Exhibit 99.1
Arco Platform Limited
Unaudited interim condensed
consolidated financial statements
June 30, 2020
Arco Platform Limited
Interim condensed consolidated statements of financial position
As of June 30, 2020, and December 31, 2019
(In thousands of Brazilian reais, unless otherwise stated)
Notes | June 30, 2020 | December 31, 2019 | ||||||||
(unaudited) | ||||||||||
Assets | ||||||||||
Current assets | ||||||||||
Cash and cash equivalents | 3 | 188,894 | 48,900 | |||||||
Financial investments | 4 | 702,761 | 574,804 | |||||||
Trade receivables | 5 | 298,407 | 329,428 | |||||||
Inventories | 6 | 47,175 | 40,106 | |||||||
Recoverable taxes | 29,175 | 15,612 | ||||||||
Financial instruments from acquisition of interest | 12 | - | 3,794 | |||||||
Related parties | 7 | 1,321 | 1,298 | |||||||
Other assets | 32,207 | 14,630 | ||||||||
Total current assets | 1,299,940 | 1,028,572 | ||||||||
Non-current assets | ||||||||||
Financial instruments from acquisition of interest | 12 | 32,311 | 32,152 | |||||||
Deferred income tax | 21 | 198,377 | 156,748 | |||||||
Recoverable taxes | 9,531 | 6,613 | ||||||||
Financial investments | 4 | 4,791 | 4,690 | |||||||
Related parties | 7 | 15,106 | 14,813 | |||||||
Other assets | 16,136 | 14,399 | ||||||||
Investments and interests in other entities | 8 | 57,250 | 48,574 | |||||||
Property and equipment | 9 | 22,082 | 21,328 | |||||||
Right-of-use assets | 10 | 19,409 | 21,631 | |||||||
Intangible assets | 11 | 1,793,850 | 1,811,903 | |||||||
Total non-current assets | 2,168,843 | 2,132,851 | ||||||||
Total assets | 3,468,783 | 3,161,423 | ||||||||
Liabilities | ||||||||||
Current liabilities | ||||||||||
Trade payables | 30,806 | 34,521 | ||||||||
Labor and social obligations | 14 | 89,645 | 68,511 | |||||||
Taxes and contributions payable | 4,729 | 7,508 | ||||||||
Income taxes payable | 54,506 | 52,038 | ||||||||
Advances from customers | 36,452 | 25,626 | ||||||||
Lease liabilities | 10 | 7,639 | 6,845 | |||||||
Loans and financing | 15 | 302,682 | 98,561 | |||||||
Accounts payable to selling shareholders | 13 | 344,214 | 117,959 | |||||||
Other liabilities | 757 | 607 | ||||||||
Total current liabilities | 871,430 | 412,176 | ||||||||
Non-current liabilities | ||||||||||
Labor and social obligations | 14 | 6,335 | 2,801 | |||||||
Lease liabilities | 10 | 16,758 | 19,012 | |||||||
Loans and financing | 15 | 1,226 | - | |||||||
Financial instruments from acquisition of interest | 12 | 29,446 | 33,940 | |||||||
Provision for legal proceedings | 25 | 845 | 251 | |||||||
Accounts payable to selling shareholders | 13 | 911,192 | 1,098,273 | |||||||
Other liabilities | 787 | 160 | ||||||||
Total non-current liabilities | 966,589 | 1,154,437 | ||||||||
Total liabilities | 1,838,019 | 1,566,613 | ||||||||
Equity | 16 | |||||||||
Share capital | 11 | 11 | ||||||||
Capital reserve | 1,608,499 | 1,607,622 | ||||||||
Share-based compensation reserve | 99,558 | 84,546 | ||||||||
Accumulated losses | (77,304 | ) | (97,369 | ) | ||||||
Total equity | 1,630,764 | 1,594,810 | ||||||||
Total liabilities and equity | 3,468,783 | 3,161,423 |
The accompanying notes are part of the unaudited interim condensed consolidated financial statements.
F-2
Arco Platform Limited
Interim condensed consolidated statements of income and comprehensive income
For the three and six-month periods ended June 30, 2020 and 2019
(In thousands of Brazilian reais, except earnings per share)
Three-month period ended | Six-month period ended | |||||||||||||||||
Notes | June 30, 2020 | June 30, 2019 | June 30, 2020 | June 30, 2019 | ||||||||||||||
(unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||||
Net revenue | 18 | 234,864 | 137,566 | 496,443 | 254,621 | |||||||||||||
Cost of sales | 19 | (43,120 | ) | (25,827 | ) | (110,340 | ) | (47,696 | ) | |||||||||
Gross profit | 191,744 | 111,739 | 386,103 | 206,925 | ||||||||||||||
Selling expenses | 19 | (88,070 | ) | (39,315 | ) | (175,970 | ) | (75,450 | ) | |||||||||
General and administrative expenses | 19 | (60,139 | ) | (44,926 | ) | (126,922 | ) | (65,758 | ) | |||||||||
Other income (expenses), net | 347 | (437 | ) | 759 | 2,922 | |||||||||||||
Operating profit | 43,882 | 27,061 | 83,970 | 68,639 | ||||||||||||||
Finance income | 20 | 12,792 | 13,961 | 22,179 | 30,917 | |||||||||||||
Finance costs | 20 | (30,752 | ) | (12,374 | ) | (69,091 | ) | (28,855 | ) | |||||||||
Finance result | 20 | (17,960 | ) | 1,587 | (46,912 | ) | 2,062 | |||||||||||
Share of loss of equity-accounted investees | 8 | (3,293 | ) | (667 | ) | (3,999 | ) | (1,159 | ) | |||||||||
Profit before income taxes | 22,629 | 27,981 | 33,059 | 69,542 | ||||||||||||||
Income taxes - income (expense) | ||||||||||||||||||
Current | (22,435 | ) | (10,899 | ) | (54,623 | ) | (29,151 | ) | ||||||||||
Deferred | 16,050 | 8,617 | 41,629 | 16,149 | ||||||||||||||
21 | (6,385 | ) | (2,282 | ) | (12,994 | ) | (13,002 | ) | ||||||||||
Net profit for the period | 16,244 | 25,699 | 20,065 | 56,540 | ||||||||||||||
Other comprehensive income for the period | - | - | - | - | ||||||||||||||
Total comprehensive income for the period | 16,244 | 25,699 | 20,065 | 56,540 | ||||||||||||||
Basic earnings per share - in Brazilian reais | 17 | |||||||||||||||||
Class A | 0.30 | 0.51 | 0.37 | 1.12 | ||||||||||||||
Class B | 0.30 | 0.51 | 0.37 | 1.12 | ||||||||||||||
Diluted earnings per share - in Brazilian reais | 17 | |||||||||||||||||
Class A | 0.29 | 0.49 | 0.36 | 1.09 | ||||||||||||||
Class B | 0.30 | 0.50 | 0.37 | 1.10 |
The accompanying notes are part of the unaudited interim condensed consolidated financial statements.
F-3
Arco Platform Limited
Interim condensed consolidated statements of changes in equity
For the three and six-month periods ended June 30, 2020 and 2019
(In thousands of Brazilian reais, unless otherwise stated)
Attributable to equity holders of the parent | ||||||||||||||||||||||||||||
Share capital | Capital reserve | Share-based compensation reserve | Accumulated losses | Total | Non-controlling interests | Total equity | ||||||||||||||||||||||
Balances at March 31, 2019 (unaudited) | 10 | 1,081,261 | 67,487 | (57,334 | ) | 1,091,424 | - | 1,091,424 | ||||||||||||||||||||
Profit for the period | - | - | - | 25,699 | 25,699 | - | 25,699 | |||||||||||||||||||||
Total comprehensive income | - | - | - | 25,699 | 25,699 | - | 25,699 | |||||||||||||||||||||
Capital increase | - | 12,611 | - | - | 12,611 | - | 12,611 | |||||||||||||||||||||
Corporate restructuring | - | (27,162 | ) | - | - | (27,162 | ) | - | (27,162 | ) | ||||||||||||||||||
Restricted stock units | - | - | 14,158 | - | 14,158 | - | 14,158 | |||||||||||||||||||||
Share-based compensation plan – International School | - | - | 138 | - | 138 | - | 138 | |||||||||||||||||||||
Balances at June 30, 2019 (unaudited) | 10 | 1,066,710 | 81,783 | (31,635 | ) | 1,116,868 | - | 1,116,868 |
Attributable to equity holders of the parent | ||||||||||||||||||||||||||||
Share capital | Capital reserve | Share-based compensation reserve | Accumulated losses | Total | Non-controlling interests | Total equity | ||||||||||||||||||||||
Balances at December 31, 2018 | 10 | 1,089,505 | 67,350 | (86,687 | ) | 1,070,178 | (294 | ) | 1,069,884 | |||||||||||||||||||
Change in accounting policy – IFRS 16 | - | - | - | (1,488 | ) | (1,488 | ) | - | (1,488 | ) | ||||||||||||||||||
Profit for the period | - | - | - | 56,540 | 56,540 | - | 56,540 | |||||||||||||||||||||
Total comprehensive income | - | - | - | 56,540 | 56,540 | - | 56,540 | |||||||||||||||||||||
Capital increase | - | 13,829 | - | - | 13,829 | - | 13,829 | |||||||||||||||||||||
Corporate restructuring | - | (36,624 | ) | - | - | (36,624 | ) | - | (36,624 | ) | ||||||||||||||||||
Restricted stock units | - | - | 14,158 | - | 14,158 | - | 14,158 | |||||||||||||||||||||
Non-controlling interest | - | - | - | - | - | 294 | 294 | |||||||||||||||||||||
Share-based compensation plan – International School | - | - | 275 | - | 275 | - | 275 | |||||||||||||||||||||
Balances at June 30, 2019 (unaudited) | 10 | 1,066,710 | 81,783 | (31,635 | ) | 1,116,868 | - | 1,116,868 |
F-4
Attributable to equity holders of the parent | ||||||||||||||||||||||||||||
Share capital | Capital reserve | Share-based compensation reserve | Accumulated losses | Total | Non-controlling interests | Total equity | ||||||||||||||||||||||
Balances at March 31, 2020 (unaudited) | 11 | 1,607,622 | 93,453 | (93,548 | ) | 1,607,538 | - | 1,607,538 | ||||||||||||||||||||
Profit for the period | - | - | - | 16,244 | 16,244 | - | 16,244 | |||||||||||||||||||||
Total comprehensive income | - | - | - | 16,244 | 16,244 | - | 16,244 | |||||||||||||||||||||
Restricted stock transferred | - | 877 | (877 | ) | - | - | - | - | ||||||||||||||||||||
Share-based compensation plan | - | - | 6,982 | - | 6,982 | - | 6,982 | |||||||||||||||||||||
Balances at June 30, 2020 (unaudited) | 11 | 1,608,499 | 99,558 | (77,304 | ) | 1,630,764 | - | 1,630,764 |
Attributable to equity holders of the parent | ||||||||||||||||||||||||||||
Share | Capital reserve | Share-based compensation reserve | Accumulated losses | Total | Non-controlling interests | Total equity | ||||||||||||||||||||||
Balances at December 31, 2019 | 11 | 1,607,622 | 84,546 | (97,369 | ) | 1,594,810 | - | 1,594,810 | ||||||||||||||||||||
Profit for the period | - | - | - | 20,065 | 20,065 | - | 20,065 | |||||||||||||||||||||
Total comprehensive income | - | - | - | 20,065 | 20,065 | - | 20,065 | |||||||||||||||||||||
Restricted stock transferred | - | 877 | (877 | ) | - | - | - | - | ||||||||||||||||||||
Share-based compensation plan | - | - | 15,889 | - | 15,889 | - | 15,889 | |||||||||||||||||||||
Balances at June 30, 2020 (unaudited) | 11 | 1,608,499 | 99,558 | (77,304 | ) | 1,630,764 | - | 1,630,764 |
The accompanying notes are part of the unaudited interim condensed consolidated financial statements.
