
|
| |
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||
| Financial instruments from acquisition of interests | - | (11,041 | ) | (11,041 | ) | (1,373 | ) | (12,414 | ) | - | (12,414 | ) | (5,752 | ) | - | (18,166 | ) |
| (23,873) |
| 14,642 |
| — |
| (9,231) | | — |
| — |
| (9,231) | |||||||||||||||||||||||
Tax benefit from tax deductible goodwill | | — | | (15,678) | | — | | (15,678) | | (38,219) | | — | | (53,897) | ||||||||||||||||||||||||||||||||||||||||
| Other temporary differences | (169 | ) | 86 | (83 | ) | (265 | ) | (348 | ) | - | (348 | ) | (1,115 | ) | - | (1,463 | ) |
| (1,237) |
| (764) |
| — |
| (2,001) | | 1,993 | | — |
| (8) | |||||||||||||||||||||||
| Total deferred tax liabilities | (169 | ) | (10,955 | ) | (11,124 | ) | (1,638 | ) | (12,762 | ) | - | (12,762 | ) | (6,867 | ) | - | (19,629 | ) |
| (25,110) |
| (1,800) |
| — |
| (26,910) | | (36,226) |
| — |
| (63,136) | ||||||||||||||||||||||
| Deferred tax assets (liabilities), net | 2,968 | (5,482 | ) | (2,514 | ) | 8,294 | 5,780 | 1,450 | 7,230 | 44,538 | 46,314 | 98,082 |
| 156,748 |
| 65,057 |
| 15,098 |
| 236,903 | | 81,183 |
| 3,137 |
| 321,223 | ||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | ||||||||||||||||||||||||||||||||||||||||
| Deferred tax assets | 2,968 | 3,719 | 5,860 | 7,310 | 99,460 |
| 156,748 |
|
|
|
|
| 236,903 | |
|
|
|
| 321,223 | |||||||||||||||||||||||||||||||||||
| Deferred tax liabilities | - | (6,233 | ) | (80 | ) | (80 | ) | (1,378 | ) |
| — |
|
|
|
|
| — | |
|
|
|
| — | |||||||||||||||||||||||||||||||
F-62
As of December 31, 2018,2021, the Company had unrecognized deferred income tax assets in the amount of R$ 3,545 (2017:4,387 (2020: R$ 1,006)1,489) with respect to tax loss carryforward. The net operating losses carried forward do not expire, however, their compensation is limited to 30% of the annual taxable income. The recognition of the deferred income tax assets is supported by the Company’s forecasts of the future profitability and historical results.
25 Segment information
Segment information is presented consistently with the internal reports provided to the Company’s main key executives and chief operating decision makers. They are responsible for allocating resources, assessing the performance of the operating segments, and making the Company’s strategic decisions.
The Executive Officers have defined the operating segments based on the reports used to make structured strategic decisions, which allow for decision-making based on these structures:
| (i) | Core: The Core Curriculum business segment provides solutions that address the Brazilian K-12 curriculum requirements through a personalized and interactive learning experience. Students access content in various formats, such as digital, video, print, and other audiovisual formats that are aligned with the daily curriculum of their classes; |
| (ii) | Supplemental: The Supplemental Solutions business segment provide additional value-added content that private schools can opt, in addition to the Core Curriculum solution. Currently, the Company’s primary Supplemental product is an English as a second language (ESL) bilingual teaching program. Technological solutions for communication with the students’ parents, learning laboratories that use the methodology of maker culture, a platform of questions to students and teachers, a Learning Management System (LMS) platform, an educational as a benefit platform and content to develop socio emotional skills are also offered. |
F-69
The Executive Officers do not make strategic decisions or evaluate performance based on geographic regions. Currently, the Company operates solely in Brazil and mainly all the assets, liabilities and results are allocated in Brazil. Also, based on the agreements signed with private schools as of December 31, 2018 and 2017,2021, none of the customers individually represented more than 5% of total revenue.
| | | | | | |
| | 2021 | ||||
|
| Core |
| Supplemental |
| Total |
Net revenue |
| 935,999 |
| 296,075 |
| 1,232,074 |
Cost of sales |
| (228,474) |
| (65,933) |
| (294,407) |
Gross profit |
| 707,525 |
| 230,142 |
| 937,667 |
Selling expenses |
| (396,369) |
| (99,929) |
| (496,298) |
Segment profit | | 311,156 | | 130,213 | | 441,369 |
General and administrative expenses |
| — |
| — |
| (328,643) |
Other income (expenses), net |
| — |
| — |
| 16,673 |
Operating profit |
| — |
| — |
| 129,399 |
Finance income |
| — |
| — |
| 91,212 |
Finance costs |
| — |
| — |
| (372,086) |
Share of loss of equity-accounted investees |
| — |
| — |
| (22,182) |
Loss before income taxes |
| — |
| — |
| (173,657) |
Income taxes benefit |
| — |
| — |
| 15,574 |
Net loss for the year |
| — |
| — |
| (158,083) |
| | | | | | |
Other disclosures |
| | | | | |
Depreciation and amortization |
| 177,564 |
| 17,321 |
| 194,885 |
Investments in associates and joint ventures |
| 126,873 |
| — |
| 126,873 |
Capital expenditures |
| 186,846 |
| 24,550 |
| 211,396 |
F-63
| | | | | | |
| | 2020 | ||||
|
| Core |
| Supplemental |
| Total |
Net revenue |
| 841,145 |
| 160,565 |
| 1,001,710 |
Cost of sales |
| (190,893) |
| (30,237) |
| (221,130) |
Gross profit |
| 650,252 |
| 130,328 |
| 780,580 |
Selling expenses |
| (309,816) |
| (62,453) |
| (372,269) |
Segment profit | | 340,436 | | 67,875 | | 408,311 |
General and administrative expenses |
| — |
| — |
| (270,558) |
Other income (expenses), net |
| — |
| — |
| (2,258) |
Operating profit |
| — |
| — |
| 135,495 |
Finance income |
| — |
| — |
| 45,211 |
Finance costs |
| — |
| — |
| (142,013) |
Share of loss of equity-accounted investees |
| — |
| — |
| 409 |
Profit before income taxes |
| — |
| — |
| 39,102 |
Income taxes expense |
| — |
| — |
| (22,322) |
Net profit for the year |
| — |
| — |
| 16,780 |
| | | | | | |
Other disclosures |
| | | | | |
Depreciation and amortization |
| 118,416 |
| 9,039 |
| 127,455 |
Investments in associates and joint ventures |
| 9,654 |
| — |
| 9,654 |
Capital expenditures |
| 95,672 |
| 11,977 |
| 107,649 |
F-70
| 2018 | ||||||||||||||||||||
| Core | Supplemental | Total reportable segments | Adjustments and eliminations | Total | ||||||||||||||||
| Revenue | 303,031 | 77,950 | 380,981 | - | 380,981 | |||||||||||||||
| Cost of sales | (70,903 | ) | (9,842 | ) | (80,745 | ) | - | (80,745 | ) | |||||||||||
| Gross profit | 232,128 | 68,108 | 300,236 | - | 300,236 | |||||||||||||||
| Selling expenses | (87,186 | ) | (26,084 | ) | (113,270 | ) | - | (113,270 | ) | |||||||||||
| Segment profit | 144,942 | 42,024 | 186,966 | - | 186,966 | |||||||||||||||
| General and administrative expenses | - | - | - | - | (129,754 | ) | ||||||||||||||
| Other income (expenses), net | - | - | - | - | 4,856 | |||||||||||||||
| Operating profit | - | - | - | - | 62,068 | |||||||||||||||
| Finance income | - | - | - | - | 36,618 | |||||||||||||||
| Finance costs | - | - | - | - | (198,795 | ) | ||||||||||||||
| Share of loss of equity-accounted investees | - | - | - | - | (792 | ) | ||||||||||||||
| Loss before income taxes | - | - | - | - | (100,901 | ) | ||||||||||||||
| Income taxes income | - | - | - | - | 17,985 | |||||||||||||||
| Loss for the year | - | - | - | - | (82,916 | ) | ||||||||||||||
| Total assets | 1,273,107 | 62,006 | 1,335,113 | (235 | ) | 1,334,878 | ||||||||||||||
| Total liabilities | 254,744 | 10,485 | 265,229 | (235 | ) | 264,994 | ||||||||||||||
| Other disclosures | ||||||||||||||||||||
| Depreciation and amortization | 17,997 | 1,597 | 19,594 | - | 19,594 | |||||||||||||||
| Investments in associates and joint ventures | 11,862 | - | 11,862 | - | 11,862 | |||||||||||||||
| Capital expenditures | 28,165 | 8,092 | 36,257 | - | 36,257 | |||||||||||||||
F-64
| 2017 | ||||||||||||||||||||||||||
| Core | Supplemental | Total reportable segments | Adjustments and eliminations | Total | ||||||||||||||||||||||
| Revenue | 218,957 | 25,425 | 244,382 | - | 244,382 | |||||||||||||||||||||
| | | | | | | ||||||||||||||||||||
| | 2019 | ||||||||||||||||||||||||
|
| Core |
| Supplemental |
| Total | ||||||||||||||||||||
Net revenue |
| 433,372 |
| 139,465 |
| 572,837 | ||||||||||||||||||||
| Cost of sales | (54,317 | ) | (4,200 | ) | (58,517 | ) | - | (58,517 | ) |
| (97,513) |
| (19,745) |
| (117,258) | |||||||||||
| Gross profit | 164,640 | 21,225 | 185,865 | - | 185,865 |
| 335,859 |
| 119,720 |
| 455,579 | |||||||||||||||
| Selling expenses | (56,318 | ) | (8,996 | ) | (65,314 | ) | - | (65,314 | ) |
| — |
| — |
| (199,780) | |||||||||||
| Segment profit | 108,322 | 12,229 | 120,551 | - | 120,551 | |||||||||||||||||||||
| General and administrative expenses | - | - | - | - | (48,931 | ) |
| — |
| — |
| (191,438) | ||||||||||||||
| Other income (expenses), net | - | - | - | - | 3,299 |
| — |
| — |
| (6,287) | |||||||||||||||
| Operating profit | - | - | - | - | 74,919 |
| — |
| — |
| 58,074 | |||||||||||||||
| Finance income | - | - | - | - | 12,531 |
| — |
| — |
| 72,047 | |||||||||||||||
| Finance costs | - | - | - | - | (20,389 | ) |
| — |
| — |
| (170,855) | ||||||||||||||
| Share of loss of equity-accounted investees | - | - | - | - | (705 | ) |
| — |
| — |
| (1,800) | ||||||||||||||
| Profit before income taxes | - | - | - | - | 66,356 | |||||||||||||||||||||
| Income taxes expense | - | - | - | - | (22,716 | ) | ||||||||||||||||||||
| Profit for the year | - | - | - | - | 43,640 | |||||||||||||||||||||
| Total assets | 408,321 | 24,658 | 432,979 | (2,570 | ) | 430,409 | ||||||||||||||||||||
| Total liabilities | 118,304 | 8,940 | 127,244 | (2,570 | ) | 124,674 | ||||||||||||||||||||
Loss before income taxes |
| — |
| — |
| (42,534) | ||||||||||||||||||||
Income taxes benefit |
| — |
| — |
| 33,103 | ||||||||||||||||||||
Net loss for the year |
| — |
| — |
| (9,431) | ||||||||||||||||||||
| | | | | | | ||||||||||||||||||||
| Other disclosures |
|
|
|
|
|
| ||||||||||||||||||||
| Depreciation and amortization | 12,650 | 1,638 | 14,288 | - | 14,288 |
| 43,854 |
| 4,460 |
| 48,314 | |||||||||||||||
| Investments in associates and joint ventures | 12,654 | - | 12,654 | - | 12,654 |
| 48,574 |
| — |
| 48,574 | |||||||||||||||
| Capital expenditures | 7,183 | 4,200 | 11,383 | - | 11,383 |
| 45,851 |
| 8,242 |
| 54,093 | |||||||||||||||
F-65
| 2016 | ||||||||||||||||||||
| Core | Supplemental | Total reportable segments | Adjustments and eliminations | Total | ||||||||||||||||
| Revenue | 159,270 | - | 159,270 | - | 159,270 | |||||||||||||||
| Cost of sales | (41,324 | ) | - | (41,324 | ) | - | (41,324 | ) | ||||||||||||
| Gross profit | 117,946 | - | 117,946 | - | 117,946 | |||||||||||||||
| Selling expenses | (40,317 | ) | - | (40,317 | ) | - | (40,317 | ) | ||||||||||||
| Segment profit | 77,629 | - | 77,629 | - | 77,629 | |||||||||||||||
| General and administrative expenses | - | - | - | - | (32,650 | ) | ||||||||||||||
| Other income (expenses), net | - | - | - | - | 3,606 | |||||||||||||||
| Operating profit | - | - | - | - | 48,585 | |||||||||||||||
| Finance income | - | - | - | - | 47,167 | |||||||||||||||
| Finance costs | - | - | - | - | (1,803 | ) | ||||||||||||||
| Share of loss of equity-accounted investees | - | - | - | - | (1,111 | ) | ||||||||||||||
| Profit before income taxes | - | - | - | - | 92,838 | |||||||||||||||
| Income taxes expense | - | - | - | - | (18,443 | ) | ||||||||||||||
| Profit for the year | - | - | - | - | 74,395 | |||||||||||||||
| Other disclosures | ||||||||||||||||||||
| Depreciation and amortization | 5,757 | - | 5,757 | - | 5,757 | |||||||||||||||
| Capital expenditures | 7,154 | - | 7,154 | - | 7,154 | |||||||||||||||
Capital expenditures consist of additions of property and equipment and intangible assets. There were no0 inter-segment revenues in the years ended December 31, 2018, 20172021, 2020 and 2016.