F-5
Arco Platform Limited
Interim condensed consolidated statements of cash flows
For the six-month periods ended June 30, 2020 and 2019
(In thousands of Brazilian reais)
June 30, 2020 | June 30, 2019 | |||||||
(unaudited) | (unaudited) | |||||||
Operating activities | ||||||||
Profit before income taxes for the period | 33,059 | 69,542 | ||||||
Adjustments to reconcile profit before income taxes | ||||||||
Depreciation and amortization | 60,048 | 16,343 | ||||||
Inventory reserves | 3,644 | 3,560 | ||||||
Allowance for doubtful accounts | 12,554 | 2,203 | ||||||
Loss on sale/disposal of property and equipment and intangible assets disposed | 1,452 | 131 | ||||||
Fair value change in financial instruments from acquisition interests | (859 | ) | 1,866 | |||||
Changes in accounts payable to selling shareholders | 6,894 | - | ||||||
Share of loss of equity-accounted investees | 3,999 | 1,159 | ||||||
Share-based compensation plan | 17,648 | 14,433 | ||||||
Interest accretion on acquisition liability | 36,977 | 14,440 | ||||||
Accrued interest on loans and financing | 6,975 | - | ||||||
Income on financial investments | (5,656 | ) | - | |||||
Interest on lease liabilities | 1,419 | 782 | ||||||
Provision for legal proceedings | 594 | 211 | ||||||
Provision for payroll taxes (restricted stock units) | 9,046 | 6,518 | ||||||
Foreign exchange income | 180 | 516 | ||||||
Gain on sale of investment | - | (3,286 | ) | |||||
Other financial cost/revenue, net | (1,038 | ) | (1,202 | ) | ||||
Trade receivables | 18,467 | (8,409 | ) | |||||
Inventories | (7,563 | ) | (2,031 | ) | ||||
Recoverable taxes | (4,304 | ) | (5,373 | ) | ||||
Other assets | (18,901 | ) | (7,826 | ) | ||||
Trade payables | (3,715 | ) | 659 | |||||
Labor and social obligations | 15,622 | 11,354 | ||||||
Taxes and contributions payable | (2,779 | ) | (1,047 | ) | ||||
Advances from customers | 10,826 | 14,998 | ||||||
Other liabilities | (982 | ) | (354 | ) | ||||
Cash generated from operations | 193,607 | 129,187 | ||||||
Income taxes paid | (64,020 | ) | (23,210 | ) | ||||
Interest paid on lease liabilities | (710 | ) | (220 | ) | ||||
Net cash flows from operating activities | 128,877 | 105,757 | ||||||
Investing activities | ||||||||
Acquisition of property and equipment | (4,042 | ) | (5,829 | ) | ||||
Payment of investments and interests in other entities | (12,675 | ) | (4,200 | ) | ||||
Acquisition of subsidiaries, net of cash acquired | - | (16,137 | ) | |||||
Acquisition of intangible assets | (39,480 | ) | (18,379 | ) | ||||
Purchase of financial investments | (122,402 | ) | (62,529 | ) | ||||
Loans to related parties | - | (14,000 | ) | |||||
Net cash flows used in investing activities | (178,599 | ) | (121,074 | ) | ||||
Financing activities | ||||||||
Capital increase | - | 13,829 | ||||||
Share issuance costs | - | (673 | ) | |||||
Payment of lease liabilities | (3,779 | ) | (1,080 | ) | ||||
Payment of loans and financing | - | (14 | ) | |||||
Payment to owners to acquire entity’s shares | (1,001 | ) | - | |||||
Loans and financing | 198,372 | - | ||||||
Dividends paid by subsidiaries | (3,696 | ) | - | |||||
Net cash flows from financing activities | 189,896 | 12,062 | ||||||
Foreign exchange effects on cash and cash equivalents | (180 | ) | (516 | ) | ||||
Increase (decrease) in cash and cash equivalents | 139,994 | (3,771 | ) | |||||
Cash and cash equivalents at the beginning of the period | 48,900 | 12,301 | ||||||
Cash and cash equivalents at the end of the period | 188,894 | 8,530 | ||||||
Increase (decrease) in cash and cash equivalents | 139,994 | (3,771 | ) |
The accompanying notes are part of the unaudited interim condensed consolidated financial statements.
F-6
Notes to the unaudited interim condensed consolidated financial statements Expressed in thousands of Brazilian reais, unless otherwise stated
1 | Corporate information |
Arco Platform Limited (“Arco”) is a holding company incorporated under the laws of the Cayman Islands on April 12, 2018 and whose shares are publicly traded on the National Association of Securities Dealers Automated Quotations Payments exchange (NASDAQ) under the ticker symbol “ARCE”. Arco and its subsidiaries are collectively referred to as the Company. Arco became the parent company of Arco Educação S.A. ("Arco Brazil") through the completion of the corporate reorganization and initial public offering of the Company in 2018. Arco Brazil is the holding company of the operating subsidiaries, including EAS Educação S.A. (“EAS”), which provides educational content from basic to secondary education (“K-12 curriculum”).
Since 2015, the Company has been investing in technology and its printed methodology 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 comprise the editing, publishing, advertising and sale of educational content for private schools.
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 initial terms that average three 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.
The address of the Company’s principal executive office is 2840 Rua Augusta, 11th Floor, Consolação, São Paulo, Brazil.
These unaudited interim condensed consolidated financial statements were authorized for issue by the Board of Directors on August 14, 2020.
Follow-on public offering
On June 04, 2020, Arco completed a follow-on public offering. The public offering of 5,563,203 Class A common shares, offered by General Atlantic Arco (Bermuda), L.P. (“GA”), and Alfaco Holding Inc. (the “Selling Shareholders”), at a public offering price of U$ 47.70. Arco did not receive any proceeds from the sale of Class A common shares by the Selling Shareholders. Neither Arco nor any of its other shareholders, including its founding shareholders and members of management, sold Class A common shares in this offering.
F-7
2 | Significant accounting policies |
2.1 | Basis for preparation of the unaudited interim condensed consolidated financial statements |
These unaudited interim condensed consolidated financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting ("IAS 34") as issued by the International Accounting Standards Board (“IASB”). Accordingly, certain disclosures included in the Company’s annual consolidated financial statements prepared in accordance with International Financial Reporting Standards (“IFRSs”) as issued by the IASB have been condensed or omitted. These unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s annual consolidated financial statements for the year ended December 31, 2019, which include information necessary or useful to understanding the Company’s business and financial statement presentation. In particular, the Company’s significant accounting policies were presented in Note 2 Significant accounting policies to the consolidated financial statements for the year ended December 31, 2019.
The accounting policies applied in the preparation of these unaudited interim condensed consolidated financial statements are consistent with those applied and disclosed in the Company’s consolidated financial statements for the year ended December 31, 2019.
In preparing these unaudited interim condensed consolidated financial statements, management has made judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, revenue and expenses. Actual results may differ from these estimates. The critical judgements made by management in applying the Company’s accounting policies and the key sources of estimation uncertainty were the same as those applied and disclosed in Note 3 Significant accounting estimates and assumptions to the Company’s consolidated financial statements for the year ended December 31, 2019.
The unaudited interim condensed consolidated financial statements are presented in Brazilian reais (“BRL” or “R$”), which is the Company’s functional and presentation currency. All amounts are rounded to the nearest thousands, except when otherwise indicated.
2.2 | Significant events during the period |
(a) | Changes in the corporate organization |
During the six-month period ended June 30, 2020, the Company had the following changes in the corporate organization:
On January 1, 2020, the Company performed a corporate reorganization through the incorporation of companies Osterreich Investimentos – Participações Societárias S.A., Mendel Investimentos – Participações Societárias S.A., Torino Investimentos – Participações Societárias S.A., Remare Investimentos – Participações Societárias S.A., Fahe Investimentos – Participações Societárias S.A. by Positivo Soluções Didáticas Ltda.
F-8
On March 4, 2020, Arco acquired an additional 10.51% interest in the share capital of Geekie through the purchase of minority shareholders increasing its total interest to 48.04% as shown in Note 8.
(b) | Information related to Covid-19 pandemic |
On March 11, 2020, the World Health Organization declared the novel coronavirus (COVID-19) a global pandemic. While the spread started December 2019 in China and adversely impacted regional economies across the globe, first cases in Brazil were officially reported during the first quarter of 2020. Such events caused the disruption of economic activity, imposing restrictions on industries, commerce and social contact. At the beginning of the pandemic, state and local authorities have ordered many companies to limit or suspend operations and encourage social distancing with the aim to reduce the speed at which COVID-19 is spreading.
The initial measures of restrictions taken by Brazilian states and local authorities directly impacted the education industry by indefinitely postponing on-site school activities. Nonetheless, as education is an important and essential service, the private schools are teaching classes remotely. In Brazil, the resumption of economic activity is happening in stages, some activities are gradually being released with several security rules. The return is happening differently in each Brazilian state, according to their situation.
Notwithstanding the above, the Company did not suspend its activities and, even with the return allowed by the authorities, most of its workforce continues to work remotely from home, with the exception of teams from the distribution centers that are working on site, however, with several safety rules, in accordance with health and social distancing guidelines. In this scenario, the Company made additional investments in IT and network infrastructure, had additional expenses for cleaning and disinfecting the installations, bought alcohol and masks, funded COVID-19 tests and H1N1 flu vaccination campaigns with the objective of taking care of employees, reducing the demand for care in health units and to facilitate the diagnosis of COVID-19. In addition, the Company delivered chairs, computers, and work kits. Additionally, to support schools, sinceday-1, the Company has made available an integrated platform with daily live classes to all students, webinars, broadcast, and remote support in light of to maintaining student learning with the social distancing measures.
The measures discussed above, including travel restrictions, were put in place to safeguard the health and safety of our 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.
Our content production continues according to the scheduled curriculum calendar and the current educational material has been delivered to the schools according to the school calendar for the year, enabling the Company to recognize the revenues on these products.
With respect to the Company’s distribution and delivery capacity, which relies on third parties, the Company’s principal vendors responsible for the printing of educational material did not raise any issues related to their ability to fulfill scheduled shipments or with respect to the incurrence of any significant additional expenses.
F-9
As a result, as of June 30, 2020, the following events and transactions occurred during the period:
· | Expected credit losses were revised considering estimated increases in financial defaults and in unemployment rates in Brazil for the foreseeable future, which resulted in an increase of R$4,028 in allowance for doubtful accounts as of June 30, 2020. |
· | The Company incurred additional expenses of R$3,680 during the six-month period ended June 30, 2020. These additional expenses are related to IT, network infrastructure and an integrated teaching platform, as well as expenses to maintain protective measures such as cleaning and disinfecting the installations, distribution of protective masks and alcohol to employees and delivery chairs, computers and work kits. |
· | The Company assessed the existence of potential impairment indicators and the possible impacts on the key assumptions and projections caused by the pandemic on the recoverability of long-lived assets (impairment tests) and concluded that no provision for impairment of long-lived assets needed to be recognized in the interim financial statements. |
· | There was no relevant impact on revenue for the six-month period ended June 30, 2020, which was consistent with the expected revenue seasonality for the period. However, although 2020 collection sales are already guaranteed through contracts signed with clients, a portion of expected deliveries have been delayed as a result of suspended activities in schools across Brazil, but which are expected to be fulfilled during 2020 when classes are expected to resume. |
· | The inventory reserves were increased to properly reflect the expected realization of inventories, which resulted in an incremental charge of R$287 in the unaudited interim consolidated statement of income for the six-month period ended June 30, 2020. |
· | As of June 30, 2020, management opted to not benefit from the payroll relief measures announced by the Brazilian government. On the tax side, the Company opted for some Brazilian benefits of postponing tax payments for certain entities (PIS, COFINS, INSS and FGTS), deferring payments for the second semester. |
· | There were rent concessions, regarding leased buildings, that occur as a direct consequence of the covid-19 pandemic, and it was accounted as if they were not lease modifications. Therefore, no changes occurred in the expected useful life and residual amount of properties and equipment. For the six-month period, ended June 30, 2020, the discount obtained was R$97. |
· | No changes in the provision for contingencies against the Company were identified as a result of COVID-19. |
F-10
· | The Company entered into an additional loan agreement of R$ 200,000, with no significant change in costs, and has no financial covenants on any of its existing loans and financing and has sufficient working capital and other undrawn financing facilities to service its operating activities and ongoing investments. See Note 15 for further information. |
The future impact of the COVID-19 pandemic on an ongoing basis is still uncertain and will remain a factor in the analysis of key estimates and judgements used in preparing the Company’s financial statements, especially given the rapid and unexpected changes the pandemic is posing to global and local economic environments.
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 or to reasonably estimate its impact on Arco's results of operations, cash flows or financial condition, including, but not limited to:
· | A decrease in the number of students, which may impact the expected amount of revenue. |
· | An increase in bad debt due to the current economic scenario. |
· | A change in the fair value of financial instruments. |
· | The renegotiation of loans and lease agreements to ensure the continued strength of the Company’s financial position. |
Management will continue to monitor and assess the impact COVID-19 may have on the Company’s business and financial performance and position.
3 | Cash and cash equivalents |
June 30, 2020 | December 31, 2019 | |||||||
(unaudited) | ||||||||
Cash and bank deposits | 8,257 | 2,838 | ||||||
Bank deposits in foreign currency (a) | 1,500 | 23,346 | ||||||
Cash equivalents (b) | 179,137 | 22,716 | ||||||
188,894 | 48,900 |
(a) | Short-term deposits maintained in U.S. dollar. |
(b) | Cash equivalents correspond to financial investments in Bank Certificates of Deposit (“CDB”) of highly rated financial institutions. As of June 30, 2020, the average interest on these CDB are equivalent to 89.4% (December 31, 2019: 30.0%) of the Interbank Certificates of Deposit (“CDI”). These financial investments are available for immediate use and have insignificant risk of changes in value. |
F-11
4 | Financial investments |
June 30, 2020 | December 31, 2019 | |||||||
(unaudited) | ||||||||
Financial investments (a) | 704,766 | 577,398 | ||||||
Financial investments in foreign currency | 2,280 | 1,629 | ||||||
Other | 506 | 467 | ||||||
707,552 | 579,494 | |||||||
Current | 702,761 | 574,804 | ||||||
Non-current | 4,791 | 4,690 |
(a) | Financial investments correspond to investments in funds managed by highly rated financial institutions. As of June 30, 2020, the average interest on these funds are equivalent to 98.6% (December 31, 2019: 99.9%) of the CDI. The increase in the balance is mainly due to loans acquired during the period, as described in Note 15. |
5 | Trade receivables |
June 30, 2020 | December 31, 2019 | |||||||
(unaudited) | ||||||||
From sales of educational content | 339,810 | 354,968 | ||||||
From related parties (Note 7) | 641 | 4,511 | ||||||
340,451 | 359,479 | |||||||
(-) Allowance for doubtful accounts | (42,044 | ) | (30,051 | ) | ||||
298,407 | 329,428 |
As of June 30, 2020, and December 31, 2019, the aging of trade receivables was as follows:
June 30, 2020 | December 31, 2019 | |||||||
(unaudited) | ||||||||
Neither past due nor impaired | 247,442 | 299,159 | ||||||
Past due | 93,009 | 60,320 | ||||||
1 to 60 days | 38,010 | 18,931 | ||||||
61 to 90 days | 12,746 | 6,865 | ||||||
91 to 120 days | 10,312 | 6,414 | ||||||
121 to 180 days | 8,011 | 9,904 | ||||||
More than 180 days | 23,930 | 18,206 | ||||||
340,451 | 359,479 |
The movement in the allowance for doubtful accounts for the six-month periods ended June 30, 2020 and 2019, was as follows:
June 30, 2020 | June 30, 2019 | |||||||
(unaudited) | (unaudited) | |||||||
Balance at beginning of the period | (30,051 | ) | (13,419 | ) | ||||
Additions | (12,554 | ) | (2,203 | ) | ||||
Receivables written off during the period as uncollectible | 561 | 806 | ||||||
Balance at end of period | (42,044 | ) | (14,816 | ) |
F-12
6 | Inventories |
June 30, 2020 | December 31, 2019 | |||||||
(unaudited) | ||||||||
Educational content | 24,624 | 24,535 | ||||||
Educational content in progress (a) | 20,270 | 12,837 | ||||||
Consumables and supplies | 1,123 | 835 | ||||||
Inventories held by third parties | 1,158 | 1,899 | ||||||
47,175 | 40,106 |
(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 six-month periods ended June 30, 2020 and 2019 was as follows:
June 30, 2020 | June 30, 2019 | |||||||
(unaudited) | (unaudited) | |||||||
Balance at beginning of the period | (6,517 | ) | (4,403 | ) | ||||
Inventory reserve | (3,644 | ) | (3,560 | ) | ||||
Write-off of inventories against reserve | 2,356 | 3,505 | ||||||
Balance at end of the period | (7,805 | ) | (4,458 | ) |
7 | Related parties |
The table below summarizes the balances and transactions with related parties:
June 30, 2020 | December 31, 2019 | |||||||
(unaudited) | ||||||||
Assets | ||||||||
Trade receivables | ||||||||
Livraria ASC Ltda. and Educadora ASC Ltda. (a) | 641 | 4,511 | ||||||
641 | 4,511 | |||||||
Other assets | ||||||||
Alfaco Holding Inc. (b) | 68 | - | ||||||
General Atlantic Arco (Bermuda), L.P. (c) | - | 4,109 | ||||||
68 | 4,109 | |||||||
Loans to related parties | ||||||||
WPensar S.A. (d) | 1,321 | 1,298 | ||||||
Loans - Geekie (e) | 4,315 | 4,231 | ||||||
Debentures – Geekie (e) | 10,791 | 10,582 | ||||||
16,427 | 16,111 | |||||||
Current | 1,321 | 1,298 | ||||||
Non-current | 15,106 | 14,813 | ||||||
Advances from customers | ||||||||
Livraria ASC Ltda. and Educadora ASC Ltda. (a) | (524 | ) | (1 | ) | ||||
(524 | ) | (1 | ) |
F-13
June 30, 2020 | June 30, 2019 | |||||||
(unaudited) | (unaudited) | |||||||
Net revenue | ||||||||
Livraria ASC Ltda. and Educadora ASC Ltda. (a) | 1,431 | 3,585 | ||||||
Expenses | ||||||||
ASC Empreendimentos Ltda. and OSC Empreendimentos Ltda. (f) | (1 | ) | (4 | ) | ||||
Finance income | ||||||||
WPensar S.A. (d) | 23 | - | ||||||
Geekie (e) | 293 | - | ||||||
316 | - |
(a) | Arco Ventures S.A. 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. |
(b) | The amount refers to underwriting discounts and commissions incurred for issuing shares with the follow-on public of Class A shares of the selling shareholder, that will be settled within the fiscal year. See Note 1 for further information. |
(c) | On June 04, 2020, General Atlantic Arco (Bermuda), L.P (“GA”). sold the entire interest held in the Company as described in Note 1. Accordingly, as a result of the follow-on public offering, as of June 30, 2020, GA is no longer a related party to the Company. |
(d) | The amounts receivable from WPensar S.A. are related to loan agreements and are indexed to the Brazilian Sistema Especial de Liquidação e Custódia (SELIC) interest rate and have a due date in July 2020. During the six-month period ended June 30, 2020, the Company recognized R$ 23 of interest income. |
(e) | On January 17, 2019, the Company entered into an agreement with its associated company, Geekie Desenvolvimento de Softwares S.A. (“Geekie”) buying 100,000 debentures issued at same date at par value of R$ 100.00 (hundred reais) each, totaling R$ 10,000. During the six-month period ended June 30, 2020, the Company recognized R$ 209 of interest income. The debentures are due in June 2022 and bear interest of 110% of the CDI. The debentures are convertible in shares at the option of Arco at maturity similar to same terms of the call and put options presented in the investment agreement. |
On the same date, the Company lent R$ 4,000 to Geekie Partners S.A., the controlling shareholder 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 six-month period ended June 30, 2020, the Company recognized R$ 84 of interest income.
The transactions totaled R$ 14,000 and are intended to support Geekie’s working capital needs.
(f) | Arco Ventures S.A. leases a facility from OSC Empreendimentos Ltda., which are entities under common control of the Company’s controlling shareholder. The agreement ended in February 2020. |
F-14
Key management personnel compensation
Key management personnel compensation comprised the following:
June 30, 2020 | June 30, 2019 | |||||||
(unaudited) | (unaudited) | |||||||
Short-term employee benefits | 21,176 | 6,527 | ||||||
Share-based compensation plan | 31,311 | 20,676 | ||||||
52,487 | 27,203 |
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 14).