2019.
Segment performance is evaluated based on segment profit and is measured consistently with profit or loss in the consolidated financial statements. General and administrative expenses, other income (expenses), net, finance result, share of profit (loss) of equity-accounted investees and income taxes are managed on a Company basis and are not allocated to operating segments.
Segment profit or loss excludes general and administrative expenses, other income (expenses), net, finance result, share of profit (loss) of equity-accounted investees and income taxes to demonstrate the results without the influence of shared service center expenses or significant items of income and expenses which may have an impact on quality of earnings such as restructuring costs, legal expenses, and impairments.
Segment assets, liabilities and results
There were no adjustments or eliminations in the profit or loss between segments. Segment assets and liabilities are measured in the same way as in the financial statements. These assets and liabilities are allocated based on the operations of the segment.
| | | | | | | | | | |
|
| |
| |
| Total |
| Adjustments |
| |
| | | | | | reportable | | and | | |
|
| Core |
| Supplemental |
| segments |
| eliminations |
| Total |
As of December 31, 2021 |
|
|
|
|
|
|
|
|
|
|
Total assets |
| 5,637,667 |
| 378,520 |
| 6,016,187 |
| (26,068) |
| 5,990,119 |
Total liabilities |
| 4,048,511 |
| 92,442 |
| 4,140,953 |
| (26,068) |
| 4,114,885 |
| | | | | | | | | | |
As of December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
Total assets |
| 4,342,905 |
| 253,480 |
| 4,596,385 |
| (20,105) |
| 4,576,280 |
Total liabilities |
| 2,316,545 |
| 78,956 |
| 2,395,501 |
| (20,105) |
| 2,375,396 |
All adjustments and eliminations are part of detailed reconciliations presented above.
(a) Reconciliations
(i)Segment profit
Segment profit excludes general and administrative expenses, other income (expenses), net, finance result, share of profit (loss) of equity-accounted investees and income taxes in order to demonstrate the results without the influence of shared
F-66
F-71
service center expenses or significant items of income and expenses which may have an impact on the quality of earnings such as restructuring costs, legal expenses, and impairments.
There were no adjustments or eliminations in the profit or loss between segments.
26 Financial instruments
The Company holds the following financial instruments:
| | | | | | | ||||||||||||
|
| Assets at FVPL |
| Assets at amortized cost |
| Total | ||||||||||||
Financial assets | Assets at FVPL | Assets at amortized cost | Total | | | | | | | |||||||||
| December 31, 2018 | ||||||||||||||||||
December 31, 2021 |
|
|
|
|
|
| ||||||||||||
Cash and cash equivalents |
| — |
| 211,143 |
| 211,143 | ||||||||||||
Financial investments |
| — |
| 1,014,056 |
| 1,014,056 | ||||||||||||
| Trade receivables | - | 136,611 | 136,611 |
| — |
| 593,263 |
| 593,263 | |||||||||
| Financial investments | 2,370 | 808,789 | 811,159 | |||||||||||||||
| Financial instruments from acquisition of interests | 26,630 | - | 26,630 | |||||||||||||||
| Cash and cash equivalents | 12,301 | - | 12,301 | |||||||||||||||
| 41,301 | 945,400 | 986,701 | ||||||||||||||||
| Assets at FVPL | Loans and receivables | Total | ||||||||||||||||
| December 31, 2017 | ||||||||||||||||||
| Trade receivables | - | 94,936 | 94,936 | |||||||||||||||
| Financial investments | 36,686 | 46,522 | 83,208 | |||||||||||||||
| Financial instruments from acquisition of interests | 12,511 | - | 12,511 | |||||||||||||||
| Cash and cash equivalents | 834 | - | 834 | |||||||||||||||
| 50,031 | 141,458 | 191,489 | ||||||||||||||||
Derivative financial assets |
| 861 |
| — |
| 861 | ||||||||||||
Related parties | | — | | 11,390 | | 11,390 | ||||||||||||
Investments and interests in other entities | | 9,803 | | — | | 9,803 | ||||||||||||
Other assets (Instituto Arco) | | — | | 1,373 | | 1,373 | ||||||||||||
|
| 10,664 |
| 1,831,225 |
| 1,841,889 | ||||||||||||
| | | | | | |
|
| Assets at FVPL |
| Assets at amortized cost |
| Total |
December 31, 2020 |
|
|
|
|
|
|
Cash and cash equivalents |
| — |
| 424,410 |
| 424,410 |
Financial investments |
| 17,645 |
| 705,349 |
| 722,994 |
Trade receivables |
| — |
| 415,282 |
| 415,282 |
Related parties | | — | | 20,478 | | 20,478 |
Other assets | | 9,654 | | — | | 9,654 |
|
| 27,299 |
| 1,565,519 |
| 1,592,818 |
| | | | | | |
| | | | Liabilities at | | |
|
| Liabilities at FVPL |
| amortized cost |
| Total |
Financial liabilities | | | | | | |
December 31, 2021 |
|
|
|
|
|
|
Trade payables |
| — |
| 103,292 |
| 103,292 |
Derivative financial liabilities |
| 223,561 |
| — |
| 223,561 |
Accounts payable to selling shareholders (a) |
| 867,264 |
| 801,522 |
| 1,668,786 |
Leases liabilities |
| — |
| 43,118 |
| 43,118 |
Loans and financing |
| — |
| 1,831,327 |
| 1,831,327 |
|
| 1,090,825 |
| 2,779,259 |
| 3,870,084 |
December 31, 2020 |
|
|
|
|
|
|
Trade payables |
| — |
| 40,925 |
| 40,925 |
Accounts payable to selling shareholders (a) |
| 861,385 |
| 925,130 |
| 1,786,515 |
Leases liabilities | | — |
| 35,220 |
| 35,220 |
Loans and financing | | — |