8 | Investments and interests in other entities |
(a) | Investments |
(i) | Investments and interests in other entities |
Reconciliation of carrying amount:
June 30, 2020 | June 30, 2019 | |||||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
WPensar | Geekie | Total | Total | |||||||||||||
At beginning of the period | 3,049 | 45,525 | 48,574 | 11,862 | ||||||||||||
Capital contributions | - | 12,675 | 12,675 | 4,200 | ||||||||||||
Forward contract | - | - | - | 43,210 | ||||||||||||
Share of loss of equity-accounted investees | (94 | ) | (3,905 | ) | (3,999 | ) | (1,159 | ) | ||||||||
At end of the period | 2,955 | 54,295 | 57,250 | 58,113 |
(ii) | Selected financial information for associates and joint ventures |
WPensar | Geekie | |||||||
June 30, 2020 (unaudited) | ||||||||
Current assets | 1,848 | 11,252 | ||||||
Non-current assets | 1,776 | 19,950 | ||||||
Current liabilities | 419 | 12,902 | ||||||
Non-current liabilities | 1,266 | 13,887 | ||||||
Equity | 1,939 | 4,413 | ||||||
Net revenue | 1,179 | 7,607 | ||||||
Costs and expenses (*) | (1,039 | ) | (14,996 | ) | ||||
Profit (loss) for the period | 140 | (7,389 | ) | |||||
June 30, 2019 (unaudited) | ||||||||
Current assets | 1,697 | 5,209 | ||||||
Non-current assets | 1,573 | 13,851 | ||||||
Current liabilities | 302 | 4,391 | ||||||
Non-current liabilities | 1,206 | 10,277 | ||||||
Equity | 1,762 | 4,392 | ||||||
Net revenue | 2,482 | 5,554 | ||||||
Costs and expenses (*) | (2,303 | ) | (12,426 | ) | ||||
Profit (loss) for the period | 179 | (6,872 | ) | |||||
December 31, 2019 | ||||||||
Current assets | 1,619 | 8,444 | ||||||
Non-current assets | 1,687 | 17,983 | ||||||
Current liabilities | 268 | 5,042 | ||||||
Non-current liabilities | 1,240 | 10,964 | ||||||
Equity | 1,798 | 10,421 | ||||||
Net revenue | 4,200 | 14,266 | ||||||
Costs and expenses (*) | (3,985 | ) | (25,848 | ) | ||||
Profit (loss) for the year | 215 | (11,582 | ) |
(*) | Comprise costs, selling and administrative expenses, finance result, other expenses and income tax and social contribution. |
F-15
9 | Property and equipment |
Reconciliation of carrying amount:
June 30, 2020 | June 30, 2019 | |||||||||||||||||||||||||||||||||||
(unaudited) | (unaudited) | |||||||||||||||||||||||||||||||||||
Machinery and equipment | Vehicles | Furniture and fixtures | IT equipment | Facilities | Leasehold improvements | Others | Total | Total | ||||||||||||||||||||||||||||
Cost | ||||||||||||||||||||||||||||||||||||
At the beginning of the period | 1,257 | 121 | 2,353 | 7,272 | 80 | 10,034 | 7,234 | 28,351 | 19,625 | |||||||||||||||||||||||||||
Additions | 173 | - | 486 | 1,714 | 22 | 1,243 | 404 | 4,042 | 5,829 | |||||||||||||||||||||||||||
Disposals | - | - | (4 | ) | (1 | ) | - | - | - | (5 | ) | (1,122 | ) | |||||||||||||||||||||||
Business combination | - | - | - | - | - | - | - | - | 83 | |||||||||||||||||||||||||||
Sale of Escola de Aplicação São José dos Campos Ltda. | - | - | - | - | - | - | - | - | (1,012 | ) | ||||||||||||||||||||||||||
Write-offs | - | - | - | - | - | - | - | - | (792 | ) | ||||||||||||||||||||||||||
At the end of the period | 1,430 | 121 | 2,835 | 8,985 | 102 | 11,277 | 7,638 | 32,388 | 22,611 | |||||||||||||||||||||||||||
Depreciation | ||||||||||||||||||||||||||||||||||||
At the beginning of the period | (221 | ) | (100 | ) | (379 | ) | (1,395 | ) | (26 | ) | (2,225 | ) | (2,677 | ) | (7,023 | ) | (6,278 | ) | ||||||||||||||||||
Depreciation charge for the period | (146 | ) | (11 | ) | (131 | ) | (958 | ) | (4 | ) | (870 | ) | (1,163 | ) | (3,283 | ) | (1,576 | ) | ||||||||||||||||||
Depreciation of disposals | - | - | - | - | - | - | - | - | 991 | |||||||||||||||||||||||||||
Sale of Escola de Aplicação São José dos Campos Ltda. | - | - | - | - | - | - | - | - | 211 | |||||||||||||||||||||||||||
At the end of the period | (367 | ) | (111 | ) | (510 | ) | (2,353 | ) | (30 | ) | (3,095 | ) | (3,840 | ) | (10,306 | ) | (6,652 | ) | ||||||||||||||||||
Net book value | ||||||||||||||||||||||||||||||||||||
At the beginning of the period | 1,036 | 21 | 1,974 | 5,877 | 54 | 7,809 | 4,557 | 21,328 | 13,347 | |||||||||||||||||||||||||||
At the end of the period | 1,063 | 10 | 2,325 | 6,632 | 72 | 8,182 | 3,798 | 22,082 | 15,959 | |||||||||||||||||||||||||||
Annual depreciation rates | 10 | % | 20 | % | 10 | % | 20 | % | 10 | % | 10% to 50 | % | 33 | % |
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 six-month periods ended June 30, 2020 and 2019.
F-16
10 | Leases |
The balance sheet shows the following amounts relating to leases:
June 30, 2020 | December 31, 2019 | |||||||
(unaudited) | ||||||||
Right-of-use assets | ||||||||
Properties | 19,296 | 21,518 | ||||||
Machinery and equipment | 113 | 113 | ||||||
19,409 | 21,631 |
June 30, 2020 | December 31, | |||||||
(unaudited) | ||||||||
Lease liabilities | ||||||||
Current | 7,639 | 6,845 | ||||||
Non-current | 16,758 | 19,012 | ||||||
24,397 | 25,857 |
Set out below, are the carrying amounts of the Company’s right-of-use assets and lease liabilities and the movements during the period:
June 30, 2020 | June 30, 2019 | |||||||
(unaudited) | (unaudited) | |||||||
Right-of-use assets | ||||||||
At the beginning of the period | 21,631 | 20,102 | ||||||
Additions | 1,034 | - | ||||||
Lease modification | 576 | (315 | ) | |||||
Depreciation expense | (3,832 | ) | (2,194 | ) | ||||
At the end of the period | 19,409 | 17,593 | ||||||
Average annual depreciation rate | 23.6 | % | 18 | % |
June 30, 2020 | June 30, 2019 | |||||||
(unaudited) | (unaudited) | |||||||
Lease liabilities | ||||||||
At the beginning of the period | 25,857 | 22,321 | ||||||
Additions | 1,034 | - | ||||||
Lease modification | 576 | (315 | ) | |||||
Interest expense | 1,419 | 782 | ||||||
Payments of lease liabilities | (3,779 | ) | (1,080 | ) | ||||
Interest paid | (710 | ) | (220 | ) | ||||
At the end of the period | 24,397 | 21,488 | ||||||
The Company recognized rent expense from short-term leases and low-value assets of R$ 1,400 for the six-month period ended June 30, 2020 (June 30, 2019: R$ 1,506).
F-17
11 | Intangible assets and goodwill |
June 30, 2020 | June 30, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||
(unaudited) | (unaudited) | |||||||||||||||||||||||||||||||||||||||||||||||
Goodwill | Rights on contracts | Customer relationships | Educational system | Copyrights | Software license | Trademarks | Educational platform | Non-compete agreement | In Progress | Total | Total | |||||||||||||||||||||||||||||||||||||
Cost | ||||||||||||||||||||||||||||||||||||||||||||||||
At the beginning of the period | 916,767 | 15,263 | 206,971 | 251,223 | 21,069 | 18,412 | 355,298 | 87,987 | 8,303 | 9,606 | 1,890,899 | 224,496 | ||||||||||||||||||||||||||||||||||||
Corporate restructuring | - | - | - | - | - | - | - | - | - | - | - | (53,521 | ) | |||||||||||||||||||||||||||||||||||
Acquisitions | - | - | - | - | 3,168 | 10,940 | - | 18,330 | - | 7,042 | 39,480 | 18,379 | ||||||||||||||||||||||||||||||||||||
Disposals | - | - | - | - | - | (2 | ) | - | (3,680 | ) | - | - | (3,682 | ) | - | |||||||||||||||||||||||||||||||||
Business combination | - | - | - | - | - | - | - | - | - | - | - | 18,934 | ||||||||||||||||||||||||||||||||||||
Transfer | - | - | - | - | 252 | (169 | ) | - | 15,098 | - | (15,181 | ) | - | - | ||||||||||||||||||||||||||||||||||
At the end of the period | 916,767 | 15,263 | 206,971 | 251,223 | 24,489 | 29,181 | 355,298 | 117,735 | 8,303 | 1,467 | 1,926,697 | 208,288 | ||||||||||||||||||||||||||||||||||||
Amortization | ||||||||||||||||||||||||||||||||||||||||||||||||
At the beginning of the period | - | (5,291 | ) | (14,010 | ) | (22,234 | ) | (11,682 | ) | (2,955 | ) | (8,241 | ) | (13,773 | ) | (810 | ) | - | (78,996 | ) | (36,756 | ) | ||||||||||||||||||||||||||
Amortization | - | (762 | ) | (11,541 | ) | (13,075 | ) | (2,944 | ) | (2,867 | ) | (9,259 | ) | (14,736 | ) | (902 | ) | - | (56,086 | ) | (13,572 | ) | ||||||||||||||||||||||||||
Amortization of disposals | - | - | - | - | - | - | - | 2,235 | - | - | 2,235 | - | ||||||||||||||||||||||||||||||||||||
At the end of the period | - | (6,053 | ) | (25,551 | ) | (35,309 | ) | (14,626 | ) | (5,822 | ) | (17,500 | ) | (26,274 | ) | (1,712 | ) | - | (132,847 | ) | (50,328 | ) | ||||||||||||||||||||||||||
Net book value | ||||||||||||||||||||||||||||||||||||||||||||||||
At the beginning of the period | 916,767 | 9,972 | 192,961 | 228,989 | 9,387 | 15,457 | 347,057 | 74,214 | 7,493 | 9,606 | 1,811,903 | 187,740 | ||||||||||||||||||||||||||||||||||||
At the end of the period | 916,767 | 9,210 | 181,420 | 215,914 | 9,863 | 23,359 | 337,798 | 91,461 | 6,591 | 1,467 | 1,793,850 | 157,960 | ||||||||||||||||||||||||||||||||||||
Annual amortization years | - | 10 | 5 to 16 | 3 to 10 | 3 | 2 to 5 | 10 to 20 | 3 to 10 | 2 to 5 | - |
F-18
(a) | Goodwill |
The carrying amount of goodwill by operating segment was:
June 30, 2020 | December 31, 2019 | |||||||
(unaudited) | ||||||||
Core | 755,539 | 755,539 | ||||||
Supplemental | 161,228 | 161,228 | ||||||
916,767 | 916,767 |
Impairment test for goodwill
The Company performs its annual impairment test in December and whenever circumstances indicate that the carrying value may be impaired. The Company’s impairment test for goodwill is based on value-in-use calculations. The key assumptions used to determine the recoverable amount for the different cash generating units were disclosed in the annual consolidated financial statements for the year ended December 31, 2019.
There were no indications of impairment for the six-month period ended June 30, 2020.
(b) | Other intangible assets |
Intangible assets, other than goodwill, are valued separately for each acquisition and are amortized during each useful life. The useful lives and methods of amortization of other intangibles are reviewed at each financial year end and adjusted prospectively, if appropriate.
For the six-month period ended June 31, 2020 there were no indicators that the Company’s intangible assets with definite lives might be impaired.