| 311,119 |
| 311,119 |
|
| 861,385 |
| 1,312,394 |
| 2,173,779 |
F-67
| (a) | The Company measures at fair value through profit or loss the contingent consideration arising from business combinations in accordance with IFRS 3. |
| Financial liabilities | Liabilities at FVPL | Liabilities at amortized cost | Total | |||||||||
| December 31, 2018 | ||||||||||||
| Trade payables | - | 14,845 | 14,845 | |||||||||
| Financial instruments from acquisition of interests | 25,097 | - | 25,097 | |||||||||
| Accounts payable to selling shareholders | - | 181,381 | 181,381 | |||||||||
| 25,097 | 196,226 | 221,323 | ||||||||||
| December 31, 2017 | ||||||||||||
| Trade payables | - | 3,918 | 3,918 | |||||||||
| Financial instruments from acquisition of interests | 13,637 | - | 13,637 | |||||||||
| Accounts payable to selling shareholders | - | 58,003 | 58,003 | |||||||||
| 13,637 | 61,921 | 75,558 | ||||||||||
The Company’s exposure to certain risks associated with the financial instruments is discussed in Note 25.
27.
The maximum exposure to credit risk at the end of the reporting period is the carrying amount of each class of financial assets mentioned above.
F-72
(a) Financial instruments at fair value through profit or loss
Financial investments
TheUntil December 31, 2020, the Company designated part of its financial investments as financial assets at fair value through profit or loss, related to multimarket investment fund which investments were entered to achieve 102.3%82.9% of the CDI. The Company designated these investments at fair value through profit or loss, given the swaps exist solely for the counterparty to deliver a fixed return on CDI. This investment was settled in 2021 and no other financial investment was recognized at fair value through profit or loss. See Note 6 for more details on the financial investments.
Derivative instruments
assets and liabilities
The Company acquired entities under business combinationsmaintains put options from investments and through the acquisition of interests in associates and joint ventures. The share purchase agreements contain put and call options and forward contracts thatswap derivatives to protect its exposure to foreign currency risk, specifically for loans contracts. These derivatives are also measured at fair value through profitand are presented as financial assets when the fair value results in a gain, and as financial liabilities when the fair value results in a loss. Any gains or loss.
losses from these derivatives are recognized directly in the income statement.
As of and for the years ended December 31, 2018, 20172021, 2020 and 20162019 none of the Company’s derivatives havehas been designated as hedges for accounting purposes.
(ii) Amounts recognized in profit or loss
Changes in fair values of financial instruments at fair value through profit or loss are recorded in finance income (costs)(expenses) in profit or loss (gain of R$ 659, loss861, gain of R$ 6,657562 and gain of R$ 31,682473 for the years ended in December 31, 2018, 20172021, 2020 and 2016,2019, respectively).
F-68
(b) Recognized fair value measurements
(i) Fair value hierarchy
The table below explains the judgements and estimates made in determining the fair values of the financial instruments that are recognized and measured at fair value through profit or loss in the consolidated financial statements. To provide an indication about the reliability of the inputs used in determining fair value, the Company has classified its financial instruments into the three levels.
Assets and liabilities are measured and recognized at fair value as follows:
| Hierarchy | 2018 | 2017 | ||||||||||||||||
| | | | | | | ||||||||||||
|
| Hierarchy |
| 2021 |
| 2020 | ||||||||||||
| Financial assets |
|
|
|
|
|
| ||||||||||||
| Cash and cash equivalents | Level 2 | 12,301 | 834 | |||||||||||||||
| Financial investments | Level 2 | 2,370 | 36,686 |
| Level 2 |
| — |
| 17,645 | |||||||||
| Derivative financial instruments | Level 3 | 26,630 | 12,511 | |||||||||||||||
Derivative financial assets |
| Level 2 |
| 861 |
| — | ||||||||||||
Investments at fair value | | Level 1 | | 9,803 | | 9,654 | ||||||||||||
| | | | | | | ||||||||||||
| Financial liabilities |
|
|
| |
|
| ||||||||||||
| Derivative financial instruments | Level 3 | 25,097 | 13,637 | |||||||||||||||
Derivative financial iliabilities |
| Level 3 |
| 223,561 |
| — | ||||||||||||
Accounts payable to selling shareholders |
| Level 3 |
| 867,264 |
| 861,385 | ||||||||||||
As of December 31, 20182021, and 2017,2020, the Company assessed the fair values of its financial instruments. This assessment does not indicate fair values significantly different from the carrying amounts. The estimated realizable values of financial assets and liabilities were determined based on available market information and appropriate valuation methodologies.
The Company’s policy is to recognize transfers into and transfers out of fair value hierarchy levels as at the end of the reporting period.
F-73
There were no transfers between levels for recurring fair value measurements during the financial statementsstatements’ periods presented herein.
(ii) Valuation techniques used to determine fair values
Specific valuation techniques used to value financial instruments include:
| the use of quoted market prices or dealer quotes for similar instruments; |
| the fair value of derivatives is calculated with Black & Scholes; and |
| the fair value of the remaining financial instruments is determined using discounted cash flow analysis. |
All of the resulting fair value estimates are included in level 2 except for contingent consideration and certain derivative contracts, where the fair values have been determined based on present values and the discount rates used were adjusted for counterparty or own credit risk.
F-69
If the inputs used to measure the fair value of an asset or a liability fall into different levels of the fair value hierarchy, then the fair value measurement is categorized in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement.
(iii) Fair value measurements using significant unobservable inputs (level 3)
The following table presents the changes in level 3 items for the years ended December 31, 2018, 20172021, 2020 and 2016.2019
| Recurring fair value measurements | Financial instruments from acquisition of interests (assets) | Financial instruments from acquisition of interests (liabilities) | ||||||
| Balance as of December 31, 2015 | 2,901 | (20,474 | ) | |||||
| Acquisitions | 8,851 | (29,724 | ) | |||||
| Deferred revenue in Escola de Aplicação São José dos Campos | - | (201 | ) | |||||
| Disposals | (2,501 | ) | - | |||||
| Gains/(losses) recognized in statement of income | 11,359 | 20,323 | ||||||
| Balance as of December 31, 2016 | 20,610 | (30,076 | ) | |||||
| Acquisitions | - | (364 | ) | |||||
| Disposals | (4,542 | ) | 19,852 | |||||
| Deferred revenue in Escola de Aplicação São José dos Campos | - | 51 | ||||||
| Losses recognized in statement of income | (3,557 | ) | (3,100 | ) | ||||
| Balance as of December 31, 2017 | 12,511 | (13,637 | ) | |||||
| Payment of capital increase in Geekie | - | 2,000 | ||||||
| Deferred revenue in Escola de Aplicação São José dos Campos | - | 50 | ||||||
| Gains (losses) recognized in statement of income (loss) | 14,119 | (13,510 | ) | |||||
| Balance as of December 31, 2018 | 26,630 | (25,097 | ) | |||||
| | | | | | |
| | Financial instruments | | Financial instruments | | Accounts payable to |
Recurring fair value measurements |
| Assets |
| liabilities |
| selling shareholders |
Balance as of December 31, 2018 |
| 26,630 |
| (25,097) |
| (174,410) |
Acquisition of Nave à Vela |
| — |
| — |
| (58,194) |
Payment of acquisition of Nave à Vela |
| — |
| — |
| 21,098 |
Changes in accounts payable to selling shareholders |
| — |
| — |
| (89,403) |
Interest expense |
| — |
| — |
| (35,127) |
Deferred revenue in Escola de Aplicação São José dos Campos Ltda. |
| — |
| 54 |
| — |
Fair value held in step acquisitions |
| — |
| — |
| 7,368 |
Gains (loss) recognized in statement of income |
| 9,316 |
| (8,897) |
| — |
Balance as of December 31, 2019 |
| 35,946 |
| (33,940) |
| (328,668) |
Acquisitions | | — | | — | | (478,209) |
Payment | | — | | — | | 9,520 |
Changes in accounts payable to selling shareholders |
| — |
| — |
| (20,314) |
Interest expense |
| — |
| — |
| (43,714) |
Gains (loss) recognized in statement of income |
| (35,946) |
| 33,940 |
| — |
Balance as of December 31, 2020 |
| 0 |
| 0 |
| (861,385) |
Acquisitions | | — | | — | | (33,411) |
Derivative liabilities | | — | | (185,409) | | — |
Payment | | — | | — | | 119,950 |
Changes in accounts payable to selling shareholders |
| — |
| — |
| (87,706) |
Changes in fair value of derivatives | | — | | (38,152) | | — |
Interest expense |
| — |
| — |
| (71,664) |
Finalization of price allocation (Note 14.b) |
| — |
| — |
| 66,952 |
Balance as of December 31, 2021 |
| — |
| (223,561) |
| (867,264) |
(iv) Transfers between levels 2 and 3
In the years ended December 31, 2018, 20172021, 2020 and 2016,2019, the Company did not transfer any financial instruments from level 2 into level 3.
F-74
(v) Valuation processes
The finance department of the Company performs and reviews the valuations of items required for financial reporting purposes, including level 3 fair values. Discussions of valuation processes and results conform with the Company’s yearly reporting periods. Also, the Company hires specialists to measure fair value of certain financial assets and liabilities independently.
F-70
The main level 3 inputs used by the Company are derived and evaluated as follows:
| Discount rates for financial assets and financial liabilities are determined using a capital asset pricing model to calculate a pre-tax rate that reflects current market assessments of the time value of money and the risk specific to the asset. |
| Risk adjustments specific to the counterparties (including assumptions about credit default rates) are derived from observable market data of credit risk grading. |
| Earnings growth factors for unlisted equity securities are estimated based on market information for similar types of companies. |
| Contingent consideration – expected cash outflows are estimated based on the terms of the business combinations and the entity’s knowledge of the business as well as how the current economic environment is likely to impact it. |
27 Risk
(a) Financial risk management
The Company monitors market, credit, and operational risks in line with the objectives in capital management and counts with the support, monitoring, and oversight of the Board of Directors in decisions related to capital management and its alignment with the objectives and risks. The Company monitors the effectiveness of the Company’s risk management.
The sensitivity analyses in the following sections relate to the position as of December 31, 2018.2021.
Capital management
The Company’s objectives when managing capital are to:
| maximize shareholder value; |
| safeguard its ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders; and |
| maintain an optimal capital structure to reduce the cost of capital. |
In order to maintain or alter the capital structure, the Company may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.
No changes were made in the objectives, policies, or processes for managing capital during the years ended December 31, 2018, 20172021, 2020 and 2016.
F-712019.