12 | Financial instruments from acquisition of interests |
The breakdown of derivative instruments from acquisition of investments in associates and joint ventures is as follows:
June 30, 2020 | December 31, 2019 | |||||||
(unaudited) | ||||||||
Assets | ||||||||
Derivative financial instruments | ||||||||
Investment in Geekie – call options (a) | 32,311 | 32,152 | ||||||
Investment in WPensar – call options (a) | - | 3,794 | ||||||
32,311 | 35,946 | |||||||
Current | - | 3,794 | ||||||
Non-current | 32,311 | 32,152 |
F-19
June 30, 2020 | December 31, 2019 | |||||||
(unaudited) | ||||||||
Liabilities | ||||||||
Derivative financial instruments | ||||||||
Investment in Geekie – put options (a) | 29,236 | 31,626 | ||||||
Investment in WPensar – put options (a) | - | 2,314 | ||||||
Investment in WPensar – forward contract (b) | 210 | - | ||||||
29,446 | 33,940 |
(a) | Refer to Note 11 of the consolidated financial statements at December 31, 2019 for a description of the terms and condition of the call and put options. See item b) for further information regarding WPensar. |
(b) | On May 28, 2020, EAS Educação S.A. signed an amendment to Sale and Purchase Agreement (SPA) renegotiating the terms of the original agreement, excluding the call option of the Company to acquire the remaining 75% interest in WPensar and the put option of the other shareholders to sell their interest of 75% as mentioned above. At this date, the Company has a future obligation through a forward contract to purchase and the other shareholders have an obligation to sell the remaining share capital of WPensar. |
The acquisition date will occur until September 30, 2020 and on that date, the Company will have control of WPensar. The exercise price for the remaining 75% interest in WPensar is calculated by revenues for the period from July 2019 to June 2020 multiplied by 5, less net debt. As of June 30, 2020, the Company recognized a derivative financial instrument.
The derivative financial instrument is initially recognized at fair value of net the right and obligation on the date on which the derivative contract was entered into and are subsequently remeasured. Derivative is carried as financial asset when the fair value is positive or as financial liability when the fair value is negative.
Any gains or losses arising from changes in the fair value of the derivative are recorded directly to finance result.
The recognition of a financial liability for the full obligation of the forward contract will occur upon the acquisition of control of WPensar.
13 | Accounts payable to selling shareholders |
The breakdown of the liabilities regarding balances of accounts payable from business combination is as follows:
June 30, 2020 | December 31, 2019 | |||||||
(unaudited) | ||||||||
Accounts payable to selling shareholders | ||||||||
Acquisition of International School (a) | (327,767 | ) | (297,722 | ) | ||||
Acquisition of NS Educação Ltda. (b) | (6,577 | ) | (6,461 | ) | ||||
Acquisition of Escola em Movimento (c) | (1,014 | ) | (1,992 | ) | ||||
Acquisition of Nave à Vela (d) | (25,257 | ) | (30,946 | ) | ||||
Acquisition of Positivo (e) | (894,791 | ) | (879,111 | ) | ||||
(1,255,406 | ) | (1,216,232 | ) | |||||
Current | (344,214 | ) | (117,959 | ) | ||||
Non-current | (911,192 | ) | (1,098,273 | ) |
F-20
(a) | The financial liability is recorded at the present value of the estimated amount payable to the non-controlling shareholder upon the exercise of purchasing of the remaining interest using an estimated interest rate of 14.9%. During the six-month period ended June 30, 2020, the Company recognized R$19,387 of interest. The amount payable is estimated based on realized EBITDA for the 2019 school year and projected EBITDA for 2020 school year. The first installment will be paid within the 2020 fiscal year and the second installment in the first half of 2021. The Company performed a review of previous operations projections, because it had a better visibility regarding next year’s contracts revenue with customers (ACV), and respective costs and expenses. Based on the new projected numbers for 2020, the accounts payable increased by R$14,354. See Note 25 for more information. |
(b) | This amount was retained for any losses, which will be released in annual installments until December 31, 2022. The amount is being adjusted by the interest from Interbank certificates of deposit (CDI). |
(c) | This amount was retained for any losses, which will be released in two annual installments on the first and second anniversary of the acquisition. The amount is being adjusted by the basic interest rate (SELIC). |
(d) | This amount is related to the remaining acquisition of 49% interest in Nave and will occur over the next two years (subject to price adjustments, net of debt at each closing date). This amount is recorded at the present value using an estimated interest rate of 15.7%. During the six-month period ended June 30, 2020, the Company recognized R$1,771 of interest. The next tranche is payable on February 15, 2021, in this date Arco Ventures S.A. will acquire 24% interest, for the 24% of Nave’s revenues from October 1, 2019 to September 30, 2020 multiplied by 5.3, net of debt. The last tranche is payable on February 15, 2022, in this date Arco Ventures S.A. will acquire 25% interest, for 25% of Nave’s revenues from October 1, 2020 to September 30, 2021 multiplied by 3, net of debt. Based on the new projected numbers for 2020 and 2021 school year, the accounts payable decreased by R$7,460. |
(e) | The amount of the contract is updated by CDI and the Company the Company recognized R$15,680 of interest during the six-month period ended June 30, 2020. |
14 | Labor and social obligations |
(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$7,904 during the six-month period ended June 30, 2020.
(b) | Share-based compensation plan |
Arco plan
Members of the Company’s management participated in the EAS share-based compensation plan. In 2019, all directors exercised their stock options.
As of June 30, 2020, and December 31, 2019, there were no outstanding share options. There was no stock options expense for the six-month period ended June 30, 2020.
F-21
International School plan
The share options vest on January 1, 2020 and the compensation expense recognized for the International School Plan in the statement of income (loss) for the six-month period ended June 30, 2020 was R$129.
On May 20, 2020, all directors exercised their 153,262 stock options pursuant to the International School Plan approved by its shareholders on August 4, 2017, with unit value of R$1.39. As of June 30, 2020, there were no outstanding share options.
Restricted stock units
In 2019 the Company issued a new share-based payment program called restricted stock units (“RSU”) of the holding company Arco Platfom Limited for employees registered with the Company's subsidiaries, which will be available for sale by the beneficiaries annually, on their anniversary dates. The related compensation expense will be recognized over according to the following schedule.
Final vesting date | Quantity of stocks | |||
28/09/2019 | 197,951 | |||
30/06/2020 | 3,086 | |||
28/09/2020 | 214,509 | |||
28/09/2021 | 214,509 | |||
28/09/2022 | 16,557 | |||
Total | 646,612 |
The participant's right to effectively receive ownership of the restricted shares will be conditioned to the participant's continuance as an employee, director or director of any company in the business group from the grant date until the grace periods (“Vesting”). If a participant leaves the group, it will be considered as non-compliance with the “vesting” condition, not being a cancellation of the plan but a “forfeiture”. After the vesting period, the restricted shares have the same rights and privileges as any shareholder.
The following table reflects the movements from the grant date until June 30, 2020:
Number of share options | ||||
Outstanding at December 31, 2019 | 337,185 | |||
Granted | 62,837 | |||
Exercised | (4,388 | ) | ||
Estimated forfeited | (2,733 | ) | ||
Outstanding at June 30, 2020 | 392,901 |
The total compensation expense for the six-month period ended June 30, 2020, including taxes and social charges, was R$31,311, net of estimated forfeited. These awards are classified as equity settled.
F-22
The fair value of these equity instruments was measured on the grant date as follows:
Grant date | Total shares granted | Total shares outstanding | Average fair value at grant date | Average fair value of the unit | ||||||||||||
30/04/2019 | 542,760 | 310,577 | 68,802 | 126.76 | ||||||||||||
30/06/2019 | 1,543 | 1,543 | 319 | 206.66 | ||||||||||||
30/06/2019 | 1,543 | 1,543 | 274 | 177.71 | ||||||||||||
15/10/2019 | �� | 37,929 | 23,769 | 7,593 | 200.18 | |||||||||||
23/01/2020 | 13,000 | 12,220 | 2,788 | 214.48 | ||||||||||||
02/03/2020 | 36,673 | 34,473 | 8,762 | 238.93 | ||||||||||||
04/03/2020 | 13,164 | 8,776 | 3,346 | 254.21 | ||||||||||||
Total | 646,612 | 392,901 | 91,884 |
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 the terms and conditions of the agreement.
15 | Loans and financing |
Interest rate | Maturity | June 30, 2020 | December 31, 2019 | ||||||||||
(unaudited) | |||||||||||||
Bank loan | 100% CDI + 0.7% pa | October/2020 | 102,150 | 98,561 | |||||||||
Bank loan | 100% CDI + 0.7% pa | December/2020 | 199,699 | - | |||||||||
Bank loan | 8.1% pa | March/2022 | 2,059 | - | |||||||||
303,908 | 98,561 | ||||||||||||
Current | 302,682 | 98,561 | |||||||||||
Non-current | 1,226 | - |
On February 17, 2020, Nave à Vela, a Company’s subsidiary, entered into a loan agreement in the amount of R$2,000 for working capital, to be settled in 21 installments from July 2020 to March 2022.
On March 23, 2020, the Company increased its borrowings under a loan contract by R$200,000. This loan is repayable in a single installment due in December 2020 and is classified as short-term in the consolidated financial statements. The loan is secured by guarantee letter through a chattel mortgage of Positivo's shares. Financing arranged by Company is not subject to compliance with any financial covenants.
F-23
Set out below the movements during the period:
June 30, 2020 | ||||
(unaudited) | ||||
Balance at beginning of the period | 98,561 | |||
Additions | 202,000 | |||
Loan cost | (3,628 | ) | ||
Interest expense | 6,975 | |||
Balance at end of period | 303,908 |
16 | Equity |
Share capital
As of June 30, 2020, Arco’s share capital is represented by 54,942,270 (December 31, 2019: 54,939,088) common shares of par value of US$ 0.00005 each, comprised by 27,400,848 (December 31, 2019: 27,400,848) Class B common shares and 27,541,422 (December 31, 2019: 27,538,240) Class A common shares.
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 one 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.
17 | Earnings per share (EPS) |
Basic
Basic EPS is calculated by dividing profit 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 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.
F-24
The following table reflects the profit attributable to equity holders of the parent and the share data used in the basic and diluted EPS computations:
Three-month period ended | Three-month period ended | ||||||||||||||||||||||
June 30, 2020 (unaudited) | June 30, 2019 (unaudited) | ||||||||||||||||||||||
Class A | Class B | Total | Class A | Class B | Total | ||||||||||||||||||
Profit attributable to equity holders of the parent | 8,143 | 8,101 | 16,244 | 11,857 | 13,842 | 25,699 | |||||||||||||||||
Weighted average number of common shares outstanding (thousand) | 27,541 | 27,401 | 54,942 | 23,397 | 27,312 | 50,709 | |||||||||||||||||
Effects of dilution from: | |||||||||||||||||||||||
Share-based compensation plan (thousands) | 393 | - | 567 | - | |||||||||||||||||||
Basic earnings per share - R$ | 0.30 | 0.30 | 0.51 | 0.51 | |||||||||||||||||||
Diluted earnings per share - R$ | 0.29 | 0.30 | 0.49 | 0.50 |
Six-month period ended | Six-month period ended | |||||||||||||||||||||||
June 30, 2020 (unaudited) | June 30, 2019 (unaudited) | |||||||||||||||||||||||
Class A | Class B | Total | Class A | Class B | Total | |||||||||||||||||||
Profit attributable to equity holders of the parent | 10,058 | 10,007 | 20,065 | 26,087 | 30,453 | 56,540 | ||||||||||||||||||
Weighted average number of common shares outstanding (thousand) | 27,540 | 27,401 | 54,941 | 23,303 | 27,202 | 50,505 | ||||||||||||||||||
Effects of dilution from: | ||||||||||||||||||||||||
Share-based compensation plan (thousands) | 393 | - | 567 | - | ||||||||||||||||||||
Basic earnings per share - R$ | 0.37 | 0.37 | 1.12 | 1.12 | ||||||||||||||||||||
Diluted earnings per share - R$ | 0.36 | 0.37 | 1.09 | 1.10 |
Diluted profit per share is calculated by the weighted average number of outstanding shares, in order to assume the conversion of all potential dilutive shares. Diluted result 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.