F-75
(i) Foreign exchange risk
Exposure
The Company’s exposure to foreign currency risk as of December 31, 20182021 and December 31, 2017,2020, was as follows:
| 2018 | 2017 | |||||||
| Cash and cash equivalents (Note 5) | 3,615 | - | ||||||
| | | | |
|
| 2021 |
| 2020 |
Cash and cash equivalents (Note 5) |
| 154 |
| 28,327 |
Financial investments |
| — |
| 542 |
Loans and financing |
| (654,864) |
| — |
The Company does not operate outside Brazil and does not have exposure to foreign exchange risk on commercial transactions, i.e., revenues or expenses. The IPO proceedings were received in U.S. dollar but are not expected to be maintained in such currency.
Sensitivity analysis
The sensitivity analysis as of December 31, 20182021, consider three scenarios of U.S. dollar exchange rate variation, as follows:
| Base scenario - exchange rate as of December 31, |
| Scenario I - a 10% increase in the U.S. dollar exchange rate to R$ |
| Scenario II - a 10% decrease in the U.S. dollar exchange rate to R$ |
The table below set forth the sensitivity analysis as of December 31, 2018,2021, for the amount of cash and cash equivalents and financial investments of US$ 28 thousand and for US$ 117,361 thousand of convertible notes, both denominated in U.S. dollar of US$ 933 thousand:dollar:
|
| | | | | |
|
| Base scenario | Scenario I | Scenario II | ||
| | Exchange rate: R$ | Exchange rate: | Exchange rate: | ||
Finance income (costs) | | — | | R$ | | R$ |
| | | |
(ii) Liquidity risk
Management of the Company has responsibility for mitigating liquidity risk. In order to achieve its goals, management regularly reviews the risk and maintains appropriate reserves, including bank credit facilities with first tier financial institutions. Management also continuously monitors projected and actual cash flows and the combination of the maturity profiles of the financial assets and liabilities.
The main requirements for financial resources used by the Company arise from the need to make payments for printing educational content, freight expenses, operating expenses, labor and social obligations, acquisition of interest in other entities and other operating disbursements.
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The table below summarizes the maturity profile of the Company’s financial liabilities based on contractual undiscounted amounts:
As of December 31, 2018 | On demand | Less than 3 months | 3 to 12 months | 1 to 5 years | More than 5 years | Total | ||||||||||||||||||
| Trade payables | - | 14,845 | - | - | - | 14,845 | ||||||||||||||||||
| Financial instruments from acquisition of interests | - | 13 | 38 | 25,046 | - | 25,097 | ||||||||||||||||||
| Accounts payable to selling shareholders | - | - | 830 | 180,551 | - | 181,381 | ||||||||||||||||||
| - | 14,858 | 868 | 205,597 | - | 221,323 | |||||||||||||||||||
| | | | | | | | | | | | | | | | |
| | Less | | | | | | | | | | | | More | | |
| | than 3 | | 3 to 12 | | 1 to 2 | | 2 to 3 | | 3 to 4 | | 4 to 5 | | than 5 | | |
December 31, 2021 |
| months |
| months |
| years |
| years |
| years |
| years |
| years |
| Total |
Trade payables |
| 103,292 |
| — |
| — |
| — | | — | | — | | — |
| 103,292 |
Lease liabilities |
| 6,018 |
| 14,104 |
| 16,972 |
| 4,620 | | 1,005 | | 349 | | 50 |
| 43,118 |
Loans and financing |
| 213,214 |
| 15,234 |
| 941,568 |
| 19,324 | | — | | — | | 641,987 |
| 1,831,327 |
Derivative financial liabilities | | — | | — | | — | | — | | — | | — | | 223,561 | | 223,561 |
Accounts payable to selling shareholders |
| 379,501 |
| 420,052 |
| 540,470 |
| 307,836 | | 20,690 | | 237 | | — |
| 1,668,786 |
|
| 702,025 |
| 449,390 |
| 1,499,010 |
| 331,780 | | 21,695 | | 586 | | 865,598 |
| 3,870,084 |
As of December 31, 2017 | On demand | Less than 3 months | 3 to 12 months | 1 to 5 years | More than 5 years | Total | ||||||||||||||||||
| Trade payables | 42 | 3,870 | 6 | - | - | 3,918 | ||||||||||||||||||
| Financial instruments from acquisition of interests | - | - | 1,784 | 11,853 | - | 13,637 | ||||||||||||||||||
| Accounts payable to selling shareholders | - | - | 14,936 | 43,067 | - | 58,003 | ||||||||||||||||||
| 42 | 3,870 | 16,726 | 54,920 | - | 75,558 | |||||||||||||||||||
F-76
(iii) Financial counterparty risk
This risk arises from the possibility that the Company may incur losses due to the default of its counterparties. To mitigate these risks, the Company adopts as practice the analysis of the financial and equity situation of its counterparties.
Counterparty credit limits, which take published credit ratings and other factors into account, are set to cover the Company’s total aggregate exposure to a single financial institution. Exposures and limits applicable to each financial institution are approved by our treasury within guidelines approved by the board and are reviewed on a regular basis.
(iv) Interest rate risk
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company’s exposure to the risk of changes in market interest rates relates primarily to the Company’s investments with floating interest rates. The Company is mainly exposed to fluctuations in CDI interest rates on cash equivalentsfinancial investments, related parties, accounts payable to selling shareholders and financial investments.loans and financing.
F-73
Sensitivity analysis
The Company has a significant portion of its financial investments indexed to the CDI variation. According to the reference rates obtained from the website of the Brazilian Stock Exchange – B3 S.A. - Brasil, Bolsa, Balcão (“B3”) and projected for 12 months, as of December 31, 20182021, the CDI rate was 6.42%12.36%.
As of December 31, 2018,2021, the Company’s management estimated two scenarios of the CDI rates at +10% and -10%, which were used as a basis for the possible and remote scenarios, respectively. The table below shows a summary of the scenarios estimated by Management and the effect on profit before income taxes:
| Exposure | +10% | -10% | |||||||||
| | | | | | | |||||
December 31, 2021 |
| Exposure |
| +10% |
| -10% | |||||
| Cash, bank deposits and cash equivalents | 8,686 | 56 | (56) |
| 210,989 |
| 2,608 |
| (2,608) | ||
| Financial investments | 810,812 | 5,205 | (5,205) |
| 1,014,056 |
| 12,534 |
| (12,534) | ||
Accounts payable to selling shareholders | | 801,522 | | 9,907 | | (9,907) | |||||
Related parties | | 11,390 | | 141 | | (141) | |||||
Loans and financing | | 1,176,463 | | 14,570 | | (14,570) | |||||
The Company has derivatives (calls and put options) on non-controlling interests in associates and joint ventures acquired. The fair value of these derivatives is calculated using multiple scenarios and intrinsic methods. The major inputs are: exercise price, exercise date, volatility and gross profit of the associates and joint ventures.
The Company performed evaluation of their fair value at the end of each year in order to account for any changes to it, as disclosed in Note 24.26. These derivatives, which are not publicly traded, have specific conditions that do not enable the Company to present a sensitivity analysis in relation to specific interest rates or market indexes. Also, these derivatives are part of the Company’s strategy to acquire companies directly related to its continuous growth and are considered by the Company as a deferred payment to the previous shareholders' of the acquirees.
Changes in liabilities arising from financing activities
| January 1, 2017 | Cash flows | Other | December 31, 2017 | Cash flows | Other | December 31, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||
| Dividends payable | 17,843 | (75,053 | ) | 67,721 | 10,511 | (85,000 | ) | 82,266 | - | |||||||||||||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||||||
| | | | Change in | | As of | | | | | | | | | | |
| | | | | |
| | ||||||||||||||||||||||||||||
| | December 31, | | accounting | | January | | Cash | | | | December | | Cash | | | | December | | Cash | | | | December | ||||||||||||||||||||||||||||
|
| 2018 |
| practice |
| 1, 2019 |
| flows |
| Other |
| 31, 2019 |
| flows |
| Other |
| 31, 2020 |
| flows |
| Other |
| 31, 2021 | ||||||||||||||||||||||||||||
Leases | | 0 | | 20,089 | | 20,089 | | (5,259) | | 11,027 | | 25,857 | | (10,610) | | 19,973 | | 35,220 | | (19,023) | | 26,921 | | 43,118 | ||||||||||||||||||||||||||||
Loans and financing | | 0 | | — | | — | | 97,011 | | 1,550 | | 98,561 | | 183,860 | | 28,698 | | 311,119 | | 1,448,208 | | 72,000 | | 1,831,327 | ||||||||||||||||||||||||||||
| Total | 17,843 | (75,053 | ) | 67,721 | 10,511 | (85,000 | ) | 82,266 | - | | 0 | | 20,089 | | 20,089 | | 91,752 | | 12,577 | | 124,418 | | 173,250 | | 48,671 |
| 346,339 | | 1,429,185 | | 98,921 |
| 1,874,445 | |||||||||||||||||||
F-74
F-77
28 Commitments and contingencies
(i) Operating lease commitments – Company as a lessee
The Company has entered into operating leases for certain offices and facilities. These leases have a term of 2.5 to 10 years. The Company has the option, under some of its leases, to lease the assets for additional terms of 2.5 years.
Future minimum lease payments under non-cancellable operating leases as of December 31, 2018 and 2017 are as follows:
| 2018 | 2017 | |||||||
| Within one year | 5,293 | 4,203 | ||||||
| After one year but not more than three years | 11,218 | 6,386 | ||||||
| After three years but not more than five years | 9,596 | 3,959 | ||||||
| More than five years | 1,290 | 3,160 | ||||||
| Total | 27,397 | 17,708 | ||||||
(ii) Legal proceedings
The Company is party to labor and tax litigation in progress, which arise during the ordinary course of business. The provisions for probable losses arising from these matters are estimated and periodically adjusted by Management, supported by the opinion of its external legal advisors.
| Labor | Taxes | Total | ||||||||||||||||||
| Balance at December 31, 2017 | - | - | - | |||||||||||||||||
| | | | | | | | | ||||||||||||
|
| Civil |
| Labor |
| Taxes |
| Total | ||||||||||||
Balance at December 31, 2019 |
| 0 | | 122 |
| 129 |
| 251 | ||||||||||||
| Additions | 17 | 124 | 141 |
| 564 | | 108 |
| 137 |
| 809 | |||||||||
Business combination | | — | | — | | 599 | | 599 | ||||||||||||
| Reversals | - | (10 | ) | (10 | ) |
| (99) | | (178) |
| (16) |
| (293) | |||||||
| Balance at December 31, 2018 | 17 | 114 | 131 | |||||||||||||||||
Balance at December 31, 2020 |
| 465 | | 52 |
| 849 |
| 1,366 | ||||||||||||
Additions |
| 262 | | 720 |
| 274 |
| 1,256 | ||||||||||||
Business combination | | — | | 4 | | — | | 4 | ||||||||||||
Reversals |
| (393) | | (479) |
| (356) |
| (1,228) | ||||||||||||
Balance at December 31, 2021 |
| 334 | | 297 |
| 767 |
| 1,398 | ||||||||||||
As of December 31, 2018,2021, the Company was party to lawsuits classified as possible losses totaling R$ 5,170 (2017:9,004 (2020: R$ 4,588)7,863), as shown below:
| 2018 | 2017 | |||||||
| Civil (a) | 4,425 | 4,133 | ||||||
| Labor (b) | 745 | 455 | ||||||
| Total | 5,170 | 4,588 | ||||||
| | | | |
|
| 2021 |
| 2020 |
Civil (a) |
| 7,032 |
| 6,367 |
Labor (b) |
| 1,972 |
| 1,496 |
Total |
| 9,004 |
| 7,863 |
| (a) | The civil proceedings relate mainly to customer claims, including those related to the early termination of certain agreements, among |
| (b) | The labor proceedings to which the Company is a party were filed by former employees or suppliers and third-party service providers’ employees seeking joint liability for the acts of the Company’s suppliers and service providers. |
On September 19, 2019, Mr. Ulisses Borges Cardinot, the non-controlling shareholder in our subsidiary, International School, filed a request for arbitration with the Center for Arbitration and Mediation of the Chamber of Commerce Brazil-Canada in Brazil against Arco Platform Limited, Companhia Brasileira de Educação e Sistemas de Ensino S.A. and Arco Educação S.A. This request for arbitration purporting to assert the non-controlling shareholder’s rights related to both the form of payment (shares) and the calculation of the purchase price under the Investment Agreement is still ongoing.