F-25
18 | Revenue |
The Company’s net revenue is as follows:
Three-month period ended | Six-month period ended | |||||||||||||||
June 30, 2020 | June 30, 2019 | June 30, 2020 | June 30, 2019 | |||||||||||||
(unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
Educational content | 253,527 | 146,919 | 532,244 | 275,824 | ||||||||||||
Other | 2,136 | 356 | 4,320 | 356 | ||||||||||||
Deductions: | ||||||||||||||||
Taxes | (202 | ) | (21 | ) | (499 | ) | (21 | ) | ||||||||
Returns and discounts | (20,597 | ) | (9,688 | ) | (39,622 | ) | (21,538 | ) | ||||||||
Net revenue | 234,864 | 137,566 | 496,443 | 254,621 |
For the six-month period ended 30 June 2020 | For the six-month period ended 30 June 2019 | ||||||||||||||||||||||
(unaudited) | (unaudited) | ||||||||||||||||||||||
Segments | Core | Supplemental | Total | Core | Supplemental | Total | |||||||||||||||||
Type of goods or service | |||||||||||||||||||||||
Educational content | 452,721 | 39,402 | 492,123 | 199,982 | 54,304 | 254,286 | |||||||||||||||||
Other | 990 | 3,330 | 4,320 | - | 335 | 335 | |||||||||||||||||
Total net revenue from contracts with customers | 453,711 | 42,732 | 496,443 | 199,982 | 54,639 | 254,621 | |||||||||||||||||
Timing of revenue recognition | |||||||||||||||||||||||
Transferred at a point in time | 453,711 | 42,732 | 496,443 | 199,982 | 54,639 | 254,621 | |||||||||||||||||
Total net revenue from contracts with customers | 453,711 | 42,732 | 496,443 | 199,982 | 54,639 | 254,621 |
For the three-month period ended 30 June 2020 | For the three-month period ended 30 June 2019 | ||||||||||||||||||||||
(unaudited) | (unaudited) | ||||||||||||||||||||||
Segments | Core | Supplemental | Total | Core | Supplemental | Total | |||||||||||||||||
Type of goods or service | |||||||||||||||||||||||
Educational content | 232,576 | 152 | 232,728 | 100,832 | 36,399 | 137,231 | |||||||||||||||||
Other | 452 | 1,684 | 2,136 | - | 335 | 335 | |||||||||||||||||
Total net revenue from contracts with customers | 233,028 | 1,836 | 234,864 | 100,832 | 36,734 | 137,566 | |||||||||||||||||
Timing of revenue recognition | |||||||||||||||||||||||
Transferred at a point in time | 233,028 | 1,836 | 234,864 | 100,832 | 36,734 | 137,566 | |||||||||||||||||
Total net revenue from contracts with customers | 233,028 | 1,836 | 234,864 | 100,832 | 36,734 | 137,566 |
The Company recognized allowance for doubtful accounts on trade receivables arising from contracts with customers, included under selling expenses in the statement of income, of R$12,554 and R$2,203 for the six-month periods ended June 31, 2020 and 2019, respectively.
F-26
19 | Expenses by nature |
Three-month period ended | Six-month period ended | |||||||||||||||
June 30, 2020 | June 30, 2019 | June 30, 2020 | June 30, 2019 | |||||||||||||
(unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
Content providing | 17,587 | 11,272 | 61,029 | 22,480 | ||||||||||||
Operations personnel | 6,669 | 3,651 | 12,067 | 5,974 | ||||||||||||
Inventory reserves | 1,538 | 1,332 | 3,644 | 3,560 | ||||||||||||
Freight | 4,401 | 4,387 | 10,892 | 7,481 | ||||||||||||
Depreciation and amortization | 8,941 | 4,068 | 16,333 | 6,611 | ||||||||||||
Other | 3,984 | 1,117 | 6,375 | 1,590 | ||||||||||||
Cost of sales | 43,120 | 25,827 | 110,340 | 47,696 | ||||||||||||
Sales personnel | 45,909 | 17,972 | 83,916 | 37,444 | ||||||||||||
Depreciation and amortization | 18,915 | 3,388 | 37,008 | 6,483 | ||||||||||||
Sales & marketing | 2,562 | 7,556 | 10,889 | 10,626 | ||||||||||||
Customer support | 10,020 | 7,875 | 25,129 | 14,885 | ||||||||||||
Allowance for doubtful accounts | 6,386 | 550 | 12,554 | 2,203 | ||||||||||||
Real estate rentals | 326 | 381 | 537 | 944 | ||||||||||||
Other | 3,952 | 1,593 | 5,937 | 2,865 | ||||||||||||
Selling expenses | 88,070 | 39,315 | 175,970 | 75,450 | ||||||||||||
Corporate personnel | 16,187 | 10,298 | 38,198 | 22,735 | ||||||||||||
Third party services | 16,621 | 8,265 | 36,885 | 12,323 | ||||||||||||
Real estate rents | 363 | 928 | 763 | 1,506 | ||||||||||||
Travel expenses | 182 | 649 | 1,909 | 1,218 | ||||||||||||
Tax expenses | 515 | 365 | 2,242 | 1,088 | ||||||||||||
Software licenses | 1,199 | 109 | 2,234 | 298 | ||||||||||||
Share-based compensation plan | 15,480 | 20,814 | 31,440 | 20,951 | ||||||||||||
Depreciation and amortization | 3,517 | 1,647 | 6,707 | 3,249 | ||||||||||||
Other | 6,075 | 1,851 | 6,544 | 2,390 | ||||||||||||
General and administrative expenses | 60,139 | 44,926 | 126,922 | 65,758 | ||||||||||||
Total | 191,329 | 110,068 | 413,232 | 188,904 | ||||||||||||
The increase in expenses for the six months ended June 30, 2020 compared to the same period of the previous year, is due to the inclusion of the companies as mentioned in Note 4 of the consolidated financial statements as of December 31, 2019.
During the six-month period ended June 30, 2020 the companies acquired in 2019, contributed with R$63,034 (2019: R$234) of cost of sales and with R$87,770 (2019: R$240) of expenses.
In June 2019, the Company completed the acquisition of a new subsidiary called Escola em Movimento, which contributed with only one month of results for the six-month period ended on June 30, 2019.
F-27
20 | Finance result |
Three-month period ended | Six-month period ended | |||||||||||||||
June 30, 2020 | June 30, 2019 | June 30,2020 | June 30,2019 | |||||||||||||
(unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
Income from financial investments | 868 | 8,781 | 1,796 | 20,844 | ||||||||||||
Changes in fair value of financial investments (a) | 3,664 | 4,383 | 5,090 | 4,661 | ||||||||||||
Changes in fair value of derivative instruments (b) | 6,644 | - | 10,849 | 3,449 | ||||||||||||
Foreign exchange gains | 129 | 65 | 1,152 | 377 | ||||||||||||
Interest income | 828 | - | 2,027 | - | ||||||||||||
Other | 659 | 732 | 1,265 | 1,586 | ||||||||||||
Finance income | 12,792 | 13,961 | 22,179 | 30,917 | ||||||||||||
Changes in fair value of derivative instruments (b) | (5,731 | ) | - | (9,990 | ) | (5,369 | ) | |||||||||
Changes in accounts payable to selling shareholders (Note 13) | (294 | ) | - | (6,894 | ) | - | ||||||||||
Financial discounts granted | (329 | ) | (1,316 | ) | (1,629 | ) | (2,382 | ) | ||||||||
Bank fees | (1,193 | ) | (1,094 | ) | (2,338 | ) | (2,174 | ) | ||||||||
Foreign exchange loss | (1,051 | ) | (893 | ) | (1,332 | ) | (893 | ) | ||||||||
Interest on acquisition of investments (c) | (16,711 | ) | (6,916 | ) | (36,977 | ) | (14,440 | ) | ||||||||
Interest on lease liabilities | (687 | ) | (387 | ) | (1,419 | ) | (782 | ) | ||||||||
Other | (4,756 | ) | (1,768 | ) | (8,512 | ) | (2,815 | ) | ||||||||
Finance costs | (30,752 | ) | (12,374 | ) | (69,091 | ) | (28,855 | ) | ||||||||
Finance result | (17,960 | ) | 1,587 | (46,912 | ) | 2,062 |
(a) | Refers to gains on financial investments measured at FVTPL. |
(b) | Refers to changes in the fair value of derivative financial instruments, comprised of the put and call options from investments in associates and joint ventures. |
(c) | Refer to interest expense on liabilities related to business combinations. |
F-28
21 | Income taxes |
(a) Reconciliation of income taxes expense
Three-month period ended | Six-month period ended | |||||||||||||||
June 30, 2020 | June 30, 2019 | June 30,2020 | June 30,2019 | |||||||||||||
(unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
Profit before income taxes | 22,629 | 27,981 | 33,059 | 69,542 | ||||||||||||
Combined statutory income taxes rate - % | 34 | % | 34 | % | 34 | % | 34 | % | ||||||||
Income tax expense at statutory rates | (7,694 | ) | (9,513 | ) | (11,240 | ) | (23,644 | ) | ||||||||
Reconciliation adjustments: | ||||||||||||||||
Share of loss of equity-accounted investees (a) | (1,120 | ) | (227 | ) | (1,360 | ) | (394 | ) | ||||||||
Effect of presumed profit of subsidiaries (b) | 4,368 | 3,429 | 4,929 | 8,167 | ||||||||||||
Other (additions) exclusions, net | (1,939 | ) | 4,029 | (5,323 | ) | 2,869 | ||||||||||
(6,385 | ) | (2,282 | ) | (12,994 | ) | (13,002 | ) | |||||||||
Current | (22,435 | ) | (10,899 | ) | (54,623 | ) | (29,151 | ) | ||||||||
Deferred | 16,050 | 8,617 | 41,629 | 16,149 | ||||||||||||
Income taxes expense | (6,385 | ) | (2,282 | ) | (12,994 | ) | (13,002 | ) | ||||||||
Effective rate | 28.2 | % | 8.2 | % | 39.3 | % | 18.7 | % | ||||||||
(a) | Refers to the effect of 34% on the share of loss of investees for the year. |
(b) | 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. |
(b) Deferred income taxes
The changes in the deferred tax assets and liabilities are as follows:
As of December 31, 2019 | Recognized in profit or loss | As of June 30, 2020 | ||||||||||
(unaudited) | ||||||||||||
Deferred tax assets | ||||||||||||
Tax losses carryforward | 16,283 | 6,286 | 22,569 | |||||||||
Temporary differences | ||||||||||||
Financial instruments – call options on equity method investments | 106,729 | 14,113 | 120,842 | |||||||||
Tax benefit from tax deductible goodwill | 14,888 | (1,669 | ) | 13,219 | ||||||||
Other temporary differences | 29,325 | 4,533 | 33,858 | |||||||||
Share base compensation | 7,960 | 8,584 | 16,544 | |||||||||
Amortization of intangible assets | 6,673 | 13,261 | 19,934 | |||||||||
Total deferred tax assets | 181,858 | 45,108 | 226,966 | |||||||||
Deferred tax liabilities | ||||||||||||
Financial instruments from acquisition of interest | (23,873 | ) | (2,932 | ) | (26,805 | ) | ||||||
Other temporary differences | (1,237 | ) | (547 | ) | (1,784 | ) | ||||||
Total deferred tax liabilities | (25,110 | ) | (3,479 | ) | (28,589 | ) | ||||||
Deferred tax assets (liabilities), net | 156,748 | 41,629 | 198,377 | |||||||||
Deferred tax assets | 156,748 | 198,377 | ||||||||||
Deferred tax liabilities | - | - | ||||||||||
F-29 |
As of June 30, 2020, the Company had unrecognized deferred income tax assets in the amount of R$ 703 (December 31, 2019: R$ 1,382) 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.