F-75On November 29, 2021, the arbitration panel issued a partial award on the merits of the arbitration. The decision is under the ongoing review of financial and legal advisors of the Company and its amount calculated will be further discussed in the award liquidation phase of the arbitration proceeding. However, the arbitration panel decided that (i) Arco Platform Ltd. and Arco Educação S.A. are not subject to the terms of the Investment Agreement, therefore, shall not be part of the arbitration proceeding; (ii) Mr. Cardinot will not be entitled to receive shares of Arco Platform; and (iii) the amount due by Companhia Brasileira de Educação e Sistemas de Ensino S.A. shall be calculated based on the 10 times realized EBITDA for the school years of 2019 (first installment) and 2020 (second installment), both net of net debt, as determined in the investment agreement, consistent with the calculation methodology to estimate the provisioned amount in our balance sheet as reported.
In light of the arbitration proceeding and based on IAS 37, the Company understands that the circumstances, risks and uncertainties of the arbitration must be taken into consideration in order to reach the best estimate of the liability. Contingencies should be reevaluated at each balance sheet date and adjusted to reflect the best current estimate.
F-78
Based on the arbitration panel decision mentioned above, the Company has recorded the provision of the amount considered the amount due for the purchase price under the Investment Agreement payable to the non-controlling shareholder. The liability is calculated based on the realized EBITDA for the school years of 2019 (first installment) and 2020 (second installment), both, net of debts, as determined in the agreement. The school year is defined as the twelve-month period starting in October of the previous year to September of the mentioned current year. The first and second installments will be paid in the course of the arbitration. Based on realized numbers, the liability increased by R$ 4,683 in 2021 and was recorded as financial expense as described in Note 17.a). During the twelve-month period ended December 31, 2021, the Company recognized R$ 23,373 of interest related to the liability.
29 Transactions not involving cash
During the years ended December 31, 2018, 20172021, 2020 and 2016,2019, the Company carried out the following non-cash activities, which are not reflected in the statement of cash flows:
| 2018 | 2017 | 2016 | ||||||||||
| Share issuance costs – unpaid | 674 | - | - | |||||||||
| Tax benefit from tax deductible goodwill (Note 22b) | 46,314 | - | - | |||||||||
| Investing - accounts payable to selling shareholders | - | 58,003 | 8,143 | |||||||||
| Investing - derivative financial instruments | - | - | 1,420 | |||||||||
| Business combinations - derivative financial instruments | - | - | 19,655 | |||||||||
| | | | | | |
|
| 2021 |
| 2020 |
| 2019 |
Tax benefit from tax deductible goodwill |
| — |
| — |
| (46,314) |
Investing - financial derivatives |
| — |
| — |
| 14,597 |
Business combinations - financial derivatives |
| — |
| — |
| 38,924 |
Lease (Note 13) | | 22,346 | | 14,471 | | 1,251 |
Forward contract (Note 4) | | 51,501 | | 406,635 | | 29,728 |
Retained payments from business combination (Note 4) | | 1,324 | | 14,821 | | 874,440 |
Capital contribution (Note 4) | | 10,000 | | — | | — |
Price adjustment from business combination (Note 4) | | (7,400) | | 4,620 | | — |
Acquisition from business combination (Note 4) | | 36,172 | | 22,857 | | 39,419 |
Sale
30 Subsequent events
Acquisition of Escola de Aplicação São José dos CamposPGS and Mentes do Amanhã
On February 3, 2022, Arco concluded the acquisition of following solutions from Pearson Education do Brasil Ltda.:
(i) PGS: a K-12 bilingual courseware and teaching methodology, previously known as Pearson Global School; and (ii) Mentes do Amanhã (“Mentes”): a K12 supplemental solution focused on 21st century skills (social-emotional learning, financial literacy and technology).
On January 2, 2019, the Company enteredThe purchase consideration consists of: (i) R$ 15,000 paid in an agreement to sell its shares of Escola de Aplicação São José dos Campos Ltda. to the minority shareholders,February 2022; and (ii) 1,5 x net revenue from sales until March 2022, which is part of the Company’s Core segment. The transaction price of R$ 3,741 will be receivedsettled until April 2022.
This transaction broadens Arco’s supplemental market presence by adding high-quality solutions with pricing complementary to its portfolio. Arco believes in 16 quarterly installments from January 2022the large potential for English as a Second Language and in the favorable market trends for 21st century skills. An even stronger portfolio better positions Arco to October 2025, adjusted by the IGP-M (Brazilian general market price index issued by the FGV – “Fundação Getúlio Vargas”). The balance of investments in Escola de Aplicação São José dos Campos Ltda. is negative in R$ 667, as of December 31, 2018.capture this demand outside Arco’s school base.
The transaction’s rationale was to remain efficient and to keep focus on our main businesses.
As of and for the year ended December 31, 2018, the main balances of Escola de Aplicação São José dos Campos Ltda., are as follows:
Geekie transaction
Loan liquidation
On January 17, 2019,03, 2022, the Company entered into anpaid in full a loan agreement withthrough one of its associated company Geekie buying 100.00 debentures issued at same date at par valuesubsidiaries Arco Educação, in the amount of R$ 100.00 (a hundred reais) each, totaling R$ 10,000. The debentures are due201,883.
Shares repurchase
From January 1st, 2022, until March 31, 2022, the Company purchased an aggregate amount of 338,718 Class A common shares for a total of approximately US$ 6.6 million. This repurchase was made in June 2022 and bear interest of 110% ofaccordance with the CDI. The debentures are convertible at the option of Arco on maturity at the same mechanics of the call and put options presented in the investment agreement, as describedRepurchase Program mentioned in Note 11.19.
F-76
On the same date, the Company lent R$ 4,000 to Geekie Partners S.A., the controlling shareholder of Geekie, through a mutual agreement with bullet payment in June 2022, interest of 110% of the CDI, and with their entire interest on Geekie’s shares as collateral to the transaction.
The total transaction totaled R$ 14,000 and has the purpose to support Geekie’s working capital needs.
***