22 | 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 for, 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 and content to develop socio-emotional skills are also offered. |
The Executive Officers do not make strategic decisions or evaluate performance based on geographic regions. Also, based on the agreements signed with schools as of June 30, 2020, none of our customers individually represented more than 5% of our total revenue.
F-30
Six-month period ended June 30, 2020 (unaudited) | ||||||||||||||||
Core | Supplemental | Total reportable segments | Total | |||||||||||||
Net revenue | 453,711 | 42,732 | 496,443 | 496,443 | ||||||||||||
Cost of sales | (99,846 | ) | (10,494 | ) | (110,340 | ) | (110,340 | ) | ||||||||
Gross profit | 353,865 | 32,238 | 386,103 | 386,103 | ||||||||||||
Selling expenses | - | - | - | (175,970 | ) | |||||||||||
General and administrative expenses | - | - | - | (126,922 | ) | |||||||||||
Other income | - | - | - | 759 | ||||||||||||
Operating profit | - | - | - | 83,970 | ||||||||||||
Finance income | - | - | - | 22,179 | ||||||||||||
Finance costs | - | - | - | (69,091 | ) | |||||||||||
Share of loss of equity-accounted investees | - | - | - | (3,999 | ) | |||||||||||
Profit before income taxes | - | - | - | 33,059 | ||||||||||||
Income taxes expense | - | - | - | (12,994 | ) | |||||||||||
Profit for the period | - | - | - | 20,065 | ||||||||||||
Other disclosures | ||||||||||||||||
Depreciation and amortization | 56,548 | 3,500 | 60,048 | 60,048 | ||||||||||||
Investments in associates and joint ventures | 57,250 | - | 57,250 | 57,250 | ||||||||||||
Capital expenditures | 38,151 | 5,371 | 43,522 | 43,522 |
F-31
Six-month period ended June 30, 2019 (unaudited) | ||||||||||||||||
Core | Supplemental | Total reportable segments | Total | |||||||||||||
Net revenue | 199,982 | 54,639 | 254,621 | 254,621 | ||||||||||||
Cost of sales | (40,274 | ) | (7,422 | ) | (47,696 | ) | (47,696 | ) | ||||||||
Gross profit | 159,708 | 47,217 | 206,925 | 206,925 | ||||||||||||
Selling expenses | (57,738 | ) | (17,712 | ) | (75,450 | ) | (75,450 | ) | ||||||||
Segment profit | 101,970 | 29,505 | 131,475 | 131,475 | ||||||||||||
General and administrative expenses | - | - | - | (65,758 | ) | |||||||||||
Other income | - | - | - | 2,922 | ||||||||||||
Operating profit | - | - | - | 68,639 | ||||||||||||
Finance income | - | - | - | 30,917 | ||||||||||||
Finance costs | - | - | - | (28,855 | ) | |||||||||||
Share of loss of equity-accounted investees | - | - | - | (1,159 | ) | |||||||||||
Profit before income taxes | - | - | - | 69,542 | ||||||||||||
Income taxes expense | - | - | - | (13,002 | ) | |||||||||||
Profit for the period | - | - | - | 56,540 | ||||||||||||
Other disclosures | ||||||||||||||||
Depreciation and amortization | 14,414 | 1,929 | 16,343 | 16,343 | ||||||||||||
Investments in associates and joint ventures | 58,113 | - | 58,113 | 58,113 | ||||||||||||
Capital expenditures | 6,417 | 17,791 | 24,208 | 24,208 |
F-32
Tree-month period ended June 30, 2020 (unaudited) | ||||||||||||||||
Core | Supplemental | Total reportable segments | Total | |||||||||||||
Net revenue | 233,028 | 1,836 | 234,864 | 234,864 | ||||||||||||
Cost of sales | (40,601 | ) | (2,519 | ) | (43,120 | ) | (43,120 | ) | ||||||||
Gross profit | 192,427 | (683 | ) | 191,744 | 191,744 | |||||||||||
Selling expenses | - | - | - | (88,070 | ) | |||||||||||
General and administrative expenses | - | - | - | (60,139 | ) | |||||||||||
Other income | - | - | - | 347 | ||||||||||||
Operating profit | - | - | - | 43,882 | ||||||||||||
Finance income | - | - | - | 12,792 | ||||||||||||
Finance costs | - | - | - | (30,752 | ) | |||||||||||
Share of loss of equity-accounted investees | - | - | - | (3,293 | ) | |||||||||||
Profit before income taxes | - | - | - | 22,629 | ||||||||||||
Income taxes expense | - | - | - | (6,385 | ) | |||||||||||
Profit for the period | - | - | - | 16,244 | ||||||||||||
Three-month period ended June 30, 2019 (unaudited) | ||||||||||||||||
Core | Supplemental | Total reportable segments | Total | |||||||||||||
Net revenue | 100,832 | 36,734 | 137,566 | 137,566 | ||||||||||||
Cost of sales | (20,589 | ) | (5,238 | ) | (25,827 | ) | (25,827 | ) | ||||||||
Gross profit | 80,243 | 31,496 | 111,739 | 111,739 | ||||||||||||
Selling expenses | (28,602 | ) | (10,713 | ) | (39,315 | ) | (39,315 | ) | ||||||||
Segment profit | 51,641 | 20,783 | 72,424 | 72,424 | ||||||||||||
General and administrative expenses | - | - | - | (44,926 | ) | |||||||||||
Other expenses | - | - | - | (437 | ) | |||||||||||
Operating profit | - | - | - | 27,061 | ||||||||||||
Finance income | - | - | - | 13,961 | ||||||||||||
Finance costs | - | - | - | (12,374 | ) | |||||||||||
Share of loss of equity-accounted investees | - | - | - | (667 | ) | |||||||||||
Profit before income taxes | - | - | - | 27,981 | ||||||||||||
Income taxes expense | - | - | - | (2,282 | ) | |||||||||||
Profit for the period | - | - | - | 25,699 |
F-33
Capital expenditures consist of additions of property and equipment and intangible assets. There were no inter-segment revenues in the six-month periods ended June 30, 2020 and 2019.
Segment performance is evaluated based on segment profit and is measured consistently with profit or loss in the consolidated financial statements. Selling expenses, 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.
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.
Core | Supplemental | Total reportable segments | Adjustments and eliminations | Total | ||||||||||||||||
June 30, 2020 (unaudited) | ||||||||||||||||||||
Total assets | 3,339,510 | 150,991 | 3,490,501 | (21,718 | ) | 3,468,783 | ||||||||||||||
Total liabilities | 1,810,721 | 49,016 | 1,859,737 | (21,718 | ) | 1,838,019 | ||||||||||||||
December 31, 2019 | ||||||||||||||||||||
Total assets | 2,999,497 | 176,196 | 3,175,693 | (14,270 | ) | 3,161,423 | ||||||||||||||
Total liabilities | 1,535,695 | 45,188 | 1,580,883 | (14,270 | ) | 1,566,613 | ||||||||||||||
23 | Financial instruments |
The Company holds the following financial instruments:
Financial assets | Assets at FVPL | Assets at amortized cost | Total | |||||||||
June 30, 2020 (unaudited) | ||||||||||||
Cash and cash equivalents | - | 188,894 | 188,894 | |||||||||
Financial investments | 285,715 | 421,837 | 707,552 | |||||||||
Trade receivables | - | 298,407 | 298,407 | |||||||||
Financial instruments from acquisition of interest | 32,311 | - | 32,311 | |||||||||
Related parties | - | 16,427 | 16,427 | |||||||||
Other assets | - | 68 | 68 | |||||||||
318,026 | 925,633 | 1,243,659 |
Financial assets | Assets at FVPL | Assets at amortized cost | Total | |||||||||
December 31, 2019 | ||||||||||||
Cash and cash equivalents | - | 48,900 | 48,900 | |||||||||
Financial investments | 498,584 | 80,910 | 579,494 | |||||||||
Trade receivables | - | 329,428 | 329,428 | |||||||||
Financial instruments from acquisition of interest | 35,946 | - | 35,946 | |||||||||
Related parties | - | 16,111 | 16,111 | |||||||||
Other assets | - | 4,109 | 4,109 | |||||||||
534,530 | 479,458 | 1,013,988 |
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Financial liabilities | Liabilities at FVPL | Liabilities at amortized cost | Total | |||||||||
June 30, 2020 (unaudited) | ||||||||||||
Trade payables | - | 30,806 | 30,806 | |||||||||
Financial instruments from acquisition of interest | 29,446 | - | 29,446 | |||||||||
Accounts payable to selling shareholders | 353,024 | 902,382 | 1,255,406 | |||||||||
Lease liabilities | - | 24,397 | 24,397 | |||||||||
Loans and financing | - | 303,908 | 303,908 | |||||||||
382,470 | 1,261,493 | 1,643,963 |
Financial liabilities | Liabilities at FVPL | Liabilities at amortized cost | Total | |||||||||
December 31, 2019 | ||||||||||||
Trade payables | - | 34,521 | 34,521 | |||||||||
Financial instruments from acquisition of interest | 33,940 | - | 33,940 | |||||||||
Accounts payable to selling shareholders | 328,668 | 887,564 | 1,216,232 | |||||||||
Leases liabilities | - | 25,857 | 25,857 | |||||||||
Loans and financing | - | 98,561 | 98,561 | |||||||||
362,608 | 1,046,503 | 1,409,111 | ||||||||||
The Company’s exposure to certain risks associated with the financial instruments is discussed in Note 24.
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.
(a) Financial instruments at fair value through profit or loss
Financial investments
The Company designated part of its financial investments as financial assets at fair value through profit or loss.
Derivative instruments
The Company acquired entities under business combinations and through the acquisition of interests in associates and joint ventures. The share purchase agreements contain put and call options and forward contracts that are also measured at fair value through profit or loss.
As of and for the six-month periods ended June 30, 2020 and 2019 none of the Company’s derivatives have 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) in profit or loss (gain of R$ 859 and loss of R$ 1,866 for the six-month periods ended in June 30, 2020 and 2019, respectively).
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(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 measured and recognized at fair value as follows:
Hierarchy | June 30, 2020 | December 31, 2019 | ||||||||||
(unaudited) | ||||||||||||
Financial assets | ||||||||||||
Financial investments | Level 2 | 285,715 | 498,584 | |||||||||
Derivative financial instruments | Level 3 | 32,311 | 35,946 | |||||||||
Financial liabilities | ||||||||||||
Derivative financial instruments | Level 3 | 29,446 | 33,940 | |||||||||
Accounts payable to selling shareholders | Level 3 | 353,024 | 328,668 |
As of June 30, 2020, and December 31, 2019, the Company assessed the fair values of its financial instruments and concluded that carrying amounts and fair values approximate. 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.
There were no transfers between levels for recurring fair value measurements during the financial statement period.
(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.
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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 six-month periods ended June 30, 2020 and 2019.
Recurring fair value measurements | Financial instruments from acquisition of interest (assets) | Financial instruments from acquisition of interest (liabilities) | Accounts payable to selling shareholders | |||||||||
As of December 31, 2018 | 26,630 | (25,097 | ) | 181,381 | ||||||||
Acquisition of Escola em Movimento | - | - | 1,929 | |||||||||
Forward contract of Nave | - | (43,210 | ) | - | ||||||||
Interest expense | - | - | 14,450 | |||||||||
Deferred revenue in Escola de Aplicação São José dos Campos Ltda. | - | 54 | - | |||||||||
Gains (loss) recognized in statement of income | (5,369 | ) | 3,449 | - | ||||||||
As of June 30, 2019 (unaudited) | 21,261 | (64,804 | ) | 197,760 | ||||||||
As of December 31, 2019 | 35,946 | (33,940 | ) | (328,668 | ) | |||||||
Payment | - | - | 3,696 | |||||||||
Changes in accounts payable to selling shareholders | - | - | (6,894 | ) | ||||||||
Interest expense | - | - | (21,158 | ) | ||||||||
Gains (loss) recognized in statement of income | (3,635 | ) | 4,494 | - | ||||||||
As of June 30, 2020 (unaudited) | 32,311 | (29,446 | ) | (353,024 | ) |
(iv) Transfers between levels 2 and 3
During the six-month periods ended June 30, 2020 and 2019, the Company did not transfer any financial instruments from level 2 into level 3.
(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 independently.
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. |
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24 | 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 June 30, 2020.
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 six-month period ended June 30, 2020.
(i) | Foreign exchange risk |
Exposure
The Company’s exposure to foreign currency risk as of June 30, 2020 and December 31, 2019, was as follows:
June 30, 2020 | December 31, 2019 | |||||||
(unaudited) | ||||||||
Cash and cash equivalents (Note 3) | 1,500 | 23,346 | ||||||
Financial investments (Note 4) | 2,280 | 1,629 |
The Company does not have exposure to foreign exchange risk on commercial transactions, i.e., revenues or expenses.
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Sensitivity analysis
The sensitivity analysis as of June 30, 2020 consider three scenarios of U.S. dollar exchange rate variation, as follows:
· | Base scenario - exchange rate as of June 30, 2020 of R$ 5.4754 per US$ 1.00; |
· | Scenario I - a 10% increase in the U.S. dollar exchange rate, to R$ 6.0229; and |
· | Scenario II - a 10% decrease in the U.S. dollar exchange rate, to R$ 4.9279. |
The table below set forth the sensitivity analysis as of June 30, 2020, for the amount of cash and cash equivalents denominated in U.S. dollar of US$ 690 thousand:
Base scenario | Scenario I | Scenario II | ||||
Exchange rate: | Exchange rate: | Exchange rate: | ||||
R$ 5.4754 | R$ 6.0229 | R$ 4.9279 | ||||
Finance income (costs) | R$ 378 | R$ (378) |
The Company ensures that its net exposure is maintained at an acceptable level in accordance with the policies and limits defined by the Management and is monitoring the possible impacts of the COVID-19 pandemic.
(ii) | Liquidity risk |
Management of the Company has responsibility for mitigating liquidity risk. In order to achieve their 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 and other operating disbursements.
The table below summarizes the maturity profile of the Company’s financial liabilities based on contractual undiscounted amounts:
June 30, 2020 (unaudited) | On demand | Less than 3 months | 3 to 12 months | 1 to 5 years | More than 5 years | Total | ||||||||||||||||||
Trade payables | - | 30,806 | - | - | - | 30,806 | ||||||||||||||||||
Lease liabilities | - | 1,721 | 5,918 | 16,758 | - | 24,397 | ||||||||||||||||||
Loans and financing | - | - | 302,682 | 1,226 | - | 303,908 | ||||||||||||||||||
Financial instruments from acquisition of interest | - | - | - | 29,446 | - | 29,446 | ||||||||||||||||||
Accounts payable to selling shareholders | - | 200,470 | 143,744 | 911,192 | - | 1,255,406 | ||||||||||||||||||
- | 232,997 | 452,344 | 958,622 | - | 1,643,963 |
The Company does not expect to have a significant impact on liquidity and cash flow resulting from the COVID-19 pandemic and reinforces its commitment to resource management to maintain its schedule of commitments, not generating liquidity risks for the Company and its subsidiaries.
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(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.
As a result of the COVID-19 pandemic, the Company is individually assessing customer demands. The Company has taken steps to ensure the continued strength of its financial position. In order to mitigate the impact to the credit risk the Company has been monitoring the amounts receivable more intensively, as well as intensifying the collection of receivables.
(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 financial investments.
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 June 30, 2020 the CDI rate was 2.37%.
As of June 30, 2020, 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:
June 30, 2020 (unaudited) | Exposure | +10% | -10% | |||||||||
Cash, bank deposits and cash equivalents | 187,394 | 444 | (444 | ) | ||||||||
Financial investments | 705,272 | 1,671 | (1,671 | ) | ||||||||
Accounts payable to selling shareholders | 894,791 | 2,121 | (2,121 | ) | ||||||||
Related parties | 15,106 | 36 | (36 | ) | ||||||||
Loans and financing | 303,908 | 732 | (732 | ) |
The Company has derivatives (calls and put options) and forward contracts 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.
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The Company performed evaluation of their fair value at the end of each period to account for any changes to it, as disclosed in Note 23. These derivatives, which are not publicly traded, have specific conditions that do not enable us 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 our 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
December 31, 2019 | Cash flows | Other | June 30, 2020 | |||||||||||||
(unaudited) | ||||||||||||||||
Leases | 25,857 | (4,489 | ) | 3,029 | 24,397 | |||||||||||
Loans and financing | 98,561 | 198,372 | 6,975 | 303,908 | ||||||||||||
Total | 124,418 | 193,883 | 10,004 | 328,305 |
Other market risk
The Company has a significant portion of its accounts payable whose exercise price is determined by multiples of EBITDA discounted to present value for the acquisition of the remaining interest of International School as described in Note 13.
Sensitivity analysis
As of June 30, 2020, the Company’s management estimated two scenarios of the rates at +10% and -10% of revenue and +5% and -5% of Weighted Average Capital Cost (WACC), whose premises are used in the calculation of debt. The table below shows a summary of the scenarios estimated:
Revenue change | Revenue change | |||||||
10% | -10% | |||||||
Effect on purchase obligation | 23,383 | (23,383 | ) |
WACC change | WACC change | |||||||
5% | -5% | |||||||
Effect on purchase obligation | 6,925 | (6,925 | ) |
25 | Commitments and contingencies |
(i) | 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.
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Civil | Labor | Taxes | Total | ||||||||||||||
Balance at December 31, 2018 | - | 17 | 114 | 131 | |||||||||||||
Additions | - | 209 | 145 | 354 | |||||||||||||
Reversals | - | (104 | ) | (130 | ) | (234 | ) | ||||||||||
Balance at December 31, 2019 | - | 122 | 129 | 251 | |||||||||||||
Additions | 489 | 107 | - | 596 | |||||||||||||
Reversals | - | - | (2 | ) | (2 | ) | |||||||||||
Balances at June 30, 2020 (unaudited) | 489 | 229 | 127 | 845 |
As of June 30, 2020, the Company was party to lawsuits classified as possible losses totaling R$ 7,343 (R$ 7,209 as of December 31, 2019), as shown below:
June 30, 2020 | December 31, 2019 | |||||||
(unaudited) | ||||||||
Civil (a) | 6,930 | 6,113 | ||||||
Labor (b) | 413 | 1,096 | ||||||
Total | 7,343 | 7,209 |
(a) | The civil proceedings relate mainly to copyright and customer claims, including those related to the early termination of certain agreements, among others. |
(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, EAS Educação 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 at an early stage.
As the arbitration proceeding progresses the estimated amount payable by EAS to the non-controlling shareholder may be lower than the provision recorded, due to the disposition of the Investment Agreement that sets forth that the payment schedule of the purchase price shall be anticipated in case of an initial public offering. Conversely, the estimated amount payable by EAS to the non-controlling shareholder may be higher than the provision recorded in light of the claims asserted, and to be asserted, by the non-controlling shareholder.
In light of the arbitration proceeding and based on standard IAS 37 Provisions, contingent liabilities and contingent assets, 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.
Therefore, in light of the current early stage of the proceeding and the range of potential outcomes, the calculation methodology of the estimate has remained unchanged, consistent with the estimate previously calculated and reported.
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Based on this analysis, the Company has recorded the provision at the present value of the amount considered the appropriate estimate of the amount of the purchase price under the Investment Agreement payable to the non-controlling shareholder and discounted to present value. The provision is calculated based on the realized EBITDA for the school year of 2019 (first installment) and the projected EBITDA for school year of 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 installment would be paid within the 2020 fiscal year and the second installment in the first half of 2021. The Company performed a review of previous operations projections, and based on the new projected numbers, the liability increased by R$ 13,354 in 2020 and was recorded as financial expense as described in note 13a. During the six-month period ended June 30, 2020, the Company recognized R$ 19,387 of interest related to the liability.
The Company’s review of previous operations projections as described above was performed with no change to the accounting criteria applied to prior financial periods. The operation projections may vary in subsequent financial periods depending on the application of the agreement and the outcome of the arbitration, and the final basis of calculation of its financial liability and will be updated accordingly in its financial statements for future financial periods.
26 | Transactions not involving cash |
The Company carried out the non-cash activities in the six-month period ended June 30, 2020, which are not reflected in the statement of cash flows, mainly related to the effects of lease contracts signed in the period as described in Note 10.
27 | Subsequent events |
Loan agreements
On July 01, 2020, the Company entered into loans agreements under the following terms:
a) | In the amount of R$100,000, maturing in December 2021 (single installment), and an interest rate of 100% of CDI plus 2.7% p.a. |
b) | In the amount of R$200,000, maturing in January 2022, to be settled in 17 installments from August 2020 to January 2022, and an interest rate of 100% of CDI plus 2.7% p.a. |
Acquisition of additional shares of Geekie
On July 06, 2020, Arco acquired an additional 4.62% interest in Geekie’s share capital from minority shareholders for R$5,782 increasing our total interest to 52.67%.
At that date, based on the shareholders’ agreement the Company has not yet acquired control of Geekie.
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Corporate restructuring
On July 07, 2020, according to a resolution approved by the Board of Directors and registered at the Board of Trade of Ceará, the corporate name of the subsidiary EAS Educação S.A. was changed to PSD Educação S.A.
On August 01, 2020, continuing the corporate restructuring, PSD Educação S.A. incorporated the Companies Positivo Soluções Didáticas Ltda. and Editora Piá Ltda. When PSD Educação S.A. acquired these entities, goodwill and fair value adjustments recognized in the amount of R$830,028 and R$726,876, respectively, were treated as not deductible. However, after this transaction, PSD Educação S.A has the tax benefit of the deductibility of the goodwill and fair value adjustments of R$529,347. The fair value adjustments should be deductible over the next 5 to 20 years, according to the useful life of the identified asset and the goodwill should be deductible for at least 5 years, under of Brazilian tax laws, depending on the utilization curve established by the Company in the initial use of the benefit.
At the end of each fiscal year, if the tax benefit is greater than the taxable income, the Company will recognize a deferred tax asset from the tax loss, which may be offset in the next fiscal years, limited to 30% of taxable income.
Investment fund participation
On July 24, 2020, the Company acquired a 10.28% interest through the purchase of quotas in Bewater Ventures I GA Fundo de Investimento em Participações Multiestratégia, a Private Equity Investment Fund for R$9,670.
***
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